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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
----------------
COMMISSION FILE NUMBER 1-4346
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SALOMON SMITH BARNEY HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW YORK 11-2418067
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
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388 GREENWICH STREET, NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 816-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
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 ____
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
BECAUSE THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC., NONE OF
THE REGISTRANT'S OUTSTANDING VOTING STOCK IS HELD BY NONAFFILIATES OF THE
REGISTRANT. AS OF THE DATE HEREOF, 1,000 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.01 PAR VALUE, WERE ISSUED AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
NOW AVAILABLE ON THE WEB @ www.citigroup.com
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
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9 -1/2% TRUST PREFERRED STOCK (SM) (TRUPS (SM)) UNITS OF NEW YORK STOCK EXCHANGE
SUBSIDIARY TRUST (AND REGISTRANT'S GUARANTY WITH RESPECT
THERETO)
6.25% EXCHANGEABLE NOTES DUE 2001 NEW YORK STOCK EXCHANGE
6 5/8% NOTES DUE JUNE 1, 2000 NEW YORK STOCK EXCHANGE
SMITH BARNEY S&P 500 EQUITY LINKED NOTES DUE AUGUST 13, 2001 NEW YORK STOCK EXCHANGE AND
CHICAGO BOARD OPTIONS EXCHANGE
SMITH BARNEY S&P 500 EQUITY LINKED NOTES DUE MARCH 11, 2002 CHICAGO BOARD OPTIONS EXCHANGE
NIKKEI 225 INDEX SECURITIES DUE AUGUST 20, 2002 NEW YORK STOCK EXCHANGE AND
CHICAGO BOARD OPTIONS EXCHANGE
SENIOR FLOATING INTEREST NOTES (FINS) DUE 2003 (MEDIUM-TERM NEW YORK STOCK EXCHANGE
NOTES, SERIES D)
RESETTABLE EXCHANGEABLE STANDARD & POOR'S 500 INDEX NOTES AMERICAN STOCK EXCHANGE
(SPINS) DUE 2001
7.200% TRUST PREFERRED SECURITIES (TRUPS(R)) OF SUBSIDIARY NEW YORK STOCK
EXCHANGE TRUST (AND REGISTRANT'S GUARANTY WITH RESPECT THERETO)
EQUITY LINKED NOTES BASED UPON THE DOW JONES INDUSTRIAL CHICAGO BOARD OPTIONS EXCHANGE
AVERAGE (SM) DUE SEPTEMBER 6, 2005
TARGETED GROWTH ENHANCED SECURITIES (TARGETS (SM)) OF CHICAGO BOARD OPTIONS EXCHANGE
SUBSIDIARY TRUST
CALL WARRANTS ON THE 1998 TEN+(SM) INDEX CHICAGO BOARD OPTIONS EXCHANGE
PRINCIPAL-PROTECTED EQUITY LINKED NOTES BASED UPON THE S&P AMERICAN STOCK EXCHANGE
500(R) INDEX DUE 2005
PRINCIPAL-PROTECTED EQUITY LINKED NOTES BASED UPON THE S&P CHICAGO BOARD OPTIONS EXCHANGE
500(R) INDEX DUE 2005
CALLABLE PRINCIPAL-PROTECTED EQUITY LINKED NOTES BASED UPON CHICAGO BOARD OPTIONS EXCHANGE
THE S&P 500(R) INDEX DUE 2006
TARGETED GROWTH ENHANCED SECURITIES (TARGETS (SM)) OF CHICAGO BOARD OPTIONS EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF LUCENT
TECHNOLOGIES INC.
CALLABLE EQUITY LINKED NOTES BASED UPON THE THESTREET.COM AMERICAN STOCK EXCHANGE
INTERNET SECTOR INDEX DUE 2006
0.25% CASH EXCHANGEABLE NOTES LINKED TO A BASKET OF AMERICAN STOCK EXCHANGE
TELECOMMUNICATIONS STOCKS
TARGETED GROWTH ENHANCED SECURITIES (TARGETS (SM)) OF CHICAGO BOARD OPTIONS EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON
STOCK OF MCI WORLDCOM, INC.
TARGETED GROWTH ENHANCED SECURITIES (TARGETS (SM)) OF CHICAGO BOARD OPTIONS EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF AMGEN
INC.
CALL WARRANTS ON THE 1999 TEN+(SM) INDEX CHICAGO BOARD OPTIONS EXCHANGE
TARGETED GROWTH ENHANCED SECURITIES (TARGETS (SM)) OF CHICAGO BOARD OPTIONS EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF SUN
MICROSYSTEMS, INC.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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SALOMON SMITH BARNEY HOLDINGS INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
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TABLE OF CONTENTS
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FORM 10-K
ITEM NUMBER PAGE
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PART I
1. Business.................................................................................................1
2. Properties..............................................................................................11
3. Legal Proceedings.......................................................................................11
4. Omitted Pursuant to General Instruction I
PART II
5. Market For Registrant's Common Equity And Related Stockholder Matters...................................14
6. Omitted Pursuant to General Instruction I
7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................................................14
7A. Quantitative And Qualitative Disclosures About Market Risk..............................................34
8. Financial Statements And Supplementary Data.............................................................34
9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure....................................................................................34
PART III
10-13 Omitted Pursuant to General Instruction I
PART IV
14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K........................................35
Exhibit Index...........................................................................................37
Signatures..............................................................................................36
Index to Consolidated Financial Statements and Schedules...............................................F-1
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PART I
ITEM 1. BUSINESS.
Salomon Smith Barney Holdings Inc. ("SSBH") operates through its subsidiaries in
two business segments: (i) Investment Services and (ii) Asset Management.
Salomon Smith Barney provides investment banking, securities and commodities
trading, capital raising, asset management, advisory, research and brokerage
services to its customers, other financial services and executes proprietary
trading strategies on its own behalf. As used in this Form 10-K, unless the
context otherwise requires, "Salomon Smith Barney" and the "Company" refer to
SSBH and its consolidated subsidiaries.
In February 1999, the Company and The Nikko Securities Co., Ltd ("Nikko") formed
a joint venture. Nikko Salomon Smith Barney Limited ("Nikko Salomon Smith
Barney") provides investment banking, sales and trading and research services
for corporate and institutional clients in Japan and other foreign
jurisdictions. Nikko Salomon Smith Barney is headquartered in Tokyo and works
closely with staff in Salomon Smith Barney entities globally that cover the
Japanese institutional securities business. Nikko Salomon Smith Barney is owned
51% by Nikko and 49% by the Company.
