Charles Schwab 2008 Annual Report Download - page 39

THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
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Net revenues increased in 2007 by $155 million, or 16%, from 2006 due to increases in asset management and administration
fees and net interest revenue. Asset management and administration fees increased as a result of higher balances of client
assets in the Company’s proprietary mutual funds and Mutual Fund OneSource service, as well as balances participating in
managed account service programs. Net interest revenue increased due to higher levels of market interest rates and changes in
the composition of interest-earning assets, including increases in securities available for sale. Expenses excluding interest
increased in 2007 by $77 million, or 14%, from 2006 primarily due to higher business development, marketing and account
servicing related expenses, as well as increased infrastructure investment.
Corporate and Retirement Services
Net revenues were flat in 2008 as compared to 2007 as a result of an increase in trading revenue offset by a decrease in net
interest revenue. Trading revenue increased due to higher daily average revenue trades. Net interest revenue decreased due to
the impact of a decrease in the average net yield earned on interest-earning assets. Expenses excluding interest increased in
2008 by $22 million, or 6%, from 2007 due to increased costs to service additional corporate retirement plan participants
resulting from the acquisition of the 401(k) Company, offset by lower incentive compensation expense.
Net revenues increased in 2007 by $133 million, or 36%, from 2006 due to increases in asset management and administration
fees and net interest revenue, as well as the acquisition of the 401(k) Company in March 2007. Asset management and
administration fees increased as a result of higher balances of client assets in the Company’s mutual funds and advisory and
managed account service programs. Net interest revenue increased due to higher levels of market interest rates and changes in
the composition of interest-earning assets. Expenses excluding interest increased in 2007 by $99 million, or 37%, from 2006
primarily due to costs to service additional corporate retirement plan participants as a result of the acquisition of the 401(k)
Company.
Capital Restructuring
In 2007, CSC completed a capital restructuring that returned approximately $3.3 billion in capital to stockholders to create a
more efficient and cost-effective capital structure. The capital restructuring included the following components:
 CSC paid a special cash dividend of $1.00 per common share, which returned $1.2 billion to stockholders. The
special dividend was paid on August 24, 2007, to stockholders of record on July 24, 2007.
 CSC repurchased 84 million shares of its common stock through a modified “Dutch Auction” tender offer in August
2007. The tender offer period closed on July 31, 2007, and CSC accepted for purchase 84 million shares of its
common stock, at a purchase price of $20.50 per share, for a total purchase price of $1.7 billion.
 CSC executed a separate Stock Purchase Agreement with Chairman and former CEO Charles R. Schwab, CSC’s
largest stockholder, and with certain additional stockholders whose shares Mr. Schwab was deemed to beneficially
own. Under the Stock Purchase Agreement, Mr. Schwab and the other stockholders who are parties to the agreement
did not participate in the tender offer, but instead, sold, and CSC purchased, 18 million shares, at a purchase price
($20.50 per share), which is the same as was determined and paid in the tender offer, for a total purchase price of
$369 million. The number of shares repurchased resulted in Mr. Schwab maintaining the same beneficial percentage
interest in CSC’s outstanding common stock that he had prior to the tender offer and sale of shares pursuant to the
Stock Purchase Agreement (approximately 18 percent, which does not take into consideration Mr. Schwab’s
outstanding options to acquire stock). The shares under this agreement were repurchased on August 15, 2007.
 CSC issued $250 million of 6.375% Senior Medium-Term Notes due in 2017 in September 2007 and $300 million of
junior subordinated notes in October 2007. For further discussion of the issuance of the junior subordinated notes,
see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 12.
Borrowings.”
Discontinued Operations
On July 1, 2007, the Company completed the sale of all of the outstanding common stock of U.S. Trust for $3.3 billion in
cash. CSC recognized a gain on the sale of $1.9 billion, or $1.2 billion after tax, in third quarter of 2007. In connection with
the determination of the final income tax gain on the sale of U.S. Trust, the Company recorded additional tax expense of