<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, 2000
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)
NEW YORK 11-2418067
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
388 GREENWICH STREET
NEW YORK, NEW YORK
(ADDRESS OF PRINCIPAL 10013
EXECUTIVE OFFICES) (ZIP CODE)
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.
NOW AVAILABLE ON THE WEB @ WWW.CITIGROUP.COM.
<PAGE> 2
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2000
<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, 2000 and 1999 1
Condensed Consolidated Statements of Financial Condition -
June 30, 2000 (Unaudited) and December 31, 1999 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
-----------------
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Exhibit Index 20
Signatures 21
</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, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 1,020 $ 905 $ 2,333 $ 1,808
Investment banking 834 771 1,747 1,435
Asset management and administration fees 820 652 1,598 1,265
Principal transactions 640 704 1,503 1,682
Other 107 52 239 118
-------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 3,421 3,084 7,420 6,308
-------------------------------------------------------------------------------------------------------------------------
Interest and dividends 3,933 2,866 7,262 5,479
Interest expense 3,468 2,414 6,410 4,663
-------------------------------------------------------------------------------------------------------------------------
Net interest and dividends 465 452 852 816
-------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,886 3,536 8,272 7,124
-------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 2,072 1,753 4,138 3,598
Floor brokerage and other production 153 125 301 224
Communications 159 114 295 236
Occupancy and equipment 137 108 259 219
Advertising and market development 113 83 210 155
Professional services 86 56 154 110
Other operating and administrative expenses 190 195 358 359
Restructuring credit - - - (211)
-------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,910 2,434 5,715 4,690
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 976 1,102 2,557 2,434
Provision for income taxes 318 406 911 894
-------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 658 696 1,646 1,540
Cumulative effect of change in accounting principle
(net of tax benefit of $12) - - - (15)
-------------------------------------------------------------------------------------------------------------------------
Net income $ 658 $ 696 $ 1,646 $ 1,525
=========================================================================================================================
</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 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,746 $ 1,624
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,305 2,421
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $74,147 $74,138
Deposits paid for securities borrowed 42,040 35,979
------------- ---------
116,187 110,117
Financial instruments owned and contractual commitments:
U.S. government and government agency securities 34,951 25,734
Corporate debt securities 11,699 9,755
Contractual commitments 11,561 12,464
Non-U.S. government and government agency securities 11,175 6,638
Equity securities 8,769 7,291
Money market instruments 8,161 7,383
Mortgage loans and collateralized mortgage securities 5,699 5,622
Other financial instruments 2,952 2,651
------------- ---------
94,967 77,538
Receivables:
Customers 27,095 19,377
Brokers, dealers and clearing organizations 2,617 1,767
Receivable for securities provided as collateral 1,323 1,550
Other 1,853 2,754
------------- ---------
32,888 25,448
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $859 and
$787, respectively 1,091 953
Other assets 6,910 5,733
-------------------------------------------------------------------------------------------------------------------------------
Total assets $256,094 $223,834
===============================================================================================================================
</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 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 22,400 $ 17,827
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $102,841 $75,801
Deposits received for securities loaned 16,547 10,279
------------ ---------
119,388 86,080
Financial instruments sold, not yet purchased, and
contractual commitments:
U.S. government and government agency securities 16,533 24,664
Contractual commitments 13,621 16,432
Non-U.S. government and government agency securities 12,527 15,402
Corporate debt securities and other 4,605 2,156
Equity securities 4,578 4,298
------------ ---------
51,864 62,952
Payables and accrued liabilities:
Customers 13,019 13,779
Brokers, dealers and clearing organizations 6,101 1,122
Obligation to return securities received as collateral 1,911 3,203
Other 10,465 9,979
------------ ---------
31,496 28,083
Term debt 19,925 18,821
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 1,772 1,626
Retained earnings 8,500 7,686
Accumulated changes in equity from nonowner sources 4 14
------------ ---------
Total stockholder's equity 10,276 9,326
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $256,094 $223,834
====================================================================================================================================
