UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003 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)
120 Kearny Street, San Francisco, CA 94108
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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.
1,354,355,086 shares of $.01 par value Common Stock
Outstanding on July 31, 2003
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2003
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 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 - 31
Item 4. Controls and Procedures 31
Part II - Other Information
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 33
Signature 34
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statement of Income
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
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Revenues
Asset management and administration fees $ 445 $ 444 $ 873 $ 885
Commissions 313 290 553 588
Interest revenue 244 303 483 612
Interest expense (64) (90) (128) (181)
------- ------- ------- -------
Net interest revenue 180 213 355 431
Principal transactions 43 49 76 100
Other 37 41 61 81
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Total 1,018 1,037 1,918 2,085
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Expenses Excluding Interest
Compensation and benefits 449 462 866 925
Other compensation - merger retention programs - 8 - 22
Occupancy and equipment 111 114 222 229
Depreciation and amortization 71 80 147 162
Communications 58 63 118 133
Advertising and market development 21 51 69 103
Professional services 44 46 81 93
Commissions, clearance and floor brokerage 20 17 33 34
Restructuring charges 24 3 24 29
Impairment charges - - 5 -
Other 38 32 74 58
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Total 836 876 1,639 1,788
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Income from continuing operations before taxes on income and extraordinary gain 182 161 279 297
Taxes on income (56) (60) (79) (110)
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Income from continuing operations before extraordinary gain 126 101 200 187
Loss from discontinued operations, net of tax benefit - (3) (3) (7)
Extraordinary gain on sale of corporate trust business, net of tax expense - - - 12
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 126 $ 98 $ 197 $ 192
====================================================================================================================================
Weighted-Average Common Shares Outstanding - Diluted 1,360 1,385 1,358 1,387
====================================================================================================================================
Earnings Per Share - Basic
Income from continuing operations before extraordinary gain $ .10 $ .08 $ .15 $ .14
Loss from discontinued operations, net of tax benefit - $ (.01) - $ (.01)
Extraordinary gain, net of tax expense - - - $ .01
Net income $ .10 $ .07 $ .15 $ .14
Earnings Per Share - Diluted
Income from continuing operations before extraordinary gain $ .09 $ .08 $ .14 $ .14
Loss from discontinued operations, net of tax benefit - $ (.01) - $ (.01)
Extraordinary gain, net of tax expense - - - $ .01
Net income $ .09 $ .07 $ .14 $ .14
====================================================================================================================================
Dividends Declared Per Common Share $ .011 $ .011 $ .022 $ .022
====================================================================================================================================
All periods have been adjusted to summarize the impact of The Charles Schwab Corporation's sale of its United Kingdom brokerage
subsidiary, Charles Schwab Europe, in loss from discontinued operations.
See Notes to Condensed Consolidated Financial Statements.
- 1 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheet
(In millions, except share and per share amounts)
(Unaudited)
June 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 2,099 $ 3,114
Cash and investments segregated and on deposit for federal or other
regulatory purposes(1) (including resale agreements of $18,574 in 2003
and $16,111 in 2002) 22,633 21,005
Securities owned - at market value (including securities pledged of $314
in 2003 and $337 in 2002) 2,317 1,716
Receivables from brokers, dealers and clearing organizations 302 222
Receivables from brokerage clients - net 7,023 6,845
Loans to banking clients - net 4,967 4,555
Loans held for sale 100 -
Equipment, office facilities and property - net 1,011 868
Goodwill - net 604 603
Other assets 780 777
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Total $ 41,836 $ 39,705
====================================================================================================================================
Liabilities and Stockholders' Equity
Deposits from banking clients $ 5,229 $ 5,231
Drafts payable 223 134
Payables to brokers, dealers and clearing organizations 2,662 1,476
Payables to brokerage clients 26,206 26,401
Accrued expenses and other liabilities 1,212 1,302
Short-term borrowings 1,314 508
Long-term debt 811 642
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Total liabilities 37,657 35,694
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Stockholders' equity:
Preferred stock - 9,940,000 shares authorized; $.01 par value per share;
none issued - -
Common stock - 3 billion shares authorized; $.01 par value per share;
1,392,091,544 and 1,391,991,180 shares issued in 2003 and 2002, respectively 14 14
Additional paid-in capital 1,737 1,744
Retained earnings 2,905 2,769
Treasury stock - 40,255,433 and 47,195,631 shares in 2003 and 2002,
respectively, at cost (387) (465)
Unamortized stock-based compensation (81) (33)
Accumulated other comprehensive loss (9) (18)
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Total stockholders' equity 4,179 4,011
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 41,836 $ 39,705
====================================================================================================================================
(1) Amounts included represent actual balances on deposit, whereas cash and investments required to be segregated for federal or
other regulatory purposes were $22,111 million and $21,252 million at June 30, 2003 and December 31, 2002, respectively. On
July 2, 2003, the Company withdrew $93 million of excess segregated cash. On January 2, 2003, the Company deposited $655
million into its segregated reserve bank accounts.
See Notes to Condensed Consolidated Financial Statements.
- 2 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statement of Cash Flows
(In millions)
(Unaudited)
Six Months Ended
June 30,
2003 2002
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Cash Flows from Operating Activities
Net income $ 197 $ 192
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization 147 162
Impairment charges 5 -
Compensation payable in common stock 15 13
Deferred income taxes 16 86
Tax benefit (expense) from stock options exercised and other stock-based compensation (6) 4
Non-cash restructuring charges - 3
Extraordinary gain on sale of corporate trust business, net of tax expense - (12)
Loss (gain) on sales of subsidiaries 2 (4)
Other - 3
Originations of loans held for sale (183) -
Proceeds from sales of loans held for sale 83 -
Net change in:
Cash and investments segregated and on deposit for federal or other
regulatory purposes (2,356) 55
Securities owned (excluding securities available for sale) (197) (25)
Receivables from brokers, dealers and clearing organizations (98) 260
Receivables from brokerage clients (182) 1,123
Other assets (15) (135)
Drafts payable 89 (173)
Payables to brokers, dealers and clearing organizations 1,210 47
Payables to brokerage clients 501 (2,253)
Accrued expenses and other liabilities (91) (63)
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Net cash used for operating activities (863) (717)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (868) (1,075)
Proceeds from sales of securities available for sale 159 361
Proceeds from maturities, calls and mandatory redemptions of securities
available for sale 308 185
Net increase in loans to banking clients (413) (396)
Proceeds from sale of banking client loans - 196
Purchase of equipment, office facilities and property - net (65) (72)
Cash payments for business combinations and investments, net of cash received (8) 2
Proceeds from sales of subsidiaries 53 26
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Net cash used for investing activities (834) (773)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in deposits from banking clients (2) (1,091)
Net increase in short-term borrowings 806 696
Proceeds from long-term debt - 100
Repayment of long-term debt (73) (82)
Dividends paid (30) (30)
Purchase of treasury stock (32) (31)
Proceeds from stock options exercised 13 19
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 682 (419)
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (1,015) (1,909)
Cash and Cash Equivalents at Beginning of Period 3,114 4,407
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 2,099 $ 2,498
====================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 3 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Amounts and Ratios)
(Unaudited)
1. Basis of Presentation
The Charles Schwab Corporation (CSC) is a financial holding company
engaged, through its subsidiaries, in securities brokerage, banking, and related
financial services. Charles Schwab & Co., Inc. (Schwab) is a securities
broker-dealer with 372 domestic branch offices in 48 states, as well as a branch
in the Commonwealth of Puerto Rico. U.S. Trust Corporation (USTC, and with its
subsidiaries collectively referred to as U.S. Trust) is a wealth management firm
that through its subsidiaries also provides fiduciary services and private
banking services with 33 offices in 13 states. Other subsidiaries include
Charles Schwab Investment Management, Inc., the investment advisor for Schwab's
proprietary mutual funds, Schwab Capital Markets L.P. (SCM), a market maker in
Nasdaq and other securities providing trade execution services primarily to
broker-dealers and institutional clients, CyberTrader, Inc. (CyberTrader), an
electronic trading technology and brokerage firm providing services to highly
active, online traders, and Charles Schwab Bank, N.A. (Schwab Bank), a retail
bank which commenced operations in the second quarter of 2003.
The accompanying unaudited condensed consolidated financial statements
include CSC and its majority-owned subsidiaries (collectively referred to as the
Company). These financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and, in the opinion of
management, reflect all adjustments necessary to present fairly the financial
position, results of operations, and cash flows for the periods presented in
conformity with generally accepted accounting principles in the U.S. (GAAP). All
adjustments were of a normal recurring nature, except as discussed in Note "6 -
Discontinued Operations." Certain items in prior periods' financial statements
have been reclassified to conform to the 2003 presentation. 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 2002 Annual Report to
Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the
year ended December 31, 2002, and the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2003. The Company's results for any interim
period are not necessarily indicative of results for a full year or any other
interim period.
2. New Accounting Standards
Financial Accounting Standards Board Interpretation (FIN) No. 45 -
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, was issued in November 2002. This
interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. In accordance with FIN No. 45,
the Company adopted the disclosure requirements on December 31, 2002 and the
recognition requirements on January 1, 2003. The adoption of FIN No. 45 did not
have a material impact on the Company's financial position, results of
operations, earnings per share (EPS), or cash flows.
FIN No. 46 - Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51 - Consolidated Financial Statements, was
issued in January 2003. This interpretation provides new criteria for
determining whether a company is required to consolidate (i.e., record the
assets and liabilities on the balance sheet) a variable interest entity. Upon
adoption of this interpretation in the first quarter of 2003, the Company
consolidated a special purpose trust (Trust) that was formed in 2000 to finance
the acquisition and renovation of an office building and land. The Trust,
through an agent, raised the $245 million needed to acquire and renovate the
building and land by issuing long-term debt ($235 million) and raising equity
capital ($10 million). Upon adoption, the Company recorded: the building and
land at a cost of $245 million, net of accumulated depreciation of $16 million;
long-term debt of $235 million; and a net reduction of accrued expenses and
other liabilities of $7 million. The cumulative effect of this accounting change
was immaterial.
The building is being depreciated on a straight-line basis over twenty
years. The long-term debt consists of a variable-rate note maturing in June
2005. The interest rate on the note was 1.66% at June 30, 2003, and ranged from
1.60% to 1.72% during the quarter, and 1.60% to 1.82% for the first half of
2003. The building and land have been pledged as collateral for the long-term
debt. At June 30, 2003, the carrying value of the building and land was $223
million (net of accumulated depreciation of $22 million). Additionally, the
Company has guaranteed the debt of the Trust up to a maximum of $202 million.
The lender does not have recourse to any other assets of the Company.
- 4 -
The annual impact of the adoption of FIN No. 46 on the Company's Condensed
Consolidated Statement of Income is to cease both amortizing the shortfall of
the residual value guarantee and recording rent expense on the lease and to
record both the depreciation on the building and the interest expense associated
with the debt. The adoption of FIN No. 46 did not have and is not expected to
have a material impact on the Company's results of operations, EPS, or cash
flows.
Statement of Financial Accounting Standards (SFAS) No. 149 - Amendment of
Statement 133 on Derivative Instruments and Hedging Activities was issued in
April 2003. This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133 -
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 also
amends certain other existing pronouncements. The Company adopted the provisions
of this statement on June 30, 2003. The adoption of this statement did not have
and is not expected to have a material impact on the Company's financial
position, results of operations, EPS, or cash flows.
3. Stock Incentive Plans
The Company's stock incentive plans provide for granting options to
employees, officers, and directors. Options are granted for the purchase of
shares of common stock at an exercise price not less than market value on the
date of grant, and expire within 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:
- --------------------------------------------------------------------------------
2003 2002
----------------- -----------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
- --------------------------------------------------------------------------------
Outstanding at
beginning of year 156 $15.38 153 $16.20
Granted:
Quarter ended March 31 -(1) $ 9.26 7 $13.15
Quarter ended June 30 2 $ 8.93 2 $12.12
- --------------------------------------------------------------------------------
Total granted 2 $ 8.99 9 $12.87
Exercised (2) $ 5.65 (3) $ 6.67
Canceled (10) $18.48 (5) $20.93
- --------------------------------------------------------------------------------
Outstanding
at June 30 146 $15.25 154 $16.03
================================================================================
Exercisable
at June 30 80 $14.14 63 $12.48
- --------------------------------------------------------------------------------
Available for future
grant at June 30 40 45
- --------------------------------------------------------------------------------
Weighted-average fair
value of options granted:
Quarter ended March 31 $ 4.34 $ 6.33
Quarter ended June 30 $ 3.96 $ 5.51
- --------------------------------------------------------------------------------
(1) Less than 500,000 options were granted during the first quarter of 2003.
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:
- --------------------------------------------------------------------------------
Three Months Ended
March 31, June 30,
----------- ------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Expected dividend yield .30% .30% .30% .30%
Expected volatility 52% 50% 49% 50%
Risk-free interest rate 2.9% 4.1% 2.6% 4.4%
Expected life (in years) 5 5 5 5
- --------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25 - Accounting
for Stock Issued to Employees, and related interpretations, for its stock-based
employee compensation plans. Because the Company grants stock option awards at
market value, there is no compensation expense recorded, except for
restructuring-related expense for modifications of officers' stock options.
Had compensation expense for the Company's stock option awards been
determined based on the Black-Scholes fair value at the grant dates for awards
under those plans consistent with the fair value method of SFAS No. 123 -
Accounting for Stock-Based Compensation, the Company would have recorded
additional compensation expense and its net income and EPS would have been
reduced to the pro forma amounts presented in the following table:
- 5 -
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Compensation expense for stock
options (after-tax):
As reported $ - $ - $ - $ 2
Pro forma (1) $ 29 $ 38 $ 58 $ 78
- --------------------------------------------------------------------------------
Net income:
As reported $126 $ 98 $197 $192
Pro forma $ 97 $ 60 $139 $116
- --------------------------------------------------------------------------------
Basic EPS:
As reported $.10 $.07 $.15 $.14
Pro forma $.07 $.04 $.10 $.08
Diluted EPS:
As reported $.09 $.07 $.14 $.14
Pro forma $.07 $.04 $.10 $.08
- --------------------------------------------------------------------------------
(1) Includes pro forma compensation expense related to stock options granted in
both current and prior periods. Pro forma stock option compensation is
amortized on a straight-line basis over the vesting period beginning with
the month in which the option was granted.
