-----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, WWXOHWmiOYLtnY7om7RvvCYUriIqOAFmkdG79OJbZFRebJSp9sm6DbTtxeBQ3PfW D7X4BrvX4OZsguX4uvI6dw== 0000950123-99-010137.txt : 19991115 0000950123-99-010137.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950123-99-010137 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 112418067 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04346 FILM NUMBER: 99750878 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 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 SEPTEMBER 30, 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, 1,000 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 SEPTEMBER 30, 1999
PAGE ---- Part I. Financial Information Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Statements of Income (Unaudited) - Three and nine months ended September 30, 1999 and 1998 1 Condensed Consolidated Statements of Financial Condition - September 30, 1999 (Unaudited) and December 31, 1998 2 - 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, 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 22 Exhibit Index 23 Signatures 24
3 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------- Dollars in millions Three Months Nine Months Period Ended September 30, 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Revenues: Commissions $ 815 $ 797 $ 2,623 $ 2,376 Investment banking 778 531 2,213 1,799 Principal transactions 329 (1,331) 2,011 (236) Asset management and administration fees 693 563 1,958 1,614 Other 67 28 185 102 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest revenues 2,682 588 8,990 5,655 - ----------------------------------------------------------------------------------------------------------------------- Interest and dividends 2,811 3,338 8,290 10,124 Interest expense 2,420 3,013 7,083 9,003 - ----------------------------------------------------------------------------------------------------------------------- Net interest and dividends 391 325 1,207 1,121 - ----------------------------------------------------------------------------------------------------------------------- Revenues, net of interest expense 3,073 913 10,197 6,776 - ----------------------------------------------------------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 1,608 915 5,206 4,181 Communications 124 118 360 351 Floor brokerage and other production 110 111 335 326 Occupancy and equipment 114 105 333 315 Advertising and market development 81 80 236 218 Professional services 64 69 174 166 Other operating and administrative expenses 138 39 496 288 Restructuring credit (30) - (241) (324) - ----------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 2,209 1,437 6,899 5,521 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and cumulative effect of change in accounting principle 864 (524) 3,298 1,255 Provision (benefit) for income taxes 326 (199) 1,220 477 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting principle 538 (325) 2,078 778 Cumulative effect of change in accounting principle (net of tax benefit of $12) - - (15) - - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 538 $ (325) $ 2,063 $ 778 =======================================================================================================================
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
- ---------------------------------------------------------------------------------------------------------------------------------- September 30, December 31, Dollars in millions 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets: Cash and cash equivalents $ 1,959 $ 2,261 Cash segregated and on deposit for Federal and other regulations or deposited with clearing organizations 2,419 2,358 Collateralized short-term financing agreements: Securities purchased under agreements to resell $69,345 $38,691 Deposits paid for securities borrowed 32,626 49,392 ------- ------- 101,971 88,083 Financial instruments and commodities owned and contractual commitments: U.S. government and government agency securities 26,760 24,643 Contractual commitments 10,634 14,319 Corporate debt securities 10,205 11,347 Non-U.S. government and government agency securities 8,371 18,632 Mortgage loans and collateralized mortgage securities 6,081 6,066 Money market instruments 5,699 5,153 Equity securities 5,075 4,860 Commodities 267 245 Other financial instruments 2,756 3,372 ------- ------- 75,848 88,637 Receivables: Customers 16,469 14,130 Receivable for securities provided as collateral 3,757 3,101 Brokers, dealers and clearing organizations 1,923 4,234 Other 1,816 2,709 ------- ------- 23,965 24,174 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization of $817 and $1,032, respectively 1,065 1,114 Other assets 5,610 5,274 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $212,837 $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
- ----------------------------------------------------------------------------------------------------------------------------- September 30, December 31, Dollars in millions 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- (Unaudited) Liabilities and Stockholder's Equity: Commercial paper and other short-term borrowings $ 11,890 $ 15,495 Collateralized short-term financing agreements: Securities sold under agreements to repurchase $77,487 $61,024 Deposits received for securities loaned 7,993 7,712 ------- ------- 85,480 68,736 Financial instruments and commodities sold, not yet purchased, and contractual commitments: U.S. government and government agency securities 21,477 32,538 Non-U.S. government and government agency securities 17,022 10,719 Contractual commitments 12,582 15,698 Equity securities 3,784 4,224 Corporate debt securities and other 3,074 3,103 ------- ------- 57,939 66,282 Payables and accrued liabilities: Customers 11,167 13,119 Obligation to return securities received as collateral 4,379 5,348 Brokers, dealers and clearing organizations 1,891 3,406 Other 10,348 9,851 ------- ------- 27,785 31,724 Term debt 19,119 20,151 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 1,621 1,589 Retained earnings 8,241 7,159 Cumulative translation adjustments 17 20 ------- ------- Total stockholder's equity 9,879 8,768 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholder's equity $212,837 $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 Nine Months Ended September 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,063 $ 778 Depreciation and amortization 270 241 - ------------------------------------------------------------------------------------------------------------------------------- Net income adjusted for noncash items 2,333 1,019 - ------------------------------------------------------------------------------------------------------------------------------- (Increase) decrease in operating assets - Cash segregated and on deposit for Federal and other regulations or deposited with clearing organizations (61) (265) Collateralized short-term financing agreements (13,888) 14,783 Financial instruments and commodities owned and contractual commitments 12,789 33,037 Receivables 209 (6,801) Other assets (645) (805) - ------------------------------------------------------------------------------------------------------------------------------- (Increase) decrease in operating assets (1,596) 39,949 - ------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in operating liabilities - Collateralized short-term financing agreements 16,744 (33,112) Financial instruments and commodities sold, not yet purchased, and contractual commitments (8,343) (24,251) Payables and accrued liabilities (4,422) 12,030 - ------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in operating liabilities 3,979 (45,333) - ------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities 4,716 (4,365) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase (decrease) in commercial paper and other short-term borrowings (3,605) 4,664 Proceeds from issuance of term debt 3,151 5,491 Term debt maturities and repurchases (3,913) (3,863) Collateralized mortgage obligations (71) (81) Issuance of mandatorily redeemable securities of subsidiary trusts - 400 Dividends paid (427) (729) Other capital transactions 32 2 - ------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities (4,833) 5,884 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Assets securing collateralized mortgage obligations 73 96 Property, equipment and leasehold improvements (258) (279) Other - 42 - ------------------------------------------------------------------------------------------------------------------------------- Cash used in investing activities (185) (141) - ------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (302) 1,378 Cash and cash equivalents at January 1, 2,261 1,808 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at September 30, $ 1,959 $ 3,186 ===============================================================================================================================
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., 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. ("Citigroup"). Material intercompany transactions have been eliminated. The 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. 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 to conform to the current period presentation. These 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 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 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. In June 1999, FASB issued SFAS No. 137 which postponed the effective date of SFAS 133 for one year. SFAS 133 is now effective for fiscal years beginning after June 15, 2000. 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 "SSB merger") to form the Company. As a result of the SSB 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 September 30, 1999 September 30, 1999 - ------------------- ------------------- ------------------ ------------------ Seven World Trade Center lease $610 $(605) * $5 Other facilities 53 (52) ** 1 - ----------------------------------------------------------------------------------------------------------------------------- Total facilities 663 (657) 6 Severance 161 (161) ** - Other 14 (14) ** - - ----------------------------------------------------------------------------------------------------------------------------- $838 $(832) $6*** =============================================================================================================================
* 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 ($124 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 third quarter of 1999, the Company recorded a reduction of $1.4 million ($849 thousand after tax) to the restructuring reserve relating to the Seven World Trade Center lease. ** 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 $5 million cash component and $1 million non-cash component. At September 30, 1999, the portion of the non-cash balance of the restructuring reserve that related to other facilities was $1 million. The non-cash costs of other facilities reflects 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. On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned subsidiary of Travelers (the "Citigroup merger"). Following the Citigroup merger, Travelers changed its name to Citigroup Inc. As a result 6 9 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 Reserve as Charges and Credits through Balance at Dollars in millions Originally Recorded September 30, 1999 September 30, 1999 - ------------------------------------------------------------------------------------------------------------------------ Severance $69 $(69)** $- Facilities 9 (6)** 3 Other 2 (2) - - ------------------------------------------------------------------------------------------------------------------------ $80 $(77) $3* ========================================================================================================================
* All cash components ** In the third quarter of 1999, the Company recorded an adjustment of $29 million ($16 million after tax) to the restructuring reserve. The components are as follows: severance $27 million; facilities $2 million. These reductions were a result of changes in staffing and space requirements as integration of the Company and Citigroup progressed. 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. 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, 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. 7 10 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. 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 Nine Months Period ended September 30, 1999 1998 1999 1998 ----------------------------------------------------------------------------------------------------- Net income (loss) $538 $(325) $2,063 $778 Other changes in equity from nonowner sources (2) 5 (3) 5 ----------------------------------------------------------------------------------------------------- Total comprehensive income (loss) $536 $(320) $2,060 $783 =====================================================================================================
NOTE 5. PRINCIPAL TRANSACTION REVENUES The following table presents principal transaction revenue by business activity for the three and nine months ended September 30, 1999 and 1998.
