<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
101 Montgomery Street, San Francisco, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
174,989,299* shares of $.01 par value Common Stock
Outstanding on May 3, 1996
* Reflects the September 1995 two-for-one common stock split.
<PAGE>
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1996
Index
Page
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Statement of Income 1
Balance Sheet 2
Statement of Cash Flows 3
Notes 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-11
Part II - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
FORWARD-LOOKING STATEMENTS In addition to the historical information contained
throughout this interim report, there are forward-looking statements that
reflect management's expectations for the future. These statements relate to
the Company's strategy, sources of liquidity, capital expenditures and
litigation. Many factors could cause actual results to differ materially from
these statements. These factors include: the competitive environment,
fundamentally cyclical financial markets, the nature of the Company's revenues
and expenses, evolving industry regulation, rapid changes in technology,
customer trading patterns, and the myriad domestic and international political
and economic factors that affect securities markets and therefore may influence
the behavior of the individual investor.
<PAGE>
<TABLE>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Revenues
Commissions $240,913 $150,947
Mutual fund service fees 68,835 46,239
Interest revenue, net of interest expense of $99,009 in 1996
and $79,203 in 1995 58,944 46,048
Principal transactions 61,634 43,296
Other 16,455 10,323
- -------------------------------------------------------------------------------------------------
Total 446,781 296,853
- -------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 195,708 123,161
Communications 42,954 26,363
Occupancy and equipment 29,976 23,520
Commissions, clearance and floor brokerage 19,533 15,599
Depreciation and amortization 24,751 14,134
Advertising and market development 22,203 10,898
Professional services 13,435 5,647
Other 18,551 14,150
- -------------------------------------------------------------------------------------------------
Total 367,111 233,472
- -------------------------------------------------------------------------------------------------
Income before taxes on income 79,670 63,381
Taxes on income 32,727 25,005
- -------------------------------------------------------------------------------------------------
Net Income $ 46,943 $ 38,376
=================================================================================================
Weighted-average number of common and
common equivalent shares outstanding (1, 2) 178,887 176,148
=================================================================================================
Per Share (1)
Primary Earnings per Share $ .26 $ .22
=================================================================================================
Fully Diluted Earnings per Share $ .26 $ .22
=================================================================================================
Dividends Declared per Common Share (1) $ .040 $ .030
=================================================================================================
(1) Reflects the September 1995 two-for-one common stock split.
(2) Amounts shown are used to calculate primary earnings per share.
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
(Unaudited)
-----------
<S>
Assets <C> <C>
Cash and equivalents (including resale agreements of $25,000 in 1996 $ 543,319 $ 429,298
and $250,000 in 1995)
Cash and investments required to be segregated under Federal or other
regulations (including resale agreements of $5,250,465 in 1996
and $4,384,298 in 1995) 5,731,105 5,426,619
Receivable from brokers, dealers and clearing organizations 166,611 141,916
Receivable from customers (less allowance for doubtful accounts
of $3,910 in 1996 and $3,700 in 1995) 4,057,883 3,946,295
Securities owned - at market value 118,446 113,522
Equipment, office facilities and property (less accumulated depreciation
and amortization of $223,290 in 1996 and $212,035 in 1995) 286,695 243,472
Intangible assets (less accumulated amortization of $165,451 in 1996
and $162,358 in 1995) 76,904 80,863
Other assets 116,010 170,023
- ------------------------------------------------------------------------------------------------------------------------
Total $11,096,973 $10,552,008
========================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 162,435 $ 212,961
Payable to brokers, dealers and clearing organizations 678,893 581,226
Payable to customers 8,966,972 8,551,996
Accrued expenses and other 325,139 326,785
Long-term debt (including current maturities) 279,970 246,146
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,413,409 9,919,114
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940,000 shares authorized; $.01 par value
per share; none issued
Common stock - 200,000,000 shares authorized; $.01 par value per share;
178,459,416 shares issued in 1996 and 1995 1,785 1,785
Additional paid-in capital 185,982 180,302
Retained earnings 560,491 520,532
Treasury stock - 3,633,055 shares in 1996 and 4,427,255 shares in 1995,
at cost (44,326) (50,968)
Unearned ESOP shares (8,414) (9,397)
Unamortized restricted stock compensation (8,838) (7,074)
Foreign currency translation adjustment (3,116) (2,286)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 683,564 632,894
- ------------------------------------------------------------------------------------------------------------------------
