10-Q 1 e10-q.txt SALOMON SMITH BARNEY HOLDINGS INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] 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 1-4346 SALOMON SMITH BARNEY HOLDINGS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 11-2418067 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 388 GREENWICH STREET NEW YORK, NEW YORK (ADDRESS OF PRINCIPAL 10013 EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000 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 --------- --------- THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE HEREOF, 1000 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE ISSUED AND OUTSTANDING. REDUCED DISCLOSURE FORMAT THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H 1 (a) AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY. NOW AVAILABLE ON THE WEB @ WWW.CITIGROUP.COM. 2 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 2000
PAGE ---- Part I. Financial Information --------------------- Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Statements of Income (Unaudited) - Three and six months ended June 30, 2000 and 1999 1 Condensed Consolidated Statements of Financial Condition - June 30, 2000 (Unaudited) and December 31, 1999 2 - 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 30, 2000 and 1999 4 Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Part II. Other Information ----------------- Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19 Exhibit Index 20 Signatures 21
3 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------- Dollars in millions Three Months Six Months Period Ended June 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Revenues: Commissions $ 1,020 $ 905 $ 2,333 $ 1,808 Investment banking 834 771 1,747 1,435 Asset management and administration fees 820 652 1,598 1,265 Principal transactions 640 704 1,503 1,682 Other 107 52 239 118 ------------------------------------------------------------------------------------------------------------------------- Total noninterest revenues 3,421 3,084 7,420 6,308 ------------------------------------------------------------------------------------------------------------------------- Interest and dividends 3,933 2,866 7,262 5,479 Interest expense 3,468 2,414 6,410 4,663 ------------------------------------------------------------------------------------------------------------------------- Net interest and dividends 465 452 852 816 ------------------------------------------------------------------------------------------------------------------------- Revenues, net of interest expense 3,886 3,536 8,272 7,124 ------------------------------------------------------------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 2,072 1,753 4,138 3,598 Floor brokerage and other production 153 125 301 224 Communications 159 114 295 236 Occupancy and equipment 137 108 259 219 Advertising and market development 113 83 210 155 Professional services 86 56 154 110 Other operating and administrative expenses 190 195 358 359 Restructuring credit - - - (211) ------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 2,910 2,434 5,715 4,690 ------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 976 1,102 2,557 2,434 Provision for income taxes 318 406 911 894 ------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 658 696 1,646 1,540 Cumulative effect of change in accounting principle (net of tax benefit of $12) - - - (15) ------------------------------------------------------------------------------------------------------------------------- Net income $ 658 $ 696 $ 1,646 $ 1,525 =========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 4 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
------------------------------------------------------------------------------------------------------------------------------- June 30, December 31, Dollars in millions 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets: Cash and cash equivalents $ 1,746 $ 1,624 Cash segregated and on deposit for Federal and other regulations or deposited with clearing organizations 2,305 2,421 Collateralized short-term financing agreements: Securities purchased under agreements to resell $74,147 $74,138 Deposits paid for securities borrowed 42,040 35,979 ------------- --------- 116,187 110,117 Financial instruments owned and contractual commitments: U.S. government and government agency securities 34,951 25,734 Corporate debt securities 11,699 9,755 Contractual commitments 11,561 12,464 Non-U.S. government and government agency securities 11,175 6,638 Equity securities 8,769 7,291 Money market instruments 8,161 7,383 Mortgage loans and collateralized mortgage securities 5,699 5,622 Other financial instruments 2,952 2,651 ------------- --------- 94,967 77,538 Receivables: Customers 27,095 19,377 Brokers, dealers and clearing organizations 2,617 1,767 Receivable for securities provided as collateral 1,323 1,550 Other 1,853 2,754 ------------- --------- 32,888 25,448 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization of $859 and $787, respectively 1,091 953 Other assets 6,910 5,733 ------------------------------------------------------------------------------------------------------------------------------- Total assets $256,094 $223,834 ===============================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 5 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, Dollars in millions 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ (Unaudited) Liabilities and Stockholder's Equity: Commercial paper and other short-term borrowings $ 22,400 $ 17,827 Collateralized short-term financing agreements: Securities sold under agreements to repurchase $102,841 $75,801 Deposits received for securities loaned 16,547 10,279 ------------ --------- 119,388 86,080 Financial instruments sold, not yet purchased, and contractual commitments: U.S. government and government agency securities 16,533 24,664 Contractual commitments 13,621 16,432 Non-U.S. government and government agency securities 12,527 15,402 Corporate debt securities and other 4,605 2,156 Equity securities 4,578 4,298 ------------ --------- 51,864 62,952 Payables and accrued liabilities: Customers 13,019 13,779 Brokers, dealers and clearing organizations 6,101 1,122 Obligation to return securities received as collateral 1,911 3,203 Other 10,465 9,979 ------------ --------- 31,496 28,083 Term debt 19,925 18,821 Company-obligated mandatorily redeemable securities of subsidiary trusts holding solely junior subordinated debt securities of the Company 745 745 Stockholder's equity: Common stock (par value $.01 per share 1,000 shares authorized; 1,000 shares issued and outstanding) - - Additional paid-in capital 1,772 1,626 Retained earnings 8,500 7,686 Accumulated changes in equity from nonowner sources 4 14 ------------ --------- Total stockholder's equity 10,276 9,326 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholder's equity $256,094 $223,834 ====================================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 6 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------------------------------------------- Dollars in millions Six Months Ended June 30, 2000 1999 ----------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,646 $ 1,525 Depreciation and amortization 223 179 ----------------------------------------------------------------------------------------------------------- Net income adjusted for noncash items 1,869 1,704 ----------------------------------------------------------------------------------------------------------- (Increase) decrease in operating assets - Cash segregated and on deposit for Federal and other regulations or deposited with clearing organizations 116 1 Collateralized short-term financing agreements (6,070) (12,167) Financial instruments owned and contractual commitments (17,429) 8,059 Receivables (7,440) (757) Other assets (1,482) (946) ----------------------------------------------------------------------------------------------------------- Increase in operating assets (32,305) (5,810) ----------------------------------------------------------------------------------------------------------- Increase (decrease) in operating liabilities - Collateralized short-term financing agreements 33,308 14,278 Financial instruments sold, not yet purchased, and contractual commitments (11,088) (1,834) Payables and accrued liabilities 3,090 (4,851) ----------------------------------------------------------------------------------------------------------- Increase in operating liabilities 25,310 7,593 ----------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities (5,126) 3,487 ----------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase (decrease) in commercial paper and other short-term borrowings 4,573 (1,881) Proceeds from issuance of term debt 4,882 2,414 Term debt maturities and repurchases (3,562) (3,199) Collateralized mortgage obligations (6) (21) Dividends paid (503) (422) Other capital transactions 146 - ----------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities 5,530 (3,109) ----------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Assets underlying collateralized mortgage obligations 6 22 Property, equipment and leasehold improvements, net (288) (153) ----------------------------------------------------------------------------------------------------------- Cash used in investing activities (282) (131) ----------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 122 247 Cash and cash equivalents at January 1, 1,624 2,261 ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at June 30, $ 1,746 $ 2,508 -----------------------------------------------------------------------------------------------------------
Interest paid did not differ materially from the amount of interest expense recorded for financial statement purposes. The accompanying notes are an integral part of these condensed consolidated financial statements. 4 7 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The condensed consolidated financial statements reflect the accounts of Salomon Smith Barney Holdings Inc. ("SSBH"), a New York corporation (the successor to Salomon Smith Barney Holdings Inc., a Delaware corporation) and its subsidiaries (collectively the "Company"). The Company is a wholly owned subsidiary of Citigroup Inc. Material intercompany transactions have been eliminated. The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the use of management's best judgment and estimates. Estimates, including the fair value of contractual commitments, the outcome of litigation, realization of deferred tax assets and other matters that affect the reported amounts and disclosures of contingencies in the financial statements, may vary from actual results. The financial statements are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation have been reflected. Certain prior period amounts have been reclassified or restated to conform to the current period presentation. These financial statements should be read in conjunction with the audited consolidated financial statements included in SSBH's Annual Report on Form 10-K for the year ended December 31, 1999. Certain financial information that is normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, but that is not required for interim reporting purposes, has been condensed or omitted. On May 1, 2000, the Company completed the approximately $2.2 billion acquisition of the global investment banking business and related net assets of Schroders plc, including all corporate finance, financial markets and securities activities. The combined European operations of the Company will now be known as Schroder Salomon Smith Barney. ACCOUNTING CHANGES During the first quarter of 1999 the Company recorded the cumulative effect of a change in accounting principle of $15 million (net of tax benefit of $12 million) which relates to the write-off of certain capitalized closed-end fund distribution costs in connection with the adoption of AICPA Statement of Position 98-5, Reporting on the Cost of Start-Up Activities. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of FASB Statement No. 133 ("SFAS 137"), which postponed the effective date of SFAS 133 to January 1, 2001 for calendar year companies such as the Company. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133 ("SFAS 138"), which will become effective concurrently with SFAS 137. 5 8 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Under SFAS 133, as amended by SFAS 138, an entity is required to recognize all freestanding and embedded derivatives at fair value in earnings unless the derivatives can be designated as hedges of certain exposures for which specific hedge accounting is prescribed. If certain conditions are met, a derivative may be designated as a hedge of the fair value changes of a recognized asset, liability or an unrecognized firm commitment; or a hedge of the exposure to variable cash flows of a recognized asset, liability or a forecasted transaction; or a hedge of the foreign currency exposure of a recognized asset, liability, a net investment in a foreign operation, an unrecognized firm commitment or a forecasted transaction. The Company is in the process of evaluating the potential impact of adopting these new accounting standards. NOTE 2. RESTRUCTURING CREDIT During the first quarter of 1999, the Company recorded an adjustment of $211 million ($124 million after tax) to the restructuring reserve relating to the merger of Salomon Inc and Smith Barney Holdings Inc. in November 1997. This reduction in the reserve related to the Seven World Trade Center lease and resulted from a current reassessment of space needs due to the merger of Travelers Group Inc. and Citicorp. This reassessment indicated the need for increased occupancy by the Company utilizing space previously considered excess. NOTE 3. COMPREHENSIVE INCOME Comprehensive income represents the sum of net income and other changes in stockholder's equity from nonowner sources which, for the Company, are comprised of cumulative translation adjustments, net of tax:
------------------------------------------------------------------------------------------ Dollars in millions Three Months Six Months Period ended June 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------ Net income $ 658 $ 696 $ 1,646 $ 1,525 Other changes in equity from nonowner sources (1) (6) (10) (1) ------------------------------------------------------------------------------------------ Total comprehensive income $ 657 $ 690 $ 1,636 $ 1,524 ------------------------------------------------------------------------------------------
NOTE 4. PRINCIPAL TRANSACTIONS REVENUES The following table presents principal transactions revenues by business activity for the three and six months ended June 30, 2000 and 1999.
------------------------------------------------------------------------------------------------------------- Dollars in millions Three Months Six Months Period ended June 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------- Fixed Income $ 223 $ 384 $ 692 $1,066 Equities 318 269 649 466 Commodities 87 29 143 122 Other 12 22 19 28 ------------------------------------------------------------------------------------------------------------- Total principal transactions revenues $ 640 $ 704 $1,503 $1,682 -------------------------------------------------------------------------------------------------------------
6 9 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5. CAPITAL REQUIREMENTS Certain U.S. and non-U.S. subsidiaries are subject to securities and commodities regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. Capital requirements related to SSBH's principal regulated subsidiaries are as follows:
NET EXCESS OVER (DOLLARS IN MILLIONS) CAPITAL OR MINIMUM SUBSIDIARY JURISDICTION EQUIVALENT REQUIREMENTS ------------------------------------------------------------------------------------------------------------------------------------ U.S. Securities and Exchange Commission Salomon Smith Barney Inc. Uniform Net Capital Rule (Rule 15c3-1) $2,623 $2,063 Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $3,485 $ 798 Salomon Brothers AG Germany's Banking Supervisory Authority $ 151 $ 123 ------------------------------------------------------------------------------------------------------------------------------------
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc ("Swapco"), a wholly owned subsidiary of SSBH, must maintain minimum levels of capital in accordance with agreements with its rating agencies. At June 30, 2000, Swapco was in compliance with all such agreements. Swapco's capital requirements are dynamic, varying with the size and concentration of its counterparty receivables. 7 10 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6. CONTRACTUAL COMMITMENTS A summary of the Company's contractual commitments as of June 30, 2000 and December 31, 1999 is as follows:
JUNE 30, 2000 DECEMBER 31, 1999 -------------------------------- -------------------------------- Current Market or Current Market or Fair Value Fair Value Notional -------------------- Notional -------------------- Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities ------------------------------------------------------------------------------------------------------------------------------------ Exchange-issued products: Futures contracts (a) $ 151.1 $ - $ - $ 528.1 $ - $ - Other exchange-issued products: Equity contracts 9.3 .2 .2 8.4 .3 .3 Fixed income contracts 8.7 - - 1.2 - - Commodities contracts 1.9 - - 1.2 - - ------------------------------------------------------------------------------------------------------------------------------------ Total exchange-issued products 171.0 .2 .2 538.9 .3 .3 ------------------------------------------------------------------------------------------------------------------------------------ Over-the-counter ("OTC") swaps, swap options, caps, floors and forward rate agreements: Swaps 2,868.0 2,752.0 Swap options written 82.9 100.2 Swap options purchased 63.4 84.6 Caps, floors and forward rate agreements 559.1 274.9 ------------------------------------------------------------------------------------------------------------------------------------ Total OTC swaps, swap options, caps, floors and forward rate agreements (b) 3,573.4 5.3 7.0 3,211.7 5.5 8.1 ------------------------------------------------------------------------------------------------------------------------------------ Other options and contractual commitments: Options and warrants on equities and equity indices 63.7 4.9 5.1 62.6 5.4 6.6 Options and forward contracts on fixed-income securities 380.2 .9 1.0 210.2 .8 1.0 Foreign exchange contracts and options(b) 34.7 .2 .3 50.1 .3 .3 Commodities contracts 11.0 .1 - 12.4 .2 .1 ------------------------------------------------------------------------------------------------------------------------------------ Total contractual commitments $4,234.0 $ 11.6 $ 13.6 $4,085.9 $ 12.5 $ 16.4 ------------------------------------------------------------------------------------------------------------------------------------
(a) Margin on futures contracts is included in receivable/payables to brokers, dealers and clearing organizations on the condensed consolidated statements of financial condition. (b) Includes notional values of swap agreements and forward currency contracts for non-trading activities (primarily related to the Company's fixed-rate long-term debt) of $14.9 billion and $4.7 billion at June 30, 2000 and $15.5 billion and $2.1 billion at December 31, 1999, respectively. 8 11 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7. SEGMENT INFORMATION The following table summarizes the results of operations for the Company's two operating segments, Investment Services and Asset Management.
--------------------------------------------------------------------------------------------------------------------- Dollars in millions Three Months Six Months Period ended June 30, 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------- Noninterest revenues: Investment Services $ 3,123 $ 2,805 $ 6,820 $ 5,769 Asset Management 298 279 600 539 --------------------------------------------------------------------------------------------------------------------- Total $ 3,421 $ 3,084 $ 7,420 $ 6,308 ===================================================================================================================== Net interest and dividends: Investment Services $ 466 $ 456 $ 857 $ 825 Asset Management (1) (4) (5) (9) --------------------------------------------------------------------------------------------------------------------- Total $ 465 $ 452 $ 852 $ 816 ===================================================================================================================== Income before cumulative effect of change in accounting principle: Investment Services $ 578 $ 608 $ 1,477 $ 1,379 Asset Management 80 88 169 161 --------------------------------------------------------------------------------------------------------------------- Total $ 658 $ 696 $ 1,646 $ 1,540 =====================================================================================================================
Total assets of the Investment Services and Asset Management segments were $254.6 billion and $1.5 billion, respectively, at June 30, 2000 and $222.4 billion and $1.4 billion, respectively, at December 31, 1999. For further discussion of the Company's operating segments, please refer to the Results of Operations section of Management's Discussion and Analysis. NOTE 8. LEGAL PROCEEDINGS The Company has been named as a defendant in legal actions relating to its operations, some of which seek damages of material or indeterminate amounts. In addition, from time to time the Company is a party to examinations and inquiries by various regulatory and self-regulatory bodies. In connection with its discontinued commodities processing operations, the Company and certain of its subsidiaries are subject to claims asserted by the U.S. Environmental Protection Agency, certain state agencies and private parties in connection with environmental matters. Management of the Company, after consultation with outside legal counsel, believes that the ultimate resolution of legal proceedings and environmental matters (net of applicable reserves) will not have a material adverse effect on the Company's financial condition; however, such resolution could have a material adverse impact on operating results in future periods depending in part on the results for such periods. 