<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 JUNE 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 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 JUNE 30, 1998
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three and six months ended June 30, 1998 and 1997 1
Condensed Consolidated Statements of Financial Condition -
June 30, 1998 (Unaudited) and December 31, 1997 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 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 - 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20 - 21
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 Six Months
Period Ended June 30, 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 784 $ 686 $ 1,579 $ 1,402
Investment banking 640 475 1,268 959
Principal transactions 315 709 1,095 1,471
Asset management and administration fees 553 399 1,051 788
Other 42 25 74 53
------- ------- ------- -------
Total noninterest revenues 2,334 2,294 5,067 4,673
------- ------- ------- -------
Interest and dividends 3,468 3,008 6,786 5,499
Interest expense 3,067 2,578 5,990 4,747
------- ------- ------- -------
Net interest and dividends 401 430 796 752
------- ------- ------- -------
Revenues, net of interest expense 2,735 2,724 5,863 5,425
------- ------- ------- -------
Noninterest expenses:
Compensation and benefits 1,544 1,442 3,266 2,921
Communications 116 124 233 245
Floor brokerage and other production 105 86 215 172
Occupancy and equipment 105 110 210 216
Advertising and market development 68 70 138 132
Professional services 46 47 97 88
Other operating and administrative expenses 106 106 249 234
Restructuring credit (324) -- (324) --
------- ------- ------- -------
Total noninterest expenses 1,766 1,985 4,084 4,008
------- ------- ------- -------
Income before income taxes 969 739 1,779 1,417
Provision for income taxes 368 288 676 555
------- ------- ------- -------
Net income $ 601 $ 451 $ 1,103 $ 862
======= ======= ======= =======
</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>
June 30, December 31,
Dollars in millions 1998 1997
----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,314 $ 1,808
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,316 2,034
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $81,754 $75,802
Deposits paid for securities borrowed 49,564 33,932
-------- --------
131,318 109,734
Financial instruments and commodities owned and contractual
commitments:
U.S. government and government agency securities 56,562 52,109
Non-U.S. government and government agency securities 32,214 46,502
Corporate debt securities 15,103 13,614
Equity securities 6,309 6,420
Contractual commitments 12,614 10,120
Mortgage loans and collateralized mortgage securities 6,495 3,103
Other financial instruments 8,293 6,590
Commodities 1,176 1,274
-------- --------
138,766 139,732
Receivables:
Receivable for securities provided as collateral 7,857 --
Customers 12,566 12,415
Brokers, dealers and clearing organizations 2,309 3,212
Other 1,238 2,387
-------- --------
23,970 18,014
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $956 and
$884, respectively 1,012 986
Other assets 4,310 4,312
--------- ---------
Total assets $304,006 $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>
June 30, December 31,
Dollars in millions 1998 1997
----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper $ 14,187 $ 7,110
Other short-term borrowings 4,495 4,354
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $111,540 $113,593
Deposits received for securities loaned 10,523 5,978
-------- --------
122,063 119,571
Financial instruments and commodities sold, not
yet purchased, and contractual commitments:
U.S. government and government agency securities 36,068 33,970
Non-U.S. government and government agency securities 39,624 45,166
Contractual commitments 12,892 11,688
Equity securities 4,228 3,462
Corporate debt securities and other 2,536 1,880
-------- --------
95,348 96,166
Payables and accrued liabilities:
Obligation to return securities received as collateral 12,366 -
Customers 9,227 9,791
Brokers, dealers and clearing organizations 5,460 2,972
Other 9,791 8,719
-------- --------
36,844 21,482
Term debt 20,998 19,074
-------- --------
Total liabilities 293,935 267,757
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 1,576 1,574
Retained earnings 7,749 6,943
Cumulative translation adjustments 1 1
-------- --------
Total stockholder's equity 9,326 8,518
-------- --------
Total liabilities and stockholder's equity $304,006 $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
Six Months Ended June 30, 1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash items -
Net income $ 1,103 $ 862
Depreciation and amortization 156 144
-------- --------
Cash items included in net income 1,259 1,006
-------- --------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (282) (29)
Collateralized short-term financing agreements (21,584) (21,294)
Financial instruments and commodities owned and contractual commitments 966 (22,185)
Receivables (5,956) (1,818)
Other assets (41) (180)
