<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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------ ------
COMMISSION FILE NUMBER 1-4346
SALOMON SMITH BARNEY HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ----
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE
HEREOF, 1000 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE,
WERE ISSUED AND OUTSTANDING.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H 1 (a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
<PAGE> 2
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information
---------------------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three months ended March 31, 1999 and 1998 1
Condensed Consolidated Statements of Financial Condition -
March 31, 1999 (Unaudited) and December 31, 1998 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three months ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Part II. Other Information
-----------------
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Exhibit Index 22
Signatures 23
</TABLE>
<PAGE> 3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Three Months Ended March 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Commissions $ 903 $ 795
Investment banking 664 628
Principal transactions 978 780
Asset management and administration fees 613 498
Other 66 32
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 3,224 2,733
- ----------------------------------------------------------------------------------------------------------------------------
Interest and dividends 2,613 3,318
Interest expense 2,249 2,923
- ----------------------------------------------------------------------------------------------------------------------------
Net interest and dividends 364 395
- ----------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,588 3,128
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 1,845 1,722
Communications 122 117
Floor brokerage and other production 105 110
Occupancy and equipment 111 105
Advertising and market development 72 70
Professional services 54 51
Other operating and administrative
expenses 158 143
Restructuring credit (211) -
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,256 2,318
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,332 810
Provision for income taxes 488 308
- ----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 844 502
Cumulative effect of change in accounting principle
(net of tax benefit of $12) (15) -
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 829 $ 502
============================================================================================================================
</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>
- ---------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Dollars in millions 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 939 $ 2,261
Cash segregated and on deposit for Federal and other
regulations or deposited with clearing organizations 2,231 2,358
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $67,673 $38,691
Deposits paid for securities borrowed 38,643 49,392
----------- ----------
106,316 88,083
Financial instruments and commodities owned and
contractual commitments:
U.S. government and government agency securities 29,345 24,643
Contractual commitments 12,167 14,319
Corporate debt securities 10,910 11,347
Non-U.S. government and government agency securities 10,336 18,632
Equity securities 7,279 4,860
Mortgage loans and collateralized mortgage securities 7,271 6,066
Money market instruments 2,498 5,153
Commodities 198 245
Other financial instruments 5,114 3,372
----------- ---------
85,118 88,637
Receivables:
Customers 14,484 14,130
Brokers, dealers and clearing organizations 4,254 4,234
Receivable for securities provided as collateral 3,454 3,101
Other 2,436 2,709
----------- ----------
24,628 24,174
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $918 and
$1,032, respectively 1,006 1,114
Other assets 5,583 5,274
- ---------------------------------------------------------------------------------------------------------------------
Total assets $225,821 $211,901
=====================================================================================================================
</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>
- ---------------------------------------------------------------------------------------------------------------
March 31, December 31,
Dollars in millions 1999 1998
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 15,179 $ 15,495
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $87,809 $61,024
Deposits received for securities loaned 7,546 7,712
----------- ----------
95,355 68,736
Financial instruments and commodities sold, not yet
purchased, and contractual commitments:
U.S. government and government agency securities 25,051 32,538
Non-U.S. government and government agency securities 15,753 10,719
Contractual commitments 12,866 15,698
Equity securities 5,816 4,224
Corporate debt securities and other 2,728 3,103
----------- ----------
62,214 66,282
Payables and accrued liabilities:
Customers 10,611 13,119
Obligation to return securities received as collateral 3,098 5,348
Brokers, dealers and clearing organizations 1,627 3,406
Other 8,339 9,851
----------- ----------
23,675 31,724
Term debt 19,057 20,151
Guaranteed beneficial interests in Company
subordinated debt securities 345 345
Company-obligated mandatorily redeemable securities
of subsidiary trust holding solely junior subordinated
debt securities of the Company 400 400
Stockholder's equity:
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 1,589 1,589
Retained earnings 7,982 7,159
Cumulative translation adjustments 25 20
----------- ----------
Total stockholder's equity 9,596 8,768
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $225,821 $211,901
================================================================================================================
</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
Three Months Ended March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash items -
Net income $ 829 $ 502
Depreciation and amortization 93 78
- --------------------------------------------------------------------------------------------------------
Cash items included in net income 922 580
- --------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations 127 (37)
Collateralized short-term financing agreements (18,233) (6,202)
Financial instruments and commodities owned and contractual commitments 3,519 15,166
Receivables (454) (26,044)
Other assets (485) (198)
- --------------------------------------------------------------------------------------------------------
Increase in operating assets (15,526) (17,315)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 26,619 (3,204)
Financial instruments and commodities sold, not yet purchased, and
contractual commitments (4,068) (30,988)
Payables and accrued liabilities (8,038) 43,680
- --------------------------------------------------------------------------------------------------------
Increase in operating liabilities 14,513 9,488
- --------------------------------------------------------------------------------------------------------
Cash used in operating activities (91) (7,247)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term
borrowings (316) 6,731
Proceeds from issuance of term debt 572 1,463
Term debt maturities and repurchases (1,410) (1,278)
Collateralized mortgage obligations (11) (55)
Issuance of mandatorily redeemable securities of subsidiary trusts - 400
Dividends paid (6) (130)
Other capital transactions - 3
- --------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (1,171) 7,134
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 11 31
Property, equipment and leasehold improvements (71) (75)
Other - 16
- --------------------------------------------------------------------------------------------------------
Cash used in investing activities (60) (28)
- --------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,322) (141)
Cash and cash equivalents at January 1, 2,261 1,808
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $ 939 $ 1,667
========================================================================================================
</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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim condensed consolidated financial statements reflect the accounts of
Salomon Smith Barney Holdings Inc. and its subsidiaries (collectively the
"Company"). The Company is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Material intercompany transactions have been eliminated. These
interim condensed consolidated financial statements are unaudited; however, in
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected.