---------------------------------------------------------------------------------------------- Dollars in millions Three Months Nine Months Period ended September 30, 1999 1998 1999 1998 ---------------------------------------------------------------------------------------------- Fixed Income $ 47 $(1,485) $1,113 $(811) Equities 243 59 709 348 Commodities 45 54 167 209 Other (6) 41 22 18 ---------------------------------------------------------------------------------------------- Total principal transaction revenues $329 $(1,331) $2,011 $(236) ==============================================================================================
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 CAPITAL MINIMUM (DOLLARS IN MILLIONS) OR REQUIREMENTS SUBSIDIARY JURISDICTION EQUIVALENT - ------------------------------------------------------------------------------------------------------------------------------- Salomon Smith Barney Inc. U.S. Securities and Exchange Commission $3,755 $3,377 Uniform Net Capital Rule (Rule 15c3-1) Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $4,076 $1,378 Salomon Brothers AG Germany's Banking Supervisory Authority $ 218 $ 175 The Robinson-Humphrey Company, LLC U.S. Securities and Exchange Commission $ 74 $ 73 Uniform Net Capital Rule (Rule 15c3-1) - -------------------------------------------------------------------------------------------------------------------------------
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 September 30, 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 September 30, 1999 and December 31, 1998 is as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------------------------- ----------------------------------- 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) $ 577.7 $ - $ - $ 858.3 $ - $ - Other exchange-issued products: Equity contracts 7.6 .2 .2 9.5 .1 .2 Fixed income contracts 50.3 - - 118.1 - .1 Commodities contracts 1.6 - - 1.3 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total exchange-issued products 637.2 .2 .2 987.2 .1 .3 - ----------------------------------------------------------------------------------------------------------------------------------- Over-the-counter ("OTC") swaps, swap options, caps and floors: Swaps 2,771.2 2,395.3 Swap options written 96.4 81.7 Swap options purchased 86.5 85.4 Caps and floors 244.7 191.8 - ----------------------------------------------------------------------------------------------------------------------------------- Total OTC swaps, swap options, caps and floors (b) 3,198.8 5.3 6.6 2,754.2 8.2 8.8 - ----------------------------------------------------------------------------------------------------------------------------------- OTC foreign exchange contracts and options: Forward currency contracts (b) 44.3 .2 .1 146.7 1.0 1.3 Options written 18.9 - .2 52.3 - .8 Options purchased 19.1 .2 - 47.3 1.1 - - ----------------------------------------------------------------------------------------------------------------------------------- Total OTC foreign exchange contracts and options 82.3 .4 .3 246.3 2.1 2.1 - ----------------------------------------------------------------------------------------------------------------------------------- Other options and contractual commitments: Options and warrants on equities and equity indices 61.6 3.6 4.5 63.3 3.1 3.2 Options and forward contracts on fixed-income securities 376.5 .8 .8 383.8 .6 1.1 Commodities contracts 14.0 .3 .2 7.0 .2 .2 - ----------------------------------------------------------------------------------------------------------------------------------- Total contractual commitments $4,370.4 $10.6 $12.6 $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 $17.2 billion and $2.5 billion at September 30, 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.
