Managed Accounts Available at Charles Schwab & Co., Inc. Investment Strategy: U.S. Trust Investment Style: Large Cap Growth All information as of December 31, 2006 The management team seeks outstanding large-cap high growth companies. We believe that innovative and competitively advantaged companies have the best potential for earnings growth, which in turn drives potential share price appreciation. Our aim is buy growth that s more than double that of average companies and to do so at valuations which we believe can generate attractive returns. Our aim is to stay ahead of the curve, by pinpointing business sectors that we believe will benefit from the economic change we foresee. We believe that fundamental shifts in demographic trends, such as the relative aging of the population, can drive economic growth and industry leadership. Our target is firms with a sustainable growth franchise. Our managers cull 30-35 growth stocks from a diversified industry pool, with market caps that exceed $2 billion. The goal is to create a vehicle with positive long-term performance potential over leading benchmarks. Seek to maintain a consistent investment style, while aiming to diversify across growth industries. Our definition of growth is broad, and we bring extensive research, trading efficiency, and strict professionalism to the task of targeting high-potential investment returns. We dig deep into the companies we evaluate in our search for those that have the ability and the financial strength to produce sustainable growth potential and that can weather the effects of economic cycles. We look for strong balance sheets, excellent management, accelerated earnings growth momentum and a strong commitment to shareholder value. Our goal is to make a long-term commitment to the highest-quality growth companies for our investors. Key Investment Professionals Thomas Galvin President and Portfolio Manager Growth Equity Group U.S. Trust Joined Firm: 2003 Began Investment Career: 1983 Todd Herget Senior Vice President and Portfolio Manager U.S. Trust Joined Firm: 1998 Portfolio Performance through December 31, 2006 2 15% 5% -5% - Q4 06 One Year* Two Year* Three Year* Since inception* (Gross) 4.62% 9.86% 11.65% 13.07% 17.93% (04/2003) (Net) 4.18% 7.99% 9.75% 11.16% 15.96% 5.93% 9.07% 7.15% 6.87% 13.36% Past performance is no guarantee of future results. Please read the important disclosures inside under About this Document. * Annualized
Portfolio Characteristics and Performance Philosophy/Process We believe earnings growth drives stock prices over time. In addition, we believe that managing a concentrated portfolio of dynamic large cap growth companies disciplines us to implement only our best investment ideas. Emphasis is placed on selecting high-quality companies having dominant industry positions, strong financials, and consistently high earnings growth rates. Such companies tend to be brand name, globally dominant companies in open-ended growth industries such as devices/biotech/genetics, information technology (software and hardware), global consumer brands, and global financial companies. We focus on finding and purchasing true growth companies throughout all economic cycles. In our view, such companies usually have the following fundamental characteristics: a strong expected compound earnings growth rate, financial strength as measured by such factors as: low debt, high return on equity, reinvested earnings and substantive free cash flow generation and highly regarded, shareholder-focused management. Portfolio Construction/Sell Discipline Each team member is involved in the genesis and analysis of idea generation, bringing a diverse background and unique contribution to portfolio construction. We make investment decisions based on mostly bottom-up analysis, and allow for significant position weights for individual holdings based on our level of conviction in the underlying company. We rely on fundamental research to build our portfolios, company by company. We limit the cost of any one holding to 5% of the total portfolio, diversifying across growth industries, usually initiating a new position at 2-3%. Security weights are the result of our level of conviction in the strength of the company s fundamentals and the growth potential of the security. Generally, we invest in common stocks and ADRs. We monitor benchmark tracking error as a measure of overall risk management. In addition, we use the Thompson Baseline System, AFG, and HOLT ValueSearch to monitor individual security risk. (1) Companies are sold for 4 reasons: change in fundamentals, harvest of success, risk management and market message. If fundamentals change and the investment team concludes that the earnings growth opportunity for the company over the next 3 years no longer meets the criteria, it is sold. We may sell to harvest success when a security trades within of established