In January 2000, the Company agreed to acquire the global investment banking
business and related assets of Schroders PLC ("Schroders"), including all
corporate finance, financial markets and securities activities. The combined
European operations of the Company will be known as Schroders Salomon Smith
Barney. Outside of Europe, Schroders' investment banking function will be
integrated into Salomon Smith Barney. In the U.S., Schroders' private clients
services team will join Salomon Smith Barney. Completion of the transaction is
subject to Schroders shareholder approval, various regulatory approvals and
other customary closing conditions.
Citigroup Inc. ("Citigroup"), SSBH's parent, is a diversified holding company
whose businesses provide a broad range of financial services to consumer and
corporate customers around the world. Citigroup's activities are conducted
through Global Consumer, Global Corporate and Investment Bank, Asset Management,
and Investment Activities. The periodic reports of Citigroup provide additional
business and financial information concerning that company and its consolidated
subsidiaries.
The principal offices of the Company are located at 388 Greenwich Street, New
York, New York 10013, telephone number (212) 816-6000. SSBH was incorporated in
New York in 1977 and is the successor to Salomon Smith Barney Holdings Inc., a
Delaware corporation, following a statutory merger effective on July 1, 1999 for
the purpose of changing its state of incorporation.(1)
(1) Certain items in this Form 10-K, including certain matters discussed under
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" (the "MD&A"), are forward-looking statements. The matters
referred to in such statements could be affected by the risks and uncertainties
involved in the Company's business, including the effect of economic and market
conditions, the level and volatility of interest rates and currency values, the
impact of current or pending legislation and regulation and the other risks and
uncertainties detailed in "Outlook" in the MD&A.
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INVESTMENT SERVICES
Salomon Smith Barney is a global, full-service investment banking and securities
brokerage firm. Salomon Smith Barney provides a full range of financial
advisory, research and capital raising services to corporations, governments and
individuals. The firm's over 11,300 Financial Consultants, located in 476
offices across the United States, service approximately 6.6 million client
accounts, representing approximately $965 billion in assets.
INVESTMENT BANKING AND TRADING
Salomon Smith Barney's global investment banking services encompass a full range
of capital market activities, including the underwriting and distribution of
debt and equity securities for United States and foreign corporations and for
state, local and other governmental and government sponsored authorities. The
Company frequently acts as an underwriter or private placement agent in
corporate and public securities offerings and provides alternative financing
options. It also provides financial advice to investment banking clients on a
wide variety of transactions including mergers and acquisitions, divestitures,
leveraged buyouts, financial restructurings and a variety of cross-border
transactions.
Salomon Smith Barney executes securities and commodity futures brokerage
transactions on all major United States securities and futures exchanges and
major international exchanges on behalf of customers and for its own account.
The Company's significant capital base and extensive distribution capabilities
also enable it to provide liquidity to investors across a broad range of markets
and financial instruments, and to execute capital-intensive transactions on
behalf of its customers and for its own account. It executes transactions in
large blocks of exchange-listed stocks, usually with institutional investors,
and often acts as principal to facilitate these transactions. It makes markets,
buying and selling as principal, in over 1,335 equity securities traded on the
NASDAQ system. Additionally, the firm makes markets in convertible and preferred
stocks, warrants and other equity securities.
Salomon Smith Barney also engages in principal transactions in fixed income
securities. Through its subsidiaries, it is a major dealer in government
securities in New York, London, Frankfurt and Tokyo. Salomon Smith Barney makes
inter-dealer markets and trades as principal in corporate debt and equity
securities, including those of United States and foreign corporate issuers,
United States and foreign government and agency securities, mortgage-related
securities, whole loans, municipal and other tax-exempt securities, commercial
paper and other money market instruments as well as emerging market debt
securities and foreign exchange. It also enters into repurchase and reverse
repurchase agreements to provide financing for itself and its customers, and
engages in securities lending and borrowing transactions.
Salomon Smith Barney is a major participant in the over-the-counter ("OTC")
market for derivative instruments involving a wide range of products, including
interest rate, equity and currency swaps, caps and floors, options, warrants and
other derivative products. It also creates and sells various types of structured
securities. The Company's ability to execute transactions is
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enhanced by its established presence in international capital markets, its use
of information technology and quantitative risk management tools, its research
capabilities, and its knowledge and experience in various derivative markets.
Salomon Smith Barney also trades for its own account in various markets
throughout the world, and uses many different strategies involving a broad
spectrum of financial instruments and derivative products. Historically, these
trading strategies have primarily involved the fixed income securities of the
G-7 countries, but they also involve the trading of fixed income securities
globally (including emerging markets) as well as currencies and equities.
Because these trading strategies are often designed with time horizons of one
year or more, profits or losses reported in interim periods can be volatile and
may not reflect the ultimate success or failure of these strategies. For a
discussion of certain of the risks involved in Salomon Smith Barney's securities
trading and investment activities, and the firm's strategies to manage these
risks, see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RETAIL BROKERAGE AND RELATED SERVICES
The Private Client Division provides investment advice and financial planning
and brokerage services for almost six million client accounts, primarily through
the network of Salomon Smith Barney Financial Consultants. A significant portion
of Salomon Smith Barney's revenues is generated from the commissions that it
earns as a broker for its clients in the purchase and sale of securities.
Financing customers' securities transactions through secured margin lending
provides Salomon Smith Barney with an additional source of income. While credit
losses may arise as a result of this financing activity, to date such losses
have not been material. The Financial Consultants also sell proprietary mutual
funds and a large number of mutual funds sponsored and managed by others, and
Salomon Smith Barney receives commissions and other sales and services revenues
from these activities.
Qualified Salomon Smith Barney Financial Consultants also offer individual
insurance products, primarily variable annuities. Some of these products, such
as Travelers Life and Annuity's Vintage Life(R) and Vintage Annuity(R), single
premium variable annuity and universal life products, 401(k) Blueprint(R) and
Travelers Target Maturity(R), a market value-adjusted fixed annuity, are
manufactured by other subsidiaries of Citigroup.
The Company's Corporate Client Group provides retirement plan services and stock
plan services to a wide variety of corporations. These services involve the
management of defined benefit and defined contribution plan products such as
401(k) plans, as well as the provision of administrative and brokerage services
for sponsors of and participants in stock option and other stock-based benefit
plans.