Total $11,096,973 $10,552,008
========================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<C> <S> <S>
Cash flows from operating activities
Net income $ 46,943 $ 38,376
Noncash items included in net income:
Depreciation and amortization 24,751 14,134
Deferred income taxes (421) 517
Other 5,031 4,067
Change in securities owned - at market value (4,924) 17,422
Change in other assets 57,354 (14,226)
Change in accrued expenses and other 8,549 (2,719)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 137,283 57,571
- -----------------------------------------------------------------------------------------------------------------
Change in customer-related balances:
Payable to customers 416,033 142,655
Receivable from customers (111,953) 96,677
Drafts payable (50,579) 41,617
Payable to brokers, dealers and clearing organizations 97,920 131,986
Receivable from brokers, dealers and clearing organizations (24,988) (1,627)
Cash and investments required to be segregated under
Federal or other regulations (305,344) (411,176)
- -----------------------------------------------------------------------------------------------------------------
Net change in customer-related balances 21,089 132
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 158,372 57,703
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (68,700) (18,006)
Cash payments for business acquired (3,709)
- -----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (72,409) (18,006)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from long-term debt 34,000
Purchase of treasury stock (1,024)
Dividends paid (6,984) (5,142)
Other 2,161 2,157
- -----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 28,153 (2,985)
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents (95)
- -----------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 114,021 36,712
Cash and equivalents at beginning of period 429,298 380,616
- -----------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 543,319 $ 417,328
=================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>
THE CHARLES SCHWAB CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
the Company). CSC is a holding company engaged, through its subsidiaries, in
securities brokerage and related investment services. CSC's principal operating
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer
with a network of over 230 branch offices and four regional customer telephone
service centers. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market
maker in Nasdaq securities, provides trade execution services to broker-dealers,
including Schwab, and institutional customers.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the opinion
of management, reflect all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles. All adjustments were
of a normal recurring nature. All material intercompany balances and
transactions have been eliminated. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1995 Annual Report to Stockholders, which are
incorporated by reference in the Company's 1995 Annual Report on Form 10-K.
Prior periods' financial statements have been reclassified to conform to the
1996 presentation.
Statement of Financial Accounting Standard No. 121
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121 - Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of. The statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of the new standard did not have an effect on the Company's financial
position, results of operations, earnings per share or cash flows.
SFAS No. 123
Effective January 1, 1996, the Company adopted SFAS No. 123 - Accounting for
Stock-Based Compensation. The new standard establishes accounting and
disclosure requirements using a fair value-based method of accounting for stock-
based employee compensation plans. Under the new standard, the Company may
either adopt the new fair value-based accounting method or continue using the
intrinsic value-based method under Accounting Principles Board (APB) Opinion No.
25 and provide pro forma disclosures of net income and earnings per share as if
the accounting provision of the new standard had been adopted. The Company
elected to continue to follow APB Opinion No. 25 and implement only the
disclosure requirements of the new standard. Such adoption did not have an
effect on the Company's results of operations, earnings per share or cash flows.
Commitments and Contingencies
In the normal course of its margin lending activities, Schwab may be liable
for the margin requirement of customer margin securities transactions.
M&S has been named as one of thirty-three defendant market-making firms in a
consolidated class action which is pending in Federal District Court in the
Southern District of New York pursuant to an order of the Judicial Panel on
Multidistrict Litigation. On December 16, 1994, the plaintiffs filed a
consolidated amended complaint purportedly on behalf of certain persons who
purchased or sold Nasdaq securities during the period May 1, 1989 through
May 27, 1994. A second consolidated amended complaint was filed on August 22,
1995. The consolidated complaint does not set forth any specific conduct by M&S
and does not request any specific amount of damages, although it requests that
the actual damages be trebled where permitted by statute. The consolidated
complaint generally alleges an illegal combination and conspiracy among the
defendant market makers to fix and maintain the spreads between the bid and ask
prices of Nasdaq securities. The ultimate outcome of this consolidated action
cannot currently be determined.