</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, 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,646 $ 1,525
Depreciation and amortization 223 179
-----------------------------------------------------------------------------------------------------------
Net income adjusted for noncash items 1,869 1,704
-----------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations 116 1
Collateralized short-term financing agreements (6,070) (12,167)
Financial instruments owned and contractual commitments (17,429) 8,059
Receivables (7,440) (757)
Other assets (1,482) (946)
-----------------------------------------------------------------------------------------------------------
Increase in operating assets (32,305) (5,810)
-----------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 33,308 14,278
Financial instruments sold, not yet purchased, and contractual commitments (11,088) (1,834)
Payables and accrued liabilities 3,090 (4,851)
-----------------------------------------------------------------------------------------------------------
Increase in operating liabilities 25,310 7,593
-----------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (5,126) 3,487
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term borrowings 4,573 (1,881)
Proceeds from issuance of term debt 4,882 2,414
Term debt maturities and repurchases (3,562) (3,199)
Collateralized mortgage obligations (6) (21)
Dividends paid (503) (422)
Other capital transactions 146 -
-----------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 5,530 (3,109)
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets underlying collateralized mortgage obligations 6 22
Property, equipment and leasehold improvements, net (288) (153)
-----------------------------------------------------------------------------------------------------------
Cash used in investing activities (282) (131)
-----------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 122 247
Cash and cash equivalents at January 1, 1,624 2,261
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30, $ 1,746 $ 2,508
-----------------------------------------------------------------------------------------------------------
</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. ("SSBH"), 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. Material intercompany transactions have been eliminated.
The condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
use of management's best judgment and estimates. Estimates, including the fair
value of contractual commitments, the outcome of litigation, realization of
deferred tax assets and other matters that affect the reported amounts and
disclosures of contingencies in the financial statements, 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. Certain prior period
amounts have been reclassified or restated to conform to the current period
presentation.
These financial statements should be read in conjunction with the audited
consolidated financial statements included in SSBH's Annual Report on Form 10-K
for the year ended December 31, 1999.
Certain financial information that is normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States, but that is not required for interim reporting purposes, has been
condensed or omitted.
On May 1, 2000, the Company completed the approximately $2.2 billion acquisition
of the global investment banking business and related net assets of Schroders
plc, including all corporate finance, financial markets and securities
activities. The combined European operations of the Company will now be known
as Schroder Salomon Smith Barney.
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 Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective date of FASB Statement No. 133 ("SFAS 137"), which
postponed the effective date of SFAS 133 to January 1, 2001 for calendar year
companies such as the Company. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133 ("SFAS 138"), which will become effective
concurrently with SFAS 137.
5
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Under SFAS 133, as amended by SFAS 138, an entity is required to recognize all
freestanding and embedded derivatives at fair value in earnings unless the
derivatives can be designated as hedges of certain exposures for which specific
hedge accounting is prescribed. If certain conditions are met, a derivative may
be designated as a hedge of the fair value changes of a recognized asset,
liability or an unrecognized firm commitment; or a hedge of the exposure to
variable cash flows of a recognized asset, liability or a forecasted
transaction; or a hedge of the foreign currency exposure of a recognized asset,
liability, a net investment in a foreign operation, an unrecognized firm
commitment or a forecasted transaction.
The Company is in the process of evaluating the potential impact of adopting
these new accounting standards.
NOTE 2. RESTRUCTURING CREDIT
During the first quarter of 1999, the Company recorded an adjustment of $211
million ($124 million after tax) to the restructuring reserve relating to the
merger of Salomon Inc and Smith Barney Holdings Inc. in November 1997. This
reduction in the reserve related to the Seven World Trade Center lease and
resulted from a current reassessment of space needs due to the merger of
Travelers Group Inc. and Citicorp. This reassessment indicated the need for
increased occupancy by the Company utilizing space previously considered excess.
