<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 SEPTEMBER 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)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--------- ---------
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE
HEREOF, 1000 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE,
WERE ISSUED AND OUTSTANDING.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H 1 (a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
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 SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three and nine months ended September 30, 2000 and 1999 1
Condensed Consolidated Statements of Financial Condition -
September 30, 2000 (Unaudited) and December 31, 1999 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 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 Nine Months
Period Ended September 30, 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 994 $ 815 $ 3,327 $ 2,623
Investment banking 1,003 778 2,750 2,213
Asset management and administration fees 848 693 2,446 1,958
Principal transactions 760 329 2,263 2,011
Other 108 67 347 185
-----------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 3,713 2,682 11,133 8,990
-----------------------------------------------------------------------------------------------------------------------
Interest and dividends 4,375 2,811 11,637 8,290
Interest expense 3,938 2,420 10,348 7,083
-----------------------------------------------------------------------------------------------------------------------
Net interest and dividends 437 391 1,289 1,207
-----------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 4,150 3,073 12,422 10,197
-----------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 2,181 1,608 6,319 5,206
Floor brokerage and other production 171 110 472 335
Communications 170 124 465 360
Occupancy and equipment 147 114 406 333
Advertising and market development 121 81 331 236
Professional services 81 64 235 174
Other operating and administrative expenses 172 138 530 496
Restructuring credit - (30) - (241)
-----------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 3,043 2,209 8,758 6,899
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,107 864 3,664 3,298
Provision for income taxes 411 326 1,322 1,220
-----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 696 538 2,342 2,078
Cumulative effect of change in accounting principle
(net of tax benefit of $12) - - - (15)
-----------------------------------------------------------------------------------------------------------------------
Net income $ 696 $ 538 $ 2,342 $ 2,063
=======================================================================================================================
</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>
------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,350 $ 1,624
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,209 2,421
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $73,044 $74,138
Deposits paid for securities borrowed 45,581 35,979
-------------- -------------
118,625 110,117
Financial instruments owned and contractual commitments:
U.S. government and government agency securities 27,165 25,734
Corporate debt securities 12,948 9,755
Contractual commitments 10,241 12,464
Non-U.S. government and government agency securities 9,006 6,638
Equity securities 8,709 7,291
Money market instruments 7,240 7,383
Mortgage loans and collateralized mortgage securities 6,070 5,622
Other financial instruments 2,922 2,651
-------------- -------------
84,301 77,538
Receivables:
Customers 25,760 19,377
Brokers, dealers and clearing organizations 3,926 1,767
Receivable for securities provided as collateral 644 1,550
Other 2,279 2,754
-------------- -------------
32,609 25,448
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $923 and
$787, respectively 1,196 953
Other assets 7,045 5,733
------------------------------------------------------------------------------------------------------------------------------------
Total assets $249,335 $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>
------------------------------------------------------------------------------------------------------------------------------------
September 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 $ 22,741 $ 17,827
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 97,248 $75,801
Deposits received for securities loaned 17,042 10,279
-------------- ------------
114,290 86,080
Financial instruments sold, not yet purchased, and contractual
commitments:
Non-U.S. government and government agency securities 15,917 15,402
U.S. government and government agency securities 15,671 24,664
Contractual commitments 11,130 16,432
Equity securities 5,150 4,298
Corporate debt securities and other 4,453 2,156
-------------- ------------
52,321 62,952
Payables and accrued liabilities:
Customers 13,520 13,779
Brokers, dealers and clearing organizations 2,756 1,122
Obligation to return securities received as collateral 1,067 3,203
Other 10,935 9,979
-------------- ------------
28,278 28,083
Term debt 20,273 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 1,838 1,626
Retained earnings 8,843 7,686
Accumulated changes in equity from nonowner sources 6 14
-------------- ------------
Total stockholder's equity 10,687 9,326
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $249,335 $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
Nine Months Ended September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,342 $ 2,063
Depreciation and amortization 346 270
-------------------------------------------------------------------------------------------------------------------------------
Net income adjusted for noncash items 2,688 2,333
-------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations 212 (61)
Collateralized short-term financing agreements (6,349) (13,888)
Financial instruments owned and contractual commitments (5,899) 12,789
Receivables 2,084 209
Other assets (425) (645)
-------------------------------------------------------------------------------------------------------------------------------