9 12 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. RESULTS OF OPERATIONS The Company recorded net income of $658 million for the three months ended June 30, 2000 (the "2000 Quarter") compared to net income of $696 million for the three months ended June 30, 1999 (the "1999 Quarter"). Revenues, net of interest expense, were $3,886 million in the 2000 Quarter compared to $3,536 million in the 1999 Quarter reflecting increases in commissions, investment banking fees, and asset management and administration fees. For the six months ended June 30, 2000 (the "2000 Period") the Company reported net income of $1,646 million compared to net income of $1,525 million reported for the six months ended June 30, 1999 (the "1999 Period"). Revenues, net of interest expense, were $8,272 million in the 2000 Period compared to $7,124 million in the 1999 Period. Included in the 1999 Period's results was a credit of $211 million ($124 million after tax) to the restructuring reserve relating to the November 28, 1997 merger of Salomon Inc and Smith Barney Holdings Inc. (see Note 2 to the condensed consolidated financial statements for further discussion of the restructuring credit). During the first quarter of 1999 the Company recorded the cumulative effect of a change in accounting principle of $15 million (net of tax benefit of $12 million) which relates to the write-off of certain capitalized closed-end fund distribution costs in connection with the adoption of AICPA Statement of Position 98-5, Reporting on the Cost of Start-Up Activities. Following is a discussion of the Company's two operating segments, Investment Services and Asset Management. 10 13 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTMENT SERVICES
------------------------------------------------------------------------------------------------------------------------ Dollars in millions Three Months Six Months Period Ended June 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------ Revenues: Commissions $ 1,017 $ 903 $ 2,326 $ 1,803 Investment banking 826 761 1,731 1,417 Principal transactions 635 698 1,495 1,672 Asset management and administration fees 540 396 1,035 768 Other 105 47 233 109 ------------------------------------------------------------------------------------------------------------------------ Total noninterest revenues 3,123 2,805 6,820 5,769 ------------------------------------------------------------------------------------------------------------------------ Net interest and dividends 466 456 857 825 ------------------------------------------------------------------------------------------------------------------------ Revenues, net of interest expense 3,589 3,261 7,677 6,594 ------------------------------------------------------------------------------------------------------------------------ Noninterest expenses: Compensation and benefits 2,012 1,706 4,015 3,498 Other operating and administrative expenses 735 600 1,386 1,140 Restructuring credit - - - (211) ------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 2,747 2,306 5,401 4,427 ------------------------------------------------------------------------------------------------------------------------ Income before income taxes and cumulative effect of change in accounting principle 842 955 2,276 2,167 ------------------------------------------------------------------------------------------------------------------------ Provision for income taxes 264 347 799 788 ------------------------------------------------------------------------------------------------------------------------ Income before cumulative effect of change in accounting principle $ 578 $ 608 $ 1,477 $ 1,379 ------------------------------------------------------------------------------------------------------------------------
The Company's investment services segment reported income of $578 million and $1,477 million for the 2000 Quarter and 2000 Period, compared to $608 million and $1,379 million for the 1999 Quarter and 1999 Period. Revenues, net of interest expense, increased to $3,589 million and $7,677 million in the 2000 Quarter and 2000 Period compared to $3,261 million and $6,594 million in the 1999 Quarter and 1999 Period as a result of increases in commissions, investment banking fees, and asset management and administration fees. Commission revenues increased 13% to $1,017 million in the 2000 Quarter compared to $903 million in the 1999 Quarter. This increase is primarily the result of an increase in listed commissions. In the 2000 Period commission revenues increased 29% to $2,326 million. During the 2000 Period annualized gross production per financial consultant increased to $548 thousand reflecting the continued strength of the Private Client business. Also contributing to the increase in the 2000 Period was an increase in OTC commissions. Investment banking revenues increased to $826 million in the 2000 Quarter compared to $761 million in the 1999 Quarter. Increases in merger and acquisition fees, and equity underwriting, were partially offset by a 11 14 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS decline in high yield underwriting. In the 2000 Period, investment banking revenue increased 22% to $1,731 million. Principal transactions revenues decreased to $635 million in the 2000 Quarter compared to $698 million in the 1999 Quarter and declined 11% in the 2000 Period as a result of less robust conditions in the fixed income markets. For further information related to principal transactions revenues see Note 4 to the condensed consolidated financial statements. The investment services segment includes results from assets managed by the Company's Financial Consultants and assets that are managed through the Consulting