-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VpEAvxYaudSCZlXl27rsXPmeXts6ylwO4SAZjlZHoMSY//lc5DrcAcpl+g01BxuW xVS7W6w6uehMJ/ILuKvmUA== 0000950123-99-004705.txt : 19990517 0000950123-99-004705.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950123-99-004705 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALOMON SMITH BARNEY HOLDINGS INC CENTRAL INDEX KEY: 0000200245 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 221660266 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04346 FILM NUMBER: 99623245 BUSINESS ADDRESS: STREET 1: 388 GREENWICH ST STREET 2: 28TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2128166000 MAIL ADDRESS: STREET 1: SEVEN WORLD TRADE CENTER STREET 2: 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: SALOMON INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PHIBRO CORP DATE OF NAME CHANGE: 19820526 FORMER COMPANY: FORMER CONFORMED NAME: ENGELHARD MINERALS & CHEMICALS CORP DATE OF NAME CHANGE: 19811104 10-Q 1 FORM 10-Q 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 MARCH 31, 1999 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) DELAWARE 22-1660266 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 388 GREENWICH STREET NEW YORK, NEW YORK 10013 (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES)
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. 2 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1999
PAGE ---- Part I. Financial Information --------------------- Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Statements of Income (Unaudited) - Three months ended March 31, 1999 and 1998 1 Condensed Consolidated Statements of Financial Condition - March 31, 1999 (Unaudited) and December 31, 1998 2 - 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 Part II. Other Information ----------------- Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 21 Exhibit Index 22 Signatures 23
3 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------- Dollars in millions Three Months Ended March 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Revenues: Commissions $ 903 $ 795 Investment banking 664 628 Principal transactions 978 780 Asset management and administration fees 613 498 Other 66 32 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest revenues 3,224 2,733 - ---------------------------------------------------------------------------------------------------------------------------- Interest and dividends 2,613 3,318 Interest expense 2,249 2,923 - ---------------------------------------------------------------------------------------------------------------------------- Net interest and dividends 364 395 - ---------------------------------------------------------------------------------------------------------------------------- Revenues, net of interest expense 3,588 3,128 - ---------------------------------------------------------------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 1,845 1,722 Communications 122 117 Floor brokerage and other production 105 110 Occupancy and equipment 111 105 Advertising and market development 72 70 Professional services 54 51 Other operating and administrative expenses 158 143 Restructuring credit (211) - - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 2,256 2,318 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 1,332 810 Provision for income taxes 488 308 - ---------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 844 502 Cumulative effect of change in accounting principle (net of tax benefit of $12) (15) - - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 829 $ 502 ============================================================================================================================
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
- --------------------------------------------------------------------------------------------------------------------- March 31, December 31, Dollars in millions 1999 1998 - --------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets: Cash and cash equivalents $ 939 $ 2,261 Cash segregated and on deposit for Federal and other regulations or deposited with clearing organizations 2,231 2,358 Collateralized short-term financing agreements: Securities purchased under agreements to resell $67,673 $38,691 Deposits paid for securities borrowed 38,643 49,392 ----------- ---------- 106,316 88,083 Financial instruments and commodities owned and contractual commitments: U.S. government and government agency securities 29,345 24,643 Contractual commitments 12,167 14,319 Corporate debt securities 10,910 11,347 Non-U.S. government and government agency securities 10,336 18,632 Equity securities 7,279 4,860 Mortgage loans and collateralized mortgage securities 7,271 6,066 Money market instruments 2,498 5,153 Commodities 198 245 Other financial instruments 5,114 3,372 ----------- --------- 85,118 88,637 Receivables: Customers 14,484 14,130 Brokers, dealers and clearing organizations 4,254 4,234 Receivable for securities provided as collateral 3,454 3,101 Other 2,436 2,709 ----------- ---------- 24,628 24,174 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization of $918 and $1,032, respectively 1,006 1,114 Other assets 5,583 5,274 - --------------------------------------------------------------------------------------------------------------------- Total assets $225,821 $211,901 =====================================================================================================================
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
- --------------------------------------------------------------------------------------------------------------- March 31, December 31, Dollars in millions 1999 1998 - ---------------------------------------------------------------------------------------------------------------- (Unaudited) Liabilities and Stockholder's Equity: Commercial paper and other short-term borrowings $ 15,179 $ 15,495 Collateralized short-term financing agreements: Securities sold under agreements to repurchase $87,809 $61,024 Deposits received for securities loaned 7,546 7,712 ----------- ---------- 95,355 68,736 Financial instruments and commodities sold, not yet purchased, and contractual commitments: U.S. government and government agency securities 25,051 32,538 Non-U.S. government and government agency securities 15,753 10,719 Contractual commitments 12,866 15,698 Equity securities 5,816 4,224 Corporate debt securities and other 2,728 3,103 ----------- ---------- 62,214 66,282 Payables and accrued liabilities: Customers 10,611 13,119 Obligation to return securities received as collateral 3,098 5,348 Brokers, dealers and clearing organizations 1,627 3,406 Other 8,339 9,851 ----------- ---------- 23,675 31,724 Term debt 19,057 20,151 Guaranteed beneficial interests in Company subordinated debt securities 345 345 Company-obligated mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debt securities of the Company 400 400 Stockholder's equity: Common stock (par value $.01 per share 1,000 shares authorized; 1,000 shares issued and outstanding) - - Additional paid-in capital 1,589 1,589 Retained earnings 7,982 7,159 Cumulative translation adjustments 25 20 ----------- ---------- Total stockholder's equity 9,596 8,768 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholder's equity $225,821 $211,901 ================================================================================================================