Increase in operating assets (10,377) (1,596)
-------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 26,130 16,744
Financial instruments sold, not yet purchased, and contractual commitments (11,534) (8,343)
Payables and accrued liabilities (7,908) (4,422)
-------------------------------------------------------------------------------------------------------------------------------
Increase in operating liabilities 6,688 3,979
-------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (1,001) 4,716
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term borrowings 4,039 (3,605)
Proceeds from issuance of term debt 6,451 3,151
Term debt maturities and repurchases (4,512) (3,913)
Collateralized mortgage obligations (8) (71)
Dividends paid (837) (427)
Other capital transactions 212 32
-------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 5,345 (4,833)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets underlying collateralized mortgage obligations 8 73
Purchase of subsidiary (2,200) -
Property, equipment and leasehold improvements, net (426) (258)
-------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (2,618) (185)
-------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,726 (302)
Cash and cash equivalents at January 1, 1,624 2,261
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30, $ 3,350 $ 1,959
-------------------------------------------------------------------------------------------------------------------------------
</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"). It subsequently amended SFAS
133 in June 1999 and June 2000. The Company will adopt these new rules when they
become effective on January 1, 2001. Under the new rules 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
5
<PAGE> 8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
anticipates a significant increase in the complexity of the accounting and
recordkeeping requirements for these hedging activities, but overall it does not
foresee a material impact on its financial position or results of operations
from implementing the new rules. The FASB continues to deliberate potential
changes to the new rules, the effect of which cannot be presently determined.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125 ("SFAS 140"), which is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Other provisions of SFAS 140 are effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company is in the process of evaluating the potential impact of this
new accounting standard.
NOTE 2. RESTRUCTURING CREDIT
During the first and third quarters of 1999, the Company recorded adjustments of
$211 million ($124 million after tax) and $30 million ($18 million after tax),
respectively, to the restructuring reserve relating to the November 1997 merger
of Salomon Inc and Smith Barney Holdings Inc.
The $211 million first quarter adjustment in the reserve related primarily 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.
The $30 million third quarter adjustment related to reductions due to a higher
level of attrition than originally anticipated, abandonment of space on terms
more favorable than anticipated, and anticipated duplicate contract payments
which were avoided due to favorable negotiations.
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 Nine Months
Period ended September 30, 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $696 $538 $2,342 $2,063
Other changes in equity from
nonowner sources 2 (2) (8) (3)
------------------------------------------------------------------------------------------------------------
Total comprehensive income $698 $536 $2,334 $2,060
============================================================================================================
</TABLE>
6
<PAGE> 9
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. PRINCIPAL TRANSACTIONS REVENUES
The following table presents principal transactions revenues by business
activity for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Nine Months
Period ended September 30, 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income $387 $ 47 $1,079 $1,113
Equities 303 243 952 709
Commodities 63 45 206 167
Other 7 (6) 26 22
-----------------------------------------------------------------------------------------------------------
Total principal transactions revenues $760 $329 $2,263 $2,011
===========================================================================================================
</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. Capital
requirements related to SSBH's principal regulated subsidiaries at September 30,
2000 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 $2,224 $1,658
Uniform Net Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $3,339 $ 998
Salomon Brothers AG Germany's Banking Supervisory Authority $ 139 $ 122
----------------------------------------------------------------------------------------------------------------------------------
</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 September 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 September 30, 2000 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------ -----------------------------------
Current Market or Current Market or
Notional Fair Value Notional Fair Value
------------------------ -----------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 104.1 $ - $ - $ 528.1 $ - $ -
Other exchange-issued products:
Equity contracts 7.8 .2 .2 8.4 .3 .3
Fixed income contracts 12.9 - - 1.2 - -
Commodities contracts 2.0 - - 1.2 - -
------------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 126.8 .2 .2 538.9 .3 .3
------------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps,
floors and forward rate agreements:
Swaps 2,716.4 2,752.0
Swap options written 83.3 100.2
Swap options purchased 59.5 84.6
Caps, floors and forward rate agreements 417.0 274.9
------------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps, floors and
forward rate agreements (b) 3,276.2 4.8 6.1 3,211.7 5.5 8.1
------------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 63.7 3.7 3.9 62.6 5.4 6.6
Options and forward contracts on fixed-income securities 525.6 1.4 .7 210.2 .8 1.0
