<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 28, 1997
---------------------------
Salomon Smith Barney Holdings Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-4346 22-1660266
-------- ------ ----------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
388 Greenwich Street, New York, New York 10013
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 816-6000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Salomon Inc
Seven World Trade Center, New York, New York 10048
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
SALOMON SMITH BARNEY HOLDINGS INC.
Current Report on Form 8-K
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
At 8:00 a.m. (Eastern Standard Time) on November 28, 1997, pursuant to
an Agreement and Plan of Merger (the "Merger Agreement"), dated as of September
24, 1997, among Travelers Group Inc., a Delaware corporation ("Travelers"),
Diamonds Acquisition Corp., a Delaware corporation and wholly owned subsidiary
of Travelers ("Sub"), and Salomon Inc, a Delaware corporation ("Salomon"), Sub
merged with and into Salomon (the "Merger"). Salomon, which continued as the
surviving corporation in the Merger and became a wholly owned subsidiary of
Travelers, changed its name to "Salomon Smith Barney Holdings Inc." (the
"Company").
As a result of the Merger, (i) each share of the common stock, par
value $1.00 per share, of Salomon ("Salomon Common Stock") issued and
outstanding immediately prior to the Merger, together with the associated
preferred stock purchase rights attached thereto ("Salomon Rights"), was
converted into 1.695 shares of common stock, par value $.01 per share, of
Travelers ("Travelers Common Stock"); (ii) each issued and outstanding share of
Series A Cumulative Convertible Preferred Stock, no par value, of Salomon,
together with the associated Salomon Rights, was converted into the right to
receive one share of Series I Cumulative Convertible Preferred Stock, par value
$1.00 per share, of Travelers; (iii) each issued and outstanding share of
Salomon 8.08% Cumulative Preferred Stock, Series D, no par value ("Salomon
Series D Stock"), and Salomon 8.40% Cumulative Preferred Stock, Series E, no par
value ("Salomon Series E Stock"), were converted into the right to receive one
share of 8.08% Cumulative Preferred Stock, Series J, par value $1.00 per share,
and 8.40% Cumulative Preferred Stock, Series K, par value $1.00 per share, of
Travelers, respectively; and (iv) the right to receive one share of Salomon
9.50% Cumulative Preferred Stock, Series F, no par value, was converted into the
right to receive one share of 9.50% Cumulative Preferred Stock, Series L, $1.00
par value per share, of Travelers. As in the case of the Salomon Series D Stock
and Salomon Series E Stock, each share of the corresponding series of Travelers
Series J Stock and Travelers Series K Stock is represented by depositary shares,
each of which represents a one-twentieth (1/20th) interest in the corresponding
series of Travelers preferred stock. Cash will be paid in lieu of fractional
shares of Travelers Common Stock. The transaction was a tax-free exchange and
was accounted for on a "pooling of interests" basis.
As of December 1, 1997 Deryck C. Maughan, who had previously served on
the Salomon Board of Directors, was elected to the Travelers Board of Directors.
All directors of Salomon other than Deryck Maughan submitted resignations
effective November 28, 1997. Effective as of November 28, 1997, the Company's
Board of Directors is comprised of the following individuals: Steven D. Black;
James Dimon; Jay Mandelbaum; Eduardo G. Mestre;
2
<PAGE> 3
Michael B. Panitch; James Boshart III; Thomas G. Maheras; Deryck C. Maughan and
Shigeru Myojin.
Following the Merger, Smith Barney Holdings Inc., a Delaware
corporation and a subsidiary of Travelers ("Smith Barney Holdings"), merged with
and into the Company. The Company continued as the surviving corporation in this
subsequent merger and now holds all of the investment banking, proprietary
trading, retail brokerage and asset management operations previously owned by
Salomon and Smith Barney Holdings.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On November 28, 1997, the Company engaged Coopers & Lybrand L.L.P.
to audit the 1997 financial statements of the Company in addition to Arthur
Andersen L.L.P. Coopers & Lybrand L.L.P. has been the independent auditors of
Smith Barney Holdings.
ITEM 5. OTHER EVENTS.
See Item 7(a) below for certain financial statements filed as Exhibits
99.01 through 99.04 to this Form 8-K and incorporated herein by reference.
By virtue of the merger on November 28, 1997 of Smith Barney Holdings
with and into the Company, the Company has succeeded to the liabilities of Smith
Barney Holdings. Descriptions of the material pending legal proceedings
involving Smith Barney Holdings or its subsidiaries are filed as Exhibit 99.06
to this Form 8-K and are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) Financial Statements
The year end supplemental consolidated financial statements of the
Company as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996, including Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company, are
filed as Exhibit 99.01 to this Form 8-K and are incorporated herein by
reference. These supplemental financial statements give retroactive effect to
the merger of the Company and Smith Barney Holdings on November 28, 1997,
which has been accounted for in a manner similar to a pooling of interests as
described in Note 1 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation. The
supplemental consolidated financial statements do not extend through the date of
consummation. However, they will become the historical
3
<PAGE> 4
consolidated financial statements of the Company and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.
The unaudited supplemental condensed consolidated financial statements
of the Company for the fiscal quarter ended March 31, 1997, including
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company, are filed as Exhibit 99.02 to this Form 8-K and are
incorporated herein by reference.
The unaudited supplemental condensed consolidated financial statements
of the Company for the fiscal quarter ended June 30, 1997, including
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company, are filed as Exhibit 99.03 to this Form 8-K and are
incorporated herein by reference.
The unaudited supplemental condensed consolidated financial statements
of the Company for the fiscal quarter ended September 30, 1997, including
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company, are filed as Exhibit 99.04 to this Form 8-K and are
incorporated herein by reference.
(c) Exhibits:
See Exhibit Index attached hereto.
4
<PAGE> 5
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
12.01 Supplemental Computation of Ratio of Earnings to Fixed
Charges for each of the fiscal years in the five-year
period ending December 31, 1996
12.02 Supplemental Computation of Ratio of Earnings to Fixed
Charges and Preferred Dividends for each of the fiscal
years in the five-year period ending December 31, 1996
12.03 Supplemental Computation of Ratio of Earnings to Fixed
Charges for the three months ended March 31, 1997
12.04 Supplemental Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends for the three months
ended March 31, 1997
12.05 Supplemental Computation of Ratio of Earnings to Fixed
Charges for the six months ended June 30, 1997
12.06 Supplemental Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends for the six months
ended June 30, 1997
12.07 Supplemental Computation of Ratio of Earnings to Fixed Charges
for the nine months ended September 30, 1997
12.08 Supplemental Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends for the nine months
ended September 30, 1997
23.01 Consent of Coopers & Lybrand L.L.P.
23.02 Consent of Arthur Andersen LLP
27.01 Financial Data Schedule relating to the fiscal years ended
December 31, 1996 and 1995
27.02 Financial Data Schedule relating to the three months ended
March 31, 1997
27.03 Financial Data Schedule relating to the six months ended
June 30, 1997
27.04 Financial Data Schedule relating to the nine months ended
September 30, 1997
99.01 Audited Supplemental Consolidated Financial Statements of the
Company and its subsidiaries as of December 31, 1996 and 1995
and for each of the years in the three-year period ended
December 31, 1996, including Management's Discussion and
Analysis of Financial Condition and Results of Operations
99.02 Unaudited Supplemental Condensed Consolidated Financial
Statements of the Company and its subsidiaries at March 31,
1997, including Management's Discussion and Analysis of
Financial Condition and Results of Operations
99.03 Unaudited Supplemental Condensed Consolidated Financial
Statements of the Company and its subsidiaries at June 30,
1997, including Management's Discussion and Analysis of
Financial Condition and Results of Operations
99.04 Unaudited Supplemental Condensed Consolidated Financial
Statements of the Company and its subsidiaries at September
30, 1997, including Management's Discussion and Analysis of
Financial Condition and Results of Operations
99.05 Report of Arthur Andersen LLP dated March 13, 1997 relating
to the historical consolidated financial statements of Salomon
Inc as of December 31, 1996, and 1995 and for each of the
three years in the period ended December 31, 1996
(incorporated by reference to the report of Arthur Andersen
LLP included in the Annual Report on Form 10-K of the Company
for the fiscal year ended December 31, 1996)
99.06 Description of material pending legal proceedings involving
Smith Barney Holdings Inc. and/or its subsidiaries
5
<PAGE> 6
SIGNATURE
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 hereunto duly authorized.
Dated: November 28, 1997 SALOMON SMITH BARNEY
HOLDINGS INC.
By /s/ Mark I. Kleinman
-------------------
Mark I. Kleinman
Deputy Treasurer
6
<PAGE> 7
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
12.01 Supplemental Computation of Ratio of Earnings to Fixed
Charges for each of the fiscal years in the five-year
period ending December 31, 1996
12.02 Supplemental Computation of Ratio of Earnings to Fixed
Charges and Preferred Dividends for each of the fiscal
years in the five-year period ending December 31, 1996
12.03 Supplemental Computation of Ratio of Earnings to Fixed
Charges for the three months ended March 31, 1997
12.04 Supplemental Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends for the three months
ended March 31, 1997
12.05 Supplemental Computation of Ratio of Earnings to Fixed
Charges for the six months ended June 30, 1997
12.06 Supplemental Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends for the six months
ended June 30, 1997
12.07 Supplemental Computation of Ratio of Earnings to Fixed Charges
for the nine months ended September 30, 1997
12.08 Supplemental Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends for the nine months
ended September 30, 1997
23.01 Consent of Coopers & Lybrand L.L.P.
23.02 Consent of Arthur Andersen LLP
27.01 Financial Data Schedule relating to the fiscal years ended
December 31, 1996 and 1995
27.02 Financial Data Schedule relating to the three months ended
March 31, 1997
27.03 Financial Data Schedule relating to the six months ended
June 30, 1997
27.04 Financial Data Schedule relating to the nine months ended
September 30, 1997
99.01 Audited Supplemental Consolidated Financial Statements of the
Company and its subsidiaries as of December 31, 1996 and 1995
and for each of the years in the three-year period ended
December 31, 1996, including Management's Discussion and
Analysis of Financial Condition and Results of Operations
99.02 Unaudited Supplemental Condensed Consolidated Financial
Statements of the Company and its subsidiaries at March 31,
1997, including Management's Discussion and Analysis of
Financial Condition and Results of Operations
99.03 Unaudited Supplemental Condensed Consolidated Financial
Statements of the Company and its subsidiaries at June 30,
1997, including Management's Discussion and Analysis of
Financial Condition and Results of Operations
99.04 Unaudited Supplemental Condensed Consolidated Financial
Statements of the Company and its subsidiaries at September
30, 1997, including Management's Discussion and Analysis of
Financial Condition and Results of Operations
99.05 Report of Arthur Andersen LLP dated March 13, 1997 relating
to the historical consolidated financial statements of Salomon
Inc as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 (incorporated by
reference to the report of Arthur Andersen LLP included in the
Annual Report on Form 10-K of the Company for the fiscal year
ended December 31, 1996)
99.06 Description of material pending legal proceedings involving
Smith Barney Holdings Inc. and/or its subsidiaries
7
<PAGE> 1
EXHIBIT 12.01
SALOMON SMITH BARNEY HOLDINGS INC.
AND SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
Dollars in millions
1996 1995 1994 1993 1992
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations:
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles $ 3,064 $ 1,820 $ (173) $2,047 $1,369
Add fixed charges (see below) 8,265 8,890 7,204 6,477 5,222
Other adjustments 1 0 0 22 20
------- ------- ------ ------ ------
Earnings as defined $11,330 $10,710 $7,031 $8,546 $6,611
======= ======= ====== ====== ======
Fixed charges from continuing operations:
Interest expense $ 8,175 $ 8,797 $7,112 $6,391 $5,151
Other adjustments 90 93 92 86 71
Fixed charges from continuing
operations as defined $ 8,265 $ 8,890 $7,204 $6,477 $5,222
======= ======= ====== ====== ======
Ratio of earnings to
fixed charges 1.37 1.20 0.98* 1.32 1.27
======= ======= ====== ====== ======
</TABLE>
NOTE:
The ratio of earnings to fixed charges from continuing operations is
calculated by dividing fixed charges into the sum of income (loss) 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.
* For the year ended December 31, 1994, earnings as defined were inadequate to
cover fixed charges. The amount by which fixed charges exceeded earnings as
defined for the year was $173 million.
<PAGE> 1
EXHIBIT 12.02
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
Supplemental Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
Dollars in millions 1996 1995 1994 1993 1992
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations:
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles $ 3,064 $ 1,820 $ (173) $2,047 $1,369
Add fixed charges (see below) 8,265 8,890 7,204 6,477 5,222
Other adjustments 1 0 0 22 20
------- ------- ------ ------ ------
Earnings as defined $11,330 $10,710 $7,031 $8,546 $6,611
======= ======= ====== ====== ======
Fixed charges from continuing operations and preferred
dividends:
Interest expense $ 8,175 $ 8,797 $7,112 $6,391 $5,151
Other adjustments 90 93 92 86 71
------- ------- ------ ------ ------
Fixed charges from continuing operations as defined 8,265 8,890 7,204 6,477 5,222
Preferred stock dividends (tax equivalent basis) 111 106 129 83 131
------- ------- ------ ------ ------
Combined fixed charges and preferred dividends $ 8,376 $ 8,996 $7,333 $6,560 $5,353
======= ======= ====== ====== ======
Ratio of earnings to combined fixed charges and preferred
dividends $1.35 1.19 0.96* 1.30 1.24
======= ======= ====== ====== ======
</TABLE>
NOTES:
The ratio of earnings to combined fixed charges from continuing operations and
preferred dividends was calculated by dividing the sum of combined fixed charges
and tax equivalent preferred dividends into the sum of income (loss) 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.
The preferred stock dividend amounts represent the pretax earnings necessary to
cover preferred dividends after adjusting for the effects of interest rate
swaps, which effectively convert these fixed rate obligations into variable
rate obligations.
* For the year ended December 31, 1994, earnings as defined were inadequate to
cover fixed charges, including preferred dividends. The amount by which fixed
charges, including preferred dividends, exceeded earnings as defined for the
year ended December 31, 1994 was $302 million.
<PAGE> 1
EXHIBIT 12.03
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Three
Months
Ended
March 31,
Dollars in millions 1997
------------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 678
Add fixed charges (see below) 2,193
Other adjustments (1)
-------
Earnings as defined $ 2,870
=======
Fixed Charges from continuing operations:
Interest expense $ 2,169
Other adjustments 24
-------
Fixed charges from continuing operations as defined $ 2,193
=======
Ratio of earnings to fixed charges 1.31
=======
</TABLE>
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.
<PAGE> 1
EXHIBIT 12.04
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED DIVIDENDS
(Unaudited)
<TABLE>
<CAPTION>
Three
Months
Ended
March 31,
Dollars in millions 1997
------------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 678
Add fixed charges (see below) 2,193
Other adjustments (1)
-------
Earnings as defined $ 2,870
=======
Fixed Charges from continuing operations
and preferred dividends:
Interest expense $ 2,169
Other adjustments 24
-------
Fixed charges from continuing operations as defined 2,193
Preferred dividends
(tax equivalent basis) 24
-------
Combined fixed charges
and preferred dividends $ 2,217
=======
Ratio of earnings to
combined fixed charges
and preferred dividends 1.29
=======
</TABLE>
NOTES: The ratio of earnings to combined fixed charges from continuing
operations and preferred dividends was calculated by dividing the sum of
combined fixed charges and tax equivalent preferred dividends 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.
The preferred stock dividend amounts represent the pretax earnings
necessary to cover preferred dividends after adjusting for the effects of
interest rate swaps, which effectively convert these fixed rate obligations
into variable rate obligations.
<PAGE> 1
EXHIBIT 12.05
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
Dollars in millions 1997
-----------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 1,417
Add fixed charges (see below) 4,790
Other adjustments 3
--------
Earnings as defined $ 6,210
========
Fixed Charges from continuing operations:
Interest expense $ 4,747
Other adjustments 43
--------
Fixed charges from continuing operations as defined $ 4,790
========
Ratio of earnings to fixed charges 1.30
========
</TABLE>
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.
<PAGE> 1
EXHIBIT 12.06
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED DIVIDENDS
(Unaudited)
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
Dollars in millions 1997
----------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 1,417
Add fixed charges (see below) 4,790
Other adjustments 3
---------
Earnings as defined $ 6,210
=========
Fixed Charges from continuing operations and preferred dividends:
Interest expense $ 4,747
Other adjustments 43
---------
Fixed charges from continuing operations as defined 4,790
Preferred dividends
(tax equivalent basis) 48
---------
Combined fixed charges
and preferred dividends $ 4,838
=========
Ratio of earnings to
combined fixed charges
and preferred dividends 1.28
=========
</TABLE>
NOTES:
The ratio of earnings to combined fixed charges from continuing
operations and preferred dividends was calculated by dividing the
sum of combined fixed charges and tax equivalent preferred
dividends 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.
The preferred stock dividend amounts represent the pretax earnings
necessary to cover preferred dividends after adjusting for the
effects of interest rate swaps, which effectively convert these
fixed rate obligations into variable rate obligations.
<PAGE> 1
EXHIBIT 12.07
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Nine
Months
Ended
September 30,
Dollars in millions 1997
----------------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 2,245
Add fixed charges (see below) 7,653
Other adjustments 0
---------
Earnings as defined $ 9,898
=========
Fixed charges from continuing operations:
Interest expense $ 7,588
Other adjustments 65
---------
Fixed charges from continuing operations as defined $ 7,653
=========
Ratio of earnings to fixed charges 1.29
=========
</TABLE>
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.
<PAGE> 1
EXHIBIT 12.08
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED DIVIDENDS
(Unaudited)
<TABLE>
<CAPTION>
Nine
Months
Ended
September 30,
Dollars in millions 1997
--------------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 2,245
Add fixed charges (see below) 7,653
Other adjustments 0
---------
Earnings as defined $ 9,898
=========
Fixed charges from continuing operations and preferred dividends:
Interest expense $ 7,588
Other adjustments 65
---------
Fixed charges from continuing operations as defined 7,653
Preferred dividends
(tax equivalent basis) 73
---------
Combined fixed charges
and preferred dividends $ 7,726
=========
Ratio of earnings to
combined fixed charges
and preferred dividends 1.28
=========
</TABLE>
NOTES: The ratio of earnings to combined fixed charges from
continuing operations and preferred dividends was calculated by
dividing the sum of combined fixed charges and tax equivalent
preferred dividends 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.
The preferred stock dividend amounts represent the pretax earnings
necessary to cover preferred dividends after adjusting for the
effects of interest rate swaps, which effectively convert these
fixed rate obligations into variable rate obligations.
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of Salomon Smith Barney Holdings Inc.:
We consent to the incorporation by reference in the Registration Statements of
Salomon Smith Barney Holdings Inc. on:
Form S-3 Registration Statement No. 33-40600,
Form S-3 Registration Statement No. 33-41932,
Form S-3 Registration Statement No. 33-48199,
Form S-3 Registration Statement No. 33-49136,
Form S-3 Registration Statement No. 33-57922,
Form S-3 Registration Statement No. 33-51269,
Form S-3 Registration Statement No. 33-54929,
Form S-3 Registration Statement No. 33-56481,
Form S-3 Registration Statement No. 333-01807,
Form S-3 Registration Statement No. 333-02897,
Form S-3 Registration Statement No. 333-11881,
Form S-3 Registration Statement No. 333-38931, and
Form S-8 Registration Statement No. 33-55250;
of our report dated November 28, 1997 on our audits of the supplemental
consolidated financial statements of Salomon Smith Barney Holdings Inc. and
Subsidiaries (the "Company") as of December 31, 1996 and 1995 and for the three
years in the period ended December 31, 1996, which is incorporated by reference
in the form 8-K dated November 28, 1997 of Salomon Smith Barney Holdings Inc.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
New York, New York
November 28, 1997
<PAGE> 1
EXHIBIT 23.02
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements on:
* Form S-3 Nos. 33-40600, 33-41932, 33-48199, 33-49136, 33-57922,
33-51269, 33-54929, 33-56481, 333-01807, 333-02897,
333-11881, and 333-38931
* Form S-8 No. 33-55250
of Salomon Inc of our report dated March 13, 1997, relating to the consolidated
statement of financial condition of Salomon Inc and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996, which report is incorporated by reference or
included in the annual report on Form 10-K of Salomon Inc for the year ended
December 31, 1996.
/s/ ARTHUR ANDERSON LLP
New York, New York
November 25, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 1,962 1,607
<RECEIVABLES> 11,890 13,351
<SECURITIES-RESALE> 60,509 72,881
<SECURITIES-BORROWED> 24,517 25,104
<INSTRUMENTS-OWNED> 121,802 126,568
<PP&E> 1,791 959
<TOTAL-ASSETS> 229,387 246,114
<SHORT-TERM> 11,249 10,020
<PAYABLES> 18,537 16,756
<REPOS-SOLD> 108,980 97,269
<SECURITIES-LOANED> 3,937 5,525
<INSTRUMENTS-SOLD> 62,240 92,032
<LONG-TERM> 14,930 15,748
560 420
312 450
<COMMON> 0 0
<OTHER-SE> 6,305 7,165
<TOTAL-LIABILITY-AND-EQUITY> 229,387 246,114
<TRADING-REVENUE> 2,140 3,027
<INTEREST-DIVIDENDS> 10,442 9,663
<COMMISSIONS> 2,376 2,612
<INVESTMENT-BANKING-REVENUES> 1,318 2,001
<FEE-REVENUE> 1,087 1,390
<INTEREST-EXPENSE> 8,797 8,175
<COMPENSATION> 4,900 5,558
<INCOME-PRETAX> 1,820 3,064
<INCOME-PRE-EXTRAORDINARY> 1,052 1,500
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,052 1,500
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 1997 SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS INCLUDED HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,026
<RECEIVABLES> 13,328
<SECURITIES-RESALE> 87,709
<SECURITIES-BORROWED> 24,945
<INSTRUMENTS-OWNED> 132,292
<PP&E> 940
<TOTAL-ASSETS> 266,704
<SHORT-TERM> 12,324
<PAYABLES> 15,512
<REPOS-SOLD> 107,808
<SECURITIES-LOANED> 9,655
<INSTRUMENTS-SOLD> 95,399
<LONG-TERM> 17,004
420
450
<COMMON> 0
<OTHER-SE> 7,419
<TOTAL-LIABILITY-AND-EQUITY> 266,704
<TRADING-REVENUE> 762
<INTEREST-DIVIDENDS> 2,491
<COMMISSIONS> 716
<INVESTMENT-BANKING-REVENUES> 484
<FEE-REVENUE> 389
<INTEREST-EXPENSE> 2,169
<COMPENSATION> 1,479
<INCOME-PRETAX> 678
<INCOME-PRE-EXTRAORDINARY> 411
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 411
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 1997 SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,768
<RECEIVABLES> 15,154
<SECURITIES-RESALE> 77,157
<SECURITIES-BORROWED> 42,122
<INSTRUMENTS-OWNED> 148,753
<PP&E> 955
<TOTAL-ASSETS> 291,698
<SHORT-TERM> 12,286
<PAYABLES> 19,778
<REPOS-SOLD> 125,478
<SECURITIES-LOANED> 9,239
<INSTRUMENTS-SOLD> 96,930
<LONG-TERM> 18,816
420
450
<COMMON> 0
<OTHER-SE> 7,629
<TOTAL-LIABILITY-AND-EQUITY> 291,698
<TRADING-REVENUE> 1,471
<INTEREST-DIVIDENDS> 5,499
<COMMISSIONS> 1,402
<INVESTMENT-BANKING-REVENUES> 959
<FEE-REVENUE> 788
<INTEREST-EXPENSE> 4,747
<COMPENSATION> 2,921
<INCOME-PRETAX> 1,417
<INCOME-PRE-EXTRAORDINARY> 862
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 862
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1997 SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS INCLUDED HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,078
<RECEIVABLES> 15,427
<SECURITIES-RESALE> 87,865
<SECURITIES-BORROWED> 34,351
<INSTRUMENTS-OWNED> 151,741
<PP&E> 987
<TOTAL-ASSETS> 297,096
<SHORT-TERM> 11,161
<PAYABLES> 21,623
<REPOS-SOLD> 134,335
<SECURITIES-LOANED> 13,418
<INSTRUMENTS-SOLD> 87,398
<LONG-TERM> 19,727
420
450
<COMMON> 0
<OTHER-SE> 7,955
<TOTAL-LIABILITY-AND-EQUITY> 297,096
<TRADING-REVENUE> 2,261
<INTEREST-DIVIDENDS> 8,706
<COMMISSIONS> 2,185
<INVESTMENT-BANKING-REVENUES> 1,556
<FEE-REVENUE> 1,236
<INTEREST-EXPENSE> 7,588
<COMPENSATION> 4,548
<INCOME-PRETAX> 2,245
<INCOME-PRE-EXTRAORDINARY> 1,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,369
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 2
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 3
Supplemental Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995 4
Supplemental Consolidated Statements of Changes in Stockholder's Equity
for the years ended December 31, 1996, 1995 and 1994 6
Supplemental Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 7
Notes to Supplemental Consolidated Financial Statements 8
QUARTERLY FINANCIAL DATA (UNAUDITED) 42
Management's Discussion and Analysis of
Financial Condition and Results of Operations 43
</TABLE>
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder of
Salomon Smith Barney Holdings Inc. and subsidiaries:
We have audited the accompanying supplemental consolidated statements of
financial condition of Salomon Smith Barney Holdings Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related supplemental consolidated statements
of income, cash flows and changes in stockholder's equity for the years ended
December 31, 1996, 1995 and 1994. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. We did not audit the consolidated
statements of financial condition of Salomon Inc and subsidiaries as of December
31, 1996 and 1995, or the related statements of income, cash flows and changes
in stockholder's equity for the years ended December 31, 1996, 1995 and 1994,
which statements reflect total assets of $194,881 million and $188,428 million
as of December 31, 1996 and 1995, respectively, and total revenues, net of
interest expense of $4,367 million, $3,199 million and $1,321 million for the
years ended December 31, 1996, 1995 and 1994, respectively, and net income
(loss) of $617 million, $457 million, and ($399) million for the years ended
December 31, 1996, 1995 and 1994, respectively. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Salomon Inc and subsidiaries for such
periods, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Salomon Inc and Smith Barney Holdings Inc. on November 28,1997,
which has been accounted for in a manner similar to a pooling of interests as
described in Note 1 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation. The
supplemental consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of Salomon Smith Barney Holdings Inc. and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.
