<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, 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 JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three and six months ended June 30, 1999 and 1998 1
Condensed Consolidated Statements of Financial Condition -
June 30, 1999 (Unaudited) and December 31, 1998 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three and six months ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 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 Six Months
Period Ended June 30, 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 905 $ 784 $ 1,808 $ 1,579
Principal transactions 704 315 1,682 1,095
Investment banking 771 640 1,435 1,268
Asset management and administration fees 652 553 1,265 1,051
Other 52 42 118 74
-----------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 3,084 2,334 6,308 5,067
-----------------------------------------------------------------------------------------------------------------------
Interest and dividends 2,866 3,468 5,479 6,786
Interest expense 2,414 3,067 4,663 5,990
-----------------------------------------------------------------------------------------------------------------------
Net interest and dividends 452 401 816 796
-----------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,536 2,735 7,124 5,863
-----------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 1,753 1,544 3,598 3,266
Floor brokerage and other production 136 105 241 215
Communications 114 116 236 233
Occupancy and equipment 108 105 219 210
Advertising and market development 83 68 155 138
Professional services 56 46 110 97
Other operating and administrative expenses 184 106 342 249
Restructuring credit - (324) (211) (324)
-----------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,434 1,766 4,690 4,084
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,102 969 2,434 1,779
Provision for income taxes 406 368 894 676
-----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 696 601 1,540 1,103
Cumulative effect of change in accounting principle
(net of tax benefit of $12) - - (15) -
-----------------------------------------------------------------------------------------------------------------------
Net income $ 696 $ 601 $ 1,525 $ 1,103
=======================================================================================================================
</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 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,508 $ 2,261
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,359 2,358
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $68,463 $38,691
Deposits paid for securities borrowed 31,787 49,392
------- -------
100,250 88,083
Financial instruments and commodities owned and contractual
commitments:
U.S. government and government agency securities 28,428 24,643
Non-U.S. government and government agency securities 12,086 18,632
Corporate debt securities 10,067 11,347
Contractual commitments 9,836 14,319
Mortgage loans and collateralized mortgage securities 6,171 6,066
Equity securities 5,948 4,860
Money market instruments 5,194 5,153
Commodities 139 245
Other financial instruments 2,709 3,372
------- -------
80,578 88,637
Receivables:
Customers 17,064 14,130
Receivable for securities provided as collateral 3,185 3,101
Brokers, dealers and clearing organizations 3,134 4,234
Other 1,548 2,709
------- -------
24,931 24,174
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $944 and
$1,032, respectively 1,024 1,114
Other assets 5,915 5,274
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $217,565 $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>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 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 $ 13,614 $ 15,495
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $76,576 $61,024
Deposits received for securities loaned 6,438 7,712
------- -------
83,014 68,736
Financial instruments and commodities sold, not yet purchased,
and contractual commitments:
Non-U.S. government and government agency securities 23,566 10,719
U.S. government and government agency securities 22,675 32,538
Contractual commitments 11,359 15,698
Equity securities 3,885 4,224
Corporate debt securities and other 2,963 3,103
------- -------
64,448 66,282
Payables and accrued liabilities:
Customers 10,906 13,119
Obligation to return securities received as collateral 3,130 5,348
Brokers, dealers and clearing organizations 2,301 3,406
Other 10,801 9,851
------- -------
27,138 31,724
Term debt 19,021 20,151
Company-obligated mandatorily redeemable securities
of subsidiary trusts holding solely junior subordinated
debt securities of the Company 745 745
Stockholder's equity:
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 1,590 1,589
Retained earnings 7,976 7,159
Cumulative translation adjustments 19 20
------- -------
Total stockholder's equity 9,585 8,768
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $217,565 $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
Six Months Ended June 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,525 $ 1,103
Depreciation and amortization 179 156
-------- --------
Net income adjusted for noncash items 1,704 1,259
-------- --------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations 1 (282)
Collateralized short-term financing agreements (12,167) (21,584)
Financial instruments and commodities owned and contractual commitments 8,059 966
Receivables (757) (5,956)
Other assets (946) (41)
-------- --------
Increase in operating assets (5,810) (26,897)
-------- --------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 14,278 2,492
Financial instruments and commodities sold, not yet purchased, and contractual commitments (1,834) (818)
Payables and accrued liabilities (4,851) 15,414
-------- --------
Increase in operating liabilities 7,593 17,088
-------- --------
Cash provided by (used in) operating activities 3,487 (8,550)
-------- --------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term borrowings (1,881) 7,218
Proceeds from issuance of term debt 2,414 3,177
Term debt maturities and repurchases (3,199) (1,357)
Collateralized mortgage obligations (21) (71)
Issuance of mandatorily redeemable securities of subsidiary trusts -- 400
Dividends paid (422) (279)
Other capital transactions -- 3
-------- --------
Cash provided by (used in) financing activities (3,109) 9,091
-------- --------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 22 86
Property, equipment and leasehold improvements (153) (144)
Other -- 23
-------- --------
Cash used in investing activities (131) (35)
-------- --------
Increase in cash and cash equivalents 247 506
Cash and cash equivalents at January 1, 2,261 1,808
-------- --------
Cash and cash equivalents at June 30, $ 2,508 $ 2,314
======== ========
</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 condensed consolidated financial statements reflect the accounts of Salomon
Smith Barney Holdings Inc., a New York corporation (the successor to Salomon
Smith Barney Holdings Inc., a Delaware corporation) and its subsidiaries
(collectively the "Company"). The Company is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup"). Material intercompany transactions have been
eliminated.
