<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 10013
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE
HEREOF, 1,000 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 MARCH 31, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three months ended March 31, 2000 and 1999 1
Condensed Consolidated Statements of Financial Condition -
March 31, 2000 (Unaudited) and December 31, 1999 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three months ended March 31, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17 - 18
Exhibit Index 18
Signatures 19
</TABLE>
<PAGE> 3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Dollars in millions
Three Months Ended March 31, 2000 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Commissions $ 1,313 $ 903
Investment banking 913 664
Principal transactions 863 978
Asset management and administration fees 778 613
Other 132 66
- ------------------------------------------------------------------------------------------
Total noninterest revenues 3,999 3,224
- ------------------------------------------------------------------------------------------
Interest and dividends 3,329 2,613
Interest expense 2,942 2,249
- ------------------------------------------------------------------------------------------
Net interest and dividends 387 364
- ------------------------------------------------------------------------------------------
Revenues, net of interest expense 4,386 3,588
- ------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 2,066 1,845
Floor brokerage and other production 148 99
Communications 136 122
Occupancy and equipment 122 111
Advertising and market development 97 72
Professional services 68 54
Other operating and administrative expenses 168 164
Restructuring credit - (211)
- ------------------------------------------------------------------------------------------
Total noninterest expenses 2,805 2,256
- ------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,581 1,332
Provision for income taxes 593 488
- ------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 988 844
Cumulative effect of change in accounting principle
(net of tax benefit of $12) - (15)
- ------------------------------------------------------------------------------------------
Net income $ 988 $ 829
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 4
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Dollars in millions 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,365 $ 1,624
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,439 2,421
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $70,315 $74,138
Deposits paid for securities borrowed 38,524 35,979
------- -------
108,839 110,117
Financial instruments owned and contractual commitments:
U.S. government and government agency securities 26,518 25,734
Corporate debt securities 12,537 9,755
Contractual commitments 12,398 12,464
Equity securities 8,075 7,291
Non-U.S. government and government agency securities 6,344 6,638
Mortgage loans and collateralized mortgage securities 5,930 5,622
Money market instruments 5,412 7,383
Other financial instruments 2,572 2,651
------- -------
79,786 77,538
Receivables:
Customers 21,694 19,377
Brokers, dealers and clearing organizations 1,833 1,767
Receivable for securities provided as collateral 1,605 1,550
Other 1,812 2,754
------- -------
26,944 25,448
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $836 and
$787, respectively 986 953
Other assets 5,321 5,733
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 226,680 $ 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>
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 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 $ 15,154 $ 17,827
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $86,591 $75,801
Deposits received for securities loaned 11,806 10,279
------- -------
98,397 86,080
Financial instruments sold, not yet purchased, and
contractual commitments:
U.S. government and government agency securities 15,540 24,664
Non-U.S. government and government agency securities 15,458 15,402
Contractual commitments 14,737 16,432
Equity securities 5,321 4,298
Corporate debt securities and other 3,029 2,156
------- -------
54,085 62,952
Payables and accrued liabilities:
Customers 14,367 13,779
Brokers, dealers and clearing organizations 3,177 1,122
Obligation to return securities received as collateral 2,494 3,203
Other 10,028 9,979
------- -------
30,066 28,083
Term debt 18,357 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 1,696 1,626
Retained earnings 8,175 7,686
Accumulated changes in equity from nonowner sources 5 14
------- -------
Total stockholder's equity 9,876 9,326
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $226,680 $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
Three Months Ended March 31, 2000 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 988 $ 829
Depreciation and amortization 106 93
- ---------------------------------------------------------------------------------------------------
Net income adjusted for noncash items 1,094 922
- ---------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (18) 127
Collateralized short-term financing agreements 1,278 (18,233)
Financial instruments owned and contractual commitments (2,248) 3,519
Receivables (1,496) (454)
Other assets 246 (485)
- ---------------------------------------------------------------------------------------------------
Increase in operating assets (2,238) (15,526)
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 12,317 26,619
Financial instruments sold, not yet purchased, and contractual commitments (8,867) (4,068)
Payables and accrued liabilities 1,492 (8,038)
- ---------------------------------------------------------------------------------------------------
Increase in operating liabilities 4,942 14,513
- ---------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 3,798 (91)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in commercial paper and other short-term borrowings (2,673) (316)
Proceeds from issuance of term debt 1,964 572
Term debt maturities and repurchases (2,296) (1,410)
Collateralized mortgage obligations (4) (11)
Dividends paid (4) (6)
Other capital transactions 70 --
- ---------------------------------------------------------------------------------------------------
Cash used in financing activities (2,943) (1,171)
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 4 11
Property, equipment and leasehold improvements, net (118) (71)
- ---------------------------------------------------------------------------------------------------
Cash used in investing activities (114) (60)
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 741 (1,322)
Cash and cash equivalents at January 1, 1,624 2,261
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $ 2,365 $ 939
- ---------------------------------------------------------------------------------------------------
</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 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.
