CREDIT SUISSE FIRST BOSTON USA INC - 10-Q Quarterly Report

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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 quarter ended June 30, 2002

Commission File Number: 1-6862

Credit Suisse First Boston (USA), Inc.
(Exact name of registrant as specified in its charter)

Delaware	13-1898818
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)
Eleven Madison Avenue	10010
New York, N.Y. (Address of principal executive offices)	(Zip Code)

(212) 325-2000
(Registrant's telephone number, including area code)

The Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

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

All of the outstanding shares of common stock of the registrant, $0.10 par value, are held by Credit Suisse First Boston, Inc.

CREDIT SUISSE FIRST BOSTON (USA), INC.

Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2002

TABLE OF CONTENTS

			Number Page
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Financial Condition at June 30, 2002 and December 31, 2001 (Unaudited)	2
		Condensed Consolidated Statements of Income for the three and six months ended June 30, 2002 and 2001 (Unaudited)	4
		Condensed Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2001, and 2002 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
		Independent Accountants' Review Report	26
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	45
	Item 2.	Omitted Pursuant to General Instruction H	46
	Item 3.	Omitted Pursuant to General Instruction H	46
	Item 4.	Omitted Pursuant to General Instruction H	46
	Item 5.	Other Information	46
	Item 6.	Exhibits	47
	Signature		48

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)
(In millions)

		June 30, 2002		December 31, 2001
ASSETS
Cash and cash equivalents		$	1,486	$	1,666
Cash and securities segregated for regulatory purposes or deposited with clearing organizations			5,742		6,407
Collateralized short-term agreements:
	Securities purchased under agreements to resell		52,817		43,961
	Securities borrowed		68,781		68,232
Receivables:
	Customers		4,631		4,740
	Brokers, dealers and other		9,365		11,555
Financial instruments owned:
	U.S. government and agencies (includes securities pledged as collateral of $30,221 and $21,639, respectively)		36,765		30,836
	Corporate debt (includes securities pledged as collateral of $9,915 and $9,765, respectively)		13,318		13,420
	Mortgage whole loans (includes loans pledged as collateral of $6,320 and $4,997, respectively)		7,387		6,846
	Equities (includes securities pledged as collateral of $5,474 and $5,917, respectively)		10,042		11,142
	Commercial paper		665		582
	Private equity and other long-term investments		776		963
	Derivatives contracts		2,116		3,077
	Other		1,804		2,085
Net deferred tax asset			1,509		2,200
Office facilities at cost (net of accumulated depreciation and amortization of $715 and $683, respectively)			591		759
Goodwill and other intangible assets			320		249
Loans receivable from parent and affiliates			15,580		7,626
Other assets and deferred amounts			1,795		1,974

Total Assets		$	235,490	$	218,320

See accompanying notes to condensed consolidated financial statements (unaudited).

		June 30, 2002			December 31, 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term borrowings		$	12,050		$	9,287
Collateralized short-term financings:
	Securities sold under agreements to repurchase		113,635			96,101
	Securities loaned		19,888			27,105
Payables:
	Customers		8,934			11,593
	Brokers, dealers and other		9,926			12,816
Financial instruments sold not yet purchased:
	U.S. government and agencies		27,295			20,888
	Corporate debt		3,135			3,402
	Equities		3,172			3,063
	Derivatives contracts		1,901			2,957
	Other		405			345
Obligation to return securities received as collateral			638			1,034
Accounts payable and accrued expenses			3,693			5,256
Other liabilities			717			1,922
Long-term borrowings			22,227			15,663

	Total liabilities		227,616			211,432

Stockholders' Equity:
Preferred stock, 50,000,000 shares authorized:
	Series B Preferred Stock, at $50.00 per share liquidation preference (90,000 shares issued and outstanding)		5			5
Common Stock, ($0.10 par value; 50,000 shares authorized; 1,100 shares issued and outstanding)			—			—
Paid-in capital			6,406			6,064
Retained earnings			1,527			891
Accumulated other comprehensive loss			(64	)		(72	)

	Total stockholders' equity		7,874			6,888

Total Liabilities and Stockholders' Equity		$	235,490		$	218,320

See accompanying notes to condensed consolidated financial statements (unaudited).

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)
(In millions)

		Three Months Ended June 30,				Six Months Ended June 30,
		2002		2001		2002		2001
Revenues:
	Principal transactions–net	$	118	$	514	$	141	$	1,290
	Investment banking and advisory		877		980		1,688		1,937
	Commissions		391		338		775		778
	Interest and dividends, net of interest expense of $1,459, $3,089, $2,815 and $6,449, respectively		541		282		966		435
	Other		17		1		551		190

	Total net revenues		1,944		2,115		4,121		4,630

Expenses:
	Employee compensation and benefits		1,022		1,281		2,064		2,615
	Occupancy and equipment rental		148		185		290		340
	Brokerage, clearing, and exchange fees		73		74		144		146
	Communications		56		74		118		152
	Professional fees		51		109		109		193
	Merger-related costs		91		145		182		288
	Other operating expenses		72		150		235		340

	Total expenses		1,513		2,018		3,142		4,074

Income before provision for income taxes, and cumulative effect of a change in accounting principle			431		97		979		556
Provision for income taxes			148		28		343		185

Income before cumulative effect of a change in accounting principle			283		69		636		371
Cumulative effect of a change in accounting principle, net of tax provision of $0.3			—		—		—		1

Net income		$	283	$	69	$	636	$	372

See accompanying notes to condensed consolidated financial statements (unaudited).