The condensed consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States, which require the
use of management's best judgment and estimates. Estimates, including the fair
value of financial instruments, commodities and contractual commitments, may
vary from actual results. The financial statements are unaudited; however, in
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected.
These financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
Certain financial information that is normally included in financial statements
prepared in accordance with generally accepted accounting principles, but that
is not required for interim reporting purposes, has been condensed or omitted.
ACCOUNTING CHANGES
During the first quarter of 1999 the Company recorded the cumulative effect of a
change in accounting principle of $15 million (net of tax benefit of $12
million) which relates to the write-off of certain capitalized closed-end fund
distribution costs in connection with the adoption of AICPA Statement of
Position 98-5, Reporting on the Cost of Start-Up Activities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No.133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 requires that an entity recognize all derivatives in the
statement of financial condition and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. In June 1999, FASB issued
SFAS No. 137 which postponed the effective date of SFAS 133 for one year.
Statement 133 is now effective for fiscal years beginning after June 15, 2000.
The Company is in the process of evaluating the potential impact of the new
accounting standard.
5
<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 June 30, 1999 June 30, 1999
- ------------------- ------------------------ --------------------------- ---------------------
<S> <C> <C> <C>
Seven World Trade Center lease $ 610 $(591) * $ 19
Other facilities 53 (38) ** 15
----- ----- ----
Total facilities 663 (629) 34
Severance 161 (160) ** 1
Other 14 (14) ** -
----- ----- ----
$ 838 $(803) $35***
----- ----- ----
</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 $23 million cash component and $12 million non-cash component.
At June 30, 1999, the portion of the cash and non-cash balances of the
restructuring reserve that related to facilities were $22 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 Inc. 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 Reserve as Charges through Balance at
Dollars in millions Originally Recorded June 30, 1999 June 30, 1999
- ------------------- ------------------------ ---------------- ---------------------
<S> <C> <C> <C>
Severance $69 $(32) $37
Facilities 9 (5) 4
Other 2 (1) 1
--- ---- ---
$80 $(38) $42*
--- ---- ---
</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.
All of the amounts were determined in accordance with the guidelines included in
Emerging Issues Task Force 94-3 and represent costs that are not associated with
future revenues and are either incremental or contractual with no economic
benefit. None of the amounts included in the restructuring charge represent
operating losses or income. The cash component of these restructuring costs will
be funded from working capital and will not require any incremental funding
source.
NOTE 3. THE NIKKO SECURITIES CO., LTD.
On February 26, 1999, the Company and The Nikko Securities Co., Ltd ("Nikko")
formed a joint venture. The joint venture, Nikko Salomon Smith Barney Limited
("Nikko Salomon Smith Barney"), provides investment banking, sales and trading
and research services for corporate and institutional clients in Japan and other
foreign jurisdictions. Nikko Salomon Smith Barney combined the Japanese
institutional and corporate business of the Company with Nikko's domestic and
international institutional and corporate business. Nikko's retail business and
other activities, including asset management, remain under Nikko's management.
Nikko Salomon Smith Barney is headquartered in Tokyo and maintains offices and
staff worldwide.
Nikko Salomon Smith Barney is owned 51% by Nikko and 49% by the Company. A
shareholder agreement further provides for operating standards as to how the
entity operates as a joint venture.