Schwab has been named as a defendant in eleven class action lawsuits filed in
state courts in Minnesota, Illinois, New York, Louisiana, Texas, Florida and
California. The class actions were filed between
- 4 -
<PAGE>
August 12, 1993 and November 17, 1995, and purport to be brought on behalf of
customers of Schwab who purchased or sold securities for which Schwab received
payments from the market maker, stock dealers or others who executed the
transaction. The complaints generally allege that Schwab failed to disclose
and remit such payments to members of the class, and generally seek damages
equal to the payments received by Schwab. On June 30, 1995, a class was
certified in Civil District Court for the Parish of Orleans in Louisiana for
Louisiana residents who purchased or sold securities through Schwab between
February 1, 1985 and February 1, 1995 for which Schwab received monetary
payments from the market maker or stock dealer who executed the transaction.
The class certification was affirmed by the Louisiana Court of Appeals on
February 29, 1996. On August 16, 1995, another class was certified in Civil
District Court for the Parish of Natchitoches in Louisiana for residents of
all states who purchased or sold securities through Schwab since 1985 for
which Schwab received monetary payments from the market maker or other third
party who executed the transaction. Schwab has appealed this class
certification to the Louisiana Court of Appeals. On October 11, 1995,
the action filed in the Fifteenth Judicial Circuit Court in
and for Palm Beach County, Florida, was voluntarily dismissed by plaintiff. On
April 19, 1996, the Minnesota Supreme Court unanimously upheld the dismissal of
the three class actions filed against Schwab in the Fourth Judicial District
Court, Hennepin County, Minnesota, finding that the claims asserted were
preempted by federal law. The ultimate outcome of the remaining actions cannot
currently be determined.
There are other various lawsuits pending against the Company which, in the
opinion of management, will be resolved with no material impact on the Company's
financial position or results of operations.
Regulatory Requirements
Schwab and M&S are subject to the SEC's Uniform Net Capital Rule and each
compute net capital under the alternative method permitted by this Rule, which
requires the maintenance of minimum net capital, as defined, of the greater of
2% of aggregate debit balances arising from customer transactions or a minimum
dollar amount, which is based on the type of business conducted by the broker-
dealer. The minimum dollar amount for both Schwab and M&S is $1 million. Under
the alternative method, a broker-dealer may not repay subordinated borrowings,
pay cash dividends, or make any unsecured advances or loans to its parent or
employees if such payment would result in net capital of less than 5% of
aggregate debit balances or less than 120% of its minimum dollar amount
requirement. At March 31, 1996, Schwab's net capital was $417 million (10% of
aggregate debit balances), which was $333 million in excess of its minimum
required net capital and $207 million in excess of 5% of aggregate debit
balances. At March 31, 1996, M&S' net capital was $8 million (242% of aggregate
debit balances), which was $7 million in excess of its minimum required net
capital.
Schwab, ShareLink Limited, a subsidiary of ShareLink Investment Services plc,
and M&S had portions of their cash and investments segregated for the exclusive
benefit of customers at March 31, 1996, in accordance with applicable
regulations.
Cash Flow Information
Certain information affecting the cash flows of the Company follows (in
thousands):
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Income taxes paid $ 370 $ 3,993
======= =======
Interest paid:
Customer cash
balances $86,436 $72,468
Long-term debt (including
current maturities) 7,403 5,204
Other 7,631 3,610
------- -------
Total interest paid $101,470 $81,282
======== =======
</TABLE>
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide brokerage and related investment services to
customers with 3.6 million active (a) accounts and assets that totaled
$200.5 billion at March 31, 1996. With a network of over 230 branch offices,
the Company's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is
physically represented in 46 states, the Commonwealth of Puerto Rico and the
United Kingdom. Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq
securities, provides trade execution services to broker-dealers and
institutional customers.
