EXHIBIT 13.1
The Charles Schwab Corporation
1997 Annual Report to Stockholders
(only those portions specifically incorporated by reference into
The Charles Schwab Corporation 1997 Annual Report on Form 10-K)
THE CHARLES SCHWAB CORPORATION
SELECTED FINANCIAL AND OPERATING DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
Growth Rates
-------------------------
Compounded Annual
---------- ------
5-Year 1-Year
1992-1997 1996-1997 1997 (1) 1996 1995 1994 1993
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OPERATING RESULTS
Revenues 25% 24% $ 2,299 $ 1,851 $ 1,420 $ 1,065 $ 965
Expenses excluding interest 25% 27% $ 1,852 $ 1,457 $ 1,142 $ 841 $ 758
Net income 27% 16% $ 270 $ 234 $ 173 $ 135 $ 118
Basic earnings per share (2, 3) 27% 14% $ 1.03 $ .90 $ .67 $ .53 $ .45
Diluted earnings per share (2, 3) 26% 14% $ .99 $ .87 $ .64 $ .51 $ .44
Dividends declared per common share (2) 33% 16% $ .139 $ .120 $ .094 $ .064 $ .042
Weighted-average number of common shares
outstanding (2, 4) 273 269 268 263 268
Trading revenues as a % of revenues (5) 62% 65% 66% 67% 75%
Non-trading revenues as a % of revenues (5) 38% 35% 34% 33% 25%
Effective income tax rate 39.6% 40.7% 37.7% 39.7% 39.7%
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PERFORMANCE MEASURES
Revenue growth 24% 30% 33% 10% 29%
Pre-tax profit margin 19.5% 21.3% 19.5% 21.1% 21.4%
After-tax profit margin 11.8% 12.6% 12.2% 12.7% 12.2%
Return on stockholders' equity 27% 31% 31% 32% 37%
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FINANCIAL CONDITION (AT YEAR END)
Total assets 23% 20% $16,482 $13,779 $10,552 $ 7,918 $6,897
Borrowings 19% 27% $ 361 $ 284 $ 246 $ 171 $ 185
Stockholders' equity 35% 34% $ 1,145 $ 855 $ 633 $ 467 $ 379
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(1) 1997 INCLUDES CHARGES FOR A LITIGATION SETTLEMENT OF $24 MILLION AFTER-TAX
($.09 PER SHARE FOR BOTH BASIC AND DILUTED EARNINGS PER SHARE).
(2) REFLECTS THE SEPTEMBER 1997 THREE-FOR-TWO COMMON STOCK SPLIT.
(3) BOTH BASIC AND DILUTED EARNINGS PER SHARE ARE NET OF THE EFFECT OF AN
EXTRAORDINARY CHARGE IN 1993 OF $.03 PER SHARE.
(4) AMOUNTS SHOWN ARE USED TO CALCULATE DILUTED EARNINGS PER SHARE.
(5) TRADING REVENUES INCLUDE COMMISSION AND PRINCIPAL TRANSACTION REVENUES.
NON-TRADING REVENUES INCLUDE MUTUAL FUND SERVICE FEES, NET INTEREST REVENUE
AND OTHER REVENUES.
CERTAIN PRIOR YEARS' REVENUES AND EXPENSES HAVE BEEN RECLASSIFIED TO CONFORM TO
THE 1997 PRESENTATION.
THE CHARLES SCHWAB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DESCRIPTION OF BUSINESS
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide securities brokerage and related
financial services for over 4.8 million active customer accounts(a). Customer
assets totaled $353.7 billion at December 31, 1997. CSC's principal
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities
broker-dealer with 272 domestic branch offices in 47 states, as well as a
branch in each of the Commonwealth of Puerto Rico and the United Kingdom.
Schwab served an estimated 55% of the discount brokerage market in 1997, up
from 52% in 1996(b). Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a
market maker in Nasdaq and other securities, provides trade execution
services to broker-dealers and institutional customers. Other subsidiaries
include Charles Schwab Investment Management, Inc., the investment advisor
for Schwab's proprietary mutual funds, and Charles Schwab Europe (formerly
known as ShareLink), a retail discount securities brokerage firm located in
the United Kingdom.
(CHART OMITTED)
The Company's strategy is to attract, retain and grow 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 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 a
nationally recognized brand, a broad range of products and services, multi-
channel 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 1,164,000 new accounts and gather $68.9 billion
in net new customer assets during 1997.
The Company offers both a broad range of value-oriented products and
services tailored to meet customers' varying investment and financial needs, as
well as access to extensive investment news and information. 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 investment managers
through the Schwab AdvisorSource-TM- service. The Company's Mutual Fund
Marketplace-Registered Trademark- provides customers with the ability to invest
in nearly 1,400 mutual funds from 219 fund families, including 825 Mutual Fund
OneSource-Registered Trademark- funds. The Company responds to changing customer
needs with continued product and service innovations. During 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. Additionally, the Company began to offer access to futures and
commodities trading to certain of its most active customers.
The Company differentiates itself with multi-channel delivery systems which
allow customers to choose how they prefer to do business with the Company. To
enable customers to obtain services in person with a Company representative, the
Company maintains a network of branch offices. Telephonic access to the Company
is provided primarily through four regional customer telephone service centers
and two online customer support centers that operate both during and after
normal market hours. Additionally, customers are able to obtain financial
information and execute trades on an automated basis through the Company's
electronic brokerage channels that provide both online and telephonic access.
Online channels include PC-based services such as SchwabLink-Registered
Trademark- -- a service for investment managers, and the Charles Schwab Web
Site-TM- (formerly known as SchwabNOW!-TM-) -- an information and trading
service on the Internet. The Company's online channels handled 37% of total
trades during 1997, up from 25% of total trades in 1996. Automated telephonic
channels include TeleBroker-Registered Trademark- -- Schwab's touch-tone
telephone trading service, and VoiceBroker-TM- -- Schwab's voice recognition
quote service. Schwab's automated telephonic channels handled 73% of the
110 million customer calls received during 1997, up from 67% of the 97 million
customer calls received in 1996.
The Company's ongoing investment in technology is a key element in
enhancing its delivery systems, providing fast and consistent customer service,
and reducing processing costs. The Company uses technology to empower its
customers to manage their financial affairs and is a forerunner in driving
technological advancements in the financial services industry. In 1997, the
Company introduced a number of new Internet-based investment services, including
the Asset Allocation Toolkit-TM- for portfolio allocation guidance, and the
Mutual Fund OneSource Online and Market Buzz-TM- sites for research and
information. Schwab also introduced the SchwabLink Web-TM- site for independent
investment managers, which enables them to 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-
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(a) ACCOUNTS WITH BALANCES OR ACTIVITY WITHIN THE PRECEDING TWELVE MONTHS.
(b) SOURCE: SECURITIES INDUSTRY ASSOCIATION BASED ON THE AVERAGE OF THE FIRST
THREE QUARTERS OF EACH RESPECTIVE YEAR.
2
party mutual funds online and obtain information on mutual fund performance and
fees, all through the Company's international Web site. Also during 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 companies seeking to attract
customer financial assets, including full commission brokerage firms, discount
brokerage firms, mutual fund companies and banks. Certain of these competitors
have significantly greater financial resources than the Company, particularly
given the continued consolidation within the financial services industry. In
addition, the recent expansion and customer acceptance of conducting financial
transactions online has attracted competition from software development
companies and providers of online services. In 1997, price competition continued
to intensify in the area of online investing as competitors sought to gain
market share in this rapidly growing area. The Company experienced declines in
its average commission per revenue trade as the proportion of its customers
using electronic brokerage channels, which provide discounts from the Company's
standard commission rates, has increased. As the Company focuses on further
enhancements to its electronic service offering, average commission per revenue
trade is expected to continue to decline. 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 (including 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. Also, the Company
views its development spending as essential for future growth and therefore
tries to avoid major adjustments in such spending unless faced with a sustained
slowdown in customer trading activity. 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 period are not
necessarily indicative of results for a future period.
In addition to historical information, this Annual Report contains forward-
looking statements that reflect management's objectives and expectations as of
the date hereof. These statements relate to, among other things, the Company's
strategy (see Description of Business), sources of liquidity (see Liquidity and
Capital Resources -- Liquidity), capital expenditures and capital structure (see
Liquidity and Capital Resources -- Cash Flows and Capital Resources), Year 2000
project (see Liquidity and Capital Resources -- Year 2000), and revenue growth,
after-tax profit margin, and return on stockholders' equity (see Results of
Operations and Looking Ahead). Achievement of the expressed objectives and
expectations described in these statements is subject to certain risks and
uncertainties that could cause actual results to differ materially from the
expressed objectives and expectations. Important factors that may cause such
differences are noted throughout this Annual Report and in the Company's Annual
Report on Form 10-K and include, but are not limited to: the effect of customer
trading patterns on Company revenues and earnings; changes in technology;
computer system failures; risks associated with the Year 2000 computer systems
conversions; 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.
RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
The Company achieved record revenues for the eighth consecutive year and
record earnings for the seventh consecutive year in 1997. One of the factors
contributing to this record performance was strong trading volumes in the
securities markets during the year. The combined daily average share volume for
the New York Stock Exchange (NYSE) and Nasdaq reached an all time high of
1,175 million shares in 1997, a 23% increase over 1996. The Standard & Poor's
500 Index (on a dividend reinvested basis) rose 33% during 1997.
(CHART OMITTED)
3
Other key factors that contributed to the Company's financial performance
in 1997 include:
- - Assets in Schwab customer accounts rose $100.5 billion, or 40%, to a record
$353.7 billion. This increase resulted from net new customer assets of
$68.9 billion and net market gains of $31.6 billion.
- - A record 1,164,000 new Schwab customer accounts were opened, an increase of
18% from 985,000 opened in 1996.
- - Trading activity reached record levels as shown in the following table (in
thousands):
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Daily Average Trades 1997 1996 1995
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Online 39.6 20.2 12.4
TeleBroker-Registered Trademark- 13.5 13.1 9.4
Regional customer telephone service centers,
branch offices and other 52.9 47.9 36.8
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Total (1) 106.0 81.2 58.6
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% change 31% 39% 34%
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(1) Includes Mutual Fund OneSource-Registered Trademark- daily average trades
of 34.2 in 1997, 27.2 in 1996 and 17.8 in 1995.