-------- --------
Increase in operating assets (26,897) (45,506)
-------- --------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 2,492 31,923
Financial instruments and commodities sold, not yet purchased, and contractual
commitments (818) 4,898
Payables and accrued liabilities 15,414 3,032
-------- --------
Increase in operating liabilities 17,088 39,853
-------- --------
Cash used in operating activities (8,550) (4,647)
-------- --------
Cash flows from financing activities:
Increase in commercial paper and other short-term
borrowings 7,218 2,266
Proceeds from issuance of term debt 3,177 4,596
Term debt maturities and repurchases (1,357) (1,392)
Collateralized mortgage obligations (71) (63)
Issuance of trust preferred securities 400 --
Dividends paid (279) (286)
Other capital transactions 3 (98)
-------- --------
Cash provided by financing activities 9,091 5,023
-------- --------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 86 63
Proceeds from the sale of Basis Petroleum -- 365
Property, equipment and leasehold improvements (144) (98)
Other 23 (20)
-------- --------
Cash provided by (used in) investing activities (35) 310
-------- --------
Increase in cash and cash equivalents 506 686
Cash and cash equivalents at January 1, 1,808 1,607
-------- --------
Cash and cash equivalents at June 30, $ 2,314 $ 2,293
======== ========
</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 six
months ended June 30, 1997 and the condensed consolidated statement of
cash flows for the six months ended June 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 June 30, 1998 June 30, 1998
------------------- ------------------------ --------------------------- ---------------------
<S> <C> <C> <C>
Seven World Trade Center lease $ 610 ($324) * $ 286
Other facilities 53 (18) 35
----- ----- -----
Total facilities 663 (342) 321
Severance 161 (122) 39
Other 14 (3) 11
----- ----- -----
$ 838 ($467) $ 371**
===== ===== =====
</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 sub-lease 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 pending 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 $146 million cash component and $225 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 represents
costs that are not associated with future revenues and are either
incremental or contractual with no economic benefit.
At June 30, 1998, the cash and non-cash balances of the restructuring
reserve related to facilities were $97 million and $224 million,
respectively. Lease costs 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. PENDING TRANSACTIONS
TRAVELERS MERGER WITH CITICORP
On April 6, 1998, Travelers announced that it had entered into a merger
agreement with Citicorp. The transaction, which is expected to be
completed during the third quarter of 1998, is subject to various
regulatory approvals, including approval by the Federal Reserve Board.
Upon consummation of the merger, Travelers would be 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.
Although the effects of the proposed merger and compliance with the
requirements of the BHCA and the Glass-Steagall Act are still under
review, the Company does not believe that its compliance with applicable
law following the merger involving Travelers and Citicorp will have a
material adverse effect on its ability to continue to operate the
businesses in which it is presently engaged.
THE NIKKO SECURITIES CO., LTD.
On June 1, 1998, Travelers and The Nikko Securities Co., Ltd ("Nikko")
announced their intention to form a global strategic alliance. The
proposed 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 overseas.
It 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.
6
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nikko Salomon Smith Barney will be owned 51% by Nikko and 49% by the
Company. A definitive joint venture agreement is expected to be signed by
the end of August 1998, and it is anticipated that the joint venture will
be operational in January 1999, subject to applicable regulatory
approvals.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim condensed consolidated financial statements reflect the
accounts of the Company, a wholly owned subsidiary of Travelers.
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 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") 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. Restatement of previously issued financial
statements is not allowed. 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 June 30, 1998, the
impact of SFAS 127 on the Company's condensed consolidated statement of
financial position was an increase to total assets and liabilities of
approximately $6.1 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 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
7
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
<TABLE>
<CAPTION>
Dollars in Millions Three Months Ended Six Months Ended
For the period ended June 30, 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 601 $ 451 $1,103 $ 862
Other changes in equity from
