<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
/ / FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-4346
SALOMON SMITH BARNEY HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1660266
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. (FORMERLY
TRAVELERS GROUP INC.). AS OF THE DATE HEREOF, 1000 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE ISSUED AND OUTSTANDING.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H 1 (a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
<PAGE> 2
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three and nine months ended September 30, 1998 and 1997 1
Condensed Consolidated Statements of Financial Condition -
September 30, 1998 (Unaudited) and December 31, 1997 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Exhibit Index
Signatures
</TABLE>
<PAGE> 3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Nine Months
Period Ended September 30, 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 797 $ 783 $ 2,376 $ 2,185
Investment banking 531 597 1,799 1,556
Principal transactions (1,331) 790 (236) 2,261
Asset management and administration fees 563 448 1,614 1,236
Other 28 41 102 94
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 588 2,659 5,655 7,332
- ----------------------------------------------------------------------------------------------------------------------
Interest and dividends 3,338 3,207 10,124 8,706
Interest expense 3,013 2,841 9,003 7,588
- ----------------------------------------------------------------------------------------------------------------------
Net interest and dividends 325 366 1,121 1,118
- ----------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 913 3,025 6,776 8,450
- ----------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 915 1,627 4,181 4,548
Communications 118 127 351 372
Floor brokerage and other production 111 99 326 271
Occupancy and equipment 105 108 315 324
Advertising and market development 80 70 218 202
Professional services 69 53 166 141
Other operating and administrative expenses 39 113 288 347
Restructuring credit -- -- (324) --
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,437 2,197 5,521 6,205
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (524) 828 1,255 2,245
Provision (benefit) for income taxes (199) 321 477 876
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (325) $ 507 $ 778 $ 1,369
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 4
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,186 $ 1,808
Cash segregated and on deposit for Federal and other
regulations or deposited with clearing organizations 2,299 2,034
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $53,895 $75,802
Deposits paid for securities borrowed 41,056 33,932
------- -------
94,951 109,734
Financial instruments and commodities owned and contractual
commitments:
U.S. government and government agency securities 34,607 52,109
Non-U.S. government and government agency securities 24,777 46,502
Corporate debt securities 12,076 13,614
Equity securities 5,152 6,420
Contractual commitments 15,516 10,120
Mortgage loans and collateralized mortgage securities 6,589 3,103
Other financial instruments 7,533 6,590
Commodities 445 1,274
------- -------
106,695 139,732
Receivables:
Receivable for securities provided as collateral 4,365 -
Customers 14,021 12,415
Brokers, dealers and clearing organizations 5,128 3,212
Other 1,301 2,387
------- -------
24,815 18,014
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $983 and
$884, respectively 1,083 986
Other assets 5,149 4,312
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $238,178 $276,620
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 5
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper $ 11,825 $ 7,110
Other short-term borrowings 4,303 4,354
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $77,959 $113,593
Deposits received for securities loaned 8,500 5,978
------- --------
86,459 119,571
Financial instruments and commodities sold, not yet purchased,
and contractual commitments:
U.S. government and government agency securities 26,695 33,970
Non-U.S. government and government agency securities 22,567 45,166
Contractual commitments 16,240 11,688
Equity securities 3,356 3,462
Corporate debt securities and other 3,057 1,880
------- --------
71,915 96,166
Payables and accrued liabilities:
Obligation to return securities received as collateral 9,189 -
Customers 11,212 9,791
Brokers, dealers and clearing organizations 3,863 2,972
Other 9,037 8,719
------- --------
33,301 21,482
Term debt 20,915 19,074
-------- --------
Total liabilities 228,718 267,757
Guaranteed preferred beneficial interests in Company
subordinated debt securities 345 345
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated debt
securities of the Company 400 -
Stockholder's equity:
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 1,589 1,574
Retained earnings 7,120 6,943
Cumulative translation adjustments 6 1
------- --------
Total stockholder's equity 8,715 8,518
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $238,178 $276,620
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Dollars in millions
Nine Months Ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash items -
Net income $ 778 $ 1,369
Depreciation and amortization 241 219
- -------------------------------------------------------------------------------------------------------------------
Cash items included in net income 1,019 1,588
- -------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (265) (272)
Collateralized short-term financing agreements 14,783 (24,231)
Financial instruments and commodities owned and contractual commitments 33,037 (25,173)
Receivables (6,801) (2,210)
Other assets (805) (86)
- -------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets 39,949 (51,972)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements (33,112) 44,959
Financial instruments and commodities sold, not yet purchased, and contractual
commitments (24,251) (4,634)
Payables and accrued liabilities 12,030 4,807
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities (45,333) 45,132
- -------------------------------------------------------------------------------------------------------------------
Cash used in operating activities (4,365) (5,252)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in commercial paper and other short-term
borrowings 4,664 1,141
Proceeds from issuance of term debt 5,491 7,249
Term debt maturities and repurchases (3,863) (3,030)
Collateralized mortgage obligations (81) (129)
Issuance of trust preferred securities 400 --
Dividends paid (729) (435)
Other capital transactions 2 (97)
- -------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 5,884 4,699
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 96 131
Proceeds from the sale of Basis Petroleum -- 365
Property, equipment and leasehold improvements (279) (168)
Other 42 (22)
- -------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities (141) 306
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,378 (247)
Cash and cash equivalents at January 1, 1,808 1,607
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30, $ 3,186 $ 1,360
===================================================================================================================
</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 condensed consolidated
financial statements.
4
<PAGE> 7
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. THE SMITH BARNEY MERGER WITH SALOMON
On November 28, 1997, a newly formed wholly owned subsidiary of
Travelers Group Inc. ("Travelers") was merged into Salomon Inc
("Salomon") and Salomon became a wholly owned subsidiary of Travelers.
Following this merger, Salomon and Smith Barney Holdings Inc. ("Smith
Barney") were merged (the "Merger") to form Salomon Smith Barney
Holdings Inc. ("SSBH" and, collectively with its subsidiaries, the
"Company"). The transaction was treated as a tax-free exchange.
The condensed consolidated statement of income for the three and nine
months ended September 30, 1997 and the condensed consolidated
statement of cash flows for the nine months ended September 30, 1997,
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. Certain
reclassifications have been made to conform the accounting policies of
Salomon and Smith Barney.