The interim condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States,
which require the use of management's best judgment and estimates. Estimates,
including the fair value of financial instruments, commodities and contractual
commitments, may vary from actual results.
These interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain financial information that is normally included in financial statements
prepared in accordance with generally accepted accounting principles, but that
is not required for interim reporting purposes, has been condensed or omitted.
ACCOUNTING CHANGES
During the first quarter of 1999 the Company recorded a cumulative effect of
change in accounting principle of $15 million (net of tax benefit of $12
million) which relates to the write-off of certain capitalized closed-end fund
distribution costs in connection with the adoption of AICPA Statement of
Position 98-5, Reporting on the Cost of Start-Up Activities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security or a foreign-currency-denominated
forecasted transaction. SFAS 133 is effective for fiscal years beginning after
June 15, 1999. The Company is in the process of evaluating the potential impact
of the new accounting standard.
5
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGES
On November 28, 1997, a newly formed wholly owned subsidiary of Travelers Group
Inc. ("Travelers") was merged into Salomon Inc ("Salomon") and Salomon became a
wholly owned subsidiary of Travelers. Following this merger, Salomon and Smith
Barney Holdings Inc. ("Smith Barney") were merged (the "Merger") to form the
Company.
As a result of the Merger, the Company recorded a pre-tax restructuring charge
of $838 million ($496 million after tax) in the fourth quarter of 1997. The
material components of the restructuring reserve were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Restructuring Reserve
Restructuring Reserve as Charges and Credits through Balance at
Dollars in Millions Originally Recorded March 31, 1999 March 31, 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seven World Trade Center lease $ 610 $(591) * $ 19
Other facilities 53 (37) ** 16
- ------------------------------------------------------------------------------------------------------------------
Total facilities 663 (628) 35
Severance 161 (160) ** 1
Other 14 (14) ** -
- ------------------------------------------------------------------------------------------------------------------
$ 838 $(802) $36***
==================================================================================================================
</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. In the first
quarter of 1999, the Company recorded an adjustment of $211 million ($125
million after-tax) to the restructuring reserve relating to the Seven World
Trade Center lease. This reduction in the reserve resulted from a current
reassessment of space needs due to the Citigroup merger. This reassessment
indicated the need for increased occupancy by the Company utilizing space
previously considered excess.
** In the fourth quarter of 1998, the Company recorded an adjustment of $30
million ($18 million after tax) to the restructuring reserve. The components
of the reduction are as follows: severance $10 million; other facilities $11
million; other $9 million. The reduction in severance reserves was due to a
higher level of attrition than originally anticipated. The reduction in
reserves related to other facilities was mainly due to the abandonment of
space on terms more favorable than originally anticipated. The other reserve
reversal was mainly due to anticipated duplicate contract payments which were
avoided due to favorable negotiations.
*** Consists of $24 million cash component and $12 million non-cash component.
At March 31, 1999, the portion of the cash and non-cash balances of the
restructuring reserve that related to facilities were $23 million and $12
million, respectively. Such costs include lease costs, which represent the
difference between contractual obligations and the estimated fair market rental
obtainable through sublease from the date that such facilities are expected to
be vacated, and other costs incidental to abandonment of the space. These
contractual lease payments are estimated to be made over the remaining term and
the remaining cash costs are expected to be paid in 1999.
Non-cash costs of other facilities reflect the write-off of leasehold
improvements, furniture and equipment upon abandonment and represent the
remaining depreciated book value at the estimated dates of abandonment.
Depreciation and amortization of these assets will continue during the period
they are in use. The facilities are located primarily in the United States and
generally support multiple lines of business. The assets have not been
reclassified to a held for sale category since substantially all are subject to
abandonment and will not be realized through sale.