In our opinion, based on our audits and the report of the other auditors, the
accompanying supplemental consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Salomon Smith
Barney Holdings Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
/s/ Coopers & Lybrand L.L.P.
New York, New York
November 28, 1997.
2
<PAGE> 3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions $2,612 $2,376 $2,171
Investment banking 2,001 1,318 1,167
Principal transactions 3,027 2,140 420
Asset management and administration fees 1,390 1,087 962
Other 150 124 105
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 9,180 7,045 4,825
- ----------------------------------------------------------------------------------------------------------------------------
Interest and dividends 9,663 10,442 8,469
Interest expense 8,175 8,797 7,112
- ----------------------------------------------------------------------------------------------------------------------------
Net interest and dividends 1,488 1,645 1,357
- ----------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 10,668 8,690 6,182
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 5,558 4,900 4,404
Communications 486 489 495
Occupancy and equipment 435 442 440
Floor brokerage and other production 302 281 321
Advertising and market development 218 180 198
Professional services 190 199 197
Other operating and administrative expenses 463 379 334
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 7,652 6,870 6,389
- ----------------------------------------------------------------------------------------------------------------------------
Gain on sale of subsidiaries and affiliates 48 -- 34
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 3,064 1,820 (173)
Provision /(benefit) for income taxes 1,199 712 (151)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 1,865 1,108 (22)
- ----------------------------------------------------------------------------------------------------------------------------
Discontinued Operations:
Income (loss), net of provision/ (benefit) for income taxes
of $(48), $(35) and $7 (75) (56) 11
Loss on sale of Basis Petroleum, net of tax benefit of $215 (290) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,500 $1,052 $ (11)
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
3
<PAGE> 4
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,607 $ 1,962
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 1,446 1,347
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 72,881 60,509
Deposits paid for securities borrowed 25,104 24,517
------ ------
97,985 85,026
Financial instruments and commodities owned and contractual commitments:
Government and government agency securities - U.S. 51,980 50,004
Government and government agency securities - non-U.S. 35,189 39,842
Corporate debt securities 14,668 13,030
Equity securities 7,396 4,952
Contractual commitments 7,218 7,428
Mortgage loans and collateralized mortgage securities 4,345 2,347
Other financial instruments 4,777 2,976
Physical commodities 995 1,223
------ ------
126,568 121,802
Receivables:
Customers 9,488 8,603
Brokers, dealers and clearing organizations 2,103 1,708
Other 1,760 1,579
------ ------
13,351 11,890
Assets securing collateralized mortgage obligations 394 2,431
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $798 and
$837, respectively 959 1,791
Net realizable value of discontinued operations 490 -
Excess of purchase price over fair value of net assets acquired, net
of accumulated amortization of $146 and $132, respectively 405 419
Other assets 2,909 2,719
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $246,114 $229,387
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
4
<PAGE> 5
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 10,020 $ 11,249
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase 97,269 108,980
Deposits received for securities loaned 5,525 3,937
------ -------
102,794 112,917
Financial instruments and commodities sold, not yet purchased, and contractual
commitments:
Government and government agency securities - U.S. 41,864 24,845
Government and government agency securities - non-U.S. 31,699 21,994
Contractual commitments 9,984 9,446
Equity securities 6,142 3,823
Corporate debt securities 2,334 1,854
Physical commodities 9 278
------ ------
92,032 62,240
Payables and accrued liabilities:
Customers 8,160 7,490
Brokers, dealers and clearing organizations 1,859 4,667
Other 6,737 6,380
------ ------
16,756 18,537
Collateralized mortgage obligations 384 2,337
Term debt 15,748 14,930
------- -------
Total liabilities 237,734 222,210
Redeemable preferred stock, Series A 420 560
Guaranteed preferred beneficial interests in Company
subordinated debt securities 345 --
Stockholder's equity:
Preferred stock, Series C, D and E 450 312
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) -- --
Additional paid-in capital 2,399 2,255
Retained earnings 6,433 5,667
Cumulative translation adjustments 10 18
Treasury stock (1,677) (1,635)
------ ------
Total stockholder's equity 7,615 6,617
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $246,114 $229,387
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
5
<PAGE> 6
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Cumulative Total
Preferred Common Paid -In Retained Translation Treasury Stockholder's
Dollars in millions Stock Stock Capital Earnings Adjustments Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 312 -- $2,254 $5,523 $(9) $(1,414) $6,666
Net loss (11) - (11)
Dividends* (322) (322)
Other capital transactions (3) (240) (243)
Net change in cumulative translation
adjustments 18 18
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 312 -- 2,251 5,190 9 (1,654) 6,108
Net income 1,052 1,052
Dividends* (575) (575)
Other capital transactions 4 19 23
Net change in cumulative translation
adjustments 9 9
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 312 -- 2,255 5,667 18 (1,635) 6,617
Net income 1,500 1,500
Dividends* (734) (734)
Issuance of preferred stock 250 250
Retirement of preferred stock (112) (112)
Other capital transactions 144 (42) 102
Net change in cumulative translation
adjustments (8) (8)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 450 -- $2,399 $6,433 $10 $(1,677) $7,615
====================================================================================================================================
</TABLE>
* Net of after-tax impact of related interest rate swaps that effectively
convert fixed rate dividend obligations to variable rate obligations.
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
6
<PAGE> 7
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) adjusted for noncash items and non-operating activities -
Net income (loss) $ 1,500 $ 1,052 $ (11)
Loss on disposal of Basis Petroleum 290 -- --
Deferred income tax benefit (207) (345) (847)
Depreciation and amortization 353 309 253
Gain on Genesis transaction and limited service motels (59) -- --
Gain on sale of subsidiaries and affiliates (31) -- (34)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash items included in net income (loss) 1,846 1,016 (639)
- ---------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (99) (174) (177)
Collateralized short-term financing agreements (12,959) 1,455 (22,433)
Financial instruments and commodities owned and contractual commitments (5,449) (19,843) 18,854
Receivables (1,533) 5,358 1,215
Other assets (128) (31) (149)
- ---------------------------------------------------------------------------------------------------------------------------------
Increase in operating assets (20,168) (13,235) (2,690)
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements (10,123) 19,392 (6,339)
Financial instruments and commodities sold, not yet purchased, and contractual
commitments 29,816 (4,265) 6,109
Payables and accrued liabilities (1,135) (1,972) 809
- ---------------------------------------------------------------------------------------------------------------------------------
Increase in operating liabilities 18,558 13,155 579
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 236 936 (2,750)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term borrowings (1,178) 201 (2,056)
Proceeds from issuance of term debt 5,398 3,622 7,100
Term debt maturities and repurchases (4,318) (5,380) (3,707)
Collateralized mortgage obligations (403) (704) (945)
Dividends paid (820) (436) (345)
Issuance of TRUPS 345 -- --
Issuance of preferred stock 250 -- --
Redemption of preferred stock (112) (140) --
Other capital transactions (45) 13 (239)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash used in financing activities (883) (2,824) (192)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Genesis transaction and limited service motels 123 -- --
Sale of subsidiaries and affiliates 82 -- 55
Assets securing collateralized mortgage obligations 480 721 930
Property, equipment and leasehold improvements (225) (454) (462)
Other (159) (84) (69)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by investing activities 301 183 454
- ---------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (346) (1,705) (2,488)
Cash and cash equivalents at beginning of year 1,962 3,667 6,155
Cash of discontinued operations (9) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,607 $ 1,962 $ 3,667
=================================================================================================================================
</TABLE>
Interest paid did not differ materially from the amount of interest
expense recorded for financial statement purposes in 1996, 1995 and
1994.
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
7
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE MERGER
On November 28, 1997, a newly formed wholly-owned subsidiary of Travelers Group
Inc. was merged into Salomon Inc ("Salomon"). Pursuant to the merger agreement,
Salomon common stockholders received 1.695 shares of Travelers Group Inc. common
stock for each share of Salomon common stock after giving effect to the
three-for-two stock split declared by the Board of Directors of Travelers Group
Inc. and paid on November 19, 1997; each share of preferred stock of Salomon was
exchanged for a share of a substantially identical series of preferred stock of
Travelers Group Inc.; and Salomon became a wholly-owned subsidiary of Travelers
Group Inc. Following this merger, Salomon and Smith Barney Holdings Inc. ("Smith
Barney") were merged (the "Merger") to form Salomon Smith Barney Holdings Inc.
(collectively, with its subsidiaries the "Company"). The transaction is a tax
free exchange.
The supplemental consolidated financial statements give retroactive effect to
the Merger as a combination of entities under common control in a transaction
accounted for in a manner similar to a pooling of interests. The pooling of
interests method of accounting requires the restatement of all periods presented
as if Salomon and Smith Barney had always been combined. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued. The supplemental
consolidated financial statements, including the accompanying notes, should be
read in conjunction with the historical consolidated financial statements of
Salomon and Smith Barney, included in their Annual Reports on Form 10-K for the
fiscal year ended December 31, 1996. Certain reclassifications have been made to
conform the accounting policies of Salomon and Smith Barney.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The supplemental consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States, which
requires 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 supplemental consolidated financial statements reflect the combination of
the accounts of the Company, including Salomon and Smith Barney. The Company
provides investment banking, asset management, brokerage, securities trading,
advisory and other financial services to customers, and engages in proprietary
trading activities for its own account.
8
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Material intercompany transactions have been eliminated in consolidation.
Long-term investments in operating joint ventures and affiliated (20% to 50%
owned) companies are carried on the equity method of accounting and are included
in "Other assets." The Company's equity in the earnings of joint ventures and
affiliates is reported in "Other" revenues.
Assets and liabilities denominated in non-U.S. dollar currencies are translated
into U.S. dollar equivalents using year-end spot foreign exchange rates.
Revenues and expenses are translated monthly at amounts which approximate
weighted average exchange rates, with resulting gains and losses included in
income. The effects of translating the statements of financial condition of
non-U.S. subsidiaries with functional currencies other than the U.S. dollar are
recorded, net of related hedge gains and losses and income taxes, as "Cumulative
translation adjustments," a separate component of "Stockholder's equity". Hedges
of such exposure include designated issues of non-U.S. dollar term debt and, to
a lesser extent, forward currency contracts.
As discussed in Note 4 of the supplemental consolidated financial statements,
Basis Petroleum, Inc. ("Basis Petroleum"), a wholly-owned subsidiary, is
classified as a discontinued operation in the Company's supplemental
consolidated financial statements.
CASH AND CASH EQUIVALENTS The Company defines "Cash and cash equivalents" as
highly liquid investments with original maturities of three months or less at
the time of purchase, other than those held for sale in the ordinary course of
business.
COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS Securities purchased under
agreements to resell ("reverse repurchase") and securities sold under repurchase
agreements ("repurchase") are collateralized principally by government and
government agency securities and generally have terms ranging from overnight to
up to a year and are carried at their contractual amounts, including accrued
interest as specified in the respective agreements. In the determination of
income, certain financing transactions are marked to fair value, which has no
material effect on the Company's results of operations.
It is the Company's policy to take possession of the underlying collateral,
monitor its market value relative to the amounts due under the agreements, and,
when necessary, require prompt transfer of additional collateral or reduction in
the loan balance in order to maintain contractual margin protection. In the
event of counterparty default, the financing agreement provides the Company with
the right to liquidate the collateral held. Reverse repurchase and repurchase
agreements are reported net by counterparty, when applicable, pursuant to the
provisions of Financial Accounting Standards Board ("FASB") Interpretation 41,
Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements ("FIN 41"). Excluding the impact of FIN 41, reverse repurchase
agreements totaled $88.0 billion at December 31, 1996. At December 31, 1996, the
market value of securities collateralizing reverse repurchase agreements was
$89.0 billion.
Deposits paid for securities borrowed ("securities borrowed") and deposits
received for securities loaned ("securities loaned") are recorded at the amount
of cash advanced or received and are collateralized principally by government
and government agency securities, corporate debt and equity securities. The
Company monitors the market value of securities borrowed and
9
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
securities loaned daily, and additional collateral is obtained as necessary. At
December 31, 1996, the market value of securities collateralizing securities
borrowed was $24.6 billion.
FINANCIAL INSTRUMENTS, COMMODITIES AND CONTRACTUAL COMMITMENTS Financial
instruments, commodities and contractual commitments (also referred to as
"derivative instruments"), including derivatives used for trading purposes, are
recorded at either market value or, when market prices are not readily
available, fair value, which is determined under an alternative approach, such
as matrix or model pricing. Fair value includes related accrued interest or
dividends. The determination of market or fair value considers various factors,
including: closing exchange or over-the-counter market price quotations; time
value and volatility factors underlying options, warrants and contractual
commitments; price activity for equivalent or synthetic instruments in markets
located in different time zones; counterparty credit quality; and the potential
impact on market prices or fair value of liquidating the Company's positions in
an orderly manner over a reasonable period of time under current market
conditions.
The majority of the Company's financial instruments, commodities and contractual
commitments are recorded on a trade date basis. Recording the remaining
instruments on a trade date basis would not materially affect these supplemental
consolidated financial statements. Commissions, underwriting, and principal
transaction revenues and related expenses are recognized in income on a trade
date basis. Customer security transactions are recorded on a settlement date
basis.
DERIVATIVE INSTRUMENTS
DERIVATIVES USED FOR TRADING PURPOSES
Derivatives used for trading purposes include interest rate, currency and
commodity swap agreements, swap options, caps and floors, options, warrants and
financial and commodity futures and forward contracts. The market values
(unrealized gains and losses) associated with contractual commitments are
reported net by counterparty, provided a legally enforceable master netting
agreement exists, and are netted across products and against cash collateral
when such provisions are stated in the master netting agreement. Contractual
commitments in a net receivable position, as well as options owned and warrants
held, are reported as assets in "contractual commitments." Similarly,
contractual commitments in a net payable position, as well as options written
and warrants issued, are reported as liabilities in "contractual commitments."
This category also includes the Company's long-term obligations that have
principal repayments directly linked to equity securities of unaffiliated
issuers for which the Company holds in inventory a note exchangeable for the
same equity securities. Cash collateral received in connection with interest
rate swaps totaled $250 million and $447 million at December 31, 1996 and 1995,
respectively and cash collateral paid totaled $1,637 million and $1,337 million,
respectively. Revenues generated from derivative instruments used for trading
purposes are reported as "Principal transactions" and include realized gains and
losses as well as unrealized gains and losses resulting from changes in the
market or fair value of such instruments.
Margin on futures contracts is included in "Receivables - Brokers, dealers and
clearing organizations" and "Payables and accrued liabilities - Brokers, dealers
and clearing organizations."
10
<PAGE> 11
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVES USED FOR NON-TRADING PURPOSES
Non-trading derivative instruments which are designated as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the derivative contract.
Accordingly, changes in the market or fair value of the derivative instrument
must be highly correlated with changes in the market or fair value of the
underlying hedged item. The Company monitors the effectiveness of its hedges by
periodically comparing the change in value of the derivative instrument with the
change in value of the underlying hedged item. Derivatives used as hedges
include interest rate swaps, cross currency swaps and forward currency
contracts.
Interest rate and cross currency swaps, are utilized to effectively convert the
Company's fixed rate preferred stock and guaranteed preferred beneficial
interests in Company subordinated debt securities ("TRUPS"), a portion of its
short-term borrowings and the majority of its fixed rate term debt to variable
rate instruments. These swaps are recorded "off-balance sheet," with accrued
inflows and outflows reflected as adjustments to interest expense and/or
dividends. Adjustments to preferred stock dividends are recorded on an after-tax
basis. Upon early termination of an underlying hedged instrument, the derivative
is accounted for at market or fair value and the impact is recognized currently
in income. Changes in market or fair value of such instruments, or realized
gains or losses resulting from the termination of such instruments, are also
recognized currently in income.
The Company utilizes forward currency contracts to hedge a portion of the
currency exchange rate exposure relating to non-U.S. dollar term debt issued by
the Company. The impact of translating the forward currency contracts and the
related debt to prevailing exchange rates is recognized currently in income. The
Company also utilizes forward currency contracts to hedge certain investments in
subsidiaries with functional currencies other than the U.S. dollar. The impact
of marking open contracts to prevailing exchange rates and the impact of
realized gains or losses on maturing contracts, both net of the related tax
effects, are included in "Cumulative translation adjustments" in "Stockholder's
equity" as is the impact of translating the investments being hedged. Upon the
disposition of an investment in a subsidiary with a functional currency other
than the U.S. dollar, accumulated gains or losses previously included in
"Cumulative translation adjustments" are recognized currently in income.
Derivative instruments that do not meet the criteria to be designated as a hedge
are considered trading derivatives and are recorded at market or fair value.
See Notes 8, 10 and 11 of the supplemental consolidated financial statements for
a further discussion of the use of interest rate swaps and forward currency
contracts for non-trading purposes.
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSETS SECURING COLLATERALIZED MORTGAGE
OBLIGATIONS Collateralized mortgage obligations issued by the Company are
carried at their principal amounts, net of unamortized discounts, plus accrued
interest payable. Assets securing collateralized mortgage obligations are
carried at their principal amounts, net of unamortized discounts and premiums,
plus deferred issuance costs and accrued interest receivable. Discounts,
premiums
11
<PAGE> 12
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
and deferred issuance costs are amortized on an effective yield basis over the
expected lives of the obligations and assets, on a retrospective basis, taking
into consideration the prepayment experience of the underlying mortgage
collateral.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold
improvements are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are recorded substantially on a straight-line
basis over the lesser of the estimated useful lives of the related assets or
noncancelable lease terms, as appropriate. Maintenance and repairs are charged
to occupancy expense as incurred.
The cost of purchased software is capitalized and amortized over a three-year
period. Costs incurred in connection with the internal development of software,
solely for the Company's use, as well as the customization of purchased
software, are expensed in the period incurred.
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED The excess of
purchase price over fair value of net assets acquired is being amortized over 40
years. The Company amortizes other intangible assets, which are included in
"Other assets", on a straight-line basis over their estimated useful lives
ranging from 7 to 20 years.
NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the FASB issued Statement of
Financial Accounting Standards ("SFAS") 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which is
effective for transactions occurring after December 31, 1996, and is to be
applied prospectively. However, in December 1996, the FASB issued SFAS 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125,
which delayed the effective date of certain provisions of SFAS 125 until January
1, 1998. SFAS 125 defines when financial assets and liabilities should either be
recognized or derecognized, when transfers of assets should be accounted for as
sales versus secured borrowings, and when collateral received or pledged should
be recorded on, or removed from, the statement of financial condition. This
statement is based on a "financial-components approach" which focuses on control
of the assets. The provisions of SFAS 125, which went into effect on January 1,
1997, did not have a material impact on the Company's financial statements. The
Company is in the process of evaluating the effect of the SFAS 125 provisions
that have been deferred to January 1, 1998 pursuant to SFAS 127.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company is currently assessing these statements, which are effective for
fiscal years beginning after December 15, 1997 and establish standards for the
reporting and display of comprehensive income and disclosure related to
segments.
12
<PAGE> 13
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. PRINCIPAL TRANSACTION REVENUES
The following table presents principal transaction revenues by business activity
from continuing operations for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Dollars in millions
For the Year Ended December 31, 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income $2,049 $ 900 $ 132
Equities 576 995 357
Physical commodities 393 238 191
Other 9 7 (260)
----------------------------------------------------------------------
Total principal transaction revenues $3,027 $2,140 $ 420
----------------------------------------------------------------------
</TABLE>
FIXED INCOME Fixed income revenues include realized and unrealized gains and
losses arising from the trading, as principal and agent, of government and
government agency securities, investment and non-investment grade corporate
debt, municipal securities, and preferred stock, mortgage securities (primarily
U.S. government agencies, including interest only and principal only strips),
and emerging market fixed income securities and derivatives. Revenues also
include realized and unrealized gains and losses generated from a variety of
fixed income securities utilized in arbitrage strategies for the Company's own
account, and realized and unrealized gains and losses arising from the spot and
forward trading of currencies and exchange-traded and over-the-counter ("OTC")
currency options. Realized and unrealized gains and losses resulting from
changes in the market or fair value of options on fixed income securities,
interest rate swaps, currency swaps, swap options, caps and floors, financial
futures, OTC options and forward contracts on fixed income securities are
reflected as fixed income revenue.
EQUITIES Revenues from equities consist of realized and unrealized gains and
losses arising from proprietary and customer trading of U.S. and non-U.S. equity
securities, including common and convertible preferred stock, convertible
corporate debt, equity-linked notes and exchange-traded and OTC equity options
and warrants. Revenues also include realized and unrealized gains and losses on
equity securities and related derivatives utilized in arbitrage strategies for
the Company's own account.
PHYSICAL COMMODITIES The Company, primarily through its wholly-owned subsidiary
Phibro Inc. ("Phibro"), trades crude oil, refined oil products, natural gas,
electricity, metals, petrochemicals, ethanol, coffee, grains, cocoa and sugar.
In 1996, Phibro discontinued trading coal, coke and fertilizers. Commodity
revenues consist of realized and unrealized gains and losses from trading these
commodities and related derivative instruments.
13
<PAGE> 14
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
OTHER The Company's 1994 results reflect a pretax charge of $303 million ($189
million after-tax) to correct general ledger balances, of which $194 million
($126 million after-tax) is related to the Company's London-based companies and
$109 million ($63 million after-tax) arose from the completion of a detailed
review of Salomon's general ledger balances related to interest rate swaps.
NOTE 4. DISCONTINUED OPERATIONS
In March 1997, Salomon's Board of Directors approved a non-binding letter of
intent to sell all of the outstanding stock of Basis Petroleum to Valero Energy
Corporation ("Valero") and a plan of disposition for Basis Petroleum. This
transaction resulted in a pretax loss of approximately $505 million ($290
million after-tax). The sale was completed on May 1, 1997. Proceeds from the
sale included cash of $365 million, Valero common stock with a market value of
$120 million and participation payments based on a fixed notional throughput and
the difference, if any, between an average market crackspread, as defined, and a
base crackspread, as defined, over each of the next ten years. The total of the
participation payments is capped at $200 million, with a maximum of $35 million
per year. In addition, as a result of Valero's merger agreement with PG&E
Corporation, Valero's common stock was exchanged for stock of PG&E Corporation
and a new stock of the "spin-off" company ("New Valero"), representing Valero's
refining assets. In the third quarter of 1997, the Company liquidated its
interest in the PG&E and New Valero common stock. In July 1997, the Company paid
Valero $3 million in connection with the final determination of working capital.