--------------------------------------------------------------------------------------------------------------------- Dollars in millions Three Months Nine Months Period ended September 30, 1999 1998 1999 1998 --------------------------------------------------------------------------------------------------------------------- Noninterest revenues: Investment Services $2,388 $ 347 $8,157 $4,968 Asset Management 294 241 833 687 --------------------------------------------------------------------------------------------------------------------- Total $2,682 $ 588 $8,990 $5,655 ===================================================================================================================== Net interest and dividends: Investment Services $ 394 $ 331 $1,219 $1,137 Asset Management (3) (6) (12) (16) --------------------------------------------------------------------------------------------------------------------- Total $ 391 $ 325 $1,207 $1,121 ===================================================================================================================== Income (loss) before cumulative effect of change in accounting principle: Investment Services $ 447 $(395) $1,826 $ 585 Asset Management 91 70 252 193 --------------------------------------------------------------------------------------------------------------------- Total $ 538 $(325) $2,078 $ 778 =====================================================================================================================
Total assets of the Investment Services and Asset Management segments were $211.3 billion and $1.5 billion, respectively, at September 30, 1999 and $210.6 billion and $1.3 billion, respectively, at December 31, 1998. For further discussion of the Company's operating segments, please refer to the Results of Operations section of Management's Discussion and Analysis. 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 of $538 million for the three months ended September 30, 1999 (the "1999 Quarter") compared to a net loss of $325 million reported for the three months ended September 30, 1998 (the "1998 Quarter"). The loss in the 1998 Quarter resulted from severe global economic turmoil and included an after-tax loss of $700 million related to Global Arbitrage and Russian-related credit losses. The Company continues to scale back its exposure to the Global Arbitrage business, with the balance sheet commitment reduced by over 90% from its peak, to $7 billion of assets at September 30, 1999. Revenues, net of interest expense, were $3,073 million in the 1999 Quarter compared to $913 million in the 1998 Quarter reflecting increases in all revenue categories. For the nine months ended September 30, 1999 (the "1999 Period") the Company reported net income of $2,063 million compared to net income of $778 million reported for the nine months ended September 30, 1998 (the "1998 Period"). Revenues, net of interest expense, were $10,197 million in the 1999 Period compared to $6,776 million in the 1998 Period. Excluding the restructuring credits and cumulative effect of change in accounting principle, the Company recorded net income of $521 million for the 1999 Quarter compared to a net loss of $325 million for the 1998 Quarter and net income of $1,937 million for the 1999 Period compared to net income of $587 million for the 1998 Period. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "Act"), which will become effective in most significant respects 120 days after enactment. Under the Act, bank holding companies, such as Citigroup, all of whose depository institutions are "well capitalized" and "well managed," as defined in the Bank Holding Company Act of 1956, and which obtain satisfactory Community Reinvestment Act ratings, and their affiliates will have the ability to engage in a broader spectrum of activities than those currently permitted, including insurance underwriting and brokerage (including annuities), and underwriting and dealing in securities without a revenue limit. Because the Act repeals Section 20 of the Glass-Steagall Act, Citigroup and its affiliates (including the Company) will be permitted to operate without regard to revenue limits on "ineligible" securities and to acquire other securities firms without regard to such limits. Subject to certain limitations, new merchant banking rules will permit Citigroup and its affiliates (including the Company) to make investments in companies that engage in activities that are not financial in nature without regard to the existing 5% limit for domestic investments and 20% limit for overseas investments. 