6
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned
subsidiary of Travelers. Following the merger, Travelers changed its name to
Citigroup. As a result of the Citigroup merger, the Company recorded a pre-tax
restructuring charge of $80 million ($47 million after tax) in the fourth
quarter of 1998. The material components of the restructuring reserve were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Restructuring Reserve Restructuring
as Charges through Reserve Balance at
Dollars in Millions Originally Recorded March 31, 1999 March 31, 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance $69 $(28) $41
Facilities 9 (4) 5
Other 2 (1) 1
- -------------------------------------------------------------------------------------------------------
$80 $(33) $47*
=======================================================================================================
</TABLE>
*All cash components
Facilities costs include lease payments, which represent the difference between
contractual obligations and the estimated fair market rental obtainable through
sublease from the date that such facilities are expected to be vacated, and
other costs incidental to abandonment of the space. These contractual lease
payments are estimated to be expended over the remaining term and are expected
to be paid in 1999 and 2000. The facilities are located in various foreign
locations and generally support multiple lines of business. The assets have not
been reclassified to a held for sale category since substantially all are
subject to abandonment and will not be realized through sale.
The balance of severance costs are expected to be paid by the end of 1999. All
of the amounts were determined in accordance with the guidelines included in
Emerging Issues Task Force 94-3 and represent costs that are not associated with
future revenues and are either incremental or contractual with no economic
benefit. None of the amounts included in the restructuring charge represent
operating losses or income. The cash component of these restructuring costs will
be funded from working capital and will not require any incremental funding
source.
NOTE 3. THE NIKKO SECURITIES CO., LTD.
On February 26, 1999, the Company and The Nikko Securities Co., Ltd ("Nikko")
formed a joint venture. The joint venture, Nikko Salomon Smith Barney Limited
("Nikko Salomon Smith Barney"), provides investment banking, sales and trading
and research services for corporate and institutional clients in Japan and other
foreign jurisdictions. Nikko Salomon Smith Barney combined the Japanese
institutional and corporate business of the Company with Nikko's domestic and
international institutional and corporate business. Nikko's retail business and
other activities, including asset management, will remain under Nikko's
management. Nikko Salomon Smith Barney is headquartered in Tokyo and maintains
offices and staff worldwide.
Nikko Salomon Smith Barney is owned 51% by Nikko and 49% by the Company. A
shareholder agreement further provides for operating standards as to how the
entity operates as a joint venture.
NOTE 4. COMPREHENSIVE INCOME
7
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Comprehensive income represents the sum of net income and other changes in
stockholder's equity from nonowner sources. The accumulated balance of changes
in equity from nonowner sources is required to be displayed separately from
retained earnings and additional paid-in-capital in the statement of financial
position. Cumulative translation adjustments are the only changes in the
Company's equity from nonowner sources. The Company's total changes in equity
from nonowner sources, net of tax, is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Dollars in Millions
For the three months ended
March 31, 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $829 $502
Other changes in equity
from nonowner sources 5 3
- ------------------------------------------------------------------------------------------
Total comprehensive income $834 $505
==========================================================================================
</TABLE>
NOTE 5. PRINCIPAL TRANSACTION REVENUES
The following table presents principal transaction revenue by business activity
for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Dollars in Millions
Three months ended March 31, 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Fixed Income $682 $458
Equities 197 162
Commodities 93 180
Other 6 (20)
- -----------------------------------------------------------------------------
Total principal transaction
revenues $978 $780
=============================================================================
</TABLE>
NOTE 6. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to securities and commodities
regulations and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. Capital
requirements related to the Company's principal regulated subsidiaries are as
follows:
<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
Uniform Net Capital Rule (Rule 15c3-1) $3,258 $2,922
Salomon Brothers International United Kingdom's Securities and Futures
Limited Authority $4,095 $1,495
Salomon Brothers AG Germany's Banking Supervisory Authority $ 217 $ 157
The Robinson-Humphrey Company, U.S. Securities and Exchange Commission
LLC Uniform Net Capital Rule (Rule 15c3-1) $ 91 $ 90
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco"), a wholly owned subsidiary of the Company, must maintain minimum
levels of capital in accordance with agreements with its rating agencies. At
March 31, 1999, Swapco was in compliance with all such agreements. Swapco's
capital requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
NOTE 7. CONTRACTUAL COMMITMENTS
A summary of the Company's contractual commitments as of March 31, 1999
and December 31, 1998 is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------------------- ---------------------------------
Current Market
Current Market or or
Notional Fair Value Notional Fair Value
-------------------- -----------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $704.0 $ - $ - $858.3 $ - $ -
Other exchange-issued products:
Equity contracts 9.3 .1 .2 9.5 .1 .2
Fixed income contracts 140.2 - - 118.1 - .1
Commodities contracts 1.3 - - 1.3 - -
- --------------------------------------------------------------------------------------------------------------
Total exchange-issued products 854.8 .1 .2 987.2 .1 .3
- --------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options,
caps and floors:
Swaps 2,390.3 2,395.3
Swap options written 92.0 81.7
Swap options purchased 86.3 85.4
Caps and floors 194.3 191.8
- --------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and
floors (b) 2,762.9 5.6 6.9 2,754.2 8.2 8.8
- --------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 74.4 .8 .9 146.7 1.0 1.3
Options written 34.2 - .5 52.3 - .8
Options purchased 34.7 .6 - 47.3 1.1 -
- --------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and
options 143.3 1.4 1.4 246.3 2.1 2.1
- --------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and
equity indices 51.6 3.3 3.4 63.3 3.1 3.2
Options and forward contracts on
fixed-income securities 409.7 1.6 .9 383.8 .6 1.1
Commodities contracts 7.0 .2 .1 7.0 .2 .2
- --------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,229.3 $12.2 $12.9 $4,441.8 $14.3 $15.7
==============================================================================================================
</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 $18.0 billion and $4.1 billion at March 31, 1999 and
$16.2 billion and $6.1 billion at December 31, 1998, respectively.
