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

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 1-6862

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

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

Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

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 March 31, 2004

PART I	FINANCIAL INFORMATION
	ITEM 1:	Financial Statements
		Condensed Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2004 and December 31, 2003	2
		Condensed Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2004 and 2003	4
		Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the three months ended March 31, 2004 and 2003	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2004 and 2003	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)
		1. Summary of Significant Accounting Policies	7
		2. Share-Based Compensation	9
		3. Discontinued Operations	9
		4. Related Party Transactions	10
		5. Income Taxes	12
		6. Transfers and Servicing of Financial Assets	14
		7. Borrowings	17
		8. Private Equity and Other Long-Term Investments	19
		9. Net Capital	20
		10. Cash and Securities Segregated Under Federal and Other Regulations	21
		11. Derivatives Contracts	21
		12. Employee Benefit Plans	23
		13. Leases and Commitments	24
		14. Guarantees	25
		15. Industry Segment and Geographic Data	29
		16. Goodwill and Identifiable Intangible Assets	30
		17. Legal Proceedings	31
		Independent Accountants' Review Report	32
	ITEM 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
	ITEM 3:	Quantitative and Qualitative Disclosures About Market Risk	55
	ITEM 4:	Controls and Procedures	56
PART II	OTHER INFORMATION
	ITEM 1:	Legal Proceedings	57
	ITEM 5:	Other Information	58
	ITEM 6:	Exhibits and Reports on Form 8-K	58
	Signature		59

AVAILABLE INFORMATION

We file annual, quarterly and current reports and other information with the Securities and Exchange Commission, or SEC. Our SEC filings are available to the public over the internet on the SEC's website at www.sec.gov. You may also view our annual, quarterly and current reports on our website at www.csfb.com (under "Company Information") as soon as is reasonably practicable after the report is electronically filed with, or furnished to, the SEC. The information on our website is not incorporated by reference into this Quarterly Report.

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)

		March 31, 2004		December 31, 2003
ASSETS
Cash and cash equivalents		$	929	$	334
Collateralized short-term financings:
	Securities purchased under agreements to resell		48,630		50,388
	Securities borrowed		80,186		77,999
Receivables:
	Customers		2,461		2,859
	Brokers, dealers and other		6,368		6,673
Financial instruments owned (includes securities pledged as collateral of $53,243 and $47,565, respectively):
	U.S. government and agencies		47,010		31,781
	Corporate debt		11,677		12,761
	Mortgage whole loans		10,468		9,101
	Equities		20,399		15,161
	Commercial paper		895		641
	Private equity and other long-term investments		2,301		1,123
	Derivatives contracts		6,796		5,573
	Other		4,130		3,765
Net deferred tax asset			1,217		1,283
Office facilities and property at cost (net of accumulated depreciation and amortization of $871 and $865, respectively)			527		468
Goodwill			532		532
Loans receivable from parent and affiliates			19,655		19,481
Other assets and deferred amounts			1,264		1,643

	Total assets	$	265,445	$	241,566

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

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Continued)
(Unaudited)
(In millions, except share data)

		March 31, 2004			December 31, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term borrowings		$	24,005		$	15,984
Collateralized short-term financings:
	Securities sold under agreements to repurchase		117,543			110,667
	Securities loaned		28,149			27,708
Payables:
	Customers		4,589			4,278
	Brokers, dealers and other		5,917			5,410
Financial instruments sold not yet purchased:
	U.S. government and agencies		25,504			23,700
	Corporate debt		2,557			2,523
	Equities		5,723			5,231
	Derivatives contracts		5,004			3,955
	Other		756			336
Obligation to return securities received as collateral			4,823			1,955
Accounts payable and accrued expenses			2,115			2,836
Other liabilities			3,707			3,021
Long-term borrowings			25,154			24,321

	Total liabilities		255,546			231,925

Stockholders' Equity:
Common stock ($0.10 par value; 50,000 shares authorized; 1,100 shares issued and outstanding)			—			—
Paid-in capital			8,102			8,012
Retained earnings			1,954			1,787
Accumulated other comprehensive loss			(157	)		(158	)

	Total stockholders' equity		9,899			9,641

	Total liabilities and stockholders' equity	$	265,445		$	241,566

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)

			For the Three Months Ended March 31,
			2004		2003
Revenues:
	Principal transactions-net		$	63	$	(42	)
	Investment banking and advisory			474		367
	Commissions and fees			374		315
	Interest and dividends, net of interest expense of $1,198 and $1,076, respectively			647		539
	Other			22		22

		Total net revenues		1,580		1,201

Expenses:
	Employee compensation and benefits			963		713
	Occupancy and equipment rental			114		116
	Brokerage, clearing and exchange fees			72		64
	Communications			32		38
	Professional fees			55		66
	Merger-related costs			4		62
	Other operating expenses			13		55