The estimated loss includes severance costs and anticipated operating losses to
be incurred prior to the completion of the sale, and reflects other estimates of
value at time of closing. The Company's investment in Genesis Energy, L.P., a
publicly traded crude oil gathering, marketing and transportation partnership,
was not transferred to Valero.
14
<PAGE> 15
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following tables present Basis Petroleum's results of operations and the
loss on the disposal of Basis Petroleum which are included in "Discontinued
operations" on the supplemental consolidated statements of income as well as
details of Basis Petroleum's net assets at December 31, 1996 which are included
in "Net realizable value of discontinued operations" on the supplemental
consolidated statements of financial condition.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Dollars in millions
Year ended December 31, 1996 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discontinued operations:
Revenues, net of interest $ (85) $ (48) $65
Expenses 38 43 47
-------------------------------------------------------------------------------------------
Income (loss) before income taxes (123) (91) 18
Provision/ (benefit) for income taxes (48) (35) 7
-------------------------------------------------------------------------------------------
Income (loss) from operations (75) (56) 11
Loss on sale, net of tax benefit of $215 (290) - -
-------------------------------------------------------------------------------------------
Income (loss) from discontinued operations, net of taxes $ (365) $ (56) $11
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Dollars in millions December 31, 1996
--------------------------------------------------------------------------
<S> <C>
ASSETS
Commodities-related products and instruments $ 379
Receivables 438
Property, plant and equipment, net of accumulated
depreciation of $202 823
Other assets 34
--------------------------------------------------------------------------
Total assets $ 1,674
==========================================================================
LIABILITIES
Customer payables 512
Other payables 150
Commodities-related contractual commitments 17
--------------------------------------------------------------------------
Total liabilities 679
--------------------------------------------------------------------------
Net assets 995
Pretax loss on sale (505)
--------------------------------------------------------------------------
Net realizable value of discontinued operations $ 490
==========================================================================
</TABLE>
15
<PAGE> 16
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. GEOGRAPHIC DATA
The accompanying table summarizes the Company's operations by geographic area.
Amounts are determined principally by the respective legal jurisdictions of the
Company's subsidiaries. Because of the global nature of the financial and
commodities markets in which the Company competes and the integration of the
Company's worldwide business activities, the Company believes that amounts
determined in this manner are not particularly useful in understanding its
business.
<TABLE>
<CAPTION>
Revenues
before Income (Loss) from
Interest Continuing Operations
Dollars in millions Expense Before Income Taxes * Total Assets**
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1996
North America $15,298 $2,943 $152,423
Europe 3,365 77 76,875
Asia and other 180 44 16,816
------------------------------------------------------------------------------------------
Consolidated $18,843 $3,064 $246,114
==========================================================================================
Year Ended December 31, 1995
North America $12,844 $1,256 $141,956
Europe 4,370 607 75,292
Asia and other 273 (43) 12,139
------------------------------------------------------------------------------------------
Consolidated $17,487 $1,820 $229,387
==========================================================================================
Year Ended December 31, 1994
North America $11,016 $ 562 $144,943
Europe 1,717 (845) 65,082
Asia and other 561 110 7,996
------------------------------------------------------------------------------------------
Consolidated $13,294 $ (173) $218,021
==========================================================================================
</TABLE>
* For the year ended December 31, 1994, North America and Europe include
pretax charges of $109 million and $194 million, respectively, to
correct Salomon's general ledger balances.
** The net realizable value of Basis Petroleum is included in North America
in 1996. The total assets of Basis Petroleum of $1,747 million and
$1,602 million are included in North America in 1995 and 1994,
respectively.
16
<PAGE> 17
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Information regarding the Company's short-term borrowings used to finance
operations, including the securities settlement process is presented below.
Average balances were computed based on month-end outstanding balances.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1996 1995
----------------------------------------------------------------------
<S> <C> <C>
Bank borrowings:
Balance at year-end $4,388 $4,081
Weighted average interest rate 5.8% 4.9%
Annual averages --
Amount outstanding $2,950 $2,855
Weighted average interest rate 4.7% 5.7%
Maximum amount outstanding at any month-end $4,388 $4,081
----------------------------------------------------------------------
Commercial paper:
Balance at year-end $4,133 $3,198
Weighted average interest rate 5.7% 5.9%
Annual averages --
Amount outstanding $3,636 $2,736
Weighted average interest rate 5.4% 5.9%
Maximum amount outstanding at any month-end $4,238 $3,198
----------------------------------------------------------------------
Other short-term borrowings:
Balance at year-end $1,499 $3,970
======================================================================
</TABLE>
Outstanding bank borrowings include both U.S. dollar and non-U.S. dollar
denominated loans. The non-U.S. dollar loans are denominated in multiple
currencies including Japanese yen, German mark and U.K. sterling. All of the
Company's commercial paper outstanding at December 31, 1996 and 1995 was U.S.
dollar denominated. Also included in short-term borrowings are deposit
liabilities and other short-term obligations.
Smith Barney has a $500 million 364-day revolving credit agreement that extends
through May 1997. Smith Barney may borrow under its revolving credit facility at
various interest rate options (LIBOR, CD or base rate) and compensates the banks
for the facility through commitment fees. In 1992, Salomon Brothers Inc ("SBI"),
an indirect wholly-owned subsidiary, entered into a committed secured standby
bank credit facility for financing securities positions. The facility, which has
a capacity of $2.1 billion, contains certain restrictive covenants that require,
among other things, that SBI maintain minimum levels of excess net capital and
net worth, as defined. SBI's excess net capital exceeded the minimum required
under the facility by $587 million and SBI's net worth exceeded the minimum
amount required by $496 million at December 31, 1996. In 1996, Salomon Brothers
International Limited ("SBIL"), an indirect wholly-owned subsidiary, entered
into a $1.0 billion committed securities repurchase facility. The facility is
subject to restrictive covenants including a requirement that SBIL maintain
minimum levels of tangible net worth and excess financial resources, as defined.
At December 31, 1996, SBIL was in compliance with all covenants related to this
facility. In 1996, Phibro Inc. entered into an unsecured committed
17
<PAGE> 18
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
revolving line of credit. This facility, which has a capacity of $500 million,
requires Phibro Inc. to maintain minimum levels of capital and net working
capital, as defined. Phibro Inc. exceeded these minimums at December 31, 1996.
At December 31, 1996, there were no outstanding borrowings under any of these
facilities. In addition, 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.
NOTE 7. COLLATERALIZED MORTGAGE OBLIGATIONS
Certain special purpose wholly-owned subsidiaries have been organized to issue
collateralized mortgage obligations ("CMOs"). The CMOs are collateralized by
mortgages, mortgage-backed securities and short-term investments (collectively,
the "Collateral"). Principal and interest payments received on the Collateral
are utilized to meet periodic principal and interest payments on the CMOs.
Although the CMOs have contractual maturities, their actual maturities may be
shorter as a result of prepayments of the Collateral.
The CMOs, which were all U.S. dollar denominated at December 31, 1996, consisted
of the following:
<TABLE>
<CAPTION>
Dollars in millions
-------------------------------------------------------------------
December 31, 1996 1995
-------------------------------------------------------------------
<S> <C> <C>
Contractual Maturity
2006 to 2010 $ 12 $ 60
2011 to 2031 402 2,308
Accrued interest payable 8 23
Unamortized discounts (38) (54)
-------------------------------------------------------------------
Collateralized mortgage obligations $ 384 $ 2,337
===================================================================
</TABLE>
The decrease in CMOs at December 31, 1996 is due to the sale of The Mortgage
Corporation in the third quarter of 1996.
18
<PAGE> 19
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. TERM DEBT
Term debt, net of unamortized discount and including unamortized premium, if
applicable, consists of issues with original maturities in excess of one year.
Certain issues are redeemable, in whole or in part, at par or at premiums prior
to maturity.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Fixed Rate
Obligations Fixed Rate Total Fixed Variable
Swapped to Obligations Rate Rate Total Total
Dollars in millions Variable Not Swapped Obligations Obligations Dec. 31, 1996 Dec. 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated:
Salomon Smith Barney Holdings
Inc. (Parent Company) $6,670 $2,690 $ 9,360 $2,333 $11,693 $11,134
Subsidiaries -- -- -- 19 19 22
- -------------------------------------------------------------------------------------------------------------------------
U.S. dollar denominated 6,670 2,690 9,360 2,352 11,712 11,156
- -------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated:
Salomon Smith Barney Holdings
Inc. (Parent Company) 680 144 824 1,331 2,155 2,366
Subsidiaries 1,421 95 1,516 365 1,881 1,408
- -------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated 2,101 239 2,340 1,696 4,036 3,774
- -------------------------------------------------------------------------------------------------------------------------
Term debt $8,771 $2,929 $ 11,700 $4,048 $15,748 $14,930
=========================================================================================================================
</TABLE>
The maturity structure of the Company's term debt, based on contractual
maturities or the earliest date on which the debt is repayable at the option of
the holder, was as follows at December 31, 1996:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Salomon Smith Barney
Holdings Inc.
Dollars in millions (Parent Company) Subsidiaries Total
----------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 2,735 $ 378 $ 3,113
1998 2,800 137 2,937
1999 2,469 25 2,494
2000 1,478 322 1,800
2001 1,078 248 1,326
Thereafter 3,288 790 4,078
----------------------------------------------------------------------------
Total $13,848 $1,900 $ 15,748
============================================================================
</TABLE>
The Company issues U.S. dollar and non-U.S. dollar denominated fixed and
variable rate term debt. Fixed rate debt matures at various dates through 2023.
The contractual interest rates on fixed rate debt ranged from 1.25% (Japanese
yen denominated) to 10.13% (U.S. dollar denominated) at December 31, 1996 and
1.25% (Japanese yen denominated) to 12.87% (Italian lira denominated) at
December 31, 1995. The weighted average contractual rate on total fixed rate
term debt (both U.S. dollar denominated and non-U.S. dollar denominated) was
6.74% at December 31, 1996 and 6.75% at December 31, 1995. The Company utilizes
interest rate swap agreements to convert most of its fixed rate term debt to
variable rate obligations. The maturity structure of the swaps generally
corresponds with the maturity structure of the debt being hedged. The Company's
non-U.S. dollar fixed rate term debt was issued across a broad range of
currencies (including Japanese yen,
19
<PAGE> 20
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
German mark, U.K sterling, Italian lira, Swiss franc, and Portuguese escudos)
and, consequently, the term debt bears a wide range of interest rates.
At December 31, 1996, the Company had outstanding approximately $4.0 billion of
non-U.S. dollar denominated term debt, of which $1.8 billion was Japanese yen
denominated, $1.4 billion was German mark denominated and $.6 billion was U.K.
sterling denominated (converted at the December 31, 1996 spot rates). Of the
$4.0 billion, approximately $1.0 billion of Salomon Smith Barney Holdings Inc.
(Parent Company) non-U.S. dollar denominated debt has been designated as a hedge
of investments in subsidiaries with functional currencies other than the U.S.
dollar. Another $.7 billion of Salomon Smith Barney Holdings Inc. (Parent
Company) debt has been effectively converted to U.S. dollar denominated
obligations using cross-currency swaps. The remaining $2.3 billion is used for
general corporate purposes.
The following table summarizes the Company's fixed rate term debt that is
swapped to variable rate obligations using interest rate swaps at December 31,
1996 and 1995. The variable rates presented are indicative of the Company's
actual costs related to such obligations.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- --------------------------------------------
Contractual
Weighted Contractual
Average Weighted Weighted
Fixed Rate Average Fixed Average
on Swapped Weighted Average Rate on Variable Rate
Principal Fixed Rate Variable Rate on Principal Swapped Fixed on Swapped Term
(Dollars in millions) Balance Term Debt Swapped Term Debt Balance Rate Term Debt Debt
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated $6,670 7.0% 6.7% $6,610 6.9% 6.9%
German mark denominated 1,252 7.4 4.7 1,014 7.9 4.2
Japanese yen denominated 420 4.3 0.8 519 4.4 0.9
Japanese yen swapped to
U.S. dollar denominated 317 3.6 6.9 265 4.1 6.8
Swiss franc swapped to
U.S. dollar denominated 65 5.1 6.1 75 5.1 6.1
Italian lira swapped to
U.S. dollar denominated 40 9.9 6.8 -- -- --
U.K. sterling denominated 4 7.6 7.5 16 11.4 7.0
Portuguese escudos swapped
to U.S. dollar denominated 3 9.5 7.1 -- -- --
Italian lira denominated -- -- -- 5 12.9 11.0
European Currency Units
swapped to U.S. dollar
denominated -- -- -- 17 8.5 5.8
- ----------------------------------------------------------------------------------------------------------------------------
Total swapped
fixed rate term debt $8,771 6.8% 6.1% $8,521 6.8% 6.2%
============================================================================================================================
</TABLE>
Variable rate term debt matures at various dates through 2004. The interest
rates are determined periodically by reference to money market rates, or in
certain instances, are calculated based on stock or bond market indices as
specified in the agreements governing the respective issues. The interest rates
on variable rate term debt ranged from .41% (Japanese yen denominated) to 9.36%
(U.S. dollar denominated) at December 31, 1996 and .71% (Japanese yen
denominated) to 10.97% (Italian lira denominated) at December 31, 1995. The
weighted average contractual rate on total variable rate term debt (both U.S.
dollar denominated and non-U.S. dollar denominated) was 4.89% at December 31,
1996 and 4.87% at December 31, 1995.
20
<PAGE> 21
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Term debt includes subordinated debt, which totaled $32 million at December 31,
1996 and $34 million at December 31, 1995. At December 31, 1996 and 1995,
subordinated debt included approximately $6 million of convertible restricted
notes, convertible at the rate of $8.19 per share into 685,516 shares and
710,942 shares of the Travelers Group Inc. common stock at December 31, 1996 and
1995, respectively, giving effect to the 1.695 exchange ratio. At December 31,
1996, the Company had outstanding $214 million of term debt for which the
principal repayment is linked to certain equity securities of unaffiliated
issuers.
Smith Barney has a $1.0 billion revolving credit agreement with a bank syndicate
that extends through May 1999. Smith Barney may borrow under this credit
facility at various interest rate options (LIBOR, CD or base rate) and
compensates the banks for the facility through commitment fees. At December 31,
1996, there were no outstanding borrowings under this facility.
Smith Barney is limited by covenants in its revolving credit facilities as to
the amount of dividends that may be paid to Travelers Group Inc. The amount of
dividends varies based upon, among other things, levels of net income of Smith
Barney.
NOTE 9. LEASE COMMITMENTS
The Company has noncancelable leases covering office space and equipment
expiring on various dates through 2012. Presented below is a schedule of minimum
future rentals on noncancelable operating leases, net of subleases, as of
December 31, 1996. Various leases contain provisions for lease renewals and
escalation of rent based on increases in certain costs incurred by the lessors.
<TABLE>
<CAPTION>
---------------------------------------------------
Dollars in millions
---------------------------------------------------
<S> <C>
1997 $ 217
1998 205
1999 173
2000 104
2001 93
Thereafter 549
---------------------------------------------------
Minimum future rentals $ 1,341
---------------------------------------------------
</TABLE>
Rent expense under operating leases from continuing operations totaled $251
million, $270 million and $273 million for the years ended December 31, 1996,
1995 and 1994, respectively.
NOTE 10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY SUBORDINATED DEBT
SECURITIES ("TRUPS")
On July 3, 1996, the Company issued $345 million or 13,800,000 TRUPS units. Each
TRUPS unit includes a 9-1/4% mandatorily redeemable preferred security of the SI
Financing Trust I (the "Trust") and a purchase contract which requires the
holder to purchase, in 2021 (or earlier if the Company elects to accelerate the
contract), one depositary share representing
21
<PAGE> 22
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
a one-twentieth interest in a share of Travelers Group Inc.'s 9-1/2% Cumulative
Preferred Stock, Series L ("Series L Preferred"). The Company is obligated under
the terms of each purchase contract to pay contract fees of 0.25% per annum,
which is included as dividends in the supplemental consolidated statement of
changes in stockholder's equity. The Trust is a wholly-owned subsidiary of the
Company and the Company's obligations under the guarantee, the subordinated debt
securities and other contracts, in the aggregate, constitute a full and
unconditional guarantee by the Company of the Trust's obligations under the
preferred securities.
The Trust was established by the Company for the sole purpose of issuing the
9-1/4% preferred securities and common securities and investing the proceeds in
$356 million aggregate principal amount of 9-1/4% subordinated debt securities
issued by Salomon Smith Barney Holdings, Inc. due June 30, 2026. The sole asset
of the Trust is the subordinated debt securities. All payments associated with
the 9-1/4% preferred securities are fully and unconditionally guaranteed by
Salomon Smith Barney Holdings, Inc.
The 9-1/2% per annum on the TRUPS units was accrued from date of issuance and is
payable quarterly, commencing September 30, 1996. The Company has entered into
an interest rate swap agreement to effectively convert the fixed rate
obligations on the TRUPS units to variable rate obligations.
The TRUPS units are redeemable at the option of the Company at any time on or
after June 30, 2001. However, if the purchase contracts are accelerated or
exercised by the Company and the holders elect not to settle the purchase
contracts by delivering the Trust preferred security, the right of the Company
to cause the Series L Preferred to be redeemed is postponed for five years. The
Series L Preferred is redeemable at the option of Travelers Group Inc. at any
time on or after June 30, 2001 or the date of issue, if later.
NOTE 11. PREFERRED STOCK
Salomon is authorized to issue a total of 5,000,000 shares of preferred stock.
The Company has entered into interest rate swap agreements that effectively
convert expected future fixed rate dividends into variable rate obligations. For
financial reporting purposes, dividends on preferred stock are adjusted by the
after-tax income or loss generated by these swaps. These swaps reduced preferred
dividends by $21 million, $19 million and $28 million in 1996, 1995 and 1994,
respectively.
The following descriptions refer to Salomon's preferred stock issues. In the
merger, each share of Salomon preferred stock was exchanged for a share of
Travelers Group Inc. preferred stock with substantially identical terms, except
that holders of Series D and Series E preferred stock will, after the merger,
have three votes for each share of such stock.
22
<PAGE> 23
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Redeemable Preferred Stock, Series A
At December 31, 1996, 420,000 shares of Series A cumulative preferred stock
("Series A Preferred"), were outstanding and held by affiliates of Berkshire
Hathaway Inc. ("Berkshire"). Each share has a redemption value of $1,000, is
preferentially entitled to receive quarterly cash dividends, if declared, at the
annual rate of $90 and, after giving effect to the merger, can be converted into
shares of Travelers Group Inc. common stock at approximately $22.42 per share
(18.7 million shares at December 31, 1996). The number of shares of common stock
into which each Series A Preferred share is convertible is subject to adjustment
in the event of stock splits, stock dividends and certain other events. The
redeemable preferred stock is entitled to one vote per common share into which
it is convertible, voting together as one class with the Travelers Group Inc.'s
common stock.
On October 31, 1995, the first of five tranches of 140,000 shares of Series A
Preferred held by Berkshire was redeemed by Salomon for $140 million. On October
29, 1996 and October 17, 1997, Berkshire converted the second and third tranches
of 140,000 shares each ($140 million) of Series A Preferred into 3.7 million
shares of Salomon common stock (6.2 million shares of Travelers Group Inc.
common stock). If not previously converted, one half of the remaining 280,000
shares are to be redeemed annually on October 31 at $1,000 per share plus any
accrued but unpaid dividends. No cash dividends may be paid on Salomon's common
stock, nor may Salomon repurchase any of its common stock, if dividends or
required redemptions of Series A Preferred are in arrears.
Preferred Stock, Series C
In June 1991, Salomon issued $112.5 million (225,000 shares) of Series C 9.50%
cumulative preferred stock ("Series C Preferred") represented by 4,500,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. On August 15, 1996 Salomon redeemed all of the Series C
Preferred.
Preferred Stock, Series D
In February 1993, Salomon issued $200 million (400,000 shares) of Series D 8.08%
cumulative preferred stock ("Series D Preferred") represented by 8,000,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. Series D Preferred is redeemable at Salomon's option at any
time on or after March 31, 1998, at a price of $500 for each preferred share
($25 for each depositary share).
Preferred Stock, Series E
In February 1996, Salomon issued $250 million (500,000 shares) of Series E 8.40%
cumulative preferred stock ("Series E Preferred") represented by 10,000,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. Series E Preferred is redeemable at Salomon's option at any
time on or after March 31, 2001, at a price of $500 for each preferred share
($25 for each depositary share).
23
<PAGE> 24
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to various 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:
<TABLE>
<CAPTION>
Excess over
Dollars in millions Net Capital minimum
Subsidiary Jurisdiction or equivalent requirement
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salomon Brothers Inc U.S. Securities and Exchange Commission Uniform Net $1,029 $ 987
Capital Rule, (Rule 15c3-1)
Smith Barney Inc. U.S. Securities and Exchange Commission Uniform Net $1,216 $ 1,060
Capital Rule, (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $3,077 $ 390
Salomon Brothers Asia Limited Japan's Ministry of Finance $ 793 $ 262
Salomon Brothers AG Germany's Banking Supervisory Authority $ 448 $ 53
The Robinson-Humphrey Company, Inc. U.S. Securities and Exchange Commission Uniform Net $ 79 $ 78
Capital Rule, (Rule 15c3-1)
Smith Barney Europe, Ltd United Kingdom's Securities and Futures Authority $ 150 $ 104
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Advances, dividend payments and other equity withdrawals from regulated
subsidiaries are restricted by the regulations of the U.S. Securities and
Exchange Commission , the New York Stock Exchange and other regulatory agencies
and by certain covenants contained in the Company's revolving credit facilities,
see Notes 6 and 8 to the supplemental consolidated financial statements. These
restrictions may limit the amounts that these subsidiaries pay as dividends or
advances to the Company.
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco"), an indirect wholly-owned subsidiary of the Company, must maintain
minimum levels of capital in accordance with agreements with its rating
agencies. At December 31, 1996, 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 13. EMPLOYEE BENEFIT PLANS
The Company's current employee benefit plans are unchanged from the respective
plans that were in effect for Salomon and Smith Barney prior to the Merger.
Accordingly, the following information summarizes both the Salomon and Smith
Barney predecessor plans.
24
<PAGE> 25
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The Company is currently in the process of reviewing the benefit plans of both
predecessor institutions.
SALOMON PREDECESSOR PLANS
RETIREMENT PLANS
Substantially all full-time U.S. employees of Salomon participate in defined
contribution plans. These plans resulted in expenses from continuing operations
of $34 million, $26 million and $24 million in 1996, 1995 and 1994,
respectively.
Non-U.S. employees generally participate in defined benefit plans that are
insured or otherwise funded. These plans resulted in expenses from continuing
operations of $25 million, $25 million and $16 million in 1996, 1995 and 1994,
respectively.
HEALTH CARE AND LIFE INSURANCE
Salomon provides certain health care and life insurance benefits for its active
employees, qualifying retired U.S. employees and certain non-U.S. employees who
reach the retirement criteria specified by the various plans. Salomon
self-insures such benefit programs. At December 31, 1996, there were
approximately 7,100 active and 600 retired employees eligible for such benefits.
Expenses recorded for health care and life insurance benefits from continuing
operations were $33 million, $39 million and $39 million in 1996, 1995 and 1994,
respectively.
Salomon provides for the cost of postretirement benefits other than pensions
over the service periods of eligible employees. The present value of the
liability related to these benefits and postemployment benefits, included in
"Payables and accrued liabilities-Other," was $84 million and $92 million at
December 31, 1996 and 1995, respectively.
EMPLOYEE INCENTIVE PLANS
In the following presentation, all per share amounts and option prices have been
adjusted by the 1.695 exchange ratio to reflect the conversion of the plans to
Travelers Group Inc. common stock.
Salomon Stock Incentive Plan ("SIP") In 1994, Salomon stockholders approved the
SIP which provides for the issuance of up to 5.9 million shares of Travelers
Group Inc. common stock in the form of options, restricted stock and stock
bonuses, as well as an additional grant of up to 2.5 million shares of Travelers
Group Inc. common stock in the form of stand-alone stock appreciation rights,
phantom stock and cash bonuses to key employees, including officers, whether or
not they are directors of Salomon. In December 1996, 2.7 million Travelers Group
Inc. options were awarded under the SIP with an exercise price set at the market
value on the date of grant ($26.48). The awards expire five years after the
grant date and vest 100% three years after the grant date. At the grant date,
the fair value per option issued was $7.76, as estimated using the Black-Scholes
option pricing model assuming a risk free interest rate of 5.88%, a constant
annual dividend rate of $0.38 per
25
<PAGE> 26
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
share, expected volatility of 25%. Fair value also assumes an expected term of 5
years and has not been reduced to reflect either the non-exercisable status of
the options prior to the vesting date or the non-transferability of the options.
SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"), allows the fair
value of stock based compensation to be included in expense over the period
earned; alternatively, if the fair value of stock based compensation awards is
not included in expense, SFAS 123 requires disclosure of net income, on a pro
forma basis, as if expense treatment had been applied. As permitted by SFAS 123,
Salomon continues to account for such compensation under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25")
pursuant to which, no compensation cost has been recognized in connection with
the issuance of stock options. Had Salomon applied SFAS 123 in accounting for
stock options, net income would have been reduced by less than $1 million in
1996.
The Non-Qualified Stock Option Plan of 1984, as amended (the "1984 Plan") The
1984 Plan, which terminated on June 30, 1994, provided for the granting of
options to purchase common stock to certain key employees. Stock appreciation
rights accompanied some of the options granted. Exercise of such rights
extinguishes the related options. Options issued under the 1984 Plan expire ten
years from the date of grant.
Changes in options outstanding under the SIP and 1984 Plan are summarized as
follows:
<TABLE>
<CAPTION>
Grant Date Fair Value of
Number of Shares Option Price per Share Options Issued
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option at:
December 31, 1996 3,562,670 $10.70 - $26.48
December 31, 1995 1,209,332 $10.70 - $23.82
December 31, 1994 2,438,071 $10.70 - $27.14
Options issued:
1996 (under the SIP) 2,712,000 $26.48 $7.76
Options exercised:
1996 347,814 $10.70 - $23.82
1995 1,042,798 $10.70 - $23.82
1994 480,194 $10.70 - $27.14
Options canceled or expired:
1996 10,848 $10.70 - $23.82
1995 185,941 $10.70 - $27.14
1994 18,984 $10.70 - $27.14
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Equity Partnership Plan (the "EPP") The EPP began in 1990 and was formally
approved by stockholders in 1991. For 1996 and future awards, the EPP was
amended. Under the original EPP, qualifying employees ("participants") received
a portion of their compensation in the form of Salomon common stock, the payment
of which is deferred for five years. The stock is purchased by the EPP's trustee
in the open market as well as from participants upon distribution in order to
satisfy their income tax withholding liabilities. The portion of each
participant's compensation paid in stock is fixed in relation to total
compensation, and for 1995 and prior years reached a maximum of 50% of total
compensation. Participants received
26
<PAGE> 27
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
the shares for 1995 and prior years with an incentive of 17.65%, whereby Salomon
makes an additional contribution to participants' accounts of 17.65% of their
compensation deferred into the EPP.
The amendments for 1996 and future awards included: an increase in the award
incentive from 17.65% to 25%, a reduction in the deferral period from five years
to three years, and the introduction of additional forfeiture provisions on both
the award and the incentive. The award is forfeited if the participant's
employment is terminated for cause (no change from prior EPP). The award is
subject to forfeiture provisions if the participant leaves Salomon to join a
competitor within three years after the award date. If a participant leaves
Salomon other than by virtue of death, disability, retirement or as the result
of a downsizing during the three years following the award, the entire 25% award
incentive will be forfeited. The EPP, as amended, also includes revisions to the
participation schedule which reduce the portion of participants' compensation
subject to the EPP (participation reaches a maximum of $1.5 million) and
increase the minimum level of annual compensation required for participation to
$360,000.
Total purchases of shares by the EPP totaled $153 million (6.1 million shares)
in 1996, $76 million (3.6 million shares) in 1995 and $266 million (9.8 million
shares) in 1994. Stock awarded under the EPP totaled $147 million (6.1 million
shares), $98 million (4.6 million shares) and $264 million (9.5 million shares)
in 1996, 1995 and 1994, respectively. These amounts are included as a component
of compensation expense. The net asset related to the EPP, which represents the
cost of the unawarded shares held by the EPP less Salomon's liability related to
the EPP, payable in common stock, is included in "Other assets".
In early 1996, 5.6 million shares held by the EPP trustee were distributed to
certain employees. To facilitate satisfaction of employees' tax obligations,
approximately 2.2 million of those shares were repurchased by Salomon as
treasury stock, for $49 million. The remaining 3.4 million shares are subject to
the same restrictions on transferability that existed prior to the distribution.
In December 1996, restrictions on transferability were lifted on 4.1 million
shares (net of withholding tax requirements) awarded by the EPP in 1991.
Employees of certain subsidiaries of Salomon do not participate in the EPP or
are unable to participate in the EPP but instead receive stock appreciation
rights subject to the same terms as shares awarded under the EPP.
SMITH BARNEY PREDECESSOR PLANS
RETIREMENT PLANS Smith Barney participates in a noncontributory defined benefit
pension plan with Travelers Group Inc. that covers substantially all of its U.S.
employees. Separate plans are maintained to cover non-U.S. employees. These
plans resulted in expenses of $21 million, $45 million and $41 million in 1996,
1995 and 1994, respectively.
27
<PAGE> 28
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Smith Barney, through Travelers Group Inc., has a defined contribution employee
savings plan covering substantially all U.S. employees. The costs relating to
such plan were $15 million, $20 million and $22 million in 1996, 1995 and 1994,
respectively.
HEALTH CARE AND LIFE INSURANCE
Smith Barney provides certain health care and life insurance benefits for its
active employees, qualifying retired U.S. employees and certain non-U.S.
employees who reach the retirement criteria specified by the various plans. At
December 31, 1996, there were approximately 26,500 active and 500 retired
employees eligible for such benefits.
Expenses recorded for health care and life insurance benefits from continuing
operations were $77 million, $86 million and $89 million in 1996, 1995 and 1994,
respectively.
Smith Barney provides for the cost of postemployment and postretirement benefits
other than pensions over the service periods of eligible employees, primarily
related to disability and severance related costs. During 1996, 1995 and 1994,
expenses for these benefits totaled $13 million, $10 million and $11 million,
respectively.
EMPLOYEE INCENTIVE PLANS
Smith Barney participates in a stock option plan sponsored by Travelers Group
Inc. that provides for the granting of stock options in Travelers Group Inc.
common stock to officers and key employees. Smith Barney applies APB 25 and
related interpretations in accounting for stock options. Since stock options are
issued at fair market value on the date of award, no compensation cost has been
recognized for these awards. As permitted by SFAS 123, Smith Barney continues to
account for such compensation under APB 25 pursuant to which, no compensation
cost has been recognized in connection with the issuance of stock options. Had
Smith Barney applied SFAS 123 in accounting for stock options, net income would
have been reduced by $14 million and $5 million in 1996 and 1995, respectively.
Smith Barney has various incentive plans under which stock of Travelers Group
Inc. is purchased for subsequent distribution to employees, subject to vesting
requirements. These plans resulted in expenses of $171 million, $143 million and
$104 million for the years ended December 31, 1996, 1995 and 1994, respectively.
28
<PAGE> 29
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. INCOME TAXES
The components of income taxes from continuing operations reflected on the
supplemental consolidated statements of income are:
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision/(benefit):
U.S. federal $1,097 $ 533 $ 221
State and local 322 183 88
Non-U.S. (13) 341 387
- --------------------------------------------------------------------
Total current tax provision 1,406 1,057 696
- --------------------------------------------------------------------
Deferred tax provision/(benefit):
U.S. federal (205) (148) (170)
State and local (68) (65) (49)
Non-U.S. 66 (132) (628)
- --------------------------------------------------------------------
Total deferred tax benefit (207) (345) (847)
- --------------------------------------------------------------------
Provision/(benefit) for income taxes $1,199 $ 712 $(151)
- --------------------------------------------------------------------
</TABLE>
Under SFAS 109, Accounting for Income Taxes ("SFAS 109"), temporary differences
between recorded amounts and the tax bases of assets and liabilities are
accounted for at current income tax rates. Under certain circumstances,
estimates are used in the determination of temporary differences.
At December 31, 1996 and December 31, 1995, respectively, the Company's
supplemental consolidated statements of financial condition included net
deferred tax assets from continuing operations of $217 million and $34 million,
comprised of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Dollars in millions
December 31, 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Employee benefits and deferred compensation $ 847 $ 728
Other deferred tax assets 279 359
- ---------------------------------------------------------------------------------------------
Total Deferred Tax Assets 1,126 1,087
- ---------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Intangible assets (293) (339)
Mark-to-market adjustments (287) (445)
Cumulative translation adjustments (114) (117)
U.S. taxes provided on the undistributed earnings of non-U.S. subsidiaries (84) (113)
Other deferred tax liabilities (131) (39)
- ---------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities (909) (1,053)
- ---------------------------------------------------------------------------------------------
Net deferred tax asset $ 217 $ 34
- ---------------------------------------------------------------------------------------------
</TABLE>
The Company had no deferred tax valuation allowance at December 31, 1996 or
December 31, 1995.
29
<PAGE> 30
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Smith Barney Holdings Inc. paid taxes of $596 million, $350 million and $278
million in 1996, 1995 and 1994, respectively, the majority of which were paid to
Travelers Group Inc. under an income tax allocation agreement. As a separate
taxpayer, Salomon paid income taxes, net of refunds, totaling $981 million in
1996, $360 million in 1995 and $409 million in 1994. These amounts include
estimated tax payments during the current tax year as well as cash settlements
relating to prior tax years.
The Company provides income taxes on the undistributed earnings of foreign
subsidiaries except to the extent that such earnings are indefinitely invested
outside the United States. At December 31, 1996, accumulated undistributed
earnings of non-U.S. subsidiaries amounted to $1.5 billion, of which $1.3
billion was indefinitely invested. At the existing U.S. federal income tax rate,
additional taxes of $376 million would have to be provided if such earnings were
remitted. With respect to the remaining $177 million of such earnings, U.S.
federal taxes, current and deferred, have already been provided. Therefore,
those earnings could be remitted to the U. S. without incurring additional
income tax expense.
The following table reconciles the U.S. federal statutory income tax rate to the
Company's effective tax rate from continuing operations:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1996 1995 1994
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate for corporations 35% 35% 35%
Impact of:
State, local and foreign taxes, net of U.S. federal tax effect 6 5 (22)
Tax advantaged income (1) (2) 25
Adjustment of tax accruals -- -- 56
Other, net (1) 1 (7)
-----------------------------------------------------------------------------------------------
Effective Tax Rate 39% 39% 87%
-----------------------------------------------------------------------------------------------
</TABLE>
NOTE 15. PLEDGED ASSETS, COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the approximate market values of securities sold under
agreements to repurchase, excluding the impact of FIN 41, or pledged by the
Company were:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Dollars in millions
-----------------------------------------------------------------------------------------
<S> <C>
For securities sold under agreements to repurchase $114,021
As collateral for securities borrowed of approximately equivalent value 39,734
As collateral on bank loans 3,195
To clearing organizations or segregated under securities laws and regulations 1,998
For securities loaned 1,593
As collateral for letters of credit 127
Other 65
-----------------------------------------------------------------------------------------
Repurchase agreements and securities pledged $160,733
-----------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, the Company had $2.4 billion of outstanding letters of
credit from banks to satisfy various collateral and margin requirements.
OTHER CONTINGENCIES
The Company has provided a residual value guarantee of $586 million in
connection with the lease of the buildings occupied by the Company's executive
offices and New York operations.
On July 31, 1993, Smith Barney, along with certain of its affiliates and
Travelers Group Inc., acquired the domestic retail brokerage and asset
management businesses (the "Shearson Acquisition") of Lehman Brothers Holdings
Inc. (then known as Shearson Lehman Brothers Holdings Inc.) and its
subsidiaries. In conjunction with the Shearson Acquisition, Smith Barney Inc.
has agreed to pay American Express Company additional amounts contingent upon
Smith Barney Inc.'s future performance, consisting of up to $50 million per year
for three years based upon the Smith Barney Inc.'s revenues and 10% of its
after-tax profits in excess of $250 million per year over a five-year period.
Amounts paid under this agreement amounted to $110 million and $76 million in
1996 and 1995, respectively. The contingent consideration is accounted for
prospectively, as additional purchase price, and results in amortization over
periods of up to 20 years.
NOTE 16. 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.
NOTE 17. FINANCIAL INSTRUMENTS, COMMODITIES AND CONTRACTUAL COMMITMENTS AND
RELATED RISKS
The Company and its subsidiaries enter into a variety of contractual
commitments, such as swaps, cap and floor agreements, swap options, futures
contracts, forward currency contracts, forward purchase and sale agreements,
option contracts and warrants. These transactions generally require future
settlement, and are either executed on an exchange or traded as OTC instruments.
Contractual commitments have widely varying terms, and durations that range from
a few days to a number of years depending on the instrument.
31
<PAGE> 32
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Interest rate swaps are OTC instruments where two counterparties agree to
exchange periodic interest payment streams calculated on a predetermined
notional principal amount. The most common interest rate swaps generally involve
one party paying a fixed interest rate and the other party paying a variable
rate. Other types of swaps include basis swaps, cross-currency swaps, equity
swaps and commodity swaps. Basis swaps consist of both parties paying variable
interest streams based on different reference rates. Cross-currency swaps
involve the exchange of coupon payments in one currency for coupon payments in
another currency. An equity swap is an agreement to exchange cash flows on a
notional amount based on changes in the values of a referenced index, such as
the Standard & Poor's 500 Index. Commodity swaps involve the exchange of a fixed
price of a commodity for a floating price, which is usually the prevailing spot
price, throughout the swap term. The most common commodity swaps are
petroleum-based; other types are based on metals or soft commodities.
Caps are contractual commitments which require the writer to pay the purchaser
an excess amount, if the reference rate exceeds a contractual rate at specified
times during the contract. Likewise, a floor is a contractual commitment that
requires the writer to pay an excess amount, if any, of a contractual rate over
a reference rate at specified times over the life of the contract. Swap options
are OTC contracts that entitle the holder to either enter into an interest rate
swap at a future date or to cancel an existing swap at a future date.
Futures contracts are exchange-traded contractual commitments to either receive
(purchase) or deliver (sell) a standard amount or value of a commodity or
financial instrument at a specified future date and price (or, with respect to
futures contracts on indices, the net cash amount). Maintaining a futures
contract will typically require the Company to deposit with the futures exchange
(or other financial intermediary), as security for its obligations, an amount of
cash or other specified asset ("initial margin") that typically ranges from 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited daily as the mark-to-market value of the futures contract
fluctuates. Futures contracts may be settled by physical delivery of the
underlying asset or cash settlement (for index futures) on the settlement date,
or by entering into an offsetting futures contract with the futures exchange
prior to the settlement date. Forward contracts are OTC contractual commitments
to purchase or sell a specified amount of foreign currency, financial
instruments, or commodities at a future date at a predetermined price. The
notional amount for forward settling securities transactions represents the
amount of cash that will be paid or received by the counterparties when the
transaction settles. Upon settlement, the security is reflected on the statement
of financial condition as either long or short inventory.
Option contracts are contractual agreements which give the purchaser the right,
but not the obligation, to purchase or sell a currency, financial instrument or
commodity at a predetermined price. In return for this right, the purchaser pays
a premium to the seller (or writer) of the option. Option contracts also exist
for various indices and are similar to options on a security or other
instruments except that, rather than settling by physical delivery of the
underlying instrument, they are settled in cash. Options on futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract. Warrants have characteristics similar to those
of options whereby the buyer has the right, but not the obligation, to purchase
a certain instrument at a specific future date and price. The seller (or writer)
of the option/warrant is
32
<PAGE> 33
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
subject to the risk of an unfavorable change in the underlying financial
instrument, commodity, or currency. The purchaser is subject to market risk to
the extent of the premium paid and credit risk. The Company is obligated to post
margin for options on futures. Option contracts may be either exchange-traded or
OTC. Exchange-traded options issued by certain regulated intermediaries, such as
the Options Clearing Corporation, are the obligations of the issuing
intermediary. In contrast to such options, which generally have standardized
terms and performance mechanics, all of the terms of an OTC option, including
the method of settlement, term, exercise price, premium, guarantees and
security, are determined by negotiation of the parties, and there is no
intermediary between the parties to assume the risks of performance. The Company
issues warrants that entitle holders to cash settlements on exercise based upon
movements in market prices of specific financial instruments and commodities,
foreign exchange rates and equity indices.
The Company sells various financial instruments which have not been purchased
("short sales"). In order to sell them short, the Company borrows these
securities, or receives the securities as collateral in conjunction with
short-term financing agreements and, at a later date, must deliver (i.e.
replace) like or substantially the same financial instruments or commodities to
the parties from which they were originally borrowed. The Company is exposed to
market risk for short sales. If the market value of an instrument sold short
increases, the Company's obligation, reflected as a liability, would increase
and revenues from principal transactions would be reduced.
The way in which the Company accounts for and presents contractual commitments
in its financial statements depends on both the type and purpose of the
contractual commitment held or issued. As discussed in Note 2 to the
supplemental consolidated financial statements, the Company records all
derivatives used for trading purposes, including those used to hedge trading
positions, at market or fair value. Consequently, changes in the amounts
recorded in the Company's supplemental consolidated statements of financial
condition resulting from movements in market or fair value are included in
"Principal transactions" in the period in which they occur. The accounting and
reporting treatment of derivatives used for non-trading purposes varies,
depending on the nature of exposure being hedged (see Note 2 to the supplemental
consolidated financial statements).
Contractual commitments and short sales risk may expose the Company to both
market risk and credit risk in excess of the amount recorded on the supplemental
consolidated statements of financial condition. These off-balance sheet risks
are discussed in more detail below.
Market Risk Market risk is the potential loss the Company may incur as a
result of changes in the market or fair value of a particular financial
instrument, commodity or contractual commitment. All financial instruments,
commodities and contractual commitments, including short sales, are subject to
market risk. The Company's exposure to market risk is determined by a number of
factors, including the size, duration, composition and diversification of
positions held, the absolute and relative levels of interest rates and foreign
currency exchange rates, as well as market volatility and illiquidity. For
instruments such as options and warrants, the time period during which the
options or warrants may be exercised and the relationship between the current
market price of the underlying instrument and the option's or warrant's
contractual strike or
33
<PAGE> 34
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
exercise price also affect the level of market risk. The most significant factor
influencing the overall level of market risk to which the Company is exposed is
its use of hedging techniques to mitigate such risk. The Company manages market
risk by setting risk limits and monitoring the effectiveness of its hedging
policies and strategies.
SFAS 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and SFAS 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, require the disclosure of the notional amounts
of derivative financial instruments, distinguishing between those used for
trading purposes and those used for purposes other than trading. The
determination of notional amounts does not consider any of the market risk
factors discussed above. Notional amounts are indicative only of the volume of
activity and are not a measure of market risk. Market risk is influenced by the
nature of the items that comprise a particular category of financial instrument.
Market risk is also influenced by the relationship among the various
off-balance-sheet categories as well as the relationship between
off-balance-sheet items and items recorded in the Company's supplemental
consolidated statements of financial condition. For all of these reasons, the
interpretation of notional amounts as a measure of market risk could be
materially misleading.
A summary of contractual commitments as of December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- --------------------------------
Current Market or Current Market or
Fair Value Fair Value
Notional -------------------- Notional --------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 530.9 $ -- $ -- $ 575.4 $ -- $ --
Other exchange-issued products:
Equity contracts 13.1 .1 .2 16.9 .5 .3
Fixed income contracts 61.2 -- -- 46.7 .2 --
Physical commodities contracts 5.0 -- -- 4.5 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 610.2 .1 .2 643.5 .7 .3
- ------------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps and floors:
Swaps 858.3 558.3
Swap options written 10.8 5.6
Swap options purchased 24.1 20.5
Caps and floors 117.1 102.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors (b) 1,010.3 4.2 6.6 686.4 4.3 6.6
- ------------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 96.3 .7 .6 71.1 .5 .5
Options written 37.1 -- .3 24.5 -- .6
Options purchased 38.7 .5 -- 23.4 .3 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 172.1 1.2 .9 119.0 .8 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
Other contractual commitments:
Options and warrants on equities and equity indices 45.8 1.1 1.8 24.2 1.1 .6
Options and forward contracts on fixed-income securities 202.8 .3 .2 211.6 .1 .5
Physical commodities contracts 22.6 .3 .3 22.5 .4 .3
- ------------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $2,063.8 $ 7.2 $ 10.0 $1,707.2 $ 7.4 $ 9.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Margin on futures contracts is included in receivables/payables to brokers,
dealers and clearing organizations on the supplemental 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, TRUPS and preferred stock) of $16.0 billion and $2.0
billion at December 31, 1996 and $13.3 billion and $1.9 billion at December
31, 1995, respectively.
34
<PAGE> 35
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The annual average balances of the Company's contractual commitments, based on
month-end balances are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Average Average Average Average
Dollars in billions Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swaps, swap options, caps and floors $3.6 $5.5 $4.1 $6.6
Index and equity contracts and options 1.3 1.1 1.2 .8
Foreign exchange contracts and options 1.0 1.0 .9 1.0
Physical commodities contracts .4 .3 .5 .5
Other .5 .7 .6 .7
---------------------------------------------------------------------------------------------------------------------
Total contractual commitments $6.8 $8.6 $7.3 $9.6
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit Risk The Company regularly transacts business with, and owns securities
issued by, a broad range of corporations, governments, international
organizations, central banks and other financial institutions. Phibro regularly
transacts business with independent and government-owned oil producers, a wide
variety of end users, trading companies and financial institutions. Credit risk
is measured by the loss the Company would record if its counterparties failed to
perform pursuant to terms of their contractual obligations and the value of
collateral held, if any, was not adequate to cover such losses. The Company has
established controls to monitor the creditworthiness of counterparties, as well
as the quality of pledged collateral, and uses master netting agreements
whenever possible to mitigate the Company's exposure to counterparty credit
risk. Master netting agreements enable the Company to net certain assets and
liabilities by counterparty. The Company also nets across product lines and
against cash collateral, provided such provisions are established in the master
netting and cash collateral agreements. The Company may require counterparties
to submit additional collateral when deemed necessary.
The Company enters into collateralized financing agreements in which it extends
short-term credit, primarily to major financial institutions. The Company
controls access to the collateral pledged by the counterparties, which consists
largely of securities issued by the G-7 governments or their agencies that may
be liquidated in the event of counterparty default.
In addition, the Company seeks to protect itself from the risks associated with
customer activities by requiring customers to maintain margin collateral in
compliance with regulatory requirements and its own internal guidelines, which
are generally more stringent than regulatory margin requirements. Margin levels
are monitored daily and additional collateral must be deposited as required. If
customers cannot meet collateral requirements, the Company will liquidate
sufficient underlying financial instruments to bring the account in compliance
with the required margin level.
CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk from financial
instruments, including contractual commitments, exist when groups of issuers or
counterparties have similar business characteristics or are engaged in like
activities that would cause their ability to meet their contractual commitments
to be adversely affected, in a similar manner, by changes in the economy or
other market conditions. The Company monitors credit risk on both an individual
and group counterparty basis. The Company's largest single concentration of
credit risk is with securities issued by the U.S. government and its agencies
which totaled $52.0 billion at December 31, 1996 and $50.0 billion in December
31, 1995.
35
<PAGE> 36
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
With the addition of U.S. government and U.S. government agency securities
pledged as collateral by counterparties in connection with collateralized
financing activity, the Company's total holdings of U.S. government securities
were $110.7 billion or 45% of the Company's total assets at December 31, 1996
and $102.8 billion or 45% of total assets at December 31, 1995. Similarly,
concentrations with non-U.S. governments totaled $75.1 billion at December 31,
1996 and $67.5 billion at December 31, 1995. These consist predominantly of
securities issued by the governments of major industrial nations. Remaining
concentrations arise principally from contractual commitments with
counterparties in financial or commodities transactions involving future
settlement and fixed income securities owned. Excluding governments, no
concentration with a single counterparty exceeded 1% of total assets at December
31, 1996 or 1995. North America and Europe represent the largest geographic
concentrations. Among industries, other major derivatives dealers represent the
largest group of counterparties. The Company has a three-year credit support
agreement with Genesis Energy, L.P., pursuant to which it provides Genesis with
working capital support of up to $550 million through June 30, 1997, $500
million for the remainder of 1997, $400 million in 1998 and $300 million until
December 31, 1999.