As a result of the Merger, the Company recorded a pre-tax restructuring
charge of $838 million ($496 million after tax) in the fourth quarter
of 1997. The material components of the restructuring reserve were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Restructuring Reserve
Restructuring Reserve as Charges and Credits through Balance at
Dollars in Millions Originally Recorded September 30, 1998 September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seven World Trade Center lease $ 610 ($324)* $286
Other facilities 53 (21) 32
- ------------------------------------------------------------------------------------------------------------------------------
Total facilities 663 (345) 318
Severance 161 (137) 24
Other 14 (3) 11
- ------------------------------------------------------------------------------------------------------------------------------
$ 838 ($485) $353**
==============================================================================================================================
</TABLE>
* In the second quarter of 1998, the Company recorded an adjustment of
$324 million ($191 million after tax) to the restructuring reserve
relating to the Seven World Trade Center lease. This reduction in the
reserve resulted from negotiations on a sublease which indicated that
excess space would be disposed of on terms more favorable than had been
originally estimated. A current reassessment of space needs, including
the merger with Citicorp, could indicate a need for increased occupancy
by the Company of space previously considered excess, and could result
in a further adjustment to reduce the restructuring reserve.
** Consists of $129 million cash component and $224 million non-cash
component.
All of the amounts were determined in accordance with the guidelines
included in Emerging Issues Task Force ("EITF") 94-3 and represent
costs that are not associated with future revenues and are either
incremental or contractual with no economic benefit.
At September 30, 1998, the portion of the cash and non-cash balances of
the restructuring reserve that related to facilities were $96 million
and $222 million, respectively. Such costs include lease costs which
represent the difference between contractual obligations and the
estimated fair market rental obtainable through sublease from the date
that such facilities are expected to be vacated, and other costs
incidental to sublease. These contractual lease payments are estimated
to be expended over the remaining term and the remaining cash costs are
expected to be paid in 1998 and 1999.
5
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Non-cash costs of other facilities reflect the write-off of leasehold
improvements, furniture and equipment upon abandonment and represent
the remaining depreciated book value at the estimated dates of
abandonment. Depreciation of these assets will continue during the
period they are in use.
The facilities are located primarily in the United States and generally
support multiple lines of business. The assets have not been
reclassified to a held for sale category since substantially all are
subject to abandonment and will not be realized through sale.
The balance of severance costs are expected to be paid by the end of
1998. None of the amounts included in the restructuring charge
represent operating losses or income. The cash component of these
restructuring costs will be funded from working capital and will not
require any incremental funding source.
NOTE 2. TRAVELERS MERGER WITH CITICORP
On October 8, 1998, Citicorp merged with and into a newly formed,
wholly owned subsidiary of Travelers. Following the merger, Travelers
changed its name to Citigroup Inc. ("Citigroup") Citigroup is a bank
holding company subject to regulation under the Bank Holding Company
Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall Act
and certain other laws and regulations. Section 20 of the
Glass-Steagall Act prohibits a member bank of the Federal Reserve
System, such as Citicorp's subsidiary Citibank, N.A., from being
affiliated with a company that is engaged principally in underwriting
and distributing securities. The Federal Reserve Board has determined
that a securities firm that does not generate more than 25% of its
gross revenues from underwriting and dealing in certain ineligible
securities is not deemed for purposes of the Glass-Steagall Act to be
"engaged principally" in securities underwriting and distribution.
The Company does not believe that its compliance with applicable law as
a result of the Citigroup merger will have a material adverse effect on
its ability to continue to operate the businesses in which it is
presently engaged.
NOTE 3. PENDING TRANSACTION
THE NIKKO SECURITIES CO., LTD.
In August 1998, Travelers, the Company and The Nikko Securities Co.,
Ltd ("Nikko") signed an agreement to form a global strategic alliance.
The agreement calls for the formation of a joint venture, to be called
Nikko Salomon Smith Barney Limited ("Nikko Salomon Smith Barney"),
which will provide investment banking, sales and trading and research
services for corporate and institutional clients in Japan and other
foreign jurisdictions. Nikko Salomon Smith Barney will combine the
Japanese institutional and corporate business of the Company with
Nikko's domestic and international institutional and corporate
business. Nikko's retail business and other activities, including asset
management, will remain under Nikko's management. Nikko Salomon Smith
Barney will be headquartered in Tokyo and will maintain offices and
staff worldwide.
Nikko Salomon Smith Barney will be owned 51% by Nikko and 49% by the
Company. It is anticipated that the joint venture will be operational
in the first quarter of 1999, subject to applicable regulatory
approvals.
6
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim condensed consolidated financial statements reflect the
accounts of SSBH, a wholly owned subsidiary of Citigroup. Material
intercompany transactions have been eliminated. These interim condensed
consolidated financial statements are unaudited; however, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected.
The interim condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United
States, which require the use of management's best judgment and
estimates. Estimates, including the fair value of financial
instruments, commodities and contractual commitments, may vary from
actual results.
These interim condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements
included in SSBH's Annual Report on Form 10-K for the year ended
December 31, 1997.
Certain financial information that is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but that is not required for interim reporting purposes,
has been condensed or omitted.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 127 Deferral of the Effective Date of
Certain Provisions of SFAS 125 ("SFAS 127"), which was effective for
transfers and pledges of certain financial assets and collateral made
after December 31, 1997. The adoption of SFAS 127 created additional
assets and liabilities on the Company's condensed consolidated
statement of financial condition related to the recognition of
securities provided and received as collateral. At September 30, 1998,
the impact of SFAS 127 on the Company's condensed consolidated
statement of financial position was a decrease to total assets and
liabilities of approximately $3.6 billion. In addition, as a result of
SFAS 127, certain inventory positions, primarily "Non-U.S. government
and government agency securities," have been reclassified to
receivables or payables.