nonowner sources (3) 1 -- (6)
------ ------ ------ ------
Total changes in equity from
nonowner sources $ 598 $ 452 $1,103 $ 856
====== ====== ====== ======
</TABLE>
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued 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. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Restatement of
previously issued financial statements is not allowed. The Company is
currently evaluating the impact of this statement of position on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS 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 4. 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 $1,515 $1,442
Uniform Net Capital Rule (Rule 15c3-1)
Smith Barney Inc.* U.S. Securities and Exchange Commission $1,278 $1,017
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $4,708 $ 949
Salomon Smith Barney Japan Limited** Japan's Ministry of Finance $ 622 $ 285
Salomon Brothers AG Germany's Banking Supervisory Authority $ 256 $ 75
The Robinson-Humphrey Company, LLC U.S. Securities and Exchange Commission $ 86 $ 85
Uniform Net Capital Rule (Rule 15c3-1)
</TABLE>
* It is anticipated that these entities will merge in the third quarter 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 June 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 5. CONTRACTUAL COMMITMENTS
A summary of the Company's contractual commitments as of June 30, 1998
and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
JUNE 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) $1,110.4 $ -- $ -- $ 940.5 $ -- $ --
Other exchange-issued products:
Equity contracts 7.6 .2 .3 10.6 .2 .4
Fixed income contracts 167.9 .1 .1 138.1 -- --
Commodities contracts 2.3 -- -- 3.5 -- --
-------- -------- -------- -------- -------- --------
Total exchange-issued products 1,288.2 .3 .4 1,092.7 .2 .4
-------- -------- -------- -------- -------- --------
Over-the-counter ("OTC") swaps, swap options, caps
and floors:
Swaps 1,703.0 1,345.9
Swap options written 52.8 38.6
Swap options purchased 66.4 48.8
Caps and floors 171.5 161.4
-------- -------- -------- -------- -------- --------
Total OTC swaps, swap options, caps and floors (b) 1,993.7 6.5 6.4 1,594.7 5.8 6.7
-------- -------- -------- -------- -------- --------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 142.6 1.3 1.2 115.4 1.0 1.0
Options written 72.6 -- .7 41.3 -- .6
Options purchased 58.5 .8 -- 37.7 .6 --
-------- -------- -------- -------- -------- --------
Total OTC foreign exchange contracts and options 273.7 2.1 1.9 194.4 1.6 1.6
-------- -------- -------- -------- -------- --------
Other options and contractual commitments:
Options and warrants on equities and equity
indices 58.1 3.1 3.7 54.8 1.8 2.7
Options and forward contracts on fixed-income
securities 511.1 .3 .3 343.4 .3 .1
Commodities contracts 10.1 .3 .2 14.3 .4 .2
-------- -------- -------- -------- -------- --------
Total contractual commitments $4,134.9 $ 12.6 $ 12.9 $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 $17.5 billion and $4.0 billion at June 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 6. 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 June
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 Travelers 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.
NOTE 7. 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
11
<PAGE> 14
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 net income of $601 million for the three months ended June
30, 1998 (the "1998 Quarter"), an increase of 33% from the $451 million reported
for the three months ended June 30, 1997 (the "1997 Quarter"). Revenues, net of
interest expense, of $2,735 million in the 1998 Quarter were relatively
unchanged from the $2,724 million reported in the 1997 Quarter.
For the six months ended June 30, 1998 (the "1998 Period"), the Company reported
net income of $1,103 million, an increase of 28% from the $862 million reported
for the six months ended June 30, 1997 (the "1997 Period). Revenues, net of
interest expense, were $5,863 million in the 1998 Period, an increase of 8% from
the $5,425 million reported in the 1997 Period.
Net income for the 1998 Quarter and 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 increased 14% to $784 million in the 1998 Quarter compared
to $686 million in the 1997 Quarter. This increase is a result of continued
strength in listed and over-the-counter securities, as well as mutual fund
commissions. Commission revenues were $1,579 million in the 1998 Period compared
to $1,402 million in the 1997 Period.
Investment banking revenues increased 35% to $640 million in the 1998 Quarter
compared to $475 million in the 1997 Quarter. This increase primarily reflects
an increase in merger and acquisition advisory fees as well as revenue growth
from public finance, unit trust, equities and high yield and investment grade
debt underwriting. Investment banking revenues were $1,268 million in the 1998
Period compared to $959 million in the 1997 Period.
Principal transaction revenues decreased to $315 million in the 1998 Quarter.