NOTE 3. 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, 2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 658 $ 696 $ 1,646 $ 1,525
Other changes in equity from
nonowner sources (1) (6) (10) (1)
------------------------------------------------------------------------------------------
Total comprehensive income $ 657 $ 690 $ 1,636 $ 1,524
------------------------------------------------------------------------------------------
</TABLE>
NOTE 4. PRINCIPAL TRANSACTIONS REVENUES
The following table presents principal transactions revenues by business
activity for the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period ended June 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income $ 223 $ 384 $ 692 $1,066
Equities 318 269 649 466
Commodities 87 29 143 122
Other 12 22 19 28
-------------------------------------------------------------------------------------------------------------
Total principal transactions revenues $ 640 $ 704 $1,503 $1,682
-------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to securities and commodities
regulations and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. Capital
requirements related to SSBH'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>
U.S. Securities and Exchange Commission
Salomon Smith Barney Inc. Uniform Net Capital Rule (Rule 15c3-1) $2,623 $2,063
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $3,485 $ 798
Salomon Brothers AG Germany's Banking Supervisory Authority $ 151 $ 123
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco"), a wholly owned subsidiary of SSBH, must maintain minimum levels of
capital in accordance with agreements with its rating agencies. At June 30,
2000, Swapco was in compliance with all such agreements. Swapco's capital
requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
7
<PAGE> 10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. CONTRACTUAL COMMITMENTS
A summary of the Company's contractual commitments as of June 30, 2000 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------- --------------------------------
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) $ 151.1 $ - $ - $ 528.1 $ - $ -
Other exchange-issued products:
Equity contracts 9.3 .2 .2 8.4 .3 .3
Fixed income contracts 8.7 - - 1.2 - -
Commodities contracts 1.9 - - 1.2 - -
------------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 171.0 .2 .2 538.9 .3 .3
------------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps, floors
and forward rate agreements:
Swaps 2,868.0 2,752.0
Swap options written 82.9 100.2
Swap options purchased 63.4 84.6
Caps, floors and forward rate agreements 559.1 274.9
------------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps, floors and forward rate
agreements (b) 3,573.4 5.3 7.0 3,211.7 5.5 8.1
------------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 63.7 4.9 5.1 62.6 5.4 6.6
Options and forward contracts on fixed-income securities 380.2 .9 1.0 210.2 .8 1.0
Foreign exchange contracts and options(b) 34.7 .2 .3 50.1 .3 .3
Commodities contracts 11.0 .1 - 12.4 .2 .1
------------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,234.0 $ 11.6 $ 13.6 $4,085.9 $ 12.5 $ 16.4
------------------------------------------------------------------------------------------------------------------------------------
</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 $14.9 billion and $4.7 billion at June 30,
2000 and $15.5 billion and $2.1 billion at December 31, 1999,
respectively.
8
<PAGE> 11
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. 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, 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest revenues:
Investment Services $ 3,123 $ 2,805 $ 6,820 $ 5,769
Asset Management 298 279 600 539
---------------------------------------------------------------------------------------------------------------------
Total $ 3,421 $ 3,084 $ 7,420 $ 6,308
=====================================================================================================================
Net interest and dividends:
Investment Services $ 466 $ 456 $ 857 $ 825
Asset Management (1) (4) (5) (9)
---------------------------------------------------------------------------------------------------------------------
Total $ 465 $ 452 $ 852 $ 816
=====================================================================================================================
Income before cumulative effect of change
in accounting principle:
Investment Services $ 578 $ 608 $ 1,477 $ 1,379
Asset Management 80 88 169 161
---------------------------------------------------------------------------------------------------------------------
Total $ 658 $ 696 $ 1,646 $ 1,540
=====================================================================================================================
</TABLE>
Total assets of the Investment Services and Asset Management segments were
$254.6 billion and $1.5 billion, respectively, at June 30, 2000 and $222.4
billion and $1.4 billion, respectively, at December 31, 1999. For further
discussion of the Company's operating segments, please refer to the Results of
Operations section of Management's Discussion and Analysis.
NOTE 8. LEGAL PROCEEDINGS
The Company has been named as a defendant in legal actions relating to its
operations, some of which seek damages of material or indeterminate amounts. In
addition, from time to time the Company is a party to examinations and inquiries
by various regulatory and self-regulatory bodies. In connection with its
discontinued commodities processing operations, 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.