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements. All items that are
required to be recognized under accounting standards as components of
comprehensive income are to be reported in an annual financial
statement with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in
equity of an enterprise during a period from transactions and other
events and circumstances from nonowner sources. Comprehensive income
will thus represent the sum of net income and other changes in
stockholder's equity from nonowner sources. The accumulated balance of
changes in equity from nonowner sources is required to be displayed
separately from retained earnings and additional paid-in-capital in the
statement of financial position. Cumulative translation adjustments are
the only changes in the Company's equity from nonowner sources. The
Company's total changes in equity from nonowner sources, net of tax, is
as follows:
7
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Dollars in Millions Three Months Nine Months
For the period ended
September 30, 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (325) $ 507 $ 778 $ 1,369
Other changes in equity from
nonowner sources 5 (1) 5 (7)
- -----------------------------------------------------------------------------------------------------------------
Total changes in equity from
nonowner sources $ (320) $ 506 $ 783 $ 1,362
=================================================================================================================
</TABLE>
During the third quarter of 1998, the Company adopted the Accounting
Standards Executive Committee of the American Institute of Certified
Public Accountants' Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use ("SOP
98-1"). SOP 98-1 provides guidance on accounting for costs of computer
software developed or obtained for internal use and for determining
when specific costs should be capitalized and when they should be
expensed. The impact of adopting SOP 98-1 on the Company's consolidated
financial statements was not material.
In June 1998, the Financial Accounting Standards Board issued SFAS
No.133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). SFAS 133 requires that an entity recognize all
derivatives in the statement of financial condition and measure those
instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company
is in the process of evaluating the potential impact of the new
accounting standard.
8
<PAGE> 11
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to securities and
commodities regulations and capital adequacy requirements promulgated
by the regulatory and exchange authorities of the countries in which
they operate. Capital requirements related to 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 Smith Barney Inc.* U.S. Securities and Exchange Commission $2,960 $2,611
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $4,869 $ 751
Salomon Smith Barney Japan Limited** Japan's Ministry of Finance $ 564 $ 245
Salomon Brothers AG Germany's Banking Supervisory Authority $ 277 $ 27
The Robinson-Humphrey Company, LLC U.S. Securities and Exchange Commission $ 76 $ 75
Uniform Net Capital Rule (Rule 15c3-1)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*On September 1, 1998, Salomon Brothers Inc and Smith Barney Inc. merged to form
Salomon Smith Barney Inc.
**Prior to April 1, 1998, this entity was known as Salomon Brothers Asia
Limited.
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco"), a wholly owned subsidiary of SSBH, must maintain minimum levels of
capital in accordance with agreements with its rating agencies. At September 30,
1998, Swapco was in compliance with all such agreements. Swapco's capital
requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
9
<PAGE> 12
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. CONTRACTUAL COMMITMENTS
A summary of the Company's contractual commitments as of September 30,
1998 and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
--------------------------------- ----------------------------------
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) $ 977.3 $ - $ - $ 940.5 $ - $ -
Other exchange-issued products:
Equity contracts 11.0 .3 .4 10.6 .2 .4
Fixed income contracts 224.8 .1 .1 138.1 - -
Commodities contracts 1.6 - - 3.5 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 1,214.7 .4 .5 1,092.7 .2 .4
- -------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps
and floors:
Swaps 2,114.6 1,345.9
Swap options written 68.4 38.6
Swap options purchased 79.4 48.8
Caps and floors 196.2 161.4
- -------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors (b) 2,458.6 9.1 9.3 1,594.7 5.8 6.7
- -------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 146.1 1.2 1.1 115.4 1.0 1.0
Options written 77.4 - .8 41.3 - .6
Options purchased 65.1 .9 - 37.7 .6 -
- -------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 288.6 2.1 1.9 194.4 1.6 1.6
- -------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 53.3 3.2 3.8 54.8 1.8 2.7
Options and forward contracts on fixed-income
securities 643.9 .5 .6 343.4 .3 .1
Commodities contracts 9.7 .2 .1 14.3 .4 .2
- -------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,668.8 $15.5 $16.2 $3,294.3 $10.1 $11.7
===============================================================================================================================
</TABLE>
(a) Margin on futures contracts is included in receivable/payables to
brokers, dealers and clearing organizations on the condensed
consolidated statements of financial condition.
(b) Includes notional values of swap agreements and forward currency
contracts for non-trading activities (primarily related to the
Company's fixed-rate long-term debt) of $18.5 billion and $6.0 billion
at September 30, 1998 and $17.6 billion and $4.1 billion at December
31, 1997, respectively.
10
<PAGE> 13
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
SSBH has formed two statutory business trusts under the laws of the
state of Delaware that exist for the exclusive purposes of (i) issuing
trust securities (both common and preferred) representing undivided
beneficial interests in the assets of the Trust; (ii) investing the
gross proceeds of the trust securities in subordinated debt securities
of SSBH (in the case of SI Financing Trust I) and junior subordinated
deferrable interest debt securities of SSBH (in the case of SSBH
Capital I); and (iii) engaging in only those activities necessary or
incidental thereto. These subordinated debt securities and the related
income effects are eliminated in the condensed consolidated financial
statements. Distributions on the mandatorily redeemable preferred
securities of subsidiary trusts below have been classified as interest
expense in the condensed consolidated statement of income. The
following table summarizes the financial structure of SSBH's subsidiary
trusts at September 30, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
SI Financing SSBH
Trust I Capital I
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trust Preferred Securities:
Issuance date July 1996 January 1998
Shares issued 13,800,000 16,000,000
Liquidation preference per share $ 25 $ 25
Liquidation value (in millions) $345 $400
Coupon rate 9.25% 7.20%
Distributions payable Quarterly Quarterly
Distributions guaranteed by SSBH SSBH
Common shares issued to SSBH 426,800 494,880
Subordinated Debt Securities:
Amount owned (in millions) $356 $412
Coupon rate 9.25% 7.20%
Interest payable Quarterly Quarterly
Maturity date June 30, 2026 January 28, 2038
Redeemable by issuer on or after June 30, 2001 January 28, 2003
- ------------------------------------------------------------------------------------------------------
</TABLE>
SI Financing Trust I, a wholly owned subsidiary of SSBH, issued
TRUPS(R)units to the public. Each TRUPS(R)unit includes a preferred
security of SI Financing Trust I, as shown in the table above, and a
purchase contract that requires the holder to purchase, in 2021 (or
earlier if SSBH elects to accelerate the contract), one depositary
share representing a one-twentieth interest in a share of Citigroup
9.50% Cumulative Preferred Stock, Series L. SSBH is obligated under the
terms of each purchase contract to pay contract fees of 0.25% per
annum.