NOTE 18. FAIR VALUE INFORMATION
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires the
disclosure of the fair value of all financial instruments. The following
information is presented to help users gain an understanding of the relationship
between the amounts reported in the Company's financial statements and the
related market or fair values. Specific accounting policies are discussed in the
Note 2 of the Supplemental Consolidated Financial Statements.
At December 31, 1996, $242 billion or 98% of the Company's total assets and $226
billion or 95% of the Company's total liabilities were carried at either market
or fair values or at amounts which approximate such values. At December 31,
1995, $223 billion or 97% of the Company's total assets and $211 billion or 95%
of the Company's total liabilities were carried at market value or fair value or
at amounts that approximate such values. Financial instruments recorded at
market or fair value include cash and cash equivalents, financial instruments,
commodities and contractual commitments used for trading purposes.
Financial instruments recorded at contractual amounts that approximate market or
fair value include collateralized short-term financing agreements, receivables,
commercial paper and other short-term borrowings, payables and accrued
liabilities, and variable rate term debt. The market value of such items are not
materially sensitive to shifts in market interest rates because of the limited
term to maturity of many of these instruments and/or their variable interest
rates.
The following table reflects financial instruments which are recorded at
contractual or historical amounts that do not necessarily approximate market or
fair value.
36
<PAGE> 37
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Such instruments include U.S. dollar denominated CMOs and the assets securing
U.S. dollar denominated CMOs, the Company's fixed rate term debt, as well as the
fair value of derivative instruments which are used for non-trading, or end
user, purposes.
<TABLE>
<CAPTION>
1996 1995
-------------------------------- ---------------------------------
Assets Liabilities Assets Liabilities
---------------- --------------- --------------- ----------------
Dollars in billions Carrying Fair Carrying Fair Carrying Fair Carrying Fair
December 31, Value Value Value Value Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial instruments recorded at contractual amounts or
historical amounts that do not necessarily approximate market
or fair value:
Assets securing U.S. dollar denominated CMOs (fixed rate) $ .4 $ .5 $ .6 $ .8
U.S. dollar denominated CMOs (fixed rate) $ .4 $ .4 $ .6 $ .7
Fixed rate term debt 11.7 12.0 10.6 11.0
Derivatives used for non-trading purposes $ -- $ .5 $ -- $ .2 $ -- $ .7 $ -- $ .2
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of fixed rate term debt has been estimated by using a discounted
cash flow analysis. The Company's U.S. dollar denominated fixed rate CMOs and
assets securing U.S. dollar denominated fixed rate CMOs are carried at their
contractual amounts. At December 31, 1996 and 1995, prevailing interest rates
and prepayments resulted in the fair value of the liabilities associated with
such CMOs exceeding their carrying amount. The fair value of assets securing the
dollar denominated CMOs also exceeded their carrying value at December 31, 1996
and 1995. CMOs and the assets which secure them should not be viewed
independently. Taken together, the fair value of the Company's dollar
denominated CMOs and the assets securing them is the present value of the
difference between future cash inflows from the CMO collateral and cash outflows
to service the CMOs. This difference was nominal at December 31, 1996 and 1995.
NOTE 19. RELATED PARTY TRANSACTIONS
The Company has entered into various related party transactions with Travelers
Group Inc. Other than the transactions disclosed in the supplemental
consolidated financial statements and elsewhere in the notes, the amounts are
immaterial for the years ended and at December 31, 1996, 1995 and 1994.
NOTE 20. OTHER EVENTS
In 1996, the Company sold its indirect wholly-owned subsidiary, The Mortgage
Corporation Limited ("TMC"), resulting in a after-tax gain of $31 million ($48
million pre-tax). TMC originated and serviced residential mortgages in the
United Kingdom. In 1994, the Company sold a 20% equity investment in HG Asia
Holdings Ltd., which was acquired in 1992, for $55 million, recording an
after-tax gain of $21 million ($34 million pre-tax).
37
<PAGE> 38
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. PARENT COMPANY ONLY SUPPLEMENTAL CONDENSED FINANCIAL STATEMENTS
The following are supplemental condensed financial statements of Salomon Smith
Barney Holdings Inc. (Parent Company Only):
PARENT COMPANY ONLY SUPPLEMENTAL CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1996 1995 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues, net of interest expense $ 126 $ 299 $161
Loss on sale of Basis Petroleum (505) -- --
Gain on sale of equity investment -- -- 34
Noninterest expenses 117 243 209
------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (496) 56 (14)
Provision/ (benefit) for income taxes (225) 20 (8)
Equity in earnings (loss) of subsidiaries 1,771 1,016 (5)
------------------------------------------------------------------------------------------------------
Net income (loss) $1,500 $1,052 $(11)
------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY SUPPLEMENTAL CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Dollars in millions
- --------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3 $ 14
Financial instruments 111 81
Physical commodities and related contractual commitments - 746
Receivables 172 514
Receivables from subsidiaries: (1)
Salomon Brothers Holding Company Inc 14,332 11,479
Smith Barney Inc. 2,236 1,790
Other subsidiaries 1,703 1,537
------ ------
18,271 14,806
Investments in subsidiaries:
Salomon Brothers Holding Company Inc 4,018 4,731
Smith Barney Inc. 2,484 2,322
Other subsidiaries 358 591
------ ------
6,860 7,644
Property, equipment and leasehold improvements, net 252 285
Other assets 635 221
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 26,304 $ 24,311
====================================================================================================================
Liabilities and stockholder's equity:
Commercial paper and other short-term borrowings $ 2,120 $1,891
Financial instruments and commodities sold, not yet
purchased, and contractual commitments 543 296
Subordinated debt payable to SI Financing Trust I 356 -
Other liabilities 1,402 1,447
Term debt 13,848 13,500
-------- ---------
Total liabilities 18,269 17,134
Redeemable preferred stock, Series A 420 560
Stockholder's equity 7,615 6,617
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 26,304 $ 24,311
====================================================================================================================
</TABLE>
(1) Includes $4.0 billion and $5.0 billion of subordinated note receivables at
December 31, 1996 and December 31, 1995, respectively.
39
<PAGE> 40
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY SUPPLEMENTAL CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Dollars in millions
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of term debt $ 4,659 $ 3,504 $ 6,715
Term debt maturities and repurchases (4,180) (5,306) (3,316)
Increase (decrease) in commercial paper and other short-term
borrowings 229 (570) (169)
Redemption of preferred stock (112) (140) --
Issuance of preferred stock 250 -- --
Other capital transactions (45) 13 (239)
Dividends paid (820) (436) (345)
- -------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (19) (2,935) 2,646
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in receivables from subsidiaries (3,290) 2,260 (3,024)
Dividends received from subsidiaries 2,359 564 636
Capital infusions and other capital transactions with subsidiaries (174) (135) (35)
Purchases of property, equipment and leasehold improvements (3) (4) (11)
Proceeds from sale of equity investment -- -- 55
- -------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities (1,108) 2,685 (2,379)
Cash provided by (used in) operating activities 1,116 257 (266)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (11) 7 1
Cash and cash equivalents at beginning of year 14 7 6
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3 $ 14 $ 7
===================================================================================================================
</TABLE>
BASIS OF PRESENTATION
The accompanying supplemental condensed financial statements, which include the
accounts of Salomon Smith Barney Holdings Inc. ("SSBH"), a wholly-owned
subsidiary of Travelers Group Inc., should be read in conjunction with the
supplemental consolidated financial statements of SSBH and its subsidiaries. On
January 1, 1996, the commodities dealer businesses conducted by the Phibro
Division of SSBH (Parent Company Only) was transferred to the Company's
wholly-owned subsidiary, Phibro Inc. Therefore, 1996 results for Phibro,
including activities previously conducted by the Phibro Division, are included
in equity in net income (loss) of subsidiaries and affiliates in the Parent
Company Only supplemental condensed statement of income.
Investments in subsidiaries are accounted for under the equity method. For
information regarding the Company's term debt see Note 8 of the supplemental
consolidated financial statements.
40
<PAGE> 41
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
RELATED PARTY TRANSACTIONS
SSBH engages in various transactions with its subsidiaries that are
characteristic of a consolidated group under common control. As a public debt
issuer, SSBH has access to long-term sources of funds which are loaned from SSBH
to certain of its subsidiaries. Such intercompany advances are payable on demand
and bear interest at varying rates.
41
<PAGE> 42
SALOMON SMITH BARNEY HOLDINGS INC
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Quarter Ended
Dollars in millions March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Noninterest revenues $2,457 $2,443 $1,986 $2,294
Net interest and dividends 400 402 340 346
- --------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 2,857 2,845 2,326 2,640
- --------------------------------------------------------------------------------------------------------------
Expenses, excluding interest 1,976 1,973 1,802 1,901
Gain on sale of subsidiaries and affiliates - - 48 -
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 881 872 572 739
Provision for income taxes 348 345 225 281
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 533 $ 527 $ 347 $ 458
==============================================================================================================
Net income $ 499 $ 520 $ 319 $ 162
==============================================================================================================
</TABLE>
Quarterly results for the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Quarter Ended
Dollars in millions March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest revenues $1,627 $ 1,229 $2,272 $1,917
Net interest and dividends 381 497 354 413
- ---------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 2,008 1,726 2,626 2,330
- ---------------------------------------------------------------------------------------------------------
Expenses, excluding interest 1,648 1,595 1,878 1,749
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 360 131 748 581
Provision for income taxes 150 57 297 208
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations $ 210 $ 74 $ 451 $ 373
=========================================================================================================
Net income $ 179 $ 74 $ 445 $ 354
=========================================================================================================
</TABLE>
42
<PAGE> 43
SALOMON SMITH BARNEY HOLDINGS INC.
For Fiscal Year Ended December 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE MERGER
On November 28, 1997, a newly formed wholly-owned subsidiary of Travelers Group
Inc. was merged into Salomon Inc ("Salomon"). Pursuant to the merger agreement,
Salomon common stockholders received 1.695 shares of Travelers Group Inc. common
stock for each share of Salomon common stock after giving effect to the
three-for-two stock split declared by the Board of Directors of Travelers Group
Inc. and paid on November 19, 1997; each share of preferred stock of Salomon was
exchanged for a share of a substantially identical series of preferred stock of
Travelers Group Inc.; and Salomon became a wholly-owned subsidiary of Travelers
Group Inc. Following this merger, Salomon and Smith Barney Holdings Inc. ("Smith
Barney") were merged (the "Merger") to form Salomon Smith Barney Holdings Inc.
(collectively, with its subsidiaries the "Company"). The transaction is a tax
free exchange. The supplemental consolidated financial statements give
retroactive effect to the Merger in a transaction accounted for in a manner
similar to a pooling of interests. The pooling of interests method of accounting
requires the restatement of all periods presented as if Salomon and Smith Barney
had always been combined. Certain reclassifications have been made to conform
the accounting policies of Salomon and Smith Barney.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 million and $500 million primarily for
severance and costs related to excess or unused office space and other
facilities.
RESULTS OF OPERATIONS
The Company's income from continuing operations, which excludes results related
to Basis Petroleum, Inc. ("Basis Petroleum" or "Basis") was $1,865 million for
the year ended December 31, 1996, an increase of 68% from $1,108 million for the
year ended December 31, 1995. The Company's results also reflect losses from
discontinued operations, including a $290 after-tax loss in 1996 related to the
sale of Basis Petroleum. As discussed in the Discontinued Operations section
which follows, Basis Petroleum is reflected as a discontinued operation in this
report. The Company's $22 million net loss from continuing operations in 1994
included pretax charges of $303 million ($189 million after-tax) to correct
general ledger balances and a $102 million income tax benefit that resulted from
the reversal of reserves established in prior years to cover potential tax
liabilities.
Revenues, net of interest expense increased $2 billion in 1996 over 1995 levels.
The Company's 1996 results reflect improvements in most of the Company's
businesses, including fixed income, investment banking, asset management and
retail sales. These improvements were partially offset by a decrease in revenues
from equities.
43
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Commission revenues increased 10% in 1996 to $2.6 billion, from $2.4 billion in
1995 and $2.2 billion in 1994. The 1996 increase reflects growth in sales of
listed and over-the-counter ("OTC") securities, as well as increased insurance
and annuity sales. The 1995 increase reflects growth in listed and OTC
securities and option activity, offset by declines in futures, mutual funds and
insurance activity.
Global investment banking revenues increased 52% in 1996 to $2.0 billion from
$1.3 billion in 1995 and $1.2 billion in 1994. The 1996 increase in revenues was
attributable to significant improvements in equity and debt underwriting,
combined with a higher level of advisory fees.
Principal transaction revenues from fixed income for the year increased 128% to
$2.0 billion in 1996 from $900 million in 1995, reflecting strong performances
in customer sales and trading, favorable market conditions, and excellent
results in proprietary trading. Fixed income revenues in 1994 were $132 million,
reflecting the impact of a lower volume of customer activity and trading losses
in certain products.
Principal transaction revenues from equities decreased 42% in 1996 to $576
million from $995 million in 1995. Equity revenues were $357 million in 1994.
The decline in 1996 primarily reflects losses associated with long-term
proprietary equity strategies. Results for 1995 reflect strong performances in
both customer sales and trading and proprietary trading, while 1994 results
reflect modest losses from proprietary trading coupled with a lower level of
revenues from customer sales and trading.
Principal transaction revenues from physical commodities were $393 million in
1996, compared with $238 million in 1995 and $191 million in 1994.
The Company's 1994 principal transaction revenues include a pre-tax accounting
charge of $303 million to correct general ledger balances, of which $194 million
is related to Salomon's London-based companies, and $109 million arose from the
completion of a detailed review of Salomon's general ledger balances related to
interest rate swaps.
Asset management and administration fees rose to $1.4 billion in 1996, up 28%
from $1.1 billion in 1995 and $1.0 billion in 1994. The increase is due to
growth in assets under management, as well as bringing in-house all of the
administrative functions for Smith Barney proprietary mutual funds and money
funds in the third quarter of 1995. Internally managed assets were $131.5
billion at December 31, 1996, compared with $109.7 billion at December 31, 1995
and $89.1 billion at year-end 1994. Total fee-based assets under management were
$175.6 billion, $145.0 billion and $115.8 billion at December 31, 1996, 1995 and
1994, respectively.
44
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Total fee-based assets under management were composed of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Dollars in billions
At December 31, 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C>
Money market funds $ 41.7 $ 35.9 $ 28.9
Mutual funds 42.2 37.2 33.2
Managed accounts 39.7 30.9 23.1
Financial Consultant managed accounts 7.9 5.7 3.9
-----------------------------------------------------------------------
Total internally managed accounts 131.5 109.7 89.1
Consulting Group externally managed assets 44.1 35.3 26.7
-----------------------------------------------------------------------
Total fee-based assets under management $175.6 $145.0 $115.8
=======================================================================
</TABLE>
Net interest and dividends decreased 10% in 1996 to $1.5 billion from $1.6
billion in 1995. The decrease is primarily due to a decrease in average net
inventory balances partially offset by increased margin lending to clients. In
1994, net interest and dividends were $1.4 billion. The increase in 1995 was
primarily due to an increase in average net inventory balances, partially offset
by increased financing costs.
Gain on sale of subsidiaries and affiliates in 1996 includes a pre-tax gain of
$48 million related to the sale of the Company's indirect wholly-owned
subsidiary The Mortgage Corporation Limited, which originated and serviced
residential mortgages in the United Kingdom.
The increase in noninterest expenses in 1996 primarily reflects an increase in
production-related compensation and employee benefits expense, reflecting the
Company's increased revenues. The Company's compensation and benefits expenses
as a percentage of revenues, net of interest expense was 52% in 1996, compared
with 56% in 1995 and 71% in 1994. The Company's ratio of non-compensation
expenses to revenues, net of interest expense was 20% in 1996, 23% in 1995 and
32% in 1994. The Company continues to maintain its focus on controlling fixed
expenses.
DISCONTINUED OPERATIONS
In March 1997, Salomon's Board of Directors approved a non-binding letter of
intent to sell all of the outstanding stock of Basis Petroleum, the Company's
oil refining and marketing business to Valero Energy Corporation and a plan of
disposition for Basis. Consequently, the Company recorded an after-tax loss of
$290 million in the fourth quarter of 1996. For a description of the terms of
the sale see Note 4 to the supplemental consolidated financial statements.
In 1996, Basis and Howell Corporation contributed their respective crude oil
gathering, marketing and transportation activities to form Genesis Energy, L.P.
("Genesis"). The Company's investment in Genesis was not transferred to Valero.
45
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Basis Petroleum had after-tax operating losses of $75 million and $56 million in
1996 and 1995, respectively. In 1994 Basis had after-tax income of $11 million.
Basis' 1996 results included an after-tax gain of $37 million ($60 million
pretax) related to a Genesis public offering and an after-tax gain of $14
million ($23 million pretax) related to the reduction of its minimum physical
inventories needed to support its refining operations. In addition, 1996 results
include an after-tax charge of $13 million ($22 million pretax) related to the
shutdown of Basis' chemical processing facility in Houston.
46
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DERIVATIVE INSTRUMENTS
Derivatives are an integral element of the world's financial and commodity
markets. Globalization of economic activity has brought more market participants
in contact with foreign exchange and interest rate risk at a time when market
volatility has increased. The Company has developed many techniques using
derivatives which enhance the efficiency of capital and trading risk management.
DERIVATIVE INSTRUMENTS - OVERVIEW
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. The markets for these instruments
have grown tremendously over the past decade. A vast increase in the types of
derivative users and their motivations in using these products has resulted in
an expansion of geographic coverage, transaction volume and liquidity, and the
number of underlying products and instruments.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk, and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, considering such factors as taxes, regulations,
capital, and liquidity, they provide the most efficient means of taking a
desired market position. These are just a few of the business objectives for
which derivatives are used. The list of objectives is large and continues to
grow.
Derivatives are accounted for and settled differently than cash instruments and
their use requires special management oversight. Such oversight should ensure
that management understands the transactions to which they commit their firms
and that the transactions are executed in accordance with sensible corporate
risk policies and procedures. Publications such as the Basle Committee on
Banking Supervision's July 1994 report, Risk Management Guidelines for
Derivatives; the International Organization of Securities Commissions' July 1994
report, Operational and Financial Risk Management Control Implications for
Over-The-Counter Derivatives Activities of Regulated Securities Firms; or the
Group of Thirty ("G-30") July 1993 report, Derivatives: Practices and
Principles, each provide an excellent framework for developing strong management
policies and procedures.
In 1994, Salomon adopted the G-30 report as its model for control of its OTC
derivatives activities. Subsequently, Salomon began working with five other U.S.
securities firms, forming the Derivatives Policy Group ("DPG"), to develop the
"Framework for Voluntary Oversight" of OTC derivatives activities of unregulated
affiliates of U.S. Securities and Exchange
47
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Commission ("SEC") registered broker dealers. In March of 1995, the DPG agreed
with the SEC to implement the framework. The framework encompasses management
controls, enhanced reporting, evaluation of risk in relation to capital and
counterparty relations.
Salomon's adoption of the DPG framework resulted in modifications and/or
enhancements to existing control procedures, including the establishment by
Salomon's Board of Directors of an OTC Derivatives Activity and Transaction
Oversight Committee ("Authorizing Body"), a Board-reviewed firmwide market risk
limit, a quarterly SEC and Commodities Futures Trading Commission ("CFTC")
reporting package, annual reviews of internal risk management control objectives
and reviews by Salomon's external auditors (provided to the SEC and CFTC) of
inventory pricing and modeling procedures.
The Authorizing Body, which consists of senior risk managers and senior control
managers from Salomon's businesses, has established guidelines which include
Salomon's framework for independent market risk measurement and monitoring; the
scope of permitted activity for Salomon's OTC derivative activities both as
dealer and end user; and the establishment of requirements for the periodic
review of risks related to the credit, funding, legal and processing aspects of
its derivatives activities.
The reports provided to the SEC and CFTC by Salomon and other DPG participants
provide insight into the OTC derivative activities conducted by unregulated
affiliates of U.S. broker dealers. Information provided by Salomon on such
reports includes:
- firmwide current credit exposure to its top 20 current net exposure
counterparties,
- firmwide current exposures by counterparty credit rating,
- potential exposures by counterparty credit rating,
- net revenues derived from OTC derivative activities in unregulated
entities, and
- OTC derivatives business revenue sensitivity to certain market
movements.
Derivatives activities, like the Company's other ongoing business activities,
give rise to market, credit, and operational risks. Market risk represents the
risk of loss from adverse market price movements. While market risk relating to
derivatives is clearly an important consideration for intermediaries such as the
Company, such risk represents only a component of overall market risk, which
arises from activities in non-derivative instruments as well. Consequently, the
scope of the Company's market risk management procedures extends beyond
derivatives to include all financial instruments and commodities. Credit risk is
the loss that the Company would incur if counterparties failed to perform
pursuant to their contractual obligations. While credit risk is not a principal
consideration with respect to exchange-traded instruments, it is a major factor
with respect to non-exchange-traded OTC instruments. Whenever possible, the
Company uses industry master netting agreements to reduce aggregate credit
exposure. Swap and foreign exchange agreements are documented utilizing
counterparty master netting agreements supplemented by trade confirmations. Over
the past several years, the Company has enhanced the funding and risk management
of its derivatives activities through the increased use of bilateral security
agreements. The Company, in particular, has been an industry leader in promoting
the use of this risk reduction technique. Based on notional
48
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
amounts, at December 31, 1996 and 1995, respectively, approximately 80% and 72%
of the Company's swap portfolio was subject to the bilateral exchange of
collateral. This initiative, combined with the success of Salomon Swapco Inc,
the Company's triple-A rated derivatives subsidiary, has greatly strengthened
the liquidity profile of the Company's derivative trading activities. See "Risk
Management" for discussions of the Company's management of market, credit, and
operational risks.
NATURE AND TERMS OF DERIVATIVE INSTRUMENTS
The Company and its subsidiaries enter into various bilateral financial
contracts involving future settlement, which are based upon a predetermined
principal or par value (referred to as the "notional" amount). Such instruments
include swaps, swap options, caps and floors, futures contracts, forward
purchase and sale agreements, option contracts and warrants. Transactions are
conducted either through organized exchanges or OTC. For a discussion of the
nature and terms of these instruments see Note 17 to the supplemental
consolidated financial statements.
THE COMPANY'S USE OF DERIVATIVE INSTRUMENTS
The Company's use of derivatives can be broadly classified between trading and
non-trading activities. The vast majority of the Company's derivatives use is in
its trading activities, which include market-making activities for customers and
the execution of proprietary trading strategies. The Company's derivative
counterparties consist primarily of other major derivative dealers, financial
institutions, insurance companies, pension funds and investment companies, and
other corporations. The scope of permitted derivatives activities both for
trading and non-trading purposes for each of the Company's businesses is defined
by the Authorizing Body.
TRADING ACTIVITIES
A fundamental activity of the Company is to provide market liquidity to its
customers across a broad range of financial instruments, including derivatives.
The Company also seeks to generate returns by executing proprietary trading
strategies which are generally longer term in nature. By their very nature,
proprietary trading activities represent the assumption of risk. However,
trading positions are constructed in a manner that seeks to define and limit
risk taking only to those risks that the Company intends to assume. The most
significant derivatives-related activity conducted by the Company is in
fixed-income derivatives, which includes interest rate swaps, financial futures,
swap options, and caps and floors. Other derivative transactions, such as
currency swaps, forwards and options as well as derivatives linked to equities,
are also regularly executed by the Company. The Company generally earns a spread
from market-making transactions involving derivatives, as it generally does from
its market-making activities for non-derivative transactions. The Company also
utilizes derivatives to manage the market risk inherent in the securities
inventories and derivative portfolios it maintains for market-making purposes as
well as its "book" of swap agreements and related transactions with customers.
The Company conducts its commodities dealer activities in organized futures
exchanges as well as in OTC forward markets. The Company executes transactions
involving commodities options, forwards and swaps, much in the same manner as it
does in the financial markets.