Revenues increased mainly due to higher customer trading volume and an
increase in customer assets. Revenues of $2,299 million in 1997 grew 24% from
1996, exceeding management's annual long-term objective of 20% revenue growth,
due to a 23% increase in commission revenues, as well as a 37% increase in
mutual fund service fees and a 39% increase in interest revenue, net of interest
expense (referred to as net interest revenue). Non-trading revenues (which
consist of mutual fund service fees, net interest revenue, and other revenues)
increased $227 million, or 35%, to $867 million in 1997.
(CHART OMITTED)
The Company's earnings rose 16% to $270 million, or $.99 diluted earnings
per share, up from $234 million, or $.87 diluted earnings per share, in 1996.
Share and per share information throughout this report have been restated to
reflect the September 1997 three-for-two common stock split, effected in the
form of a 50% stock dividend.
The Company's 1997 results include charges for the settlement of a class-
action lawsuit involving M&S and other firms engaged in making markets in Nasdaq
securities. These charges totaled $24 million after-tax, or $.09 diluted
earnings per share. Excluding these charges, the Company's earnings would have
increased 26% from 1996.
The Company's operating expenses increased 27% during 1997 to
$1,852 million, primarily due to a 26% increase in compensation and benefits
expense, a 54% increase in advertising and market development spending, and a
71% increase in other expenses primarily due to the litigation settlement. The
Company's after-tax profit margin for 1997 was 11.8%, which was slightly lower
than the 12.6% margin in 1996, and above the Company's annual long-term
objective of 10%. Excluding the charges relating to the litigation settlement,
the Company's after-tax profit margin would have been 12.8%. Net income plus
depreciation and amortization increased 19% during 1997 to $395 million and
capital expenditures decreased $20 million in 1997 to $139 million.
Return on stockholders' equity was 27% in 1997, exceeding the Company's
annual long-term objective of 20%. The Company's Board of Directors declared a
cash dividend increase during 1997, raising the effective annual dividend rate
20%.
REVENUES
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Composition of Revenues 1997 1996 1995
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Commissions 51% 52% 53%
Mutual fund service fees 19 17 15
Net interest revenue 15 14 15
Principal transactions 11 14 13
Other 4 3 4
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Total 100% 100% 100%
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COMMISSIONS
The Company earns commission revenues by executing customer trades. These
revenues are affected by the number of customer accounts that traded, the
average number of commission-generating trades per account, and the average
commission per trade. Commission revenues were $1,174 million in 1997, compared
to $954 million in 1996 and $751 million in 1995.
(CHART OMITTED)
As shown in the table below, from 1995 to 1997, the total number of
customer revenue trades executed by the Company has increased over 78% as the
Company's customer base has grown. From 1995 to 1997, average commission per
revenue trade decreased 12%, mainly due to more trades placed through electronic
brokerage channels, which provide discounts from the Company's standard
commission rates.
4
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Commissions Earned on
Customer Revenue Trades 1997 1996 1995
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Customer accounts that traded
during the year (in thousands) 2,380 2,037 1,619
Average customer revenue
trades per account 7.6 6.7 6.3
Total revenue trades (in thousands) 18,169 13,717 10,192
Average commission per revenue trade $ 64.27 $ 69.08 $ 73.11
Commissions earned on customer
revenue trades (in millions) (1) $ 1,168 $ 947 $ 745
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(1) Excludes commissions on trades with specialists totaling $6 million in
1997, $7 million in 1996 and $6 million in 1995.
In December 1997, the Company announced a plan to integrate its online and
traditional brokerage services, and to reduce the price of online trades for
most of its customers. As a result, the Company expects average commission per
revenue trade to continue to decline.
MUTUAL FUND SERVICE FEES
The Company earns mutual fund service fees for record keeping and
shareholder services provided to third-party funds, and for transfer agent
services, shareholder services, administration and investment management
provided to its proprietary funds. These fees are based upon daily balances of
customer assets invested in third-party funds and upon the average daily net
assets of its proprietary funds.
Mutual fund service fees were $428 million in 1997, compared to
$311 million in 1996 and $219 million in 1995. The increases from 1995 to 1997
were primarily due 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-.
At December 31, 1997, Schwab's Mutual Fund OneSource service enabled
customers to trade 825 mutual funds in 121 fund families without incurring
transaction fees. The service allows investors to access multiple mutual fund
companies, avoid brokerage transaction fees, and achieve investment diversity
among fund families. In addition, investors' record keeping and investment
monitoring are simplified through one consolidated statement. Customer assets
held by Schwab that have been purchased through the Mutual Fund OneSource
service, excluding Schwab's proprietary funds, were $56.6 billion, $39.2 billion
and $23.9 billion at the end of 1997, 1996 and 1995, respectively.
Additionally, customer assets invested in the Mutual Fund Marketplace-
Registered Trademark-, excluding the Mutual Fund OneSource service, were
$48.0 billion, $35.4 billion and $26.1 billion at the end of 1997, 1996 and
1995, respectively. Schwab charges a transaction fee on trades placed in the
funds included in the Mutual Fund Marketplace (except on trades through the
Mutual Fund OneSource service). These fees are recorded as commission revenues.
The SchwabFunds include money market funds, equity index funds, bond funds,
asset allocation funds, and funds that primarily invest in stock, bond and money
market funds. Schwab customers may elect to have cash balances in their
brokerage accounts automatically invested in certain SchwabFunds money market
funds. Customer assets invested in the SchwabFunds were $55.8 billion,
$43.1 billion and $31.7 billion at the end of 1997, 1996 and 1995, respectively.
NET INTEREST REVENUE
Net interest revenue is the difference between interest earned on assets
(mainly margin loans to customers and investments) and interest paid on
liabilities (mainly customer cash balances). Net interest revenue is affected by
changes in the volume and mix of these assets and liabilities, as well as by
fluctuations in interest rates.
Substantially all of the Company's net interest revenue is earned by
Schwab. In clearing its customers' trades, Schwab holds cash balances payable to
customers. In most cases, Schwab pays its customers interest on cash balances
awaiting investment, and may invest these funds and earn interest revenue.
Schwab also may lend funds to customers on a secured basis to purchase qualified
securities -- a practice commonly known as "margin lending." Pursuant to
Securities and Exchange Commission (SEC) regulations, customer cash balances
that are not used for margin lending are segregated into an investment account
that is maintained for the exclusive benefit of customers.
When investing segregated customer cash balances, Schwab must adhere to SEC
regulations that restrict investments to U.S. government securities,
participation certificates and mortgage-backed securities guaranteed by the
Government National Mortgage Association, certificates of deposit issued by U.S.
banks and thrifts, and resale agreements collateralized by qualified securities.
Schwab's policies for credit quality and maximum maturity requirements are more
restrictive than these SEC regulations. In each of the last three years, resale
agreements accounted for over 70% of Schwab's investments of segregated customer
cash balances. The average maturities of Schwab's total investments of
segregated customer cash balances were 63 days in 1997, 60 days in 1996 and 48
days in 1995.
Net interest revenue was $354 million in 1997, compared to $255 million in
1996 and $211 million in 1995, as shown in the following table (in millions):
5
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1997 1996 1995
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INTEREST REVENUE
Margin loans to customers $489 $339 $264
Investments, customer-related 376 313 283
Other 35 29 21
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Total 900 681 568
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INTEREST EXPENSE
Customer cash balances 481 368 321
Stock-lending activities 37 25 15
Borrowings 20 18 12
Other 8 15 9
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Total 546 426 357
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Net interest revenue $354 $255 $211
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The Company's interest-earning assets are financed primarily by interest-
bearing customer cash balances. Other funding sources include noninterest-
bearing customer cash balances, proceeds from stock-lending activities,
borrowings, and stockholders' equity. Customer-related daily average balances,
interest rates, and average net interest margin are summarized as follows
(dollars in millions):
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1997 1996 1995
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INTEREST-EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $ 6,990 $5,883 $4,815
Average interest rate 5.38% 5.32% 5.88%
Margin loans to customers:
Average balance outstanding $ 6,367 $4,482 $3,221
Average interest rate 7.68% 7.57% 8.20%
Average yield on interest-earning assets 6.48% 6.29% 6.81%
FUNDING SOURCES (CUSTOMER-RELATED AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $10,661 $8,377 $6,553
Average interest rate 4.51% 4.40% 4.90%
Other interest-bearing sources:
Average balance outstanding $ 1,122 $ 775 $ 457
Average interest rate 4.44% 4.37% 4.54%
Average noninterest-bearing portion $ 1,574 $1,213 $1,026
Average interest rate on funding sources 3.97% 3.88% 4.26%
SUMMARY:
Average yield on interest-earning assets 6.48% 6.29% 6.81%
Average interest rate on funding sources 3.97% 3.88% 4.26%
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Average net interest margin 2.51% 2.41% 2.55%
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The increases in net interest revenue from 1995 to 1997 were primarily due
to higher levels of average earning assets.
Since the Company establishes the rates paid on customer cash balances and
charged on margin loans, a substantial portion of its net interest margin is
managed by the Company. However, the margin is highly influenced by external
factors such as the interest rate environment and competition. As interest rates
in general were higher in 1997 than in 1996, the Company's average net interest
margin increased during 1997. To pay competitive yields to customers in a lower
interest rate environment, the Company's average net interest margin declined
from 1995 to 1996.
PRINCIPAL TRANSACTIONS
Principal transaction revenues are primarily comprised of net gains from
market-making activities in Nasdaq securities. Factors that influence principal
transaction revenues include the volume of customer trades, market price
volatility, and changes in regulations, and industry customs and practices as
discussed below. As a market maker in Nasdaq and other securities, M&S generally
executes customer trades as principal. While substantially all Nasdaq security
trades originated by the customers of Schwab are directed to M&S, the majority
of M&S' trading volume comes from parties other than Schwab.
Principal transaction revenues were $258 million in 1997, compared to
$257 million in 1996 and $191 million in 1995. Revenues were essentially
unchanged from 1996 to 1997 primarily due to greater share volume handled by
M&S, substantially offset by lower average revenue per principal transaction
(see discussion below). The increase from 1995 to 1996 was primarily due to
greater share volume handled by M&S.