11
<PAGE> 14
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. LEGAL PROCEEDINGS
The Company has been named as a defendant in legal actions relating to
its operations, some of which seek damages of material or indeterminate
amounts. In addition, from time to time the Company is a party to
examinations and inquiries by various regulatory and self-regulatory
bodies. In connection with its discontinued commodities processing
operations, SSBH 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.
12
<PAGE> 15
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
RESULTS OF OPERATIONS
The Company reported a loss of $325 million for the three months ended September
30, 1998 (the "1998 Quarter"), compared to net income of $507 million reported
for the three months ended September 30, 1997 (the "1997 Quarter"). Included in
the results for the 1998 Quarter is an after-tax loss of $700 million related to
Global Arbitrage and Russian-related credit losses. Extreme volatility in the
global fixed income markets negatively affected trading results in the 1998
Quarter, while Private Client and Asset Management performance continued at high
levels. Revenues, net of interest expense, declined to $913 million in the 1998
Quarter compared to $3,025 million reported in the 1997 Quarter.
For the nine months ended September 30, 1998 (the "1998 Period"), the Company
reported net income of $778 million compared to $1,369 million for the nine
months ended September 30, 1997 (the "1997 Period). Revenues, net of interest
expense, were $6,776 million in the 1998 Period compared to $8,450 million
reported in the 1997 Period.
Net income for the 1998 Period includes a pre-tax credit of $324 million ($191
million after tax) which represents a reduction in the $838 million ($496
million net of tax) restructuring charge recorded in the fourth quarter of 1997
in connection with the merger of Salomon Inc and Smith Barney Holdings Inc. (See
Note 1 to the Condensed Consolidated Financial Statements for further discussion
of the restructuring reserve.)
Commission revenues of $797 million in the 1998 Quarter were relatively
unchanged from the 1997 Quarter. An increase in listed commissions in the 1998
Quarter was offset by decreases in other commissions. Commission revenues
increased to $2,376 million in the 1998 Period compared to $2,185 million in the
1997 Period due to an increase in listed, OTC and mutual fund commissions.
Investment banking revenues decreased 11% to $531 million in the 1998 Quarter,
as compared to the 1997 Quarter. An increase in merger and acquisition advisory
fees was more than offset by declines in equity, high yield, high grade debt and
unit trust underwritings. Investment banking revenues increased to $1,799
million in the 1998 Period compared to $1,556 million in the 1997 Period
primarily due to increased merger and acquisition advisory fees.
Principal transaction revenues decreased to a loss of $1,331 million in the 1998
Quarter. Decreases in fixed income trading results include losses due to risk
reductions in U.S. fixed income arbitrage, losses in other Global Arbitrage, and
losses in the customer business. These decreases were partially offset by an
increase in equity trading results. Fixed income trading results were adversely
impacted by significant dislocations in the global fixed income markets,
including greatly reduced liquidity and widening credit spreads. Included in
these results are Russian-related credit losses. In the 1998 Period, principal
transaction revenues decreased to a loss of $236 million. Principal transaction
revenues by business activity were composed of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Dollars in Millions Three Months Nine Months
For the period ended September 30, 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income $(1,485) $710 $(811) $1,739
Equities 59 46 348 327
Commodities 54 37 209 185
Other 41 (3) 18 10
- ---------------------------------------------------------------------------------------------------------------
Total principal transaction revenues $(1,331) $790 $(236) $2,261
===============================================================================================================
</TABLE>
13
<PAGE> 16
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 26% to $563 million in the
1998 Quarter compared to $448 million in the 1997 Quarter as a result of the
growth in assets under fee-based management. Asset management and administration
fees were $1,614 million in the 1998 Period compared to $1,236 million in the
1997 Period. At September 30, 1998, internally managed assets were $169.6
billion and total fee-based assets under management were $247.3 billion compared
to $146.7 billion and $216.2 billion, respectively, at September 30, 1997. For
further discussion of the Salomon Smith Barney Asset Management Division refer
to the ASSET MANAGEMENT DIVISION section of 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>
- --------------------------------------------------------------------------------------------------------
Dollars in billions
Period Ended September 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money market funds $ 55.1 $ 45.3
Mutual funds 53.5 46.4
Managed accounts 61.0 55.0
- --------------------------------------------------------------------------------------------------------
Salomon Smith Barney Asset Management 169.6 146.7
Financial Consultant managed accounts 13.8 11.1
- --------------------------------------------------------------------------------------------------------
Total internally managed assets 183.4 157.8
Consulting Group externally managed assets 63.9 58.4
- --------------------------------------------------------------------------------------------------------
Total fee-based assets under management $247.3 $216.2
========================================================================================================
</TABLE>
Net interest and dividends decreased to $325 million for the 1998 Quarter from
$366 million in the 1997 Quarter due to a decrease in the level of net
interest-earning assets. For the 1998 Period, interest and dividends of $1,121
million was relatively unchanged from the 1997 Period.
Total expenses, excluding interest, decreased 35% to $1,437 million in the 1998
Quarter from $2,197 million in the 1997 Quarter, largely related to
performance-based compensation accruals. Total expenses, excluding interest and
the restructuring credit, were $5,845 million in the 1998 Period compared to
$6,205 million in the 1997 Period. The Company continues to maintain its focus
on controlling fixed expenses.
14
<PAGE> 17
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT DIVISION
Included in the Company's consolidated results is the following data relating to
the Salomon Smith Barney Asset Management Division ("SSBAM"):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Nine Months
Period Ended September 30, 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Investment advisory, administrative
and distribution fees $ 217 $ 186 $ 633 $ 527
Unit Investment Trust revenues - net 18 19 38 35
Other 9 8 25 31
- -------------------------------------------------------------------------------------------------------
Total revenues 244 213 696 593
- -------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 41 38 127 108
Deferred commission amortization 31 32 97 96
Other expenses 56 45 152 137
- -------------------------------------------------------------------------------------------------------
Total expenses 128 115 376 341
- -------------------------------------------------------------------------------------------------------
Income before income taxes 116 98 320 252
Provision for income taxes 46 39 127 100
- -------------------------------------------------------------------------------------------------------
Net income $ 70 $ 59 $ 193 $ 152
=======================================================================================================
</TABLE>
SSBAM's net income increased 19% to $70 million in the 1998 Quarter and 27% to
$193 million in the 1998 Period. Total revenues increased 15% to $244 million in
the 1998 Quarter and 17% to $696 million in the 1998 Period. SSBAM's earnings
growth reflects continued strength in mutual funds, retail and institutional
managed accounts, and its share of unit trust revenues.