The Company remains focused on achieving profitable growth within several
markets of the financial services industry - retail brokerage, mutual funds,
equity securities market making, support services for independent investment
managers, electronic brokerage and 401(k) defined contribution plans. The
Company faces heavy competitive pressure in these markets from full commission
and discount brokerage firms, as well as from mutual fund companies.
Increasingly, competition has also come from banks, software development
companies, insurance companies and others as they expand their product lines.
The Company's strategy for increasing stockholder value while operating in this
competitive environment includes several key elements, all of which reflect a
focus on providing value to customers.
First, Schwab continues to offer a broad range of products and services at
prices that management believes represent superior value to customers. The
Company has historically used varying levels of discount pricing, such as with
its Mutual Fund OneSource (registered trademark) service, to enhance the value
of its products and services and support its efforts to gain market share.
Management expects to continue aggressive use of discount pricing in the
marketing of new products and services. Second, the Company's products and
services are delivered through diverse and complementary customer service
delivery systems such as the branch office network, Schwab's regional customer
telephone service centers, and electronic brokerage channels such as Telebroker
(registered trademark), Schwab's touchtone telephone trading service, and PC-
based online services such as StreetSmart (registered trademark) and e.Schwab
(trademark). Another key element is the firm's ongoing investment in technology
to provide fast and consistent customer service and reduce processing costs.
The Company has traditionally been willing to be a forerunner in placing
technology like Telebroker and e.Schwab in the hands of customers. Finally, the
Company's nationwide advertising and marketing programs are designed to
distinguish the Schwab brand as well as the Company's products and services.
Management expects to continue to invest in all of these areas in order to
position the Company for future expansion, and to enable customers to choose the
level of service most appropriate to their investing activity.
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in volumes and price levels that occur in
fundamentally cyclical financial markets. While recent growth in mutual fund
service fees and net interest revenue has enhanced the consistency of the
Company's revenue stream, transaction-based revenues continue to represent a
majority of the Company's revenues. Since these revenues are heavily influenced
by fluctuations in the volume of securities transactions, it is not unusual for
the Company to experience significant variations in quarterly revenue levels.
Most of the
(a) Accounts with balances or activity within the preceding twelve months.
- 6 -
<PAGE>
Company's expenses do not vary directly, at least in the short term, with
fluctuations in securities trading volume. Given the nature of the Company's
revenues and expenses, and the environmental factors discussed above, the
Company's earnings and common stock price may be subject to significant
volatility. Additionally, the Company's results for any interim period are not
necessarily indicative of results for a full year.
In addition to the historical information contained throughout this interim
report, the preceding forward-looking statements relating to the Company's
strategy, as well as those that follow concerning sources of liquidity, capital
expenditures and litigation, reflect management's expectations for the
future. Many factors could cause actual results to differ materially from these
statements. These factors include: the competitive environment, fundamentally
cyclical financial markets, the nature of the Company's revenues and expenses,
evolving industry regulation, rapid changes in technology, customer trading
patterns, and the myriad domestic and international political and economic
factors that affect securities markets and therefore may influence the behavior
of the individual investor.
Three Months Ended March 31, 1996
Compared To Three Months Ended
March 31, 1995
Summary
Net income for the first quarter of 1996 totaled $47 million, up 22% from
first quarter 1995 net income of $38 million. Earnings per share for the first
quarter of 1996 increased 18% to $.26 per share from $.22 per share (a) during
the first quarter of 1995.
First quarter 1996 revenues were $447 million, up 51% from $297 million for
the first quarter of 1995, due to increases in all revenue categories primarily
resulting from higher trading volume and an increase in customer assets.
Assets in customer accounts totaled $200.5 billion at March 31, 1996, an
increase of $63.6 billion, or 46%, from a year ago primarily due to increases in
customers' equity securities of $25.4 billion, or 46%, and increases in customer
assets in Schwab's Mutual Fund Marketplace (registered trademark) of
$22.9 billion, or 65%. Customer assets in cash and money market funds at
March 31, 1996 increased 36% over the year-ago level to $41.3 billion. Schwab
added 245,100 new customer accounts during the first quarter of 1996, compared
to 164,900 new accounts during the first quarter of 1995.