7
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and other changes in
stockholder's equity from nonowner sources which, for the Company, are comprised
of cumulative translation adjustments, net of tax:
<TABLE>
<CAPTION>
Dollars in millions Three Months Six Months
Period ended June 30, 1999 1998 1999 1998
- --------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $696 $601 $1,525 $1,103
Other changes in equity from
nonowner sources (6) (3) (1) --
---- ---- ------ ------
Total comprehensive income $690 $598 $1,524 $1,103
---- ---- ------ ------
</TABLE>
NOTE 5. PRINCIPAL TRANSACTION REVENUES
The following table presents principal transaction revenue by business activity
for the three and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Dollars in millions Three Months Six Months
Period ended June 30, 1999 1998 1999 1998
--------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Fixed Income $384 $216 $1,066 $674
Equities 269 127 466 289
Commodities 29 (25) 122 143
Other 22 (3) 28 (11)
---- ---- ------ ------
Total principal transaction revenues $704 $315 $1,682 $1,095
---- ---- ------ ------
</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 MINIMUM
SUBSIDIARY JURISDICTION OR REQUIREMENTS
EQUIVALENT
- -------------------- ------------ ---------- ------------
<S> <C> <C> <C>
Salomon Smith Barney Inc. U.S. Securities and Exchange Commission $2,822 $2,442
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $4,148 $1,585
Salomon Brothers AG Germany's Banking Supervisory Authority $ 209 $ 140
The Robinson-Humphrey Company, LLC U.S. Securities and Exchange Commission $ 76 $ 75
Uniform Net Capital Rule (Rule 15c3-1)
</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
June 30, 1999, Swapco was in compliance with all such agreements. Swapco's
capital requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
NOTE 7. CONTRACTUAL COMMITMENTS
A summary of the Company's contractual commitments as of June 30, 1999 and
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------------------------------ ------------------------------------
Current Market or Current Market or
Fair Value Fair Value
Notional ------------------------ Notional ------------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
- ------------------- ------- ------ ----------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 642.9 $ - $ - $ 858.3 $ - $ -
Other exchange-issued products:
Equity contracts 13.8 .2 .2 9.5 .1 .2
Fixed income contracts 115.9 - - 118.1 - .1
Commodities contracts 1.9 - - 1.3 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 774.5 .2 .2 987.2 .1 .3
- ---------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options,
caps and floors:
Swaps 2,491.5 2,395.3
Swap options written 92.7 81.7
Swap options purchased 81.9 85.4
Caps and floors 200.9 191.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors (b) 2,867.0 5.3 6.6 2,754.2 8.2 8.8
- ---------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 57.5 .2 .2 146.7 1.0 1.3
Options written 31.6 - .5 52.3 - .8
Options purchased 32.3 .5 - 47.3 1.1 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 121.4 .7 .7 246.3 2.1 2.1
- ---------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 44.9 2.6 3.2 63.3 3.1 3.
Options and forward contracts on fixed-income securities 88.5 .8 .6 383.8 .6 1.1
Commodities contracts 11.5 .2 .1 7.0 .2 .2
- ---------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,207.8 $ 9.8 $ 11.4 $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 $17.4 billion and $3.1 billion at June 30, 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.
<TABLE>
<CAPTION>
Dollars in millions Three Months Six Months
Period ended June 30, 1999 1998 1999 1998
- ------------------------------------------------------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Noninterest revenues:
Investment Services $ 2,805 $ 2,111 $ 5,769 $ 4,621
Asset Management 279 223 539 446
------- ------- ------- -------
Total $ 3,084 $ 2,334 $ 6,308 $ 5,067
======= ======= ======= =======
Net interest and dividends:
Investment Services $ 456 $ 405 $ 825 $ 806
Asset Management (4) (4) (9) (10)
------- ------- ------- -------
Total $ 452 $ 401 $ 816 $ 796
======= ======= ======= =======
Income before cumulative effect of change in
accounting principle:
Investment Services $ 608 $ 538 $ 1,379 $ 980
Asset Management 88 63 161 123
------- ------- ------- -------
Total $ 696 $ 601 $ 1,540 $ 1,103
======= ======= ======= =======
</TABLE>
Total assets of the Investment Services and Asset Management segments were
$216.1 billion and $1.5 billion, respectively, at June 30, 1999 and $210.5
billion and $1.4 billion, respectively, at June 30, 1998. For further discussion
of the Company's operating segments, please refer to the Results of Operations
section of Management's Discussion and Analysis.