The decline principally resulted from losses in the U.S. fixed income arbitrage
business and from commodities trading conducted by Phibro Inc. In early July, a
decision was made to restructure and significantly decrease the risk profile of
the U.S. fixed income arbitrage group because of the lessening profit
opportunities and the growing risk and volatility. In the 1998 Period, principal
transaction revenues decreased to $1,095 million, principally from losses in the
U.S. fixed income arbitrage business. Principal transaction revenues by business
activity were composed of the following:
<TABLE>
<CAPTION>
Dollars in Millions Three Months Six Months
For the period ended June 30, 1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Fixed Income $ 216 $525 $ 674 $1,029
Equities 127 66 289 281
Commodities (25) 110 143 150
Other (3) 8 (11) 11
----- ---- ------- ------
Total principal transaction revenues $ 315 $709 $ 1,095 $1,471
===== ==== ======= ======
</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 39% to $553 million in the
1998 Quarter compared to $399 million in the 1997 Quarter as a result of the
growth in assets under fee-based management. Asset management and administration
fees were $1,051 million in the 1998 Period compared to $788 million in the 1997
Period. At June 30, 1998, internally managed assets were $183.9 billion and
total fee-based assets under management were $253.2 billion compared to $150.1
billion and $203.2 billion, respectively, at June 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 June 30, 1998 1997
------ ------
<S> <C> <C>
Money market funds $ 51.1 $ 44.3
Mutual funds 57.6 43.8
Managed accounts 60.9 52.2
------ ------
Salomon Smith Barney Asset Management 169.6 140.3
Financial Consultant managed accounts 14.3 9.8
------ ------
Total internally managed assets 183.9 150.1
Consulting Group externally managed assets 69.3 53.1
------ ------
Total fee-based assets under management $253.2 $203.2
====== ======
</TABLE>
Net interest and dividends decreased to $401 million for the 1998 Quarter from
$430 million in the 1997 Quarter due to a decrease in the level of net interest
earning assets, partially offset by increased margin lending to clients. For the
1998 Period, interest and dividends increased 6% to $796 million, primarily due
to increased margin lending to clients.
Total expenses, excluding interest and the restructuring credit, increased 5% to
$2,090 million in the 1998 Quarter from $1,985 million in the 1997 Quarter,
principally as a result of higher compensation and other expenses related to
increased production. Compensation and benefits expense, as a percentage of net
revenues, for the 1998 Quarter was 56% compared to 53% in the 1997 Quarter.
Non-compensation expense as a percentage of net revenues (before the
restructuring credit) was 20% in both the 1998 and 1997 Quarters. The Company
continues to maintain its focus on controlling fixed expenses.
Total expenses, excluding interest and the restructuring credit, were $4,408
million in the 1998 Period compared to $4,008 million in the 1997 Period.
Compensation and benefits expense, as a percentage of net revenues, for the 1998
Period was 56% compared to 54% in the 1997 Period. Non-compensation expense as a
percentage of net revenues (before the restructuring credit) was 19% in the 1998
Period compared to 20% in the 1997 Period.
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 Ended Six Months Ended
Period Ended June 30, 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Investment advisory, administrative
and distribution fees $ 214 $ 173 $ 416 $ 341
Unit Investment Trust revenues - net 7 7 20 16
Other 6 14 16 23
------ ------ ------ ------
Total revenues 227 194 452 380
------ ------ ------ ------
Expenses:
Compensation and benefits 44 35 86 70
Deferred commission amortization 31 31 66 64
Other expenses 48 48 96 92
------ ------ ------ ------
Total expenses 123 114 248 226
------ ------ ------ ------
Income before income taxes 104 80 204 154
Provision for income taxes 41 31 81 61
------ ------ ------ ------
Net income $ 63 $ 49 $ 123 $ 93
====== ====== ====== ======
</TABLE>
SSBAM's net income increased 29% to $63 million in the 1998 Quarter and 32% to
$123 million in the 1998 Period. Total revenues increased 17% to $227 million in
the 1998 Quarter and 19% to $452 million in the 1998 Period. SSBAM's earnings
growth reflects growth in assets under management, continued strength in retail
and institutional managed accounts, and higher mutual fund sales.
SSBAM's total assets under management reached $169.6 billion at June 30, 1998,
an increase of 21% from the $140.3 billion reported at June 30, 1997. The
increase in assets under management consisted of a 15% increase in money market
funds, a 32% increase in mutual funds, and a 17% increase in accounts managed
for high net worth individuals, pension funds, corporations and other
institutions. Investment advisory, administration and distribution fees rose 24%
to $214 million in the 1998 Quarter and 22% to $416 million in the 1998 Period
as a result of the 21% 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 proprietary mutual funds rose
48%, and accounted for a greater percentage - 28% in the 1998 Period compared to
25% 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 $304 billion at June 30, 1998, up 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 3 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). 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 $188.3 billion at June 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 and letters of credit, deposit liabilities, promissory notes and
corporate loans. Short-term uncollateralized borrowings totaled $17.4 billion at
June 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 June 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 June 30, 1998, this requirement was
exceeded by approximately $3.4 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 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
16
<PAGE> 19
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 its 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 17.1x at June 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 $7.4 billion and $6.8 billion at June 30, 1998 and December 31, 1997,
respectively. The largest high yield exposure to one counterparty was $649
million and $785 million at June 30, 1998 and December 31, 1997, respectively.