Total operating expenses excluding interest during the first quarter of 1996
were $367 million, up 57% from $233 million for the first quarter of 1995,
reflecting the Company's continued growth in staff, capacity expansion and
investments in technology and advertising.
The after-tax profit margin for the first quarter of 1996 was 11%, down from
13% for the first quarter of 1995. The annualized return on stockholders'
equity for the first quarter of 1996 was 29%, down from 31% for the first
quarter of 1995.
Commissions
Commission revenues for the Company were $241 million for the first quarter
of 1996, up $90 million, or 60%, from the first quarter of 1995. Schwab
executes commission transactions for customers on an agency basis. Commissions
earned on retail agency trades, which comprised 96% of Schwab's total
commissions for the first quarter of 1996 and 1995, totaled $226 million on a
daily average retail agency trade level of 50,600 in the first quarter of 1996,
compared with commission revenues of $145 million on a daily average retail
agency trade level of 32,800 for the comparable period in 1995. The following
table shows a comparison of certain factors that influence retail agency
commission revenues:
(a) Reflects the September 1995 two-for-one common stock split.
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<PAGE>
<TABLE>
- -------------------------------------------------------------------
Three Months
Ended
March 31, Percent
1996 1995 Change
- -------------------------------------------------------------------
<S> <C> <C> <C>
Number of customer
accounts that traded during
the quarter (in thousands) 835 666 25%
Average number of retail agency
transactions per account
that traded 3.82 3.11 23
Total number of retail agency
transactions (in thousands) 3,187 2,069 54
Average commission per
retail agency transaction $70.89 $70.10 1
Total retail agency commission
revenues (in millions) $ 226 $ 145 56
===================================================================
Note: The above table excludes customer transactions in Schwab's Mutual Fund
OneSource (registered trademark) service.
</TABLE>
The first quarter of 1996 reflected a 25% increase in customer accounts that
traded and a 23% increase in the average number of retail agency transactions
per account compared to the prior year's first quarter. As a result, total
retail agency commission revenues from first quarter 1995 to first quarter 1996
increased 56%.
Mutual Fund Service Fees
Mutual fund service fees increased $23 million, or 49%, to $69 million in the
first quarter of 1996 from the comparable period in 1995. The increase was
primarily attributable to significant increases in customer assets in Schwab's
proprietary funds, collectively referred to as the SchwabFunds (registered
trademark), and customer assets in funds purchased through Schwab's Mutual Fund
OneSource (registered trademark) service. Most of these fees are earned for
transfer agent, shareholder and investment management services provided to
proprietary money market funds, and for record keeping and shareholder services
provided to funds in the Mutual Fund OneSource service.
Customer assets invested in the SchwabFunds, substantially all of which are
in money market funds, increased 41% over the past year to $35.0 billion at
March 31, 1996. Customer assets held by Schwab that have been purchased through
the Mutual Fund OneSource service, excluding SchwabFunds, totaled $28.7 billion
at March 31, 1996, compared to $15.1 billion at March 31, 1995, a 90% increase.