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"). 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 hedge of the exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, or a hedge of the exposure to variable cash flows of a forecasted
transaction, or 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,
the FASB issued SFAS No. 137 which postponed the effective date of SFAS 133 for
one year. SFAS 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 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.
At March 31, 2000, the remaining restructuring reserve balance of $3 million, is
included in "Payables and accrued liabilities-Other".
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 ended March 31, 2000 1999
--------------------------------------------------------------------
<S> <C> <C>
Net income $988 $829
Other changes in equity from nonowner sources (9) 5
--------------------------------------------------------------------
Total comprehensive income $979 $834
--------------------------------------------------------------------
</TABLE>
NOTE 4. PRINCIPAL TRANSACTIONS REVENUES
The following table presents principal transactions revenues by business
activity for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
-----------------------------------------------------------
Dollars in millions
Three months ended March 31, 2000 1999
-----------------------------------------------------------
<S> <C> <C>
Fixed Income $469 $682
Equities 331 197
Commodities 56 93
Other 7 6
-----------------------------------------------------------
Total principal transactions revenues $863 $978
-----------------------------------------------------------
</TABLE>
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.
6
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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>
Salomon Smith Barney Inc. U.S. Securities and Exchange Commission $2,318 $1,790
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $3,842 $1,093
Salomon Brothers AG Germany's Banking Supervisory Authority $ 195 $ 159
- ------------------------------------------------------------------------------------------------------------------------
</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 March 31,
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.
NOTE 6. CONTRACTUAL COMMITMENTS
A summary of the Company's contractual commitments as of March 31, 2000 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
MARCH 31, 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) $ 501.9 $ - $ - $ 528.1 $ - $ -
Other exchange-issued products:
Equity contracts 8.9 .2 .2 8.4 .3 .3
Fixed income contracts 5.1 - - 1.2 - -
Commodities contracts 1.4 - - 1.2 - -
- ------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 517.3 .2 .2 538.9 .3 .3
- ------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps,
floors and forward rate agreements:
Swaps 2,743.4 2,752.0
Swap options written 81.7 100.2
Swap options purchased 63.8 84.6
Caps, floors and forward rate agreements 591.3 274.9
- ------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps, floors and
forward rate agreements (b) 3,480.2 5.1 7.2 3,211.7 5.5 8.1
- ------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 69.3 5.8 5.3 62.6 5.4 6.6
Options and forward contracts on fixed-income
securities 335.1 .8 1.6 210.2 .8 1.0
Foreign exchange contracts and options(b) 43.4 .3 .3 50.1 .3 .3
Commodities contracts 12.3 .2 .1 12.4 .2 .1
- ------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,457.6 $12.4 $14.7 $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 $15.4 billion and $5.6 billion at March 31, 2000 and
$15.5 billion and $2.1 billion at December 31, 1999, respectively.
7
<PAGE> 10
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 ended March 31, 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest revenues:
Investment Services $3,697 $2,964
Asset Management 302 260
-------------------------------------------------------------------------------------------
Total $3,999 $3,224
===========================================================================================
Net interest and dividends:
Investment Services $ 391 $ 369
Asset Management (4) (5)
-------------------------------------------------------------------------------------------
Total $ 387 $ 364
===========================================================================================
Income before cumulative effect of change in accounting principle:
Investment Services $ 899 $ 771
Asset Management 89 73
-------------------------------------------------------------------------------------------
Total $ 988 $ 844
===========================================================================================
</TABLE>
Total assets of the Investment Services and Asset Management segments were
$225.3 billion and $1.4 billion, respectively, at March 31, 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.
NOTE 9. SUBSEQUENT EVENT
On May 1, 2000, the Company completed the approximately $2.2 billion
acquisition of the global investment banking business and related 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.
8
<PAGE> 11
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 $988 million for the three months ended March
31, 2000 (the "2000 Quarter") compared to $829 million for the three months
ended March 31, 1999 (the "1999 Quarter"). Included in the 1999 Quarter'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 for further discussion of the
restructuring credit). During the 1999 Quarter 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.