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 Three Months Nine Months Period Ended September 30, 1999 1998 1999 1998 -------------------------------------------------------------------------------------------------------------- Revenues: Commissions $ 812 $ 794 $2,615 $2,367 Investment banking 758 514 2,175 1,763 Principal transactions 329 (1,332) 2,001 (238) Asset management and administration fees 426 345 1,194 981 Other 63 26 172 95 -------------------------------------------------------------------------------------------------------------- Total noninterest revenues 2,388 347 8,157 4,968 -------------------------------------------------------------------------------------------------------------- Net interest and dividends 394 331 1,219 1,137 -------------------------------------------------------------------------------------------------------------- Revenues, net of interest expense 2,782 678 9,376 6,105 -------------------------------------------------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 1,554 874 5,052 4,054 Other operating and administrative expenses 541 444 1,681 1,440 Restructuring credit (30) - (241) (324) -------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,065 1,318 6,492 5,170 -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and cumulative effect of change in accounting principle 717 (640) 2,884 935 -------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes 270 (245) 1,058 350 -------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting principle $ 447 $ (395) $1,826 $ 585 ==============================================================================================================
The Company's investment services segment reported income of $447 million and $1,826 million for the 1999 Quarter and 1999 Period, compared to a loss of $395 million and income of $585 million reported for the 1998 Quarter and 1998 Period. Revenues, net of interest expense, increased to $2,782 million and $9,376 million in the 1999 Quarter and 1999 Period compared to $678 million and $6,105 million reported in the 1998 Quarter and 1998 Period as a result of increases in all categories of revenue. Commission revenues of $812 million in the 1999 Quarter were relatively unchanged from the 1998 Quarter. In the 1999 Period commission revenues increased 10% to $2,615 million as a result of increases in listed, OTC, insurance and options commissions. During the 1999 Quarter annualized gross production per financial consultant remained strong at $465,000 reflecting the continued strength of the Private Client business. Investment banking revenues increased to $758 million in the 1999 Quarter compared to $514 million in the 1998 Quarter. An increase in high grade debt, high yield and equity underwritings was partially offset by a decline in merger and acquisition fees. Underwriting fees reached a record level in the 1999 Quarter. In the 1999 Period the 23% increase in investment banking revenue was also impacted by an increase in merger and acquisition fees. 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 to $329 million in the 1999 Quarter compared to a loss of $1,332 million in the 1998 Quarter which included very substantial losses from fixed income trading and the customer business, including global arbitrage and Russian-related credit losses. In the 1999 Period principal transaction revenues increased to $2,001 million. For further information related to principal transaction revenue see note 5 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 externally managed through the Consulting Group. Asset management and administration fees increased to $426 million and $1,194 million in the 1999 Quarter and 1999 Period compared to $345 million and $981 million in the 1998 Quarter and 1998 Period as a result of the growth in assets under fee-based management. Assets under fee-based management increased significantly at September 30, 1999 compared to September 30, 1998 causing the corresponding increase in revenue. Net interest and dividends increased to $394 million and $1,219 million in the 1999 Quarter and 1999 Period compared to $331 million and $1,137 million in the 1998 Quarter and the 1998 Period. These increases were due primarily to increased margin lending to clients. Total expenses, excluding interest and the restructuring credits, increased to $2,095 million in the 1999 Quarter compared to $1,318 million 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. Total expenses, excluding interest and the restructuring credits, were $6,733 million in the 1999 Period compared to $5,494 million in the 1998 Period. 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 Three Months Nine Months Period Ended September 30, 1999 1998 1999 1998 ----------------------------------------------------------------------------------------------------------- Revenues: Asset management and administration fees $267 $218 $764 $633 Other revenue, net 24 17 57 38 ----------------------------------------------------------------------------------------------------------- Revenues, net of interest expense 291 235 821 671 ----------------------------------------------------------------------------------------------------------- Noninterest expenses: Compensation and benefits 54 41 154 127 Other operating and administrative expenses 90 78 253 224 ----------------------------------------------------------------------------------------------------------- Total noninterest expense 144 119 407 351 ----------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 147 116 414 320 ----------------------------------------------------------------------------------------------------------- Income taxes 56 46 162 127 ----------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle $ 91 $ 70 $252 $193 ===========================================================================================================