4. Restructuring
In 2001, the Company initiated a restructuring plan to reduce operating
expenses due to economic uncertainties and difficult market conditions. This
restructuring plan was completed in 2002 and included a workforce reduction, a
reduction in operating facilities, and the removal of certain systems hardware,
software, and equipment from service. Included in these initiatives were costs
associated with the withdrawal from certain international operations.
In the third quarter of 2002, the Company commenced additional
restructuring initiatives due to continued difficult market conditions. These
initiatives were intended to reduce operating expenses and adjust the Company's
organizational structure to improve productivity, enhance efficiency, and
increase profitability. The restructuring initiatives were substantially
completed in 2002 and primarily included further reductions in the Company's
workforce and facilities.
The Company recorded pre-tax restructuring charges of $24 million in the
second quarter of 2003, primarily due to changes in estimates of sublease income
associated with previously announced efforts to sublease excess facilities. The
Company recorded pre-tax restructuring charges of $3 million and $29 million in
the second quarter of 2002 and the first half of 2002, respectively, all of
which related to its 2001 restructuring initiatives. The actual costs of the
Company's restructuring initiatives could differ from the estimated costs,
depending primarily on the Company's ability to sublease properties.
A summary of the activity in the restructuring reserve related to the
Company's 2001 and 2002 restructuring initiatives for the second quarter of 2003
and the six months ended June 30, 2003 is as follows:
- --------------------------------------------------------------------------------
Three months ended Workforce Facilities
June 30, 2003 Reduction Reduction Total
- --------------------------------------------------------------------------------
Balance at March 31, 2003 $ 39 $ 214 $ 253
Restructuring charges - 24 24
Cash payments (12) (20) (32)
- --------------------------------------------------------------------------------
Balance at June 30, 2003 $ 27 (1) $ 218 (2) $ 245
================================================================================
- --------------------------------------------------------------------------------
Six months ended Workforce Facilities
June 30, 2003 Reduction Reduction Total
- --------------------------------------------------------------------------------
Balance at December 31, 2002 $ 68 $ 227 $ 295
Balance related to discontinued
operations - (3) (3)
Restructuring charges - 24 24
Cash payments (41) (30) (71)
- --------------------------------------------------------------------------------
Balance at June 30, 2003 $ 27 (1) $ 218 (2) $ 245
================================================================================
(1) Includes $7 million and $20 million related to the Company's 2001 and 2002
restructuring initiatives, respectively. The Company expects to
substantially utilize the remaining workforce reduction reserve through
cash payments for severance pay and benefits over the respective severance
periods through 2004.
(2) Includes $119 million and $99 million related to the Company's 2001 and
2002 restructuring initiatives, respectively. The Company expects to
substantially utilize the remaining facilities reduction reserve through
cash payments for the net lease expense over the respective lease terms
through 2017.
5. Sale of Corporate Trust Business
In June 2001, U.S. Trust sold its Corporate Trust business to The Bank of
New York Company, Inc. (Bank of NY). During the first quarter of 2002, the
Company recorded an extraordinary gain of $22 million, or $12 million after tax,
which represented the remaining proceeds from this sale that were realized upon
satisfaction of certain client retention requirements.
6. Discontinued Operations
On January 31, 2003, the Company sold its United Kingdom (U.K.) brokerage
subsidiary, Charles Schwab Europe (CSE), to Barclays PLC (Barclays) and
transferred client-related assets of approximately $760 million (consisting
primarily of cash and investments segregated and on deposit for federal or other
regulatory purposes and receivables from brokers, dealers and clearing
organizations) and liabilities of approximately $735 million (consisting
primarily of payables to brokerage clients) to Barclays. The
- 6 -
results of the operations of CSE, net of income taxes, have been presented as
discontinued operations on the Condensed Consolidated Statement of Income. A
summary of revenues and pre-tax losses for CSE is as follows:
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenues - $ 11 $ 4 $ 23
Pre-tax losses - $ (5) $ (5) $(11)
- --------------------------------------------------------------------------------
An after-tax loss of $2 million on the sale was recorded in the first
quarter of 2003 and included the estimated costs associated with certain CSE
obligations that were retained by the Company, principally related to facilities
lease and other contracts.
CSE was included in the Company's restructuring initiatives and recorded
pre-tax restructuring charges totaling $15 million and $9 million in 2002 and
2001, respectively. The Company retained certain restructuring-related facility
lease obligations following the sale of CSE. The Company's facilities
restructuring reserve balance related to CSE, which is net of estimated sublease
income, is $12 million at June 30, 2003. This balance represents the December
31, 2002 balance of $3 million and additional charges of $9 million recorded at
the date of sale.
7. Business Acquisition and Divestiture
In June 2003, the Company sold its investment in Aitken Campbell, a
market-making joint venture in the U.K., to the Company's joint venture partner,
TD Waterhouse Group, Inc. In the first quarter of 2003, the Company recorded an
impairment charge of $5 million pre tax to reduce the carrying value of its
investment and a deferred income tax benefit of $16 million that was realized
following the completion of the sale. The Company's share of Aitken Campbell's
historical earnings, which was accounted for under the equity method, has not
been material to the Company's results of operations, EPS, or cash flows.
On June 25, 2003, the Company announced that U.S. Trust has agreed to
acquire State Street Corporation's Private Asset Management group (PAM), a
provider of wealth management services to clients in the New England area. U.S.
Trust will purchase PAM for $365 million to be paid in cash, subject to certain
possible adjustments. This transaction is expected to close in the fourth
quarter of 2003, contingent on regulatory approvals.
8. Loans to Banking Clients and Related Allowance for Credit Losses
An analysis of the composition of the loan portfolio is as follows:
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Residential real estate mortgages $3,936 $3,580
Consumer loans 614 630
Other 442 369
- --------------------------------------------------------------------------------
Total loans 4,992 4,579
Less: allowance for credit losses (25) (24)
- --------------------------------------------------------------------------------
Loans to banking clients - net $4,967 $4,555
================================================================================
Included in the loan portfolio are nonaccrual loans totaling $1 million at
both June 30, 2003 and December 31, 2002. Nonaccrual loans are considered
impaired by the Company, and represent all of the Company's nonperforming assets
at both June 30, 2003 and December 31, 2002. For each of the three- and
six-month periods ended June 30, 2003 and 2002, the impact of interest revenue
which would have been earned on nonaccrual loans versus interest revenue
recognized on these loans was not material to the Company's results of
operations.
The amount of loans accruing interest that were contractually 90 days or
more past due was immaterial at both June 30, 2003 and December 31, 2002.
Recoveries and charge-offs related to the allowance for credit losses on
the loan portfolio were not material for each of the three- and six-month
periods ended June 30, 2003 and 2002.
9. Deposits from Banking Clients
Deposits from banking clients consist of money market and other savings
deposits, noninterest-bearing deposits and certificates of deposit. Deposits
from banking clients are as follows:
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Interest-bearing deposits $ 4,685 $ 4,471
Noninterest-bearing deposits 544 760
- --------------------------------------------------------------------------------
Total $ 5,229 $ 5,231
================================================================================
The average rate paid by the Company on its interest-bearing deposits from
banking clients was 1.99% and 2.44% for the three-month periods ended June 30,
2003 and 2002, respectively, and 2.04% and 2.37% for the six-month periods ended
June 30, 2003 and 2002, respectively.
- 7 -
10. Comprehensive Income
Comprehensive income includes net income and changes in equity except those
resulting from investments by, or distributions to, stockholders. Comprehensive
income is presented in the following table:
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income $126 $ 98 $197 $192
Other comprehensive income (loss):
Net gain (loss) on cash flow
hedging instruments 3 (8) 6 (2)
Foreign currency translation
adjustment - 6 5 6
Change in net unrealized gain (loss)
on securities available for sale (1) 14 (2) 7
- --------------------------------------------------------------------------------
Total comprehensive income,
net of tax $128 $110 $206 $203
================================================================================
11. Earnings Per Share
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.
EPS under the basic and diluted computations are presented in the following
table:
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income $ 126 $ 98 $ 197 $ 192
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding - basic 1,340 1,367 1,341 1,366
Common stock equivalent shares
related to stock incentive plans 20 18 17 21
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding - diluted 1,360 1,385 1,358 1,387
================================================================================
Basic EPS:
Income from continuing operations
before extraordinary gain $ .10 $ .08 $ .15 $ .14
Loss from discontinued operations,
net of tax benefit - $(.01) - $(.01)
Extraordinary gain, net of tax expense - - - $ .01
Net income $ .10 $ .07 $ .15 $ .14
- --------------------------------------------------------------------------------
Diluted EPS:
Income from continuing operations
before extraordinary gain $ .09 $ .08 $ .14 $ .14
Loss from discontinued operations,
net of tax benefit - $(.01) - $(.01)
Extraordinary gain, net of tax expense - - - $ .01
Net income $ .09 $ .07 $ .14 $ .14
- --------------------------------------------------------------------------------
The computation of diluted EPS for the six months ended June 30, 2003 and
2002, respectively, excludes outstanding stock options to purchase 114 million
and 102 million shares, respectively, because the exercise prices for those
options were greater than the average market price of the common shares, and
therefore the effect would be antidilutive.
12. Regulatory Requirements
CSC is a financial holding company, which is a type of bank holding company
subject to supervision and regulation by the Board of Governors of the Federal
Reserve System (the Federal Reserve Board) under the Bank Holding Company Act of
1956, as amended (the Act).
Under the Act, the Federal Reserve Board has established consolidated
capital requirements for bank
- 8 -
holding companies. The regulatory capital and ratios of the Company, U.S. Trust,
United States Trust Company of New York (U.S. Trust NY), and Schwab Bank are
presented in the following table:
- --------------------------------------------------------------------------------
2003 2002
---------------- -----------------
June 30, Amount Ratio(1) Amount Ratio(1)
- --------------------------------------------------------------------------------
Tier 1 Capital:
Company $ 3,648 24.8% $ 3,781 22.7%
U.S. Trust $ 627 16.3% $ 606 17.1%
U.S. Trust NY $ 358 11.2% $ 379 13.3%
Schwab Bank (2) $ 273 123.9% - -
Total Capital:
Company $ 3,676 25.0% $ 3,807 22.8%
U.S. Trust $ 652 16.9% $ 629 17.7%
U.S. Trust NY $ 380 11.9% $ 399 14.0%
Schwab Bank (2) $ 273 123.9% - -
Tier 1 Leverage:
Company $ 3,648 9.1% $ 3,781 10.2%
U.S. Trust $ 627 8.9% $ 606 9.3%
U.S. Trust NY $ 358 6.3% $ 379 7.4%
Schwab Bank (2) $ 273 61.0% - -
- --------------------------------------------------------------------------------
(1) Minimum tier 1 capital, total capital, and tier 1 leverage ratios are 4%,
8%, and 3%-5%, respectively, for bank holding companies and banks.
Additionally, Schwab Bank is subject to a minimum tier 1 leverage ratio of
8% for its first three years of operations. Well-capitalized tier 1
capital, total capital, and tier 1 leverage ratios are 6%, 10%, and 5%,
respectively. Each of CSC's other depository institution subsidiaries
exceed the well-capitalized standards set forth by the banking regulatory
authorities.
(2) Schwab Bank commenced operations in the second quarter of 2003. Therefore,
Schwab Bank regulatory capital and ratios are not presented for 2002.
Based on their respective regulatory capital ratios at June 30, 2003 and
2002, the Company, U.S. Trust, and U.S. Trust NY are considered well capitalized
(the highest category). Additionally, based on its regulatory capital ratios at
June 30, 2003, Schwab Bank is also considered well capitalized. There are no
conditions or events that management believes have changed the Company's, U.S.
Trust's, U.S. Trust NY's or Schwab Bank's well-capitalized status.
In the first quarter of 2003, the Company implemented a value-at-risk (VAR)
model to estimate the risks associated with its inventory portfolios. Since VAR
is considered to be a comprehensive measurement tool for estimating market risk,
the Federal Reserve Board requires certain bank holding companies to incorporate
VAR in determining their Tier 1 Capital and Total Capital ratios. The
implementation of VAR had the effect of increasing both the Company's Tier 1
Capital and Total Capital ratios by .7% at June 30, 2003.
Schwab and SCM are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule). Schwab and SCM compute net capital
under the alternative method permitted by this Rule. This method requires the
maintenance of minimum net capital, as defined, of the greater of 2% of
aggregate debit balances arising from client transactions or a minimum dollar
requirement, which is based on the type of business conducted by the
broker-dealer. The minimum dollar requirement for both Schwab and SCM 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
requirement. At June 30, 2003, Schwab's net capital was $1.3 billion (18% of
aggregate debit balances), which was $1.1 billion in excess of its minimum
required net capital and $896 million in excess of 5% of aggregate debit
balances. At June 30, 2003, SCM's net capital was $91 million, which was $90
million in excess of its minimum required net capital.
On May 13, 2003, the Federal Reserve Board and the Superintendent of Banks
of the State of New York terminated a cease and desist order issued in 2001 (the
2001 order) against USTC and U.S. Trust NY (collectively, USTC/USTNY) for
alleged violations of various reporting and recordkeeping requirements. The 2001
order had required USTC/USTNY to take a number of steps to review and improve
its risk management processes and systems with respect to the Bank Secrecy Act
and banking and securities laws. The termination of the 2001 order represents
the successful completion of USTC/USTNY's remediation efforts under the 2001
order.
13. Commitments and Contingent Liabilities
Guarantees: The Company provides certain indemnifications (i.e., protection
against damage or loss) to counterparties in connection with the disposition of
certain of its assets. These indemnification agreements have various expiration
dates and the Company's liability under these agreements is generally limited to
certain maximum amounts. The Company, however, remains subject to certain
uncapped potential liabilities. During the first half of 2003, the Company
entered into two indemnification agreements relating to the sale of its U.K.
market-making operation and the sale of its U.K. brokerage subsidiary. These
indemnification agreements have various expiration dates through 2010 and a
maximum potential liability of approximately $74 million.