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 Three Months Ended March 31, 1999 1998 - -------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income adjusted for noncash items - Net income $ 829 $ 502 Depreciation and amortization 93 78 - -------------------------------------------------------------------------------------------------------- Cash items included in net income 922 580 - -------------------------------------------------------------------------------------------------------- (Increase) decrease in operating assets - Cash segregated and on deposit for Federal and other regulations or deposited with clearing organizations 127 (37) Collateralized short-term financing agreements (18,233) (6,202) Financial instruments and commodities owned and contractual commitments 3,519 15,166 Receivables (454) (26,044) Other assets (485) (198) - -------------------------------------------------------------------------------------------------------- Increase in operating assets (15,526) (17,315) - -------------------------------------------------------------------------------------------------------- Increase (decrease) in operating liabilities - Collateralized short-term financing agreements 26,619 (3,204) Financial instruments and commodities sold, not yet purchased, and contractual commitments (4,068) (30,988) Payables and accrued liabilities (8,038) 43,680 - -------------------------------------------------------------------------------------------------------- Increase in operating liabilities 14,513 9,488 - -------------------------------------------------------------------------------------------------------- Cash used in operating activities (91) (7,247) - -------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase (decrease) in commercial paper and other short-term borrowings (316) 6,731 Proceeds from issuance of term debt 572 1,463 Term debt maturities and repurchases (1,410) (1,278) Collateralized mortgage obligations (11) (55) Issuance of mandatorily redeemable securities of subsidiary trusts - 400 Dividends paid (6) (130) Other capital transactions - 3 - -------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities (1,171) 7,134 - -------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Assets securing collateralized mortgage obligations 11 31 Property, equipment and leasehold improvements (71) (75) Other - 16 - -------------------------------------------------------------------------------------------------------- Cash used in investing activities (60) (28) - -------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (1,322) (141) Cash and cash equivalents at January 1, 2,261 1,808 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at March 31, $ 939 $ 1,667 ========================================================================================================
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 interim condensed consolidated financial statements reflect the accounts of Salomon Smith Barney Holdings Inc. and its subsidiaries (collectively the "Company"). The Company is a wholly owned subsidiary of Citigroup Inc. ("Citigroup"). Material intercompany transactions have been eliminated. These interim condensed consolidated 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. The interim condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, which require the use of management's best judgment and estimates. Estimates, including the fair value of financial instruments, commodities and contractual commitments, may vary from actual results. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Certain financial information that is normally included in financial statements prepared in accordance with generally accepted accounting principles, but that is not required for interim reporting purposes, has been condensed or omitted. ACCOUNTING CHANGES During the first quarter of 1999 the Company recorded a cumulative effect of 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 issued SFAS No.133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that an entity recognize all derivatives in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Company is in the process of evaluating the potential impact of the new accounting standard. 5 8 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2. RESTRUCTURING CHARGES On November 28, 1997, a newly formed wholly owned subsidiary of Travelers Group Inc. ("Travelers") was merged into Salomon Inc ("Salomon") and Salomon became a wholly owned subsidiary of Travelers. Following this merger, Salomon and Smith Barney Holdings Inc. ("Smith Barney") were merged (the "Merger") to form the Company. As a result of the Merger, the Company recorded a pre-tax restructuring charge of $838 million ($496 million after tax) in the fourth quarter of 1997. The material components of the restructuring reserve were as follows:
- ------------------------------------------------------------------------------------------------------------------ Restructuring Reserve Restructuring Reserve as Charges and Credits through Balance at Dollars in Millions Originally Recorded March 31, 1999 March 31, 1999 - ------------------------------------------------------------------------------------------------------------------ Seven World Trade Center lease $ 610 $(591) * $ 19 Other facilities 53 (37) ** 16 - ------------------------------------------------------------------------------------------------------------------ Total facilities 663 (628) 35 Severance 161 (160) ** 1 Other 14 (14) ** - - ------------------------------------------------------------------------------------------------------------------ $ 838 $(802) $36*** ==================================================================================================================
