Charles Schwab 2008 Annual Report Download - page 90

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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 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. See note “12 – Borrowings” for further discussion of the issuance of the
junior subordinated notes.
23. Business Acquisition
On March 31, 2007, the Company completed its acquisition of The 401(k) Company, which offers retirement plan services,
for $115 million in cash. The acquisition enhanced the Company’s ability to meet the needs of retirement plans of all sizes, as
well as provided the opportunity to capture rollover accounts from individuals participating in retirement plans served by The
401(k) Company and to cross-sell the Company’s other investment and banking services to plan participants. The Company’s
consolidated financial statements include The 401(k) Company as a wholly-owned subsidiary of CSC from March 31, 2007.
Pro-forma financial information for The 401(k) Company is not presented as it is not material to the Company’s consolidated
financial statements. As a result of a purchase price allocation, the Company recorded goodwill of $106 million and intangible
assets of $8 million, both of which are deductible for tax purposes over a period of 15 years. The intangible assets, which
relate to customer relationships, are being amortized on a straight-line basis over 16 years. The goodwill was allocated to the
Corporate and Retirement Services segment.
24. 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. The components of (loss) income from discontinued operations related to U.S. Trust are as follows:
2008 2007 2006
Net revenues $ - $ 446 $ 892
Income from discontinued operations, before taxes (1) $ - $ 116 $ 197
Gain on sale of U.S. Trust, before taxes - 1,862 -
Tax (expense) benefit on income (18) (691) 136
(Loss) income from discontinued operations, net of tax (1) $ (18) $ 1,287 $ 333
(1) Includes $6 million pre-tax, or $4 million after tax, of transaction-related costs recorded in 2006.
When calculating the Company’s gain on the sale of U.S. Trust for income tax purposes, the acquisition date tax basis is the
basis of U.S. Trust’s prior stockholders in their shares as of the date U.S. Trust was acquired by the Company, since the
transaction qualified as a tax-free exchange. In 2006, the Company recorded a $205 million income tax benefit related to the
estimated difference between the tax and book bases of the Company’s U.S. Trust stock. This amount was included in income
from discontinued operations, net of tax, on the Company’s consolidated statements of income. This initial estimate of the tax
benefit was based on publicly available information, including information on the composition of U.S. Trust’s stockholders at
the acquisition date and the market price of U.S. Trust stock during relevant periods, and was subject to adjustment following
a survey of former U.S. Trust stockholders. The Company completed the survey in the third quarter of 2007. Based upon the
results of this survey, the Company recorded an additional $72 million income tax benefit in 2007. The IRS completed their
examination of the acquisition date tax basis under a pre-filing agreement in the second quarter of 2008. 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
$18 million in the second quarter of 2008. This amount was recorded in loss from discontinued operations.
In May 2007, Schwab terminated an arrangement with U.S. Trust by which the excess cash held in certain Schwab brokerage
client accounts was swept into a money market deposit account at U.S. Trust. Schwab moved all of these balances to a similar
existing arrangement with Schwab Bank. The interest expense related to these client deposit balances maintained at U.S. Trust
is included in interest expense from continuing operations on the Company's consolidated statements of income for 2007 and
2006. This interest expense was $4 million and $11 million for 2007 and 2006, respectively. The corresponding interest
revenue on the invested cash balances related to these deposits is included in interest revenue from continuing operations on
the Company's consolidated statements of income for 2007 and 2006. This interest revenue was $14 million and $38 million