In addition to more traditional brokerage services, Salomon Smith Barney
Financial Consultants also deliver the programs and services offered by Salomon
Smith Barney's Consulting Group ("CG"). CG sponsors a number of different "wrap
fee" programs, in which CG and Salomon Smith Barney typically provide a range of
services, such as an analysis of the client's financial
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situation, investment needs and risk tolerance; recommendations and ongoing
monitoring of the performance and suitability of the investment manager(s)
retained; and securities execution, custody, reporting and recordkeeping. In
such programs, the client generally pays a single bundled fee for these
services. CG also offers "wrap fee" programs in which separate accounts are
managed by selected, specially trained Salomon Smith Barney Financial
Consultants. Assets in the Financial Consultant managed programs at December 31,
1999, totaled $27.4 billion, as compared to $16.5 billion and $11.6 billion at
year-end 1998 and 1997, respectively.
In addition, CG provides traditional investment management consulting services
to institutions, including assisting clients in formulating investment
objectives and policies and in selecting investment management firms for the
day-to-day management of client portfolios. As of December 31, 1999, the Company
provided consulting services with respect to externally managed client assets
aggregating approximately $68.9 billion, excluding the TRAK(R) program described
below, as compared to approximately $59.1 billion at December 31, 1998 and
approximately $49.2 billion at December 31, 1997.
Salomon Smith Barney's TRAK(R) program provides clients with non-discretionary
asset allocation advice based on the client's identification of investment
objectives and risk tolerances. TRAK(R) clients include both individuals and
institutions, including participant-directed 401(k) plans. Clients can choose to
allocate assets among the CG Capital Markets funds, a series of 17 mutual funds
each corresponding to a particular asset class and investment style, or from
among the selected fund offerings of 42 no-load or load-waived mutual fund
families (including Smith Barney proprietary funds) corresponding to the same
asset class and investment style criteria. At December 31, 1999, TRAK(R) assets
exceeded $14.1 billion, as compared to approximately $12.8 billion at December
31, 1998 and approximately $10.5 billion at December 31, 1997. Salomon Smith
Barney also offers a separate offshore TRAK(R) program to non-resident alien
clients, which includes client investment in a series of asset class/investment
style funds domiciled outside the United States.
TRUST SERVICES
Certain subsidiaries of Citigroup are chartered as trust companies and provide a
full range of fiduciary services with a particular emphasis on personal trust
services. Another Citigroup subsidiary offers a broad range of trustee services
for qualified retirement plans, with particular emphasis on the 401(k) plan
market. Each of these trust companies is subject to supervision by either
federal or state banking authorities, as appropriate based upon the jurisdiction
in which such trust company is chartered, and uses the distribution network of
Salomon Smith Barney to market its services. Salomon Smith Barney provides
certain advisory and support services to the trust companies and receives fees
for such services. Certain subsidiaries of SSBH also operate a private trust
services business that is licensed as a bank and trust company in the Cayman
Islands.
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PHIBRO
Phibro conducts a global commodities dealer business through its principal
offices in Westport (Connecticut), London and Singapore. Commodities traded
include crude oil, refined oil products, natural gas, electricity, metals and
various soft commodities. Phibro makes extensive use of futures markets and is a
participant in the OTC derivatives market. Its principal competitors are major
integrated oil companies, other commodity trading companies, certain investment
banks and other financial institutions.
As a dealer, Phibro's strategy is to focus on taking positions in commodities on
a longer-term horizon while also engaging in counterparty flow business on a
short-term basis. Phibro's operating results are subject to a high degree of
volatility, particularly on a quarterly basis, due to the predominance of
directional positions in commodities that have a longer-term horizon until
realization. Thus, results are better evaluated over the longer term.
OPERATIONS BY GEOGRAPHIC AREA
For a summary of the Company's operations by geographic area, see Note 7 of
Notes to Consolidated Financial Statements.
DERIVATIVES AND RISK MANAGEMENT
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. The Company enters into various
bilateral financial contracts involving future settlement, which are based upon
a predetermined principal or par value (referred to as the "notional" amount).
Such instruments include swaps, swap options, caps and floors, futures
contracts, forward purchase and sale agreements, forward currency contracts,
option contracts and warrants. Derivatives activities, like Salomon Smith
Barney's other ongoing business activities, give rise to market, credit and
operational risks, although the Company also uses derivative instruments to
manage these risks in its other businesses. For a more complete discussion of
Salomon Smith Barney's use of derivative financial instruments and certain of
the related risks, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1, 6, 9, 17 and 18 of
Notes to Consolidated Financial Statements.
COMPETITION
The businesses in which Salomon Smith Barney is engaged are highly competitive.
The principal factors affecting competition in the investment banking and
brokerage industry are the quality and ability of professional personnel and the
relative prices of services and products offered. In addition to competition
from other investment banking firms, both domestic and international, and
securities brokerage companies and discount and on-line securities brokerage
operations, including regional firms in the United States, there has been
increasing competition from other sources, such as commercial banks, insurance
companies and other major companies
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that have entered the investment banking and securities brokerage industry, in
many cases through acquisitions. Certain of those competitors may have greater
capital and other resources than the Company.
ASSET MANAGEMENT
The Asset Management segment is comprised of two primary asset management
business platforms: Salomon Brothers Asset Management and the Smith Barney Asset
Management division of Salomon Smith Barney Inc. These companies offer a broad
range of asset management products and services from global investment centers,
including mutual funds, closed-end funds, managed accounts and unit investment
trusts.
Clients include private and public retirement plans, endowments, foundations,
banks, central banks, insurance companies, other corporations, government
agencies, high net worth and other individuals. Client relationships may be
introduced through the cross-marketing and distribution opportunities within the
Citigroup structure, through Asset Management's own sales force or through
independent sources.
The Company receives ongoing fees, generally stated as a percentage of the
client's assets, from asset management clients. At December 31, 1999, client
assets managed by Salomon Smith Barney Asset Management were approximately
$213.2 billion, as compared to approximately $186.0 billion at December 31, 1998
and approximately $152.5 billion at December 31, 1997. These amounts include
separately managed accounts with assets of approximately $79.5 billion at
December 31, 1999, $68.4 billion at December 31, 1998 and $54.2 billion at
December 31, 1997.
The following table shows the aggregate assets in, and number of, mutual funds
managed by the Company at December 31 for each of the last three years.