* In the second quarter of 1998, the Company recorded an adjustment of $324 million ($191 million after tax) to the restructuring reserve relating to the Seven World Trade Center lease. This reduction in the reserve resulted from negotiations on a sublease which indicated that excess space would be disposed of on terms more favorable than had been originally estimated. In the first quarter of 1999, the Company recorded an adjustment of $211 million ($125 million after-tax) to the restructuring reserve relating to the Seven World Trade Center lease. This reduction in the reserve resulted from a current reassessment of space needs due to the Citigroup merger. This reassessment indicated the need for increased occupancy by the Company utilizing space previously considered excess. ** In the fourth quarter of 1998, the Company recorded an adjustment of $30 million ($18 million after tax) to the restructuring reserve. The components of the reduction are as follows: severance $10 million; other facilities $11 million; other $9 million. The reduction in severance reserves was due to a higher level of attrition than originally anticipated. The reduction in reserves related to other facilities was mainly due to the abandonment of space on terms more favorable than originally anticipated. The other reserve reversal was mainly due to anticipated duplicate contract payments which were avoided due to favorable negotiations. *** Consists of $24 million cash component and $12 million non-cash component. At March 31, 1999, the portion of the cash and non-cash balances of the restructuring reserve that related to facilities were $23 million and $12 million, respectively. Such costs include lease costs, which represent the difference between contractual obligations and the estimated fair market rental obtainable through sublease from the date that such facilities are expected to be vacated, and other costs incidental to abandonment of the space. These contractual lease payments are estimated to be made over the remaining term and the remaining cash costs are expected to be paid in 1999. Non-cash costs of other facilities reflect the write-off of leasehold improvements, furniture and equipment upon abandonment and represent the remaining depreciated book value at the estimated dates of abandonment. Depreciation and amortization of these assets will continue during the period they are in use. The facilities are located primarily in the United States and generally support multiple lines of business. The assets have not been reclassified to a held for sale category since substantially all are subject to abandonment and will not be realized through sale. 6 9 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned subsidiary of Travelers. Following the merger, Travelers changed its name to Citigroup. As a result of the Citigroup merger, the Company recorded a pre-tax restructuring charge of $80 million ($47 million after tax) in the fourth quarter of 1998. The material components of the restructuring reserve were as follows:
- ------------------------------------------------------------------------------------------------------- Restructuring Reserve Restructuring as Charges through Reserve Balance at Dollars in Millions Originally Recorded March 31, 1999 March 31, 1999 - ------------------------------------------------------------------------------------------------------- Severance $69 $(28) $41 Facilities 9 (4) 5 Other 2 (1) 1 - ------------------------------------------------------------------------------------------------------- $80 $(33) $47* =======================================================================================================
*All cash components Facilities costs include lease payments, which represent the difference between contractual obligations and the estimated fair market rental obtainable through sublease from the date that such facilities are expected to be vacated, and other costs incidental to abandonment of the space. These contractual lease payments are estimated to be expended over the remaining term and are expected to be paid in 1999 and 2000. The facilities are located in various foreign locations and generally support multiple lines of business. The assets have not been reclassified to a held for sale category since substantially all are subject to abandonment and will not be realized through sale. The balance of severance costs are expected to be paid by the end of 1999. All of the amounts were determined in accordance with the guidelines included in Emerging Issues Task Force 94-3 and represent costs that are not associated with future revenues and are either incremental or contractual with no economic benefit. None of the amounts included in the restructuring charge represent operating losses or income. The cash component of these restructuring costs will be funded from working capital and will not require any incremental funding source. NOTE 3. THE NIKKO SECURITIES CO., LTD. On February 26, 1999, the Company and The Nikko Securities Co., Ltd ("Nikko") formed a joint venture. The joint venture, Nikko Salomon Smith Barney Limited ("Nikko Salomon Smith Barney"), provides investment banking, sales and trading and research services for corporate and institutional clients in Japan and other foreign jurisdictions. Nikko Salomon Smith Barney combined the Japanese institutional and corporate business of the Company with Nikko's domestic and international institutional and corporate business. Nikko's retail business and other activities, including asset management, will remain under Nikko's management. Nikko Salomon Smith Barney is headquartered in Tokyo and maintains offices and staff worldwide. Nikko Salomon Smith Barney is owned 51% by Nikko and 49% by the Company. A shareholder agreement further provides for operating standards as to how the entity operates as a joint venture. NOTE 4. COMPREHENSIVE INCOME 7 10 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Comprehensive income represents the sum of net income and other changes in stockholder's equity from nonowner sources. The accumulated balance of changes in equity from nonowner sources is required to be displayed separately from retained earnings and additional paid-in-capital in the statement of financial position. Cumulative translation adjustments are the only changes in the Company's equity from nonowner sources. The Company's total changes in equity from nonowner sources, net of tax, is as follows:
- ------------------------------------------------------------------------------------------ Dollars in Millions For the three months ended March 31, 1999 1998 - ------------------------------------------------------------------------------------------ Net income (loss) $829 $502 Other changes in equity from nonowner sources 5 3 - ------------------------------------------------------------------------------------------ Total comprehensive income $834 $505 ==========================================================================================
NOTE 5. PRINCIPAL TRANSACTION REVENUES The following table presents principal transaction revenue by business activity for the three months ended March 31, 1999 and 1998.