Foreign exchange contracts and options(b) 33.6 - .1 50.1 .3 .3
Commodities contracts 16.4 .1 .1 12.4 .2 .1
------------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,042.3 $10.2 $11.1 $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 $14.4 billion and $4.5 billion at September 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 Nine Months
Period ended September 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest revenues:
Investment Services $ 3,394 $ 2,388 $ 10,214 $ 8,157
Asset Management 319 294 919 833
-------------------------------------------------------------------------------------------------------------------------
Total $ 3,713 $ 2,682 $ 11,133 $ 8,990
=========================================================================================================================
Net interest and dividends:
Investment Services $ 439 $ 394 $ 1,296 $ 1,219
Asset Management (2) (3) (7) (12)
-------------------------------------------------------------------------------------------------------------------------
Total $ 437 $ 391 $ 1,289 $ 1,207
=========================================================================================================================
Income before cumulative effect of change
in accounting principle:
Investment Services $ 600 $ 447 $ 2,077 $ 1,826
Asset Management 96 91 265 252
-------------------------------------------------------------------------------------------------------------------------
Total $ 696 $ 538 $ 2,342 $ 2,078
=========================================================================================================================
</TABLE>
Total assets of the Investment Services and Asset Management segments were
$247.8 billion and $1.5 billion, respectively, at September 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 $696 million for the three months ended
September 30, 2000 (the "2000 Quarter") compared to net income of $538 million
for the three months ended September 30, 1999 (the "1999 Quarter"). Revenues,
net of interest expense, were $4,150 million in the 2000 Quarter compared to
$3,073 million in the 1999 Quarter reflecting increases in all revenue
categories.
For the nine months ended September 30, 2000 (the "2000 Period") the Company
reported net income of $2,342 million compared to net income of $2,063 million
reported for the nine months ended September 30, 1999 (the "1999 Period").
Revenues, net of interest expense, were $12,422 million in the 2000 Period
compared to $10,197 million in the 1999 Period.
Included in the results for the 1999 Quarter and the 1999 Period were credits of
$30 million ($18 million after tax) and $241 million ($142 million after tax),
respectively, 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 Nine Months
Period Ended September 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 992 $ 812 $ 3,318 $ 2,615
Investment banking 986 758 2,717 2,175
Principal transactions 763 329 2,258 2,001
Asset management and administration fees 548 426 1,583 1,194
Other 105 63 338 172
-------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 3,394 2,388 10,214 8,157
-------------------------------------------------------------------------------------------------------------------------
Net interest and dividends 439 394 1,296 1,219
-------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,833 2,782 11,510 9,376
-------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 2,123 1,554 6,138 5,052
Other operating and administrative expenses 761 541 2,147 1,681
Restructuring credit - (30) - (241)
-------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,884 2,065 8,285 6,492
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 949 717 3,225 2,884
-------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 349 270 1,148 1,058
-------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $ 600 $ 447 $ 2,077 $ 1,826
=========================================================================================================================
</TABLE>
The Company's investment services segment reported income of $600 million and
$2,077 million for the 2000 Quarter and 2000 Period, compared to $447 million
and $1,826 million for the 1999 Quarter and 1999 Period. Revenues, net of
interest expense, increased to $3,833 million and $11,510 million in the 2000
Quarter and 2000 Period compared to $2,782 million and $9,376 million in the
1999 Quarter and 1999 Period as a result of increases in all revenue categories.
Commission revenues increased 22% to $992 million in the 2000 Quarter compared
to $812 million in the 1999 Quarter. This increase was primarily the result of
an increase in listed commissions. In the 2000 Period commission revenues
increased 27% to $3,318 million. During the 2000 Period annualized gross
production per financial consultant increased to $526 thousand reflecting the
continued strength of the Private Client business. Also contributing to the
increase in the 2000 Period was an increase in over-the-counter and mutual funds
commissions.
Investment banking revenues increased to $986 million in the 2000 Quarter
compared to $758 million in the 1999 Quarter due primarily to an increase in
merger and acquisition fees. In the 2000 Period, investment banking revenues
increased 25% to $2,717 million. Also contributing to the increase in the 2000
Period was an increase in equity underwriting.
11
<PAGE> 14
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Principal transactions revenues increased to $763 million in the 2000 Quarter
compared to $329 million in the 1999 Quarter due to increases in institutional
fixed income and equities revenues from a weak prior year which also included
the scale back of the Global Arbitrage business. In the 2000 Period principal
transactions revenues increased 13% to $2,258 million. 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 $548
million and $1,583 million in the 2000 Quarter and 2000 Period compared to $426
million and $1,194 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 September 30, 2000 compared to September
30, 1999 causing the corresponding increase in revenue.