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MUTUAL FUND ASSETS UNDER MANAGEMENT
DECEMBER 31,
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1999 1998 1997
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(Dollars in billions)
NO. OF NO. OF NO. OF
FUNDS ASSETS FUNDS ASSETS FUNDS ASSETS
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Money market 16 $65.4 14 $58.6 15 $46.6
Mutual funds 138 62.9 128 55.4 114 48.6
Annuities 40 5.4 32 3.7 26 3.2
-- --- -- --- -- ---
Total 194 $133.7 174 $117.7 155 $98.4
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Smith Barney Asset Management
At December 31, 1999, Smith Barney Asset Management sponsored 76 mutual funds
(open-end investment companies), including taxable and tax-exempt money market
funds, equity funds, taxable fixed income funds and tax-exempt fixed income
funds sold primarily through Salomon Smith Barney Financial Consultants and the
Primerica Financial Services sales force, affiliates of the Company. Smith
Barney Asset Management also serves as the primary investment manager to 12
closed-end investment companies, the shares of which are listed for trading on
one or more securities exchanges. In addition, at December 31, 1999, Smith
Barney Asset Management managed 34 mutual fund portfolios serving as funding
vehicles for variable annuity contracts, including certain variable annuities
and other individual products of the Travelers Life and Annuity unit of
Citigroup, which are sold by Salomon Smith Barney Financial Consultants. Smith
Barney Asset Management also sponsors and manages 19 mutual funds domiciled
outside the United States, which are offered to Salomon Smith Barney's
non-resident alien client base as well as to the general public.
Smith Barney Asset Management also provides separate account discretionary and
non-discretionary investment management services to a wide variety of individual
and institutional clients, including private and public retirement plans,
endowments, foundations, banks, central banks, insurance companies, other
corporations and governmental agencies. Client relationships may be introduced
either through Salomon Smith Barney's network of Financial Consultants or
independently of that network.
Smith Barney Asset Management also sponsors and oversees the portfolios of a
large number of unit investment trusts, which are unmanaged investment
companies, the portfolios of which are generally static. Such unit investment
trusts may hold domestic and foreign equity and debt securities, including
municipal bonds. Certain trusts are sponsored and overseen solely by Smith
Barney Asset Management; other trusts are jointly sponsored through a syndicate
of major broker-dealers of which Smith Barney is a member. At December 31, 1999,
outstanding unit trust assets held by Smith Barney's clients were approximately
$13.8 billion, as compared to approximately $13.2 billion at December 31, 1998
and approximately $11.8 billion at December 31, 1997.
Salomon Brothers Asset Management
Salomon Brothers Asset Management provides separate account discretionary and
non-discretionary investment management services to pension funds, investment
companies, endowments, foundations, banks, central banks, insurance companies,
other corporations, governmental agencies and individuals. Client relationships
may be introduced through traditional independent consultant evaluations as well
as through the individual and institutional client relationships of the
Company's broker-dealer subsidiaries.
At December 31, 1999, Salomon Brothers Asset Management sponsored 18 mutual
funds, including taxable and tax-exempt money market funds, equity funds,
taxable fixed income funds and tax-exempt fixed income funds sold primarily
through dealer agreements with a variety of
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national and regional brokerage firms, including Salomon Smith Barney Inc.
Salomon Brothers Asset Management serves as investment manager to these mutual
funds, as well as to 6 mutual fund portfolios serving as funding vehicles for
variable annuity contracts as well as to 11 closed-end investment companies, the
shares of which are listed for trading on one or more securities exchanges.
Salomon Brothers Asset Management also manages 18 mutual funds domiciled outside
the United States, which are offered to Salomon Smith Barney's non-resident
alien client base as well as to the general public.
COMPETITION
Competitors of the mutual funds and asset management groups include a large
number of mutual fund management and sales companies, asset management firms and
banks. Competition in mutual fund sales and investment management is based on
investment performance, service to clients and product design.
OTHER INFORMATION
REGULATION
Certain of SSBH's subsidiaries are subject to various securities and commodities
regulations and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the jurisdictions in which they operate. Some
subsidiaries are registered as broker-dealers and as investment advisers with
the U.S. Securities and Exchange Commission (the "SEC") and as futures
commission merchants and as commodity pool operators with the Commodity Futures
Trading Commission ("CFTC"). Certain of SSBH's subsidiaries are also members of
the New York Stock Exchange, Inc. (the "NYSE") and other principal United States
securities exchanges, as well as the National Association of Securities Dealers,
Inc. ("NASD") and the National Futures Association ("NFA"), a not-for-profit
membership corporation designated as a registered futures association by the
CFTC. The Company's primary broker-dealer subsidiaries, Salomon Smith Barney
Inc. ("SSB") and The Robinson-Humphrey Company, LLC ("R-H"), are registered as
broker-dealers in all 50 states, the District of Columbia and Puerto Rico, and
in addition are registered as investment advisers in certain states that require
such registration. SSB is also a registered broker-dealer in Guam. SSB is also a
reporting dealer to the Federal Reserve Bank of New York and a member of the
principal United States futures exchanges. SSB and R-H are subject to extensive
regulation, primarily for the benefit of their customers, including minimum
capital requirements, which are promulgated and enforced by, among others, the
SEC, the CFTC, the NFA, the NYSE, various self-regulatory organizations of which
these subsidiaries are members and the securities administrators of the 50
states, the District of Columbia and Puerto Rico and, in the case of SSB, Guam.
The SEC and the CFTC also require certain registered broker-dealers (including
SSB) to maintain records concerning certain financial and securities activities
of affiliated companies that may be material to the broker-dealer, and to file
certain financial and other information regarding such affiliated companies.
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Salomon Smith Barney's operations abroad are conducted through various
subsidiaries and affiliates, principally Salomon Brothers International Limited
("SBIL") in London, Nikko Salomon Smith Barney (a joint venture) in Tokyo and
Salomon Brothers AG ("SBAG") in Frankfurt. Its activities in the United Kingdom,
which include investment banking, trading, brokerage and asset management
services, are subject to the Financial Services Act 1986, which regulates
organizations that conduct investment businesses in the United Kingdom
(including imposing capital and liquidity requirements), and to the rules of the
Securities and Futures Authority and the Investment Management Regulatory
Organisation. Nikko Salomon Smith Barney is a registered foreign securities
company in Japan and, as such, its activities in Japan are subject to Japanese
law applicable to non-Japanese securities firms and are regulated principally by
the Japanese Ministry of Finance and Financial Supervisory Agency. SBAG is a
German bank, principally engaged in securities trading and investment banking
and is regulated by Germany's Banking Supervisory Authority. These and other
subsidiaries of SSBH are also members of various securities and commodities
exchanges and are subject to the rules and regulations of those exchanges.
Salomon Smith Barney's other offices are also subject to the jurisdiction of
local financial services regulatory authorities.