Standby letters of credit (LOCs) are conditional commitments issued by U.S.
Trust to guarantee the performance of a client to a third party. At June 30,
2003, U.S. Trust had LOCs outstanding totaling $79 million, which are short-term
in nature and generally expire within one year.
- 9 -
In accordance with FIN No. 45, the Company recognizes, at the inception of
a guarantee, a liability for the estimated fair value of the obligation
undertaken in issuing the guarantee. The fair values of the obligations relating
to LOCs are estimated based on fees charged to enter into similar agreements,
considering the creditworthiness of the counterparties. The fair values of the
obligations relating to other guarantees are estimated based on transactions for
similar guarantees or expected present value measures. The Company does not
believe that any material loss related to indemnification agreements, including
the uncapped indemnification obligations, or LOCs is likely and therefore at
June 30, 2003, the liabilities recorded for these guarantees are immaterial.
Legal contingencies: The nature of the Company's business subjects it to
claims, lawsuits, regulatory examinations, and other proceedings in the ordinary
course of business. The results of these matters cannot be predicted with
certainty. There can be no assurance that these matters will not have a material
adverse effect on the Company's 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,
results of operations, and cash flows. However, it is the opinion of management,
after consultation with legal counsel, that the ultimate outcome of existing
claims and proceedings will not have a material adverse impact on the financial
condition, results of operations, or cash flows of the Company.
For further discussion of legal proceedings, see Part II - Other
Information, Item 1 - Legal Proceedings.
14. Segment Information
The Company structures its segments according to its various types of
clients and the services provided to those clients. These segments have been
aggregated, based on similarities in economic characteristics, types of clients,
services provided, distribution channels, and regulatory environment, into four
reportable segments - Individual Investor, Institutional Investor, Capital
Markets, and U.S. Trust.
Financial information for the Company's reportable segments is presented in
the following table. The Company periodically reallocates certain revenues and
expenses among the segments to align them with the changes in the Company's
organizational structure. Previously-reported segment information has been
revised to reflect changes during the year in the Company's internal
organization. The Company evaluates the performance of its segments based on
adjusted operating income before taxes (a non-GAAP income measure), which
excludes restructuring charges, acquisition-related charges, impairment charges,
discontinued operations, and extraordinary gains. Intersegment revenues are not
material and are therefore not disclosed. Total revenues, income from continuing
operations before taxes on income and extraordinary gain, and net income are
equal to the amounts as reported on the Company's Condensed Consolidated
Statement of Income.
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenues:
Individual Investor $ 587 $ 586 $1,094 $1,190
Institutional Investor 205 209 392 421
Capital Markets 73 66 130 131
U.S. Trust 153 176 302 343
- --------------------------------------------------------------------------------
Total $1,018 $1,037 $1,918 $2,085
================================================================================
Adjusted operating income
(loss) before taxes:
Individual Investor $ 113 $ 66 $ 140 $ 134
Institutional Investor 68 59 121 125
Capital Markets 1 5 (3) 14
U.S. Trust (1) 24 45 50 80
- --------------------------------------------------------------------------------
Adjusted operating income
before taxes 206 175 308 353
Excluded items (2) (24) (14) (29) (56)
- --------------------------------------------------------------------------------
Income from continuing
operations before taxes on
income and extraordinary gain 182 161 279 297
Tax expense on income (56) (60) (79) (110)
Loss from discontinued operations,
net of tax benefit (3) - (3) (3) (7)
Extraordinary gain on sale of
corporate trust business,
net of tax expense - - - 12
- --------------------------------------------------------------------------------
Net Income $ 126 $ 98 $ 197 $ 192
================================================================================
(1) Excludes an extraordinary pre-tax gain of $22 million for the six months
ended June 30, 2002 relating to the sale of U.S. Trust's Corporate Trust
business (see note "5 - Sale of Corporate Trust Business").
(2) Includes restructuring charges of $24 million (see note "4 -
Restructuring") for the three and six months ended June 30, 2003. Also
includes an impairment charge of $5 million related to the Company's
investment in its U.K. market-making operation for the six months ended
June 30, 2003 (see note "7 - Business Acquisition and Divestiture").
Includes restructuring charges of $3 million and $29 million for the three
and six months ended June 30, 2002, respectively, and acquisition-related
charges of $11 million and $27 million for the three and six months ended
June 30, 2002, respectively.
(3) Represents the impact of the Company's sale of its U.K. brokerage
subsidiary, which was previously included in the Individual Investor
segment (see note "6 - Discontinued Operations").
- 10 -
15. Supplemental Cash Flow Information
Certain information affecting the cash flows of the Company is presented in
the following table:
- --------------------------------------------------------------------------------
Six
Months Ended
June 30,
2003 2002
- --------------------------------------------------------------------------------
Income taxes paid $ 93 $ 15
- --------------------------------------------------------------------------------
Interest paid:
Brokerage client cash balances $ 48 $ 101
Deposits from banking clients 44 40
Long-term debt 20 27
Short-term borrowings 8 13
Other 9 2
- --------------------------------------------------------------------------------
Total interest paid $ 129 $ 183
================================================================================
Non-cash investing and financing activities:
Consolidation of special purpose trust:(1)
Building and land $ 229 -
Long-term debt and other liabilities $ 228 -
Common stock and options issued
for purchase of businesses $ 4 $ 3
- --------------------------------------------------------------------------------
(1) Upon adoption of FIN No. 46 in the first quarter of 2003, the Company
consolidated a special purpose trust. See note "2 - New Accounting
Standards."
16. Subsequent Event
On July 22, 2003, the Board of Directors increased the quarterly cash
dividend from $.011 per share to $.014 per share, payable August 21, 2003 to
stockholders of record August 7, 2003.
- 11 -
THE CHARLES SCHWAB CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Description of Business
The Company: The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) provide securities brokerage, banking,
and related financial services for 7.7 million active client accounts(a). Client
assets in these accounts totaled $844.7 billion at June 30, 2003. Charles Schwab
& Co., Inc. (Schwab) is a securities broker-dealer with 372 domestic branch
offices in 48 states, as well as a branch in the Commonwealth of Puerto Rico.
U.S. Trust Corporation (USTC, and with its subsidiaries collectively referred to
as U.S. Trust) is a wealth management firm that through its subsidiaries also
provides fiduciary services and private banking services with 33 offices in 13
states. Other subsidiaries include Charles Schwab Investment Management, Inc.
(CSIM), the investment advisor for Schwab's proprietary mutual funds, Schwab
Capital Markets L.P. (SCM), a market maker in Nasdaq and other securities
providing trade execution services primarily to broker-dealers and institutional
clients, CyberTrader, Inc. (CyberTrader), an electronic trading technology and
brokerage firm providing services to highly active, online traders, and Charles
Schwab Bank, N.A. (Schwab Bank), a retail bank which commenced operations in the
second quarter of 2003.
The Company provides financial services to individuals, institutional
clients, and broker-dealers through four segments - Individual Investor,
Institutional Investor, Capital Markets, and U.S. Trust. The Individual Investor
segment includes the Company's retail brokerage and banking operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment advisors (IAs), serves company 401(k) plan sponsors
and third-party administrators, and supports company stock option plans. The
Capital Markets segment provides trade execution services in Nasdaq,
exchange-listed, and other securities primarily to broker-dealers, including
Schwab, and institutional clients. The U.S. Trust segment provides investment,
wealth management, custody, fiduciary, and private banking services to
individual and institutional clients.
Business Strategy: The Company's primary strategy is to serve the needs of
individual investors either directly or indirectly through intermediaries, IAs,
or corporate retirement plan sponsors. The Company's products and services are
designed to meet clients' varying investment and financial needs, including help
and advice and access to extensive investment research, news and information.
The Company's infrastructure and resources are focused on pursuing six strategic
priorities:
o providing the spectrum of affluent investors with the advice,
relationships, and choices that support their desired investment outcomes;
o delivering the information, technology, service, and pricing needed to
remain a leader in serving active traders;
o continuing to provide high-quality service to emerging affluent clients -
those with less than $250,000 in assets;
o providing individual investing services through employers, including
retirement and option plans as well as personal brokerage accounts;
o offering selected banking services and developing investment products that
give clients greater control and understanding of their finances; and
o retaining a strong capital markets business to address investors' financial
product and trade execution needs.
For further discussion of the Company's business strategy, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Description of Business - Business Strategy" in the Company's 2002
Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's
Form 10-K for the year ended December 31, 2002. See also Item 1 - Business -
Narrative Description of Business - "Products, Services, and Advice Offerings"
in the Company's Form 10-K for the year ended December 31, 2002. Significant
recent developments relating to certain of these strategic priorities, as well
as other significant developments, follow:
Services for Affluent Investors: The Company's full-service advice and
relationship service offering includes Schwab Advisor Network(TM), Schwab
Private Client, and Schwab Equity Ratings(TM). The Schwab Advisor Network is a
referral program that provides investors who want the assistance of an
independent professional with access to approximately 330 participating IAs.
Schwab Private Client is a fee-based service designed to help clients who want
access to an ongoing, face-to-face advice relationship with a designated Schwab
consultant while retaining day-to-day responsibility for their investment
decisions. Schwab Equity Ratings provide clients with an objective stock rating
system
- --------
(a) Accounts with balances or activity within the preceding eight months.
Reflects the removal of 192,000 accounts in June 2003 related to the
Company's withdrawal from the Employee Stock Purchase Plan business and the
transfer of those accounts to other providers.
- 12 -
on more than 3,000 stocks, assigning each equity a single grade: A, B, C, D, or
F.
For investors enrolled in Schwab Private Client, the Company introduced
Schwab Personal Portfolios(TM). This service combines the benefits of managed
accounts - flexible, personalized, tax-sensitive investing by a CSIM portfolio
manager - with the stock evaluation capability of Schwab Equity Ratings.
For self-directed affluent investors, the Company enhanced its Schwab
Signature Platinum(R) service by creating the Platinum Benefits Center on the
Company's Web site, allowing clients to access specialized Web-casts, as well as
tailored research, tools, and information.
Schwab is focused on enhancing the support services it offers to IAs. IAs
provide customized and personalized portfolio management and financial planning
services to investors who prefer to delegate their financial management
responsibilities to an independent professional. During the second quarter of
2003, the Company enhanced its Advisor WebCenter(TM) website design and
maintenance offering to include easier document uploads and a resource center
that provides online marketing support.
On June 25, 2003, the Company announced that U.S. Trust has agreed to
acquire State Street Corporation's Private Asset Management group (PAM), a
provider of wealth management services to clients in the New England area.
U.S. Trust will purchase PAM for $365 million to be paid in cash, subject to
certain possible adjustments. PAM had $11.7 billion in assets under management
as of June 30, 2003. This transaction is intended to provide U.S. Trust with an
immediate presence in an important wealth market, as well as enable the Company
to add a full array of private banking capabilities to complement the investment
management and fiduciary services already provided by PAM. This transaction is
expected to close in the fourth quarter of 2003, contingent on regulatory
approvals.
Services for Active Traders: In the second quarter of 2003, the Company
launched the Stock Selection online seminar, which delivers on-demand
information via the internet using streaming video and audio. The Company also
released a new version of its CyberTrader Pro(R) direct market access software,
which includes enhanced charting capabilities, streaming options data, and
access to additional trading venues.
Services for Emerging Affluent Clients: In the second quarter of 2003, the
Company completed its Fresh Start program, an offer that included a customized
investment plan and all recommended equity rebalancing trades for a $95 fee.
Since its introduction in January 2003, the Fresh Start program has generated
over 40,000 qualified leads and $3.7 billion in additional assets from new and
existing clients. During the second quarter of 2003, the Company also completed
the nationwide rollout of its Foundational Consultation service, a for-fee
advice interaction specifically designed to provide tailored investment guidance
to clients with less than $100,000 in assets. This service complements Schwab's
existing Comprehensive Consultation for clients with larger portfolios.
Corporate Services: In the second quarter of 2003, the Company introduced
the Schwab Service Scorecard(TM), an online reporting tool that enables plan
sponsors to track and monitor Schwab's client service. Additionally in the
second quarter of 2003, the Company introduced the Schwab StockPlanManager(TM),
a Web-based system to help stock plan administrators manage their employee plans
by providing secure access to employee demographics, grant and exercise
information, as well as allowing real-time transfer of data to and from Schwab.
Banking and Other Financial Products: On April 23, 2003, Schwab Bank
received final regulatory approvals and on April 28, 2003 commenced operations
as a retail bank. Schwab Bank is focused on providing mortgage, home equity
lines of credit, and deposit services to Schwab's existing clients, as well as
new clients. Schwab Bank offers its products through a variety of channels,
including its branch office in Reno, Nevada, as well as telephone and online
channels. Through June 30, 2003, Schwab Bank originated $183 million in first
mortgages since its launch and committed to fund almost $900 million more.
Currently, substantially all fixed-rate first mortgage loans originated by
Schwab Bank are intended for sale, and are classified as held for sale on the
Company's Condensed Consolidated Balance Sheet. Additionally, deposits from
banking clients at Schwab Bank totaled $424 million at June 30, 2003.
Capital Markets: In the second quarter of 2003, the Company increased its
institutional equities trading capabilities by adding 10 more professionals to a
team that now numbers more than 110. Revenues from institutional equities
trading were $55 million in the first half of 2003, more than double the
revenues for the first half of 2002. Institutional equities trading is an
integral part of the Schwab Liquidity Network(TM), a market-making system that
pools the orders of the Company's individual investor client base with those of
hundreds of broker-dealers and institutional investment firms in a manner
designed to offer greater opportunities for the best possible price on most
stock trades. The Schwab Liquidity Network traded over 11,000 securities at June
30, 2003, up from about 5,000 securities at its launch in February 2003.