price objectives, it is reviewed and a candidate for sale. Security weights will be trimmed to the target weight when it exceeds the high end of its pre-determined range by 100 basis points. In the event that a stock experiences a 15% price decline in the prior seven days or three-month period or has broken below its respective 50-day moving average, it will be immediately reviewed and a candidate for sale. Manager Style January 2004 December 2006 Single Computation LARGE 1 0-1 Russell Generic Corners Operational and Specialized Services Account Minimum $100,000 Minimum Additional Contributions Average Time to Invest New Assets Cost Basis Required Tax Methodology No minimum Cash: 2 3 business days from account funding Securities-Funded: 2 3 business days No, but preferred HIFO SMALL VALUE -1 0 1 GROWTH Retirement Accounts Yes (IRAs only) Sector Weightings Relative to 4 35% 3 25% 2 15% 5% Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecomm Services Utilities Focused Large 12.2 0.0 0.0 10.45% 30.44% 6.07% 36.55% 0.0 4.29% 0.0 Cap Growth Russell 1000 14.22% 9.76% 3.97% 8.61% 17.46% 14.33% 26.63% 2.77% 0.87% 1.38% Growth
Calendar Year Returns 16% 15.97 14.04 14% 12% 13.46 11.53 9.86 9.07 8% 7.99 6.30 6% 5.26 4% 2% 0-2% 2006 2005 2004 Top 10 Holdings (As of December 31, 2006) % of Portfolio Allergan Inc. 4.47% Celgene Corp. 4.45% Google Inc. 4.27% America Movil S.A. de C.V. (ADS) 4.24% Apple Computer Inc. 4.04% Chicago Mercantile Exchange Holdings Inc. 3.98% QUALCOMM Inc. 3.87% Infosys Technologies Ltd. (ADS) 3.7 Broadcom Corp. 3.42% Gilead Sciences Inc. 3.33% Total 39.76% (Gross) (Net) Characteristics Focused Large Russell 1000 Cap Growth Growth Number of Holdings 30 683 Cash Allocation 1.3% Dividend Yield 0.39% 1.14% Price-to-Earnings (1yr forecast ) 27.16x 19.6x Price-to-Book Ratio 6.01x 3.97x Weighted Average Market Cap ($ MM) 35,270 71,800 Weighted Median Market Cap ($ MM) 26,737 35,048 Statistics Relative to the From inception to the period ending 12/31/06 Risk Value Added Tracking Downside Standard Information Sharpe Beta R-Squared Error Risk Deviation Alpha Ratio Ratio 1.31 91.04 4.36 8.50 11.61 3.07 0.99 0.70 1.00 100.00 0.00 6.21 8.57 0.00 0.00 0.45 Relative Risk vs. Relative Return (Returns are net of fees) January 2004 December 2006 Up Market/Down Market Capture (Returns are net of fees) January 2004 December 2006 13% 16 12% 15 14 Return 8% 6% Upside % 13 12 4% 1 2% 10 2% 4% 6% 8% 12% 9 95% 10 1 12 13 Standard Deviation Downside % Returns-based style analysis is a method of analyzing a manager s style and performance using historical returns, rather than holdings. Source: Zephyr. Past performance is no guarantee of future results
About this Document Important Disclosures Assets are managed by subsidiaries of U.S. Trust Corporation, which is a subsidiary of The Charles Schwab Corporation. U.S. Trust Corporation s composites represent institutional accounts and pooled investment vehicles each managed by a disciplined investment process. United States Trust Company, N.A., is a subsidiary of U.S. Trust Corporation. The U.S. Trust composite return was used as a proxy for historical performance prior to December 2005. From January 2006 to present performance is calculated using the returns from the accounts in the Managed Account's Affiliates TM program of Charles Schwab & Co. Inc. The composite is comprised of all fully discretionary, fee-paying accounts managed similarly in the style by the Firm for at least three months with a minimum market value of $250,000. It should be noted that the performance results of the composite do not necessarily reflect individual performance results of any specific investment strategy or service a client may have purchased during the composite period. Your account is tailored towards your individual needs based on your investment objectives, restrictions and strategies, including tax strategies. Therefore, individual performance returns may differ from the returns of the composite. The performance results are calculated in U.S. Dollars on a time-weighted, size-weighted basis and are presented net of all transaction fees. Performance is shown both before the deduction of management fees (gross) and after deduction of the highest possible management fee (net) charged to any account in the composite (175 bp/yr). Securities transactions and cash flows are accounted for on a trade date basis. Individual portfolio valuation includes income accruals and cash reserves. An account will be removed from a composite for any month-and only that monthwhere the net cash flow in or out is greater than or equal to 25% of the opening market value. Annualized performance is presented, except for year-to-date returns, which are not annualized. Past Performance is not a guarantee of future results. Financial Benefits to Schwab. Because U.S. Trust and Charles Schwab & Co., Inc. (Schwab) are affiliates, Schwab