SSBAM's total assets under management reached $169.6 billion at September 30,
1998, an increase of 16% from the $146.7 billion reported at September 30, 1997.
The increase in assets under management consisted of a 22% increase in money
market funds, a 15% increase in mutual funds, and a 11% increase in accounts
managed for high net worth individuals, pension funds, corporations and other
institutions. In the 1998 Quarter, SSBAM completed its acquisition of the
Australian asset management business of JP Morgan, which added $4.8 billion in
assets under fee-based management. Investment advisory, administration and
distribution fees rose 17% to $217 million in the 1998 Quarter and 20% to $633
million in the 1998 Period as a result of the 16% growth in assets under
management from the comparable prior year period.
In the mutual fund sector, dollar inflows increased and performance continued to
show improvement. In the 1998 Period, sales of Smith Barney proprietary mutual
funds rose 34%, and accounted for a greater percentage - 29% in the 1998 Period
compared to 26% in the 1997 Period - of the Company's total mutual fund sales.
15
<PAGE> 18
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $238 billion at September 30, 1998, down from
$277 billion at year-end 1997. 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 (see Note 4 to the
Condensed Consolidated Financial Statements for a discussion of the impact of
SFAS 127 on assets and liabilities). A "matched book" transaction involves a
security purchased under an agreement to resell (i.e., reverse repurchase
transaction) and simultaneously sold under an agreement to repurchase (i.e.,
repurchase transaction). Financial instruments and commodities owned and
contractual commitments declined as a result of decreased inventory positions in
U.S. and Non-U.S. government and agency securities. The decline in U.S.
government and government agency securities can, in part, be attributed to the
risk reduction in the U.S. Fixed Income Arbitrage business while the decline in
Non-U.S. government and government agency long and short securities is primarily
SFAS 127 related.
The Company's balance sheet is highly liquid, with the vast majority of its
assets consisting of marketable securities and collateralized short-term
financing agreements arising from securities transactions. The highly liquid
nature of these assets provides the Company with flexibility in financing and
managing its business. The Company monitors and evaluates the adequacy of its
capital and borrowing base on a daily basis in order to allow for flexibility
in its funding, to maintain liquidity, and to ensure that its capital base
supports the regulatory capital requirements of its subsidiaries.
The Company funds its operations through the use of collateralized and
uncollateralized short-term borrowings, long-term borrowings, trust preferred
securities, and its equity. Collateralized short-term financing, including
repurchase agreements and collateralized loans, is the Company's principal
funding source. Such borrowings are reported net by counterparty, when
applicable, pursuant to the provisions of Financial Accounting Standards Board
Interpretation 41, Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements ("FIN 41"). Excluding the impact of FIN 41,
short-term collateralized borrowings totaled $141.7 billion at September 30,
1998. Uncollateralized short-term borrowings provide the Company with a source
of short-term liquidity and are also utilized as an alternative to
collateralized financing when they represent a cheaper funding source. Sources
of short-term uncollateralized borrowings include commercial paper,
uncollateralized bank borrowings, deposit liabilities, promissory notes and
corporate loans. Short-term uncollateralized borrowings totaled $15.4 billion at
September 30, 1998.
SSBH has a $1.5 billion revolving credit facility with a bank syndicate that
extends through May 2001, and a $3.5 billion 364-day revolving credit facility
that extends through May 1999. SSBH may borrow under its revolving credit
facilities at various interest rate options (LIBOR, CD or base rate) and
compensates the banks for the facilities through commitment fees. At September
30, 1998, there were no outstanding borrowings under these facilities. Under
these facilities SSBH is required to maintain a certain level of consolidated
adjusted net worth (as defined in the agreements). At September 30, 1998, this
requirement was exceeded by approximately $2.8 billion. The Company also has
substantial borrowing arrangements consisting of facilities that the Company has
been advised are available, but where no contractual lending obligation exists.
These arrangements are reviewed on an ongoing basis to ensure flexibility in
meeting the Company's short-term requirements.
The Company's borrowing relationships are with a broad range of banks, financial
institutions and other firms from which it draws funds. The volume of the
Company's borrowings generally fluctuates in response to changes in the level of
the Company's financial instruments, commodities and contractual commitments,
customer balances, the amount of reverse repurchase agreements outstanding and
securities borrowed transactions. As the
16
<PAGE> 19
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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 uncollateralized financing is
temporarily impaired. The Company's liquidity management process includes a
contingency funding plan designed to ensure adequate liquidity even if access to
uncollateralized funding sources is severely restricted or unavailable. This
plan is reviewed periodically to keep the Company's funding options current and
in line with market conditions. The management of this plan includes an analysis
used to determine the Company's ability to withstand varying levels of stress,
which could impact its liquidation horizons and required margins. In addition,
the Company monitors leverage and liquidity ratios on a daily basis. The ratio
of total assets less collateralized short-term financing agreements to equity
(including trust preferred securities) was 15.1x at September 30, 1998, and was
18.8x at December 31, 1997.
OTHER
HIGH YIELD PORTFOLIO
The Company's activities include trading securities that are less than
investment grade, characterized as "high yield." High yield securities include
corporate debt, convertible debt, preferred and convertible preferred equity
securities rated lower than "triple B-" by internationally recognized rating
agencies, unrated securities with market yields comparable to entities rated
below "triple B-," as well as sovereign debt issued by certain countries in
currencies other than their local currencies and which are not collateralized by
U.S. government securities. For example, high yield securities exclude the
collateralized portion of the Company's holdings of "Brady Bonds," but include
such securities to the extent they are not collateralized. The Company's trading
portfolio of high yield securities owned is carried at market or fair value and
totaled $4.9 billion and $6.8 billion at September 30, 1998 and December 31,
1997, respectively. The largest high yield exposure to one counterparty was $280
million and $785 million at September 30, 1998 and December 31, 1997,
respectively.