In August 1996, the 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 NYSE, 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 1997 as compared to 1996. M&S'
average revenue per principal transaction declined 42% from the first to the
last quarter of 1997, while M&S' share volume increased 55% over the same
period. Had M&S' average revenue per principal transaction not decreased in 1997
compared to 1996, M&S' principal transaction revenues would have been
$80 million higher in 1997. Since the change to trading securities in increments
of one-sixteenth dollar per share was not implemented until June 1997 and the
Order Handling Rules were not fully implemented until October 1997, the Company
expects M&S' average revenue per principal transaction for 1998 to be materially
less than the average during substantially all of 1997. Recent and future
regulatory changes, changes in
6
industry customs and practices, and changes in trading systems are expected to
continue to result in declines in average revenue per principal transaction, and
are expected to have a material adverse impact on M&S' revenues and profit
margin.
See "Commitments and Contingent Liabilities" note in the Notes to
Consolidated Financial Statements regarding certain civil litigation relating to
various principal transaction activities.
Revenues relating to Schwab's specialist operations were $21 million in
1997, $14 million in 1996 and $9 million in 1995.
OTHER REVENUES
Other revenues include retirement plan services fees and other brokerage
fees (mainly wire fees and minimum account balance fees). These revenues were
$86 million in 1997, compared to $74 million in 1996 and $48 million in 1995.
The increases from 1995 to 1997 were primarily due to increased customer
activity and an increase in retirement plan balances.
EXPENSES EXCLUDING INTEREST
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Expenses Excluding Interest as a Percentage
of Revenues 1997 1996 1995
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Compensation and benefits 42% 41% 42%
Communications 8 9 9
Occupancy and equipment 7 7 8
Advertising and market development 6 5 4
Depreciation and amortization 5 5 5
Commissions, clearance and floor brokerage 4 4 5
Professional services 3 3 3
Other 6 5 4
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Total 81% 79% 80%
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COMPENSATION AND BENEFITS
Compensation and benefits expense includes salaries and wages, variable
compensation, and related employee benefits and taxes. Employees receive
variable compensation that is tied to the achievement of specified objectives
relating primarily to revenue growth, profit margin and growth in customer
assets. Therefore, a significant portion of compensation and benefits expense
will fluctuate with these measures.
(CHART OMITTED)
Compensation and benefits expense was $962 million in 1997, compared to
$766 million in 1996 and $594 million in 1995. Increases in compensation and
benefits expense between 1995 and 1997 were generally due to a greater number of
employees to support the Company's continued growth. The increase from 1995 to
1996 was also due to higher variable compensation resulting from the Company's
financial performance. The following table shows a comparison of certain
compensation and benefits components and employee data (in thousands):
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1997 1996 1995
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Variable compensation as a
% of compensation and benefits expense 23% 27% 24%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 14% 11% 12%
Full-time equivalent employees(1) 12.7 10.4 9.2
Revenues per average full-time equivalent
employee $198 $190 $185
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(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
The Company encourages and provides for employee ownership of the Company's
common stock through its profit sharing and employee stock ownership plan, its
stock incentive plans and an automatic investment plan. The Company's overall
compensation structure is intended to attract, retain and reward highly
qualified employees, and to align the interests of employees with those of
stockholders. To further this alignment and in recognition of the Company's
financial performance, the Company awarded all non-officer employees a stock
option grant in 1997 which totaled options to buy 1,110,000 shares of common
stock. The Company also awarded all non-officer employees a stock grant in 1996
which totaled 252,000 shares of common stock.
At December 31, 1997, directors, management and employees, and their
respective families, trusts and foundations, owned, including stock held for
employees' benefit in the Company's profit sharing and employee stock ownership
plan, approximately 37% of the Company's outstanding common stock. In addition,
directors, management and employees held options to purchase common stock in an
amount equal to approximately 8% of the Company's outstanding common stock at
December 31, 1997.
COMMUNICATIONS
Communications expense includes telephone, postage, and news and quotation
costs. This expense was $183 million in 1997, compared to $165 million in 1996
and $129 million in 1995. The increases from 1995 to 1997 primarily resulted
from higher customer transaction volumes, including increased customer use of
electronic channels. The increase from 1996 to 1997 was also due to additional
leased telephone lines related to online service offerings.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment expense includes the costs of leasing and
maintaining the Company's office space, four regional customer telephone service
centers, a primary data center and 272 domestic branch offices. It also includes
lease and rental expenses on computer and other equipment.
7
Occupancy and equipment expense was $154 million in 1997, compared to
$130 million in 1996 and $111 million in 1995. This trend reflects the Company's
continued growth and expansion, and its commitment to customer service. The
Company expanded its office space in 1997 and 1996, its primary data center in
1996, and each of its regional customer telephone service centers in 1995.
Schwab opened 40 new branch offices in 1997, 9 in 1996 and 19 in 1995.
ADVERTISING AND MARKET DEVELOPMENT
Advertising and market development expense includes media, print and direct
mail advertising expenses, and related production, printing and postage costs.
This expense was $130 million in 1997, compared to $84 million in 1996 and
$53 million in 1995. The increases from 1995 to 1997 were primarily a result of
the Company's increased media spending relating to campaigns covering Mutual
Fund OneSource-Registered Trademark- and online investing services, as well as
new product and service offerings. Print and direct mail advertisements were
also higher during this period. The Company's role as the official investment
firm for the Professional Golf Association Tour also contributed to the increase
from 1996 to 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes expenses relating to equipment and
office facilities, property, goodwill, leasehold improvements and other
intangibles. This expense was $125 million in 1997, compared to $98 million in
1996 and $69 million in 1995. The increases from 1995 to 1997 were primarily due
to newly acquired data processing and telecommunication equipment which
increased the Company's customer service capacity. Amortization expense related
to intangible assets was $15 million in 1997, compared to $12 million in 1996
and $14 million in 1995.
COMMISSIONS, CLEARANCE AND FLOOR BROKERAGE
Commissions, clearance and floor brokerage expense includes fees paid to
stock and option exchanges for trade executions, fees paid by M&S to broker-
dealers for orders received for execution, and fees paid to clearing entities
for trade processing. This expense was $92 million in 1997, compared to
$81 million in 1996 and $77 million in 1995. The increases from 1995 to 1997
were due to increases in the trading volume processed by M&S and Schwab.
PROFESSIONAL SERVICES
Professional services expense includes fees paid to consultants engaged to
support product, service and systems development, and legal and accounting fees.
This expense was $70 million in 1997, compared to $52 million in 1996 and
$41 million in 1995. The increases from 1995 to 1997 were primarily due to
higher levels of consulting fees in many areas, including new and expanded
products and services, systems development, and capacity expansion.
OTHER EXPENSES
Other expenses include those relating to travel and entertainment, errors
and bad debts, registration fees for employees, and other miscellaneous
expenses. None of these specific categories were more than 25% of total other
expenses (except for the litigation settlement in 1997 -- see discussion in
Financial Overview). These other expenses were $137 million in 1997, compared to
$80 million in 1996 and $69 million in 1995. The increase from 1996 to 1997 was
primarily due to the $39 million pre-tax charge for the litigation settlement,
and higher travel and entertainment expense. The remainder of the increase from
1996 to 1997, and the increase from 1995 to 1996 were primarily due to higher
volume-related expenses reflecting the Company's continued growth.
TAXES ON INCOME
The Company's effective income tax rate was 39.6% in 1997, 40.7% in 1996
and 37.7% in 1995. The effective income tax rate during 1995 was lower than in
1997 and 1996, primarily due to the settlement in 1995 of a U.S. Tax Court case.
LIQUIDITY AND CAPITAL RESOURCES
CSC operates as a holding company, conducting virtually all business
through its wholly owned subsidiaries. The capital structure among CSC and its
subsidiaries is designed to provide each entity with capital and liquidity
consistent with its operations. A description of significant aspects of this
structure for CSC and its two principal subsidiaries, Schwab and M&S, follows.
LIQUIDITY
SCHWAB
Most of Schwab's assets are liquid, consisting primarily of short-term
(i.e., less than 90 days) investment-grade, interest-earning investments (the
majority of which are segregated for the exclusive benefit of customers pursuant
to regulatory requirements), receivable from customers, and receivable from
brokers, dealers and clearing organizations. Customer margin loans are demand
loan obligations secured by readily marketable securities. Receivable from and
payable to brokers, dealers and clearing organizations primarily represent
current open transactions, which usually settle, or can be closed out, within a
few business days.
Liquidity needs relating to customer trading and margin borrowing
activities are met primarily through cash balances in customer accounts, which
were $12.7 billion, $10.9 billion and $8.4 billion at December 31, 1997, 1996
and 1995, 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.
8
Schwab is subject to regulatory requirements that are intended to ensure
the general financial soundness and liquidity of broker-dealers. These
regulations prohibit Schwab from repaying subordinated borrowings to CSC, paying
cash dividends, or making unsecured advances or loans to its parent or employees
if such payment would result in net capital of less than 5% of aggregate debit
balances or less than 120% of its minimum dollar amount requirement of
$1 million. At December 31, 1997, Schwab had $823 million of net capital (11% of
aggregate debit balances), which was $667 million in excess of its minimum
required net capital and $434 million in excess of 5% of aggregate debit
balances. Schwab has historically targeted net capital to be 10% of its
aggregate debit balances, which primarily consist of customer margin loans. To
achieve this target, as customer margin loans have grown, a larger portion of
cash flows have been retained to support aggregate debit balances.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$400 million subordinated revolving credit facility maturing in September 1999,
of which $315 million was outstanding at December 31, 1997. At year 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 December 31, 1997. The need
for short-term borrowings arises primarily from timing differences between cash
flow requirements and the scheduled liquidation of interest-bearing investments.
Schwab used such borrowings for 11 days in 1997, 5 days in 1996 and 9 days in
1995, with the daily amounts borrowed averaging $85 million, $52 million and
$24 million, respectively. These lines were unused at December 31, 1997.
In 1997, Schwab entered into unsecured letter of credit agreements with
five banks totaling $450 million to satisfy the margin requirement of customer
option transactions with the Options Clearing Corporation. Schwab pays a fee to
maintain these letter of credit agreements.
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 cash and
cash equivalents, marketable securities, and receivable from brokers, dealers
and clearing organizations.
M&S' liquidity is affected by the same net capital regulatory requirements
as Schwab (see discussion above). At December 31, 1997, M&S had $5 million of
net capital (347% of aggregate debit balances), which was $4 million in excess
of its minimum required net capital.
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 in 1997.
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. As discussed
above, Schwab and M&S are subject to regulatory requirements that may restrict
them from certain transactions with CSC. Management believes that funds
generated by the operations of CSC's subsidiaries will continue to be the
primary funding source in meeting CSC's liquidity needs and maintaining Schwab's
and M&S' net capital.