The Company's asset management segment revenues, net of interest expense, rose 24% to $291 million and 22% to $821 million in the 1999 Quarter and 1999 Period compared to $235 million and $671 million in the 1998 Quarter and 1998 Period. The primary revenue for the asset management segment is asset management and administration fees, which were $267 million and $764 million in the 1999 Quarter and 1999 Period, compared to $218 million and $633 million in the 1998 Quarter and 1998 Period. The overall increases in fees reflect broad growth in all asset management products. Assets under management for the segment reached $201.2 billion at September 30, 1999, an increase of 19% from September 30, 1998. 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 $144 million and $407 million in the 1999 Quarter and 1999 Period compared to $119 million and $351 million in the 1998 Quarter and 1998 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. 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 At September 30, 1999 1998 - --------------------------------------------------------------------------------- Money market funds $ 62.5 $ 55.1 Mutual funds 62.4 53.5 Managed accounts 76.3 61.0 - --------------------------------------------------------------------------------- Salomon Smith Barney Asset Management 201.2 169.6 Financial Consultant managed accounts * 21.4 13.8 - --------------------------------------------------------------------------------- Total internally managed assets 222.6 183.4 Consulting Group externally managed assets * 74.6 63.9 - --------------------------------------------------------------------------------- Total assets under fee-based management $297.2 $247.3 =================================================================================
*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 $213 billion at September 30, 1999, up from $212 billion at December 31, 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 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 $144.2 billion at September 30, 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, deposit liabilities, promissory notes and corporate loans. Short-term uncollateralized borrowings totaled $11.7 billion at September 30,1999. The Company has committed uncollateralized revolving lines of credit totaling $5.0 billion, from which it may borrow at various interest rate options (LIBOR, CD or base rate), and compensates the banks for the facilities through facility fees. At September 30, 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 September 30, 1999, this requirement was exceeded by approximately $3.9 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 lenders, are closely monitored both in terms of single investor limits and daily maturities. 16 19 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. 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. 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 September 30, 1999 and December 31, 1998. The VAR relating to non-trading instruments has been excluded from this analysis.
----------------------------------------------------------------------------------------------------------------- RISK EXPOSURES September 30, Third Quarter Third Quarter Third Quarter December 31, ($ IN MILLIONS) 1999 1999 Average 1999 High 1999 Low 1998* ----------------------------------------------------------------------------------------------------------------- Interest rate $22 $29 $37 $21 $60 Equities 4 5 16 3 5 Commodities 6 9 15 5 11 Currency 5 6 8 5 2 Diversification Benefit (15) (19) N/A N/A (18) ----------------------------------------------------------------------------------------------------------------- Total $22 $30 $41 $22 $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 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. 18 21 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Project began with a comprehensive inventory of hardware, software developed in-house, vendor products, 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. Elements of the inventory were assessed to determine necessary changes as well as upgrade or replacement of vendor products. At June 30, 1999 all necessary corrections, upgrades or replacements were completed. The Company constructed special test environments in which dates could be advanced to create the variety of conditions that will be encountered as the millenium date change occurs. Applications were put through a rigorous series of tests at the unit, system and enterprise levels, with sign-off by the relevant business area at each level, before they were certified as Year 2000 compliant. At June 30, 1999 all of the applications were certified as Year 2000 compliant. In addition, an enterprise test was successfully completed in June 1999, to establish that multiple systems can work together to support critical business processes. The Company's Year 2000 testing extended to a variety of world markets such as the United States, the United Kingdom, Japan, Hong Kong and Australia. The Company fully supported 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 participated in the Streetwide Test which commenced in March 1999 and continued through May 1999. The Company achieved successful results in each of these industry-wide tests and expects to continue its testing program during 1999 with counterparties and selected clients. The Company's total cost of the Project is expected to be approximately $130 million to $150 million. Through September 30, 1999 the Company has expended approximately $129 million on the Project. The majority of the remaining costs are expected to be directed to additional testing, contingency planning and event management. 