In connection with the mutual funds business, SSBH and its subsidiaries must
comply with regulations of a number of regulatory agencies and organizations,
including the SEC, the NASD and regulatory agencies in the United Kingdom and
Germany. SSBH is the direct or indirect parent of investment advisers registered
and regulated under the Investment Advisers Act of 1940 and the Investment
Company Act of 1940. Under those Acts, the advisory contracts between SSBH's
investment adviser subsidiaries and the mutual funds they serve ("Affiliated
Funds") would automatically terminate upon an assignment of such contracts by
the investment adviser. Such an assignment would be presumed to have occurred if
any party were to acquire more than 25% of Citigroup's voting securities. In
that event, consent to the assignment from the shareholders of the Affiliated
Funds involved would be needed for the advisory relationships to continue. In
addition, the Company's registered investment advisers and the Affiliated Funds
are subject to certain restrictions in their dealings with each other. For
example, SSB may act as broker to an Affiliated Fund in a transaction involving
an exchange-traded security only when that fund maintains procedures that
govern, among other things, the execution price of the transaction and the
commissions paid; it may not, however, conduct principal transactions with an
Affiliated Fund. Further, an Affiliated Fund may acquire securities during the
existence of an underwriting where SSB is a principal underwriter only in
certain limited situations.
SSB and R-H are members of the Securities Investor Protection Corporation
("SIPC"), which, in the event of liquidation of a broker-dealer, provides
protection for customers' securities accounts held by the firm of up to $500,000
for each eligible customer, subject to a limitation of $100,000 for claims for
cash balances. In addition, SSBH has purchased additional coverage of up to $150
million for eligible customers, approximately $50 million of which is from a
subsidiary of Citigroup.
Citigroup, SSBH's parent, is a bank holding company subject to the Bank Holding
Company Act of 1956 (the "BHCA"). For a discussion of the BHCA and its
application to the Company, see Note 2 of Notes to Consolidated Financial
Statements.
9
<PAGE> 13
CAPITAL REQUIREMENTS
As registered broker-dealers, SSB and R-H are subject to the SEC's net capital
rule, Rule 15c3-1 (the "Net Capital Rule"), promulgated under the Exchange Act.
These companies compute net capital under the alternative method of the Net
Capital Rule, which requires the maintenance of minimum net capital, as defined.
A member of the NYSE may be required to reduce its business if its net capital
is less than 4% of aggregate debit balances (as defined) and may also be
prohibited from expanding its business or paying cash dividends if resulting net
capital would be less than 5% of aggregate debit balances. Furthermore, the Net
Capital Rule does not permit withdrawal of equity or subordinated capital if the
resulting net capital would be less than 5% of such debit balances.
The Net Capital Rule also limits the ability of broker-dealers to transfer large
amounts of capital to parent companies and other affiliates. Under the Net
Capital Rule, equity capital cannot be withdrawn from a broker-dealer without
the prior approval of the SEC in certain circumstances, including when net
capital after the withdrawal would be less than (i) 120% of the minimum net
capital required by the Net Capital Rule, or (ii) 25% of the broker-dealer's
securities position "haircuts," i.e., deductions from capital of certain
specified percentages of the market value of securities to reflect the
possibility of a market decline prior to disposition. In addition, the Net
Capital Rule requires broker-dealers to notify the SEC and the appropriate
self-regulatory organization two business days before a withdrawal of excess net
capital if the withdrawal would exceed the greater of $500,000 or 30% of the
broker-dealer's excess net capital, and two business days after a withdrawal
that exceeds the greater of $500,000 or 20% of excess net capital. Finally, the
Net Capital Rule authorizes the SEC to order a freeze on the transfer of capital
if a broker-dealer plans a withdrawal of more than 30% of its excess net capital
and the SEC believes that such a withdrawal would be detrimental to the
financial integrity of the firm or would jeopardize the broker-dealer's ability
to pay its customers.
Compliance with the Net Capital Rule could limit those operations of the Company
that require the intensive use of capital, such as underwriting and trading
activities and the financing of customer account balances, and also could
restrict SSBH's ability to withdraw capital from its broker-dealer subsidiaries,
which in turn could limit SSBH's ability to pay dividends and make payments on
its debt.
At December 31, 1999, SSB had net capital, computed in accordance with the Net
Capital Rule, of $3.204 billion, which exceeded the minimum net capital
requirement by $2.732 billion. For further discussion of capital requirements
related to the Company's principal regulated subsidiaries, see Note 12 of Notes
to Consolidated Financial Statements.
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of the Company
and its subsidiaries is dependent upon a single customer or group of customers,
the loss of any one of which would have a materially adverse effect on the
Company, and no one customer or group of affiliated customers accounts for as
much as 10% of the Company's consolidated revenues.
10
<PAGE> 14
At December 31, 1999, the Company had approximately 38,798 full-time and 1,488
part-time employees.
SOURCE OF FUNDS
For a discussion of the Company's sources of funds and maturities of the
long-term debt of the Company and its subsidiaries, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," and Notes 8 and 9 of Notes to Consolidated
Financial Statements.
TAXATION
For a discussion of tax matters affecting the Company and its operations, see
Note 14 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 388 Greenwich Street,
New York, New York. The Company leases two buildings located at 388 and 390
Greenwich Street, New York, totaling approximately 2,300,000 square feet. Theses
leases, which expire in 2003, include a purchase option with respect to the
related properties. The Company also leases approximately 1,018,000 square feet
of office space at Seven World Trade Center in New York City, through 2010.
Most of the Company's other offices are located in other leased premises, the
leases for which expire at various times. The Company believes that these
facilities are adequate for the purposes for which they are used and are well
maintained. For further information concerning leases, see Note 10 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which SSBH or its subsidiaries
is a party or to which any of their property is subject.
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
11
<PAGE> 15
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.
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
12
<PAGE> 16
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.
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.
SSBH and various subsidiaries have also been named as defendants in various
matters incident to and typical of the businesses in which they are engaged.
These include numerous civil actions, arbitration proceedings and other matters
in which SSBH's broker-dealer subsidiaries have been named, arising in the
normal course of business out of activities as a broker and dealer in
securities, as an underwriter of securities, as an investment banker or
otherwise. In the opinion of SSBH's management, none of these actions is
expected to have a material adverse effect on the results of operations,
consolidated financial condition or liquidity of SSBH and its subsidiaries.
13
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to General Instruction I of Form 10-K, the information required by Item
4 is omitted.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding common stock of the Company is owned by Citigroup.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction I of Form 10-K, the information required by Item
6 is omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In 1999, the Company recorded net income of $2,812 million compared to $818
million and $1,145 million for the years ended December 31, 1998 and 1997,
respectively. Revenues, net of interest expense, were $13.8 billion in 1999
compared to $9.2 billion and $10.9 billion in 1998 and 1997, respectively.