Group. Asset management and administration fees increased to $540 million and $1,035 million in the 2000 Quarter and 2000 Period compared to $396 million and $768 million in the 1999 Quarter and 1999 Period as a result of the growth in assets under fee-based management. Assets under fee-based management increased significantly at June 30, 2000 compared to June 30, 1999 causing the corresponding increase in revenue. Other income increased to $105 million in the 2000 Quarter and $233 million in the 2000 Period primarily as a result of increased revenues from Nikko Salomon Smith Barney Limited, the Company's joint venture with The Nikko Securities Co., Ltd. Net interest and dividends increased to $466 million and $857 million in the 2000 Quarter and 2000 Period compared to $456 million and $825 million in the 1999 Quarter and 1999 Period. These increases were a result of increased margin lending to clients offset to an extent by a decrease in mortgage-backed inventory. Total expenses, excluding interest and the restructuring credit, increased to $2,747 million in the 2000 Quarter compared to $2,306 million in the 1999 Quarter primarily as a result of an increase in production-related compensation and benefits expense, reflecting increased revenues of the Company. Also contributing to the increase in expenses was the acquisition of Schroders plc in the 2000 Quarter. Total expenses, excluding interest and the restructuring credit, were $5,401 million in the 2000 Period compared to $4,638 million in the 1999 Period. The Company continues to maintain its focus on controlling fixed expenses. 12 15 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSET MANAGEMENT
----------------------------------------------------------------------------------------------------------------- Dollars in millions Three Months Six Months Period Ended June 30, 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------- Revenues: Asset management and administration fees $280 $256 $563 $497 Other revenue, net 17 19 32 33 ----------------------------------------------------------------------------------------------------------------- Revenues, net of interest expense 297 275 595 530 ----------------------------------------------------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 60 47 123 100 Other operating and administrative expenses 103 81 191 163 ----------------------------------------------------------------------------------------------------------------- Total noninterest expense 163 128 314 263 ----------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 134 147 281 267 ----------------------------------------------------------------------------------------------------------------- Provision for income taxes 54 59 112 106 ----------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle $ 80 $ 88 $169 $161 =================================================================================================================
The Company's asset management segment revenues, net of interest expense, rose 8% to $297 million and 12% to $595 million in the 2000 Quarter and 2000 Period compared to $275 million and $530 million in the 1999 Quarter and 1999 Period. The primary revenue for the asset management segment is asset management and administration fees, which were $280 million and $563 million in the 2000 Quarter and 2000 Period, compared to $256 million and $497 million in the 1999 Quarter and 1999 Period. The overall increases in fees reflects broad growth in all asset management products. Assets under management for the segment reached $233.7 billion at June 30, 2000, an increase of 9% from June 30, 1999. Other revenues include the net revenue contribution to the asset management segment for the structuring of unit investment trusts, as well as custody fees, and realized and unrealized investment income. Total noninterest expenses were $163 million and $314 million in the 2000 Quarter and 2000 Period compared to $128 million and $263 million in the 1999 Quarter and 1999 Period. The increases reflect continuing investment in the business infrastructure to support sustained growth. Other operating and administrative expense includes amortization of deferred commissions which relate to the sale of load mutual funds. 13 16 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total assets under fee-based management were as follows:
------------------------------------------------------------------------------------------ Dollars in billions At June 30, 2000 1999 ------------------------------------------------------------------------------------------ Money market funds $ 72.9 $ 63.9 Mutual funds 67.0 62.4 Managed accounts 82.6 75.6 Unit investment trusts held in client accounts 11.2 12.9 ------------------------------------------------------------------------------------------ Salomon Smith Barney Asset Management 233.7 214.8 Financial Consultant managed accounts * 58.2 29.5 Consulting Group and internally managed assets * 135.8 113.6 ------------------------------------------------------------------------------------------ Total assets under fee-based management (1) $ 427.7 $ 357.9 ------------------------------------------------------------------------------------------