Interest Revenue, Net of Interest Expense
Interest revenue, net of interest expense, increased $13 million, or 28%, to
$59 million from the prior year's first quarter as shown in the following table
(in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------
Three Months
Ended
March 31,
1996 1995
- --------------------------------------------------
<S> <C> <C>
Interest Revenue
Investments, customer-related $ 76 $ 63
Margin loans to customers 77 58
Other 5 4
- --------------------------------------------------
Total 158 125
- --------------------------------------------------
Interest Expense
Customer cash balances 86 72
Long-term debt (including
current maturities) 4 3
Other 9 4
- --------------------------------------------------
Total 99 79
- --------------------------------------------------
Interest Revenue, Net of
Interest Expense $ 59 $ 46
==================================================
</TABLE>
Customer-related daily average balances, interest rates and average net
interest margin for the first quarters of 1996 and 1995 are summarized in the
following table (dollars in millions):
- 8 -
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Three Months Ended
March 31,
1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $5,637 $4,276
Average interest rate 5.39% 5.94%
Margin loans to customers:
Average balance outstanding $4,026 $2,869
Average interest rate 7.67% 8.25%
Average yield on interest-earning assets 6.34% 6.87%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $7,791 $5,880
Average interest rate 4.46% 4.96%
Other interest-bearing sources:
Average balance outstanding $ 598 $ 342
Average interest rate 4.27% 4.18%
Average noninterest-bearing portion $1,274 $ 923
Average interest rate on funding sources 3.86% 4.28%
Summary:
Average yield on interest-earning assets 6.34% 6.87%
Average interest rate on funding sources 3.86% 4.28%
- ------------------------------------------------------------------------------------
Average net interest margin 2.48% 2.59%
====================================================================================
</TABLE>
The increase in interest revenue, net of interest expense, from the prior
year's first quarter was primarily due to higher levels of interest-earning
assets, partially offset by a decrease in average net interest margin.
Principal Transactions
During the first quarter of 1996, principal transaction revenues increased
$18 million, or 42%, from the comparable period in 1995 to $62 million. This
increase was primarily due to higher trading volume handled by M&S, a
significant participant in the Nasdaq market. Nasdaq's daily average share
volume during the first quarter of 1996 was 519 million shares, of which M&S
handled approximately 7%.
Assurance Trading (trademark), introduced in August 1995, continued to
adversely impact M&S' trading revenues. This new service provides customers an
opportunity for price improvement on certain trades in certain Nasdaq securities
through the scanning of alternative order files for a price better than the
current quoted Nasdaq inside price.
During 1994, the Department of Justice, the Securities and Exchange
Commission (SEC) and the National Association of Securities Dealers, Inc.
commenced a series of investigations and regulatory actions involving the
activities of market makers and broker dealers, including M&S and Schwab, with
respect to Nasdaq securities. These investigations and regulatory actions have
continued into 1996.
Current and proposed rulemaking, regulatory actions, improvements in
technology (such as the introduction of Assurance Trading), changes in market
practices and new market systems, if approved, could significantly impact the
manner in which business is currently conducted in the Nasdaq market. The above
factors, individually or in the aggregate, have had and could continue to have a
material adverse impact on M&S' revenues from principal transactions.
Expenses Excluding Interest
Total operating expenses excluding interest for the first quarter of 1996
were $367 million, up 57% from $233 million for the first quarter of 1995.
Compensation and benefits expense for the first quarter of 1996 increased
$73 million, or 59%, to $196 million primarily due to increases in salaries and
wages, and incentive and variable compensation. At March 31, 1996, the Company
had full-time, part-time and temporary employees, and persons employed on a
contract basis that represented the equivalent of approximately 9,900 full-time
employees, compared to approximately 6,900 at March 31, 1995.
Communications expense increased $17 million, or 63%, to $43 million from the
prior year's first quarter primarily due to higher customer trading and call
volumes, which contributed to higher telephone, financial news and securities
quotation services expenses, and printing expense.
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<PAGE>
Advertising and market development expense increased $11 million, or 104%, to
$22 million from the prior year's first quarter primarily due to increased print
and media advertising expenditures relating to campaigns covering the Company's
Mutual Fund OneSource (registered trademark) and IRA product offerings, as well
as investing for retirement.
Depreciation and amortization expense increased $11 million, or 75%, to
$25 million from prior year's first quarter primarily due to depreciation on
recently acquired data processing equipment and the amortization of related
software. In addition, a portion of the 1996 increase was due to the
amortization of goodwill and other intangibles resulting from businesses
acquired during the second half of 1995.
Professional services expense increased $8 million, or 138%, to $13 million
from the prior year's first quarter primarily due to increases in consulting
fees relating to data processing and enhancements to product and customer
service.
The Company's effective income tax rate for the first quarter of 1996 was
41.1% compared to 39.5% for the comparable period in 1995.