Net income for 1999 includes the cumulative effect of change in accounting
principle of $15 million (net of tax benefit of $12 million) which relates to
the write-off of certain capitalized closed-end fund distribution costs in
connection with the adoption of AICPA Statement of Position 98-5, Reporting on
the Cost of Start-Up Activities. This charge has not been allocated to either of
the Company's operating segments.
14
<PAGE> 18
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Following is a discussion of the results of operations of the Company's two
operating segments, Investment Services and Asset Management.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
INVESTMENT SERVICES
-------------------------------------------------------------------------------------------------------
Dollars in millions
For the year ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions $3,630 $3,202 $2,956
Investment banking 2,969 2,281 2,082
Principal transactions 2,544 (116) 2,500
Asset management and administration fees 1,620 1,308 997
Other 274 172 119
-------------------------------------------------------------------------------------------------------
Total noninterest revenues 11,037 6,847 8,654
-------------------------------------------------------------------------------------------------------
Net interest and dividends 1,610 1,456 1,533
-------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 12,647 8,303 10,187
-------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 6,637 5,672 5,891
Other operating and administrative expenses 2,313 2,006 1,983
Restructuring (credit) charge, net (243) (274) 838
-------------------------------------------------------------------------------------------------------
Total noninterest expense 8,707 7,404 8,712
-------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 3,940 899 1,475
-------------------------------------------------------------------------------------------------------
Provision for income taxes 1,449 333 538
-------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $2,491 $566 $937
-------------------------------------------------------------------------------------------------------
</TABLE>
The Company's investment services segment recorded income in 1999 of $2.49
billion compared to $566 million and $937 million for the years ended December
31, 1998 and 1997, respectively.
Revenues, net of interest expense, in 1999 increased 52% to $12.6 billion
reflecting increases in all categories of revenue. Revenues, net of interest
expense, in 1998 declined 18% to $8.3 billion, primarily due to a decline in
principal transaction revenue from fixed income and global arbitrage activities
offset to an extent by increases in commissions, asset management and
administration fees and investment banking revenues.
15
<PAGE> 19
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Commission revenues increased 13% in 1999 to $3.6 billion, from $3.2 billion in
1998 and $3.0 billion in 1997. These increases reflect growth in sales of listed
and over-the-counter ("OTC") securities.
Investment banking revenues were $2.97 billion in 1999 compared to $2.28 billion
in 1998 and $2.08 billion in 1997. The increase in 1999 reflects growth in
equity and high grade debt underwriting and merger and acquisition fees. The
increase in 1998 reflects revenue growth in unit trust, public finance, and high
grade debt underwritings, and mergers and acquisition fees. This was offset
somewhat by a decline in equity underwritings. Investment banking revenues in
1998 were favorably impacted by an increase in private placement fees, offset by
a decline in high yield underwritings.
Principal transactions increased to $2.54 billion in 1999 as the result of
increases in institutional global fixed income and global equities. Principal
transaction revenues declined to a loss of ($116) million in 1998. Decreases in
fixed income trading results include losses due to risk reductions in the U.S.
fixed income arbitrage business, and losses in other global arbitrage. The 1998
decreases were offset to an extent by an increase in equity trading results. In
1998, fixed income trading results were adversely impacted by significant
dislocations in the global fixed income markets, including greatly reduced
liquidity and widening credit spreads.
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 were $1.62
billion in 1999 compared to $1.31 billion in 1998 and $997 million in 1997.
Assets under fee-based management in these two categories increased
significantly over the three-year period, causing the corresponding increase in
revenue.
Net interest and dividends increased to $1.61 billion in 1999 compared to $1.46
billion in 1998 and $1.53 billion in 1997. The increase in 1999 compared to 1998
was the result of increased margin lending to customers.
Total noninterest expenses, excluding the restructuring (credit) charge, net,
were $8.9 billion in 1999 compared to $7.7 billion in 1998 and $7.9 billion in
1997. The increase in 1999 primarily reflects an increase in production-related
compensation and benefits expense, reflecting increased revenues. In 1998 total
noninterest expenses, excluding the restructuring (credit) charge, net, were
relatively unchanged. The Company continues to maintain its focus on controlling
fixed expenses. For further discussion of the restructuring (credit) charge,
net, see Note 3 to the consolidated financial statements.
16
<PAGE> 20
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
ASSET MANAGEMENT
-------------------------------------------------------------------------------------------------------
Dollars in millions
For the year ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Asset management and administration fees $1,030 $857 $718
Net interest and dividends and other revenue 80 47 42
-------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 1,110 904 760
-------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 210 176 146
Other operating and administrative expenses 344 311 269
-------------------------------------------------------------------------------------------------------
Total noninterest expense 554 487 415
-------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 556 417 345
-------------------------------------------------------------------------------------------------------
Provision for income taxes 220 165 137
-------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $336 $252 $208
-------------------------------------------------------------------------------------------------------
</TABLE>
The asset management segment revenues, net of interest expense, rose 23% to $1.1
billion in 1999 compared to $904 million in 1998 and $760 million in 1997. The
primary revenue component for the asset management segment is asset management
and administration fees, which were $1.0 billion in 1999, compared to $857
million in 1998 and $718 million in 1997. The 20% and 19% overall increase in
1999 and 1998 fees, respectively, reflects broad growth in all asset management
products. Assets under management for the segment increased 15% and 22% in 1999
and 1998, respectively (see table on following page for detail of the segment's
assets under fee-based management). Other revenues include the net revenue
contribution to the asset management segment for the structuring of unit
investment trusts, as well as custody fees, and realized and unrealized
investment income.
Total noninterest expenses were $554 million in 1999 compared to $487 million in
1998 and $415 million in 1997. The 14% increase in 1999 and 17% increase in 1998
reflect continuing investments in the business infrastructure of the asset
management segment to support sustained business growth. Other operating and
administrative expense includes amortization of deferred commissions, which
relate to the sale of load mutual funds.
17
<PAGE> 21
SALOMON SMITH BARNEY HOLDINGS INC.
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 December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money market funds $65.4 $58.6 $46.6
Mutual funds 68.3 59.1 51.8
Managed accounts 79.5 68.3 54.1
-------------------------------------------------------------------------------------------------------
Salomon Smith Barney Asset Management 213.2 186.0 152.5
Financial Consultant managed accounts* 27.4 16.5 11.6
-------------------------------------------------------------------------------------------------------
Total internally managed accounts 240.6 202.5 164.1
Consulting Group externally managed assets* 83.0 71.9 59.7
-------------------------------------------------------------------------------------------------------
Total assets under fee-based management $323.6 $274.4 $223.8
-------------------------------------------------------------------------------------------------------
</TABLE>
*Related results included in Investment Services segment.