* Related results included in Investment Services segment. (1) Includes jointly managed assets of $57.0 billion and $41.0 billion as of June 30, 2000 and 1999, respectively. 14 17 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company had total assets of $256.1 billion at June 30, 2000, up from $223.8 billion at December 31, 1999. Due to the nature of the Company's trading activities, it is not uncommon for the Company's asset levels to fluctuate from period to period. The Company's balance sheet is highly liquid, with the vast majority of its assets consisting of marketable securities and collateralized short-term financing agreements arising from securities transactions. The highly liquid nature of these assets provides the Company with flexibility in financing and managing its business. The Company monitors and evaluates the adequacy of its capital and borrowing base on a daily basis in order to allow for flexibility in its funding, to maintain liquidity, and to ensure that its capital base supports the regulatory capital requirements of its subsidiaries. The Company funds its operations through the use of collateralized and uncollateralized short-term borrowings, long-term borrowings, mandatorily redeemable securities of subsidiary trusts, and its equity. Collateralized short-term financing, including repurchase agreements and securities loaned, is the Company's principal funding source. Such borrowings are reported net by counterparty, when applicable, pursuant to the provisions of Financial Accounting Standards Board Interpretation 41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements ("FIN 41"). Excluding the impact of FIN 41, short-term collateralized borrowings totaled $181.8 billion at June 30, 2000. Uncollateralized short-term borrowings provide the Company with a source of short-term liquidity and are also utilized as an alternative to secured financing when they represent a cheaper funding source. Sources of short-term uncollateralized borrowings include commercial paper, unsecured bank borrowings, deposit liabilities, promissory notes and corporate loans. Short-term uncollateralized borrowings totaled $22.3 billion at June 30, 2000. The Company has a $5.0 billion 364-day committed uncollateralized revolving line of credit from commercial banks that extends through May 2001. The Company may borrow under this revolving credit facility at various interest rate options (LIBOR, CD or base rate), and compensates the banks for this facility through facility fees. At June 30, 2000 there were no outstanding borrowings under this facility. Under this facility the Company is required to maintain a certain level of consolidated adjusted net worth (as defined in the agreement). At June 30, 2000, this requirement was exceeded by approximately $3.5 billion. The Company also has substantial borrowing arrangements consisting of facilities that the Company has been advised are available, but where no contractual lending obligation exists. These arrangements are reviewed on an ongoing basis to ensure flexibility in meeting the Company's short-term requirements. The Company's global borrowing relationships are with a broad range of banks, financial institutions and other firms from which it draws funds. The volume of the Company's borrowings generally fluctuates in response to changes in the level of the Company's financial instruments and contractual commitments, customer balances, the amount of reverse repurchase transactions outstanding and securities borrowed transactions. As the Company's activities increase, borrowings generally increase to fund the additional activities. Availability of financing to the Company can vary depending upon market conditions, credit ratings, and the overall availability of credit to the securities industry. The Company seeks to expand and diversify its funding mix as well as its creditor sources. Concentration levels for these sources, particularly for short-term lenders, are closely monitored both in terms of single investor limits and daily maturities. 15 18 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company monitors liquidity by tracking asset levels, collateral and funding availability to maintain flexibility to meet its financial commitments. As a policy, the Company attempts to maintain sufficient capital and funding sources in order to have the capacity to finance itself on a fully collateralized basis in the event that the Company's access to uncollateralized financing is temporarily impaired. The Company's liquidity management process includes a contingency funding plan designed to ensure adequate liquidity even if access to unsecured funding sources is severely restricted or unavailable. This plan is reviewed periodically to keep the funding options current and in line with market conditions. In addition, the Company monitors its leverage and capital ratios on a daily basis. 16 19 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RISK MANAGEMENT MARKET RISK Measuring market risk using statistical risk management models has recently become the main focus of risk management efforts by many companies whose earnings are exposed to changes in the fair value of financial instruments. Management believes that statistical models alone do not provide a reliable method of monitoring and controlling risk. While Value at Risk ("VAR") models are relatively sophisticated, they are of limited use for internal risk management because they do not give any indication of the direction or magnitude of individual risk exposures or which market scenarios represent the largest risk exposures. These models are used by the Company only as a supplement to other risk management tools. The following table shows the results of the Company's VAR analysis, which includes substantially all of the Company's financial assets and liabilities, including all financial instruments owned and sold, contractual commitments, repurchase and resale agreements, and related funding at June 30, 2000 and December 31, 1999. The VAR relating to non-trading instruments has been excluded from this analysis.