- ----------------------------------------------------------------------------- Dollars in Millions Three months ended March 31, 1999 1998 - ----------------------------------------------------------------------------- Fixed Income $682 $458 Equities 197 162 Commodities 93 180 Other 6 (20) - ----------------------------------------------------------------------------- Total principal transaction revenues $978 $780 =============================================================================
NOTE 6. 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 the Company's principal regulated subsidiaries are as follows:
NET EXCESS OVER (DOLLARS IN MILLIONS) CAPITAL OR MINIMUM SUBSIDIARY JURISDICTION EQUIVALENT REQUIREMENTS - ------------------------------------------------------------------------------------------------------------------- Salomon Smith Barney Inc. U.S. Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1) $3,258 $2,922 Salomon Brothers International United Kingdom's Securities and Futures Limited Authority $4,095 $1,495 Salomon Brothers AG Germany's Banking Supervisory Authority $ 217 $ 157 The Robinson-Humphrey Company, U.S. Securities and Exchange Commission LLC Uniform Net Capital Rule (Rule 15c3-1) $ 91 $ 90 - -------------------------------------------------------------------------------------------------------------------
8 11 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In addition, in order to maintain its triple-A rating, Salomon Swapco Inc ("Swapco"), a wholly owned subsidiary of the Company, must maintain minimum levels of capital in accordance with agreements with its rating agencies. At March 31, 1999, Swapco was in compliance with all such agreements. Swapco's capital requirements are dynamic, varying with the size and concentration of its counterparty receivables. NOTE 7. CONTRACTUAL COMMITMENTS A summary of the Company's contractual commitments as of March 31, 1999 and December 31, 1998 is as follows:
MARCH 31, 1999 DECEMBER 31, 1998 ------------------------------- --------------------------------- Current Market Current Market or or Notional Fair Value Notional Fair Value -------------------- ----------------------- Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities - --------------------------------------------------------------------------------------------------------------- Exchange-issued products: Futures contracts (a) $704.0 $ - $ - $858.3 $ - $ - Other exchange-issued products: Equity contracts 9.3 .1 .2 9.5 .1 .2 Fixed income contracts 140.2 - - 118.1 - .1 Commodities contracts 1.3 - - 1.3 - - - -------------------------------------------------------------------------------------------------------------- Total exchange-issued products 854.8 .1 .2 987.2 .1 .3 - -------------------------------------------------------------------------------------------------------------- Over-the-counter ("OTC") swaps, swap options, caps and floors: Swaps 2,390.3 2,395.3 Swap options written 92.0 81.7 Swap options purchased 86.3 85.4 Caps and floors 194.3 191.8 - -------------------------------------------------------------------------------------------------------------- Total OTC swaps, swap options, caps and floors (b) 2,762.9 5.6 6.9 2,754.2 8.2 8.8 - -------------------------------------------------------------------------------------------------------------- OTC foreign exchange contracts and options: Forward currency contracts (b) 74.4 .8 .9 146.7 1.0 1.3 Options written 34.2 - .5 52.3 - .8 Options purchased 34.7 .6 - 47.3 1.1 - - -------------------------------------------------------------------------------------------------------------- Total OTC foreign exchange contracts and options 143.3 1.4 1.4 246.3 2.1 2.1 - -------------------------------------------------------------------------------------------------------------- Other options and contractual commitments: Options and warrants on equities and equity indices 51.6 3.3 3.4 63.3 3.1 3.2 Options and forward contracts on fixed-income securities 409.7 1.6 .9 383.8 .6 1.1 Commodities contracts 7.0 .2 .1 7.0 .2 .2 - -------------------------------------------------------------------------------------------------------------- Total contractual commitments $4,229.3 $12.2 $12.9 $4,441.8 $14.3 $15.7 ==============================================================================================================
(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 $18.0 billion and $4.1 billion at March 31, 1999 and $16.2 billion and $6.1 billion at December 31, 1998, respectively. 9 12 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8. SEGMENT INFORMATION The following table summarizes the results of operations for the Company's two operating segments, Investment Services and Asset Management. For further discussion of the Company's operating segments, please refer to the Results of Operations section of Management's Discussion and Analysis.