OUTLOOK
The Company's business is significantly affected by the levels of activity in
the securities markets, which in turn are influenced by the level and trend of
interest rates, the general state of the global economy and the national and
worldwide political environments, among other factors.
18
<PAGE> 22
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAPITAL AND LIQUIDITY MANAGEMENT
Capital is an expensive resource. To maximize the return on equity, it is
essential that the Company deploy its capital in an efficient manner. Liquidity
management is integral to capital management and is especially critical for a
financial institution such as the Company. Access to funding must be assured
under all market conditions. The confidence of creditors and counterparties in
the Company's ability to perform pursuant to its contractual obligations is
important to the Company's continued success.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $224 billion at December 31, 1999, an increase
from $212 billion at year-end 1998. 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. Financial instruments and commodities owned and contractual
commitments declined during 1999 as a result of decreased inventory positions in
non-U.S. government and agency securities. This decline can, in large part, be
attributed to the risk reduction in the Company's global arbitrage businesses.
The Company's consolidated statement of financial condition is highly liquid,
with the vast majority of its assets consisting of marketable securities and
collateralized short-term financing agreements arising from securities
transactions. The highly liquid nature of these assets provides the Company
with flexibility in financing and managing its business. The Company monitors
and evaluates the adequacy of its capital and borrowing base on a daily basis
in order to allow for flexibility in its funding, to maintain liquidity, and to
ensure that its capital base supports the regulatory capital requirements of
its subsidiaries.
The Company funds its operations through the use of collateralized and
uncollateralized short-term borrowings, long-term borrowings, mandatorily
redeemable securities of subsidiary trusts, and its equity. Collateralized
short-term financing, including repurchase agreements and secured loans, is the
Company's principal funding source. Such borrowings are reported net by
counterparty, when applicable, pursuant to the provisions of Financial
Accounting Standards Board Interpretation 41, Offsetting of Amounts Related to
Certain Repurchase and Reverse Repurchase Agreements ("FIN 41"). Excluding the
impact of FIN 41, short-term collateralized borrowings totaled $135.2 billion at
December 31, 1999. Uncollateralized short-term borrowings provide the Company
with a source of short-term liquidity and are also utilized as an alternative to
secured financing when they represent a cheaper funding source. Sources of
short-term uncollateralized borrowings include commercial paper, unsecured bank
borrowings and letters of credit, deposit liabilities, promissory notes and
corporate loans. Short-term uncollateralized borrowings totaled $14.3 billion at
December 31, 1999.
19
<PAGE> 23
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has committed uncollateralized revolving lines of credit totaling
$5.0 billion, which it may borrow from at various interest rate options (LIBOR,
CD or base rate), and compensates the banks for the facilities through facility
fees. At December 31, 1999 there were no outstanding borrowings under these
facilities. Under these facilities the Company is required to maintain a certain
level of consolidated adjusted net worth (as defined in the agreement). At
December 31, 1999, this requirement was exceeded by approximately $3.5 billion.
The Company also has substantial borrowing arrangements consisting of facilities
that the Company has been advised are available, but where no contractual
lending obligation exists. These arrangements are reviewed on an ongoing basis
to ensure flexibility in meeting the Company's short-term requirements.
Unsecured term debt is a significant component of the Company's long-term
capital. Term debt totaled $18.8 billion at December 31, 1999, compared with
$20.2 billion at December 31, 1998. The Company utilizes interest rate swaps to
convert the majority of its fixed rate term debt used to fund inventory-related
working capital requirements into variable rate obligations. Term debt issuances
denominated in currencies other than the U.S. dollar that are not used to
finance assets in the same currency are effectively converted to U.S. dollar
obligations through the use of cross-currency swaps and forward currency
contracts. The average remaining maturity of the Company's term debt was 3.25
years at December 31, 1999 and 4.0 years at December 31, 1998. See Note 9 to the
consolidated financial statements for additional information regarding term debt
and an analysis of the impact of interest rate swaps on term debt.
In July 1996, the Company issued $345 million of mandatorily redeemable
securities of subsidiary trusts, which pay interest and fees at an annual rate
of 9.50%. In January 1998, the Company issued $400 million of mandatorily
redeemable securities of subsidiary trusts, which pay interest at an annual rate
of 7.20%. For a detailed description of these securities see Note 11 to the
consolidated financial statements.
The Company's borrowing relationships are with a broad range of banks, financial
institutions and other firms from which it draws funds. The volume of the
Company's borrowings generally fluctuates in response to changes in the level of
the Company's financial instruments, commodities and contractual commitments,
customer balances, the amount of securities purchased under agreements to resell
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.
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
20
<PAGE> 24
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
fully collateralized basis in the event that the Company's access to
uncollateralized financing is temporarily impaired. The Company's liquidity
management process includes a contingency funding plan designed to ensure
adequate liquidity even if access to unsecured funding sources is severely
restricted or unavailable. This plan is reviewed periodically to keep the
funding options current and in line with market conditions. The management of
this plan includes an analysis used to determine the Company's ability to
withstand varying levels of stress, which could impact its liquidation horizons
and required margins. In addition, the Company monitors its leverage and capital
ratios on a daily basis.
OTHER
HIGH YIELD PORTFOLIO
The Company's activities include trading securities that are less than
investment grade, characterized as "high yield." High yield securities include
corporate debt, convertible debt, preferred and convertible preferred equity
securities rated lower than "triple B-" by internationally recognized rating
agencies, unrated securities with market yields comparable to entities rated
below "triple B-," as well as sovereign debt issued by certain countries in
currencies other than their local currencies and which are not collateralized by
U.S. government securities. For example, high yield securities exclude the
collateralized portion of the Company's holdings of "Brady Bonds," but include
such securities to the extent they are not collateralized. The Company's trading
portfolio of high yield securities owned is carried at market or fair value and
totaled $3.2 billion and $4.8 billion at December 31, 1999 and 1998,
respectively; the largest high yield exposure to one counterparty was $290
million and $716 million at December 31, 1999 and 1998, respectively.
21
<PAGE> 25
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DERIVATIVE INSTRUMENTS
Derivatives are an integral element of the world's financial and commodity
markets. Globalization of economic activity has brought more market participants
in contact with foreign exchange and interest rate risk at a time when market
volatility has increased. The Company has developed many techniques using
derivatives to enhance the efficiency of capital and trading risk management.