Liquidity and Capital Resources
Liquidity
Schwab
Liquidity needs relating to customer trading and margin borrowing activities
are met primarily through cash balances in customer accounts, which totaled
$8.8 billion at March 31, 1996, up 4% from the December 31, 1995 level of
$8.4 billion. Earnings from Schwab's operations are the primary source of
liquidity for capital expenditures and investments in new services, marketing
and technology. Management believes that customer cash balances and operating
earnings will continue to be the primary sources of liquidity for Schwab in the
future.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$250 million subordinated revolving credit facility maturing in September 1997,
of which $194 million was outstanding at March 31, 1996. At quarter end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
- - $10 million maturing in 1997 and $15 million maturing in 1998. Borrowings
under these subordinated lending arrangements qualify as regulatory capital for
Schwab.
For use in its brokerage operations, Schwab maintains uncommitted unsecured
bank credit lines totaling $470 million. Schwab used such borrowings for three
days during the first three months of 1996, with the daily amounts borrowed
averaging $33 million. These lines were unused at March 31, 1996.
M&S
M&S' liquidity needs are generally met through earnings generated by its
operations. Most of M&S' assets are liquid, consisting primarily of receivables
from brokers, dealers and clearing organizations, cash and equivalents, and
marketable securities. M&S may borrow up to $35 million under a subordinated
lending arrangement with CSC. At quarter end, M&S had outstanding borrowings of
$4 million under this facility. These borrowings mature in December 1997.
Borrowings under this arrangement qualify as regulatory capital for M&S.
The Charles Schwab Corporation
CSC's liquidity needs are generally met through cash generated by its
subsidiaries. Schwab and M&S are subject to regulatory requirements that are
intended to ensure the general financial soundness and liquidity of broker-
dealers. These regulations would prohibit Schwab and M&S from repaying
subordinated borrowings to CSC, paying cash dividends, or making any unsecured
advances or loans to their parent or employees if such payment would result in
net capital of less than 5% of their aggregate
- 10 -
<PAGE>
debit balances of less than 120% of their minimum dollar amount requirement
of $1 million. At March 31, 1996, Schwab had $417 million of net capital
(10% of aggregate debit balances), which was $333 million in excess of its
minimum required net capital. At March 31, 1996, M&S had $8 million of
net capital (242% of aggregate debit balances), which was $7 million in
excess of its minimum required net capital. Management believes that funds
generated by the operations of CSC's subsidiaries will continue to be the
primary funding source in meeting CSC's liquidity needs and maintaining
Schwab's and M&S' net capital.
CSC has individual liquidity needs that arise from its issued and outstanding
$274 million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as
from the funding of cash dividends, common stock repurchases and acquisitions.
The Medium-Term Notes have maturities ranging from 1996 to 2005 and fixed
interest rates ranging from 4.95% to 7.72% with interest payable semiannually.
CSC has a prospectus supplement covering the issuance of up to $140 million
in Senior or Senior Subordinated Medium-Term Notes, Series A pursuant to a
registration statement filed with the SEC. At March 31, 1996, $76 million in
securities remained unissued under this registration statement.
CSC may borrow under its $250 million committed unsecured credit facility
with a group of ten banks through June 1996. The funds are available for
general corporate purposes. CSC pays a commitment fee on the unused balance.
The terms of this facility require CSC to maintain minimum levels of
stockholders' equity and Schwab and M&S to maintain minimum levels of net
capital, as defined. This facility has never been used.
See "Commitments and Contingencies" note in the Notes to Condensed
Consolidated Financial Statements.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $72 million for the first
three months of 1996, up 37% from $53 million for the first three months of
1995. During the first three months of 1996, the Company invested $69 million
in various capital expenditures, including $33 million for an office building to
be used for the expansion of its operations and $36 million for equipment and
office facilities relating to the continued enhancement of data processing and
telecommunications systems and the opening of six new branch offices. As has
been the case recently, capital expenditures will vary from period to period as
business conditions change.
The Company issued $34 million in Medium-Term Notes during the first three
months of 1996.
In February 1996, the Company paid common stock cash dividends totaling
$7 million, up from $5 million paid in February 1995.