NOTE 9. LEGAL PROCEEDINGS
The Company has been named as a defendant in legal actions relating to its
operations, some of which seek damages of material or indeterminate amounts. In
addition, from time to time the Company is a party to examinations and inquiries
by various regulatory and self-regulatory bodies. In connection with its
discontinued commodities processing operations, the Company and certain of its
subsidiaries are subject to claims asserted by the U.S. Environmental Protection
Agency, certain state agencies and private parties in connection with
environmental matters. Management of the Company, after consultation with
outside legal counsel, believes that the ultimate resolution of legal
proceedings and environmental matters (net of applicable reserves) will not have
a material adverse effect on the Company's financial condition; however, such
resolution could have a material adverse impact on operating results in future
periods depending in part on the results for such periods.
10
<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 of $696 million for the three months ended June
30, 1999 (the "1999 Quarter") compared to net income of $601 million reported
for the three months ended June 30, 1998 (the "1998 Quarter"). Revenues, net of
interest expense, were $3,536 million in the 1999 Quarter compared to $2,735
million in the 1998 Quarter reflecting increases in all revenue categories.
For the six months ended June 30, 1999 (the "1999 Period") the Company reported
net income of $1,525 million compared to net income of $1,103 million reported
for the six months ended June 30, 1998 (the "1998 Period"). Revenues, net of
interest expense, were $7,124 million in the 1999 Period compared to $5,863
million in the 1998 Period.
Net income for the 1999 Period includes a pre-tax credit of $211 million ($125
million net of tax) and the 1998 Quarter and 1998 Period includes a pre-tax
credit of $324 million ($191 million net of tax) which represent reductions in
the restructuring charge recorded in the fourth quarter of 1997 in connection
with the merger of Salomon Inc and Smith Barney Holdings Inc. (see note 2 to the
condensed consolidated financial statements for further discussion of the
restructuring charges). Net income in the 1999 Period also includes the
cumulative effect of change in accounting principle of $15 million (net of tax
benefit of $12 million) recorded in the first quarter of 1999 which 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.
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 Three Months Six Months
Period Ended June 30, 1999 1998 1999 1998
- ----------------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 903 $ 781 $ 1,803 $ 1,573
Principal transactions 698 315 1,672 1,094
Investment banking 761 633 1,417 1,249
Asset management and administration fees 396 340 768 636
Other 47 42 109 69
------- ------- ------- -------
Total noninterest revenues 2,805 2,111 5,769 4,621
------- ------- ------- -------
Net interest and dividends 456 405 825 806
------- ------- ------- -------
Revenues, net of interest expense 3,261 2,516 6,594 5,427
------- ------- ------- -------
Noninterest expenses:
Compensation and benefits 1,706 1,500 3,498 3,180
Other operating and administrative expenses 600 475 1,140 996
Restructuring credit -- (324) (211) (324)
------- ------- ------- -------
Total noninterest expense 2,306 1,651 4,427 3,852
------- ------- ------- -------
Income before income taxes and cumulative
effect of change in accounting principle 955 865 2,167 1,575
------- ------- ------- -------
Income taxes 347 327 788 595
------- ------- ------- -------
Income before cumulative
effect of change in accounting principle $ 608 $ 538 $ 1,379 $ 980
------- ------- ------- -------
</TABLE>
The Company's investment services segment reported record results of $608
million and $1,379 million for the 1999 Quarter and 1999 Period, compared to
$538 million and $980 million reported for the 1998 Quarter and 1998 Period.
Revenues, net of interest expense, increased to $3,261 million and $6,594
million in the 1999 Quarter and 1999 Period compared to $2,516 million and
$5,427 million reported in the 1998 Quarter and 1998 Period as a result of
increases in all categories of revenue.
Commission revenues increased 16% to a record $903 million in the 1999 Quarter
compared to $781 million in the 1998 Quarter. This increase is primarily the
result of increases in listed and OTC commissions. The Company's Private Client
Group continued strong growth in commission revenue. In the 1999 Period
commission revenues increased 15% to $1,803 million.
Principal transaction revenues increased to $698 million in the 1999 Quarter
compared to $315 million in the 1998 Quarter as a result of increases in the
institutional global fixed income and global equities trading. In addition,
global arbitrage and commodity trading were moderately profitable, after
recording losses in the 1998 Quarter. In the 1999 Period principal transaction
revenues increased 53% to $1,672 million as a result of increases in
institutional global fixed income, global equities and municipal trading, offset
to an extent by a
12
<PAGE> 15
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
decline in commodities trading. For further discussion of principal transaction
revenue see Note 5 to the condensed consolidated financial statements.