OTHER
As of October 1, 1998, the Company had mark-to-market exposure to hedge funds of
$2,122 million, collateralized by $2,167 million of cash and government
securities, resulting in excess collateral of $45 million. Within these amounts,
certain hedge funds have collateral in excess of the mark-to-market deficit, and
others have deficits in excess of the collateral held. The total exposure to
hedge funds with mark-to-market deficits in excess of collateral held is $48
million. No single hedge fund had a mark-to-market deficit of more than $8
million in excess of collateral held from that hedge fund. Mark-to-market
exposure includes those hedge funds that owe the Company on foreign exchange and
derivative contracts such as swaps, swap options, and other over-the-counter
options and only the uncollateralized portion of receivables on reverse
repurchase and repurchase agreements. This exposure can change significantly as
a result of extreme market movements. The Company has no unsecured loans or loan
commitments to hedge funds. The Company has no investments in hedge funds other
than an investment in Long-Term Capital Management, LP, made in concert with a
consortium of banks and securities firms.
17
<PAGE> 20
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RISK MANAGEMENT
MARKET RISK
Measuring market risk using statistical risk management models has recently
become the main focus of risk management efforts by many companies whose
earnings are exposed to changes in the fair value of financial instruments.
Management believes that statistical models alone do not provide a reliable
method of monitoring and controlling risk. While value at risk ("VAR") models
are relatively sophisticated, they are of limited value for internal risk
management in that they do not capture all of the risks inherent in all
positions nor do they give any indication of which individual exposures are
problematic or which of the many risk simulations are particularly worrisome.
These models are used by the Company only as a supplement to other risk
management tools.
The following table shows the results of the Company's VAR analysis, which
includes substantially all of the Company's financial assets and liabilities,
including all financial instruments and commodities owned and sold, contractual
commitments, repurchase and resale agreements, and related funding at September
30, 1998 and December 31, 1997. The VAR relating to non-trading instruments has
been excluded from this analysis.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate $46 $41
Equities 4 8
Commodities 8 8
Currency 18 9
Diversification benefit (24) (22)
- --------------------------------------------------------------------------------------------
Total $52 $44
============================================================================================
</TABLE>
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating the above market risk amounts, the Company used a
95% confidence level and a one-day interval. The standard deviations and
correlation assumptions are based on historical data and reflect a horizon of
one year or more and no more than five years. VAR reflects a risk profile of the
Company at a point in time and is not a predictor of future results.
OPERATIONAL RISK
YEAR 2000
Many computer applications have been written using two digits rather than four
to define the applicable year, and therefore may not recognize a date using "00"
as the Year 2000. This could result in the inability of the application to
properly process transactions with the dates in the Year 2000 or thereafter. To
ensure the Company's computer systems will correctly handle the date change, a
firm-wide initiative was established to identify and resolve all problems. The
Year 2000 Readiness Program (the "Project") was approved by the Board of
Directors of Travelers and commenced early in 1996. The total cost of the
Project is expected to be approximately $130 million to $150 million. Through
the third quarter of 1998 the Company has expended approximately $78 million on
the Project. The majority of the remaining costs are expected to be directed to
testing activities. These costs have been and will continue to be funded through
operating cash flow and are expensed in the period in which they are incurred.
The Project is comprised of five phases: 1) inventory, 2) assessment, 3)
corrections where necessary, 4) testing and certification, and 5) deployment of
Year 2000 compliant components to all locations worldwide. The Project began
with a comprehensive inventory of hardware, vendor products, software developed
in-house, market data feeds, and physical facilities around the world. The
inventory also included electronic data exchanges with industry participants
such as the New York
18
<PAGE> 21
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Stock Exchange, the National Association of Securities Dealers, the Securities
Industry Automation Company, the National Securities Clearing Corporation, The
Depository Trust Company and other counterparties. To eliminate any processing
errors associated with the millennium date change and other associated dates
such as 9/9/99 and the leap year in the Year 2000, elements of the inventory
were assessed to determine necessary changes and upgrades or replacement of
vendor products. The inventory and assessment phases of the project were
completed in the third quarter of 1997.
At this time, the correction phase of the project is nearing completion.
Specifically, 63% of vendor products in use by the firm have been upgraded, and
corrections have been made to 73% of systems developed in-house.
Testing and certification is the most complex part of the Project. The Company
began testing in October 1997. Special mainframe and distributed system test
environments were constructed in which dates can be advanced to create a variety
of conditions that will be encountered as the millennium date change occurs.
Applications are put through a rigorous series of tests at the unit, integration
and enterprise levels, with sign-off by the relevant business areas at each
level, before they are certified as Year 2000 compliant. Approximately 40% of
the in-house applications are now certified. In addition to rigorous testing of
each component, an enterprise level front-to-back test is being planned to test
multiple systems working together to support business processes.
The Project remains on schedule. Correction work is expected to be completed by
December 31, 1998; internal testing and application certification is expected to
be completed by March 31, 1999; external testing and global deployment is
expected to be completed by June 30, 1999.
The Company fully supports initiatives by the Securities Industry Association
and other industry groups in conducting tests among industry participants,
including the recently completed industry Beta Test, the government securities
clearing test with the Federal Reserve Bank of New York and The Depository Trust
Company, and the Futures Industry Association test. The Company has achieved
successful results in each of these industry-wide tests in which it
participated. The Company expects to participate in the Streetwide Test planned
for March 1999, and expects to continue its testing program during 1999 with
counterparties and selected clients.
There are many risks associated with the Year 2000 issue. Even if the Company
successfully remediates its Year 2000 issues, it can be materially and adversely
affected by failures of third parties to remediate their own Year 2000 issues.
The failure of third parties with which the Company has financial or operational
relationships such as vendors, clients, or regulators to resolve their own Year
2000 compliance issues in a timely manner could result in material financial
risk to the Company. Consequently, comprehensive, written contingency plans are
being prepared so that alternative procedures and a framework for critical
decisions are defined before any crisis occurs. These contingency plans are
expected to be completed by the end of 1998.
The Company's expectation about future costs and the timely completion of its
Year 2000 modifications are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. The Project
will remain one of the Company's top priorities until these issues are resolved.
19
<PAGE> 22
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EUROPEAN ECONOMIC AND MONETARY UNION
European Economic and Monetary Union ("EMU") is an historic event in Europe
including the unification of currency in eleven major countries. The new unified
currency, called the Euro, is expected to compete on a global scale with the
U.S. Dollar and the Japanese Yen.
Introduction of the Euro will begin January 1, 1999, at which time the European
Central Bank assumes control of the monetary policy for participating nations.