9
<PAGE> 12
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. SEGMENT INFORMATION
The following table summarizes the results of operations for the Company's two
operating segments, Investment Services and Asset Management. For further
discussion of the Company's operating segments, please refer to the Results of
Operations section of Management's Discussion and Analysis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Dollars in millions
Three months ended March 31, 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Investment Services $ 5,574 $ 5,825
Asset Management 263 226
- -----------------------------------------------------------------------------------------
Total $ 5,837 $ 6,051
=========================================================================================
Net interest and dividends:
Investment Services $ 369 $ 402
Asset Management (5) (7)
- -----------------------------------------------------------------------------------------
Total $ 364 $ 395
=========================================================================================
Income before cumulative effect of change
in accounting principle:
Investment Services $ 771 $ 442
Asset Management 73 60
- -----------------------------------------------------------------------------------------
Total $ 844 $ 502
=========================================================================================
Total assets:
Investment Services $224,377 $210,543
Asset Management 1,444 1,358
- -----------------------------------------------------------------------------------------
Total $225,821 $211,901
=========================================================================================
</TABLE>
NOTE 9. LEGAL PROCEEDINGS
The Company has been named as a defendant in legal actions relating to its
operations, some of which seek damages of material or indeterminate amounts. In
addition, from time to time the Company is a party to examinations and inquiries
by various regulatory and self-regulatory bodies. In connection with its
discontinued commodities processing operations, the Company and certain of its
subsidiaries are subject to claims asserted by the U.S. Environmental Protection
Agency, certain state agencies and private parties in connection with
environmental matters. Management of the Company, after consultation with
outside legal counsel, believes that the ultimate resolution of legal
proceedings and environmental matters (net of applicable reserves) will not have
a material adverse effect on the Company's financial condition; however, such
resolution could have a material adverse impact on operating results in future
periods depending in part on the results for such periods.
10
<PAGE> 13
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
RESULTS OF OPERATIONS
The Company recorded net income, including the credit relating to the
restructuring charge booked in the fourth quarter of 1997 and the cumulative
effect of change in accounting principle relating (see note 2 to the condensed
consolidated financial statements for further discussion of the restructuring
charges), of $829 million for the three months ended March 31, 1999 (the "1999
Quarter") compared to $502 million for the three months ended March 31, 1998
(the "1998 Quarter"). The cumulative effect of change in accounting principle of
$15 million (net of tax benefit of $12 million) recorded in the 1999 Quarter
relates to the write-off of costs relating to certain capitalized closed-end
fund distribution costs in connection with the adoption of AICPA Statement of
Position 98-5, Reporting on the Cost of Start-Up Activities. Revenues, net of
interest expense were $3.6 billion in the 1999 Quarter compared to $3.1 billion
in the 1998 Quarter.
Following is a discussion of the Company's two operating segments, Investment
Services and Asset Management.
11
<PAGE> 14
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INVESTMENT SERVICES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Dollars in millions
For the three months ended March 31, 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Revenues:
Commissions $ 900 $ 792
Investment banking 656 616
Principal transactions 974 779
Asset management and administration fees 372 296
Other 62 27
- --------------------------------------------------------------------
Total noninterest revenues 2,964 2,510
- --------------------------------------------------------------------
Net interest and dividends 369 401
- --------------------------------------------------------------------
Revenues, net of interest expense 3,333 2,911
- --------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 1,792 1,680
Other operating and administrative
expenses 540 521
Restructuring credit (211) -
- --------------------------------------------------------------------
Total noninterest expense 2,121 2,201
- --------------------------------------------------------------------
Income before income taxes and
cumulative effect of change in
accounting principle 1,212 710
- --------------------------------------------------------------------
Income taxes 441 268
- --------------------------------------------------------------------
Income before cumulative
effect of change in accounting
principle $ 771 $ 442
====================================================================
</TABLE>
The Company's investment services segment reported income before cumulative
effect of change in accounting principle, including the credit relating to the
restructuring charge booked in the fourth quarter of 1997, of $771 million for
the 1999 Quarter, compared to net income of $442 million reported for the 1998
Quarter. Revenues, net of interest expense, increased to $3.3 billion in the
1999 Quarter compared to $2.9 billion reported in the 1998 Quarter as increases
in all categories of noninterest revenues were offset to an extent by a decline
in net interest and dividends.
Commission revenues increased 14% to $900 million in the 1999 Quarter compared
to $792 million in the 1998 Quarter. This increase is primarily the result of
increases in listed and OTC commissions.