- ----------------------------------------------------------------------------------------- Dollars in millions Three months ended March 31, 1999 1998 - ----------------------------------------------------------------------------------------- Revenues: Investment Services $ 5,574 $ 5,825 Asset Management 263 226 - ----------------------------------------------------------------------------------------- Total $ 5,837 $ 6,051 ========================================================================================= Net interest and dividends: Investment Services $ 369 $ 402 Asset Management (5) (7) - ----------------------------------------------------------------------------------------- Total $ 364 $ 395 ========================================================================================= Income before cumulative effect of change in accounting principle: Investment Services $ 771 $ 442 Asset Management 73 60 - ----------------------------------------------------------------------------------------- Total $ 844 $ 502 ========================================================================================= Total assets: Investment Services $224,377 $210,543 Asset Management 1,444 1,358 - ----------------------------------------------------------------------------------------- Total $225,821 $211,901 =========================================================================================
NOTE 9. 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. 10 13 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, including the credit relating to the restructuring charge booked in the fourth quarter of 1997 and the cumulative effect of change in accounting principle relating (see note 2 to the condensed consolidated financial statements for further discussion of the restructuring charges), of $829 million for the three months ended March 31, 1999 (the "1999 Quarter") compared to $502 million for the three months ended March 31, 1998 (the "1998 Quarter"). The cumulative effect of change in accounting principle of $15 million (net of tax benefit of $12 million) recorded in the 1999 Quarter relates to the write-off of costs relating to 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. Revenues, net of interest expense were $3.6 billion in the 1999 Quarter compared to $3.1 billion in the 1998 Quarter. Following is a discussion of the Company's two operating segments, Investment Services and Asset Management. 11 14 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTMENT SERVICES
- -------------------------------------------------------------------- Dollars in millions For the three months ended March 31, 1999 1998 - -------------------------------------------------------------------- Revenues: Commissions $ 900 $ 792 Investment banking 656 616 Principal transactions 974 779 Asset management and administration fees 372 296 Other 62 27 - -------------------------------------------------------------------- Total noninterest revenues 2,964 2,510 - -------------------------------------------------------------------- Net interest and dividends 369 401 - -------------------------------------------------------------------- Revenues, net of interest expense 3,333 2,911 - -------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 1,792 1,680 Other operating and administrative expenses 540 521 Restructuring credit (211) - - -------------------------------------------------------------------- Total noninterest expense 2,121 2,201 - -------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 1,212 710 - -------------------------------------------------------------------- Income taxes 441 268 - -------------------------------------------------------------------- Income before cumulative effect of change in accounting principle $ 771 $ 442 ====================================================================
The Company's investment services segment reported income before cumulative effect of change in accounting principle, including the credit relating to the restructuring charge booked in the fourth quarter of 1997, of $771 million for the 1999 Quarter, compared to net income of $442 million reported for the 1998 Quarter. Revenues, net of interest expense, increased to $3.3 billion in the 1999 Quarter compared to $2.9 billion reported in the 1998 Quarter as increases in all categories of noninterest revenues were offset to an extent by a decline in net interest and dividends. Commission revenues increased 14% to $900 million in the 1999 Quarter compared to $792 million in the 1998 Quarter. This increase is primarily the result of increases in listed and OTC commissions. Investment banking revenues increased to $656 million in the 1999 Quarter compared to $616 million in the 1998 Quarter. An increase in high grade debt underwritings was partially offset by declines in equity, high yield, and unit trust underwritings. During the 1999 Quarter the Company was ranked #1 in municipal underwriting and mortgage and asset backed debt underwriting, according to Securities Data Corp. 12 15 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Principal transaction revenues increased 25% to $974 million in the 1999 Quarter compared to $779 million in the 1998 Quarter. Increases in the institutional global fixed income, global equities and municipal trading businesses were partially offset by declines in the global arbitrage and commodity trading businesses. For further discussion of principal transaction revenue see Note 5 to the condensed consolidated financial statements. Asset management and administration fees increased 26% to $372 million in the 1999 Quarter compared to $296 million in the 1998 Quarter as a result of the growth in assets under fee-based management. The investment services segment includes results from assets managed by the Company's Financial Consultants and assets that are externally managed by the consulting group. Assets under fee-based management increased significantly at March 31, 1999 compared to March 31, 1998 causing the corresponding increase in revenue (see table on following page for detail of the segment's assets under fee-based management). Net interest and dividends decreased to $369 million in the 1999 Quarter compared to $401 million in the 1998 Quarter. Total expenses, excluding interest and the restructuring credit, increased 6% to $2.3 billion in the 1999 Quarter compared to $2.2 billion in the 1998 Quarter primarily as a result of an increase in production-related compensation and benefits expense, reflecting increased revenues of the Company, partially offset by the benefit of changes in employee deferred compensation plans. The Company continues to maintain its focus on controlling fixed expenses. 13 16 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSET MANAGEMENT
- -------------------------------------------------------------------- Dollars in millions For the three months ended March 31, 1999 1998 - -------------------------------------------------------------------- Revenues: Asset management and administration fees $241 $202 Net interest and dividends and other revenue 14 15 - -------------------------------------------------------------------- Revenues, net of interest expense 255 217 - -------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 53 42 Other operating and administrative expenses 82 75 - -------------------------------------------------------------------- Total noninterest expense 135 117 - -------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 120 100 - -------------------------------------------------------------------- Income taxes 47 40 - -------------------------------------------------------------------- Income before cumulative effect of change in accounting principle $ 73 $ 60 ====================================================================