and its affiliates generate more combined revenue if you open a Managed Account Affiliates (Affiliates) account than if you open an account in Schwab's other managed account program, Managed Account Select (Select). The money managers in Select are not affiliated with Schwab and, unlike U.S. Trust have been screened by an independent consulting firm, Callan Associates (Callan). There can be no assurance that U.S. Trust would be selected to participate in Select if it were subjected to the Callan screening process and were otherwise eligible (Schwab affiliates are not eligible to participate in program). See Schwab's Schedule H for additional conflict-of-interest disclosures. Account May Underperform the Benchmark. There can be no assurance that an account in the Affiliates program will outperform the relevant benchmark index, and an account s net performance (after the payment of program fees) may underperform the index even when the account s gross performance (before fees) outperforms the index. Furthermore, tax harvesting and investment restrictions by a client can cause that client s account to diverge materially from the model portfolio for this strategy and may cause the accounts performance to be lower than that of the model portfolio or the benchmark index. Affiliates Program Fees. The program fee does not include commissions for trades not executed by Schwab, dealer markups/markdowns, special service fees such as wire transfer fees, and certain costs imposed by third parties such as SEC and exchange fees, reorganization fees and others described in the account application. Accounts in the Affiliates program will be charged fees according to the following fee schedule: Dollar Value of Assets in Affiliates Accounts Affiliates Fee Schedule First $1,000,000 1.75% Next $2,000,000 1.5 Over $3,000,000 1.2 Limits of Performance Data. Past performance is no guarantee of future results. Portfolio Characteristics and Sector Weights Data. These data are based on the characteristics and data of all accounts included in the composite of accounts for which performance data is presented. Top 10 Holdings. The list of top 10 holdings shows the 10 largest holdings of all unrestricted accounts managed by U.S. Trust using this strategy. This list is current as of the date indicated and is subject to change at any time without notice, and does not indicate that the portfolios held any security listed on any prior date or will hold any security listed at any subsequent point. It should not be considered a recommendation to purchase or sell any particular security. The securities listed do not represent an entire portfolio as of the date indicated or as of any other date and may represent in the aggregate only a small percentage of portfolio holdings. It should not be assumed that any security listed was, or will prove to be, profitable. Holdings and relative weightings of stocks in individual client portfolios in the program may differ from those shown in the list. Risks of Investing. Since this strategy is limited in the types of securities that will be considered for investment, the strategy may involve a greater degree of risk than other investment strategies or products with greater diversification. Participation in the Affiliates program should be considered in view of a larger, more diversified investment portfolio. Investments in equities are subject to the risks of fluctuating stock prices, which can generate investment losses. Equities have historically been more volatile than alternatives such as fixed income securities. IRS Circular 230 Disclosure. Information in this material is not intended to constitute specific legal, tax or investment advice. You should consult your legal, tax and financial advisors before making any financial decisions. If any information is deemed written advice within the meaning of IRS Regulations, please note the following: Pursuant to IRS Regulations, neither the information, nor any advice contained in this communication (including any attachments) is intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. (1) Thomson Baseline, HOLT ValueSearch, and Applied Financial Group (AFG) are analytic tools for examining stocks, industries and sectors. 0207AY003