Investment banking revenues increased to $656 million in the 1999 Quarter
compared to $616 million in the 1998 Quarter. An increase in high grade debt
underwritings was partially offset by declines in equity, high yield, and unit
trust underwritings. During the 1999 Quarter the Company was ranked #1 in
municipal underwriting and mortgage and asset backed debt underwriting,
according to Securities Data Corp.
12
<PAGE> 15
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Principal transaction revenues increased 25% to $974 million in the 1999 Quarter
compared to $779 million in the 1998 Quarter. Increases in the institutional
global fixed income, global equities and municipal trading businesses were
partially offset by declines in the global arbitrage and commodity trading
businesses. For further discussion of principal transaction revenue see Note 5
to the condensed consolidated financial statements.
Asset management and administration fees increased 26% to $372 million in the
1999 Quarter compared to $296 million in the 1998 Quarter as a result of the
growth in assets under fee-based management. The investment services segment
includes results from assets managed by the Company's Financial Consultants and
assets that are externally managed by the consulting group. Assets under
fee-based management increased significantly at March 31, 1999 compared to March
31, 1998 causing the corresponding increase in revenue (see table on following
page for detail of the segment's assets under fee-based management).
Net interest and dividends decreased to $369 million in the 1999 Quarter
compared to $401 million in the 1998 Quarter.
Total expenses, excluding interest and the restructuring credit, increased 6% to
$2.3 billion in the 1999 Quarter compared to $2.2 billion in the 1998 Quarter
primarily as a result of an increase in production-related compensation and
benefits expense, reflecting increased revenues of the Company, partially offset
by the benefit of changes in employee deferred compensation plans. The Company
continues to maintain its focus on controlling fixed expenses.
13
<PAGE> 16
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Dollars in millions
For the three months ended March 31, 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Revenues:
Asset management and administration
fees $241 $202
Net interest and dividends and
other revenue 14 15
- --------------------------------------------------------------------
Revenues, net of interest expense 255 217
- --------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 53 42
Other operating and administrative
expenses 82 75
- --------------------------------------------------------------------
Total noninterest expense 135 117
- --------------------------------------------------------------------
Income before income taxes and
cumulative effect of change in
accounting principle 120 100
- --------------------------------------------------------------------
Income taxes 47 40
- --------------------------------------------------------------------
Income before cumulative effect of
change in accounting principle $ 73 $ 60
====================================================================
</TABLE>
The asset management segment revenues net of interest expense rose 18% to $255
million in the 1999 Quarter. The primary revenue for the asset management
segment is asset management and administration fees, which were $241 million in
the 1999 Quarter, compared to $202 million in the 1998 Quarter. The 19% overall
increase in fees reflects broad growth in all asset management products. Assets
under management for the segment reached $198 billion at March 31, 1999 an
increase of 20% from March 31, 1998. This increase includes the 1998 midyear
acquisition of JP Morgan's Australian asset management business with $5 billion
in assets under management. Other revenues include the net revenue contribution
to the asset management segment for the structuring of unit investment trusts,
as well as custody fees, and realized and unrealized investment income.
Total noninterest expenses were $135 million in the 1999 Quarter compared to
$117 million in the 1998 Quarter. The 15% increase reflects continuing
investment in the business infrastructure to support sustained growth, as well
as the 1998 midyear acquisition of JP Morgan's Australian asset management
business. Other operating and administrative expense includes deferred
commission amortization expense which relates to the sale of load mutual funds.
14
<PAGE> 17
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Total assets under fee-based management were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Dollars in billions
Period Ended March 31, 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Money market funds $ 63.7 $ 51.6
Mutual funds 61.6 56.0
Managed accounts 72.7 57.4
- -----------------------------------------------------------------------------
Salomon Smith Barney Asset Management 198.0 165.0
Financial Consultant managed accounts * 18.6 13.3
- -----------------------------------------------------------------------------
Total internally managed assets 216.6 178.3
Consulting Group externally managed assets * 73.1 67.1
- -----------------------------------------------------------------------------
Total fee-based assets under management $289.7 $245.4
- -----------------------------------------------------------------------------
</TABLE>
*Related results included in Investment Services segment.
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 $226 billion at March 31, 1999, up slightly from
$212 billion at year-end 1998. Due to the nature of the Company's trading
activities, including its matched book activities, it is not uncommon for the
Company's asset levels to fluctuate from period to period. A "matched book"
transaction involves a security purchased under an agreement to resell (i.e.,
reverse repurchase transaction) and simultaneously sold under an agreement to
repurchase (i.e., repurchase transaction).
The Company's balance sheet is highly liquid, with the vast majority of its
assets consisting of marketable securities and collateralized short-term
financing agreements arising from securities transactions. The highly liquid
nature of these assets provides the Company with flexibility in financing and
managing its business. The Company monitors and evaluates the adequacy of its
capital and borrowing base on a daily basis in order to allow for flexibility in
its funding, to maintain liquidity, and to ensure that its capital base supports
the regulatory capital requirements of its subsidiaries.