Revenues, net of interest expense, were $4.4 billion in the 2000 Quarter
compared to $3.6 billion in the 1999 Quarter.
Following is a discussion of the Company's two operating segments, Investment
Services and Asset Management.
INVESTMENT SERVICES
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Dollars in millions
For the three months ended March 31, 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Commissions $ 1,309 $ 900
Investment banking 905 656
Principal transactions 860 974
Asset management and administration fees 495 372
Other 128 62
------------------------------------------------------------------------
Total noninterest revenues 3,697 2,964
------------------------------------------------------------------------
Net interest and dividends 391 369
------------------------------------------------------------------------
Revenues, net of interest expense 4,088 3,333
------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 2,003 1,792
Other operating and administrative expenses 651 540
Restructuring credit - (211)
------------------------------------------------------------------------
Total noninterest expense 2,654 2,121
------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,434 1,212
------------------------------------------------------------------------
Provision for income taxes 535 441
------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $ 899 $ 771
------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's investment services segment reported income of $899 million for
the 2000 Quarter compared to $771 million for the 1999 Quarter. Revenues, net of
interest expense, increased to $4,088 million in the 2000 Quarter compared to
$3,333 million in the 1999 Quarter as a result of increases in commissions,
investment banking fees, and asset management and administration fees.
Commission revenues of $1,309 million in the 2000 Quarter increased 45% compared
to the 1999 Quarter as a result of increases in listed, OTC, and mutual fund
commissions. During the 2000 Quarter annualized gross production per financial
consultant increased to $598 thousand reflecting the continued strength of the
Private Client business.
Investment banking revenues increased to $905 million in the 2000 Quarter
compared to $656 million in the 1999 Quarter primarily due to an increase in
equity underwriting.
Principal transactions revenues, while down from the 1999 Quarter, increased 58%
compared to the fourth quarter of 1999, due to increases in fixed income and
global equities revenues. 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 externally managed through
the Consulting Group. Asset management and administration fees increased to $495
million in the 2000 Quarter compared to $372 million in the 1999 Quarter as a
result of the growth in assets under fee-based management. Assets under
fee-based management increased significantly at March 31, 2000 compared to March
31, 1999 causing the corresponding increase in revenue.
Net interest and dividends increased to $391 million in the 2000 Quarter
compared to $369 million in the 1999 Quarter as 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
$2,654 million in the 2000 Quarter compared to $2,332 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. The Company
continues to maintain its focus on controlling fixed expenses.
10
<PAGE> 13
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Dollars in millions
For the three months ended March 31, 2000 1999
--------------------------------------------------------------------
<S> <C> <C>
Revenues:
Asset management and administration fees $283 $241
Other revenue, net 15 14
--------------------------------------------------------------------
Revenues, net of interest expense 298 255
--------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 63 53
Other operating and administrative expenses 88 82
--------------------------------------------------------------------
Total noninterest expense 151 135
--------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 147 120
--------------------------------------------------------------------
Provision for income taxes 58 47
--------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $ 89 $ 73
--------------------------------------------------------------------
</TABLE>
The Company's asset management segment revenues, net of interest expense, rose
17% to $298 million in the 2000 Quarter compared to $255 million in the 1999
Quarter. The primary revenue for the asset management segment is asset
management and administration fees, which were $283 million in the 2000 Quarter,
compared to $241 million in the 1999 Quarter. The overall increases in fees
reflects broad growth in all asset management products. Assets under management
for the segment reached $226.9 billion at March 31, 2000, an increase of 15%
from March 31, 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 $151 million in the 2000 Quarter compared to
$135 million in the 1999 Quarter. 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.
11
<PAGE> 14
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 March 31, 2000 1999
- ------------------------------------------------------------------
<S> <C> <C>
Money market funds $74.5 $63.7
Mutual funds 70.0 62.2
Managed accounts 82.4 72.1
- ------------------------------------------------------------------
Salomon Smith Barney Asset Management 226.9 198.0
Financial Consultant managed accounts * 31.7 18.6
- ------------------------------------------------------------------
Total internally managed assets 258.6 216.6
Consulting Group externally managed assets * 86.7 73.1
- ------------------------------------------------------------------
Total assets under fee-based management $345.3 $289.7
==================================================================
</TABLE>
*Related results included in Investment Services segment.