The asset management segment revenues net of interest expense rose 18% to $255 million in the 1999 Quarter. The primary revenue for the asset management segment is asset management and administration fees, which were $241 million in the 1999 Quarter, compared to $202 million in the 1998 Quarter. The 19% overall increase in fees reflects broad growth in all asset management products. Assets under management for the segment reached $198 billion at March 31, 1999 an increase of 20% from March 31, 1998. This increase includes the 1998 midyear acquisition of JP Morgan's Australian asset management business with $5 billion in assets under management. 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 $135 million in the 1999 Quarter compared to $117 million in the 1998 Quarter. The 15% increase reflects continuing investment in the business infrastructure to support sustained growth, as well as the 1998 midyear acquisition of JP Morgan's Australian asset management business. Other operating and administrative expense includes deferred commission amortization expense which relates to the sale of load mutual funds. 14 17 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 Period Ended March 31, 1999 1998 - ----------------------------------------------------------------------------- Money market funds $ 63.7 $ 51.6 Mutual funds 61.6 56.0 Managed accounts 72.7 57.4 - ----------------------------------------------------------------------------- Salomon Smith Barney Asset Management 198.0 165.0 Financial Consultant managed accounts * 18.6 13.3 - ----------------------------------------------------------------------------- Total internally managed assets 216.6 178.3 Consulting Group externally managed assets * 73.1 67.1 - ----------------------------------------------------------------------------- Total fee-based assets under management $289.7 $245.4 - -----------------------------------------------------------------------------
*Related results included in Investment Services segment. 15 18 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's total assets were $226 billion at March 31, 1999, up slightly from $212 billion at year-end 1998. Due to the nature of the Company's trading activities, including its matched book activities, it is not uncommon for the Company's asset levels to fluctuate from period to period. A "matched book" transaction involves a security purchased under an agreement to resell (i.e., reverse repurchase transaction) and simultaneously sold under an agreement to repurchase (i.e., repurchase transaction). 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 secured loans, 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 $152.5 billion at March 31, 1999. 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 and letters of credit, deposit liabilities, promissory notes and corporate loans. Short-term uncollateralized borrowings totaled $14.9 billion at March 31,1999. The Company has committed uncollateralized revolving lines of credit totaling $5.0 billion, which it may borrow from at various interest rate options (LIBOR, CD or base rate), and compensates the banks for the facilities through facility fees. At March 31, 1999 there were no outstanding borrowings under these facilities. Under these facilities the Company is required to maintain a certain level of consolidated adjusted net worth (as defined in the agreements). At March 31, 1999, this requirement was exceeded by approximately $3.6 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 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, commodities 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 16 19 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS lenders, are closely monitored both in terms of single investor limits and daily maturities. 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. The management of this plan includes an analysis used to determine the Company's ability to withstand varying levels of stress, which could impact its liquidation horizons and required margins. In addition, the Company monitors its leverage and capital ratios on a daily basis. OTHER HIGH YIELD PORTFOLIO The Company's activities include trading securities that are less than investment grade, characterized as "high yield." High yield securities include corporate debt, convertible debt, preferred and convertible preferred equity securities rated lower than "triple B-" by internationally recognized rating agencies, unrated securities with market yields comparable to entities rated below "triple B-," as well as sovereign debt issued by certain countries in currencies other than their local currencies and which are not collateralized by U.S. government securities. For example, high yield securities exclude the collateralized portion of the Company's holdings of "Brady Bonds," but include such securities to the extent they are not collateralized. The Company's trading portfolio of high yield securities owned is carried at market or fair value and totaled $3.5 billion and $4.8 billion at March 31, 1999 and December 31, 1998, respectively. The largest high yield exposure to one counterparty was $274 million and $716 million at March 31, 1999 and December 31, 1998, respectively. OTHER As of March 31, 1999, the Company had mark-to-market exposure to hedge funds of $1,694 million, collateralized by $1,734 million of cash and government securities, resulting in excess collateral of $40 million. Within these amounts, certain hedge funds have collateral in excess of the mark-to-market deficit, and others have deficits in excess of the collateral held. The total exposure to hedge funds with mark-to-market deficits in excess of collateral held is $22 million. No single hedge fund had a mark-to-market deficit of more than $13 million in excess of collateral held from that hedge fund. Mark-to-market exposure includes those hedge funds that owe the Company on foreign exchange and derivative contracts such as swaps, swap options, and other over-the-counter options and only the uncollateralized portion of receivables on reverse repurchase and repurchase agreements. This exposure can change significantly as a result of extreme market movements. The Company has no unsecured loans or loan commitments to hedge funds. The Company has no investments in hedge funds other than an investment in Long-Term Capital Management, LP, made in concert with a consortium of banks and securities firms. 17 20 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 in that they do not capture all of the risks inherent in all positions nor do they 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 and commodities owned and sold, contractual commitments, repurchase and resale agreements, and related funding at March 31, 1999 and December 31, 1998. The VAR relating to non-trading instruments has been excluded from this analysis.