The Company monitors both the relative composition and absolute level of its
financial capital. The Company's stockholders' equity at March 31, 1996 totaled
$684 million. In addition, the Company had long-term debt (including current
maturities) of $280 million that bear interest at a weighted-average rate of
6.27%. These borrowings, together with the Company's equity, provided total
financial capital of $964 million at March 31, 1996, up $85 million, or 10% from
December 31, 1995.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Discussed in Notes to Condensed Consolidated Financial Statements, under
"Commitments and Contingencies" in Part I, Item 1, and incorporated herein by
reference.
- 11 -
<PAGE>
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Effective May 1996, the Company increased its authorized shares of common
stock from 200 million to 500 million.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q.
Exhibit
Number Exhibit
11.1 Computation of Earnings per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule (electronic only).
(b) Reports on Form 8-K
None.
- 12 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHARLES SCHWAB CORPORATION
(Registrant)
Date: May 10, 1996 /s/ A. John Gambs
-----------------------------------
A. John Gambs
Executive Vice President - Finance,
and Chief Financial Officer
- 13 -
<TABLE>
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
Computation of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Net Income $ 46,943 $ 38,376
======================================================================================================
Shares (1)
Primary:
Weighted-average number of common shares outstanding 173,303 169,844
Common stock equivalent shares related to option plans 5,584 6,304
- ------------------------------------------------------------------------------------------------------
Weighted-average number of common and
common equivalent shares outstanding 178,887 176,148
======================================================================================================
Fully Diluted:
Weighted-average number of common shares outstanding 173,303 169,844
Common stock equivalent shares related to option plans 5,796 6,823
- ------------------------------------------------------------------------------------------------------
Weighted-average number of common and
common equivalent shares outstanding 179,099 176,667
======================================================================================================
Per Share (1)
Primary earnings per share $ .26 $ .22
======================================================================================================
Fully diluted earnings per share $ .26 $ .22
======================================================================================================
(1) Reflects the September 1995 two-for-one common stock split.
</TABLE>
<TABLE>
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands, unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Earnings before taxes on income $ 79,670 $ 63,381
- -----------------------------------------------------------------------------------------
Fixed charges
Interest expense - customer 86,391 71,905
Interest expense - other 12,618 7,298
Interest portion of rental expense 5,427 4,673
- -----------------------------------------------------------------------------------------
Total fixed charges (a) 104,436 83,876
- -----------------------------------------------------------------------------------------
Earnings before taxes on income and fixed charges (b) $184,106 $147,257
=========================================================================================
Ratio of earnings to fixed charges (b) divided by (a) (1) 1.8 1.8
=========================================================================================
Ratio of earnings to fixed charges as adjusted (2) 5.4 6.3
=========================================================================================
(1) The ratio of earnings to fixed charges is calculated in a manner consistent with SEC requirements. For such
purposes, "earnings" consist of earnings before taxes on income and fixed charges. "Fixed charges" consist of
interest expense incurred on payables to customers, long-term debt (including current maturities) and one-third of
rental expense, which is estimated to be representative of the interest factor.
(2) Because interest expense incurred in connection with payables to customers is completely offset by interest revenue
on related investments and margin loans, the Company considers such interest to be an operating expense.
Accordingly, the ratio of earnings to fixed charges as adjusted reflects the elimination of such interest expense as
a fixed charge.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Income and Condensed Balance Sheet of the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 998959
<RECEIVABLES> 4224494
<SECURITIES-RESALE> 5275465
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 118446
<PP&E> 286695
<TOTAL-ASSETS> 11096973
<SHORT-TERM> 162435
<PAYABLES> 9645865
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 279970
0
0
<COMMON> 1785
<OTHER-SE> 681779
<TOTAL-LIABILITY-AND-EQUITY> 11096973
<TRADING-REVENUE> 61634
<INTEREST-DIVIDENDS> 157953
<COMMISSIONS> 240913
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 68835
<INTEREST-EXPENSE> 99009
<COMPENSATION> 195708
<INCOME-PRETAX> 79670
<INCOME-PRE-EXTRAORDINARY> 46943
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46943
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