12
<PAGE> 15
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $226.7 billion at March 31, 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 $154.8 billion at
March 31, 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 $15.1 billion at March 31, 2000.
The Company has committed uncollateralized revolving lines of credit from
commercial banks 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 March 31, 2000 there were no
outstanding borrowings under these facilities. Under these facilities the
Company is required to maintain a certain level of consolidated adjusted net
worth (as defined in the agreements). At March 31, 2000, this requirement was
exceeded by approximately $4.0 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.
13
<PAGE> 16
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.
14
<PAGE> 17
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 March 31, 2000 and
December 31, 1999. The VAR relating to non-trading instruments has been excluded
from this analysis.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
RISK EXPOSURES March 31, First Quarter First Quarter First Quarter December 31,
($ IN MILLIONS) 2000 2000 Average 2000 High 2000 Low 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate $21 $23 $28 $19 $20
Equities 11 5 14 1 6
Commodities 7 6 8 5 8
Currency 1 1 3 - -
Diversification Benefit (16) (11) N/A N/A (11)
-------------------------------------------------------------------------------------------------
Total $24 $24 $27 $20 $23
-------------------------------------------------------------------------------------------------
</TABLE>
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at March 31, 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 March 31, 2000, and is not a predictor of future results.
15
<PAGE> 18
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
16
<PAGE> 19
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. In April 2000, the U.S. Supreme
Court heard oral argument on plaintiffs' petition to reverse the decision of the
U.S. Court of Appeals for the Seventh Circuit. The U.S. Supreme Court reserved
its decision, and has not yet released its opinion.
For information concerning the complaints filed in the U.S. District Court for
the Eastern District of Louisiana (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.), a purported class action in Florida against
numerous broker-dealers including the Company (Dwight Brock as Clerk for Collier
County v. Merrill Lynch, et al.), and the IRS and SEC industry-wide
investigation into the pricing of Treasury securities in advanced refunding
transactions, see the description that appears in the fourth, fifth and sixth
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), which description is included as Exhibit 99.2 to this form 10-Q and
incorporated by reference herein. In April 2000, seventeen investment banks,
including the Company, entered into an agreement with the federal government to
settle charges related to the pricing of Treasury securities in advanced
refunding transactions. Thereafter, plaintiffs filed voluntary discontinuances
in the two Louisiana federal actions.
For information concerning the matter entitled MKP Master Fund, LDC et al. v.
Salomon Smith Barney Inc., see the description that appears in the seventh
paragraph 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), which description is included as Exhibit 99.3 to this Form 10-Q and
incorporated by reference herein. In March 2000, plaintiffs' motion to dismiss
the Company's amended counterclaims was argued, and no decision has been
rendered.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
On January 18, 2000, SSBH filed a Current Report on Form 8-K, dated January 18,
2000, reporting under Item 5 thereof the proposed acquisition of the investment
banking business of Schroders plc and the results of the Company's operations
for the three and twelve month periods ended December 31, 1999 and 1998.
17
<PAGE> 20
No other reports on Form 8-K were filed during the first quarter of 2000;
however, 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 its operations for the
three month period ended March 31, 2000 and 1999.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
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+ Fourth, fifth and sixth 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).
99.03+ Seventh paragraph 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).
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.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALOMON SMITH BARNEY HOLDINGS INC.
(Registrant)
Date: May 12, 2000 By: /s/ Charles W. Scharf
----------------------------------------
Charles W. Scharf
Chief Financial Officer
By: /s/ Michael J. Day
----------------------------------------
Michael J. Day
Controller
19
<PAGE> 1
EXHIBIT 12.01
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Three
Months
Ended
March 31,
Dollars in millions 2000
--------
<S> <C>
Earnings from operations:
Income before income taxes
and cumulative effect of change in accounting principles $1,581
Add fixed charges (see below) 2,969
------
Earnings as defined $4,550
======
Fixed charges from operations:
Interest expense $2,942
Other adjustments 27
------
Fixed charges from operations as defined $2,969
======
Ratio of earnings to fixed charges 1.53
======
</TABLE>
NOTE: The ratio of earnings to fixed charges is calculated by dividing fixed
charges into the sum of income 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
COMPANYS MARCH 31, 2000 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED
HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,804
<RECEIVABLES> 26,944
<SECURITIES-RESALE> 70,315
<SECURITIES-BORROWED> 38,524
<INSTRUMENTS-OWNED> 79,786
<PP&E> 986
<TOTAL-ASSETS> 226,680
<SHORT-TERM> 15,154
<PAYABLES> 30,066
<REPOS-SOLD> 86,591
<SECURITIES-LOANED> 11,806
<INSTRUMENTS-SOLD> 54,085
<LONG-TERM> 18,357
0
0
<COMMON> 0
<OTHER-SE> 9,876
<TOTAL-LIABILITY-AND-EQUITY> 226,680
<TRADING-REVENUE> 863
<INTEREST-DIVIDENDS> 3,329
<COMMISSIONS> 1,313
<INVESTMENT-BANKING-REVENUES> 913
<FEE-REVENUE> 778
<INTEREST-EXPENSE> 2,942
<COMPENSATION> 2,066
<INCOME-PRETAX> 1,581
<INCOME-PRE-EXTRAORDINARY> 988
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 988
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
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).