Exchange rates between the participating countries will be fixed and the Euro
will be available for electronic payments. Also on January 1, 1999, various
issuers have announced they will re-denominate their securities and harmonize
bond payment conventions. A three-year transition period will begin on January
1, 1999, after which Euro notes and coins will be issued by the European Central
Bank and national currencies will be phased out.
The Company is addressing the technological implications that will result from
the regulatory and market changes due to EMU. Changes to business processes have
been defined and are nearing completion. The Company anticipates being fully
prepared when the Euro is introduced on January 1, 1999.
FORWARD LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: the
resolution of legal proceedings and environmental matters; the conduct of the
Company's businesses following the Citicorp merger and the global strategic
alliance with Nikko; the ability of the Company to modify its systems for the
year 2000 and EMU in a timely manner; and the ability of the Company generally
to achieve anticipated levels of operational efficiencies related to recently
acquired companies, as well as achieving its other cost-savings initiatives.
Readers are also directed to other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
20
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning a suit filed by Harris Trust and Savings Bank (as
trustee for Ameritech Pension Trust) and others against Salomon Brothers Inc and
Salomon Brothers Realty Corporation, see the description that appears in the
second and third paragraphs under the caption "Legal Proceedings" beginning on
page 13 of the Annual Report on Form 10-K of SSBH for the year ended December
31, 1997 (File No. 1-4346), which description is included as Exhibit 99.01 to
this Form 10-Q and incorporated by reference herein. The U.S. Court of Appeals
for the Seventh Circuit granted defendants' petition for permission to appeal
the District Court's denial of defendants' motion for summary judgement on the
sole remaining claim.
For information concerning a complaint seeking unspecified money damages which
was filed by Orange County, California against numerous brokerage firms,
including Smith Barney Inc., see the description that appears in the seventh
paragraph under the caption "Legal Proceedings" beginning on page 13 of the
Annual Report on Form 10-K of SSBH for the year ended December 31, 1997 (File
No. 1-4346), which description is included as Exhibit 99.02 to this Form 10-Q
and incorporated by reference herein. The stay of proceedings expired in August
1998.
For information concerning two actions filed in Louisiana by the City of New
Orleans against Smith Barney Inc. and another underwriter, see the description
that appears in the third paragraph under the caption "Legal Proceedings"
beginning on page 20 of the Quarterly Report on Form 10-Q of SSBH for the
quarter ended June 30, 1998 (File No. 1-4346), which description is included as
Exhibit 99.03 to this Form 10-Q and incorporated by reference herein. The
Company filed a motion to dismiss the complaints in September 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On July 17, 1998, SSBH filed a Current Report on Form 8-K,
dated July 6, 1998, reporting under Item 5 thereof that the Company had decided
to restructure and significantly decrease the risk profile of the Company's U.S.
fixed income arbitrage group.
On July 20, 1998, SSBH filed a Current Report on Form 8-K,
dated July 20, 1998, reporting under Item 5 thereof the results of the Company's
operations for the quarter ended June 30, 1998, and certain other selected
financial data.
21
<PAGE> 24
On July 22, 1998, SSBH filed a Current Report on Form 8-K,
dated July 17, 1998, filing certain exhibits under Item 7 thereof relating to
the offer and sale of its Call Warrants on the 1998 TEN+(R) Index Expiring on
July 17, 2000.
On July 30, 1998, SSBH filed a Current Report on Form 8-K,
dated July 28, 1998, filing certain exhibits under Item 7 thereof relating to
the offer and sale of its Principal-Protected Equity Linked Notes due August 1,
2005.
On September 1, 1998, SSBH filed a Current Report on Form 8-K,
dated August 31, 1998, reporting under Item 5 thereof certain results of
operations of the Company during the July to August 1998 period.
No other reports on Form 8-K were filed during the third
quarter of 1998; however, on October 14, 1998, SSBH filed a Current Report on
Form 8-K, dated October 8, 1998, reporting under Item 5 thereof the consummation
of the Travelers/Citicorp merger and certain results of the Company's operations
for the quarter ended September 30, 1998, and certain other selected financial
data; on October 23, 1998, SSBH filed a Current Report on Form 8-K, dated
October 21, 1998, reporting under Item 5 thereof the results of the Company's
operations for the quarter ended September 30, 1998, and certain other selected
financial data; on October 29, 1998, SSBH filed a Current Report on Form 8-K,
dated October 27, 1998, filing certain exhibits under Item 7 thereof relating to
the offer and sale of its Principal-Protected Equity Linked Notes due December
30, 2005; and on November 3, 1998, SSBH filed a Current Report on Form 8-K dated
November 1, 1998, reporting under Item 5 thereof certain information regarding
the integration of its corporate business with the corporate business of
Citicorp and related executive matters.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALOMON SMITH BARNEY HOLDINGS INC.
(REGISTRANT)
DATE: November 13, 1998 By: /s/ Charles W. Scharf
--------------------------------------
Charles W. Scharf
Chief Financial Officer
By: /s/ Michael J. Day
--------------------------------------
Michael J. Day
Controller
23
<PAGE> 26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.01 Amended and Restated Certificate of Incorporation of SSBH, effective
December 1, 1997, incorporated by reference to Exhibit 4(a) to
Amendment No. 2 to SSBH's Registration Statement on Form S-3 (No.
333-38931).
3.02 By-Laws of SSBH, incorporated by reference to Exhibit 4(b) to Amendment
No. 2 to SSBH's Registration Statement on Form S-3 (No. 333-38931).
12.01+ Computation of ratio of earnings to fixed charges.
27.01+ Financial Data Schedule.
99.01+ Second and third paragraphs under the caption "Legal Proceedings"
beginning on page 13 of the Annual Report on Form 10-K of SSBH for the
year ended December 31, 1997 (File No. 1-4346).
99.02+ Seventh paragraph under the caption "Legal Proceedings" beginning on
page 13 of the Annual Report on Form 10-K of SSBH for the year ended
December 31, 1997 (File No. 1-4346).
99.03+ Third paragraph under the caption "Legal Proceedings" beginning on page
20 of the Quarterly Report on Form 10-Q of SSBH for the quarter ended
June 30, 1998 (File No. 1-4346).
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of SSBH does not exceed 10% of the total
assets of SSBH and its consolidated subsidiaries. The Company will furnish
copies of any such instrument to the SEC upon request.