The Company funds its operations through the use of collateralized and
uncollateralized short-term borrowings, long-term borrowings, mandatorily
redeemable securities of subsidiary trusts, and its equity. Collateralized
short-term financing, including repurchase agreements and secured loans, is the
Company's principal funding source. Such borrowings are reported net by
counterparty, when applicable, pursuant to the provisions of Financial
Accounting Standards Board Interpretation 41, Offsetting of Amounts Related to
Certain Repurchase and Reverse Repurchase Agreements ("FIN 41"). Excluding the
impact of FIN 41, short-term collateralized borrowings totaled $152.5 billion at
March 31, 1999. Uncollateralized short-term borrowings provide the Company with
a source of short-term liquidity and are also utilized as an alternative to
secured financing when they represent a cheaper funding source. Sources of
short-term uncollateralized borrowings include commercial paper, unsecured bank
borrowings and letters of credit, deposit liabilities, promissory notes and
corporate loans. Short-term uncollateralized borrowings totaled $14.9 billion at
March 31,1999.
The Company has committed uncollateralized revolving lines of credit totaling
$5.0 billion, which it may borrow from at various interest rate options (LIBOR,
CD or base rate), and compensates the banks for the facilities through facility
fees. At March 31, 1999 there were no outstanding borrowings under these
facilities. Under these facilities the Company is required to maintain a certain
level of consolidated adjusted net worth (as defined in the agreements). At
March 31, 1999, this requirement was exceeded by approximately $3.6 billion. The
Company also has substantial borrowing arrangements consisting of facilities
that the Company has been advised are available, but where no contractual
lending obligation exists. These arrangements are reviewed on an ongoing basis
to ensure flexibility in meeting the Company's short-term requirements.
The Company's borrowing relationships are with a broad range of banks, financial
institutions and other firms from which it draws funds. The volume of the
Company's borrowings generally fluctuates in response to changes in the level of
the Company's financial instruments, commodities and contractual commitments,
customer balances, the amount of reverse repurchase transactions outstanding and
securities borrowed transactions. As the Company's activities increase,
borrowings generally increase to fund the additional activities. Availability of
financing to the Company can vary depending upon market conditions, credit
ratings, and the overall availability of credit to the securities industry. The
Company seeks to expand and diversify its funding mix as well as its creditor
sources. Concentration levels for these sources, particularly for short-term
16
<PAGE> 19
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
lenders, are closely monitored both in terms of single investor limits and daily
maturities.
The Company monitors liquidity by tracking asset levels, collateral and funding
availability to maintain flexibility to meet its financial commitments. As a
policy, the Company attempts to maintain sufficient capital and funding sources
in order to have the capacity to finance itself on a fully collateralized basis
in the event that the Company's access to uncollateralized financing is
temporarily impaired. The Company's liquidity management process includes a
contingency funding plan designed to ensure adequate liquidity even if access to
unsecured funding sources is severely restricted or unavailable. This plan is
reviewed periodically to keep the funding options current and in line with
market conditions. The management of this plan includes an analysis used to
determine the Company's ability to withstand varying levels of stress, which
could impact its liquidation horizons and required margins. In addition, the
Company monitors its leverage and capital ratios on a daily basis.
OTHER
HIGH YIELD PORTFOLIO
The Company's activities include trading securities that are less than
investment grade, characterized as "high yield." High yield securities include
corporate debt, convertible debt, preferred and convertible preferred equity
securities rated lower than "triple B-" by internationally recognized rating
agencies, unrated securities with market yields comparable to entities rated
below "triple B-," as well as sovereign debt issued by certain countries in
currencies other than their local currencies and which are not collateralized by
U.S. government securities. For example, high yield securities exclude the
collateralized portion of the Company's holdings of "Brady Bonds," but include
such securities to the extent they are not collateralized. The Company's trading
portfolio of high yield securities owned is carried at market or fair value and
totaled $3.5 billion and $4.8 billion at March 31, 1999 and December 31, 1998,
respectively. The largest high yield exposure to one counterparty was $274
million and $716 million at March 31, 1999 and December 31, 1998, respectively.
OTHER
As of March 31, 1999, the Company had mark-to-market exposure to hedge funds of
$1,694 million, collateralized by $1,734 million of cash and government
securities, resulting in excess collateral of $40 million. Within these amounts,
certain hedge funds have collateral in excess of the mark-to-market deficit, and
others have deficits in excess of the collateral held. The total exposure to
hedge funds with mark-to-market deficits in excess of collateral held is $22
million. No single hedge fund had a mark-to-market deficit of more than $13
million in excess of collateral held from that hedge fund. Mark-to-market
exposure includes those hedge funds that owe the Company on foreign exchange and
derivative contracts such as swaps, swap options, and other over-the-counter
options and only the uncollateralized portion of receivables on reverse
repurchase and repurchase agreements. This exposure can change significantly as
a result of extreme market movements. The Company has no unsecured loans or loan
commitments to hedge funds. The Company has no investments in hedge funds other
than an investment in Long-Term Capital Management, LP, made in concert with a
consortium of banks and securities firms.
17
<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 use for internal risk
management in that they do not capture all of the risks inherent in all
positions nor do they give any indication of the direction or magnitude of
individual risk exposures or which market scenarios represent the largest risk
exposures. These models are used by the Company only as a supplement to other
risk management tools.