- 13 -
Other Significant Developments: The Company continued to combine people and
technology in the development of its services and products during the second
quarter of 2003. The Company introduced a reporting tool on its Web site to
allow investors to compare the performance of Schwab Equity Ratings over various
rolling time periods. Additionally, the Company introduced the Schwab Small-Cap
Equity Fund(TM), a mutual fund designed to help clients participate in the
growth potential of small U.S. companies through a single, diversified
investment. This fund joins the Schwab Hedged Equity Fund(TM) and the Schwab
Core Equity Fund(TM) in utilizing Schwab Equity Ratings to help guide stock
selection.
Risk Management
For discussion on the Company's principal risks and some of the policies
and procedures for risk identification, assessment, and mitigation, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Risk Management" in the Company's 2002 Annual Report to
Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the
year ended December 31, 2002. See Liquidity and Capital Resources of this report
for a discussion on liquidity risk; and see Item 3 - Quantitative and
Qualitative Disclosures About Market Risk for additional information relating to
market risk.
The Company expects to continue to evaluate and consider potential
strategic transactions, including business combinations, acquisitions and
dispositions of businesses, services, and other assets. At any given time, the
Company may be engaged in discussions or negotiations with respect to one or
more of such transactions. Any such transaction could have a material impact on
the Company's financial position, results of operations, earnings per share
(EPS), or cash flows. There is no assurance that any such discussions or
negotiations will result in the consummation of any transaction. In addition,
the process of integrating any acquisition may create unforeseen operating
difficulties, expenditures, and other risks.
Given the nature of the Company's revenues, expenses, and risk profile, the
Company's earnings and CSC's common stock price have been and may continue to be
subject to significant volatility from period to period. The Company's results
for any interim period are not necessarily indicative of results for a full year
or any other interim period. Risk is inherent in the Company's business.
Consequently, despite the Company's attempts to identify areas of risk, oversee
operational areas involving risk, and implement policies and procedures designed
to mitigate risk, there can be no assurance that the Company will not suffer
unexpected losses due to operating or other risks.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified by
words such as "believe," "expect," "intend," "plan," "will," "may," and other
similar expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. These forward-looking statements, which reflect
management's beliefs, objectives, and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company's senior
management. These statements relate to, among other things, the Company's
ability to achieve its strategic priorities (see Description of Business -
Business Strategy), the potential impact of future strategic transactions (see
Risk Management), the impact of expense reduction measures on the Company's
results of operations (see Financial Overview), anticipated levels of
advertising and market development spending (see Expenses Excluding Interest),
sources of liquidity and capital (see Liquidity and Capital Resources -
Liquidity and - Commitments), the Company's cash position, cash flows, and
capital expenditures (see Liquidity and Capital Resources - Cash and Capital
Resources), the impact of the Company's trading risk as estimated by a
value-at-risk measurement methodology (see Item 3 - Quantitative and Qualitative
Disclosures About Market Risk - Financial Instruments Held For Trading
Purposes), net interest expense under interest rate swaps (see Item 3 -
Quantitative and Qualitative Disclosures About Market Risk - Financial
Instruments Held For Purposes Other Than Trading - Interest Rate Swaps), and
contingent liabilities (see Part II - Other Information, Item 1 - Legal
Proceedings). Achievement of the expressed beliefs, 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 beliefs,
objectives and expectations.
Important factors that may cause such differences are noted in this interim
report and include, but are not limited to: the Company's success in building
fee-based relationships with its clients; the effect of client trading patterns
on Company revenues and earnings; changes in revenues and profit margin due to
cyclical securities markets and fluctuations in interest rates; the level and
continuing volatility of equity prices; a significant downturn in the securities
markets over a short period of time or a sustained decline in securities prices,
trading volumes, and investor confidence; geopolitical developments affecting
the securities markets, the economy, and investor sentiment; the size and number
of the Company's insurance claims; and a significant decline in the real estate
market, including the
- 14 -
Company's ability to sublease certain properties. Other more general factors
that may cause such differences include, but are not limited to: the Company's
inability to attract and retain key personnel; the timing and impact of changes
in the Company's level of investments in personnel, technology, or advertising;
changes in technology; computer system failures and security breaches; evolving
legislation, regulation and changing industry practices adversely affecting the
Company; adverse results of litigation; the inability to obtain external
financing at acceptable rates; the effects of competitors' pricing, product and
service decisions; and intensified industry competition and consolidation.
Critical Accounting Policies
Certain of the Company's accounting policies that involve a higher degree
of judgment and complexity are discussed in "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Critical Accounting
Policies" in the Company's 2002 Annual Report to Stockholders, which is filed as
Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2002.
There have been no material changes to these critical accounting policies during
the first six months of 2003.
Three Months Ended June 30, 2003 Compared To Three
Months Ended June 30, 2002
All references to EPS information in this report reflect diluted earnings
per share unless otherwise noted.
FINANCIAL OVERVIEW
The Company's financial performance in the second quarter of 2003 reflects
encouraging developments in both the geopolitical and economic arenas. These
developments led to a rebound in securities market returns, with both client
asset valuations and trading activity following suit. The Company's trading
revenues increased 5% from the second quarter of 2002. The increase in trading
revenues was primarily due to higher client trading activity (reflected in
commission revenues), partially offset by lower average revenue per equity share
traded (reflected in principal transactions revenues).
Non-trading revenues, which include asset management and administration
fees, interest revenue, net of interest expense (referred to as net interest
revenue), and other revenues, decreased 5% in the second quarter of 2003
compared to the year-ago level. The decrease in non-trading revenues was
primarily due to a 15% decrease in net interest revenue and a 10% decrease in
other revenues. Average margin loans to clients in the second quarter of 2003
decreased 26% from year-ago levels, which primarily caused the decline in net
interest revenue.
Total expenses excluding interest during the second quarter of 2003 were
$836 million, down 5% from the second quarter of 2002. This decrease occurred in
almost all expense categories as a result of the Company's continued expense
reduction measures, partially offset by higher restructuring charges.
On January 31, 2003, the Company sold its United Kingdom (U.K.) brokerage
subsidiary, Charles Schwab Europe (CSE), to Barclays PLC (Barclays). The results
of CSE's operations have been summarized as loss from discontinued operations,
net of tax benefit, on the Condensed Consolidated Statement of Income. The
reported loss was $3 million for the second quarter of 2002. The Company's
consolidated prior period revenues, expenses, and taxes on income have been
adjusted to reflect this presentation. For further information, see note "6 -
Discontinued Operations" in the Notes to Condensed Consolidated Financial
Statements.
Income from continuing operations before taxes on income and extraordinary
gain was $182 million for the second quarter of 2003, up 13% from the second
quarter of 2002. This increase was primarily due to the combination of factors
discussed separately above - declines in almost all expense categories,
partially offset by lower revenues and higher restructuring charges. Net income
for the second quarter of 2003 was $126 million, or $.09 per share, up 29% from
$98 million, or $.07 per share, for the second quarter of 2002. This increase
was primarily due to higher income from continuing operations before taxes on
income and extraordinary gain as discussed above. The Company's after-tax profit
margin for the second quarter of 2003 was 12.3%, up from 9.5% for the second
quarter of 2002. The annualized return on stockholders' equity for the second
quarter of 2003 was 12%, up from 9% for the second quarter of 2002.
In the second quarter of 2003, net income of $126 million included the
following items which in total had the effect of decreasing after-tax income by
$4 million: $15 million of restructuring charges and an $11 million tax benefit
associated with the Company's merger with U.S. Trust. In the second quarter of
2002, net income of $98 million included the following items which in total had
the effect of decreasing after-tax income by $11 million: a $3 million loss from
discontinued operations, $2 million of restructuring charges, and $6 million of
acquisition-related charges.
- 15 -
Segment Information: In evaluating the financial performance of the Company's
segments, management uses adjusted operating income, a non-generally accepted
accounting principles (non-GAAP) income measure which excludes the items
described in the preceding paragraph. Management believes that adjusted
operating income is a useful indicator of the ongoing financial performance of
the Company's segments, and a tool that can provide meaningful insight into
financial performance without the effects of certain material items that are not
expected to be an ongoing part of operations. As detailed in note "14 - Segment
Information" in the Notes to Condensed Consolidated Financial Statements,
adjusted operating income before taxes was $206 million for the second quarter
of 2003, up $31 million, or 18%, from the second quarter of 2002 primarily due
to increases of $47 million, or 71%, in the Individual Investor segment and
$9 million, or 15%, in the Institutional Investor segment, partially offset by
decreases of $4 million, or 80%, in the Capital Markets segment, and
$21 million, or 47%, in the U.S. Trust segment. The increases in the Individual
Investor and Institutional Investor segments were primarily due to lower
expenses as a result of the Company's expense reduction measures. The decrease
in the U.S. Trust segment was primarily due to lower average client assets. The
decrease in the Capital Markets segment was primarily due to expense growth
which exceeded revenue growth.
Restructuring: In 2001, the Company initiated a restructuring plan to reduce
operating expenses due to economic uncertainties and difficult market
conditions. The restructuring plan was completed in 2002 and included a
workforce reduction, a reduction in operating facilities, and the removal of
certain systems hardware, software, and equipment from service. Included in
these initiatives were costs associated with the withdrawal from certain
international operations.
In the third quarter of 2002, the Company commenced additional
restructuring initiatives due to continued difficult market conditions. These
initiatives were intended to reduce operating expenses and adjust the Company's
organizational structure to improve productivity, enhance efficiency, and
increase profitability. These restructuring initiatives were substantially
completed in 2002 and primarily included further reductions in the Company's
workforce and facilities.
The Company recorded pre-tax restructuring charges of $24 million in the
second quarter of 2003, primarily due to changes in estimates of sublease income
associated with previously announced efforts to sublease excess facilities. The
Company recorded pre-tax restructuring charges of $3 million in the second
quarter of 2002.
As of June 30, 2003, the remaining facilities restructuring reserve of
$218 million related to the Company's 2001 and 2002 restructuring initiatives is
net of estimated future sublease income of approximately $340 million. This
estimated future sublease income amount is determined based upon a number of
factors, including current and expected commercial real estate lease rates in
the respective properties' real estate markets, and estimated vacancy periods
prior to execution of tenant subleases. At June 30, 2003, approximately 45% of
the total square footage targeted for sublease under the 2001 and 2002
restructuring initiatives has been subleased, up from approximately 25% at
December 31, 2002.
The Company continues to evaluate its workforce and facilities requirements
in response to the market environment and the 2002 restructuring initiatives
which resulted in the consolidation of several support functions. The Company
expects to record approximately $35 million to $50 million in pre-tax
restructuring charges in the second half of 2003, encompassing mandatory staff
reductions of approximately 250 employees, as well as the consolidation of
certain facilities, including certain Schwab domestic branch offices. The
Company also expects that selective hiring in certain areas will offset some of
the mandatory staff reductions.
For further information on the Company's restructuring initiatives, see
note "4 - Restructuring" in the Notes to Condensed Consolidated Financial
Statements.
REVENUES
Revenues decreased by $19 million, or 2%, to $1.0 billion in the second
quarter of 2003 compared to the second quarter of 2002, primarily due to a
$33 million, or 15%, decrease in net interest revenue, a $6 million, or 12%,
decrease in principal transaction revenues, and a $4 million, or 10%, decrease
in other revenues, partially offset by a $23 million, or 8%, increase in
commission revenues. The Company's non-trading revenues represented 65% of total
revenues for the second quarter of 2003, as compared to 67% for the second
quarter of 2002 as shown in the following table:
- --------------------------------------------------------------------------------
Three Months
Ended
June 30,
Composition of Revenues 2003 2002
- --------------------------------------------------------------------------------
Asset management and administration fees 44% 43%
Net interest revenue 18 21
Other 3 3
- --------------------------------------------------------------------------------
Total non-trading revenues 65 67
- --------------------------------------------------------------------------------
Commissions 31 28
Principal transactions 4 5
- --------------------------------------------------------------------------------
Total trading revenues 35 33
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
While the Individual Investor and Institutional Investor segments generate
both trading and non-trading revenues,
- 16 -
the Capital Markets segment generates primarily trading revenues and the U.S.
Trust segment generates primarily non-trading revenues. The $19 million decrease
in revenues from the second quarter of 2002 was due to decreases in revenues of
$4 million, or 2%, in the Institutional Investor segment and $23 million, or
13%, in the U.S. Trust segment, partially offset by increases in revenues of
$1 million in the Individual Investor segment and $7 million, or 11%, in the
Capital Markets segment. See note "14 - Segment Information" in the Notes to
Condensed Consolidated Financial Statements for financial information by
segment.
Asset Management and Administration Fees
Asset management and administration fees include mutual fund service fees,
as well as fees for other asset-based financial services provided to individual
and institutional clients. The Company earns mutual fund service fees for
recordkeeping 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 the
daily balances of client assets invested in third-party funds and upon the
average daily net assets of the Company's proprietary funds. Mutual fund service
fees are earned through the Individual Investor, Institutional Investor, and
U.S. Trust segments. The Company also earns asset management and administration
fees for financial services, including investment management and consulting,
trust and fiduciary services, custody services, financial and estate planning,
and private banking services, provided to individual and institutional clients.
These fees are primarily based on the value and composition of assets under
management and are earned through the U.S. Trust, Individual Investor, and
Institutional Investor segments.
Asset management and administration fees were $445 million for the second
quarter of 2003, up $1 million from the second quarter of 2002, as shown in the
following table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
Asset Management and Administration Fees 2003 2002 Change
- --------------------------------------------------------------------------------
Mutual fund service fees:
Proprietary funds
(SchwabFunds(R) and Excelsior(R)) $223 $217 3%
Mutual Fund OneSource(R) 65 72 (10)
Other 13 10 30
Asset management and related services 144 145 (1)
- --------------------------------------------------------------------------------
Total $445 $444 -
================================================================================
Assets in client accounts were $844.7 billion at June 30, 2003, an increase
of $47.7 billion, or 6%, from a year ago as shown in the following table. This
increase from a year ago included net new client assets of $41.4 billion and net
market gains of $6.3 billion related to client accounts.