Definitions The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The portfolio will hold fewer companies securities than are included in the index, and may have certain industry weightings that are greater or less than that of the index. Investments cannot be made in an index. Alpha: measures a portfolio s return in excess of the market return, adjusted for any difference in volatility versus the market. It is a measure of the manager s contribution to performance with reference to stock selection. A positive alpha value indicates that a portfolio was positively rewarded for the additional risk the portfolio incurred that is not attributable to the market. For example, if the market s return over the risk-free return is and the portfolio beta is 1.5, then the manager would have to have a return over the risk-free return greater than 15% to have contributed to performance above and beyond the performance of the market. Beta: seeks to measure the sensitivity of portfolio returns to movements in the market index. A portfolio s Beta attempts to gauge the expected change in return per 1% change in the return on the market. For example, if the Beta of a portfolio is 1.5, a increase in the return on the market is expected to result, on average, in a 15% increase in the return on the portfolio. Conversely, a decrease in the market s return is expected to result, on average, in a 15% decrease in the return on the portfolio. The dividend yield: for a portfolio is the market value weighted average of each stock s total annual expected regular dividends (based on the most recent regular dividend rate) divided by the stock s price. Downside risk: attempts to differentiate between upside and downside volatility. Whereas standard deviation treats both upside and downside volatility the same, the downside risk statistic measures only the standard deviation of returns that are below the benchmark. Returns above the benchmark are assigned a deviation of zero. Both the frequency and magnitude of underperformance affect the calculation of downside risk. Excess return: is the money manager s portfolio return for this style minus that of the indicated benchmark. Price to Earnings (1 year forecast): the 1 year earnings estimates for each stock based on the average forecast data that is published by equity analysts of major brokerage firms. Source: Factset. Information ratio: measures the manager s alpha per unit of risk not attributable to the market. HIFO: Highest Cost In, First Out is a tax-sensitive method of selling securities from a taxable investment accounts. Risk statistics: examine performance characteristics of a manager relative to a benchmark (market indicator) over a specified historical period. The main unit of analysis is the excess return, which is the portfolio return minus the return on a risk-free asset as represented by the returns on 3-month Treasury Bills. Risk vs. return: is the relationship of return versus the variability of the return as measured by tracking error. R-squared: is a statistical measure that indicates the extent to which the variability of the portfolio returns is explained by a benchmark index. The value will be between 0 and 1; the higher the number, the greater the extent to which portfolio returns are related to the market return. For example, an r-squared value of.75 indicates that 75% of the fluctuation in a portfolio s return is explained by market action. Note that the r-squared measures the strength, not the positive or negative direction, of the relationship between assets and the market. Sharpe ratio: is a commonly used measure of risk-adjusted return. It is calculated by subtracting the risk-free return (3 Month Treasury Bill) from the portfolio return and dividing the resulting excess return by the portfolio s risk level (standard deviation). The result is a measure of return gained per unit of risk taken. Standard deviation: is a statistical measure of portfolio risk. It reflects the average deviation of the returns from their mean for the historical period being considered. Standard deviation is used as an estimate of risk since it measures the width of the range of returns. Tracking error: measures the standard deviation of the return differences between the money manager s portfolio for this style and the indicated benchmark over the period specified. Up market capture: is determined by the index which has an Up-Capture ratio of 10 when the index is performing positively. If a manager captures more than 10 of the index return in a rising market, the manager will have an up market capture of greater than 10. Down market capture mirrors this calculation, but refers to performance during periods when the index has negative performance. Weighted average market capitalization: is the market value weighted average of all of the individual stock market capitalizations in the portfolio. Weighted median market capitalization: is the point at which half of the market value of the portfolio is invested in stocks with a higher market capitalization and the other half is invested in stocks with a lower market capitalization. The information included is considered accurate as of 12/31/2006 and is subject to change. The price-to-book value: for a portfolio is the market value weighted average of each stock s price divided by the book value. Manager style analysis: is the regression of the money manager s portfolio returns versus multiple passive style indexes, constrained so that the coefficients of the style index variables must be positive and sum to 1.