CSC has liquidity needs that arise from its issued and outstanding
$361 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 1998 to 2007 and fixed
interest rates ranging from 5.67% 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+ in October 1997.
As of December 31, 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 December 31, 1997, $85 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 minimum levels of
stockholders' equity, and Schwab and M&S to maintain specified levels of net
capital, as defined. The Company believes that these restrictions will not have
a material effect on its ability to meet future dividend or funding
requirements. This facility was unused in 1997.
CASH FLOWS AND CAPITAL RESOURCES
Net income plus depreciation and amortization was $395 million during 1997,
up 19% from $332 million in 1996, allowing the Company to finance the majority
of its growth with internally generated funds. Depreciation and amortization
expense related to equipment, office facilities and property was $110 million in
1997 and $86 million in 1996. Amortization expense related to intangible assets
was $15 million in 1997 and $12 million in 1996.
(CHART OMITTED)
The Company's capital expenditures were $139 million in 1997 and
$160 million in 1996, or 6% and 9% of revenues, respectively. Capital
expenditures in 1997 were 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
9
opened 40 new branch offices during 1997, compared to 9 branch offices opened in
1996.
As has been the case in recent years, capital expenditures will vary from
period to period as business conditions change. While management retains
substantial flexibility to adjust capital expenditures as necessary, in general
the level of future expenditures will be influenced by the rate of growth in
customer assets and trading activities, staffing and facilities requirements,
and availability of relevant technology to support innovation in products and
services. Management currently anticipates that 1998 capital expenditures will
be approximately $190 million. These planned expenditures include $110 million
related to technology and $80 million for facilities expansion and improvements.
During 1997, the Company:
- Issued $111 million and repaid $28 million of Medium-Term Notes;
- Paid common stock dividends of $37 million;
- Repurchased 820,000 shares of its common stock for $18 million.
The Company monitors both the relative composition and absolute level of
its capital structure. The Company's total financial capital (borrowings plus
stockholders' equity) at December 31, 1997 was $1,506 million, up $368 million,
or 32%, from a year ago. At December 31, 1997, the Company had borrowings of
$361 million, or 24% of total financial capital, that bear interest at a
weighted-average rate of 6.65%. At December 31, 1997, the Company's
stockholders' equity was $1,145 million, or 76% of total financial capital.
Management currently anticipates that borrowings will remain below 30% of total
financial capital.
SHARE REPURCHASES
The Company repurchased 820,000 shares of its common stock for $18 million
in 1997, 1,621,500 shares for $28 million in 1996 and 1,310,700 shares for
$17 million in 1995. Since the inception of the repurchase plan in 1988, the
Company has repurchased 40,107,300 shares of its common stock for $164 million.
At December 31, 1997, authorization granted by the Company's Board of Directors
allows for future repurchases of 4,986,500 shares. The Company will continue to
monitor opportunities to repurchase common stock in cases where the Company
believes stockholder value would be enhanced. In considering opportunities to
repurchase stock, the Company takes into account the dilutive effects of stock
option exercises and stock grants.
DIVIDEND POLICY
As a result of the Company's continued earnings growth, the Board of
Directors increased the quarterly dividend 20% to $.040 per share in 1997. Since
the initial dividend in 1989, the Company has paid 35 consecutive quarterly
dividends and has increased the dividend 10 times. Since 1989, dividends have
increased by a 41% compounded annual growth rate. The Company paid common stock
dividends of $.139 per share in 1997, $.120 per share in 1996 and $.094 per
share in 1995. While the payment and amount of dividends are at the discretion
of the Company's Board of Directors, the Company has historically targeted its
cash dividend at approximately 10% of net income plus depreciation and
amortization.
(CHART OMITTED)
YEAR 2000
Many existing computer programs use only two digits to identify a specific
year and therefore may not accurately recognize the upcoming change in the
century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. Due to the Company's dependence on
computer technology to operate its business, and the dependence of the financial
services industry on computer technology, the nature and impact of Year 2000
processing failures on the Company's business could be material. The Company is
currently modifying its computer systems in order to enable its systems to
process data and transactions incorporating year 2000 dates without material
errors or interruptions. The Company's Year 2000 compliance project began in
1996. The Company plans to have its significant systems modified by the end of
1998. The Company's progress under its comprehensive Year 2000 compliance plan
is reviewed and monitored by senior management.
The success of the Company's plan depends in part on parallel efforts being
undertaken by other entities with which the Company's systems interact and
therefore, the Company is taking steps to determine the status of these other
entities' Year 2000 compliance. The Company's plan may also be affected by
regulatory changes, changes in industry customs and practices, and changes in
trading systems 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. The Company's plan includes
participation in industry-wide testing, and the Company is communicating its
concerns regarding the timely compliance of all securities market participants
to others with whom it does business, regulators, and industry groups.
Additionally, the Company is formulating contingency plans to be implemented in
the event that any other entity with which the Company's systems interact, or
the Company itself, fails to achieve timely and adequate Year 2000 compliance.
The Company currently estimates that it will cost approximately $35 million
to $45 million to modify its core brokerage computer systems to be Year 2000
compliant. These expenditures will consist primarily of compensation for
information technology employees and contractors dedicated to this project and
related hardware and software costs. This estimate excludes the time that may be
spent by
10
management and administrative staff in guiding and assisting the information
technology effort described above or for bringing systems other than core
brokerage computer systems into Year 2000 compliance. The Company expects to
fund all Year 2000 related costs through operating cash flows. These costs are
not expected to result in increased information technology expenditures because
they will be funded through a reallocation of the Company's overall development
spending. In accordance with generally accepted accounting principles, Year 2000
expenditures will be recognized as incurred.
MARKET RISK
The Company adopted SEC Release No. 33-7386, issued in 1997, which requires
qualitative disclosures of market risk exposure and management of that exposure,
and quantitative disclosures of the magnitude of market risk. See "Financial
Instruments with Off-Balance-Sheet and Credit Risk" note in the Notes to
Consolidated Financial Statements for additional information regarding financial
instruments discussed below.
FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
The Company held government securities with a fair value of approximately
$5 million at December 31, 1997. These securities, and the associated interest
rate risk, are not material to the Company's financial position, results of
operations or cash flows.
Through Schwab and M&S, the Company maintains inventories in exchange-
listed and Nasdaq securities on both a long and short basis. The fair value of
these securities at December 31, 1997, was $52 million in long positions and
$28 million in short positions. The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be approximately $3 million
due to the offset of losses in long positions with gains in short positions. In
addition, the Company generally enters into exchange-traded option contracts to
hedge against potential losses in inventory positions, thus reducing this
potential loss exposure. This hypothetical 10% decline in prices would not be
material to the Company's financial position, results of operations or cash
flows. The notional amount of option contracts was not material to the Company's
consolidated balance sheet at December 31, 1997.
FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
For its working capital and reserves required to be segregated under
federal or other regulations, the Company invests in money market funds, resale
agreements, certificates of deposit, and commercial paper. Money market funds do
not have maturity dates and do not present a material market risk. The other
financial instruments, as shown in the following table, are fixed rate
investments with short maturities and do not present a material interest rate
risk (dollars in millions):
Principal amount Fair
by maturity date value
December 31, 1998 Thereafter 1997
- --------------------------------------------------------------------------------
Resale agreements (1) $5,107 $5,107
Weighted-average interest rate 5.72%
Certificates of deposit $1,499 $1,499
Weighted-average interest rate 5.73%
Commercial paper $ 221 $ 221
Weighted-average interest rate 6.42%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes resale agreements of $4,707 million included in cash and
investments required to be segregated under federal or other regulations
and $400 million included in cash and cash equivalents.
At December 31, 1997, CSC had $361 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates. The Company has no cash flow
exposure regarding these Medium-Term Notes due to the fixed rate of interest.
The fair value of these Medium-Term Notes at December 31, 1997, based on
estimates of market rates for debt with similar terms and remaining maturities,
approximated their carrying amount. The table below presents the principal
amount of these Medium-Term Notes by year of maturity (dollars in millions):
Year Ended
December 31, 1998 1999 2000 2001 2002 Thereafter
- --------------------------------------------------------------------------------
Fixed rate $40 $40 $48 $39 $40 $154
Weighted-average
interest rate 6.1% 6.8% 6.3% 7.0% 7.0% 6.7%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company maintains investments in mutual funds, approximately
$32 million at December 31, 1997, to fund obligations under its deferred
compensation plan. These investments match the Company's obligation under its
deferred compensation plan, net of the income tax benefit. Any decrease in the
fair value of these investments would result in a comparable decrease in the
deferred compensation plan obligation and would not affect the Company's
financial position, results of operations or cash flows.
LOOKING AHEAD
Management expects financial services to remain intensely competitive
during 1998, as the industry's financial success and a continued trend of
consolidation have attracted new competitors and strengthened existing ones. The
Company believes that it possesses a number of competitive advantages that will
enable it to pursue its strategy of attracting and retaining customer assets. As
described more fully in the Description of Business section above, these
competitive advantages include: a nationally
11
recognized brand, a broad line of products and services offered at prices that
management believes represent superior value, multi-channel delivery systems,
and the commitment and skills necessary to invest in technology intended to
empower customers and reduce costs. Additionally, the Company's significant
level of employee ownership aligns the interests of management with those of
stockholders.
While fundamentally cyclical financial markets may adversely impact the
Company's financial results, management believes that the above competitive
advantages, combined with recent trends affecting the characteristics and
behavior of individual investors, will enable the firm to pursue its objective
of long-term profitable growth. These trends include the advent of a new
generation of investors who are currently entering their peak savings years, as
well as the increased desire of many individuals to assume greater control over
their financial affairs.
Capitalizing on and strengthening the Company's competitive advantages
requires significant operating expense outlays and capital expenditures.
Management believes that these ongoing investments are critical to increasing
the Company's market share and achieving its long-term financial objectives,
which include annual growth in revenues of 20%, an after-tax profit margin of
10%, and a return on stockholders' equity of 20%.