- --------------------------------------------------------------------------------
Change in Client Assets and Accounts
(In billions, at quarter end, June 30, Percent
except as noted) 2003 2002 Change
- --------------------------------------------------------------------------------
Assets in client accounts
Schwab One(R), other cash
equivalents and deposits
from banking clients $ 30.2 $ 28.6 6%
Proprietary funds (SchwabFunds(R)
and Excelsior(R)):
Money market funds 126.8 126.7 -
Equity and bond funds 31.2 30.9 1
- --------------------------------------------------------------------------------
Total proprietary funds 158.0 157.6 -
- --------------------------------------------------------------------------------
Mutual Fund Marketplace(R) (1):
Mutual Fund OneSource(R) 85.0 81.6 4
Mutual fund clearing services 24.5 21.9 12
All other 84.6 75.9 11
- --------------------------------------------------------------------------------
Total Mutual Fund Marketplace 194.1 179.4 8
- --------------------------------------------------------------------------------
Total mutual fund assets 352.1 337.0 4
- --------------------------------------------------------------------------------
Equity and other securities (1) 338.2 323.3 5
Fixed income securities (2) 131.1 116.5 13
Margin loans outstanding (6.9) (8.4) (18)
- --------------------------------------------------------------------------------
Total client assets $844.7 $797.0 6%
================================================================================
Net change in assets
in client accounts
(for the quarter ended)
Net new client assets $ 6.5 $ 11.5
Net market gains (losses) 75.6 (72.2)
- ---------------------------------------------------------------------
Net growth (decline) $ 82.1 $(60.7)
=====================================================================
New client accounts
(in thousands, for the
quarter ended) 151.9 224.6 (32%)
Active client accounts
(in millions) (3) 7.7 8.0 (4%)
- --------------------------------------------------------------------------------
Active online Schwab client
accounts (in millions) (4) 4.1 4.3 (5%)
Online Schwab client assets $328.6 $308.2 7%
- --------------------------------------------------------------------------------
(1) Excludes all proprietary money market, equity, and bond funds.
(2) Includes $21.8 billion and $19.2 billion at June 30, 2003 and 2002,
respectively, of certain other securities serviced by Schwab's fixed income
division, including exchange-traded unit investment trusts, real estate
investment trusts, and corporate debt.
(3) Active client accounts are defined as accounts with balances or activity
within the preceding eight months. Reflects the removal of 192,000 accounts
in June 2003 related to the Company's withdrawal from the Employee Stock
Purchase Plan business and the transfer of those accounts to other
providers.
(4) Active online accounts are defined as all active individual and U.S.
dollar-based international accounts within a household that has had at
least one online session within the past twelve months. Excludes
independent investment advisor accounts and U.S. Trust accounts.
- 17 -
Commissions
The Company earns revenues by executing client trades primarily through the
Individual Investor and Institutional Investor segments, as well as the Capital
Markets segment. These revenues are affected by the number of client accounts
that trade, the average number of revenue-generating trades per account, and the
average revenue earned per revenue trade. As shown in the following table (in
millions), commission revenues for the Company were $313 million for the second
quarter of 2003, up $23 million, or 8%, from the second quarter of 2002. This
increase was primarily due to higher daily average trades, partially offset by
lower revenue per revenue trade.
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
Commissions 2003 2002 Change
- --------------------------------------------------------------------------------
Exchange-listed securities $ 106 $ 114 (7%)
Nasdaq and other securities 156 128 22
Mutual funds 27 27 -
Options 24 21 14
- --------------------------------------------------------------------------------
Total $ 313 $ 290 8%
================================================================================
Total commission revenues include $18 million in the second quarter of 2003
and $16 million in the second quarter of 2002 related to certain securities
serviced by Schwab's fixed income division, including exchange-traded unit
investment trusts, real estate investment trusts, and corporate debt. Schwab's
fixed income division also generates principal transaction revenues.
Additionally, commission revenues include $27 million in the second quarter of
2003 and $10 million in the second quarter of 2002 related to Schwab's
institutional trading business. Schwab's institutional trading business also
generates principal transaction revenues, as well as other revenues.
The Company's client trading activity is shown in the following table (in
thousands):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
Daily Average Trades 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue Trades (1)
Online 121.1 107.8 12%
TeleBroker(R) and Schwab by Phone(TM) 4.9 5.7 (14)
Regional client telephone service
centers, branch offices, and other 15.0 15.6 (4)
- --------------------------------------------------------------------------------
Total 141.0 129.1 9%
================================================================================
Mutual Fund OneSource(R) and
Other Asset-Based Trades
Online 51.3 46.6 10%
TeleBroker and Schwab by Phone .4 .4 -
Regional client telephone service
centers, branch offices, and other 5.4 10.5 (49)
- --------------------------------------------------------------------------------
Total 57.1 57.5 (1%)
================================================================================
Total Daily Average Trades
Online 172.4 154.4 12%
TeleBroker and Schwab by Phone 5.3 6.1 (13)
Regional client telephone service
centers, branch offices, and other 20.4 26.1 (22)
- --------------------------------------------------------------------------------
Total 198.1 186.6 6%
================================================================================
(1) Includes all client trades (both individuals and institutions) that
generate either commission revenue or revenue from principal markups (i.e.,
fixed income).
- 18 -
As shown in the following table, the total number of client revenue trades
executed by the Company has increased 8% as the trading activity per account
that traded has increased, partially offset by a decrease in the number of
client accounts that traded during the quarter.
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
Trading Activity 2003 2002 Change
- --------------------------------------------------------------------------------
Total revenue trades
(in thousands) (1) 8,883 8,253 8%
Accounts that traded during
the quarter (in thousands) 1,222 1,345 (9)
Average revenue trades
per account that traded 7.3 6.1 20
Trading frequency proxy (2) 3.9 3.6 8
Number of trading days 63 64 (2)
Average revenue earned
per revenue trade $37.73 $38.02 (1)
- --------------------------------------------------------------------------------
(1) Includes all client trades (both individuals and institutions) that
generate either commission revenue or revenue from principal markups (i.e.,
fixed income).
(2) Represents annualized revenue trades per $100,000 in total client assets.
Net Interest Revenue
Net interest revenue is the difference between interest earned on assets
(mainly margin loans to clients, investments of segregated client cash balances,
loans to banking clients, and securities available for sale) and interest paid
on liabilities (mainly brokerage client cash balances and deposits from banking
clients). 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 and
hedging strategies.
Substantially all of the Company's net interest revenue is earned through
the Individual Investor, Institutional Investor, and U.S. Trust segments.
Net interest revenue was $180 million for the second quarter of 2003, down
$33 million, or 15%, from the second quarter of 2002 as shown in the following
table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
2003 2002 Change
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to clients $ 84 $ 128 (34%)
Investments, client-related 76 82 (7)
Loans to banking clients 56 59 (5)
Securities available for sale 19 22 (14)
Other 9 12 (25)
- --------------------------------------------------------------------------------
Total 244 303 (19)
- --------------------------------------------------------------------------------
Interest Expense
Brokerage client cash balances 24 43 (44)
Deposits from banking clients 22 23 (4)
Long-term debt 9 14 (36)
Short-term borrowings 4 7 (43)
Other 5 3 67
- --------------------------------------------------------------------------------
Total 64 90 (29)
- --------------------------------------------------------------------------------
Net interest revenue $ 180 $ 213 (15%)
================================================================================
- 19 -
Client-related daily average balances, interest rates, and average net
interest spread for the second quarters of 2003 and 2002 are summarized in the
following table (dollars in millions):
- --------------------------------------------------------------------------------
Three Months Ended
June 30,
2003 2002
- --------------------------------------------------------------------------------
Interest-Earning Assets (client-related and other):
Investments (client-related):
Average balance outstanding $ 22,108 $ 16,763
Average interest rate 1.38% 1.97%
Margin loans to clients:
Average balance outstanding $ 6,581 $ 8,910
Average interest rate 5.11% 5.78%
Loans to banking clients:
Average balance outstanding $ 4,747 $ 4,126
Average interest rate 4.74% 5.70%
Securities available for sale:
Average balance outstanding $ 1,668 $ 1,668
Average interest rate 4.47% 5.11%
Average yield on interest-earning assets 2.68% 3.70%
Funding Sources (client-related and other):
Interest-bearing brokerage client cash balances:
Average balance outstanding $ 23,039 $ 22,287
Average interest rate .40% .78%
Interest-bearing banking deposits:
Average balance outstanding $ 4,639 $ 3,731
Average interest rate 1.99% 2.44%
Other interest-bearing sources:
Average balance outstanding $ 2,668 $ 1,073
Average interest rate 1.17% 2.27%
Average noninterest-bearing portion $ 4,758 $ 4,376
Average interest rate on funding sources .61% .92%
Summary:
Average yield on interest-earning assets 2.68% 3.70%
Average interest rate on funding sources .61% .92%
- --------------------------------------------------------------------------------
Average net interest spread 2.07% 2.78%
================================================================================
The decrease in net interest revenue from the second quarter of 2002 was
primarily due to lower levels of, and lower rates received on, margin loans to
clients, as well as lower rates received on client-related investments,
partially offset by lower rates paid on brokerage client cash balances and
higher average balances of client-related investments.
Principal Transactions
Principal transaction revenues are primarily comprised of revenues from
client fixed income securities trading activity, which are included in the
Capital Markets, Individual Investor, and Institutional Investor segments, and
net gains from market-making activities in Nasdaq and other equity securities,
which are included in the Capital Markets segment. Factors that influence
principal transaction revenues include the volume of client trades, market price
volatility, average revenue per equity share traded, and changes in regulations
and industry practices.
Principal transaction revenues were $43 million for the second quarter of
2003, down $6 million, or 12%, from the second quarter of 2002, as shown in the
following table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
Principal Transactions 2003 2002 Change
- --------------------------------------------------------------------------------
Fixed income securities $ 24 $ 25 (4%)
Nasdaq and other equity securities 19 21 (10)
Other - 3 (100)
- --------------------------------------------------------------------------------
Total (1) $ 43 $ 49 (12%)
================================================================================
(1) Includes $3 million in the second quarter of 2003 and $4 million in the
second quarter of 2002 related to Schwab's institutional trading business.
The decrease in principal transaction revenues was primarily due to lower
average revenue per equity share traded, partially offset by higher equity share
volume handled by SCM as a result of increased institutional trading activity.
Other Revenues
Other revenues include fees for services (such as order handling fees),
account service fees, net gains and losses on certain investments, and software
maintenance fees. Other revenues are earned primarily through the Individual
Investor, Institutional Investor, and U.S. Trust segments. These revenues were
$37 million for the second quarter of 2003, down $4 million, or 10%, from the
second quarter of 2002. This decrease was primarily due to proceeds from the
settlement of a lawsuit in 2002.
EXPENSES EXCLUDING INTEREST
Total expenses excluding interest for the second quarter of 2003 was
$836 million, down $40 million, or 5%, from the second quarter of 2002,
primarily due to decreases in almost all expense categories as a result of the
Company's continued expense reduction measures, partially offset by higher
restructuring charges.
Compensation and benefits expense was $449 million for the second quarter
of 2003, down $13 million, or 3%, from the second quarter of 2002 primarily due
to a reduction in full-time equivalent employees and lower levels of employee
benefits, partially offset by higher levels of incentive compensation and
discretionary bonuses to employees.
- 20 -
The following table shows a comparison of certain compensation and benefits
components and employee data (dollars in millions, except as noted):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
Compensation and Benefits 2003 2002 Change
- --------------------------------------------------------------------------------
Salaries and wages $ 299 $ 321 (7%)
Incentive and variable compensation 86 67 28
Employee benefits and other 64 74 (14)
- --------------------------------------------------------------------------------
Total $ 449 $ 462 (3%)
================================================================================
Compensation and benefits expense as a
% of total revenues 44% 45%
Incentive and variable compensation as a
% of compensation and benefits expense 19% 15%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 6% 6%
Full-time equivalent employees
(at end of quarter, in thousands) (1) 16.1 19.1 (16%)
Revenues per average full-time equivalent
employee (in thousands) $62.6 $54.5 15%
- --------------------------------------------------------------------------------
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
Employee benefits and other expenses decreased by $10 million, or 14%, from
the second quarter of 2002 primarily due to the continued suspension of the
Company's 401(k) employer contribution, which began in the first quarter of
2003, as well as a reduction in full-time equivalent employees.
Advertising and market development expense was $21 million for the second
quarter of 2003, down $30 million, or 59%, from the second quarter of 2002. The
decrease was primarily due to reductions, as part of the Company's expense
reduction measures, in brand-focused television and other media spending.
Management anticipates that advertising and market development spending will
increase by approximately 40% in the third quarter of 2003 from the second
quarter of 2003.
The Company's effective income tax expense rate was 30.8% for the second
quarter of 2003, down from 37.2% for the second quarter of 2002. The decrease
was primarily due to a tax benefit in the second quarter of 2003 related to the
Company's merger with U.S. Trust.
Six Months Ended June 30, 2003 Compared To Six
Months Ended June 30, 2002
FINANCIAL OVERVIEW
In spite of the recent rebound in the securities markets, a difficult
market environment pressured both client asset valuations and trading activity
for most of the first half of 2003. During this period, the Company's trading
revenues decreased 9% from the first half of 2002, primarily due to lower client
trading activity and lower average revenue per equity share traded in the
Capital Markets segment.
Non-trading revenues decreased 8% in the first half of 2003 compared to the
year-ago level. The decrease in non-trading revenues was primarily due to an 18%
decrease in net interest revenue and a 25% decrease in other revenue. Average
margin loans to clients in the first half of 2003 decreased 29% from year-ago
levels, which primarily caused the decline in net interest revenue.
Total expenses excluding interest during the first half of 2003 were
$1.6 billion, down 8% from $1.8 billion during the first half of 2002. This
decrease occurred in almost all expense categories as a result of the Company's
continued expense reduction measures.
The reported loss from discontinued operations related to the Company's
sale of its U.K. brokerage subsidiary was $3 million for the first half of 2003,
compared to $7 million for the first half of 2002. For further information, see
note "6 - Discontinued Operations" in the Notes to Condensed Consolidated
Financial Statements.