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
The following table shows the results of the Company's value at risk ("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 June 30, 1998 and December 31, 1997. The VAR relating to non-trading
instruments has been excluded from this analysis.
<TABLE>
<CAPTION>
June 30, December 31,
Dollars in millions 1998 1997
------ ------
<S> <C> <C>
Interest rate $ 46 $ 41
Equities 5 8
Commodities 8 8
Currency 12 9
Diversification benefit (22) (22)
------ ------
Total $ 49 $ 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. Over 100 risk factors are used in
the simulations. VAR reflects the risk profile of the Company at a point in time
and is not a predictor of future results.
OPERATIONAL RISK
YEAR 2000 AND EUROPEAN ECONOMIC AND MONETARY UNION
The Company has analyzed the impact of the year 2000 on its systems and
processes and modifications for compliance are proceeding according to plan. All
modifications necessary for year 2000 compliance are expected to be completed by
the first quarter of 1999. In July 1998, Smith Barney Inc., a wholly owned
subsidiary of SSBH, participated in successful industry-wide testing coordinated
by the Securities Industry Association and plans to participate in such tests in
the future. The purpose of industry-wide testing is to confirm that exchanges,
clearing organizations, and other securities industry participants are prepared
for the year 2000. The failure of 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.
In addition, the Company is addressing the technological implications that will
result from regulatory and market changes due to Europe's Economic and Monetary
Union ("EMU"). Changes to business processes have been defined and the necessary
system changes are nearing completion. The Company expects to be fully prepared
for EMU.
18
<PAGE> 21
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: the
resolution of legal proceedings and related matters; the conduct of the
Company's businesses following the pending Citicorp merger and the pending
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
19
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning a complaint filed by the Antitrust Division
of the U.S. Department of Justice against 24 market makers in certain
NASDAQ stocks, including Salomon Brothers Inc and Smith Barney Inc.,
see the description that appears in the fifth and sixth 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. In August 1998,
the U.S. Court of Appeals for the Second Circuit affirmed the
settlement with the Department of Justice.
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 Company has been advised that the stay of
proceedings, currently in effect by agreement of the parties, will
expire on August 20, 1998.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations,
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 judgment 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On April 17, 1998, SSBH filed a Current Report on Form 8-K,
dated April 16, 1998, reporting under Item 5 thereof that
Travelers had entered into a definitive merger agreement with
Citicorp.
On April 20, 1998, SSBH filed a Current Report on Form 8-K,
dated April 20, 1998, reporting under Item 5 thereof the
results of its operations for the quarter ended March 31,
1998, and certain other selected financial data.
On May 13, 1998, SSBH filed a Current Report on Form 8-K,
dated May 11, 1998, filing certain exhibits under Item 7
thereof relating to the offer and sale of SSBH's 6 1/4% Notes
due May 15, 2003.
On June 8, 1998, SSBH filed a Current Report on Form 8-K,
dated June 1, 1998, reporting under Item 5 thereof that
Travelers and The Nikko Securities Co., Ltd. had announced
their
20
<PAGE> 23
intention to form a global strategic alliance and a joint
venture to be called Nikko Salomon Smith Barney Limited.
On June 10, 1998, SSBH filed a Current Report on Form 8-K,
dated June 8, 1998, filing certain exhibits under Item 7
thereof relating to the offer and sale of the Targeted Growth
Enhanced Terms Securities (TARGETS(R)) of TARGETS Trust I
with respect to the Common Stock of Cisco Systems, Inc.
On June 17, 1998, SSBH filed a Current Report on Form 8-K,
dated June 15, 1998, filing certain exhibits under Item 7
thereof relating to the offer and sale of SSBH's 6 1/4% Notes
due June 15, 2005.
No other reports on Form 8-K were filed during the second
quarter of 1998; however, 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 its
operations for the quarter ended June 30, 1998, and certain
other selected financial data; 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 SSBH's Call Warrants on the 1998 TEN+(SM) Index
Expiring on July 17, 2000; and 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 SSBH's Principal-Protected Equity Linked Notes
due August 1, 2005.
21
<PAGE> 24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.01 Amended and Restated Certificate of Incorporation of SSBH,
effective December 1, 1997, incorporated by reference to
Exhibit 4(a) to Amendment No. 2 to SSBH's Registration
Statement on Form S-3 (No. 333-38931).
3.02 By-Laws of SSBH, incorporated by reference to Exhibit 4(b) to
Amendment No. 2 to SSBH's Registration Statement on Form S-3
(No. 333-38931).