12
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions $1,174,023 $ 954,129 $ 750,896
Mutual fund service fees 427,673 311,067 218,784
Interest revenue, net of interest expense of $546,483 in 1997,
$425,872 in 1996 and $357,223 in 1995 353,552 254,988 210,897
Principal transactions 257,985 256,902 191,392
Other 85,517 73,836 47,934
- -----------------------------------------------------------------------------------------------------------------------------
Total 2,298,750 1,850,922 1,419,903
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES EXCLUDING INTEREST
Compensation and benefits 961,824 766,377 594,105
Communications 182,739 164,756 128,554
Occupancy and equipment 154,181 130,494 110,977
Advertising and market development 129,550 83,987 52,772
Depreciation and amortization 124,682 98,342 68,793
Commissions, clearance and floor brokerage 91,933 80,674 77,061
Professional services 69,583 52,055 41,304
Other 137,011 80,174 69,233
- -----------------------------------------------------------------------------------------------------------------------------
Total 1,851,503 1,456,859 1,142,799
- -----------------------------------------------------------------------------------------------------------------------------
Income before taxes on income 447,247 394,063 277,104
Taxes on income 176,970 160,260 104,500
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 270,277 $ 233,803 $ 172,604
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common
shares outstanding (1, 2) 272,575 269,101 267,714
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE (1)
Basic $ 1.03 $ .90 $ .67
Diluted $ .99 $ .87 $ .64
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE (1) $ .139 $ .120 $ .094
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
(1) Reflects the September 1997 three-for-two common stock split.
(2) Amounts shown are used to calculate diluted earnings per share.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 797,447 $ 633,317
Cash and investments required to be segregated under federal or other regulations
(including resale agreements of $4,707,187 in 1997
and $6,069,930 in 1996) 6,774,024 7,235,971
Receivable from brokers, dealers and clearing organizations 267,070 230,943
Receivable from customers -- net 7,751,513 5,012,815
Securities owned -- at market value 282,569 127,866
Equipment, office facilities and property -- net 342,273 315,376
Intangible assets -- net 55,854 68,922
Other assets 210,957 153,558
- -----------------------------------------------------------------------------------------------------------------------------
Total $16,481,707 $13,778,768
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts payable $ 268,644 $ 225,136
Payable to brokers, dealers and clearing organizations 1,122,663 877,742
Payable to customers 13,106,202 11,176,836
Accrued expenses and other liabilities 478,032 360,683
Borrowings 361,049 283,816
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 15,336,590 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 shares issued in 1997 and 1996 * 2,677 1,785
Additional paid-in capital 241,422 200,857
Retained earnings 955,496 723,085
Treasury stock -- 1,753 shares in 1997 and 5,087
shares in 1996, at cost * (35,401) (60,277)
Unearned ESOP shares (2,769) (5,517)
Unamortized restricted stock compensation (17,228) (8,658)
Foreign currency translation adjustment 920 3,280
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,145,117 854,555
- -----------------------------------------------------------------------------------------------------------------------------
Total $16,481,707 $13,778,768
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
* Reflects the September 1997 three-for-two common stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 270,277 $ 233,803 $ 172,604
Noncash items included in net income:
Depreciation and amortization 124,682 98,342 68,793
Compensation payable in common stock 24,385 26,693 3,307
Deferred income taxes (29,074) (5,214) (6,975)
Other 3,047 4,526 302
Change in securities owned -- at market value (154,699) (14,344) (53,297)
Change in other assets (25,934) (2,396) (39,610)
Change in accrued expenses and other liabilities 153,234 48,964 141,431
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer- related balances 365,918 390,374 286,555
- -----------------------------------------------------------------------------------------------------------------------------
Change in customer-related balances (excluding
the effects of businesses acquired):
Cash and investments required to be segregated under
federal or other regulations 456,662 (1,796,722) (1,157,717)
Receivable from brokers, dealers and clearing organizations (37,449) (81,517) (15,908)
Receivable from customers (2,741,796) (1,066,802) (1,011,008)
Drafts payable 43,908 11,069 89,909
Payable to brokers, dealers and clearing organizations 245,327 292,699 285,363
Payable to customers 1,935,507 2,608,577 1,775,434
- -----------------------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (97,841) (32,696) (33,927)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 268,077 357,678 252,628
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment, office facilities and property -- net (139,416) (159,812) (165,630)
Cash payments for businesses acquired, net of cash received (1,200) (4,709) (68,244)
Purchase of life insurance policies (39,628)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (140,616) (164,521) (273,502)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 111,000 64,000 70,000
Repayment of borrowings (33,649) (27,459) (2,781)
Dividends paid (37,091) (31,495) (24,249)
Purchase of treasury stock (18,234) (28,171) (17,345)
Proceeds from loans on life insurance policies 38,297
Proceeds from stock options exercised and other 14,530 7,839 11,623
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 36,556 (15,286) 75,545
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 113 450 (706)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 164,130 178,321 53,965
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 633,317 454,996 401,031
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 797,447 $ 633,317 $ 454,996
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock Additional
-------------------- Paid-In Retained Treasury
Shares* Amount Capital Earnings Stock
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 256,344 $ 595 $166,103 $373,161 $(57,968)
Net income 172,604
Dividends declared on common stock (24,249)
Purchase of treasury stock (1,311) (17,345)
Stock options exercised and restricted stock
compensation awards 6,015 12,809 24,345
Three-for-two stock split effected in the
form of a 50% stock dividend 297 (297)
Two-for-one stock split effected in the
form of a 100% stock dividend 893 (893)
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 1,390 206
Foreign currency translation adjustment
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 261,048 1,785 180,302 520,532 (50,968)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 233,803
Dividends declared on common stock (31,495)
Purchase of treasury stock (1,621) (28,171)
Stock options exercised and restricted stock
compensation awards 3,175 10,180 18,862
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 10,375 245
Foreign currency translation adjustment
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 262,602 1,785 200,857 723,085 (60,277)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 270,277
Dividends declared on common stock (37,091)
Purchase of treasury stock (820) (18,234)
Stock options exercised and restricted stock
compensation awards 4,154 25,830 43,110
Three-for-two stock split effected in the
form of a 50% stock dividend 892 (892)
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 14,735 117
Foreign currency translation adjustment
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 265,936 $2,677 $241,422 $955,496 $(35,401)
- -----------------------------------------------------------------------------------------------------------------------------
Unamortized Foreign
Unearned Restricted Currency
ESOP Stock Translation
Shares Compensation Adjustment Total
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $(10,174) $ (4,703) $ 467,014
Net income 172,604
Dividends declared on common stock (24,249)
Purchase of treasury stock (17,345)
Stock options exercised and restricted stock
compensation awards (3,511) 33,643
Three-for-two stock split effected in the
form of a 50% stock dividend
Two-for-one stock split effected in the
form of a 100% stock dividend
Amortization of restricted stock
compensation awards 1,140 1,140
ESOP shares released for allocation 777 2,373
Foreign currency translation adjustment $(2,286) (2,286)
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 (9,397) (7,074) (2,286) 632,894
- --------------------------------------------------------------------------------------------------------------
Net income 233,803
Dividends declared on common stock (31,495)
Purchase of treasury stock (28,171)
Stock options exercised and restricted stock
compensation awards (5,068) 23,974
Amortization of restricted stock
compensation awards 3,484 3,484
ESOP shares released for allocation 3,880 14,500
Foreign currency translation adjustment 5,566 5,566
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 (5,517) (8,658) 3,280 854,555
- --------------------------------------------------------------------------------------------------------------
Net income 270,277
Dividends declared on common stock (37,091)
Purchase of treasury stock (18,234)
Stock options exercised and restricted stock
compensation awards (14,179) 54,761
Three-for-two stock split effected in the
form of a 50% stock dividend
Amortization of restricted stock
compensation awards 5,609 5,609
ESOP shares released for allocation 2,748 17,600
Foreign currency translation adjustment (2,360) (2,360)
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ (2,769) $(17,228) $ 920 $1,145,117
- -------------------------------------------------------------------------------------------------------------
* Share amounts are presented net of treasury shares and reflect the
September 1997 three-for-two common stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
THE CHARLES SCHWAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Amounts in Thousands, Except Per Share and Option Price Amounts)
BASIS OF PRESENTATION
The consolidated financial statements include The Charles Schwab
Corporation (CSC) and its subsidiaries (collectively referred to as the
Company). CSC is a holding company engaged, through its subsidiaries, in
securities brokerage and related financial services. CSC's principal operating
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer
with 272 domestic branch offices in 47 states, as well as a branch in each of
the Commonwealth of Puerto Rico and the United Kingdom. Another subsidiary,
Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq and other securities,
provides trade execution services to broker-dealers, including Schwab, and
institutional customers. Other subsidiaries include Charles Schwab Investment
Management, Inc., the investment advisor for Schwab's proprietary mutual funds,
and Charles Schwab Europe (formerly known as ShareLink), a retail discount
securities brokerage firm located in the United Kingdom.
Certain items in prior years' financial statements have been reclassified
to conform to the 1997 presentation. All material intercompany balances and
transactions have been eliminated.
SIGNIFICANT ACCOUNTING POLICIES
SECURITIES TRANSACTIONS: Customers' securities transactions are recorded on a
settlement date basis with related commission revenues and expenses recorded on
a trade date basis. Principal transactions are recorded on a trade date basis.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts in the
accompanying financial statements. Such estimates relate to useful lives of
equipment, office facilities, buildings and intangible assets, fair value of
financial instruments, allowance for doubtful accounts, future tax benefits and
legal reserves. Actual results could differ from such estimates.
COSTS associated with internally developed software, and the acquisition of new
customer accounts are expensed as incurred.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company considers the
amounts presented for financial instruments on the consolidated balance sheet to
be reasonable estimates of fair value.
CASH AND INVESTMENTS REQUIRED TO BE SEGREGATED UNDER FEDERAL OR OTHER
REGULATIONS consist primarily of securities purchased under agreements to resell
(resale agreements) and certificates of deposit. Resale agreements are
accounted for as collateralized financing transactions and are recorded at their
contractual amounts. Certificates of deposit are stated at cost, which
approximates market.
RECEIVABLE FROM CUSTOMERS that remain unsecured or partially secured for more
than 30 days are substantially reserved for, and are stated net of allowance for
doubtful accounts of $8 million and $6 million at December 31, 1997 and 1996,
respectively.
EQUIPMENT, OFFICE FACILITIES AND PROPERTY: Equipment and office facilities are
depreciated on a straight-line basis over the estimated useful life of the asset
of three to seven years. Buildings are depreciated on a straight-line basis
over twenty years. Leasehold improvements are amortized on a straight-line
basis over the lesser of the estimated useful life of the asset or the life of
the lease. Equipment, office facilities and property are stated at cost net of
accumulated depreciation and amortization of $366 million and $270 million at
December 31, 1997 and 1996, respectively.