In June 2003, the Company sold its investment in Aitken Campbell, a
market-making joint venture in the U.K., to the Company's joint venture partner,
TD Waterhouse Group, Inc. In the first quarter of 2003, the Company recorded an
impairment charge of $5 million pre tax to reduce the carrying value of its
investment and an income tax benefit of $16 million. The Company's share of
Aitken Campbell's historical earnings, which was accounted for under the equity
method, has not been material to the Company's results of operations, EPS, or
cash flows.
Income from continuing operations before taxes on income and extraordinary
gain was $279 million for the first half of 2003, down 6% from the first half of
2002. This decrease was primarily due to the combination of factors discussed
separately above - lower revenues, partially offset by declines in almost all
expense categories. Net income for the first half of 2003 was $197 million, or
$.14 per share, up 3% from $192 million, or $.14 per share, for the first half
of 2002. The Company's after-tax profit margin for the first half of 2003 was
10.2%, up from 9.2% for the first half of 2002. The annualized return on
stockholders' equity for the first half of 2003 was 10%, up from 9% for the
first half of 2002.
- 21 -
In the first half of 2003, net income of $197 million included the
following items which in total had the effect of increasing after-tax income by
$4 million: a $3 million loss from discontinued operations, $15 million of
restructuring charges, a $5 million investment write-down related to the
Company's U.K. market-making operation, a $16 million tax benefit associated
with the Company's sale of its U.K. market-making operation, and an $11 million
tax benefit associated with the Company's merger with U.S. Trust. In the first
half of 2002, net income of $192 million included the following items which in
total had the effect of decreasing after-tax income by $28 million: a $7 million
loss from discontinued operations, a $12 million extraordinary gain on the sale
of U.S. Trust's corporate trust business, $17 million of restructuring charges,
and $16 million of acquisition-related charges.
Segment Information: As detailed in note "14 - Segment Information" in the Notes
to Condensed Consolidated Financial Statements, adjusted operating income was
$308 million for the first half of 2003, down $45 million, or 13%, from the
first half of 2002 primarily due to decreases of $4 million, or 3%, in the
Institutional Investor segment and $30 million, or 38%, in the U.S. Trust
segment. Additionally, the Capital Markets segment had a loss before taxes and
excluded items of $3 million in the first half of 2003, compared to income
before taxes and excluded items of $14 million in the first half of 2002. These
decreases were partially offset by an increase of $6 million, or 4%, in the
Individual Investor segment. The changes in the Individual and Institutional
Investor segments were due to lower client trading activity, offset by lower
expenses as a result of the Company's expense reduction measures. The decrease
in the Capital Markets segment was due to higher costs. The decrease in the
U.S. Trust segment was primarily due to lower average client assets related to
declines in market valuations.
Restructuring: The Company recorded pre-tax restructuring charges of $24 million
in the first half of 2003, primarily due to changes in estimates of sublease
income associated with previously announced efforts to sublease excess
facilities. The Company recorded pre-tax restructuring charges of $29 million in
the first half of 2002.
For further information on the Company's restructuring initiatives, see
note "4 - Restructuring" in the Notes to Condensed Consolidated Financial
Statements.
REVENUES
Revenues decreased by $167 million, or 8%, to $1.9 billion in the first
half of 2003 compared to the first half of 2002, due to a $76 million, or 18%,
decrease in net interest revenue, a $35 million, or 6%, decrease in commission
revenues, a $24 million, or 24%, decrease in principal transaction revenues, a
$20 million, or 25%, decrease in other revenues, and a $12 million, or 1%,
decrease in asset management and administration fees. The Company's non-trading
revenues represented 67% of total revenues in each of the first halves of 2003
and 2002 as shown in the following table:
- --------------------------------------------------------------------------------
Six Months
Ended
June 30,
Composition of Revenues 2003 2002
- --------------------------------------------------------------------------------
Asset management and administration fees 46% 42%
Net interest revenue 19 21
Other 2 4
- --------------------------------------------------------------------------------
Total non-trading revenues 67 67
- --------------------------------------------------------------------------------
Commissions 29 28
Principal transactions 4 5
- --------------------------------------------------------------------------------
Total trading revenues 33 33
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
The $167 million decrease in revenues from the first half of 2002 was due
to decreases in revenues of $96 million, or 8%, in the Individual Investor
segment, $29 million, or 7%, in the Institutional Investor segment, $41 million,
or 12%, in the U.S. Trust segment, and $1 million, or 1%, in the Capital Markets
segment. See note "14 - Segment Information" in the Notes to Condensed
Consolidated Financial Statements for financial information by segment.
Asset Management and Administration Fees
Asset management and administration fees were $873 million for the first
half of 2003, down $12 million, or 1%, from the first half of 2002, as shown in
the following table (in millions):
- 22 -
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
Asset Management and Administration Fees 2003 2002 Change
- --------------------------------------------------------------------------------
Mutual fund service fees:
Proprietary funds
(SchwabFunds(R) and Excelsior(R)) $ 440 $ 437 1%
Mutual Fund OneSource(R) 124 143 (13)
Other 23 20 15
Asset management and related services 286 285 -
- --------------------------------------------------------------------------------
Total $ 873 $ 885 (1%)
================================================================================
The decrease in asset management and administration fees was primarily due
to decreases in average assets in Schwab's Mutual Fund OneSource service and
average U.S. Trust client assets, partially offset by an increase in average
assets in and service fees earned on Schwab's proprietary funds.
During the first half of 2003, both net new client assets and new accounts
decreased from the first half of 2002 as shown in the following table:
- --------------------------------------------------------------------------------
Six Months
Ended
Change in Client Assets and Accounts June 30, Percent
(In billions, except as noted) 2003 2002 Change
- --------------------------------------------------------------------------------
Net change in assets
in client accounts
Net new client assets $ 20.7 $ 26.9
Net market gains (losses) 59.2 (75.8)
- ----------------------------------------------------------------
Net growth (decline) $ 79.9 $(48.9)
================================================================
New client accounts
(in thousands) 322.9 456.9 (29%)
- --------------------------------------------------------------------------------
Commissions
As shown in the following table (in millions), commission revenues for the
Company were $553 million for the first half of 2003, down $35 million, or 6%,
from the first half of 2002. This decrease was primarily due to lower daily
average trades, partially offset by higher revenue per revenue trade.
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
Commissions 2003 2002 Change
- --------------------------------------------------------------------------------
Exchange-listed securities $205 $232 (12%)
Nasdaq and other securities 250 255 (2)
Mutual funds 53 54 (2)
Options 45 47 (4)
- --------------------------------------------------------------------------------
Total $553 $588 (6%)
================================================================================
Total commission revenues include $35 million in the first half of 2003 and
$32 million in the first half of 2002 related to certain securities serviced by
Schwab's fixed income division, including exchange-traded unit investment
trusts, real estate investment trusts, and corporate debt. Additionally,
commission revenues include $47 million in the first half of 2003 and
$16 million in the first half of 2002 related to Schwab's institutional trading
business.
The Company's client trading activity is shown in the following table (in
thousands):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
Daily Average Trades 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue Trades (1)
Online 108.6 115.6 (6%)
TeleBroker(R) and Schwab by Phone(TM) 4.5 6.2 (27)
Regional client telephone service
centers, branch offices, and other 14.9 16.2 (8)
- --------------------------------------------------------------------------------
Total 128.0 138.0 (7%)
================================================================================
Mutual Fund OneSource(R) and
Other Asset-Based Trades
Online 50.0 46.5 8%
TeleBroker and Schwab by Phone .5 .5 -
Regional client telephone service
centers, branch offices, and other 5.3 11.0 (52)
- --------------------------------------------------------------------------------
Total 55.8 58.0 (4%)
================================================================================
Total Daily Average Trades
Online 158.6 162.1 (2%)
TeleBroker and Schwab by Phone 5.0 6.7 (25)
Regional client telephone service
centers, branch offices, and other 20.2 27.2 (26)
- --------------------------------------------------------------------------------
Total 183.8 196.0 (6%)
================================================================================
(1) Includes all client trades (both individuals and institutions) that
generate either commission revenue or revenue from principal markups (i.e.,
fixed income).
As shown in the following table, the total number of revenue trades
executed by the Company has decreased 7% as the number of client accounts that
traded has declined, while the trading activity per account that traded has
increased.
- 23 -
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
Trading Activity 2003 2002 Change
- --------------------------------------------------------------------------------
Total revenue trades
(in thousands) (1) 15,873 17,104 (7%)
Accounts that traded during
the period (in thousands) 1,764 2,014 (12)
Average revenue trades
per account that traded 9.0 8.5 6
Trading frequency proxy (2) 3.3 3.7 (11)
Number of trading days 124 124 -
Average revenue earned
per revenue trade $37.54 $36.99 1
- --------------------------------------------------------------------------------
(1) Includes all client trades (both individuals and institutions) that
generate either commission revenue or revenue from principal markups (i.e.,
fixed income).
(2) Represents annualized revenue trades per $100,000 in total client assets.
Net Interest Revenue
Net interest revenue was $355 million for the first half of 2003, down $76
million, or 18%, from the first half of 2002 as shown in the following table (in
millions):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
2003 2002 Change
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to clients $ 166 $ 261 (36%)
Investments, client-related 151 168 (10)
Loans to banking clients 112 119 (6)
Securities available for sale 35 39 (10)
Other 19 25 (24)
- --------------------------------------------------------------------------------
Total 483 612 (21)
- --------------------------------------------------------------------------------
Interest Expense
Brokerage client cash balances 48 93 (48)
Deposits from banking clients 46 45 2
Long-term debt 19 27 (30)
Short-term borrowings 7 13 (46)
Other 8 3 167
- --------------------------------------------------------------------------------
Total 128 181 (29)
- --------------------------------------------------------------------------------
Net interest revenue $ 355 $ 431 (18%)
================================================================================
Client-related and other daily average balances, interest rates, and
average net interest spread for the first halves of 2003 and 2002 are summarized
in the following table (dollars in millions):
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
2003 2002
- --------------------------------------------------------------------------------
Interest-Earning Assets (client-related and other):
Investments (client-related):
Average balance outstanding $ 21,672 $ 17,007
Average interest rate 1.41% 1.99%
Margin loans to clients:
Average balance outstanding $ 6,490 $ 9,094
Average interest rate 5.15% 5.79%
Loans to banking clients:
Average balance outstanding $ 4,647 $ 4,094
Average interest rate 4.88% 5.85%
Securities available for sale:
Average balance outstanding $ 1,593 $ 1,557
Average interest rate 4.44% 4.99%
Average yield on interest-earning assets 2.72% 3.72%
Funding Sources (client-related and other):
Interest-bearing brokerage client cash balances:
Average balance outstanding $ 23,021 $ 22,630
Average interest rate .40% .84%
Interest-bearing banking deposits:
Average balance outstanding $ 4,605 $ 3,798
Average interest rate 2.04% 2.37%
Other interest-bearing sources:
Average balance outstanding $ 2,417 $ 1,042
Average interest rate 1.21% 2.25%
Average noninterest-bearing portion $ 4,359 $ 4,282
Average interest rate on funding sources .63% .96%
Summary:
Average yield on interest-earning assets 2.72% 3.72%
Average interest rate on funding sources .63% .96%
- --------------------------------------------------------------------------------
Average net interest spread 2.09% 2.76%
================================================================================
The decrease in net interest revenue from the first half of 2002 was due to
the factors described in the comparison between the three-month periods.
Principal Transactions
Principal transaction revenues were $76 million for the first half of 2003,
down $24 million, or 24%, from the first half of 2002, as shown in the following
table (in millions):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
Principal Transactions 2003 2002 Change
- --------------------------------------------------------------------------------
Fixed income securities $ 45 $ 47 (4%)
Nasdaq and other equity securities 29 47 (38)
Other 2 6 (67)
- --------------------------------------------------------------------------------
Total (1) $ 76 $100 (24%)
================================================================================
(1) Includes $6 million in the first half of 2003 and $7 million in the first
half of 2002 related to Schwab's institutional trading business.
- 24 -
The decrease in principal transaction revenues was due to the factors
described in the comparison between the three-month periods.
Other Revenues
Other revenues were $61 million for the first half of 2003, down $20
million, or 25%, from the first half of 2002. This decrease was due to higher
net gains on investments and proceeds from the settlement of a lawsuit, both in
the first half of 2002.
EXPENSES EXCLUDING INTEREST
Total expenses excluding interest were $1.6 billion for the first half of
2003, down $149 million, or 8%, from the first half of 2002, primarily due to
decreases in almost all expense categories as a result of the Company's
continued expense reduction measures.
Compensation and benefits expense was $866 million for the first half of
2003, down $59 million, or 6%, from the first half of 2002, primarily due to the
factors described in the comparison between the three-month periods.
The following table shows a comparison of certain compensation and benefits
components and employee data (dollars in millions, except as noted):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
Compensation and Benefits 2003 2002 Change
- --------------------------------------------------------------------------------
Salaries and wages $ 604 $ 637 (5%)
Incentive and variable compensation 135 130 4
Employee benefits and other 127 158 (20)
- --------------------------------------------------------------------------------
Total $ 866 $ 925 (6%)
================================================================================
Compensation and benefits expense as a
% of total revenues 45% 44%
Incentive and variable compensation as a
% of compensation and benefits expense 16% 14%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 6% 5%
Revenues per average full-time equivalent
employee (in thousands) $116.7 $108.8 7%
- --------------------------------------------------------------------------------
Advertising and market development expense was $69 million for the first
half of 2003, down $34 million, or 33%, from the first half of 2002. This
decrease was due to the factors described in the comparison between the
three-month periods.
The Company's effective income tax rate was 28.1% for the first half of
2003, down from 37.7% for the first half of 2002. The decrease was due to tax
benefits in 2003 related to the Company's merger with U.S. Trust and the
Company's sale of its U.K. market-making operation in 2003.
Liquidity and Capital Resources
CSC is a financial holding company, which is a type of bank holding company
subject to supervision and regulation by the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended. CSC conducts 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. See note "12 - Regulatory
Requirements" in the Notes to Condensed Consolidated Financial Statements.