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. 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 have been prepared so that alternative procedures and a framework for critical decisions are defined before any crisis occurs. These plans define alternate processes to be used in the event of extended system outage. Contingency plans cover each business area and location around the world and are currently being validated. 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. 19 22 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; 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 acquisitions, 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 the suit filed by Harris Trust and Savings Bank (as trustee for Ameritech Pension Trust) and others against Salomon Brothers Inc., and Salomon Brothers Realty Corporation, see the description that appears in the second and third paragraphs 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), which description is included as Exhibit 99.01 to this Form 10-Q and incorporated by reference herein, and in the first paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended June 30, 1999 (File No. 1-4346), which description is included as Exhibit 99.02 to this Form 10-Q and incorporated by reference herein. In October 1999, plaintiffs filed a petition for certiorari with the U. S. Supreme Court. The petition seeks review of the U.S. Court of Appeals for the Seventh Circuit's decision reversing the denial of defendants' motion for summary judgment and dismissing the sole remaining ERISA claim against the Company. For information concerning a purported class action in Florida against numerous broker-dealers including Salomon Smith Barney Inc. ("SSB"), 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 99.03 to this Form 10-Q and incorporated by reference herein, in the first paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended March 31, 1999 (File No. 1-4346), which description is included as Exhibit 99.04 to this Form 10-Q and incorporated by reference herein, and in the third paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended June 30, 1999 (File No. 1-4346), which description is included as Exhibit 99.05 to this Form 10-Q and incorporated by reference herein. In October 1999, plaintiff filed a second amended complaint. In March 1999, a complaint seeking in excess of $250 million was filed by a hedge fund and its investment advisor against SSB in the Supreme Court of the State of New York, County of New York (MKP Master Fund, LDC et al. v. Salomon Smith Barney Inc.). Plaintiffs allege that, while acting as their prime broker SSB breached its contracts with plaintiffs, converted plaintiffs' monies, and engaged in tortious conduct, including breaching its fiduciary duties. In October 1999, the Court granted in part and denied in part SSB's motion to dismiss the complaint. The court dismissed plaintiffs' tort claims, including the breach of fiduciary duty claims, but allowed the breach of contract and conversion claims to stand. The Company intends to contest this lawsuit vigorously. 21 24 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: See Exhibit Index. (b) Reports on Form 8-K: On July 19, 1999, SSBH filed a Current Report on Form 8-K, dated July 19, 1999, reporting under Item 5 thereof the results of its operations for the six month period ended June 30, 1999 and 1998, and certain additional financial data. No other reports on Form 8-K were filed during the third quarter of 1999; however, on October 13, 1999, SSBH filed a Current Report on Form 8-K, dated October 11, 1999, filing certain exhibits under Item 7 thereof relating to the offer and sale of SSBH's Call Warrants on 1999 TEN+(SM) Index Expiring on October 11, 2001; and October 18, 1999, SSBH filed a Current Report on Form 8-K, dated October 18, 1999, reporting under Item 5 thereof the results of its operations for the three and nine month periods ended September 30, 1999 and 1998. 22 25 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 12 of the Annual Report on Form 10-K of SSBH for the year ended December 31, 1998 (File No. 1-4346). 99.02+ First paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended June 30, 1999 (File No. 1-4346). 99.03+ 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). 99.04+ First paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended March 31, 1999 (File No. 1-4346). 99.05+ Third paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended June 30, 1999 (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. 23 26 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: November 12, 1999 By: /s/ Charles W. Scharf ----------------------------------- Charles W. Scharf Chief Financial Officer By: /s/ Michael J. Day ----------------------------------- Michael J. Day Controller 24 EX-12.01 2 COMPUTATION OF RATIO 1 EXHIBIT 12.01 SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
Nine Months Ended September 30, Dollars in millions 1999 ---- Earnings from continuing operations: Income from continuing operations before income taxes and cumulative effect of change in accounting principles $ 3,298 Add fixed charges (see below) 7,156 ------- Earnings as defined $10,454 ======= Fixed charges from continuing operations: Interest expense $ 7,083 Other adjustments 73 ------- Fixed charges from continuing operations as defined $ 7,156 ======= Ratio of earnings to fixed charges 1.46 =======