INTANGIBLE ASSETS, including goodwill and customer lists, are amortized on a
straight-line basis over three to fifteen years. Intangible assets are stated
at cost net of accumulated amortization of $186 million and $175 million at
December 31, 1997 and 1996, respectively.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date, while
revenues and expenses are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as a separate
component of stockholders' equity.
DERIVATIVES: The Company's derivatives activities were limited to exchange-
traded option contracts to reduce market risk on inventories in Nasdaq and
exchange-listed securities. The notional amount of such derivatives was not
material to the Company's consolidated balance sheets at December 31, 1997 and
1996.
INCOME TAXES: The Company files a consolidated U.S. federal income tax return
and uses the asset and liability method in providing for income tax expense.
Under this method, deferred tax assets and liabilities are recorded for
17
temporary differences between the tax basis of assets and liabilities and their
recorded amounts for financial reporting purposes, using currently enacted tax
law.
COMMON STOCK SPLIT: Share and per share information presented in the financial
statements and related notes have been restated to reflect the September 1997
three-for-two common stock split, effected in the form of a 50% stock dividend.
CASH FLOWS: For purposes of reporting cash flows, the Company considers all
highly liquid investments (including resale agreements) with original maturities
of three months or less that are not required to be segregated under federal or
other regulations to be cash equivalents.
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 in 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, and its adoption did not have an effect on the Company's financial
position, results of operations, earnings per share or cash flows. The adoption
of SFAS No. 127 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 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 standards will not have an effect on the
Company's financial position, results of operations, earnings per share or cash
flows, but will impact financial statement disclosure.
ACQUISITIONS
During 1995, the Company completed several acquisitions. The largest
acquisition was Charles Schwab Europe for $60 million, net of cash received.
Because the acquisitions were accounted for using the purchase method of
accounting, the operating results of the acquired companies are included in the
consolidated results of the Company since the respective dates of acquisitions.
The historical results of the acquired companies are not included in periods
prior to such acquisitions. During 1997 and 1996, the Company made additional
payments relating to a 1995 acquisition.
SECURITIES OWNED
Securities owned are recorded at market value and consist of the following:
December 31, 1997 1996
- --------------------------------------------------------------------------------
SchwabFunds-Registered Trademark- money market funds $161,175 $ 50,405
Equity and bond mutual funds 63,504 38,305
Equity and other securities 57,890 39,156
- --------------------------------------------------------------------------------
Total securities owned $282,569 $127,866
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company's positions in SchwabFunds money market funds arise from
certain overnight funding of customers' redemption and check-writing activities.
Equity and bond mutual funds include investments made by the Company to fund
obligations under its deferred compensation plan. Equity and other securities
include M&S' inventories in Nasdaq securities and Schwab's inventories in
exchange-listed securities relating to its specialist operations.
Securities sold, but not yet purchased of $28 million and $24 million at
December 31, 1997 and 1996, respectively, consist of equity and other
securities, and are recorded at market value in accrued expenses and other
liabilities.
PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Payable to brokers, dealers and clearing organizations consist primarily of
securities loaned of $998 million and $776 million at December 31, 1997 and
1996, respectively. Securities loaned are recorded at the amount of cash
collateral received. The market value of securities pledged under securities
lending transactions approximated amounts due.
PAYABLE TO CUSTOMERS
The principal source of funding for Schwab's margin lending is cash
balances in customer accounts. At December 31, 1997, Schwab was paying interest
at 4.7% on $11,161 million of cash balances in customer brokerage accounts,
which were included in payable to customers. At December 31, 1996, Schwab was
paying interest at 4.5% on $9,392 million of such cash balances.
18
BORROWINGS
Borrowings consist of the following:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Medium-Term Notes $361,000 $278,000
Other 49 5,816
- --------------------------------------------------------------------------------
Total borrowings $361,049 $283,816
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 1997, CSC had $361 million aggregate principal amount of
Senior Medium-Term Notes, Series A (Medium-Term Notes) outstanding, with fixed
interest rates ranging from 5.67% to 7.72% and maturities ranging from 1998 to
2007 as follows:
- --------------------------------------------------------------------------------
1998 $ 40,000
1999 40,000
2000 48,000
2001 39,000
2002 40,000
Thereafter 154,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Medium-Term Notes carry a weighted-average interest rate of 6.65%. The
fair value of the Medium-Term Notes at December 31, 1997 and 1996, based on
estimates of market rates for debt with similar terms and remaining maturities,
approximated their carrying amounts.
As of December 31, 1997, CSC had a prospectus supplement on file with the
Securities and Exchange Commission (SEC) enabling CSC to issue up to
$196 million in Senior or Senior Subordinated Medium-Term Notes, Series A. At
December 31, 1997, $85 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 minimum levels of
stockholders' equity and Schwab and M&S to maintain specified levels of net
capital, as defined. This facility was unused in 1997.
For use in its brokerage operations, Schwab maintained uncommitted,
unsecured bank credit lines totaling $595 million and $495 million at
December 31, 1997 and 1996, respectively. There were no borrowings outstanding
under these lines at December 31, 1997 and 1996. In 1997, Schwab entered into
unsecured letter of credit agreements with five banks totaling $450 million to
satisfy the margin requirement of customer option transactions with the Options
Clearing Corporation. Schwab pays a fee to maintain these letter of credit
agreements.
TAXES ON INCOME
Income tax expense is as follows:
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $179,110 $138,990 $ 96,742
State 26,934 26,484 14,733
- --------------------------------------------------------------------------------
Total current 206,044 165,474 111,475
- --------------------------------------------------------------------------------
Deferred:
Federal (26,484) (4,881) (6,818)
State (2,590) (333) (157)
- --------------------------------------------------------------------------------
Total deferred (29,074) (5,214) (6,975)
- --------------------------------------------------------------------------------
Total taxes on income $176,970 $160,260 $104,500
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The above amounts do not include the tax benefit from the exercise of stock
options and the vesting of restricted stock awards, which for accounting
purposes is credited directly to additional paid-in capital. Such tax benefits
reduced income taxes paid by $34 million in 1997, $15 million in 1996 and
$22 million in 1995.
The temporary differences which created deferred tax assets and liabilities,
included in other assets, and accrued expenses and other liabilities, are
detailed below:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Reserves and allowances $33,456 $12,733
Deferred compensation 33,142 19,872
Depreciation and amortization 735 934
- --------------------------------------------------------------------------------
Total deferred assets 67,333 33,539
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
State and local taxes (2,622) (923)
Asset valuation differences (1,101) (3,289)
Other (4,479) 816
- --------------------------------------------------------------------------------
Total deferred liabilities (8,202) (3,396)
- --------------------------------------------------------------------------------
Net deferred tax asset $59,131 $30,143
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company determined that no valuation allowance against deferred tax
assets at December 31, 1997 and 1996 was necessary.
The effective income tax rate differs from the amount computed by applying
the federal statutory income tax rate as follows:
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 3.5 4.3 3.4
Other 1.1 1.4 (.7)
- --------------------------------------------------------------------------------
Effective income tax rate 39.6% 40.7% 37.7%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
19
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
The Company's stock incentive plans provide for granting options to
employees, officers and directors, and restricted stock awards to employees and
officers.
In 1997, the Board of Directors approved a new stock incentive plan for
granting options and restricted stock awards to non-officer employees. In
January 1998, the Company granted over one million options under this plan to
non-officer employees employed as of December 31, 1997. The Company expects to
grant such options annually with the size of the grant based on Company and
individual performance.
Options are granted for the purchase of shares of common stock at not less
than market value on the date of grant, and expire within either eight or ten
years from the date of grant. Options generally vest over a four-year period
from the date of grant. A summary of option activity follows:
1997 1996 1995
------------------------- ------------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 21,572 $ 7.57 23,164 $ 6.20 26,127 $ 3.72
Granted 4,033 $ 30.03 2,137 $ 16.83 3,943 $ 15.96
Exercised (3,474) $ 4.20 (2,838) $ 2.64 (5,788) $ 1.97
Canceled (417) $ 13.16 (891) $ 9.75 (1,118) $ 4.58
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 21,714 $ 12.17 21,572 $ 7.57 23,164 $ 6.20
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 13,357 $ 6.29 13,871 $ 4.66 10,559 $ 3.05
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Available for future grant at
end of year 15,981 4,422 5,902
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $ 13.31 $ 7.36 $ 7.14
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
The fair value of each option granted is estimated as of the grant date
using the Black-Scholes option-pricing model with the following assumptions:
1997 1996 1995
- --------------------------------------------------------------------------------
Dividend yield .75% .75% .75%
Expected volatility 44% 44% 44%
Risk-free interest rate 6.2% 6.0% 6.0%
Expected life (in years) 5 5 5
- --------------------------------------------------------------------------------
The following table summarizes information about options outstanding and
exercisable:
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices of Options Life (in years) Price of Options Price
- -----------------------------------------------------------------------------------------------------------------------------
$ 1.00 to $ 5.00 7,111 2.5 $ 2.81 7,111 $ 2.81
$ 5.01 to $17.00 7,549 6.7 $ 9.45 4,942 $ 8.35
$17.01 to $43.00 7,054 8.8 $ 24.53 1,304 $ 17.46
- -----------------------------------------------------------------------------------------------------------------------------
$ 1.00 to $43.00 21,714 6.0 $ 12.17 13,357 $ 6.29
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25 --
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized for the Company's options. Had compensation expense for the
Company's options been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123 --
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share would have been reduced to the pro forma amounts presented below:
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Net Income: As reported $270,277 $233,803 $172,604
Pro forma $255,850 $227,401 $168,296
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic Earnings
Per Share: As reported $ 1.03 $ .90 $ .67
Pro forma $ .97 $ .87 $ .65
Diluted Earnings
Per Share: As reported $ .99 $ .87 $ .64
Pro forma $ .94 $ .85 $ .63
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The pro forma effects on net income may not be representative of the pro
forma effects on net income in future years because SFAS No. 123 is applicable
only to options granted after December 31, 1994. The pro forma effect will not
be fully reflected until 1999.
Restricted stock awards are restricted from sale, and some vest based upon
the Company achieving certain financial measures. The market value of shares
associated with the restricted stock awards is recorded as unamortized
restricted stock compensation and is amortized to compensation expense over the
vesting periods, generally four years.