10.01 1998 Lease Amendment dated as of March 27, 1998 between State
Street Bank and Trust Company of Connecticut, National
Association, as Trustee (Lessor), and Smith Barney Inc.,
Salomon Brothers Inc, Travelers Group Inc. (formerly The
Travelers Inc.), Mutual Management Corp. (formerly Smith
Barney Mutual Funds Management Inc., which was successor by
merger to Mutual Management Corp.), Smith Barney Capital
Services Inc., Smith Barney Commercial Corp., Smith Barney
Futures Management Inc. and Smith Barney Global Capital
Management, Inc., as tenants in common (Lessee), to the 1994
Lease, incorporated by reference to Exhibit 10.02 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (File No. 1-4346).
12.01+ Computation of ratio of earnings to fixed charges.
27.01+ Financial Data Schedule.
99.01+ Fifth and sixth 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).
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of SSBH does not exceed 10% of the total
assets of SSBH and its consolidated subsidiaries. The Company will furnish
copies of any such instrument to the SEC upon request.
- ---------------
+ Filed herewith.
22
<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: August 13, 1998 By: /s/ Charles W. Scharf
----------------------
Charles W. Scharf
Chief Financial Officer
By: /s/ Michael J. Day
----------------------
Michael J. Day
Controller
23
<PAGE> 1
EXHIBIT 12.01
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
Dollars in millions 1998
---------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $1,779
Add fixed charges (see below) 6,033
------
Earnings as defined $7,812
======
Fixed charges from continuing operations:
Interest expense $5,990
Other adjustments 43
------
Fixed charges from continuing operations as defined $6,033
======
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.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,630
<RECEIVABLES> 23,970
<SECURITIES-RESALE> 81,754
<SECURITIES-BORROWED> 49,564
<INSTRUMENTS-OWNED> 138,766
<PP&E> 1,012
<TOTAL-ASSETS> 304,006
<SHORT-TERM> 18,682
<PAYABLES> 36,844
<REPOS-SOLD> 111,540
<SECURITIES-LOANED> 10,523
<INSTRUMENTS-SOLD> 95,348
<LONG-TERM> 20,998
0
0
<COMMON> 0
<OTHER-SE> 9,326
<TOTAL-LIABILITY-AND-EQUITY> 304,006
<TRADING-REVENUE> 1,095
<INTEREST-DIVIDENDS> 6,786
<COMMISSIONS> 1,579
<INVESTMENT-BANKING-REVENUES> 1,268
<FEE-REVENUE> 1,051
<INTEREST-EXPENSE> 5,990
<COMPENSATION> 3,266
<INCOME-PRETAX> 1,779
<INCOME-PRE-EXTRAORDINARY> 1,103
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,103
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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<PAGE> 1
EXHIBIT 99.01
FIFTH AND SIXTH 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).
In the fall of 1994, various federal and state lawsuits brought as purported
class actions against SBI, Smith Barney, R-H, and 34 other broker-dealers were
consolidated for pre-trial purposes as In re Nasdaq Market-Makers Antitrust
Litigation in the U.S. District Court for the Southern District of New York. In
the consolidated action, plaintiffs allege that broker-dealers making markets
in securities traded on NASDAQ violated antitrust laws by conspiring to
maintain a minimum spread between the bid and asked price for certain
securities, and seek unspecified monetary damages, subject to trebling under
the antitrust laws, injunctive relief, attorneys' fees and court costs. In late
1996, the Court certified a class. In December 1997, SBI, Smith Barney, R-H,
and all but one of the other 34 broker-dealer defendants executed a settlement
agreement with the plaintiffs that has been preliminarily approved by the Court
subject to final approval following a hearing scheduled for September 1998. If
approved, the settlement will not have a material effect on the Company's
results of operations, financial condition or liquidity.
In July 1996, the Antitrust Division of the Department of Justice filed a
complaint containing similar allegations to the above-described action against
24 market makers in certain NASDAQ stocks. When the complaint was filed, and
with no admission of liability, SBI, Smith Barney and the other defendants
entered into a settlement pursuant to which the defendants agreed not to engage
in certain practices relating to the quoting and trading of NASDAQ securities
and to implement additional compliance procedures. There are no fines,
penalties, or other payments of money in connection with this settlement, which
the Court approved in April 1997. In May 1997, plaintiffs in the above-described
related civil action (who were permitted to intervene for limited purposes)
appealed the Court's approval of the settlement. The appeal was argued before
the U.S. Court of Appeals, Second Circuit in March 1998.
<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.