---------------------------------------------------------------------------------------------------- RISK EXPOSURES June 30, Second Quarter Second Quarter Second Quarter December 31, ($ IN MILLIONS) 2000 2000 Average 2000 High 2000 Low 1999 ---------------------------------------------------------------------------------------------------- Interest rate $ 20 $ 22 $ 26 $ 19 $ 20 Equities 2 5 13 1 6 Commodities 12 9 13 7 8 Currency 1 1 2 - - Diversification Benefit (12) (13) N/A N/A (11) ---------------------------------------------------------------------------------------------------- Total $ 23 $ 24 $ 30 $ 20 $ 23 ----------------------------------------------------------------------------------------------------
The quantification of market risk using VAR analysis requires a number of key assumptions. In calculating VAR at June 30, 2000, the Company simulates changes in market factors by using historical volatilities and correlations and assuming lognormal distributions for changes in each market factor. VAR is calculated at the 99% confidence level, assuming a static portfolio subject to a one-day change in market factors. The historical volatilities and correlations used in the simulation are calculated using a look back period of three years. Over 200 risk factors are used in the VAR simulations. VAR reflects the risk profile of the Company at June 30, 2000, and is not a predictor of future results. 17 20 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," and similar expressions. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: changes in economic conditions, including the performance of global financial markets, and risks associated with fluctuating currency values and interest rates; competitive, regulatory or tax changes that affect the cost of or the demand for the Company's products; and the resolution of legal proceedings and environmental matters. 18 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. For information concerning a suit filed by Harris Trust Savings Bank (as trustee for the Ameritech Pension Trust) and others against Salomon Brothers Inc., and Salomon Brothers Realty Corp., see the description that appears in the second and third paragraphs under the caption "Legal Proceedings" beginning on page 11 of the Annual Report on Form 10-K of the Company for the year ended December 31, 1999 (File No. 1-4346), which description is included as Exhibit 99.1 to this Form 10-Q and incorporated by reference herein, and in the first paragraph under the caption "Legal Proceedings" beginning on page 17 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended March 31, 2000 (File No.1-4346), which description is included as Exhibit 99.2 to this Form 10-Q and incorporated by reference herein. On June 12, 2000, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Seventh Circuit's judgment, which had overturned the denial of defendants' motion for summary judgment and dismissed the sole remaining ERISA claim against the Company, and remanded the matter to the circuit court for further proceedings. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: See Exhibit Index. (b) Reports on Form 8-K: On April 17, 2000, SSBH filed a Current Report on Form 8-K, dated April 17, 2000, reporting under Item 5 thereof the results of the Company's operations for the three month periods ended March 31, 2000 and 1999. No other reports on Form 8-K were filed during the second quarter of 2000; however, on July 19, 2000, SSBH filed a Current Report on Form 8-K, dated July 19, 2000, reporting under Item 5 thereof the results of its operations for the three and six month periods ended June 30, 2000 and 1999. 19 22 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 3.01 Restated Certificate of Incorporation of Salomon Smith Barney Holdings Inc., effective July 1, 1999, incorporated by reference to Exhibit 3.2 to Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No. 333-38931) of Salomon Smith Barney Holdings Inc. ("SSBH"). 3.02 By-Laws of Salomon Smith Barney Holdings Inc., incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No. 333-38931) of SSBH. 12.01+ Computation of ratio of earnings to fixed charges. 27.01+ Financial Data Schedule. 99.01+ Second and third paragraphs under the caption "Legal Proceedings" beginning on page 11 of the Annual Report on Form 10-K of SSBH for the year ended December 31, 1999 (File No. 1-4346). 99.02+ First paragraph under the caption "Legal Proceedings" beginning on page 17 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended March 31, 2000 (File No.1-4346).
The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of SSBH does not exceed 10% of the total assets of SSBH and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the SEC upon request. - --------------- + Filed herewith 20 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SALOMON SMITH BARNEY HOLDINGS INC. ---------------------------------- (Registrant) Date: August 11, 2000 By: /s/ William Bozarth ----------------------------- William Bozarth Chief Financial Officer By: /s/ Michael J. Day ----------------------------- Michael J. Day Controller 21