The following table shows the results of the Company's VAR analysis, which
includes substantially all of the Company's financial assets and liabilities,
including all financial instruments and commodities owned and sold, contractual
commitments, repurchase and resale agreements, and related funding at March 31,
1999 and December 31, 1998. The VAR relating to non-trading instruments has been
excluded from this analysis.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RISK EXPOSURES MARCH 31, DECEMBER 31,
($ IN MILLIONS) 1999 1999 AVERAGE 1999 HIGH 1999 LOW 1998*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate $55 $60 $71 $53 $60
Equities 4 6 19 3 5
Commodities 12 11 12 11 11
Currency 6 3 6 2 2
Diversification
Benefit (23) (19) N/A N/A (18)
- ------------------------------------------------------------------------------------------------------
Total $54 $61 $72 $52 $60
======================================================================================================
</TABLE>
*In 1999, the Company began using one year of historical price data (i.e.,
volatilities and correlation factors) to calculate VAR, rather than six month's
of historical data which was used at December 31, 1998, primarily for
consistency with the capital guidelines issued by the Federal Reserve and other
U.S. Banking regulators. The December 31, 1998 disclosures have been restated to
reflect this change.
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating the above market risk amounts, the Company used a
99% confidence level and a one-day interval. The standard deviations and
correlation assumptions are based on historical data and reflect a horizon of
one year. VAR reflects the risk profile of the Company at a point in time and is
not a predictor of future results.
OPERATIONAL RISK
YEAR 2000
Many computer applications have been written using two digits rather than four
to define the applicable year, and therefore may not recognize a date using "00"
as the Year 2000. This could result in the inability of the application to
properly process transactions with the dates in the Year 2000 or thereafter. To
ensure the Company's computer systems will correctly handle the date change, a
firm-wide initiative was established to
18
<PAGE> 21
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
identify and resolve all problems. The Year 2000 Readiness Program (the
"Project") was approved by the Board of Directors of the Company's sole
stockholder and commenced early in 1996. The total cost of the Project is
expected to be approximately $130 million to $150 million. Through March 31,
1999 the Company has expended approximately $110 million on the Project. The
majority of the remaining costs are expected to be directed to testing
activities. These costs have been and will continue to be funded through
operating cash flow and are expensed in the period in which they are incurred.
The Project is comprised of five phases: 1) inventory, 2) assessment, 3)
corrections where necessary, 4) testing and certification, and 5) deployment of
Year 2000 compliant components to all locations worldwide. The Project began
with a comprehensive inventory of hardware, vendor products, software developed
in-house, market data feeds, and physical facilities around the world. The
inventory also included electronic data exchanges with industry participants
such as the New York Stock Exchange, the National Association of Securities
Dealers, the Securities Industry Automation Company, the National Securities
Clearing Corporation, The Depository Trust Company and other counterparties. To
eliminate any processing errors associated with the millennium date change and
other associated dates such as 9/9/99 and the leap year in the Year 2000,
elements of the inventory were assessed to determine necessary changes and
upgrades or replacement of vendor products. The inventory and assessment phases
of the project were completed in the third quarter of 1997.
At this time, the correction phase of the project is nearing completion.
Specifically, corrections have been made to 99% of systems developed in-house,
and 77% of vendor products in use by the firm have been upgraded.
Testing and certification is the most complex part of the Project. The Company
began testing in October 1997. Special mainframe and distributed system test
environments were constructed in which dates can be advanced to create a variety
of conditions that will be encountered as the millennium date change occurs.
Applications are put through a rigorous series of tests at the unit, integration
and enterprise levels, with sign-off by the relevant business areas at each
level, before they are certified as Year 2000 compliant. Approximately 93% of
the in-house applications are now certified. In addition to rigorous testing of
each component, an enterprise level front-to-back test is being planned to test
multiple systems working together to support business processes.
The Project remains on schedule. Correction work has been substantially
completed; internal and external testing, application certification and global
deployment is expected to be completed by June 30, 1999.
The Company fully supports initiatives by the Securities Industry Association
and other industry groups in conducting tests among industry participants,
including the completed industry Beta Test, the government securities clearing
test with the Federal Reserve Bank of New York and the Depository Trust Company,
and the Futures Industry Association test. The Company has achieved successful
results in each of these industry-wide tests in which it participated. The
Company is participating in the Streetwide Test which commenced in March 1999,
and expects to continue its testing program during 1999 with counterparties and
selected clients.
There are many risks associated with the Year 2000 issue. Even if the Company
successfully remediates its Year 2000 issues, it can be materially and adversely
affected by failures of third parties to remediate their own Year 2000 issues.
The failure of third parties with which the Company has financial or operational
relationships such as vendors, clients, or regulators to resolve their own Year
2000 compliance issues in a timely manner could result in material financial
risk to the Company. Consequently, comprehensive, written contingency plans are
being prepared so that alternative procedures and a framework for critical
decisions are defined before any crisis occurs. Contingency plans are nearing
completion. These plans define alternate processes to be used in
19
<PAGE> 22
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
the event of extended system outage. The plans cover each business area and
location around the world. Contingency plans will be validated in the first
half of 1999.
