Charles Schwab 2011 Annual Report Download - page 86

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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 58 -
Pro Forma Financial Information (Unaudited)
The following table presents unaudited pro forma financial information as if optionsXpress had been acquired on January 1,
2009. Pro forma net income for the year ended December 31, 2011, was adjusted to exclude $16 million, after tax, of
acquisition related costs incurred by the Company in 2011. Pro forma net income for the year ended December 31, 2009, was
adjusted to include these costs. Additionally, pro forma net income below excludes $15 million, before tax, of acquisition
related costs because these costs were incurred by optionsXpress prior to the acquisition date. Pro forma net income also
reflects the impact of amortizing purchase accounting adjustments relating to intangible assets, net of tax, of $20 million,
$22 million, and $24 million, for the years ended December 31, 2011, 2010, and 2009, respectively.
Year Ended December 31, 2011 2010 2009
Net revenues $ 4,857 $ 4,479 $ 4,426
Net income $ 896 $ 481 $ 804
Basic EPS $ .71 $ .39 $ .66
Diluted EPS $ .71 $ .38 $ .66
The unaudited pro forma financial information above is presented for illustrative purposes only and is not necessarily
indicative of the results that actually would have occurred had the acquisition been completed at the beginning of 2009, nor is
it indicative of the results of operations for future periods.
Windward Investment Management, Inc.
On November 9, 2010, the Company completed its acquisition of substantially all of the assets of Windward Investment
Management, Inc. (Windward) for $106 million in common stock and $44 million in cash. Windward was an investment
advisory firm that managed diversified investment portfolios comprised primarily of exchange-traded fund securities. As a
result of the acquisition, Windhaven Investment Management, Inc. was formed as a wholly-owned subsidiary of Schwab
Holdings, Inc.
The Company’s consolidated financial statements include the net assets and results of operations associated with this
acquisition from November 9, 2010. Pro forma financial information for the business acquired from Windward is not
presented as it is not material to the Company’s consolidated financial statements. As a result of a fair value allocation, the
Company recorded goodwill of $103 million and intangible assets of $47 million, both of which are deductible for tax
purposes over a period of 15 years. The intangible assets, which primarily relate to customer relationships and technology, are
being amortized on a straight-line basis over 11 years and 9 years, respectively. The goodwill was allocated to the Investor
Services and Institutional Services segments in the amounts of $30 million and $73 million, respectively.
In connection with the acquisition, the Company established employee retention and incentive programs that provide for cash
payments up to an aggregate $100 million. These payments are contingent upon the employees’ continued employment and
achievement of certain assets under management thresholds prior to specified time periods concluding 102 months (the
Service Period) following the acquisition, with payments due at intervals throughout the period if earned. These payments
will be recorded as compensation expense if such payments are deemed probable, and will be recognized over the Service
Period. The estimated liability under this program was not material at December 31, 2011 or 2010.
4. Receivables from Brokerage Clients
Receivables from brokerage clients are recorded net of an allowance for doubtful accounts. The allowance for doubtful
accounts was not material at December 31, 2011 or 2010. Receivables from brokerage clients consist primarily of margin
loans to brokerage clients of $10.2 billion and $10.3 billion at December 31, 2011 and 2010, respectively. Securities owned
by brokerage clients are held as collateral for margin loans. Such collateral is not reflected in the consolidated financial
statements. The average yield earned on margin loans was 4.39% and 4.87% in 2011 and 2010, respectively.