20
EMPLOYEE BENEFIT PLANS
The Company has a profit sharing and employee stock ownership plan (Profit
Sharing Plan), including a 401(k) salary deferral component, for eligible
employees who have met certain service requirements. The Company matches
certain employee contributions; additional contributions to this plan are at the
discretion of the Company. Total Company contribution expense was $44 million
in 1997, $36 million in 1996 and $32 million in 1995.
In January 1993, the Profit Sharing Plan borrowed $15 million from the
Company to purchase over 3 million shares of the Company's common stock. The
note receivable from the Profit Sharing Plan had a balance of $2 million and
$5 million at December 31, 1997 and 1996, respectively, bears interest at 7.9%
and is due in annual installments through 2007. As the note is repaid, shares
are released for allocation to eligible employees based on the proportion of
debt service paid during the year. In accordance with Statement of Position
No. 93-6 -- Employers' Accounting for Employee Stock Ownership Plans (the
Statement), the Company recognizes as compensation and benefits expense the fair
value of shares released for allocation to employees through the employee stock
ownership plan (ESOP). Only released ESOP shares are considered outstanding for
basic and diluted earnings per share computations. Dividends on allocated
shares and unallocated shares are charged to retained earnings and compensation
and benefits expense, respectively. Compensation and benefits expense related
to shares released for allocation through the ESOP loan repayments was
$17 million in 1997, $14 million in 1996 and $2 million in 1995. The increase
from 1995 to 1997 was primarily due to higher employer ESOP contributions. The
unallocated shares are recorded as unearned ESOP shares on the consolidated
balance sheet. Under the "grandfather" provisions of the Statement, the Company
did not apply the Statement to shares purchased by the ESOP prior to 1993.
The ESOP share information is as follows:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Allocated shares:
Purchased prior to 1993 12,640 15,358
Purchased in 1993 and after 2,949 1,220
Shares released for allocation:
Purchased in 1993 and after 681 1,729
Unreleased shares:
Purchased in 1993 and after 597 1,196
- --------------------------------------------------------------------------------
Total ESOP shares 16,867 19,503
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fair value of unreleased shares $25,020 $25,510
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company is the beneficiary of a life insurance program covering the
majority of its employees. Under the program, the cash surrender value of
insurance policies is recorded net of policy loans in other assets. At
December 31, 1997 and 1996, policy loans with an interest rate of 8.0% totaled
$81 million.
EARNINGS PER SHARE
The Company adopted SFAS No. 128 -- Earnings Per Share in 1997. This
standard replaced previous 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. Earnings per share
under the basic and diluted computations are as follows:
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Net Income $270,277 $233,803 $172,604
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic Shares:
Weighted-average common
shares outstanding 262,545 259,909 257,696
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diluted Shares:
Weighted-average common
shares outstanding 262,545 259,909 257,696
Common stock equivalent shares
related to stock incentive plans 10,030 9,192 10,018
- --------------------------------------------------------------------------------
Diluted weighted-average
common shares outstanding 272,575 269,101 267,714
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic earnings per share $ 1.03 $ .90 $ .67
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diluted earnings per share $ .99 $ .87 $ .64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REGULATORY REQUIREMENTS
Schwab and M&S are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule) and each compute net capital under
the alternative method permitted by this Rule, which requires the maintenance of
minimum net capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar amount, which is
based on the type of business conducted by the broker-dealer. The minimum
dollar amount for both Schwab and M&S is $1 million. Under the alternative
method, a broker-dealer may not repay subordinated borrowings, pay cash
dividends, or make any unsecured advances or loans to its parent or employees if
such payment would result in net capital of less than 5% of aggregate debit
balances or less than 120% of its minimum dollar amount requirement. At
December 31, 1997, Schwab's net capital was $823 million (11% of aggregate debit
balances), which was $667 million in excess of its minimum required net capital
and $434 million in excess of 5% of aggregate debit balances. At December 31,
1997, M&S' net capital was $5 million (347% of aggregate debit
21
balances), which was $4 million in excess of its minimum required net capital.
Schwab and Charles Schwab Europe had portions of their cash and investments
segregated for the exclusive benefit of customers at December 31, 1997, in
accordance with applicable regulations. M&S had no such cash reserve
requirement at December 31, 1997.
COMMITMENTS AND CONTINGENT LIABILITIES
The Company has noncancelable operating leases for office space and
equipment. Future minimum rental commitments under these leases at December 31,
1997 are as follows:
- --------------------------------------------------------------------------------
1998 $ 77,556
1999 75,529
2000 63,709
2001 58,938
2002 66,515
Thereafter 335,939
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense was
$104 million in 1997, $92 million in 1996 and $79 million in 1995.
On December 24, 1997, M&S and 30 of the 31 other remaining defendants
submitted for court approval a settlement agreement 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. The
settlement would fully resolve alleged claims on behalf of certain persons who
purchased or sold Nasdaq securities during the period May 1, 1989 through
July 17, 1996 concerning the width of spreads between the bid and ask prices of
certain Nasdaq securities. Pursuant to the settlement agreement, M&S paid
approximately $1 million on December 31, 1997, and agreed that on September 30,
1998, it would contribute Treasury securities which would mature to a value of
approximately $46 million on or before July 30, 1999. As of December 31, 1997,
the Company has recognized all of the settlement charges for the litigation and
does not expect to incur any charges relating to this settlement beyond 1997.
The court granted preliminary approval of the settlement on December 31, 1997,
and is expected to consider final approval in 1998.
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.
Through October 1997, one of the actions was voluntarily dismissed and five were
resolved favorably to Schwab on the grounds that the claims asserted are
preempted by federal law. In addition, on November 20, 1997, the Illinois
Supreme Court ruled that the claims asserted in a case in that state were
preempted by federal law. The remaining four cases are still pending in state
courts in Texas, California and Louisiana. The action in Texas has been stayed.
The action in California has been dismissed, and plaintiffs have filed an
appeal.
On June 30, 1995, a class was certified in the action in Civil District
Court for the Parish of Orleans in Louisiana on behalf 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, a class was certified in the action in Civil District Court for
the Parish of Natchitoches in Louisiana on behalf 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. There can be no assurance that
these legal proceedings will not have a material adverse effect on the results
of operations in any future period, depending partly on the results for that
period, and a substantial judgment could have a material adverse impact on the
Company's financial condition and results of operations. However, it is the
opinion of management, after consultation with outside legal counsel, that the
ultimate outcome of these actions will not have a material adverse impact on the
financial condition or operating results of the Company.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
AND CREDIT RISK
Through Schwab and M&S, the Company loans customer securities temporarily
to other brokers in connection with its securities lending activities. The
Company receives cash as collateral for the securities loaned. Increases in
security prices may cause the market value of the securities loaned to
22
exceed the amount of cash received as collateral. In the event the counterparty
to these transactions does not return the loaned securities, the Company may be
exposed to the risk of acquiring the securities at prevailing market prices in
order to satisfy its customer obligations. The Company mitigates this risk by
requiring credit approvals for counterparties, by monitoring the market value of
securities loaned on a daily basis and by requiring additional cash as
collateral when necessary.
The Company is obligated to settle transactions with brokers and other
financial institutions even if its customers fail to meet their obligations to
the Company. Customers are required to complete their transactions on
settlement date, generally three business days after trade date. If customers
do not fulfill their contractual obligations, the Company may incur losses. The
Company has established procedures to reduce this risk by requiring deposits
from customers in excess of amounts prescribed by regulatory requirements for
certain types of trades.
In the normal course of its margin lending activities, Schwab may be liable
for the margin requirement of customer margin securities transactions. As
customers write option contracts or sell securities short, the Company may incur
losses if the customers do not fulfill their obligations and the collateral in
customer accounts is not sufficient to fully cover losses which customers may
incur from these strategies. To mitigate this risk, the Company monitors
required margin levels daily and customers are required to deposit additional
collateral, or reduce positions, when necessary.
In its capacity as market maker, M&S maintains inventories in Nasdaq
securities on both a long and short basis. While long inventory positions
represent M&S ownership of securities, short inventory positions represent
obligations of M&S to deliver specified securities at a contracted price, which
may differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result in
losses or gains to M&S as market values of securities fluctuate. Also, Schwab
maintains inventories in exchange-listed securities on both a long and short
basis relating to its specialist operations and could incur losses or gains as a
result of changes in the market value of these securities. To mitigate the risk
of losses, long and short positions are marked to market daily and are
continuously monitored to assure compliance with limits established by the
Company. Additionally, the Company may purchase exchange-traded option
contracts to reduce market risk on these inventories.
Schwab enters into collateralized resale agreements principally with other
broker-dealers which could result in losses in the event the counterparty to the
transaction does not purchase the securities held as collateral for the cash
advanced and the market value of these securities declines. To mitigate this
risk, Schwab requires that the counterparty deliver securities to a custodian,
to be held as collateral, with a market value in excess of the resale price.
Schwab also sets standards for the credit quality of the counterparty, monitors
the market value of the underlying securities as compared to the related
receivable, including accrued interest, and requires additional collateral where
deemed appropriate.
CONCENTRATIONS
Fees received from the Company's proprietary mutual funds represented
approximately 12% of the Company's consolidated revenues in 1997. As of
December 31, 1997, approximately 28% of Schwab's total customer accounts were
located in California.
SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
CASH PAID:
Income taxes $166,773 $145,113 $ 98,444
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Interest:
Customer cash balances $479,504 $369,960 $ 319,645
Stock-lending activities 36,939 24,302 14,106
Borrowings 18,790 16,931 11,131
Other 10,749 9,670 4,833
- --------------------------------------------------------------------------------
Total interest $545,982 $420,863 $ 349,715
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BUSINESSES ACQUIRED IN 1995 AND
RESIDUAL PAYMENTS:
Assets acquired $ 219,457
Liabilities assumed (138,204)
Other $ 1,200 $ 4,709 (5,484)
- --------------------------------------------------------------------------------
Cash payments 1,200 4,709 75,769
Cash received (7,525)
- --------------------------------------------------------------------------------
Cash payments, net of
cash received $ 1,200 $ 4,709 $ 68,244
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
MANAGEMENT'S REPORT
To Our Stockholders:
Management of the Company is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and the other financial
information presented in this annual report. To meet these responsibilities we
maintain a system of internal control that is designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of Company and customer assets from unauthorized use, and the
execution and recording of transactions in accordance with management's
authorization. The system is augmented by careful selection of our managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring that employees
adhere to the highest standards of personal and professional integrity. The
Company's internal audit function monitors and reports on the adequacy of and
compliance with our internal controls, policies and procedures. Although no
cost-effective internal control system will preclude all errors and
irregularities, we believe the Company's system of internal control is adequate
to accomplish the objectives set forth above.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and necessarily include some amounts
that are based on estimates and our best judgments. The financial statements
have been audited by the independent accounting firm of Deloitte & Touche LLP,
who were given unrestricted access to the Company's financial records and
related data. We believe that all representations made to Deloitte & Touche LLP
during their audit were valid and appropriate.