9
<PAGE> 12
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 $658 million for the three months ended June
30, 2000 (the "2000 Quarter") compared to net income of $696 million for the
three months ended June 30, 1999 (the "1999 Quarter"). Revenues, net of interest
expense, were $3,886 million in the 2000 Quarter compared to $3,536 million in
the 1999 Quarter reflecting increases in commissions, investment banking fees,
and asset management and administration fees.
For the six months ended June 30, 2000 (the "2000 Period") the Company reported
net income of $1,646 million compared to net income of $1,525 million reported
for the six months ended June 30, 1999 (the "1999 Period"). Revenues, net of
interest expense, were $8,272 million in the 2000 Period compared to $7,124
million in the 1999 Period.
Included in the 1999 Period's results was a credit of $211 million ($124 million
after tax) to the restructuring reserve relating to the November 28, 1997 merger
of Salomon Inc and Smith Barney Holdings Inc. (see Note 2 to the condensed
consolidated financial statements for further discussion of the restructuring
credit). 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.
Following is a discussion of the Company's two operating segments, Investment
Services and Asset Management.
10
<PAGE> 13
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, 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 1,017 $ 903 $ 2,326 $ 1,803
Investment banking 826 761 1,731 1,417
Principal transactions 635 698 1,495 1,672
Asset management and administration fees 540 396 1,035 768
Other 105 47 233 109
------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 3,123 2,805 6,820 5,769
------------------------------------------------------------------------------------------------------------------------
Net interest and dividends 466 456 857 825
------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,589 3,261 7,677 6,594
------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 2,012 1,706 4,015 3,498
Other operating and administrative expenses 735 600 1,386 1,140
Restructuring credit - - - (211)
------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,747 2,306 5,401 4,427
------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 842 955 2,276 2,167
------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 264 347 799 788
------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $ 578 $ 608 $ 1,477 $ 1,379
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's investment services segment reported income of $578 million and
$1,477 million for the 2000 Quarter and 2000 Period, compared to $608 million
and $1,379 million for the 1999 Quarter and 1999 Period. Revenues, net of
interest expense, increased to $3,589 million and $7,677 million in the 2000
Quarter and 2000 Period compared to $3,261 million and $6,594 million in the
1999 Quarter and 1999 Period as a result of increases in commissions, investment
banking fees, and asset management and administration fees.
Commission revenues increased 13% to $1,017 million in the 2000 Quarter compared
to $903 million in the 1999 Quarter. This increase is primarily the result of an
increase in listed commissions. In the 2000 Period commission revenues
increased 29% to $2,326 million. During the 2000 Period annualized gross
production per financial consultant increased to $548 thousand reflecting the
continued strength of the Private Client business. Also contributing to the
increase in the 2000 Period was an increase in OTC commissions.
Investment banking revenues increased to $826 million in the 2000 Quarter
compared to $761 million in the 1999 Quarter. Increases in merger and
acquisition fees, and equity underwriting, were partially offset by a
11
<PAGE> 14
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
decline in high yield underwriting. In the 2000 Period, investment banking
revenue increased 22% to $1,731 million.
Principal transactions revenues decreased to $635 million in the 2000 Quarter
compared to $698 million in the 1999 Quarter and declined 11% in the 2000 Period
as a result of less robust conditions in the fixed income markets. For further
information related to principal transactions revenues see Note 4 to the
condensed consolidated financial statements.
The investment services segment includes results from assets managed by the
Company's Financial Consultants and assets that are managed through the
Consulting Group. Asset management and administration fees increased to $540
million and $1,035 million in the 2000 Quarter and 2000 Period compared to $396
million and $768 million in the 1999 Quarter and 1999 Period as a result of the
growth in assets under fee-based management. Assets under fee-based management
increased significantly at June 30, 2000 compared to June 30, 1999 causing the
corresponding increase in revenue.
Other income increased to $105 million in the 2000 Quarter and $233 million in
the 2000 Period primarily as a result of increased revenues from Nikko Salomon
Smith Barney Limited, the Company's joint venture with The Nikko Securities Co.,
Ltd.
Net interest and dividends increased to $466 million and $857 million in the
2000 Quarter and 2000 Period compared to $456 million and $825 million in the
1999 Quarter and 1999 Period. These increases were a result of increased margin
lending to clients offset to an extent by a decrease in mortgage-backed
inventory.