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<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NON-TRADING ACTIVITIES
The Company also makes significant use of financial derivatives for non-trading,
or end user, purposes. Such activities are significant, though not nearly as
extensive as its use of derivatives for trading purposes. As an end user, these
instruments provide the Company with added flexibility in the management of its
capital and funding costs. Interest rate swaps are utilized to effectively
convert the majority of the Company's fixed-rate term debt, its preferred stock,
a portion of its short-term borrowings and its guaranteed preferred beneficial
interests in Company subordinated debt securities ("TRUPS") to variable-rate
obligations. Cross-currency swaps and forward currency contracts are utilized to
effectively convert a portion of its non-U.S. dollar denominated term debt to
U.S. dollar denominated obligations and to minimize the variability in equity
and book value per share otherwise attributable to exchange rate movements.
NOTIONAL AMOUNTS
Notional amounts of derivatives are the underlying principal amounts used to
calculate contractual cash flows to be exchanged between derivatives
counterparties. The notional amounts presented in this report are only a rough
indicator of the volume of derivative instrument activity and are not indicative
of the level of market or credit risk assumed by the Company through their use.
ACCOUNTING FOR DERIVATIVES
The way in which the Company accounts for and reports derivative instruments in
its financial statements depends on both the type and purpose of the derivative
instruments. Derivative instruments used for trading purposes, including those
used to hedge trading positions, are marked to market value or, when market
prices are not readily available, fair value is determined on a comparable
basis, for example, by using matrix or model pricing. Changes in market price or
fair value are recognized currently in earnings in "Principal transactions." The
market or fair value of derivatives used for trading purposes is included in
"Contractual commitments" within either assets or liabilities, as appropriate,
in the supplemental consolidated statements of financial condition. Derivative
receivables and payables are netted by counterparty when a legal right of offset
exists under a legally enforceable master netting agreement. Derivative
receivables and payables are netted across products and against cash collateral
if such provisions are included in the master netting and cash collateral
agreements. The determination of market or fair value involves various factors,
including the potential impact on market prices of liquidating positions over a
reasonable time period, and counterparty credit quality. When marking derivative
positions to market, higher risk counterparties warrant a higher risk premium,
or yield to the Company, which equates to a lower price. Credit-related
adjustments are applied in determining the carrying amount of the Company's
derivatives portfolio. These adjustments consider, among other things,
concentrations of exposure, netting agreements, and expected defaults. In
specific situations in which individual counterparties experience financial
difficulties that compromise their ability to meet their contractual obligations
to the Company, reserves are established to cover such exposure. As part of its
mark-to-market policy, the Company provides for the future operational costs of
maintaining long-term derivatives.
Interest rate swaps, including cross-currency swaps, which are used to convert
the Company's fixed rate term debt, preferred stock, short-term borrowings and
TRUPS obligations to variable rate obligations, are not marked to market.
Instead, the net
50
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
inflows or outflows are recorded as adjustments to interest expense or
dividends, as appropriate. Adjustments to dividends are recorded on an after-tax
basis. Non-U.S. dollar denominated debt issued by Salomon Smith Barney Holdings
Inc. (Parent Company) is translated to U.S. dollars at exchange rates prevailing
at the end of each reporting period. Except for debt specifically identified as
a hedge of an investment in a subsidiary with a functional currency other than
the U.S. dollar, the translation impact is included in income. The Company
mitigates this exposure by entering into forward currency purchase and swap
agreements. The impact of marking such agreements to prevailing exchange rates
is also included in income. The Company also enters into forward currency sales
contracts to hedge investments in subsidiaries with functional currencies other
than the U.S. dollar. The impact of marking such contracts to prevailing
exchange rates is included in "Cumulative translation adjustments" as is the
impact of translating the investments being hedged.
ADDITIONAL DERIVATIVES-RELATED DISCLOSURES CONTAINED IN THE SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS
- Note 2 - Summary of Significant Accounting Policies
- Note 3 - Principal Transaction Revenues
- Note 8 - Term Debt
- Note 17 - Financial Instruments, Commodities and Contractual
Commitments and Related Risks
- Note 18 - Fair Value Information
51
<PAGE> 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAPITAL AND LIQUIDITY MANAGEMENT
Capital is an expensive resource. To maximize the return on equity, it is
essential that the Company deploy its capital in an efficient manner. Liquidity
management is integral to capital management and is especially critical for a
financial institution such as the Company. Access to funding must be assured
under all market conditions. The confidence of creditors and counterparties in
the Company's ability to perform pursuant to its contractual obligations is
important to the Company's continued success.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $246 billion at December 31, 1996, up from $229
billion at year-end 1995. 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. 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 secured and unsecured
short-term borrowings, long-term borrowings, TRUPS, and its common and preferred
equity. Secured short-term financing, including repurchase agreements and
secured loans, is the Company's principal funding source. Such borrowings
totaled $105.1 billion at December 31, 1996. Unsecured 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 unsecured borrowings include commercial paper,
unsecured bank borrowings and letters of credit, deposit liabilities, promissory
notes and corporate loans. Short-term unsecured borrowing totaled $7.7 billion
at December 31, 1996.
Smith Barney and Phibro have committed uncollateralized revolving lines of
credit totaling $1.5 billion and $500 million, respectively. In addition,
Salomon Brothers Inc has a $2.1 billion committed secured standby bank credit
facility for financing securities positions which enables it to borrow on a
secured basis using a variety of financial instruments as collateral and Salomon
Brothers International Limited has a committed securities repurchase facility in
the amount of $1.0 billion. At December 31, 1996 there were no outstanding
borrowings under these facilities. 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.
Unsecured term debt is a significant component of the Company's long-term
capital. Term debt totaled $15.7 billion at December 31, 1996, compared with
$14.9 billion at December 31, 1995. The Company utilizes interest rate swaps to
52
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
convert the majority of its fixed rate term debt used to fund inventory-related
working capital requirements into variable rate obligations. Term debt issuances
denominated in currencies other than the U.S. dollar which are not used to
finance assets in the same currency are effectively converted to U.S. dollar
obligations through the use of cross-currency swaps and forward currency
contracts. The average remaining maturity of the Company's term debt was 3.6
years at December 31, 1996 and 3.4 years at December 31, 1995. See Note 8 to the
supplemental consolidated financial statements for additional information
regarding term debt and an analysis of the impact of interest rate swaps on term
debt.
In July 1996, the Company issued $345 million of TRUPS which pay interest at an
annual rate of 9-1/2%. The Company has entered into an interest rate swap
agreement to effectively convert the expected future fixed rate payments on the
TRUPS to variable rate obligations. For a detailed description of these
securities see Note 10 to the supplemental consolidated financial statements.
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.
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 unsecured financing was 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 which is utilized
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. The ratio of
total assets less securities purchased under agreement to resell to equity
(including redeemable preferred stock and TRUPS) at December 31, 1996 and 1995
was 20.7x and 23.5x, respectively.
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<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RISK MANAGEMENT
Effective management of the risks inherent in the Company's businesses is
critical. The following section discusses the risks inherent in the Company's
businesses, procedures in place to manage such risks, and initiatives underway
to continue to enhance the Company's management of risk.
MARKET RISK
Market risk represents the potential loss the Company may incur as a
result of absolute and relative price movements in financial instruments,
commodities and contractual commitments, price volatility, changes in yield
curves, currency fluctuations and changes in market liquidity. The Company
utilizes a mark-to-market accounting policy for a substantial majority of items
recorded on the balance sheet as well as off-balance-sheet derivatives. When
market prices are not readily available, fair value is determined on a
comparable basis, for example, by using matrix or model pricing. Prices are
adjusted, where appropriate, to address factors such as the market liquidity of
the instrument, aging or holding period of the instrument, and credit quality of
the counterparty. The market liquidity component considers the size of positions
relative to the market and would generally result in a markdown of a position as
its relative size is increased. The Company considers this to be an integral
component of mark-to-market accounting. The Company manages market risk across
both on- and off-balance sheet products. This, together with the Company's
mark-to-market accounting policy, means that separate discussion of market risk
for individual products, including derivatives, is not meaningful. The
distinguishing risks relative to derivatives are credit risk and funding
(liquidity) risk, which is roughly equivalent to the risk of margin calls. Each
type of risk can be increased or decreased by market movements. See "Risk
Management - Credit Risk - Credit Exposure from Derivative Activities".
Within the Company's trading businesses, sound management of market risk has
always been a critical consideration. The sections that follow discuss
organizational elements of market risk management, as well as specific risk
management tools and techniques. The Company has sought to institutionalize
these elements across all its businesses. Efforts to further strengthen the
Company's management of market risk are ongoing and the enhancement of risk
management systems and reporting, including the development and utilization of
quantitative tools, is of major importance. Nevertheless, the basis for strong
risk management is the expertise and judgment of the Company's trading
professionals and senior management, and open lines of communication.
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<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE COMPANY'S RISK MANAGEMENT CONTROL FRAMEWORK
The Company's risk management control framework is based upon the ongoing
participation of senior management, business unit managers and the coordinated
efforts of various support units throughout the firm.
The Company's risk management capabilities meet or exceed the risk management
requirements of major regulatory and reporting bodies such as the Securities and
Exchange Commission, Commodities Futures and Trading Commission, and the
Derivatives Policy Group's Framework for Voluntary Oversight of OTC Derivatives
Activity; Office of the Comptroller of the Currency; the Federal Reserve Bank;
the Securities and Futures Authority and the Group of Thirty. These requirements
include the establishment of appropriate market and credit risk controls,
policies and procedures; appropriate senior management risk oversight with
thorough risk analysis and reporting; and independent risk management with
capabilities to evaluate and monitor risk limits.
INVENTORY CONTROL AND VALUATION
With regard to the Company's inventory (financial instruments, commodities and
contractual commitments), the Co-Chairmen and Co-Chief Executive Officers
determine the appropriate risk profile of the Company with assistance from the
Risk Management Committee. This committee is comprised of senior business
managers, the Chief Financial Officer and the Chief Risk Officer and reviews and
recommends appropriate levels of risk, reviews risk capital allocations, balance
sheet and regulatory capital usage by business units and recommends overall risk
policies and controls. Prior to the Merger, this committee was comprised of the
Vice Chairman of Salomon Brothers, Salomon's Global Risk Manager, the Chairman
and CEO of Salomon, the Chairman and CEO of Salomon Brothers and the heads of
the major risk-taking business units. Lastly, an independent Global Risk
Management Group provides technical and quantitative analysis of the market risk
associated with inventory to the Co-Chairmen and Co-Chief Executive Officers and
members of the Risk Management Committee on a frequent basis.
Inventory is necessary for an active market maker, but can be a major source of
liquidity risk. Monitoring the Company's inventory levels and composition and
oversight for inventory pricing is the responsibility of the Global Risk
Management Group and various support units, which monitor inventory on a
position by position level, and employs specific risk models to track inventory
exposure in credit markets, emerging markets and the mortgage market. The
Company also provides for liquidity risk by imposing markdowns as the age of the
inventory increases. Inventory event risk, both for issuer credit and emerging
markets, is analyzed with the involvement of senior traders, economists and
credit department personnel. Market scenarios for the major emerging markets are
maintained and updated to reflect the event risk for the emerging market
inventory. In addition, the Company, as a dealer of securities in the global
capital markets, has risk to issuers of fixed income securities for the timely
payment of principal and interest. Principal risk is reviewed by the Global Risk
Management Group, which identifies and reports major risks undertaken by the
trading businesses. The Credit Department
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<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(the "Department") combines principal risk positions with credit risks resulting
from market and delivery risk to review aggregate exposures by counterparty,
industry and country.
RISK LIMITS
The Company's trading businesses have implemented desk and business
unit limits on exposure to risk factors. These limits, which are intended to
enforce the discipline of communicating and gaining approval for higher risk
positions, are periodically reviewed by the Global Risk Management Group.
Individual desks may not exceed risk limits without the approval of the business
unit head. Business units may not exceed risk limits without the approval of the
appropriate members of the Global Risk Management Group.
THEORETICAL REVENUE RECONCILIATION
The trading units of the Company, the Global Risk Management Group and various
support units perform periodic revenue reconciliations, comparing actual
revenues with the revenue outcome that would have been expected based on risk
factor exposures. A discrepancy between the expected revenue impact for a given
market event and the actual revenues may indicate an unexplained dimension of
market risk. Comparing the two thus provides a fundamental check that risk
management is capturing all the material market risk factors and that the
sources of trading risk and trading revenue are consistent with the realized
revenue.
TOOLS FOR RISK MANAGEMENT AND REPORTING
The Company's global risk measurement begins with the identification of relevant
market risk factors. These core risk factors vary from market to market, and
region to region. For example, in fixed income markets, risk factors include
interest rates, yield curve slopes, credit spreads, and interest rate
volatility. In equity markets, risk factors include equity index exposure,
equity volatility and equity index spreads. In the foreign exchange market, risk
factors are exchange rates and exchange rate volatility. In the commodities
markets, risk factors include price levels, spreads and the volatility of
prices. The Company identifies other factors specific to trading strategies as
well as risk factors significant to the Company as a whole, such as aggregate
credit spread exposure, that may not be significant for individual desks.
Overall, more than one hundred risk factors are employed. Risk factors are used
in three types of analysis: stress analysis, value-at-risk analysis and scenario
analysis.
STRESS ANALYSIS The Company performs stress analysis by repricing
inventory positions for specified upward and downward moves in risk factors, and
computing the revenue implications of these repricings. Stress analysis is a
useful tool for identifying exposures that appear to be relatively small in the
current environment but grow more than proportionately with changes in risk
factors. Such risk is typical of a number of derivative instruments, including
options sold, many mortgage derivatives and a number of structured products.
Stress analysis provides for the measurement of the potential impact of
extremely large moves in risk factors, which, though infrequent, can be expected
to occur from time to time.
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<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
VALUE-AT-RISK ANALYSIS. Under value-at-risk analysis, revenue implications are
computed for individual simulations, each based on a random outcome for the
individual risk factors. Value-at-risk is a summary statistic constructed by
performing thousands of simulations from which a probability distribution of
revenues is derived. It is of limited value for internal risk management in that
it does not give any indication of which individual exposures are problematic or
which of the many risk factor simulations are particularly worrisome. However,
it does provide a concise and simple measure of risk.
SCENARIO ANALYSIS. Scenario analysis is a tool that generates forward-looking
"what-if" simulations for specified changes in market factors. For example, a
scenario analysis could simulate the impact of a dramatic tightening by the
Federal Reserve Board. The revenue implications of the specified scenario are
quantified not only for the Company as a whole, but on a business unit basis and
on a geographic basis. The risk management system keeps track of many scenarios
developed by both members of the Group and the Company's economists and
strategists.
CREDIT RISK
Credit risk represents the loss the Company could incur if an issuer
or counterparty is unable or unwilling to perform on its commitments, including
the timely payment of principal and interest or settlement of swap and foreign
exchange transactions, repurchase agreements, securities purchases and sales,
and other contractual obligations. The Company's credit risk management process
considers the many factors that influence the probability of a potential loss,
including, but not limited to, the issuer's or counterparty's financial profile,
its business prospects and reputation, the specific terms and duration of the
transactions, the exposure of the transactions to market risk, macroeconomic
developments and sovereign risk.
ORIGIN OF CREDIT RISK
In the normal course of its operations, the Company and its subsidiaries enter
into various transactions which give rise to credit risk. Credit risk is
generally attributable to one or more of the following risks: market, delivery
and default of principal. Market and delivery risks create credit risk with
respect to transactions with counterparties. Default of principal risk is the
risk of nonpayment of the principal and interest of a security.
The components of market risk such as absolute and relative price movements,
price volatility, changes in yield curves, currency fluctuations, and changes in
market liquidity, result in credit risk when a counterparty's obligation to the
Company exceeds the obligation of the Company to the counterparty. Delivery risk
arises from the requirement, in certain circumstances, to release cash or
securities before receiving payment. For both market and delivery risk, the
Department sets credit limits or requires specific approvals which anticipate
the potential exposure of transactions.
CREDIT RISK MANAGEMENT AT SALOMON SMITH BARNEY HOLDINGS INC.
The Chief Credit Officer, who is independent of any revenue-generating function,
manages the Department, whose professionals assess, approve, monitor, and
coordinate the extension of credit on a global basis. In considering such risk,
the Department evaluates the risk/return trade-offs as well as current and
potential credit exposures to a counterparty or to groups
57
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
of counterparties that are related because of industry, geographic, or economic
characteristics. The Department also has established various credit policies and
control procedures used singularly or in combination, depending upon the
circumstances, including:
- establishment of internal guidelines monitored by the Chief Credit Officer
for maximum potential credit exposure to each counterparty or each issuer
and to each country;
- initial credit approval, whereby the approval of a designated member of
the Department is required before execution of a transaction that does not
meet defined parameters; credit limits, against which monitoring of
transactions is performed on a daily basis;
- specific clauses in legal agreements for collateral requirements,
cross-default, right of set-off, guarantees, event risk covenants and
two-way mark to market, among others;
- establishment of collateral standards for financing activities and secured
derivatives;
- quarterly analysis of potential exposure for DPG reporting to the SEC and
CFTC, see "Derivative Instruments - Overview;"
- periodic scenario analysis of subsets of the credit portfolio to evaluate
sensitivity to market variables;
- periodic assessment of sovereign risk through analysis of economic and
political developments; and
- periodic review of aged and large inventory positions with the Global Risk
Management Group and various support units.
58
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CREDIT RISK MANAGEMENT OF COMMODITIES-RELATED TRANSACTIONS
Phibro's credit department determines the credit limits for counterparties in
its commodities-related activities. Exposure reports, which contain detailed
information about cash flows with customers, goods in transit and forward
mark-to-market positions, are reviewed daily.
CREDIT EXPOSURE FROM DERIVATIVES ACTIVITIES
The following table summarizes the Company's credit exposure, net of cash and
securities collateral for swap agreements, swap options, caps and floors and
foreign exchange contracts and options at December 31, 1996. These numbers do
not present potential credit exposure that may result from factors that
influence market risk or from the passage of time. Severe changes in market
factors may cause credit exposure to increase suddenly and dramatically. Swap
agreements, swap options, caps and floors include transactions with both short-
and long-term periods of commitment.
<TABLE>
<CAPTION>
Transactions
with over 3 years to
Dollars in billions All transactions maturity 1996 average
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Swaps, swap options, caps and floors:
Risk classes 1 and 2 $ 1.1 $ .8 $ 1.0
Risk class 3 1.2 .6 1.0
Risk classes 4 and 5 .7 .3 .8
Risk classes 6, 7 and 8 -- .1 .1
- ---------------------------------------------------------------------------------------------------------------------
$ 3.0 $ 1.8 $ 2.9
- ---------------------------------------------------------------------------------------------------------------------
Foreign exchange contracts and options:
Risk classes 1 and 2 $ .8 -- $ .6
Risk class 3 .3 -- .3
Risk classes 4 and 5 .1 -- .1
- ---------------------------------------------------------------------------------------------------------------------
$ 1.2 -- $ 1.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are analogous to
external credit ratings whereby risk classes one through three are high quality
investment grades. Risk classes four and five include counterparties ranging
from the lowest investment grade to the highest non-investment grade. Risk
classes six, seven and eight represent higher risk counterparties.
With respect to sovereign risk related to derivatives, credit exposure at
December 31, 1996 was primarily to counterparties in the U.S. ($1.7 billion),
Germany ($.5 billion), Japan ($.4 billion), Great Britain ($.3 billion), Italy
($.2 billion) and Switzerland ($.2 billion).
OPERATIONAL RISK
As a major intermediary in financial and commodities markets, the Company is
directly exposed to market risk and credit risk, which arise in the normal
course of its business activities. Slightly less direct, but of critical
importance, are risks pertaining to operational and back office support. This is
particularly the case in a rapidly changing and increasingly global environment
with increasing transaction volumes and an expansion in the number and
complexity of products in the marketplace. Such risks include:
59
<PAGE> 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Operational/Settlement Risk - the risk of financial and opportunity loss
and legal liability attributable to operational problems, such as
inaccurate pricing of transactions, untimely trade execution, clearance
and/or settlement, or the inability to process large volumes of
transactions. The Company is subject to increased risks with respect to
its trading activities in emerging markets securities, where clearance,
settlement, and custodial risks are often greater than in more established
markets.
Technological Risk - the risk of loss attributable to technological
limitations or hardware failure that constrain the Company's ability to
gather, process, and communicate information efficiently and securely,
without interruption, with customers, among units within the Company, and
in the markets where the Company participates. In addition, the Company
must enhance its systems to process dates starting with the year 2000 and
to address the technological implications that will result from regulatory
and market changes, such as Europe's Economic and Monetary Union.
Legal/Documentation Risk - the risk of loss attributable to deficiencies
in the documentation of transactions (such as trade confirmations) and
customer relationships (such as master netting agreements) or errors that
result in noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls; strong financial systems and controls
ensure that assets are safeguarded, that transactions are executed in
accordance with management's authorization, and that financial information
utilized by management and communicated to external parties, including the
Company's stockholder, creditors, and regulators, is free of material
errors.
As the above risks are largely interrelated, so are the Company's actions to
mitigate and manage them. The Company's Chief Administrative Officer is
responsible for, among other things, oversight of global operations and
technology. An essential element in mitigating the risks noted above is the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data.
ENVIRONMENTAL RISK
The Company is subject to environmental risk from two primary sources:
discontinued commodities processing and oil refining operations, and existing
energy-related transportation activities.
The Company is subject to uncertain remedial liability as a result of
commodities-related industrial operations, which were discontinued in or prior
to 1984. Such liability arises under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
which provides that potentially responsible parties
60
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
("PRPs"), including waste generators and past and present site owners and
operators, may be held jointly and severally liable for the entire cost of site
clean-up. The Company may also be subject to liability under state or other U.S.
environmental laws.
The process of remediating hazardous waste sites under CERCLA is normally
lengthy and involves a series of events including initial site identification,
environmental site studies and evaluations, issuance of the "Preliminary
Identification of Remedial Alternatives," completion of the "Remedial
Investigation and Feasibility Study," selection of an appropriate site remedy
and its related cost estimate known as the "Record of Decision," performance of
site remediation and post-remediation site monitoring. Factors that influence
the cost and time of completion include the remediation method selected; the
number of financially solvent PRPs responsible for payment; whether PRPs were
owners, operators or generators; determination of cost allocation among PRPs,
and the ongoing development of more efficient and effective remediation
technologies. The process may take ten years or more from site identification to
completion and may be further complicated by protracted legal proceedings
involving numerous PRPs.
The ultimate share of remediation costs that will be borne by the Company and
its subsidiaries cannot be predicted with accuracy. Although certain exposures
may be covered by insurance contracts or indemnification agreements from other
parties, the Company has incurred and will continue to incur costs related to
remediation at certain sites already identified. Further, it is possible that
the Company will be named as a PRP at additional sites. Management believes,
based upon currently known facts and established reserves, that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.
Phibro has potential environmental exposure in connection with activities in
which cargoes of products are transported and stored. Phibro mitigates this
exposure through insurance coverage and consideration of ports of delivery and
storage terminals.
61
<PAGE> 1
EXHIBIT 99.02
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1997
PAGE
Supplemental Condensed Consolidated Financial Statements
(unaudited):
Supplemental Condensed Consolidated Statements of Income -
Three months ended March 31, 1997 and 1996 2
Supplemental Condensed Consolidated Statements of Financial
Condition - March 31, 1997 and December 31, 1996 3
Supplemental Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 5
Notes to Supplemental Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
<PAGE> 2
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Dollars in millions
Three Months Ended March 31, 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Commissions $ 716 $ 704
Investment banking 484 459
Principal transactions 762 939
Asset management and administration fees 389 326
Other 28 29
------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 2,379 2,457
------------------------------------------------------------------------------------------------------------------
Interest and dividends 2,491 2,487
Interest expense 2,169 2,087
------------------------------------------------------------------------------------------------------------------
Net interest and dividends 322 400
------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 2,701 2,857
------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 1,479 1,463
Communications 121 116
Occupancy and equipment 106 109
Floor brokerage and other production 86 74
Advertising and market development 62 55
Professional services 41 42
Other operating and administrative expenses 128 117
------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,023 1,976
------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 678 881
Provision for income taxes 267 348
------------------------------------------------------------------------------------------------------------------
Income from continuing operations 411 533
Loss from discontinued operations, net of tax - (34)
------------------------------------------------------------------------------------------------------------------
Net income $ 411 $ 499
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental
condensed consolidated financial statements.