Liquidity
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. As discussed
below, Schwab, CSC's depository institution subsidiaries, and SCM 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, meeting CSC's depository institution subsidiaries' capital
guidelines, and maintaining Schwab's and SCM's net capital. Based on their
respective regulatory capital ratios at June 30, 2003, the Company and its
depository institution subsidiaries are considered well capitalized.
CSC has liquidity needs that arise from its issued and outstanding $493
million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from
the funding of cash dividends, acquisitions, and other investments. The
Medium-Term Notes have maturities ranging from 2003 to 2010 and fixed interest
rates ranging from 6.04% to 8.05% with interest payable semiannually (see Item 3
- - Quantitative and Qualitative Disclosures About Market Risk - Financial
Instruments Held For Purposes Other Than Trading - Interest Rate Swaps). The
Medium-Term Notes are rated A2 by Moody's Investors Service (Moody's), A- by
Standard & Poor's Ratings Group (S&P), and A by Fitch IBCA, Inc. (Fitch).
CSC has a prospectus supplement on file with the Securities and Exchange
Commission enabling CSC to issue up to $750 million in Senior or Senior
Subordinated Medium-Term Notes, Series A. At June 30, 2003, all of these notes
remained unissued.
- 25 -
CSC has authorization from its Board of Directors to issue commercial paper
up to the amount of CSC's committed, unsecured credit facility (see below), not
to exceed $1.5 billion. At June 30, 2003, no commercial paper has been issued.
CSC's ratings for these short-term borrowings are P-1 by Moody's, A-2 by S&P,
and F1 by Fitch.
In June 2003, CSC established an $800 million committed, unsecured credit
facility with a group of twenty banks which is scheduled to expire in June 2004.
This facility replaced a similar $1.0 billion facility that expired in June
2003. CSC elected to reduce the size of the new facility. These facilities were
unused during the first six months of 2003. Any issuances under CSC's commercial
paper program (see above) will reduce the amount available under this facility.
The funds under this facility are available for general corporate purposes and
CSC pays a commitment fee on the unused balance of this facility. The financial
covenants in this facility require CSC to maintain a minimum level of tangible
net worth, and Schwab and SCM to maintain specified levels of net capital, as
defined. Management believes that these restrictions will not have a material
effect on its ability to meet foreseeable dividend or funding requirements.
CSC also has direct access to $769 million of the $819 million uncommitted,
unsecured bank credit lines, provided by nine banks that are primarily utilized
by Schwab to manage short-term liquidity. The amount available to CSC under
these lines is lower than the amount available to Schwab because the credit line
provided by one of these banks is only available to Schwab. These lines were not
used by CSC during the first six months of 2003.
Schwab
Liquidity needs relating to client trading and margin borrowing activities
are met primarily through cash balances in brokerage client accounts, which were
$25.6 billion and $24.9 billion at June 30, 2003 and December 31, 2002,
respectively. Management believes that brokerage client cash balances and
earnings will continue to be the primary sources of liquidity for Schwab in the
future.
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 requirement of $1 million. At
June 30, 2003, Schwab's net capital was $1.3 billion (18% of aggregate debit
balances), which was $1.1 billion in excess of its minimum required net capital
and $896 million in excess of 5% of aggregate debit balances. Schwab has
historically targeted net capital to be at least 10% of its aggregate debit
balances, which primarily consist of client margin loans.
To manage Schwab's regulatory capital requirement, CSC provides Schwab with
a $1.4 billion subordinated revolving credit facility which is scheduled to
expire in September 2003. The amount outstanding under this facility at June 30,
2003 was $220 million. Borrowings under these subordinated lending arrangements
qualify as regulatory capital for Schwab.
Upon adoption of Financial Accounting Standards Board Interpretation
(FIN) No. 46 - Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 - Consolidated Financial Statements in the
first quarter of 2003, the Company consolidated a special purpose trust (Trust)
that was formed in 2000 to finance the acquisition and renovation of an office
building and land. See note "2 - New Accounting Standards" in the Notes to the
Condensed Consolidated Financial Statements. Upon adoption of FIN No. 46 in the
first quarter of 2003, Schwab recorded long-term debt totaling $235 million,
which was outstanding at June 30, 2003. The long-term debt consists of a
variable-rate note maturing in June 2005. The interest rate on the note was
1.66% at June 30, 2003, and ranged from 1.60% to 1.72% during the quarter, and
1.60% to 1.82% for the first half of 2003. The building and land have been
pledged as collateral for the long-term debt. Additionally, the Company has
guaranteed the debt of the Trust up to a maximum of $202 million. The lender
does not have recourse to any other assets of the Company.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured
bank credit lines with a group of nine banks totaling $819 million at June 30,
2003 (as noted previously, $769 million of these lines are also available for
CSC to use). 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 5 days during the
first six months of 2003, with the daily amounts borrowed averaging $23 million.
There were no borrowings outstanding under these lines at June 30, 2003.
To satisfy the margin requirement of client option transactions with the
Options Clearing Corporation (OCC), Schwab had unsecured letter of credit
agreements with nine banks in favor of the OCC aggregating $630 million at
June 30, 2003. Schwab pays a fee to maintain these letters of credit. No funds
were drawn under these letters of credit at June 30, 2003.
- 26 -
U.S. Trust
U.S. Trust's liquidity needs are generally met through earnings generated
by its operations.
U.S. Trust is subject to the Federal Reserve Board's risk-based and
leverage capital guidelines. These regulations require banks and bank holding
companies to maintain minimum levels of capital. In addition, USTC's depository
institution subsidiaries are subject to limitations on the amount of dividends
they can pay to USTC.
In addition to traditional funding sources such as deposits, federal funds
purchased, and repurchase agreements, USTC's depository institution subsidiaries
have established their own external funding sources. At June 30, 2003, U.S.
Trust had $50 million in Trust Preferred Capital Securities outstanding with a
fixed interest rate of 8.41%. Certain of USTC's depository institution
subsidiaries have established credit facilities with the Federal Home Loan Bank
System (FHLB) totaling $792 million. At June 30, 2003, $500 million was
outstanding under these facilities. Additionally, at June 30, 2003, U.S. Trust
had $505 million of federal funds purchased and $308 million of repurchase
agreements outstanding.
CSC provides U.S. Trust with a $300 million short-term credit facility
maturing in December 2003. Borrowings under this facility do not qualify as
regulatory capital for U.S. Trust. The amount outstanding under this facility
was $45 million at June 30, 2003.
SCM
SCM's liquidity needs are generally met through its equity capital and
borrowings from CSC. Most of SCM's assets are liquid, consisting primarily of
cash and cash equivalents, marketable securities, and receivables from brokers,
dealers and clearing organizations.
SCM's liquidity is affected by the same regulatory net capital requirements
as Schwab (see discussion above). At June 30, 2003, SCM's net capital was
$91 million, which was $90 million in excess of its minimum required net
capital.
SCM may borrow up to $150 million under a revolving subordinated lending
arrangement with CSC which is scheduled to expire in August 2003. Borrowings
under this arrangement qualify as regulatory capital for SCM. The amount
outstanding under this facility at June 30, 2003 was $75 million. The advances
under this facility satisfy increased intra-day capital needs at SCM to support
the expansion of its institutional equities and trading businesses. In addition,
CSC provides SCM with a $50 million short-term credit facility. Borrowings under
this arrangement do not qualify as regulatory capital for SCM. No funds were
drawn under this facility at June 30, 2003.
Schwab Bank
Schwab Bank's current liquidity needs are generally met through deposits
from banking clients and equity capital. Schwab Bank is subject to the same
risk-based and leverage capital guidelines as U.S. Trust (see discussion above),
except that Schwab Bank is subject to a minimum tier 1 leverage ratio of 8% for
its first three years of operations. In addition, Schwab Bank is subject to
limitations on the amount of dividends it can pay to CSC.
Schwab Bank has access to traditional funding sources such as deposits,
federal funds purchased, and repurchase agreements. Additionally, under an
agreement effective in June 2003, CSC provides Schwab Bank with a $100 million
short-term credit facility which matures in December 2005. Borrowings under this
facility do not qualify as regulatory capital for Schwab Bank. No funds were
drawn under this facility at June 30, 2003.
Liquidity Risk Factors
Specific risk factors which may affect the Company's liquidity position are
discussed in "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources - Liquidity Risk Factors"
in the Company's 2002 Annual Report to Stockholders, which is filed as
Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2002.
There have been no material changes to these liquidity risk factors in the first
six months of 2003.
Cash and Capital Resources
The Company's cash position (reported as cash and cash equivalents on the
Condensed Consolidated Balance Sheet) and cash flows are affected by changes in
brokerage client cash balances and the associated amounts required to be
segregated under federal or other regulatory guidelines. Timing differences
between cash and investments actually segregated on a given date and the amount
required to be segregated for that date may arise in the ordinary course of
business and are addressed by the Company in accordance with applicable
regulations. Other factors which affect the Company's cash position and cash
flows include investment activity in securities owned, levels of capital
expenditures, banking client deposit and loan activity, financing activity in
short-term borrowings and long-term debt, payment of dividends, and repurchases
of CSC's common stock.
In the first half of 2003, cash and cash equivalents decreased
$1.0 billion, or 33%, to $2.1 billion primarily due to movements of brokerage
client-related funds to meet segregation requirements and increases in
investments in securities available for sale. Management does not believe that
this decline in cash and cash equivalents is an indication of a trend.
- 27 -
The Company's capital expenditures were $65 million in the first half of
2003 and $72 million in the first half of 2002, or 3% of revenues for each
period. Capital expenditures in the first half of 2003 were for software and
equipment relating to the Company's information technology systems and certain
facilities. Capital expenditures as described above include the capitalized
costs for developing internal-use software of $30 million in the first half of
2003 and $36 million in the first half of 2002. During the first half of 2003,
2 million of the Company's stock options, with a weighted-average exercise price
of $5.65, were exercised with cash proceeds received by the Company of
$13 million and a related tax benefit of $2 million. The cash proceeds are
recorded as an increase in cash and a corresponding increase in stockholders'
equity. The tax benefit is recorded as a reduction in income taxes payable and a
corresponding increase in stockholders' equity.
The Company increased its long-term debt by $235 million (see discussion
above in "Liquidity - Schwab") and repaid $73 million of long-term debt during
the first half of 2003.
During the first half of 2003, CSC repurchased 4 million shares of its
common stock for $32 million. During the first half of 2002, CSC repurchased
3 million shares of its common stock for $31 million. On March 14, 2003, the
Board of Directors authorized the repurchase of up to an additional $250 million
of CSC's common stock. Including the amount remaining under an authorization
granted by the Board of Directors on September 20, 2001, CSC now has authority
to repurchase a total of $318 million.
During each of the first halves of 2003 and 2002, the Company paid common
stock cash dividends of $30 million.
The Company monitors both the relative composition and absolute level of
its capital structure. The Company's total financial capital (long-term debt
plus stockholders' equity) at June 30, 2003 was $5.0 billion, up $337 million,
or 7%, from December 31, 2002 due to a net increase in long-term debt and higher
stockholders' equity. At June 30, 2003, the Company had long-term debt of
$811 million, or 16% of total financial capital, that bears interest at a
weighted-average rate of 5.15%. At June 30, 2003, the Company's stockholders'
equity was $4.2 billion, or 84% of total financial capital.
Commitments
A summary of the Company's principal contractual obligations and other
commitments as of June 30, 2003 is shown in the following table (in millions).
Management believes that funds generated by its operations, as well as cash
provided by external financing, will continue to be the primary funding sources
in meeting these obligations and commitments.
- --------------------------------------------------------------------------------
2004 - 2007 -
2003 2006 2008 Thereafter Total
- --------------------------------------------------------------------------------
Operating leases (1) $ 151 $ 575 $ 297 $ 627 $1,650
Long-term debt (2) 47 392 81 258 778
Credit-related financial
instruments (3) 1,508 130 - - 1,638
Other commitments (4) 5 10 - - 15
- --------------------------------------------------------------------------------
Total $1,711 $1,107 $ 378 $ 885 $4,081
================================================================================
(1) Includes minimum rental commitments, net of sublease commitments, and
maximum guaranteed residual values under noncancelable leases for
equipment.
(2) Excludes the effect of interest rate swaps, see Item 3 - Quantitative and
Qualitative Disclosures About Market Risk - Financial Instruments Held For
Purposes Other Than Trading - Interest Rate Swaps.
(3) Includes U.S. Trust and Schwab Bank firm commitments to extend credit
primarily for mortgage loans to banking clients and standby letters of
credit.
(4) Includes committed capital contributions to venture capital funds.
In addition to the commitments summarized above, in the ordinary course of
its business the Company has entered into various agreements with third-party
vendors, including agreements for advertising, sponsorships of sporting events,
data processing equipment purchases, licensing, and software installation. These
agreements typically can be canceled by the Company if notice is given according
to the terms specified in the agreements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial Instruments Held For Trading Purposes
The Company holds municipal, other fixed income and government securities,
and certificates of deposit in inventory to meet clients' trading needs. The
fair value of such inventory was approximately $76 million and $34 million at
June 30, 2003 and December 31, 2002, respectively. These securities, and the
associated interest rate risk, are not material to the Company's financial
position, results of operations, or cash flows.
The Company maintains inventories in exchange-listed, Nasdaq, and other
equity securities on both a long and short basis. The fair value of these
securities at June 30, 2003 and December 31, 2002 are shown in the following
table (in millions):
- --------------------------------------------------------------------------------
June 30, December 31,
Equity Securities 2003 2002
- --------------------------------------------------------------------------------
Long positions $115 $ 79
Short positions (99) (7)
- --------------------------------------------------------------------------------
Net long positions $ 16 $ 72
================================================================================
- 28 -
Using a hypothetical 10% increase or decrease in prices, the potential loss
or gain in fair value is estimated to be approximately $2 million and $7 million
at June 30, 2003 and December 31, 2002, respectively.