- ------------------------------------------------------------------------------------------------------ RISK EXPOSURES MARCH 31, DECEMBER 31, ($ IN MILLIONS) 1999 1999 AVERAGE 1999 HIGH 1999 LOW 1998* - ------------------------------------------------------------------------------------------------------ Interest rate $55 $60 $71 $53 $60 Equities 4 6 19 3 5 Commodities 12 11 12 11 11 Currency 6 3 6 2 2 Diversification Benefit (23) (19) N/A N/A (18) - ------------------------------------------------------------------------------------------------------ Total $54 $61 $72 $52 $60 ======================================================================================================
*In 1999, the Company began using one year of historical price data (i.e., volatilities and correlation factors) to calculate VAR, rather than six month's of historical data which was used at December 31, 1998, primarily for consistency with the capital guidelines issued by the Federal Reserve and other U.S. Banking regulators. The December 31, 1998 disclosures have been restated to reflect this change. The quantification of market risk using VAR analysis requires a number of key assumptions. In calculating the above market risk amounts, the Company used a 99% confidence level and a one-day interval. The standard deviations and correlation assumptions are based on historical data and reflect a horizon of one year. VAR reflects the risk profile of the Company at a point in time and is not a predictor of future results. OPERATIONAL RISK YEAR 2000 Many computer applications have been written using two digits rather than four to define the applicable year, and therefore may not recognize a date using "00" as the Year 2000. This could result in the inability of the application to properly process transactions with the dates in the Year 2000 or thereafter. To ensure the Company's computer systems will correctly handle the date change, a firm-wide initiative was established to 18 21 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS identify and resolve all problems. The Year 2000 Readiness Program (the "Project") was approved by the Board of Directors of the Company's sole stockholder and commenced early in 1996. The total cost of the Project is expected to be approximately $130 million to $150 million. Through March 31, 1999 the Company has expended approximately $110 million on the Project. The majority of the remaining costs are expected to be directed to testing activities. These costs have been and will continue to be funded through operating cash flow and are expensed in the period in which they are incurred. The Project is comprised of five phases: 1) inventory, 2) assessment, 3) corrections where necessary, 4) testing and certification, and 5) deployment of Year 2000 compliant components to all locations worldwide. The Project began with a comprehensive inventory of hardware, vendor products, software developed in-house, market data feeds, and physical facilities around the world. The inventory also included electronic data exchanges with industry participants such as the New York Stock Exchange, the National Association of Securities Dealers, the Securities Industry Automation Company, the National Securities Clearing Corporation, The Depository Trust Company and other counterparties. To eliminate any processing errors associated with the millennium date change and other associated dates such as 9/9/99 and the leap year in the Year 2000, elements of the inventory were assessed to determine necessary changes and upgrades or replacement of vendor products. The inventory and assessment phases of the project were completed in the third quarter of 1997. At this time, the correction phase of the project is nearing completion. Specifically, corrections have been made to 99% of systems developed in-house, and 77% of vendor products in use by the firm have been upgraded. Testing and certification is the most complex part of the Project. The Company began testing in October 1997. Special mainframe and distributed system test environments were constructed in which dates can be advanced to create a variety of conditions that will be encountered as the millennium date change occurs. Applications are put through a rigorous series of tests at the unit, integration and enterprise levels, with sign-off by the relevant business areas at each level, before they are certified as Year 2000 compliant. Approximately 93% of the in-house applications are now certified. In addition to rigorous testing of each component, an enterprise level front-to-back test is being planned to test multiple systems working together to support business processes. The Project remains on schedule. Correction work has been substantially completed; internal and external testing, application certification and global deployment is expected to be completed by June 30, 1999. The Company fully supports initiatives by the Securities Industry Association and other industry groups in conducting tests among industry participants, including the completed industry Beta Test, the government securities clearing test with the Federal Reserve Bank of New York and the Depository Trust Company, and the Futures Industry Association test. The Company has achieved successful results in each of these industry-wide tests in which it participated. The Company is participating in the Streetwide Test which commenced in March 1999, and expects to continue its testing program during 1999 with counterparties and selected clients. There are many risks associated with the Year 2000 issue. Even if the Company successfully remediates its Year 2000 issues, it can be materially and adversely affected by failures of third parties to remediate their own Year 2000 issues. The failure of third parties with which the Company has financial or operational relationships such as vendors, clients, or regulators to resolve their own Year 2000 compliance issues in a timely manner could result in material financial risk to the Company. Consequently, comprehensive, written contingency plans are being prepared so that alternative procedures and a framework for critical decisions are defined before any crisis occurs. Contingency plans are nearing completion. These plans define alternate processes to be used in 19 22 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the event of extended system outage. The plans cover each business area and location around the world. Contingency plans will be validated in the first half of 1999. The Company's expectation about future costs and the timely completion of its Year 2000 modifications are subject to uncertainties that could cause actual results to differ materially from what has been discussed above. The Project will remain one of the Company's top priorities until these issues are resolved. 