2
<PAGE> 3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Dollars in millions 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,571 $ 1,607
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 1,455 1,446
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 87,709 72,881
Deposits paid for securities borrowed 24,945 25,104
------ ------
112,654 97,985
Financial instruments and commodities owned and contractual commitments:
Government and government agency securities - U.S. 51,273 51,980
Government and government agency securities - non-U.S. 38,659 35,189
Corporate debt securities 16,462 14,668
Equity securities 7,477 7,396
Contractual commitments 6,923 7,218
Mortgage loans and collateralized mortgage securities 4,740 4,345
Other financial instruments 5,608 4,777
Physical commodities 1,150 995
------ ------
132,292 126,568
Receivables:
Customers 9,939 9,488
Brokers, dealers and clearing organizations 1,998 2,103
Other 1,391 1,760
------ ------
13,328 13,351
Assets securing collateralized mortgage obligations 378 394
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $831 and
$798, respectively 940 959
Net realizable value of discontinued operations 490 490
Excess of purchase price over fair value of net assets acquired, net
of accumulated amortization of $150 and $146, respectively 402 405
Other assets 3,194 2,909
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $266,704 $246,114
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
3
<PAGE> 4
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Dollars in millions 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 12,324 $ 10,020
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase 107,808 97,269
Deposits received for securities loaned 9,655 5,525
------- -------
117,463 102,794
Financial instruments and commodities sold, not yet purchased, and contractual
commitments:
Government and government agency securities - U.S. 47,606 41,864
Government and government agency securities - non-U.S. 29,097 31,699
Contractual commitments 9,775 9,984
Equity securities 6,417 6,142
Corporate debt securities 2,504 2,343
------- -------
95,399 92,032
Payables and accrued liabilities:
Customers 7,083 8,160
Brokers, dealers and clearing organizations 2,074 1,859
Other 6,355 6,737
------- -------
15,512 16,756
Collateralized mortgage obligations 368 384
Term debt 17,004 15,748
------- -------
Total liabilities 258,070 237,734
Redeemable preferred stock, Series A 420 420
Guaranteed preferred beneficial interests in Company
subordinated debt securities 345 345
Stockholder's equity:
Preferred stock, Series D and E 450 450
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 2,399 2,399
Retained earnings 6,691 6,433
Cumulative translation adjustments 3 10
Treasury stock (1,674) (1,677)
------- -------
Total stockholder's equity 7,869 7,615
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $266,704 $246,114
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
4
<PAGE> 5
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Dollars in millions
Three Months Ended March 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash items -
Net income $ 411 $ 499
Depreciation and amortization 75 90
- ------------------------------------------------------------------------------------------------------------
Cash items included in net income 486 589
- ------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (9) 66
Collateralized short-term financing agreements (14,669) (5,095)
Financial instruments and commodities owned and contractual commitments (5,724) 7,070
Receivables (80) (2,851)
Other assets (469) 32
- ------------------------------------------------------------------------------------------------------------
Increase in operating assets (20,951) (778)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 14,669 (14,275)
Financial instruments and commodities sold, not yet purchased, and contractual
commitments 3,367 17,852
Payables and accrued liabilities (1,262) (1,060)
- ------------------------------------------------------------------------------------------------------------
Increase in operating liabilities 16,774 2,517
- ------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (3,691) 2,328
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term
borrowings 2,304 (2,318)
Proceeds from issuance of term debt 2,511 1,521
Term debt maturities and repurchases (980) (1,132)
Collateralized mortgage obligations (17) (134)
Dividends paid (134) (219)
Issuance of preferred stock -- 250
Other capital transactions (2) --
- ------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 3,682 (2,032)
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 17 128
Property, equipment and leasehold improvements (37) (53)
Other (7) (53)
- ------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities (27) 22
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (36) 318
Cash and cash equivalents at January 1, 1,607 1,962
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $ 1,571 $ 2,280
============================================================================================================
</TABLE>
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 supplemental condensed consolidated financial statements.
5
<PAGE> 6
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The Merger
See Note 1 of Notes to supplemental consolidated financial statements
as of December 31, 1996 and for the three years then ended included
herewith as Exhibit 99.01.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 million and $500 million primarily
for severance and costs related to excess or unused office space and
other facilities.
2. Summary of Significant Accounting Policies
Basis of Presentation
The supplemental condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles in
the United States, which requires 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 supplemental condensed consolidated financial statements reflect the
combination of the accounts of the Company including Salomon and Smith
Barney. All material intercompany balances and transactions have been
eliminated. These interim supplemental 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.
Certain financial information that is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but is not required for interim reporting purposes, has been
condensed or omitted.
6
<PAGE> 7
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. 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:
<TABLE>
<CAPTION>
NET EXCESS OVER
(DOLLARS IN MILLIONS) CAPITAL OR MINIMUM
SUBSIDIARY JURISDICTION EQUIVALENT REQUIREMENTS
- ----------------------------------------- ---------------------------------------------------- ----------- --------------
<S> <C> <C> <C>
Salomon Brothers Inc U.S. Securities and Exchange Commission $1,029 $978
Uniform Net Capital Rule (Rule 15c3-1)
Smith Barney Inc. U.S. Securities and Exchange Commission $1,065 $910
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $3,634 $583
Salomon Brothers Asia Limited Japan's Ministry of Finance $ 762 $372
Salomon Brothers AG Germany's Banking Supervisory Authority $ 412 $ 7
The Robinson-Humphrey Company, Inc. U.S. Securities and Exchange Commission $ 75 $ 74
Uniform Net Capital Rule (Rule 15c3-1)
Smith Barney Europe, Ltd. United Kingdom's Securities and Futures Authority $ 127 $105
</TABLE>
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco") must maintain minimum levels of capital in accordance with
agreements with its rating agencies. At March 31, 1997, Swapco was in
compliance with all such agreements. Swapco's capital requirements are
dynamic, varying with the size and concentration of its counterparty
receivables.
7
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Contractual Commitments
A summary of the Company's contractual commitments as of March 31, 1997
and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------
Current Market or
Fair Value
Notional -------------------------
Dollars in billions Amounts Assets Liabilities
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 641.5 $ -- $ --
Other exchange-issued products:
Equity contracts 13.6 .1 .3
Fixed income contracts 131.2 -- --
Foreign exchange contracts .2 -- --
Physical commodities contracts 3.9 -- --
- ---------------------------------------------------------------------------------------------------------
Total exchange-issued products 790.4 .1 .3
- ---------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps and floors:
Swaps 927.1
Swap options written 17.0
Swap options purchased 28.6
Caps and floors 123.9
- ---------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors (b) 1,096.6 3.6 5.8
- ---------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 120.7 .8 .6
Options written 48.6 -- .6
Options purchased 47.9 .7 --
- ---------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 217.2 1.5 1.2
- ---------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity 52.3 1.2 2.0
indices
Options and forward contracts on fixed-income 284.6 .3 .3
securities
Physical commodities contracts 21.6 .2 .2
- ---------------------------------------------------------------------------------------------------------
Total contractual commitments $ 2,462.7 $ 6.9 $ 9.8
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
Current Market or
Fair Value
Notional ---------------------
Dollars in billions Amounts Assets Liabilities
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 530.9 $ $ --
Other exchange-issued products:
Equity contracts 13.1 .1 .2
Fixed income contracts 61.2 -- --
Foreign exchange contracts -- -- --
Physical commodities contracts 5.0 -- --
- ------------------------------------------------------------------------------------------------------------
Total exchange-issued products 610.2 .1 .2
- ------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps and floors:
Swaps 858.3
Swap options written 10.8
Swap options purchased 24.1
Caps and floors 117.1
- ------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors (b) 1,010.3 4.2 6.6
- ------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 96.3 .7 .6
Options written 37.1 -- .3
Options purchased 38.7 .5 --
- ------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 172.1 1.2 .9
- ------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity 45.8 1.1 1.8
indices
Options and forward contracts on fixed-income 202.8 .3 .2
securities
Physical commodities contracts 22.6 .3 .3
- ------------------------------------------------------------------------------------------------------------
Total contractual commitments $ 2,063.8 $ 7.2 $ 10.0
============================================================================================================
</TABLE>
(a) Margin on futures contracts is included in receivable/payables to brokers,
dealers and clearing organizations on the supplemental 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, TRUPS and preferred stock) of $17.4 billion and $1.9
billion at March 31, 1997 and $16.0 billion and $2.0 million at December
31, 1996, respectively.
8
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE MERGER
On November 28, 1997, a newly formed wholly-owned subsidiary of Travelers Group
Inc. was merged into Salomon Inc ("Salomon"). Pursuant to the merger agreement,
Salomon common stockholders received 1.695 shares of Travelers Group Inc. common
stock for each share of Salomon common stock after giving effect to the
three-for-two stock split declared by the Board of Directors of Travelers Group
Inc. and paid on November 19, 1997; each share of preferred stock of Salomon was
exchanged for a share of a substantially identical series of preferred stock of
Travelers Group Inc.; and Salomon became a wholly-owned subsidiary of Travelers
Group Inc. Following this merger, Salomon and Smith Barney Holdings Inc. ("Smith
Barney") were merged (the "Merger") to form Salomon Smith Barney Holdings Inc.
(collectively, with its subsidiaries the "Company"). The transaction is a tax
free exchange. The supplemental condensed consolidated financial statements give
retroactive effect to the Merger in a transaction accounted for in a manner
similar to a pooling of interests. The pooling of interests method of accounting
requires the restatement of all periods presented as if Salomon and Smith Barney
had always been combined. Certain reclassifications have been made to conform
the accounting policies of Salomon and Smith Barney.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 million and $500 million primarily for
severance and costs related to excess or unused office space and other
facilities.
RESULTS OF OPERATIONS
The Company reported net income from continuing operations of $411 million for
the three months ended March 31, 1997 (the "1997 Quarter"), a decline of 23%
from the $533 million reported for the three months ended March 31, 1996 (the
"1996 Quarter"). Revenues, net of interest expense, declined 5% to $2,701
million in the 1997 Quarter compared to $2,857 million in the 1996 Quarter.
Commission revenues increased 2% to $716 million in the 1997 Quarter compared
to $704 million in the 1996 Quarter. This increase is a result of strong
activity in listed and over-the-counter securities, offset by declines in listed
option and mutual fund commissions.
Global investment banking revenues increased 5% to $484 million in the 1997
Quarter compared to $459 million in the 1996 Quarter. This increase was
primarily the result of strong debt underwriting.
Principal transaction revenues decreased 19% to $762 million in the 1997 Quarter
from $939 million in the 1996 Quarter. This is a result of a decline in fixed
income proprietary trading revenues and physical commodities trading revenues,
partially offset by an increase in equity customer and proprietary trading
revenues.
Asset management and administration fees increased 19% to $389 million in the
1997 Quarter compared to $326 million in the 1996 Quarter. This reflects broad
growth in all recurring fee-based products. At March 31, 1997, internally
managed assets were $136.3 billion and total fee-based assets under management
were $183.3 billion compared to $117.1 billion and $154.7 billion, respectively,
at March 31, 1996.
9
<PAGE> 10
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 composed of the following:
<TABLE>
<CAPTION>
As of March 31,
--------------------
(in billions) 1997 1996
- ---------------- ------- -------
<S> <C> <C>
Money market funds $ 43.4 $ 39.2
Mutual funds 42.7 38.2
Managed accounts 41.3 33.2
Financial Consultant managed accounts 8.9 6.5
------- -------
Total internally managed assets 136.3 117.1
------- -------
Consulting Group externally managed assets 47.0 37.6
------- -------
Total fee-based assets under management $ 183.3 $ 154.7
======= =======
</TABLE>
Net interest and dividends decreased 20% to $322 million for the 1997 Quarter
from $400 million in the 1996 Quarter due to a lower level of net interest
earning assets.
Total expenses, excluding interest, increased 2% to $2,023 million in the 1997
Quarter from $1,976 million in the 1996 Quarter. Compensation and benefits
expense, as a percentage of net revenues, for the 1997 Quarter was 55% compared
to 51% in the 1996 Quarter and non-compensation expense as a percentage of net
revenues was 20% in the 1997 Quarter compared to 18% in the 1996 Quarter. The
Company continues to maintain its focus on controlling fixed expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $267 billion at March 31, 1997, up from $246
billion at December 31, 1996. 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. 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.
Smith Barney and Phibro have committed uncollateralized revolving lines of
credit totaling $1.5 billion and $500 million, respectively. Smith Barney may
borrow under its revolving credit facility at various interest rate options
(LIBOR, CD or base rate) and compensates the bank for the facility through
commitment fees. In addition, Salomon Brothers Inc has a $2.1 billion committed
secured standby bank credit facility for financing securities positions which
enables it to borrow on a secured basis using a variety of financial instruments
as collateral and Salomon Brothers International Limited has a committed
securities repurchase facility in the amount of $1 billion. At March 31, 1997,
there were no outstanding borrowings under these facilities. 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.
10
<PAGE> 11
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unsecured term debt is a significant component of the Company's long-term
capital. Term debt totaled $17.0 billion at March 31, 1997, compared with $15.7
billion at December 31, 1996.
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 securities inventories, customer balances, the amount of reverse
repurchase transactions outstanding (i.e., purchases of securities under
agreements to resell the same security) 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.
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 unsecured financing was 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 which is utilized
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. Net assets
(total assets less securities purchased under agreements to resell) to equity
(including redeemable preferred stock and TRUPS) ratio at March 31, 1997 and
December 31, 1996 was 20.7x.
11
<PAGE> 1
EXHIBIT 99.03
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 1997
PAGE
Supplemental Condensed Consolidated Financial Statements
(unaudited):
Supplemental Condensed Consolidated Statements of Income -
Three and Six months ended June 30, 1997 and 1996 2
Supplemental Condensed Consolidated Statements of Financial
Condition - June 30, 1997 and December 31, 1996 3
Supplemental Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1996 5
Notes to Supplemental Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
<PAGE> 2
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 1997 1996 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 686 $ 661 $1,402 $1,365
Investment banking 475 548 959 1,007
Principal transactions 709 861 1,471 1,800
Asset management and administration fees 399 342 788 668
Other 25 31 53 60
----------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 2,294 2,443 4,673 4,900
----------------------------------------------------------------------------------------------------------------------
Interest and dividends 3,008 2,343 5,499 4,830
Interest expense 2,578 1,941 4,747 4,028
----------------------------------------------------------------------------------------------------------------------
Net interest and dividends 430 402 752 802
----------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 2,724 2,845 5,425 5,702
----------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 1,442 1,443 2,921 2,906
Communications 124 117 245 233
Occupancy and equipment 110 109 216 218
Floor brokerage and other production 86 74 172 148
Advertising and market development 70 51 132 106
Professional services 47 55 88 97
Other operating and administrative expenses 106 124 234 241
----------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,985 1,973 4,008 3,949
----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 739 872 1,417 1,753
Provision for income taxes 288 345 555 693
----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 451 527 862 1,060
Loss from discontinued operations, net of tax - (7) - (41)
----------------------------------------------------------------------------------------------------------------------
Net income $ 451 $ 520 $ 862 $1,019
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
2
<PAGE> 3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
Dollars in millions 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,293 $ 1,607
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 1,475 1,446
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 77,157 72,881
Deposits paid for securities borrowed 42,122 25,104
------- -------
119,279 97,985
Financial instruments and commodities owned and contractual commitments:
Government and government agency securities - U.S. 60,489 51,980
Government and government agency securities - non-U.S. 43,407 35,189
Corporate debt securities 17,119 14,668
Equity securities 8,435 7,396
Contractual commitments 7,810 7,218
Mortgage loans and collateralized mortgage securities 4,321 4,345
Other financial instruments 5,806 4,777
Physical commodities 1,366 995
------- -------
148,753 126,568
Receivables:
Customers 12,280 9,488
Brokers, dealers and clearing organizations 2,082 2,103
Other 792 1,760
------- -------
15,154 13,351
Assets securing collateralized mortgage obligations 337 394
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $846 and
$798, respectively 955 959
Net realizable value of discontinued operations 490
Excess of purchase price over fair value of net assets acquired, net
of accumulated amortization of $153 and $146, respectively 398 405
Other assets 3,054 2,909
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $291,698 $246,114
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
3
<PAGE> 4
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
Dollars in millions 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 12,286 $ 10,020
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase 125,478 97,269
Deposits received for securities loaned 9,239 5,525
------- -------
134,717 102,794
Financial instruments and commodities sold,
not yet purchased, and contractual commitments:
Government and government agency securities - U.S. 40,005 41,864
Government and government agency securities - non-U.S. 36,126 31,699
Contractual commitments 10,747 9,984
Equity securities 7,474 6,142
Corporate debt securities 2,578 2,343
------- -------
96,930 92,032
Payables and accrued liabilities:
Customers 7,913 8,160
Brokers, dealers and clearing organizations 4,237 1,859
Other 7,628 6,737
------- -------
19,778 16,756
Collateralized mortgage obligations 327 384
Term debt 18,816 15,748
------- -------
Total liabilities 282,854 237,734
Redeemable preferred stock, Series A 420 420
Guaranteed preferred beneficial interests in Company
subordinated debt securities 345 345
Stockholder's equity:
Preferred stock, Series D and E 450 450
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 2,400 2,399
Retained earnings 6,994 6,433
Cumulative translation adjustments 4 10
Treasury stock (1,769) (1,677)
------- -------
Total stockholder's equity 8,079 7,615
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 291,698 $246,114
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
4
<PAGE> 5
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Six Months Ended June 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash items -
Net income $ 862 $ 1,019
Depreciation and amortization 144 148
- -------------------------------------------------------------------------------------------------------------------------------
Cash items included in net income 1,006 1,167
- -------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (29) 12
Collateralized short-term financing agreements (21,294) (7,870)
Financial instruments and commodities owned and contractual commitments (22,185) 9,855
Receivables (1,818) (203)
Other assets (180) 88
- -------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets (45,506) 1,882
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 31,923 (14,921)
Financial instruments and commodities sold, not yet purchased, and contractual
commitments 4,898 15,865
Payables and accrued liabilities 3,032 (1,905)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities 39,853 (961)
- -------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (4,647) 2,088
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term
borrowings 2,266 (2,486)
Proceeds from issuance of term debt 4,596 2,871
Term debt maturities and repurchases (1,392) (2,119)
Collateralized mortgage obligations (63) (284)
Dividends paid (286) (478)
Issuance of preferred stock - 250
Other capital transactions (98) (49)
- -------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 5,023 (2,295)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 63 351
Proceeds from sale of Basis Petroleum 365 -
Property, equipment and leasehold improvements (98) (112)
Other (20) (55)
- -------------------------------------------------------------------------------------------------------------------------------
Cash provided by investing activities 310 184
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 686 (23)
Cash and cash equivalents at January 1 1,607 1,962
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $2,293 $1,939
===============================================================================================================================
</TABLE>
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 supplemental condensed
consolidated financial statements.
5
<PAGE> 6
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The Merger
See Note 1 of Notes to supplemental consolidated financial statements
as of December 31, 1996 and for the three years then ended included
herewith as Exhibit 99.01.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 million and $500 million primarily
for severance and costs related to excess or unused office space and
other facilities.
2. Summary of Significant Accounting Policies
Basis of Presentation
The supplemental condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles in
the United States, which requires 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 supplemental condensed consolidated financial statements reflect
the combination of the accounts of the Company including Salomon and
Smith Barney. All material intercompany balances and transactions have
been eliminated. These interim supplemental 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.
Certain financial information that is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but is not required for interim reporting purposes, has
been condensed or omitted.
6
<PAGE> 7
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. 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:
<TABLE>
<CAPTION>
NET EXCESS OVER
(DOLLARS IN MILLIONS) CAPITAL OR MINIMUM
SUBSIDIARY JURISDICTION EQUIVALENT REQUIREMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salomon Brothers Inc U.S. Securities and Exchange Commission $ 1,011 $ 938
Uniform Net Capital Rule (Rule 15c3-1)
Smith Barney Inc. U.S. Securities and Exchange Commission $ 1,300 $ 1,122
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $ 3,937 $ 483
Salomon Brothers Asia Limited Japan's Ministry of Finance $ 384 $ 305
Salomon Brothers AG Germany's Banking Supervisory Authority $ 225 $ 1
The Robinson-Humphrey Company, Inc. U.S. Securities and Exchange Commission $ 77 $ 76
Uniform Net Capital Rule (Rule 15c3-1)
Smith Barney Europe, Ltd. United Kingdom's Securities and Futures Authority $ 127 $ 91
</TABLE>
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco") must maintain minimum levels of capital in accordance with agreements
with its rating agencies. At June 30, 1997, Swapco was in compliance with all
such agreements. Swapco's capital requirements are dynamic, varying with the
size and concentration of its counterparty receivables.
7
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Contractual Commitments
A summary of the Company's contractual commitments as of June 30, 1997
and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------------ ----------------------------
CURRENT MARKET OR CURRENT MARKET OR
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL ---------------------
DOLLARS IN BILLIONS AMOUNTS ASSETS LIABILITIES AMOUNTS ASSETS LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 572.8 $ -- $ -- $ 530.9 $ -- $ --
Other exchange-issued products:
Equity contracts 15.9 .2 .5 13.1 .1 .2
Fixed income contracts 93.7 -- -- 61.2 -- --
Foreign exchange contracts .1 -- -- -- -- --
Physical commodities contracts 4.1 -- -- 5.0 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 686.6 .2 .5 610.2 .1 .2
- ------------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps and floors:
Swaps (b) 1,066.6 858.3
Swap options written 17.6 10.8
Swap options purchased 31.7 24.1
Caps and floors 143.7 117.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 1,259.6 3.8 6.4 1,010.3 4.2 6.6
- ------------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 118.0 .8 .6 96.3 .7 .6
Options written 42.5 -- .4 37.1 -- .3
Options purchased 45.7 .7 -- 38.7 .5 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 206.2 1.5 1.0 172.1 1.2 .9
- ------------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options, warrants and forwards on equities and 57.6 1.8 2.5 45.8 1.1 1.8
equity indices
Options and forward contracts on fixed-income 270.6 .3 .1 202.8 .3 .2
securities
Physical commodities contracts 17.3 .2 .2 22.6 .3 .3
- ------------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $2,497.9 $ 7.8 $ 10.7 $2,063.8 $ 7.2 $ 10.0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Margin on futures contracts is included in receivables or payables on the
supplemental condensed consolidated statements of financial condition.
(b) Includes notional values of swap agreements or forward currency contracts
for non-trading activities (primarily related to the Company's fixed-rate
long-term debt, TRUPS and preferred stock) of $19.4 billion and $1.7
billion at June 30, 1997 and $16.0 billion and $2.0 billion at December 31,
1996, respectively.
8
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE MERGER
On November 28, 1997, a newly formed wholly-owned subsidiary of Travelers Group
Inc. was merged into Salomon Inc ("Salomon"). Pursuant to the merger agreement,
Salomon common stockholders received 1.695 shares of Travelers Group Inc. common
stock for each share of Salomon common stock after giving effect to the
three-for-two stock split declared by the Board of Directors of Travelers Group
Inc. and paid on November 19, 1997; each share of preferred stock of Salomon was
exchanged for a share of a substantially identical series of preferred stock of
Travelers Group Inc.; and Salomon became a wholly-owned subsidiary of Travelers
Group Inc. Following this merger, Salomon and Smith Barney Holdings Inc. ("Smith
Barney") were merged (the "Merger") to form Salomon Smith Barney Holdings Inc.
(collectively, with its subsidiaries the "Company"). The transaction is a tax
free exchange. The supplemental condensed consolidated financial statements give
retroactive effect to the Merger in a transaction accounted for in a manner
similar to a pooling of interests. The pooling of interests method of accounting
requires the restatement of all periods presented as if Salomon and Smith Barney
had always been combined. Certain reclassifications have been made to conform
the accounting policies of Salomon and Smith Barney.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 and $500 million primarily for severance
and costs related to excess or unused office space and other facilities.
RESULTS OF OPERATIONS
The Company reported net income from continuing operations of $451 million for
the three months ended June 30, 1997 (the "1997 Quarter"), a decline from the
$527 million reported for the three months ended June 30, 1996 (the "1996
Quarter"). Revenues, net of interest expense, declined to $2,724 million in the
1997 Quarter compared to $2,845 million in the 1996 Quarter.
For the six months ended June 30, 1997 (the "1997 Period") the Company reported
net income from continuing operations of $862 million, a decline from the $1,060
million reported for the six months ended June 30, 1996 (the "1996 Period").
Revenues, net of interest expense, declined to $5,425 million in the 1997 Period
compared to $5,702 million in the 1996 Period.