- - ---------------
+ Filed herewith.
<PAGE> 1
EXHIBIT 12.01
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Nine
Months
Ended
September 30,
Dollars in millions 1998
----
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 1,255
Add fixed charges (see below) 9,065
-------
Earnings as defined $10,320
=======
Fixed charges from continuing operations:
Interest expense $ 9,003
Other adjustments 62
-------
Fixed charges from continuing operations as defined $ 9,065
=======
Ratio of earnings to fixed charges 1.14
=======
</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.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1998 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,485
<RECEIVABLES> 24,815
<SECURITIES-RESALE> 53,895
<SECURITIES-BORROWED> 41,056
<INSTRUMENTS-OWNED> 106,695
<PP&E> 1,083
<TOTAL-ASSETS> 238,178
<SHORT-TERM> 16,128
<PAYABLES> 33,301
<REPOS-SOLD> 77,959
<SECURITIES-LOANED> 8,500
<INSTRUMENTS-SOLD> 71,915
<LONG-TERM> 20,915
0
0
<COMMON> 0
<OTHER-SE> 8,715
<TOTAL-LIABILITY-AND-EQUITY> 238,178
<TRADING-REVENUE> (236)
<INTEREST-DIVIDENDS> 10,124
<COMMISSIONS> 2,376
<INVESTMENT-BANKING-REVENUES> 1,799
<FEE-REVENUE> 1,614
<INTEREST-EXPENSE> 9,003
<COMPENSATION> 4,181
<INCOME-PRETAX> 1,255
<INCOME-PRE-EXTRAORDINARY> 778
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 778
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
Second and third paragraphs under the caption "Legal Proceedings" beginning on
page 13 of the Annual Report on Form 10-K of SSBH for the year ended December
31, 1997.
In September 1992, Harris Trust and Savings Bank (as trustee for Ameritech
Pension Trust ("APT")), Ameritech Corporation, and an officer of Ameritech filed
suit against SBI and Salomon Brothers Realty Corporation ("SBRC") in the U.S.
District Court for the Northern District of Illinois (Harris Trust Savings Bank,
not individually but solely as trustee for the Ameritech Pension Trust,
Ameritech Corporation and John A. Edwardson v. Salomon Brothers Inc and Salomon
Brothers Realty Corp.). The second amended complaint alleges that three
purchases by APT from defendants of participation interests in net cash flow or
resale proceeds of three portfolios of motels owned by Motels of America, Inc.
("MOA"), as well as a fourth purchase by APT of a similar participation interest
with respect to a portfolio of motels owned by Best Inns, Inc. ("Best"),
violated the Employee Retirement Income Security Act ("ERISA"), and that the
purchase of the participation interests for the third MOA portfolio and for the
Best portfolio violated the Racketeer Influenced and Corrupt Organization Act
("RICO") and state law. SBI had acquired the participation interests in
transactions in which it purchased as principal mortgage notes issued by MOA and
Best to finance purchases of motel portfolios; 95% of three such interests and
100% of one such interest were sold to APT for purchase prices aggregating
approximately $20.9 million. Plaintiffs' second amended complaint seeks (i) a
judgment on the ERISA claims for the purchase prices of the four
participation interests (approximately $20.9 million), for rescission and for
disgorgement of profits, as well as other relief, and (ii) a judgment on the
claims brought under RICO and state law in the amount of $12.3 million, with
damages trebled to $37 million on the RICO claims and punitive damages in excess
of $37 million on certain of the state law claims as well as other relief. SBI
and SBRC answered the second amended complaint in part, moved to dismiss in part
and asserted counterclaims against plaintiff Ameritech Corp. In August 1993 the
Court (i) dismissed the RICO claims as well as plaintiffs' claims for breach of
contract and unjust enrichment; (ii) denied SBI's motion to dismiss one of the
ERISA claims (which alleges that SBI participated in a fiduciary's breach); and
(iii) denied Ameritech's motion to dismiss SBI's counterclaims.
In June 1996, the Court (i) granted in part defendants' motion for summary
judgment on the ERISA claims, dismissing Counts I and III of the second amended
complaint and any claims contained in Count II that are premised on an alleged
breach of fiduciary duty; (ii) otherwise denied defendants' motion for summary
judgment as it related to the remaining portions of the claims in Count II;
(iii) denied plaintiffs' motion for partial summary judgment with respect to
Count II; and (iv) granted plaintiffs' motion for summary judgment dismissing
defendants' counterclaims against Ameritech for contribution. In September 1997,
the Court granted defendants' alternative motion for summary judgment on
plaintiffs' remaining state law claims, dismissing Counts VIII-X of the second
amended complaint. In January 1998, the Court certified for interlocutory appeal
on that portion of its June 1996 order denying defendants' motion for summary
judgment on Count III. Also in January 1998, defendants filed, in the U.S. Court
of Appeals for the Seventh Circuit, a petition for permission to appeal, and
that petition remains pending.
<PAGE> 1
EXHIBIT 99.02
SEVENTH PARAGRAPH UNDER THE CAPTION "LEGAL PROCEEDINGS" BEGINNING ON PAGE 13 OF
THE ANNUAL REPORT ON FORM 10-K OF SSBH FOR THE YEAR ENDED DECEMBER 31, 1997
(FILE NO. 1-4346).
In December 1996, a complaint seeking unspecified monetary damages was filed by
Orange County, California against numerous brokerage firms, including Smith
Barney, 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. The case (County of Orange et al v.
Bear Stearns & Co. Inc. et al.) has been stayed by agreement of the parties.
<PAGE> 1
EXHIBIT 99.03
Third paragraph under the caption "Legal Proceedings" beginning on page 20 of
the Quarterly Report on Form 10-Q of SSBH for the quarter ended June 30, 1998.
In June 1998, complaints were filed in the U.S. District Court for the Eastern
District of Louisiana in two actions (Board of Liquidators, City Debt of the
City of New Orleans v. Smith Barney Inc. et ano. and The City of New Orleans v.
Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
declaratory judgement that Smith Barney Inc. and another underwriter are
responsible for any damages that the City incurs in the event the Internal
Revenue Service denies tax exempt status to the City's General Obligation
Refunding Bonds Series 1991. The Company intends to contest these actions
vigorously.