Investment banking revenues increased to a record $761 million in the 1999
Quarter compared to $633 million in the 1998 Quarter. An increase in merger and
acquisition fees, high grade debt, high yield and equity underwritings was
partially offset by a decline in public finance underwriting. In the 1999
Period, investment banking revenue increased 13% to $1,417 million as a result
of increases in high grade debt underwriting and merger and acquisition fees.
The investment services segment includes results from assets managed by the
Company's Financial Consultants and assets that are externally managed through
the Consulting Group. Asset management and administration fees increased to $396
million and $768 million in the 1999 Quarter and 1999 Period compared to $340
million and $636 million in the 1998 Quarter and 1998 Period as a result of the
growth in assets under fee-based management. Assets under fee-based management
increased significantly at June 30, 1999 compared to June 30, 1998 causing the
corresponding increase in revenue.
Net interest and dividends increased to $456 million and $825 million in the
1999 Quarter and 1999 Period compared to $405 million and $806 million in the
1998 Quarter and the 1998 Period. These increases were due primarily to
increased margin lending to clients.
Total expenses, excluding interest and the restructuring credit, increased to
$2,306 million in the 1999 Quarter compared to $1,975 million in the 1998
Quarter primarily as a result of an increase in production-related compensation
and benefits expense, reflecting increased revenues of the Company, partially
offset by the benefit of changes in employee deferred compensation plans. Total
expenses, excluding interest and the restructuring credit, were $4,638 million
in the 1999 Period compared to $4,176 million in the 1998 Period. 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 Three Months Six Months
Period Ended June 30, 1999 1998 1999 1998
--------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Asset management and administration fees $256 $213 $497 $415
Other revenue, net 19 6 33 21
---- ---- ---- ----
Revenues, net of interest expense 275 219 530 436
---- ---- ---- ----
Noninterest expenses:
Compensation and benefits 47 44 100 86
Other operating and administrative expenses 81 71 163 146
---- ---- ---- ----
Total noninterest expense 128 115 263 232
---- ---- ---- ----
Income before income taxes and cumulative
effect of change in accounting principle 147 104 267 204
---- ---- ---- ----
Income taxes 59 41 106 81
---- ---- ---- ----
Income before cumulative effect of change
in accounting principle $ 88 $ 63 $161 $123
---- ---- ---- ----
</TABLE>
The Company's asset management segment's revenues, net of interest expense, rose
26% to $275 million and 22% to $530 million in the 1999 Quarter and 1999 Period
compared to $219 million and $436 million in the 1998 Quarter and 1998 Period.
The primary revenue for the asset management segment is asset management and
administration fees, which were $256 million and $497 million in the 1999
Quarter and 1999 Period, compared to $213 million and $415 million in the 1998
Quarter and 1998 Period. The overall increases in fees reflect broad growth in
all asset management products. Assets under management for the segment reached
$201.9 billion at June 30, 1999, an increase of 19% from June 30, 1998. This
increase reflects the July 1998 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 $128 million and $263 million in the 1999
Quarter and 1999 Period compared to $115 million and $232 million in the 1998
Quarter and 1998 Period. The increases reflect continuing investment in the
business infrastructure to support sustained growth, as well as the July 1998
acquisition of JP Morgan's Australian asset management business. Other operating
and administrative expense includes amortization of deferred commissions which
relate 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 June 30, 1999 1998
- --------------------- ---- ----
<S> <C> <C>
Money market funds $61.9 $51.1
Mutual funds 63.8 57.6
Managed accounts 76.2 60.9
----- -----
Salomon Smith Barney Asset Management 201.9 169.6
Financial Consultant managed accounts * 20.2 14.3
----- -----
Total internally managed assets 222.1 183.9
Consulting Group externally managed assets * 76.8 69.3
----- -----
Total assets under fee-based management $298.9 $253.2
----- -----
</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 $218 billion at June 30, 1999, up from $212
billion at December 31, 1998. Due to the nature of the Company's trading
activities, including its matched book activities, it is not uncommon for the
Company's asset levels to fluctuate from period to period. A "matched book"
transaction involves a security purchased under an agreement to resell (i.e.,
reverse repurchase transaction) and simultaneously sold under an agreement to
repurchase (i.e., repurchase transaction).