Commission revenues were $686 million in the 1997 Quarter up slightly from the
$661 million reported in the 1996 Quarter, as an increase in listed securities
was offset by declines in mutual funds and over-the-counter securities
commissions. Commission revenues were $1,402 in the 1997 Period compared to
$1,365 in the 1996 Period.
Global investment banking revenues declined to $475 million in the 1997 Quarter
compared to $548 million in the 1996 Quarter, primarily as a result of a decline
in equity underwritings. This decline was offset to an extent by increases in
advisory and debt underwriting fees. Global investment banking revenues declined
to $959 million in the 1997 period compared to $1,007 in the 1996 Period.
Principal transaction revenues decreased to $709 million in the 1997 Quarter
compared to $861 million in the 1996 Quarter. This decrease is the result of
lower revenues from fixed income and equity proprietary and customer trading,
partially offset by an increase in physical commodities trading revenues.
Principal transaction revenues declined to $1,471 million in the 1997 Period
compared to $1,800 million in the 1996 Period as a result of lower fixed income
proprietary trading revenues and revenues from physical commodities trading,
partially offset by an increase in equity proprietary trading revenues.
9
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Asset management and administration fees increased 17% to $399 million in the
1997 Quarter compared to $342 million in the 1996 Quarter. This reflects broad
growth in all recurring fee-based products. Asset management and administration
fees increased 18% to $788 million in the 1997 Period compared to $668 million
in the 1996 Period. At June 30, 1997, internally managed assets were $147.5
billion and total fee-based assets under management were $200.6 billion compared
to $118.9 billion and $158.6 billion, respectively, at June 30, 1996.
Total assets under fee-based management were composed of the following:
<TABLE>
<CAPTION>
As of June 30,
(in billions) 1997 1996
- ------------- ----- -----
<S> <C> <C>
Money market funds $ 44.1 $ 38.7
Mutual funds 46.4 39.2
Managed accounts 47.2 34.3
Financial Consultant managed accounts 9.8 6.7
------- -------
Total internally managed assets 147.5 118.9
------- -------
Consulting Group externally managed assets 53.1 39.7
------- -------
Total fee-based assets under management $ 200.6 $ 158.6
======= =======
</TABLE>
Net interest and dividends increased 7% to $430 million for the 1997 Quarter
from $402 million in the 1996 Quarter, primarily due to increased margin lending
to clients and higher levels of interest-earning net assets. Net interest and
dividends declined to $752 million in the 1997 Period compared to $802 million
in the 1996 Period.
Total expenses, excluding interest, increased slightly to $1,985 million in the
1997 Quarter from $1,973 million in the 1996 Quarter. Compensation and benefits
expense, as a percentage of net revenues, for the 1997 Quarter was 53% compared
to 51% in the 1996 Quarter and non-compensation expense as a percentage of net
revenues was 20% in the 1997 Quarter compared to 19% in the 1996 Quarter. The
Company continues to maintain its focus on controlling fixed expenses.
Total expenses, excluding interest, increased 1% to $4,008 million in the 1997
Period from $3,949 million in the 1996 Period. Compensation and benefits
expense, as a percentage of net revenues, for the 1997 Period was 54% compared
to 51% in the 1996 Period and non-compensation expense as a percentage of net
revenues was 20% in the 1997 Period compared to 18% in the 1996 Period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $292 billion at June 30, 1997, up from $246
billion at December 31, 1996. 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. 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
10
<PAGE> 11
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
Smith Barney and Phibro have committed uncollateralized revolving lines of
credit totaling $2.0 billion and $500 million, respectively. Smith Barney may
borrow under its revolving credit facility at various interest rate options
(LIBOR, CD or base rate) and compensates the bank for the facility through
commitment fees. In addition, Salomon Brothers Inc has a $2.1 billion committed
secured standby bank credit facility for financing securities positions which
enables it to borrow on a secured basis using a variety of financial instruments
as collateral and Salomon Brothers International Limited has a committed
securities repurchase facility in the amount of $1 billion. At June 30, 1997
there were no outstanding borrowings under these facilities. 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.
Unsecured term debt is a significant component of the Company's long-term
capital. Term debt totaled $18.8 billion at June 30, 1997 compared with $15.7
billion at December 31, 1996.
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 securities inventories, customer balances, the amount of reverse
repurchase transactions outstanding (i.e., purchases of securities under
agreements to resell the same security) 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.
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 unsecured financing was 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 which is utilized
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. Net assets
(total assets less securities purchased under agreements to resell) to equity
(including redeemable preferred stock and TRUPS) ratio at June 30, 1997 and
December 31, 1996 was 24.3x and 20.7x, respectively.
11
<PAGE> 1
EXHIBIT 99.04
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PAGE
----
Supplemental Condensed Consolidated Financial Statements (unaudited):
Supplemental Condensed Consolidated Statements of Income -
Three and Nine months ended September 30, 1997 and 1996 2
Supplemental Condensed Consolidated Statements of Financial Condition -
September 30, 1997 and December 31, 1996 3
Supplemental Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996 5
Notes to Supplemental Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
<PAGE> 2
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Nine Months
Period Ended September 30, 1997 1996 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 783 $574 $2,185 $1,939
Investment banking 597 476 1,556 1,483
Principal transactions 790 564 2,261 2,364
Asset management and administration fees 448 353 1,236 1,021
Other 41 19 94 79
---------------------------------------------------------------------------------------------------------------
Total noninterest revenues 2,659 1,986 7,332 6,886
---------------------------------------------------------------------------------------------------------------
Interest and dividends 3,207 2,370 8,706 7,200
Interest expense 2,841 2,030 7,588 6,058
---------------------------------------------------------------------------------------------------------------
Net interest and dividends 366 340 1,118 1,142
---------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,025 2,326 8,450 8,028
---------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 1,627 1,283 4,548 4,189
Communications 127 129 372 362
Occupancy and equipment 108 109 324 327
Floor brokerage and other production 99 77 271 225
Advertising and market development 70 52 202 158
Professional services 53 45 141 142
Other operating and administrative expenses 113 107 347 348
---------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,197 1,802 6,205 5,751
---------------------------------------------------------------------------------------------------------------
Gain on sale of subsidiaries and affiliates 48 48
---------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 828 572 2,245 2,325
Provision for income taxes 321 225 876 918
---------------------------------------------------------------------------------------------------------------
Income from continuing operations 507 347 1,369 1,407
Loss from discontinued operations, net of tax -- (28) -- (69)
---------------------------------------------------------------------------------------------------------------
Net income $ 507 $ 319 $1,369 $1,338
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
2
<PAGE> 3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,360 $ 1,607
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 1,718 1,446
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 87,865 72,881
Deposits paid for securities borrowed 34,351 25,104
------ ------
122,216 97,985
Financial instruments and commodities owned and contractual commitments:
Government and government agency securities - U.S. 55,243 51,980
Government and government agency securities - non-U.S. 49,493 35,189
Corporate debt securities 19,439 14,668
Equity securities 6,814 7,396
Contractual commitments 9,054 7,218
Mortgage loans and collateralized mortgage securities 4,619 4,345
Other financial instruments 5,653 4,777
Physical commodities 1,426 995
------ ------
151,741 126,568
Receivables:
Customers 12,571 9,488
Brokers, dealers and clearing organizations 1,828 2,103
Other 1,028 1,760
------ ------
15,427 13,351
Assets securing collateralized mortgage obligations 272 394
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $861 and
$798, respectively 987 959
Net realizable value of discontinued operations 490
Excess of purchase price over fair value of net assets acquired, net
of accumulated amortization of $156 and $146, respectively 395 405
Other assets 2,980 2,909
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 297,096 $246,114
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
3
<PAGE> 4
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 11,161 $ 10,020
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase 134,335 97,269
Deposits received for securities loaned 13,418 5,525
------- ------
147,753 102,794
Financial instruments and commodities sold, not yet purchased, and contractual
commitments:
Government and government agency securities - U.S. 32,754 41,864
Government and government agency securities - non-U.S. 35,920 31,699
Contractual commitments 11,268 9,984
Equity securities 5,154 6,142
Corporate debt securities 2,302 2,343
------- ------
87,398 92,032
Payables and accrued liabilities:
Customers 7,907 8,160
Brokers, dealers and clearing organizations 5,384 1,859
Other 8,332 6,737
------- ------
21,623 16,756
Collateralized mortgage obligations 264 384
Term debt 19,727 15,748
------ ------
Total liabilities 287,926 237,734
Redeemable preferred stock, Series A 420 420
Guaranteed preferred beneficial interests in Company
subordinated debt securities 345 345
Stockholder's equity:
Preferred stock, Series D and E 450 450
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) -- --
Additional paid-in capital 2,401 2,399
Retained earnings 7,318 6,433
Cumulative translation adjustments 3 10
Treasury stock (1,767) (1,677)
------- ------
Total stockholder's equity 8,405 7,615
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 297,096 $246,114
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
4
<PAGE> 5
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Nine Months Ended September 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash items and non-operating activities -
Net income $ 1,369 $ 1,338
Depreciation and amortization 219 223
Gain on sale of The Mortgage Corporation -- (31)
- -------------------------------------------------------------------------------------------------------------------------------
Cash items included in net income 1,588 1,530
- -------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (272) (18)
Collateralized short-term financing agreements (24,231) (14,422)
Financial instruments and commodities owned and contractual commitments (25,173) 5,011
Receivables (2,210) (154)
Other assets (86) (557)
- -------------------------------------------------------------------------------------------------------------------------------
Increase in operating assets (51,972) (10,140)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 44,959 (9,729)
Financial instruments and commodities sold, not yet purchased, and contractual
commitments (4,634) 20,125
Payables and accrued liabilities 4,807 128
- -------------------------------------------------------------------------------------------------------------------------------
Increase in operating liabilities 45,132 10,524
- -------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (5,252) 1,914
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term
borrowings 1,141 (2,141)
Proceeds from issuance of term debt 7,249 3,204
Term debt maturities and repurchases (3,030) (2,858)
Collateralized mortgage obligations (129) (380)
Dividends paid (435) (688)
Issuance of TRUPS -- 345
Issuance of preferred stock -- 250
Redemption of preferred stock -- (112)
Other capital transactions (97) (45)
- -------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 4,699 (2,425)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of The Mortgage Corporation -- 82
Assets securing collateralized mortgage obligations 131 456
Proceeds from sale of Basis Petroleum 365 --
Property, equipment and leasehold improvements (168) (176)
Other (22) (58)
- -------------------------------------------------------------------------------------------------------------------------------
Cash provided by investing activities 306 304
- -------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (247) (207)
Cash and cash equivalents at January 1 1,607 1,962
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30 $1,360 $1,755
===============================================================================================================================
</TABLE>
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 supplemental condensed
consolidated financial statements.
5
<PAGE> 6
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The Merger
See Note 1 of Notes to supplemental consolidated financial statements
as of December 31, 1996 and for the three years then ended included
herewith as Exhibit 99.01.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 million and $500 million primarily
for severance and costs related to excess or unused office space and
other facilities.
2. Summary of Significant Accounting Policies
Basis of Presentation
The supplemental condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles in
the United States, which requires 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 supplemental condensed consolidated financial statements reflect
the combination of the accounts of the Company including Salomon and
Smith Barney. All material intercompany balances and transactions have
been eliminated. These interim supplemental 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.
Certain financial information that is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but is not required for interim reporting purposes, has
been condensed or omitted.
6
<PAGE> 7
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. 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:
<TABLE>
<CAPTION>
NET EXCESS OVER
(DOLLARS IN MILLIONS) CAPITAL OR MINIMUM
SUBSIDIARY JURISDICTION EQUIVALENT REQUIREMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salomon Brothers Inc U.S. Securities and Exchange Commission $1,187 $1,019
Uniform Net Capital Rule (Rule 15c3-1)
Smith Barney Inc. U.S. Securities and Exchange Commission $1,316 $1,123
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $4,381 $ 614
Salomon Brothers Asia Limited Japan's Ministry of Finance $ 672 $ 255
Salomon Brothers AG Germany's Banking Supervisory Authority $ 228 $ 40
The Robinson-Humphrey Company, Inc. U.S. Securities and Exchange Commission $ 74 $ 73
Uniform Net Capital Rule (Rule 15c3-1)
Smith Barney Europe, Ltd. United Kingdom's Securities and Futures Authority $ 117 $ 69
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco") must maintain minimum levels of capital in accordance with agreements
with its rating agencies. At September 30, 1997, Swapco was in compliance with
all such agreements. Swapco's capital requirements are dynamic, varying with the
size and concentration of its counterparty receivables.
</TABLE>
7
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Contractual Commitments
A summary of the Company's contractual commitments as of September 30,
1997 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------------------- ----------------------------------
Current Market or Current Market or
Fair Value Fair Value
Notional ----------------------- Notional -----------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 653.3 $ -- $ -- $ 530.9 $ -- $ --
Other exchange-issued products:
Equity contracts 17.1 .2 .6 13.1 .1 .2
Fixed income contracts 86.8 -- -- 61.2 -- --
Foreign exchange contracts -- -- -- -- -- --
Physical commodities contracts 4.1 -- -- 5.0 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 761.3 .2 .6 610.2 .1 .2
- -----------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps and
floors:
Swaps (b) 1,232.2 858.3
Swap options written 24.8 10.8
Swap options purchased 38.4 24.1
Caps and floors 144.3 117.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 1,439.7 4.7 6.1 1,010.3 4.2 6.6
- -----------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 129.4 .8 1.0 96.3 .7 .6
Options written 41.1 -- .5 37.1 -- .3
Options purchased 43.6 .5 -- 38.7 .5 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 214.1 1.3 1.5 172.1 1.2 .9
- -----------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options, warrants and forwards on equities and equity
indices 61.7 2.2 2.7 45.8 1.1 1.8
Options and forward contracts on fixed-income
securities 332.6 .4 .2 202.8 .3 .2
Physical commodities contracts 16.0 .3 .2 22.6 .3 .3
- -----------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $2,825.4 $ 9.1 $ 11.3 $2,063.8 $7.2 $10.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Margin on futures contracts is included in receivables or payables on the
supplemental 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, TRUPS and preferred stock) of $19.5 billion and $3.5
billion at September 30, 1997 and $16.0 billion and $2.0 billion at
December 31, 1996, respectively.
8
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE MERGER
On November 28, 1997, a newly formed wholly-owned subsidiary of Travelers Group
Inc. was merged into Salomon Inc ("Salomon"). Pursuant to the merger agreement,
Salomon common stockholders received 1.695 shares of Travelers Group Inc. common
stock for each share of Salomon common stock after giving effect to the
three-for-two stock split declared by the Board of Directors of Travelers Group
Inc. and paid on November 19, 1997; each share of preferred stock of Salomon was
exchanged for a share of a substantially identical series of preferred stock of
Travelers Group Inc.; and Salomon became a wholly-owned subsidiary of Travelers
Group Inc. Following this merger, Salomon and Smith Barney Holdings Inc. ("Smith
Barney") were merged (the "Merger") to form Salomon Smith Barney Holdings Inc.
(collectively, with its subsidiaries the "Company"). The transaction is a tax
free exchange. The supplemental condensed consolidated financial statements give
retroactive effect to the Merger in a transaction accounted for in a manner
similar to a pooling of interests. The pooling of interests method of accounting
requires the restatement of all periods presented as if Salomon and Smith Barney
had always been combined. Certain reclassifications have been made to conform
the accounting policies of Salomon and Smith Barney.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 million and $500 million primarily for
severance and costs related to excess or unused office space and other
facilities.
RESULTS OF OPERATIONS
The Company reported net income from continuing operations of $507 million for
the three months ended September 30, 1997 (the "1997 Quarter"), an increase of
46% from the $347 million reported for the three months ended September 30, 1996
(the "1996 Quarter"). Revenues, net of interest expense, increased 30% to $3,025
million in the 1997 Quarter compared to $2,326 million in the 1996 Quarter.
For the nine months ended September 30, 1997 (the "1997 Period") the Company
reported net income from continuing operations of $1,369 million, a decrease of
3% from the $1,407 million reported for the nine months ended September 30, 1996
(the "1996 Period"). Revenues, net of interest expense, increased 5% to $8,450
million in the 1997 Period compared to $8,028 million in the 1996 Period.
Commission revenues increased 36% to $783 million in the 1997 Quarter up from
the $574 million reported in the 1996 Quarter, reflecting strong increases in
listed and over-the-counter securities, as well as mutual fund commissions.
Commission revenues were $2,185 million in the 1997 Period compared to $1,939 in
the 1996 Period.
Global investment banking revenues increased 25% to $597 million in the 1997
Quarter compared to $476 million in the 1996 Quarter. Global investment banking
revenues increased to $1,556 million in the 1997 Period compared to $1,483
million in the 1996 Period. The increases in each of these periods are the
result of higher underwriting and advisory fees.
Principal transaction revenues increased 40% to $790 million in the 1997 Quarter
compared to $564 million in the 1996 Quarter. This increase is the result of
strong results from fixed income proprietary and customer trading revenues as
well as increased results from equity proprietary trading. Equity revenues in
the 1997 Quarter included a loss on a risk arbitrage position in British
Telecommunications PLC and MCI
9
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Communications Corporation which has largely been liquidated, which was
partially offset by a gain on the sale of Valero Energy common stock received
earlier this year in connection with the sale of Basis Petroleum, Inc. Principal
transaction revenues declined to $2,261 million in the 1997 Period compared to
$2,364 million in the 1996 Period. This year-to-year decrease was primarily due
to lower revenues from fixed income proprietary trading and physical commodities
trading, partially offset by improved results from equity proprietary trading.
Asset management and administration fees increased 27% to $448 million in the
1997 Quarter compared to $353 million in the 1996 Quarter. This reflects broad
growth in all recurring fee-based products. Asset management and administration
fees increased 21% to $1,236 million in the 1997 Period compared to $1,021
million in the 1996 Period. At September 30, 1997, internally managed assets
were $155.7 billion and total fee-based assets under management were $214.1
billion compared to $122.1 billion and $163.4 billion, respectively, at
September 30, 1996.
Total assets under fee-based management were composed of the following:
<TABLE>
<CAPTION>
As of September 30,
(in billions) 1997 1996
- ------------- ----- -----
<S> <C> <C>
Money market funds $ 45.5 $ 38.8
Mutual funds 49.1 40.4
Managed accounts 50.0 35.7
Financial Consultant managed accounts 11.1 7.2
------- -------
Total internally managed assets 155.7 122.1
------- -------
Consulting Group externally managed assets 58.4 41.3
------- -------
Total fee-based assets under management $ 214.1 $ 163.4
======= =======
</TABLE>
Net interest and dividends increased 8% to $366 million for the 1997 Quarter
from $340 million in the 1996 Quarter, primarily due to increased margin lending
to clients and higher levels of interest-earning net assets. Net interest and
dividends declined to $1,118 million in the 1997 Period compared to $1,142
million in the 1996 Period.
Total expenses, excluding interest, increased 22% to $2,197 million in the 1997
Quarter from $1,802 million in the 1996 Quarter, primarily the result of higher
production related compensation expense. Compensation and benefits expense, as a
percentage of net revenues, for the 1997 Quarter declined to 54% from 55% in the
1996 Quarter and non-compensation expense as a percentage of net revenues was
19% in the 1997 Quarter compared to 22% in the 1996 Quarter. The Company
continues to maintain its focus on controlling fixed expenses.
Total expenses, excluding interest, increased 8% to $6,205 million in the 1997
Period from $5,751 million in the 1996 Period. Compensation and benefits
expense, as a percentage of net revenues, for the 1997 Period was 54% compared
to 52% in the 1996 Period and non-compensation expense as a percentage of net
revenues was 20% in the 1997 Period compared to 19% in the 1996 Period.
10
<PAGE> 11
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 $297 billion at September 30, 1997, up from $246
billion at December 31, 1996. 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. 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.
Smith Barney and Phibro have committed uncollateralized revolving lines of
credit totaling $2.0 billion and $500 million, respectively. Smith Barney may
borrow under its revolving credit facility at various interest rate options
(LIBOR, CD or base rate) and compensates the bank for the facility through
commitment fees. In addition, Salomon Brothers Inc has a $2.1 billion committed
secured standby bank credit facility for financing securities positions which
enables it to borrow on a secured basis using a variety of financial instruments
as collateral and Salomon Brothers International Limited has a committed
securities repurchase facility in the amount of $1 billion. At September 30,
1997 there were no outstanding borrowings under these facilities. 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.
Unsecured term debt is a significant component of the Company's long-term
capital. Term debt totaled $19.7 billion at September 30, 1997 compared with
$15.7 billion at December 31, 1996.
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 securities inventories, customer balances, the amount of reverse
repurchase transactions outstanding (i.e., purchases of securities under
agreements to resell the same security) 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.
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 unsecured financing was 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 which is utilized
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
11
<PAGE> 12
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
on a daily basis. Net assets (total assets less securities purchased under
agreements to resell) to equity (including redeemable preferred stock and TRUPS)
ratio at September 30, 1997 and December 31, 1996 was 22.8x and 20.7x,
respectively.
12
<PAGE> 1
Exhibit 99.06
Description of Certain Pending
Legal Proceedings Involving
Smith Barney Holdings Inc.
and/or its Subsidiaries
Two purported class actions were filed in October 1994 against
Greyhound Bus Lines, Inc. ("Greyhound"), various of its officers and directors
and Smith Barney Inc. ("SBI"), a wholly owned subsidiary of Salomon Smith Barney
Holdings Inc. (the "Company"), and one of its managing directors, in the U.S.
District Court for the Northern District of Texas. The plaintiffs purport to
represent purchasers of senior notes, subordinated convertible debentures and
common stock of Greyhound. SBI was lead manager or co-lead manager on the
underwriting of certain of these securities. The actions allege, among other
things, that the prospectuses and other public statements contained inaccurate
statements relating to Greyhound's financial prospects. The plaintiffs are
seeking money damages in an unspecified amount. SBI is reviewing the allegations
and intends to vigorously defend against these actions. A consolidated amended
class action complaint was filed in July 1995. A motion to dismiss was filed in
September 1995. A motion for class certification was filed in January 1996.
Although the defendants' motion to dismiss was granted in October 1996,
plaintiffs subsequently filed a second amended complaint. In addition, in late
October 1996, a purported class action was filed against SBI, among others, in
the District Court, Dallas County, Texas, entitled Clarkson v. Greyhound Lines,
Inc., et al., with allegations similar to those in the federal case referred to
above. SBI intends to contest the allegations. In December 1996, SBI filed a
plea and abatement in this action. In April 1997, SBI's plea and abatement in
Clarkson v. Greyhound Lines, Inc., et al. was denied.
In June 1994, several actions relating to trading practices on the
National Association of Securities Dealers Automated Quotation ("Nasdaq") system
were filed against a number of major broker-dealers, including SBI, in various
federal courts. In October 1994, the actions were consolidated in the U.S.
District Court for the Southern District of New York. The plaintiffs purport to
represent a class of purchasers of stock trading in that system over the last
four years. The claims generally allege price-fixing violations under the
federal antitrust laws and violations of the federal securities laws relating to
the use of even-eighth price quotes instead of odd-eighth bid and asked quotes.
The Company is reviewing these allegations and intends to vigorously defend
against these claims. A consolidated amended complaint was filed in December
1994. In August 1995, the defendants' motion to dismiss was granted with leave
to replead, and a consolidated amended complaint was filed. In November 1996, a
class of plaintiffs was certified and in April 1997, the class was expanded to
include institutional plaintiffs.
In July 1996, a complaint seeking equitable relief was filed in the
U.S. District Court for the Southern District of New York by the U.S. Department
of Justice, naming twenty-four major brokerage firms, including SBI, as
defendants. A settlement has been agreed to by the parties and approved by the
court. Pursuant to this settlement, the defendants, without admitting any
liability, would agree not to engage in certain practices relating to the
quoting of Nasdaq securities and would further agree to implement a program to
<PAGE> 2
ensure compliance with federal antitrust laws and with the terms of the
settlement. No monetary fines or penalties are imposed as part of the
settlement. In April 1997, the U.S. District Court for the Southern District of
New York approved the settlement previously agreed to by the parties. In May
1997, plaintiffs in the related civil action challenged certain provisions of
the settlement.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SBI, in the U.S. Bankruptcy Court for the Central District of California.
Plaintiff alleges, among other things, that defendants recommended and sold to
plaintiff unsuitable securities. SBI intends to contest the allegations. The
case, entitled County of Orange et al. v. Bear, Stearns & Co. Inc. et al., has
been stayed by agreement of the parties.