In addition, the Company generally enters into exchange-traded futures and
options contracts based on equity market indices to hedge potential losses in
equity inventory positions. There were no open futures or options contracts at
June 30, 2003. The notional amounts and fair values of these futures and options
contracts are shown in the following table (in millions):
- --------------------------------------------------------------------------------
June 30, December 31,
Exchange-traded Contracts 2003 2002
- --------------------------------------------------------------------------------
Net Short Futures (1):
Notional Amount - $ 63
Fair Value - $ 61
Long Put Options:
Notional Amount - $ 4
Fair Value - -
- --------------------------------------------------------------------------------
(1) Notional amount represents original contract price of the futures. Fair
value represents the index price. The difference between the notional and
fair value amounts are settled daily in accordance with futures market
requirements.
Using a hypothetical 10% increase or decrease in the underlying indices,
the potential loss or gain in fair value was estimated to be approximately
$6 million at December 31, 2002, which would substantially offset the potential
loss or gain on the equity securities previously discussed.
Value-at-risk
All trading activities are subject to market risk limits established by the
Company's businesses and approved by senior management who are independent of
the businesses. The Company manages trading risk through position policy limits,
value-at-risk (VAR) measurement methodology, and other market sensitivity
measures. Based on certain assumptions and historical relationships, VAR
estimates a potential loss from adverse changes in the fair values of the
Company's overnight trading positions. To calculate VAR, the Company uses a 99%
confidence level with a one-day holding period for most instruments. Stress
testing is performed on a regular basis to estimate the potential loss from
severe market conditions. It is the responsibility of the Company's Risk
Management department, in conjunction with the businesses, to develop stress
scenarios and use the information to assess the ongoing appropriateness of
exposure levels and limits.
The Company holds fixed income securities and equities for trading
purposes. The estimated VAR for both fixed income securities and equities at
June 30, 2003 and the high, low, and daily average during the first half of 2003
was $1 million or less for each category and stated period.
The VAR model is a risk analysis tool that attempts to measure the
potential losses in fair value, earnings, or cash flows from changes in market
conditions and may not represent actual losses in fair value that may be
incurred by the Company. The Company believes VAR provides an indication as to
the Company's loss exposure in future periods. However, VAR relies on historical
data and statistical relationships. As a result, VAR must be interpreted with an
understanding of the method's strengths and limitations. The Company actively
works to improve its measurement and use of VAR.
Financial Instruments Held For Purposes Other Than Trading
Debt Issuances
At June 30, 2003, CSC had $493 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates ranging from 6.04% to 8.05%. At
December 31, 2002, CSC had $566 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates ranging from 6.04% to 8.05%. See
"Interest Rate Swaps" below.
At June 30, 2003 and December 31, 2002, U.S. Trust had $50 million Trust
Preferred Capital Securities outstanding, with a fixed interest rate of 8.41%.
The Company has fixed cash flow requirements regarding these long-term debt
obligations due to the fixed rate of interest. The fair value of these
obligations at June 30, 2003 and December 31, 2002, based on estimates of market
rates for debt with similar terms and remaining maturities, approximated their
carrying amount.
Interest Rate Swaps
As part of its consolidated asset and liability management process, the
Company utilizes interest rate swap agreements (Swaps) to manage interest rate
risk.
U.S. Trust uses Swaps to hedge the interest rate risk associated with its
variable rate deposits from banking clients. The Swaps are structured for U.S.
Trust to receive a variable rate of interest and pay a fixed rate of interest.
Information on these Swaps is summarized in the following table:
- 29 -
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Notional principal amount (in millions) $ 705 $ 790
Weighted-average variable interest rate 1.23% 1.57%
Weighted-average fixed interest rate 6.41% 6.38%
Weighted-average maturity (in years) 1.5 1.8
- --------------------------------------------------------------------------------
These Swaps have been designated as cash flow hedges under SFAS No. 133 -
Accounting for Derivative Instruments and Hedging Activities, and are recorded
on the Condensed Consolidated Balance Sheet, with changes in their fair values
primarily recorded in other comprehensive income (loss), a component of
stockholders' equity. At June 30, 2003 and December 31, 2002, U.S. Trust
recorded a derivative liability of $53 million and $64 million, respectively,
for these Swaps. Based on current interest rate assumptions and assuming no
additional Swaps are entered into, U.S. Trust expects to reclassify
approximately $35 million, or $21 million after tax, from other comprehensive
loss to interest expense over the next twelve months.
CSC uses Swaps to effectively convert the interest rate characteristics of
a portion of its Medium-Term Notes from fixed to variable. These Swaps are
structured for CSC to receive a fixed rate of interest and pay a variable rate
of interest based on the three-month LIBOR rate. The variable interest rates
reset every three months. Information on these Swaps is summarized in the
following table:
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Notional principal amount (in millions) $ 293 $ 293
Weighted-average variable interest rate 3.73% 3.87%
Weighted-average fixed interest rate 7.57% 7.57%
Weighted-average maturity (in years) 5.8 6.3
- --------------------------------------------------------------------------------
These Swaps have been designated as fair value hedges under SFAS No. 133,
and are recorded on the Condensed Consolidated Balance Sheet. Changes in fair
value of the Swaps are completely offset by changes in fair value of the hedged
Medium-Term Notes. Therefore, there is no effect on net income. At June 30,
2003, CSC recorded a derivative asset of $33 million for these Swaps.
Concurrently, the carrying value of the Medium-Term Notes was increased by
$33 million.
Loans Held for Sale
Schwab Bank's loans held for sale portfolio consists of fixed-rate and
hybrid mortgages, which are subject to a loss in value when market interest
rates rise. Schwab Bank uses forward sale commitments to manage this risk. At
June 30, 2003, the forward sale commitments were designated as hedging
instruments of the loans held for sale in effective cash flow hedges.
Accordingly, the fair values of the forward sale commitments are recorded on the
Condensed Consolidated Balance Sheet, with gains or losses recorded in other
comprehensive income (loss). At June 30, 2003, the derivative liability recorded
by Schwab Bank for these forward sale commitments was immaterial.
Deferred Compensation
The Company maintains investments in mutual funds related to its deferred
compensation plan, which is available to certain employees. These investments
were approximately $62 million and $49 million at June 30, 2003 and December 31,
2002, respectively. These securities, and the associated market risk, are not
material to the Company s financial position, results of operations, or cash
flows.
Value-at-risk
The estimated VAR for equities held for purposes other than trading, which
primarily consist of mutual funds related to the Company s deferred compensation
plan and an equity investment, was $2 million at June 30, 2003 with a high, low,
and daily average of $2 million, $1 million, and $1 million, respectively,
during the first half of 2003. The estimated VAR for short-term investments,
which are subject to interest rate risk, held for purposes other than trading at
June 30, 2003 and the high, low, and daily average during the first half of 2003
was $1 million or less for each. The estimated VAR for foreign exchange
investments, which consist of equity investments in the Company's international
subsidiaries, at June 30, 2003 and the high, low, and daily average during the
first half of 2003 was $1 million or less for each.
Net Interest Revenue Simulation
The Company uses net interest revenue simulation modeling techniques to
evaluate and manage the effect of changing interest rates. The simulation model
(the model) includes all interest-sensitive assets and liabilities, as well as
Swaps utilized by the Company to hedge its interest rate risk. Key variables in
the model include assumed margin loan and brokerage client cash balance growth
or decline, changes in the level and term structure of interest rates, the
repricing of financial instruments, prepayment and
- 30 -
reinvestment assumptions, loan, banking deposit, and brokerage client cash
balance pricing and volume assumptions. The simulations involve assumptions that
are inherently uncertain and, as a result, the simulations cannot precisely
estimate net interest revenue or precisely predict the impact of changes in
interest rates on net interest revenue. Actual results may differ from simulated
results due to the timing, magnitude, and frequency of interest rate changes as
well as changes in market conditions and management strategies, including
changes in asset and liability mix.
As demonstrated by the simulations presented below, the Company is
positioned so that the consolidated balance sheet produces an increase in net
interest revenue when interest rates rise and, conversely, a decrease in net
interest revenue when interest rates fall (i.e., interest-earning assets are
repricing more quickly than interest-bearing liabilities). The Swaps entered
into during 2002 have the effect of increasing the repricing frequency of
interest-bearing liabilities, thereby reducing the Company's consolidated
interest-rate sensitivity.
The simulations in the following table assume that the asset and liability
structure of the consolidated balance sheet would not be changed as a result of
the simulated changes in interest rates. As the Company actively manages its
consolidated balance sheet and interest rate exposure, in all likelihood the
Company would take steps to manage any additional interest rate exposure that
could result from changes in the interest rate environment. The following table
shows the results of a gradual 100 basis point increase or decrease in interest
rates relative to the Company's current base rate forecast on simulated net
interest revenue over the next twelve months at June 30, 2003 and December 31,
2002.
- --------------------------------------------------------------------------------
Impact on Net Interest Revenue June 30, December 31,
Percentage Increase (Decrease) 2003 2002
- --------------------------------------------------------------------------------
Increase of 100 basis points 4.2% 5.3%
Decrease of 100 basis points (9.0%) (12.1%)
- --------------------------------------------------------------------------------
Item 4. Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of June 30, 2003. Based
on this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective for gathering, analyzing, and disclosing the information the Company
is required to disclose in the reports it files under the Securities Exchange
Act of 1934, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Such evaluation did not identify any change in the
Company's internal control over financial reporting that occurred during the
quarter ended June 30, 2003 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 2001, an action was filed against U.S. Trust Company, N.A. (USTC,
N.A). in the U.S. District Court for the Central District of Illinois.
Plaintiffs are participants in an employee stock ownership plan (the ESOP)
sponsored by Foster & Gallagher, Inc. (F&G), a now-bankrupt company. Plaintiffs
allege that USTC, N.A. breached fiduciary duties under the Employee Retirement
Income Security Act of 1974 when, as trustee of the ESOP, it caused the ESOP to
purchase stock of F&G in 1995 and 1997. Also named as defendants are numerous
individuals who sold stock to the ESOP in the 1995 and 1997 transactions. The
plaintiffs claim that as a result of the alleged breaches, they suffered losses
in the amount of $200 million. USTC, N.A. has answered, denying all liability,
and is vigorously defending the lawsuit. The case is scheduled to go to trial in
December 2003.
The nature of the Company's business subjects it to claims, lawsuits,
regulatory examinations, and other proceedings in the ordinary course of
business. The ultimate outcome of the matter described above and the various
other lawsuits, arbitration proceedings, and claims pending against the Company
cannot be determined at this time, and the results of these matters cannot be
predicted with certainty. There can be no assurance that these matters will not
have a material adverse effect on the Company's 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, results of operations, and cash flows. However, it is the
opinion of management, after consultation with legal counsel, that the ultimate
outcome of these existing claims and proceedings will not have a material
adverse impact on the financial condition, results of operations, or cash flows
of the Company.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of The Charles Schwab Corporation (CSC)
was held on May 9, 2003, and a total of 1,221,039,991 shares were present in
person or by proxy at the Annual Meeting. CSC's stockholders voted upon the
following proposals:
Proposal No. 1 - Election of Four Directors:
Shares
Shares For Withheld
---------- --------
Nancy H. Bechtle 1,170,060,612 50,979,379
C. Preston Butcher 1,164,473,602 56,566,389
David S. Pottruck 1,187,325,987 33,714,004
George P. Shultz 1,159,798,049 61,241,942
Proposal No. 2 - Approval of an Amendment to the 2001 Stock Incentive Plan
Regarding Grants to Non-Employee Directors:
Shares For Shares Against Abstentions
---------- -------------- -----------
1,144,624,296 66,744,454 9,671,241
Proposal No. 3 - Approval of the Long-Term Incentive Plan:
Shares For Shares Against Abstentions
---------- -------------- -----------
1,029,073,249 182,589,245 9,377,497
Proposal No. 4 - Approval of the Annual Bonus Provisions Contained in Charles R.
Schwab's Amended Employment Agreement:
Shares For Shares Against Abstentions
---------- -------------- -----------
1,175,269,798 36,040,865 9,729,328
Proposal No. 5 - Approval of the Incentive Plan for Lon Gorman, Vice Chairman
and President, Schwab Institutional and Asset Management:
Shares For Shares Against Abstentions
---------- -------------- -----------
1,145,968,497 63,548,288 11,523,206
Proposal No. 6 - Stockholder Proposal Regarding the Expensing of Stock Options:
Broker
Shares For Shares Against Abstentions Non-votes
---------- -------------- ----------- ---------
281,808,801 691,949,876 23,817,845 223,463,469
Item 5. Other Information
On May 5, 2003, CSC announced that Mr. John P. Coghlan will resign as Vice
Chairman of CSC and Charles Schwab & Co., Inc. (Schwab) and President of the
Individual Investor division of Schwab. Mr. Coghlan's resignation became
effective on July 25, 2003. Mr. Coghlan's responsibilities have been reassigned
in conjunction with a corporate reorganization.
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Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished as part of this quarterly report on
Form 10-Q.
- --------------------------------------------------------------------------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
3.12 Third Restated Bylaws of the Registrant, as amended on May 9, 2003
(supersedes Exhibit 3.9).
10.251 The Charles Schwab Corporation 2001 Stock Incentive Plan, restated to
include amendments through May 2003 (supersedes Exhibit 10.248).
10.252 The Charles Schwab Corporation Long-Term Incentive Plan.
10.253 Employment Agreement dated as of March 31, 2003 between the Registrant
and Charles R. Schwab (supersedes Exhibit 10.149).
10.254 The Charles Schwab Severance Pay Plan restated as of May 1, 2003
(supersedes Exhibit 10.247).
10.255 Credit Agreement (364-Day Commitment) dated as of June 20, 2003
between the Registrant and the financial institutions listed therein
(supersedes Exhibit 10.241).
12.1 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted
Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted
Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.**
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.**
** Furnished as an exhibit to this quarterly report on Form 10-Q.
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
On April 22, 2003, the Registrant furnished a Current Report on Form 8-K
announcing under Item 9 (Information Provided Under Item 12) in accordance with
SEC Release No. 33-8216, the financial results for the quarter ended March 31,
2003.
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THE CHARLES SCHWAB CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHARLES SCHWAB CORPORATION
(Registrant)
Date: August 12, 2003 /s/ Christopher V. Dodds
-------------------------- ------------------------------
Christopher V. Dodds
Executive Vice President and
Chief Financial Officer
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