Total expenses, excluding interest and the restructuring credit, increased to
$2,747 million in the 2000 Quarter compared to $2,306 million in the 1999
Quarter primarily as a result of an increase in production-related compensation
and benefits expense, reflecting increased revenues of the Company. Also
contributing to the increase in expenses was the acquisition of Schroders plc in
the 2000 Quarter. Total expenses, excluding interest and the restructuring
credit, were $5,401 million in the 2000 Period compared to $4,638 million in the
1999 Period. The Company continues to maintain its focus on controlling fixed
expenses.
12
<PAGE> 15
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, 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Asset management and administration fees $280 $256 $563 $497
Other revenue, net 17 19 32 33
-----------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 297 275 595 530
-----------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 60 47 123 100
Other operating and administrative expenses 103 81 191 163
-----------------------------------------------------------------------------------------------------------------
Total noninterest expense 163 128 314 263
-----------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 134 147 281 267
-----------------------------------------------------------------------------------------------------------------
Provision for income taxes 54 59 112 106
-----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $ 80 $ 88 $169 $161
=================================================================================================================
</TABLE>
The Company's asset management segment revenues, net of interest expense, rose
8% to $297 million and 12% to $595 million in the 2000 Quarter and 2000 Period
compared to $275 million and $530 million in the 1999 Quarter and 1999 Period.
The primary revenue for the asset management segment is asset management and
administration fees, which were $280 million and $563 million in the 2000
Quarter and 2000 Period, compared to $256 million and $497 million in the 1999
Quarter and 1999 Period. The overall increases in fees reflects broad growth in
all asset management products. Assets under management for the segment reached
$233.7 billion at June 30, 2000, an increase of 9% from June 30, 1999. 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 $163 million and $314 million in the 2000
Quarter and 2000 Period compared to $128 million and $263 million in the 1999
Quarter and 1999 Period. The increases reflect continuing investment in the
business infrastructure to support sustained growth. Other operating and
administrative expense includes amortization of deferred commissions which
relate to the sale of load mutual funds.
13
<PAGE> 16
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
At June 30, 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
Money market funds $ 72.9 $ 63.9
Mutual funds 67.0 62.4
Managed accounts 82.6 75.6
Unit investment trusts held in client accounts 11.2 12.9
------------------------------------------------------------------------------------------
Salomon Smith Barney Asset Management 233.7 214.8
Financial Consultant managed accounts * 58.2 29.5
Consulting Group and internally managed assets * 135.8 113.6
------------------------------------------------------------------------------------------
Total assets under fee-based management (1) $ 427.7 $ 357.9
------------------------------------------------------------------------------------------
</TABLE>
* Related results included in Investment Services segment.
(1) Includes jointly managed assets of $57.0 billion and $41.0 billion as of
June 30, 2000 and 1999, respectively.
14
<PAGE> 17
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 had total assets of $256.1 billion at June 30, 2000, up from $223.8
billion at December 31, 1999. Due to the nature of the Company's trading
activities, it is not uncommon for the Company's asset levels to fluctuate from
period to period.
The Company's balance sheet is highly liquid, with the vast majority of its
assets consisting of marketable securities and collateralized short-term
financing agreements arising from securities transactions. The highly liquid
nature of these assets provides the Company with flexibility in financing and
managing its business. The Company monitors and evaluates the adequacy of its
capital and borrowing base on a daily basis in order to allow for flexibility in
its funding, to maintain liquidity, and to ensure that its capital base supports
the regulatory capital requirements of its subsidiaries.
The Company funds its operations through the use of 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 securities loaned, 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 $181.8 billion at
June 30, 2000. 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 $22.3 billion at June 30, 2000.