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)

For the Six Months Ended June 30, 2001 and June 30, 2002
(In millions)

		Preferred Stock		CSFB (USA) Common Stock		*CSFBdirect*** Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances at December 31, 2000		$	375	$	—	$	2	$	5,072	$	1,064		$	(7	)	$	6,506
Net income			—		—		—		—		372			—			372
Translation adjustment			—		—		—		—		—			(3	)		(3	)
Change in accounting principle (SFAS 133)			—		—		—		—		—			(2	)		(2	)

	Total comprehensive income																367

Capital contribution of Credit Suisse First Boston Capital Holdings, Inc.			—		—		—		34		—			—			34
Dividends:
	Preferred stock		—		—		—		—		(10	)		—			(10	)
CSG Share Plan Activity			—		—		—		478		—			—			478
Tax benefit on CSG Share Plan Activity			—		—		—		41		—			—			41

Balances at June 30, 2001		$	375	$	—	$	2	$	5,625	$	1,426		$	(12	)	$	7,416

Balances at December 31, 2001			5		—		—		6,064		891			(72	)		6,888
Net income			—		—		—		—		636			—			636
Foreign currency translation adjustment			—		—		—		—		—			3			3
Decrease in pension liability, net of tax expense of $3			—		—		—		—		—			5			5

	Total comprehensive income																644

CSG Share Plan Activity			—		—		—		342		—			—			342

Balances at June 30, 2002		$	5	$	—	$	—	$	6,406	$	1,527		$	(64	)	$	7,874

See accompanying notes to condensed consolidated financial statements (unaudited).

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)
(In millions)

			Six Months Ended June 30,
			2002			2001
Cash flows from operating activities:
	Net income		$	636		$	372
	Adjustments to reconcile net income to net cash used in operating activities:
		Net pre-tax gain on sale of certain broker dealer subsidiaries		(528	)		—
		Depreciation and amortization		83			121
		CSG Share Plan activity		342			478
		Deferred taxes		314			53
		Net change in the fair value of private equity and other long-term investments		80			42
		Other, net		3			(5	)
	(Increase) decrease in operating assets:
		Cash and securities segregated for regulatory purposes or deposited with clearing organizations		665			606
		Securities borrowed		(549	)		(2,156	)
		Receivables from customers		109			315
		Receivables from brokers, dealers and other		2,190			(4,299	)
		Financial instruments owned		(4,109	)		(2,749	)
		Other assets and deferred amounts		411			464
	Increase (decrease) in operating liabilities:
		Securities loaned		(7,217	)		(4,228	)
		Payables to customers		(2,659	)		(673	)
		Payables to brokers, dealers and other		(2,890	)		(1,833	)
		Financial instruments sold not yet purchased		5,253			1,855
		Obligation to return securities received as collateral		(396	)		2,025
		Accounts payable and accrued expenses		(1,563	)		(3,396	)
		Other liabilities		(1,200	)		798

Net cash used in operating activities			$	(11,025	)	$	(12,210	)

See accompanying notes to condensed consolidated financial statements (unaudited).

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)
(In millions)

				Six Months Ended June 30,
				2002			2001
Cash flows from investing activities:
	Net (payments for) proceeds from:
		Loans receivable from parent and affiliates		$	(7,954	)	$	1,855
		Capital contribution of Credit Suisse First Boston Capital Holdings, Inc.			—			34
		Purchases of private equity and other long-term investments			(131	)		(110	)
		Sales of private equity and other long-term investments			238			163
		Office facilities			95			119
		Sale of certain broker-dealer subsidiaries			674			—
		Purchase of subsidiary			(70	)		—
		Other assets			3			(210	)

Net cash (used in) provided by investing activities					(7,145	)		1,851

Cash flows from financing activities:
	Net proceeds from (payments for):
		Short-term financings			2,763			(9,685	)
		Securities sold under agreements to repurchase, net of securities purchased under agreements to resell			8,678			22,319
		Senior notes			4,040			(286	)
		Medium-term notes			2,593			1,320
		Structured notes			(64	)		(25	)
		Other long-term borrowings			(5	)		4
		Subordinated loan agreements			—			(4,150	)
		Cash dividends			—			(10	)
		Other assets			(15	)		—

Net cash provided by financing activities					17,990			9,487

Decrease in cash and cash equivalents					(180	)		(872	)
Cash and cash equivalents at beginning of period					1,666			2,758

Cash and cash equivalents at end of period				$	1,486		$	1,886

Supplemental statement of cash flows information:
	Supplemental schedule of noncash investing and financing activities:
		Capital contribution of Credit Suisse First Boston Capital Holdings, Inc.
			Fair value of assets contributed				$	67
			Less: liabilities assumed					33