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 September 30, 1999 condensed consolidated financial statements included herein and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 1,959 23,965 69,345 32,626 75,848 1,065 212,837 11,890 27,785 77,487 7,993 57,939 19,119 0 0 0 9,879 212,837 2,011 8,290 2,623 2,213 1,958 7,083 5,206 3,298 2,078 0 (15) 2,063 0 0
EX-99.01 4 LEGAL PROCEEDINGS 1 EXHIBIT 99.01 Second and third paragraphs 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 September 1992, Harris Trust and Savings Bank (as trustee for Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers Realty Corporation ("SBRC") in the U.S. District Court for the Northern District of Illinois (Harris Trust Savings Bank, not individually but solely as trustee for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v. Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended complaint alleges that three purchases by APT from defendants of participation interests in net cash flow or resale proceeds of three portfolios of motels owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of a similar participation interest with respect to a portfolio of motels owned by Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act ("ERISA"), and that the purchase of the participation interests for the third MOA portfolio and for the Best portfolio violated the Racketeer Influenced and Corrupt Organization Act ("RICO") and state law. SBI had acquired the participation interests in transactions in which it purchased as principal mortgage notes issued by MOA and Best to finance purchases of motel portfolios; 95% of three such interests and 100% of one such interest were sold to APT for purchase prices aggregating approximately $20.9 million. Plaintiffs' second amended complaint seeks (a) judgment on the ERISA claims for the purchase prices of the four participation interests (approximately $20.9 million), for rescission and for disgorgement of profits, as well as other relief, and (b) judgment on the claims brought under RICO and state law in the amount of $12.3 million, with damages trebled to $37 million on the RICO claims and punitive damages in excess of $37 million on certain of the state law claims as well as other relief. The court dismissed the RICO, breach of contract, and unjust enrichment claims. The court also found that defendants did not qualify as an ERISA fiduciary and dismissed the claims based on that allegation. Defendants moved for summary judgment on the sole remaining claim. The motion was denied, and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit. Defendants are awaiting a decision. Both the Department of Labor and the Internal Revenue Service have advised SBI that they were or are reviewing the transactions in which APT acquired such participation interests. With respect to the Internal Revenue Service review, SSBH, SBI and SBRC have consented to extensions of time for the assessment of excise taxes that may be claimed to be due with respect to the transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to the transactions and SSBH, SBI and SBRC were given an opportunity to comment on whether the IRS should issue 30-day letters, which would actually commence the assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum setting forth reasons why the IRS should not issue 30-day letters with respect to the transactions. EX-99.02 5 LEGAL PROCEEDINGS 1 EXHIBIT 99.02 First paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended June 30, 1999 (File No. 1-4346) For information concerning a suit filed by Harris Trust and Savings Bank (as trustee for Ameritech Pension Trust) and others against Salomon Brothers Inc., and Salomon Brothers Realty Corporation, see the description that appears on the second and third paragraphs 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), which description is included as Exhibit 99.01 to this Form 10-Q and incorporated by reference herein. In July 1999, the U. S. Court of Appeals for the Seventh Circuit reversed the denial of defendants' motion for summary judgment and dismissed the sole remaining ERISA claim against the Company. EX-99.03 6 LEGAL PROCEEDINGS 1 EXHIBIT 99.03 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. EX-99.04 7 LEGAL PROCEEDINGS 1 EXHIBIT 99.04 First paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended March 31, 1999 (File No. 1-4346). 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. EX-99.05 8 LEGAL PROCEEDINGS 1 EXHIBIT 99.05 Third paragraph under the caption "Legal Proceedings" beginning on page 21 of the Quarterly Report on Form 10-Q of SSBH for the quarterly period ended June 30, 1999 (File No. 1-4346). For information concerning a suit by the City of New Orleans and a purported class action in Florida against numerous broker-dealers including Salomon Smith Barney, see the descriptions that appear in the fifth and sixth paragraphs 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 99.03 to this Form 10-Q and incorporated by reference herein. In connection with these matters, the IRS and SEC have been conducting an industry-wide investigation into the pricing of Treasury securities in advanced refunding transactions. -----END PRIVACY-ENHANCED MESSAGE-----