		Total expenses		1,253		1,114

Income from continuing operations before provision for income taxes, minority interests and discontinued operations				327		87
Provision for income taxes				79		30
Minority interests				81		—

Income from continuing operations				167		57

Discontinued operations:
	Income from discontinued operations			—		37
	Provision for income taxes			—		13

		Income from discontinued operations, net of income taxes		—		24

Net income			$	167	$	81

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 Three Months Ended March 31, 2004 and 2003
(In millions)

		Preferred Stock			Common Stock		Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balances as of December 31, 2002		$	4		$	—	$	7,646	$	595	$	(156	)	$	8,089
Net income			—			—		—		81		—			81

	Total comprehensive income														81

Redemption of Series B preferred stock			(4	)		—		—		—		—			(4	)
Capital contribution by CSFBI			—			—		75		—		—			75
CSG share plan activity, net of tax charge of $4			—			—		94		—		—			94

Balances as of March 31, 2003			—			—		7,815		676		(156	)		8,335

Balances as of December 31, 2003			—			—		8,012		1,787		(158	)		9,641
Net income			—			—		—		167		—			167
Decrease in pension liability			—			—		—		—		1			1

	Total comprehensive income														168

CSG share plan activity, net of tax charge of $10			—			—		90		—		—			90

Balances as of March 31, 2004		$	—		$	—	$	8,102	$	1,954	$	(157	)	$	9,899

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)

			For the Three Months Ended March 31,
			2004			2003
Cash flows from operating activities:
	Net income		$	167		$	81
	Adjustments to reconcile net income to net cash (used in) provided by operating activities:
		Depreciation and amortization		47			47
		CSG share plan activity		100			98
		Deferred taxes		61			116
		Other, net		(9	)		(4	)
	Change in operating assets and operating liabilities:
		Securities borrowed		(2,187	)		598
		Receivables from customers		398			(1,622	)
		Receivables from brokers, dealers and other		305			(2,376	)
		Financial instruments owned		(22,157	)		(4,020	)
		Other assets and Other liabilities, net		(89	)		327
		Securities loaned		441			3,945
		Payables to customers		311			1,988
		Payables to brokers, dealers and other		507			3,006
		Financial instruments sold not yet purchased		3,799			1,594
		Obligation to return securities received as collateral		2,868			(22	)
		Accounts payable and accrued expenses		(721	)		(1,014	)

Net cash (used in) provided by operating activities				(16,159	)		2,742

Cash flows from investing activities:
	Net payments for:
		Loans receivable from parent and affiliates		(174	)		(508	)
		Office facilities		(97	)		(17	)

Net cash used in investing activities				(271	)		(525	)

Cash flows from financing activities:
	Net proceeds from (payments for):
		Commercial paper and short-term borrowings		8,021			(99	)
		Repurchase of Series B preferred stock		—			(4	)
		Capital contribution by CSFBI		—			75
		Securities sold under agreements to repurchase, net of securities purchased under agreements to resell		8,634			(3,268	)
		Issuances of long-term borrowings		996			1,896
		Redemptions and maturities of long-term borrowings		(626	)		(590	)

Net cash provided by (used in) financing activities				17,025			(1,990	)

Increase in cash and cash equivalents				595			227
Increase in cash and cash equivalents included in assets held for sale				—			208

Cash and cash equivalents as of the beginning of period				334			480

Cash and cash equivalents as of the end of period			$	929		$	499

SUPPLEMENTAL DISCLOSURES
Cash payments for interest			$	1,244		$	1,329
Cash payments for income taxes, net of refunds			$	8		$	9

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

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

Notes to Condensed Consolidated Financial Statement (Unaudited)

March 31, 2004

1. Summary of Significant Accounting Policies

The Company

Credit Suisse First Boston (USA), Inc. and its subsidiaries (the "Company"), is a leading integrated investment bank serving institutional, corporate, government and high-net worth individual clients. The Company provides clients with a broad range of products and services that includes securities underwriting, sales and trading, financial advisory services, private equity investments, full-service brokerage services, derivatives and risk management products and investment research.

Basis of Presentation

The condensed consolidated financial statements include Credit Suisse First Boston (USA), Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company is a wholly owned subsidiary of Credit Suisse First Boston, Inc. ("CSFBI").

Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America but not required for interim reporting purposes has been condensed or omitted. These condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal, recurring accruals) that are necessary for a fair presentation of the condensed consolidated statements of financial condition and income for the interim periods presented.