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 in a portfolio of motels owned by Best Inns,
Inc. ("Best"), violated the Employee Retirement Income Security Act ("ERISA"),
and that APT's purchase of the participation interests in the third MOA
portfolio and in the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and the Illinois Consumer Fraud and Deceptive
Practices Act ("Consumer Fraud Act"), and constituted fraud, negligent
misrepresentation, breach of contract and unjust enrichment. SBI had acquired
the participation interests when it purchased principal mortgage notes issued by
MOA and Best to finance purchases of motel portfolios; 95% of three of those
interests and 100% of the fourth were sold to APT for a total of approximately
$20.9 million. Plaintiffs' second amended complaint seeks judgment (a) on the
ERISA claims for the approximately $20.9 million purchase price, for rescission
and for disgorgement of profits, as well as other relief, and (b) on the RICO
and state law claims 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. Following motions by
defendants, the court dismissed the RICO, Consumer Fraud Act, fraud, negligent
misrepresentation, breach of contract, and unjust enrichment claims. The court
also found that defendants were not ERISA fiduciaries and dismissed two of the
three claims based on that allegation. Defendants moved for summary judgment on
plaintiffs' only remaining claim, which alleged an ERISA violation. The motion
was denied, and defendants appealed to the U.S. Court of Appeals for the Seventh
Circuit. 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. Plaintiffs filed a petition for
certiorari with the U. S. Supreme Court seeking review of the decision of the
Court of Appeals. The petition was granted in January 2000.
Both the Department of Labor and the Internal Revenue Service have advised SBI
that they were or are reviewing the underlying transactions. With respect to the
Internal Revenue Service, SSBH, SBI and SBRC have consented to extensions of
time for the assessment of excise taxes that may be claimed 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 such 30-day letters. Since
that time, the IRS has not issued such 30-day letters to SSBH, SBI or SBRC.
<PAGE> 1
EXHIBIT 99.2
FOURTH, FIFTH AND SIXTH 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).
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 if 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, the
complaints were subsequently amended, and the Company then filed a motion to
dismiss the amended complaints. In May 1999, the Court denied the Company's
motion to dismiss, but stayed the litigation because the matter was not ripe.
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.
Plaintiff amended its complaint to name an additional defendant and, in March
1999, the Company filed a motion to dismiss the amended complaint. In October
1999, plaintiff filed a second amended complaint. The Company moved to dismiss
the second amended complaint in November 1999.
In connection with the Board of Liquidations, The City of New Orleans and Brock
matters, the IRS and SEC have been conducting an industry-wide investigation
into the pricing of Treasury securities in advanced refunding transactions.
<PAGE> 1
EXHIBIT 99.3
SEVENTH PARAGRAPH 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).
In March 1999, a complaint seeking in excess of $250 million was filed by a
hedge fund and its investment advisor against SSB in the Supreme Court of the
State of New York, County of New York (MKP Master Fund, LDC et al. v. Salomon
Smith Barney Inc.). Plaintiffs allege that while acting as their prime broker
SSB breached its contracts with plaintiffs, converted plaintiffs' monies and
engaged in tortious conduct, including breaching its fiduciary duties. In
October 1999, the court dismissed plaintiffs' tort claims, including the breach
of fiduciary duty claims, but allowed the breach of contract and conversion
claims to stand. In December 1999, SSB filed an answer and asserted
counterclaims against the investment advisor. In response to plaintiffs' motion
to strike the counterclaims, in January 2000, SSB amended its counterclaims
against the investment advisor to seek indemnification and contribution.
Plaintiffs moved to strike SSB's amended counterclaims in February 2000.