The Board of Directors through its Audit Committee, which is comprised
entirely of nonmanagement directors, has an oversight role in the area of
financial reporting and internal control. The Audit Committee periodically
meets with Deloitte & Touche LLP, our internal auditors and Company management
to discuss accounting, auditing, internal control over financial reporting and
other matters.
Charles R. Schwab
Chairman of the Board and Co-Chief Executive Officer
David S. Pottruck
President, Co-Chief Executive Officer and Chief Operating Officer
Steven L. Scheid
Executive Vice President and Chief Financial Officer
24
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of The Charles Schwab Corporation:
We have audited the accompanying consolidated balance sheets of The Charles
Schwab Corporation and subsidiaries (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Charles Schwab Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 23, 1998
25
THE CHARLES SCHWAB CORPORATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
Weighted- Basic
Expenses Average Earnings
Excluding Net Common Per
Revenues (a) Interest Income Shares (b) Share
- --------------------------------------------------------------------------------------------------------------------------------
1997 BY QUARTER (d)
Fourth DIVIDEND INCREASE $ 620.6 $ 516.3 $ 63.1 274.4 $.24
Third STOCK SPLIT 611.8 484.9 76.5 273.0 .29
Second 530.7 424.9 64.0 271.6 .24
First 535.7 425.4 66.7 271.2 .26
- --------------------------------------------------------------------------------------------------------------------------------
1996 BY QUARTER
Fourth $ 482.3 $ 383.1 $ 59.7 269.8 $.23
Third DIVIDEND INCREASE 430.0 333.4 57.1 269.4 .22
Second 491.8 373.1 70.1 268.9 .27
First 446.8 367.2 46.9 268.3 .18
- --------------------------------------------------------------------------------------------------------------------------------
1995 BY QUARTER
Fourth $ 394.8 $ 332.4 $ 42.6 269.8 $.17
Third DIVIDEND INCREASE/STOCK SPLIT 385.5 307.5 47.2 269.5 .18
Second 342.7 269.4 44.4 267.2 .17
First DIVIDEND INCREASE/STOCK SPLIT 296.9 233.5 38.4 264.2 .15
- --------------------------------------------------------------------------------------------------------------------------------
1994 BY QUARTER
Fourth $ 270.4 $ 214.4 $ 33.8 262.7 $.13
Third 248.1 196.5 31.2 261.3 .12
Second 258.2 205.1 32.1 262.6 .13
First DIVIDEND INCREASE 287.9 224.3 38.2 264.6 .15
- --------------------------------------------------------------------------------------------------------------------------------
1993 BY QUARTER
Fourth $ 257.5 $ 212.3 $ 28.5 269.3 $.11
Third 238.8 191.1 22.2(e) 268.5 .08(e)
Second DIVIDEND INCREASE / STOCK SPLIT 232.4 180.4 31.6 266.9 .12
First 236.3 174.9 35.4 265.4 .14
- --------------------------------------------------------------------------------------------------------------------------------
Dividends
Diluted Declared Range Range
Earnings Per of Common of Price/
Per Common Stock Price Earnings
Share Share Per Share Ratio (c)
- --------------------------------------------------------------------------------------------------------------------------------
1997 BY QUARTER (d)
Fourth DIVIDEND INCREASE $.23 $.040 $44.25 - 29.25 45 - 30
Third STOCK SPLIT .28 .033 36.56 - 26.67 37 - 27
Second .23 .033 28.58 - 20.25 31 - 22
First .25 .033 28.00 - 20.25 30 - 22
- --------------------------------------------------------------------------------------------------------------------------------
1996 BY QUARTER
Fourth $.22 $.033 $21.92 - 15.00 25 - 17
Third DIVIDEND INCREASE .21 .033 17.92 - 13.25 22 - 16
Second .26 .027 17.67 - 14.58 23 - 19
First .18 .027 18.25 - 12.42 27 - 18
- --------------------------------------------------------------------------------------------------------------------------------
1995 BY QUARTER
Fourth $.15 $.027 $17.78 - 11.08 28 - 17
Third DIVIDEND INCREASE/STOCK SPLIT .17 .027 19.33 - 13.83 32 - 23
Second .17 .020 15.25 - 9.83 27 - 18
First DIVIDEND INCREASE/STOCK SPLIT .15 .020 11.00 - 7.36 21 - 14
- --------------------------------------------------------------------------------------------------------------------------------
1994 BY QUARTER
Fourth $.13 $.016 $ 8.22 - 6.14 16 - 12
Third .12 .016 6.86 - 5.64 14 - 11
Second .12 .016 7.53 - 5.50 16 - 12
First DIVIDEND INCREASE .14 .016 7.33 - 5.78 16 - 13
- --------------------------------------------------------------------------------------------------------------------------------
1993 BY QUARTER
Fourth $.11 $.011 $ 8.53 - 6.39 19 - 15
Third .08(e) .011 8.25 - 5.94 18 - 13
Second DIVIDEND INCREASE/STOCK SPLIT .12 .011 6.44 - 4.54 17 - 12
First .13 .009 5.52 - 3.69 17 - 11
- --------------------------------------------------------------------------------------------------------------------------------
ALL SHARE AND PER SHARE DATA REFLECT THE SEPTEMBER 1997 THREE-FOR-TWO COMMON
STOCK SPLIT.
(a) REVENUES ARE PRESENTED NET OF INTEREST EXPENSE.
(b) AMOUNTS SHOWN ARE USED TO CALCULATE DILUTED EARNINGS PER SHARE.
(c) PRICE/EARNINGS RATIO IS COMPUTED BY DIVIDING THE HIGH AND LOW MARKET PRICES
BY DILUTED EARNINGS PER SHARE FOR THE 12-MONTH PERIOD ENDED ON THE LAST DAY
OF THE QUARTER PRESENTED. THE EXTRAORDINARY CHARGE IN 1993 (DESCRIBED
BELOW) HAS BEEN EXCLUDED.
(d) 1997 INCLUDES CHARGES FOR A LITIGATION SETTLEMENT OF $23.6 MILLION AFTER-
TAX ($.09 PER SHARE FOR BOTH BASIC AND DILUTED EARNINGS PER SHARE).
(e) NET INCOME AND EARNINGS PER SHARE ARE NET OF THE EFFECT OF A $6.7 MILLION
($.03 PER SHARE FOR BOTH BASIC AND DILUTED EARNINGS PER SHARE)
EXTRAORDINARY CHARGE FROM THE EARLY RETIREMENT OF DEBT.
26
THE CHARLES SCHWAB CORPORATION
CHART APPENDIX LIST
In this appendix, the following descriptions of certain charts in portions
of the Company's 1997 Annual Report to Stockholders that are omitted from the
EDGAR Version are more specific with respect to the actual numbers, amounts and
percentages than is determinable from the charts themselves. The Company
submits such more specific descriptions only for the purpose of complying with
the requirements for transmitting portions of this Annual Report on Form 10-K
electronically via EDGAR; such more specific descriptions are not intended in
any way to provide information that is additional to the information otherwise
provided in portions of the Company's 1997 Annual Report to Stockholders.
EDGAR Chart Description
Version -----------------
Page Number
- -----------
2 Stacked bar chart titled "Assets in Schwab Customer Accounts"
depicting the composition of assets in Schwab customer accounts at
year end 1997, 1996, 1995, 1994 and 1993 (shown on the bottom
axis) as follows (billions of dollars): Cash and Equivalents
$60.9, $50.0, $37.9, $28.6 and $20.1, respectively; Mutual Fund
Marketplace (registered trademark) $112.1, $78.3, $52.0, $32.2 and
$26.2, respectively; Stocks (net of margin loans) $150.8, $98.5,
$71.6, $46.1 and $39.5, respectively; Fixed Income Securities
$29.9, $26.4, $20.2, $15.7 and $10.0, respectively; Assets in
Schwab Customer Accounts (bar labeled) $353.7, $253.2, $181.7,
$122.6 and $95.8, respectively.
3 Bar chart titled "Revenues" depicting the revenues for the fiscal
years 1997, 1996 and 1995 (shown on the bottom axis) as follows
(millions of dollars) (bar labeled): $2,299, $1,851 and $1,420,
respectively.
4 Bar chart titled "Net Income" depicting the net income for the
fiscal years 1997, 1996 and 1995 (shown on the bottom axis) as
follows (millions of dollars) (bar labeled): $270, $234 and $173,
respectively.
4 Stacked bar chart titled "Commissions" depicting the composition
of commissions for the fiscal years 1997, 1996 and 1995 (shown on
the bottom axis) as follows (millions of dollars): Listed $527,
$423 and $348, respectively; Nasdaq $465, $394 and $283,
respectively; Options $103, $66 and $53, respectively; Other $79,
$71 and $67, respectively; Commissions (bar labeled) $1,174, $954
and $751, respectively.
7 Stacked bar chart titled "Compensation and Benefits" depicting the
composition of compensation and benefits for the fiscal years
1997, 1996 and 1995 (shown on the bottom axis) as follows
(millions of dollars): Salaries and Wages $601, $451 and $355,
respectively; Variable Compensation $217, $205 and $144,
respectively; Other Benefits $144, $110 and $95, respectively;
Compensation and Benefits (bar labeled) $962, $766 and $594,
respectively.
9 Bar chart titled "Net Income Plus Depreciation and Amortization"
depicting the net income plus depreciation and amortization for
the fiscal years 1997, 1996 and 1995 (shown on the bottom axis) as
follows (millions of dollars) (bar labeled): $395, $332 and $241,
respectively.
10 Bar chart titled "Dividends Declared Per Common Share" depicting
the dividends declared per common share for the fiscal years 1997,
1996 and 1995 (shown on the bottom axis) as follows (bar labeled):
$.139, $.120 and $.094, respectively.
27