The results of operations for interim periods are not necessarily indicative of results for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

To prepare condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management must make estimates and assumptions. The reported amounts of assets and liabilities and revenues and expenses are affected by these estimates and assumptions, the most significant of which are discussed in the notes to the consolidated financial statements and related disclosures. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ materially from these estimates. For a description of the Company's significant accounting policies, see Note 1 of the consolidated financial statements in Part II, Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Prior period numbers have been restated to reflect the transfer by CSFBI, the Company's immediate parent, of the high-net-worth business of Credit Suisse Asset Management, LLC ("CSAM"), a wholly owned subsidiary of CSFBI, to the Company as a capital contribution of $221 million on March 31, 2004. The transfer of this business was accounted for at historical cost in a manner similar to pooling-of-interest accounting because CSAM and the Company were under the common control of CSFBI at the time of transfer. Accordingly, the Company has restated its financial information for all periods presented to reflect the results of operations, financial condition, cash flows and changes in stockholders' equity of the CSAM high-net-worth business as if the Company had acquired it on November 3, 2000, the date that the Company was acquired by CSFBI. The transferred assets of this business consist principally of goodwill and intangible assets relating primarily to CSAM's acquisition of Warburg Pincus Asset Management in 1999. In December 2003, CSAM wrote down the value of its

high-net-worth intangible assets, resulting in a pre-tax loss of $200 million and an after-tax loss of $130 million. The Company will reflect this write down in its operating results when it restates its results of operations for the year ended December 31, 2003. For the three months ended March 31, 2004 and 2003, the impact of the CSAM high-net-worth business on the Company's total net revenues was an increase of $1 million. For the three months ended March 31, 2004, there was no impact from the CSAM high-net-worth business in the Company's net income. For the three months ended March 31, 2003, the impact of the CSAM high-net-worth business was a decrease in the Company's net income of $2 million.

As of January 1, 2004, the Company transferred the private equity and private fund businesses from the Institutional Securities segment to the Financial Services segment, which has been renamed Wealth & Asset Management. In addition, the Company changed the presentation of the Institutional Securities and Wealth & Asset Management segment results. For comparative purposes, prior period segment numbers have been changed to conform to the new segment reporting structure. These segment changes did not affect the Company's previously reported consolidated results of operations.

Certain other reclassifications have been made to prior year condensed consolidated financial statements to conform to the 2004 presentation.

On May 1, 2003, the Company sold its Pershing unit ("Pershing") to The Bank of New York Company, Inc. and recorded a pre-tax gain of approximately $1.3 billion and an after-tax gain of $852 million in the second quarter of 2003. The Pershing income is presented as discontinued operations for all periods presented in the condensed consolidated statements of income. The condensed consolidated statements of cash flows present the Company's cash flows as if the assets and liabilities of Pershing were not presented as assets held for sale and liabilities held for sale in the condensed consolidated statements of financial condition as of March 31, 2003 and December 31, 2002 used to prepare the condensed statement of cash flows for the three months ended March 31, 2003. Therefore, the cash flows pertaining to discontinued operations have not been reported separately in the condensed consolidated statements of cash flows.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires the Company to consolidate all variable interest entities ("VIEs") for which it is the primary beneficiary, defined as the entity that will absorb a majority of expected losses, receive a majority of the expected residual returns, or both. In December 2003, the FASB modified FIN 46, through the issuance of FIN 46R, to address various implementation issues that had arisen since the issuance of FIN 46 and to provide companies the option to defer the adoption of FIN 46 for certain VIEs to periods ending after March 15, 2004. As of December 31, 2003, with the exception of certain private equity funds that were a subject of the deferral, the Company consolidated all VIEs under FIN 46, for which it is the primary beneficiary, all of which were related to its collateralized debt obligations ("CDO") activities. As of January 1, 2004, the Company consolidated under FIN 46R certain private equity funds. See Note 6 for more information.

2. Share-Based Compensation

In August 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," using the prospective method. Under the prospective method, the Company recognizes compensation expense over the vesting period for all share option and share awards granted or modified under the Credit Suisse Group International Share Plan (the "Plan") for services provided after January 1, 2003.

Share option awards granted in or before January 2003 for services provided in prior years, if not subsequently modified, will continue to be accounted for under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and no compensation expense has been or will be recognized for those option awards, which had no intrinsic value on the date of grant. Share awards with no vesting requirements granted in or before January 2003 for services provided in prior years were expensed during the year the services were provided. For share awards granted with vesting requirements, compensation expense is recognized over the vesting period.

If the Company had applied the fair-value based method under SFAS 123 to recognize expense over the relevant service period for share options granted before January 2003 which have future vesting requirements, net income would have decreased for the three months ended March 31, 2004 and 2003. The following table reflects this pro forma effect:

	For the Three Months Ended March 31,
	2004		2003
	(In millions)
Net income, as reported	$	167	$	81
Add: Share-based employee compensation expense, net of related tax effects, included in reported net income		64		70
Deduct: Share-based employee compensation expense, net of related tax effects, determined under the fair-value based method for all awards		66		74

Pro forma net income	$	165	$	77

3. Discontinued Operations

In accordance with SFAS 144, "Accounting for Impairment or Disposal of Long-lived Assets", the operating results of Pershing are presented as discontinued operations