The Company's balance sheet is highly liquid, with the vast majority of its
assets consisting of marketable securities and collateralized short-term
financing agreements arising from securities transactions. The highly liquid
nature of these assets provides the Company with flexibility in financing and
managing its business. The Company monitors and evaluates the adequacy of its
capital and borrowing base on a daily basis in order to allow for flexibility in
its funding, to maintain liquidity, and to ensure that its capital base supports
the regulatory capital requirements of its subsidiaries.
The Company funds its operations through the use of collateralized and
uncollateralized short-term borrowings, long-term borrowings, mandatorily
redeemable securities of subsidiary trusts, and its equity. Collateralized
short-term financing, including repurchase agreements and 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 $146.3 billion at
June 30, 1999. Uncollateralized short-term borrowings provide the Company with a
source of short-term liquidity and are also utilized as an alternative to
secured financing when they represent a cheaper funding source. Sources of
short-term uncollateralized borrowings include commercial paper, unsecured bank
borrowings, deposit liabilities, promissory notes and corporate loans.
Short-term uncollateralized borrowings totaled $13.5 billion at June 30,1999.
The Company has committed uncollateralized revolving lines of credit totaling
$5.0 billion, from which it may borrow at various interest rate options (LIBOR,
CD or base rate), and compensates the banks for the facilities through facility
fees. At June 30, 1999 there were no outstanding borrowings under these
facilities. Under these facilities the Company is required to maintain a certain
level of consolidated adjusted net worth (as defined in the agreements). At June
30, 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.
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 June 30,
1999 and December 31, 1998. The VAR relating to non-trading instruments has been
excluded from this analysis.
<TABLE>
<CAPTION>
RISK EXPOSURES June 30, Second Quarter Second Quarter Second Quarter December 31,
($ IN MILLIONS) 1999 1999 Average 1999 High 1999 Low 1998*
-------------- -------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Interest rate $38 $42 $48 $36 $60
Equities 6 5 14 3 5
Commodities 16 13 16 13 11
Currency 7 5 8 3 2
Diversification Benefit (25) (21) N/A N/A (18)
--- --- --- --- ---
Total $42 $44 $50 $38 $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 Project began with a comprehensive inventory of hardware, software developed
in-house, vendor products, market data feeds, and physical facilities around the
world. The inventory also included electronic data exchanges with industry
participants such as the New York Stock Exchange, the National Association of
Securities Dealers, the Securities Industry Automation Company, the National
Securities Clearing Corporation, The Depository Trust Company and other
counterparties. Elements of the inventory were assessed to determine necessary
changes as well as upgrade or replacement of vendor products. At June 30, 1999
all necessary corrections, upgrades or replacements have been completed.
The Company constructed special test environments in which dates could be
advanced to create the variety of conditions that will be encountered as the
millenium date change occurs. Applications were put through a rigorous series of
tests at the unit, system and enterprise levels, with sign-off by the relevant
business area at each level, before they were certified as Year 2000 compliant.
At June 30, 1999 all of the applications have been certified as Year 2000
compliant. In addition, an enterprise front-to-back test was successfully
completed in June 1999, to establish that multiple systems can work together to
support critical business processes.
The Company's Year 2000 testing extended to a variety of world markets such as
the United States, the United Kingdom, Japan, Hong Kong and Australia. The
Company fully supported initiatives by the Securities Industry Association and
other industry groups in conducting tests among industry participants, including
the completed industry Beta Test, the government securities clearing test with
the Federal Reserve Bank of New York and the Depository Trust Company, and the
Futures Industry Association test. The Company participated in the Streetwide
Test which commenced in March 1999 and continued through May 1999. The Company
achieved successful results in each of these industry-wide tests and expects to
continue its testing program during 1999 with counterparties and selected
clients.
The Company's total cost of the Project is expected to be approximately $130
million to $150 million. Through June 30, 1999 the Company has expended
approximately $125 million on the Project. The majority of the remaining costs
are expected to be directed to additional testing, contingency planning and
event management. These costs have been and will continue to be funded through
operating cash flow and are expensed in the period in which they are incurred.
There are many risks associated with the Year 2000 issue. Even if the Company
successfully remediates its Year 2000 issues, it can be materially and adversely
affected by failures of third parties to remediate their own Year 2000 issues.
The failure of third parties with which the Company has financial or operational
relationships such as vendors, clients, or regulators to resolve their own Year
2000 compliance issues in a timely manner could result in material financial
risk to the Company. Consequently, comprehensive, written contingency plans have
been prepared so that alternative procedures and a framework for critical
decisions are defined before any crisis occurs. These plans define alternate
processes to be used in the event of extended system outage. Contingency plans
cover each business area and location around the world and will be validated in
the second 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.