The Company has a $5.0 billion 364-day committed uncollateralized revolving line
of credit from commercial banks that extends through May 2001. The Company may
borrow under this revolving credit facility at various interest rate options
(LIBOR, CD or base rate), and compensates the banks for this facility through
facility fees. At June 30, 2000 there were no outstanding borrowings under this
facility. Under this facility the Company is required to maintain a certain
level of consolidated adjusted net worth (as defined in the agreement). At June
30, 2000, this requirement was exceeded by approximately $3.5 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 global 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 and contractual commitments,
customer balances, the amount of reverse repurchase transactions outstanding and
securities borrowed transactions. As the Company's activities increase,
borrowings generally increase to fund the additional activities. Availability of
financing to the Company can vary depending upon market conditions, credit
ratings, and the overall availability of credit to the securities industry. The
Company seeks to expand and diversify its funding mix as well as its creditor
sources. Concentration levels for these sources, particularly for short-term
lenders, are closely monitored both in terms of single investor limits and daily
maturities.
15
<PAGE> 18
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. In addition, the Company monitors its leverage and capital
ratios on a daily basis.
16
<PAGE> 19
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 because they do not 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 owned and sold, contractual commitments,
repurchase and resale agreements, and related funding at June 30, 2000 and
December 31, 1999. 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) 2000 2000 Average 2000 High 2000 Low 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate $ 20 $ 22 $ 26 $ 19 $ 20
Equities 2 5 13 1 6
Commodities 12 9 13 7 8
Currency 1 1 2 - -
Diversification Benefit (12) (13) N/A N/A (11)
----------------------------------------------------------------------------------------------------
Total $ 23 $ 24 $ 30 $ 20 $ 23
----------------------------------------------------------------------------------------------------
</TABLE>
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at June 30, 2000, the Company simulates changes
in market factors by using historical volatilities and correlations and assuming
lognormal distributions for changes in each market factor. VAR is calculated at
the 99% confidence level, assuming a static portfolio subject to a one-day
change in market factors. The historical volatilities and correlations used in
the simulation are calculated using a look back period of three years. Over 200
risk factors are used in the VAR simulations. VAR reflects the risk profile of
the Company at June 30, 2000, and is not a predictor of future results.
17
<PAGE> 20
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; and the resolution of legal proceedings and
environmental matters.
18
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning a suit filed by Harris Trust Savings Bank (as trustee
for the Ameritech Pension Trust) and others against Salomon Brothers Inc., and
Salomon Brothers Realty Corp., see the description that appears in the second
and third paragraphs under the caption "Legal Proceedings" beginning on page 11
of the Annual Report on Form 10-K of the Company for the year ended December 31,
1999 (File No. 1-4346), which description is included as Exhibit 99.1 to this
Form 10-Q and incorporated by reference herein, and in the first paragraph under
the caption "Legal Proceedings" beginning on page 17 of the Quarterly Report on
Form 10-Q of SSBH for the quarterly period ended March 31, 2000 (File
No.1-4346), which description is included as Exhibit 99.2 to this Form 10-Q and
incorporated by reference herein. On June 12, 2000, the U.S. Supreme Court
reversed the U.S. Court of Appeals for the Seventh Circuit's judgment, which had
overturned the denial of defendants' motion for summary judgment and dismissed
the sole remaining ERISA claim against the Company, and remanded the matter to
the circuit court for further proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
On April 17, 2000, SSBH filed a Current Report on Form 8-K, dated April 17,
2000, reporting under Item 5 thereof the results of the Company's operations for
the three month periods ended March 31, 2000 and 1999.
No other reports on Form 8-K were filed during the second quarter of 2000;
however, on July 19, 2000, SSBH filed a Current Report on Form 8-K, dated July
19, 2000, reporting under Item 5 thereof the results of its operations for the
three and six month periods ended June 30, 2000 and 1999.
19
<PAGE> 22
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 11 of the Annual Report on
Form 10-K of SSBH for the year ended December 31, 1999 (File
No. 1-4346).
99.02+ First paragraph under the caption "Legal Proceedings"
beginning on page 17 of the Quarterly Report on Form 10-Q of
SSBH for the quarterly period ended March 31, 2000 (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
20
<PAGE> 23
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 11, 2000 By: /s/ William Bozarth
-----------------------------
William Bozarth
Chief Financial Officer
By: /s/ Michael J. Day
-----------------------------
Michael J. Day
Controller
21