Other income increased to $105 million in the 2000 Quarter and $338 million in
the 2000 Period due in part to 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 $439 million and $1,296 million in the
2000 Quarter and 2000 Period compared to $394 million and $1,219 million in the
1999 Quarter and 1999 Period. These increases were primarily a result of
increased margin lending to clients.
Total expenses, excluding interest and the restructuring credit, increased to
$2,884 million in the 2000 Quarter compared to $2,095 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 second quarter of 2000. Total expenses, excluding interest and the
restructuring credit, were $8,285 million in the 2000 Period compared to $6,733
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 Nine Months
Period Ended September 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Asset management and administration fees $300 $267 $863 $764
Other revenue, net 17 24 49 57
-------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 317 291 912 821
-------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 58 54 181 154
Other operating and administrative expenses 101 90 292 253
-------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 159 144 473 407
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 158 147 439 414
-------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 62 56 174 162
-------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $ 96 $ 91 $265 $252
=========================================================================================================================
</TABLE>
The Company's asset management segment revenues, net of interest expense, rose
9% to $317 million and 11% to $912 million in the 2000 Quarter and 2000 Period
compared to $291 million and $821 million in the 1999 Quarter and 1999 Period.
The primary revenue for the asset management segment is asset management and
administration fees, which were $300 million and $863 million in the 2000
Quarter and 2000 Period, compared to $267 million and $764 million in the 1999
Quarter and 1999 Period. The overall increase in fees reflects broad growth in
all asset management products. Assets under management for the segment reached
$241.8 billion at September 30, 2000, an increase of 13% from September 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 $159 million and $473 million in the 2000
Quarter and 2000 Period compared to $144 million and $407 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 September 30, 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Money market funds $ 78.8 $ 64.6
Mutual funds 69.2 60.3
Managed accounts 82.9 76.3
Unit investment trusts held in client accounts 10.9 12.3
-----------------------------------------------------------------------------------------------
Salomon Smith Barney Asset Management 241.8 213.5
Financial Consultant managed accounts * 62.2 31.6
Consulting Group and internally managed assets * 140.2 113.0
-----------------------------------------------------------------------------------------------
Total assets under fee-based management (1) $ 444.2 $ 358.1
===============================================================================================
</TABLE>
* Related results included in Investment Services segment.
(1) Includes jointly managed assets of $60.3 billion and $43.6 billion as of
September 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 $249.3 billion at September 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 $169.2 billion at
September 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 $22.7 billion at September 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 September 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
September 30, 2000, this requirement was exceeded by approximately $3.9 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 September 30, 2000 and
December 31, 1999. The VAR relating to non-trading instruments has been excluded
from this analysis.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
RISK EXPOSURES September 30, Third Quarter Third Quarter Third Quarter December 31,
(DOLLARS IN MILLIONS) 2000 2000 Average 2000 High 2000 Low 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate $31 $27 $32 $20 $20
Equities 2 8 17 2 6
Commodities 13 13 14 11 8
Currency 2 2 8 1 -
Diversification Benefit (16) (19) N/A N/A (11)
------------------------------------------------------------------------------------------------------------------------------
Total $32 $31 $37 $23 $23
==============================================================================================================================
</TABLE>
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at September 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 September 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; the impact of the implementation of new accounting
rules; 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 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 99.1 to this Form 10-Q and
incorporated by reference herein, and in the third 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. In September 2000, the court denied plaintiffs' motion to
dismiss SSB's counterclaims based on indemnification and contribution.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
On July 19, 2000, SSBH filed a Current Report on Form 8-K, dated July, 2000,
reporting under Item 5 thereof the results of the Company's operations for the
three month and six month periods ended June 30, 2000 and 1999.
No other reports on Form 8-K were filed during the third quarter of 2000;
however, on October 17, 2000, SSBH filed a Current Report on Form 8-K, dated
October 17, 2000, reporting under Item 5 thereof the results of its operations
for the three and nine month periods ended September 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+ 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).
99.02+ Third 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: November 13, 2000 By: /s/ Barbara Yastine
----------------------------------
Barbara Yastine
Chief Financial Officer
By: /s/ Michael J. Day
----------------------------------
Michael J. Day
Controller
21