19
<PAGE> 22
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: changes in
economic conditions, including the performance of global financial markets, and
risks associated with fluctuating currency values and interest rates;
competitive, regulatory or tax changes that affect the cost of or the demand for
the Company's products; the resolution of legal proceedings and environmental
matters; the actual cost of Year 2000 remediation and the ability of the Company
and third party vendors to modify computer systems for the Year 2000 date
conversion in a timely manner; and the ability of the Company generally to
achieve anticipated levels of operational efficiencies related to recent mergers
and acquisitions, as well as achieving its other cost-savings initiatives.
Readers are also directed to other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
20
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning a suit filed by Harris Trust and Savings Bank (as
trustee for Ameritech Pension Trust) and others against Salomon Brothers Inc.,
and Salomon Brothers Realty Corporation, see the description that appears on the
second and third paragraphs under the caption "Legal Proceedings" beginning on
page 12 of the Annual Report on Form 10-K of SSBH for the year ended December
31, 1998 (File No. 1-4346), which description is included as Exhibit 99.01 to
this Form 10-Q and incorporated by reference herein. In July 1999, the U. S.
Court of Appeals for the Seventh Circuit reversed the denial of defendants'
motion for summary judgment and dismissed the sole remaining ERISA claim against
the Company.
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 fourth
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), which description is included as Exhibit 99.02 to this Form 10-Q
and incorporated by reference herein. Smith Barney and the remaining brokerage
firms have settled with Orange County.
For information concerning a suit by the City of New Orleans and a purported
class action in Florida against numerous broker-dealers including Salomon Smith
Barney, see the descriptions that appear in the fifth and sixth paragraphs under
the caption "Legal Proceedings" beginning on page 12 of the Annual Report on
Form 10-K of SSBH for the year ending December 31, 1998 (File No.1-4346), which
description is included as Exhibit 99.03 to this Form 10-Q and incorporated by
reference herein. In connection with these matters, the IRS and SEC have been
conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
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
three month period ended March 31, 1999 and 1998, and certain additional
financial data.
On May 27, 1999, SSBH filed a Current Report on Form 8-K, dated May 25,
1999, filing certain exhibits under Item 7 thereof relating to the offer
and sale of SSBH's Callable Equity Linked Notes based upon the
TheStreet.com Internet Sector Index due May 30, 2006.
No other reports on Form 8-K were filed during the first quarter of 1999;
however, on July 19, 1999, SSBH filed a Current Report on Form 8-K, dated
July 19, 1999, reporting under Item 5 thereof the results of its operations
for the three and six month periods ended June 30, 1999 and 1998.
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
3.01 Restated Certificate of Incorporation of Salomon Smith Barney Holdings Inc.,
effective July 1, 1999, incorporated by reference to Exhibit 3.2 to
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
333-38931) of Salomon Smith Barney Holdings Inc. ("SSBH").
3.02 By-Laws of Salomon Smith Barney Holdings Inc., incorporated by reference to
Exhibit 3.3 to Post-Effective Amendment No. 1 to Registration Statement on Form
S-3 (No. 333-38931) of SSBH.
12.01+ Computation of ratio of earnings to fixed charges.
27.01+ Financial Data Schedule.
99.01+ Second and third paragraphs under the caption "Legal Proceedings" beginning on
page 12 of the Annual Report on Form 10-K of SSBH for the year ended December 31,
1998 (File No. 1-4346).
99.02+ Fourth paragraph under the caption "Legal Proceedings" beginning on page 12 of
the Annual Report on Form 10-K of SSBH for the year ended December 31, 1998
(File No. 1-4346).