The Company's expectation about future costs and the timely completion of its
Year 2000 modifications are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. The Project
will remain one of the Company's top priorities until these issues are resolved.
FORWARD LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: changes in
economic conditions, including the performance of global financial markets, and
risks associated with fluctuating currency values and interest rates;
competitive, regulatory or tax changes that affect the cost of or the demand for
the Company's products; the resolution of legal proceedings and environmental
matters; the actual cost of Year 2000 remediation and the ability of the Company
and third party vendors to modify computer systems for the Year 2000 date
conversion in a timely manner; and the ability of the Company generally to
achieve anticipated levels of operational efficiencies related to recent mergers
and acquistions, as well as achieving its other cost-savings initiatives.
Readers are also directed to other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
20
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning a purported class action against numerous
broker-dealers including Salomon Smith Barney, see the description that
appears in the sixth paragraph under the caption "Legal Proceedings"
beginning on page 12 of the Annual Report on Form 10-K of SSBH for the
year ending December 31, 1998 (File No. 1-4346), which description is
included as Exhibit 99.01 to this Form 10-Q and incorporated by
reference herein. The Company has filed a motion to dismiss the amended
complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On January 25, 1999, SSBH filed a Current Report on Form 8-K,
dated January 25, 1999, reporting under Item 5 thereof the
results of its operations for the three and twelve month periods
ended December 31, 1998, and certain other selected financial
data.
On February 25, 1999, SSBH filed a Current Report on Form 8-K,
dated February 23, 1999, filing certain exhibits under Item 7
thereof relating to the offer and sale of SSBH's Callable
Principal-Protected Equity Linked Notes based upon the S&P(R)
500 Index due June 30, 2006.
No other reports on Form 8-K were filed during the first quarter
of 1999; however, on April 19, 1999, SSBH filed a Current Report
on Form 8-K, dated April 19, 1999, reporting under Item 5
thereof the results of its operations for the quarter ended
March 31, 1999, and certain other selected financial data.
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.01 Amended and Restated Certificate of Incorporation of SSBH, effective December 1, 1997,
incorporated by reference to Exhibit 4(a) to Amendment No. 2 to SSBH's Registration
Statement on Form S-3 (No. 333-38931).
3.02 By-Laws of SSBH, incorporated by reference to Exhibit 4(b) to Amendment No. 2 to SSBH's
Registration Statement on Form S-3 (No. 333-38931).
12.01+ Computation of ratio of earnings to fixed charges.
27.01+ Financial Data Schedule.
99.01+ Sixth paragraph under the caption "Legal Proceedings" beginning on page 12 of the
Annual Report on Form 10-K of SSBH for the year ended December 31, 1998 (File No. 1-4346).
</TABLE>
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: May 14, 1999 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>
Three
Months
Ended
March 31,
Dollars in millions 1999
------------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes $ 1,332
Add fixed charges (see below) 2,273
------------
Earnings as defined $ 3,605
============
Fixed charges from continuing operations:
Interest expense $ 2,249
Other adjustments 24
------------
Fixed charges from continuing operations as defined $ 2,273
============
Ratio of earnings to fixed charges 1.59
============
</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 MARCH 31, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,170
<RECEIVABLES> 24,628
<SECURITIES-RESALE> 67,673
<SECURITIES-BORROWED> 38,643
<INSTRUMENTS-OWNED> 85,118
<PP&E> 1,006
<TOTAL-ASSETS> 225,821
<SHORT-TERM> 15,179
<PAYABLES> 23,675
<REPOS-SOLD> 87,809
<SECURITIES-LOANED> 7,546
<INSTRUMENTS-SOLD> 62,214
<LONG-TERM> 19,057
0
0
<COMMON> 0
<OTHER-SE> 9,596
<TOTAL-LIABILITY-AND-EQUITY> 225,821
<TRADING-REVENUE> 978
<INTEREST-DIVIDENDS> 2,613
<COMMISSIONS> 903
<INVESTMENT-BANKING-REVENUES> 664
<FEE-REVENUE> 613
<INTEREST-EXPENSE> 2,249
<COMPENSATION> 1,845
<INCOME-PRETAX> 1,332
<INCOME-PRE-EXTRAORDINARY> 844
<EXTRAORDINARY> 0
<CHANGES> (15)
<NET-INCOME> 829
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
SIXTH PARAGRAPH UNDER THE CAPTION "LEGAL PROCEEDINGS" BEGINNING ON PAGE 12 OF
THE ANNUAL REPORT ON FORM 10-K OF SSBH FOR THE YEAR ENDED DECEMBER 31, 1998
(FILE NO. 1-4346).
In November 1998, a purported class action complaint was filed in the United
States District Court for the Middle District of Florida (Dwight Brock as Clerk
for Collier County v. Merrill Lynch et al.). The complaint alleges that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
The Company intends to contest this complaint vigorously.