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; the resolution of legal proceedings and environmental matters; the actual cost of Year 2000 remediation and the ability of the Company and third party vendors to modify computer systems for the Year 2000 date conversion in a timely manner; and the ability of the Company generally to achieve anticipated levels of operational efficiencies related to recent mergers and acquistions, as well as achieving its other cost-savings initiatives. Readers are also directed to other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 20 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. For information concerning a purported class action against numerous broker-dealers including Salomon Smith Barney, see the description that appears in the sixth paragraph under the caption "Legal Proceedings" beginning on page 12 of the Annual Report on Form 10-K of SSBH for the year ending December 31, 1998 (File No. 1-4346), which description is included as Exhibit 99.01 to this Form 10-Q and incorporated by reference herein. The Company has filed a motion to dismiss the amended complaint. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: See Exhibit Index. (b) Reports on Form 8-K: On January 25, 1999, SSBH filed a Current Report on Form 8-K, dated January 25, 1999, reporting under Item 5 thereof the results of its operations for the three and twelve month periods ended December 31, 1998, and certain other selected financial data. On February 25, 1999, SSBH filed a Current Report on Form 8-K, dated February 23, 1999, filing certain exhibits under Item 7 thereof relating to the offer and sale of SSBH's Callable Principal-Protected Equity Linked Notes based upon the S&P(R) 500 Index due June 30, 2006. No other reports on Form 8-K were filed during the first quarter of 1999; however, on April 19, 1999, SSBH filed a Current Report on Form 8-K, dated April 19, 1999, reporting under Item 5 thereof the results of its operations for the quarter ended March 31, 1999, and certain other selected financial data. 21 24 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 3.01 Amended and Restated Certificate of Incorporation of SSBH, effective December 1, 1997, incorporated by reference to Exhibit 4(a) to Amendment No. 2 to SSBH's Registration Statement on Form S-3 (No. 333-38931). 3.02 By-Laws of SSBH, incorporated by reference to Exhibit 4(b) to Amendment No. 2 to SSBH's Registration Statement on Form S-3 (No. 333-38931). 12.01+ Computation of ratio of earnings to fixed charges. 27.01+ Financial Data Schedule. 99.01+ Sixth paragraph under the caption "Legal Proceedings" beginning on page 12 of the Annual Report on Form 10-K of SSBH for the year ended December 31, 1998 (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. 22 25 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: May 14, 1999 By: /s/ Charles W. Scharf ----------------------------- Charles W. Scharf Chief Financial Officer By: /s/ Michael J. Day ----------------------------- Michael J. Day Controller 23 EX-12.01 2 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.01 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
Three Months Ended March 31, Dollars in millions 1999 ------------ Earnings from continuing operations: Income from continuing operations before income taxes $ 1,332 Add fixed charges (see below) 2,273 ------------ Earnings as defined $ 3,605 ============ Fixed charges from continuing operations: Interest expense $ 2,249 Other adjustments 24 ------------ Fixed charges from continuing operations as defined $ 2,273 ============ Ratio of earnings to fixed charges 1.59 ============
NOTE: The ratio of earnings to fixed charges from continuing operations is calculated by dividing fixed charges into the sum of income from continuing operations before income taxes and cumulative effect of change in accounting principles and fixed charges. Fixed charges consist of interest expense, including capitalized interest and a portion of rental expense representative of the interest factor. EX-27.01 3 FINANCIAL DATA SCHEDULE
BD THE SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S MARCH 31, 1999 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 3,170 24,628 67,673 38,643 85,118 1,006 225,821 15,179 23,675 87,809 7,546 62,214 19,057 0 0 0 9,596 225,821 978 2,613 903 664 613 2,249 1,845 1,332 844 0 (15) 829 0 0
EX-99.01 4 PARAGRAPH FROM FORM 10-K FOR YEAR ENDED 12-31-1999 1 EXHIBIT 99.01 SIXTH PARAGRAPH UNDER THE CAPTION "LEGAL PROCEEDINGS" BEGINNING ON PAGE 12 OF THE ANNUAL REPORT ON FORM 10-K OF SSBH FOR THE YEAR ENDED DECEMBER 31, 1998 (FILE NO. 1-4346). In November 1998, a purported class action complaint was filed in the United States District Court for the Middle District of Florida (Dwight Brock as Clerk for Collier County v. Merrill Lynch et al.). The complaint alleges that, pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB, charged excessive mark-ups in connection with advanced refunding transactions. The Company intends to contest this complaint vigorously. -----END PRIVACY-ENHANCED MESSAGE-----