99.03+ Fifth and sixth paragraphs under the caption "Legal Proceedings" beginning on
page 12 of the Annual Report on Form 10-K of SSBH for the year 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: August 12, 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>
Six
Months
Ended
June 30,
Dollars in millions 1999
--------
<S> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes
and cumulative effect of change in accounting principles $2,434
Add fixed charges (see below) 4,711
------
Earnings as defined $7,145
======
Fixed charges from continuing operations:
Interest expense $4,663
Other adjustments 48
------
Fixed charges from continuing operations as defined $4,711
======
Ratio of earnings to fixed charges 1.52
======
</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, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,508
<RECEIVABLES> 24,931
<SECURITIES-RESALE> 68,463
<SECURITIES-BORROWED> 31,787
<INSTRUMENTS-OWNED> 80,578
<PP&E> 1,024
<TOTAL-ASSETS> 217,565
<SHORT-TERM> 13,614
<PAYABLES> 27,138
<REPOS-SOLD> 76,576
<SECURITIES-LOANED> 6,438
<INSTRUMENTS-SOLD> 64,448
<LONG-TERM> 19,021
0
0
<COMMON> 0
<OTHER-SE> 9,585
<TOTAL-LIABILITY-AND-EQUITY> 217,565
<TRADING-REVENUE> 1,682
<INTEREST-DIVIDENDS> 5,479
<COMMISSIONS> 1,808
<INVESTMENT-BANKING-REVENUES> 1,435
<FEE-REVENUE> 1,265
<INTEREST-EXPENSE> 4,663
<COMPENSATION> 3,598
<INCOME-PRETAX> 2,434
<INCOME-PRE-EXTRAORDINARY> 1,540
<EXTRAORDINARY> 0
<CHANGES> (15)
<NET-INCOME> 1,525
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
SECOND AND THIRD PARAGRAPHS UNDER THE CAPTION "LEGAL PROCEEDINGS" BEGINNING ON
PAGE 12 OF THE ANNUAL REPORT ON FORM 10-K OF SSBH FOR THE YEAR ENDED DECEMBER
31, 1998 (FILE NO. 1-4346).
In September 1992, Harris Trust and Savings Bank (as trustee for Ameritech
Pension Trust ("APT"), Ameritech Corporation, and an officer of Ameritech filed
suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers Realty
Corporation ("SBRC") in the U.S. District Court for the Northern District of
Illinois (Harris Trust Savings Bank, not individually but solely as trustee for
the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
MOA portfolio and for the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and state law. SBI had acquired the
participation interests in transactions in which it purchased as principal
mortgage notes issued by MOA and Best to finance purchases of motel portfolios;
95% of three such interests and 100% of one such interest were sold to APT for
purchase prices aggregating approximately $20.9 million. Plaintiffs' second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of the four participation interests (approximately $20.9 million), for
rescission and for disgorgement of profits, as well as other relief, and (b)
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
damages in excess of $37 million on certain of the state law claims as well as
other relief. The court dismissed the RICO, breach of contract, and unjust
enrichment claims. The court also found that defendants did not qualify as an
ERISA fiduciary and dismissed the claims based on that allegation. Defendants
moved for summary judgment on the sole remaining claim. The motion was denied,
and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit.
Defendants are awaiting a decision.
Both the Department of Labor and the Internal Revenue Service have advised SBI
that they were or are reviewing the transactions in which APT acquired such
participation interests. With respect to the Internal Revenue Service review,
SSBH, SBI and SBRC have consented to extensions of time for the assessment of
excise taxes that may be claimed to be due with respect to the transactions for
the years 1987, 1988 and 1989. In August 1996, the IRS sent SSBH, SBI and SBRC
what appeared to be draft "30-day letters" with respect to the transactions and
SSBH, SBI and SBRC were given an opportunity to comment on whether the IRS
should issue 30-day letters, which would actually commence the assessment
process. In October 1996, SSBH, SBI and SBRC submitted a memorandum setting
forth reasons why the IRS should not issue 30-day letters with respect to the
transactions.
<PAGE> 1
EXHIBIT 99.02
FOURTH 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 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
(County of Orange et al. v. Bear Stearns & Co. Inc. et al.). Plaintiff alleges,
among other things, that defendants recommended and sold to plaintiff unsuitable
securities and that such transactions were outside the scope of plaintiff's
statutory and constitutional authority (ultra vires). Defendants' motion for
summary judgment was granted with respect to the ultra vires claims in February
1999. The court allowed the filing of an amended complaint asserting claims
based on alleged breaches of fiduciary duty.
<PAGE> 1
EXHIBIT 99.03
FIFTH AND SIXTH PARAGRAPHS UNDER THE CAPTION "LEGAL PROCEEDINGS" BEGINNING ON
PAGE 12 OF THE ANNUAL REPORT ON FORM 10-K OF SSBH FOR THE YEAR ENDED DECEMBER
31, 1998 (FILE NO. 1-4346).
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 may incur in the event the Internal Revenue Service denies
tax exempt status to the City's General Obligation Refunding Bonds Series 1991.
The Company filed a motion to dismiss the complaints in September 1998, and the
complaints were subsequently amended. The Company has filed a motion to dismiss
the amended complaints.
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.