DERIVATIVE INSTRUMENTS - OVERVIEW
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. The markets for these instruments
have grown tremendously over the past decade. A vast increase in the types of
derivative users and their motivations in using these products has resulted in
an expansion of geographic coverage, transaction volume and liquidity, and the
number of underlying products and instruments.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk, and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, considering such factors as taxes, regulations,
capital, and liquidity, they provide the most efficient means of taking a
desired market position. These are just a few of the business objectives for
which derivatives are used. The list of objectives is large and continues to
grow.
Derivatives are accounted for and settled differently than cash instruments and
their use requires special management oversight. Such oversight should ensure
that management understands the transactions to which it commits the firms and
that the transactions are executed in accordance with sensible corporate risk
policies and procedures.
Derivatives activities, like the Company's other ongoing business activities,
give rise to market, credit, and operational risks. Market risk represents the
risk of loss from adverse market price movements. While market risk relating to
derivatives is clearly an important consideration for intermediaries such as the
Company, such risk represents only a component of the Company's overall market
risk, which arises from activities in non-derivative instruments as well.
Consequently, the scope of the Company's market risk management procedures
extends beyond derivatives to include all financial instruments and commodities.
Credit risk is the loss that the Company would incur if counterparties failed to
perform pursuant to their contractual obligations. While credit risk is not a
principal consideration with respect to exchange-traded instruments, it is a
major factor with respect to non-exchange-traded OTC instruments.
22
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Whenever possible, the Company uses industry master netting agreements to reduce
aggregate credit exposure. Swap and foreign exchange agreements are documented
utilizing counterparty master netting agreements supplemented by trade
confirmations. Over the past several years, the Company has enhanced the funding
and risk management of its derivatives activities through the increased use of
bilateral security agreements. The Company, in particular, has been an industry
leader in promoting the use of this risk reduction technique. Based on notional
amounts, at December 31, 1999 and 1998, respectively, approximately 92% and 90%
of the Company's swap portfolio was subject to the bilateral exchange of
collateral. This initiative, combined with the success of Salomon Swapco Inc,
the Company's triple-A rated derivatives subsidiary, has greatly strengthened
the liquidity profile of the Company's derivative trading activities. See "Risk
Management" for discussions of the Company's management of market, credit, and
operational risks.
NATURE AND TERMS OF DERIVATIVE INSTRUMENTS
The Company and its subsidiaries enter into various bilateral financial
contracts involving future settlement, which are based upon a predetermined
principal or par value (referred to as the "notional" amount). Such instruments
include swaps, swap options, caps and floors, futures contracts, forward
purchase and sale agreements, option contracts and warrants. Transactions are
conducted either through organized exchanges or OTC. For a discussion of the
nature and terms of these instruments see Note 17 to the consolidated financial
statements.
THE COMPANY'S USE OF DERIVATIVE INSTRUMENTS
The Company's use of derivatives can be broadly classified between trading and
non-trading activities. The vast majority of the Company's derivatives use is in
its trading activities, which include market-making activities for customers and
the execution of trading strategies for its own account ("proprietary trading").
The Company's derivative counterparties consist primarily of other major
derivative dealers, financial institutions, insurance companies, pension funds
and investment companies, and other corporations. The scope of permitted
derivatives activities both for trading and non-trading purposes for each of the
Company's businesses is defined by senior management.
TRADING ACTIVITIES
A fundamental activity of the Company is to provide market liquidity to its
customers across a broad range of financial instruments, including derivatives.
The Company also seeks to generate returns by executing proprietary trading
strategies. By their very nature, proprietary trading activities represent the
assumption of risk. However, trading positions are constructed in a manner that
seeks to define and limit risk taking only to those risks that the Company
intends to assume. The most significant derivatives-related activity conducted
by the Company is in fixed-income derivatives, which include interest rate
swaps, financial futures, swap options, and caps and floors. Other derivative
transactions, such as currency swaps, forwards and options as well
23
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
as derivatives linked to equities, are also regularly executed by the Company.
The Company generally earns a spread from market-making transactions involving
derivatives, as it generally does from its market-making activities for
non-derivative transactions. The Company also utilizes derivatives to manage the
market risk inherent in the securities inventories and derivative portfolios it
maintains for market-making purposes as well as its "book" of swap agreements
and related transactions with customers. The Company conducts its commodities
dealer activities in spot and forward physical markets, organized futures
exchanges as well as in OTC financially-settled markets where the Company
executes transactions involving commodities options, forwards and swaps, much in
the same manner as it does in the financial markets.
NON-TRADING ACTIVITIES
The Company also makes use of financial derivatives for non-trading, or end
user, purposes. As an end user, these instruments provide the Company with added
flexibility in the management of its capital and funding costs. Interest rate
swaps are utilized to effectively convert the majority of the Company's
fixed-rate term debt and a portion of its short-term borrowings to variable-rate
obligations. Cross-currency swaps and forward currency contracts are utilized to
effectively convert a portion of its non-U.S. dollar denominated term debt to
U.S. dollar denominated obligations and to minimize the variability in equity
otherwise attributable to exchange rate movements.
For additional derivatives-related disclosures contained in the consolidated
financial statements see the following:
- Note 1 - Summary of Significant Accounting Policies
- Note 6 - Principal Transaction Revenues
- Note 9 - Term Debt
- Note 17 - Financial Instruments, Commodities and Contractual
Commitments and Related Risks
- Note 18 - Fair Value Information
24
<PAGE> 28
SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RISK MANAGEMENT
Effective management of the risks inherent in the Company's businesses is
critical. The following section discusses certain of the risks inherent in the
Company's businesses, procedures in place to manage such risks, and initiatives
underway to continue to enhance the Company's management of risk.
MARKET RISK
Market risk represents the potential loss the Company may incur as a result of
absolute and relative price movements in financial instruments, commodities and
contractual commitments due to price volatility, changes in yield curves,
currency fluctuations and changes in market liquidity. The Company manages
aggregate market risk across both on- and off-balance sheet products and,
therefore, separate discussion of market risk for individual products, including
derivatives, is not meaningful. The distinguishing risks relative to derivatives
are credit risk and funding (liquidity) risk. Each type of risk can be increased
or decreased by market movements. See "Risk Management - Credit Risk - Credit
Exposure from Derivative Activities."
Within the Company's trading businesses, sound management of market risk has
always been a critical consideration. The sections that follow discuss
organizational elements of market risk management, as well as specific risk
management tools and techniques. The Company has sought to institutionalize
these elements across all its businesses. Efforts to further strengthen the
Company's management of market risk are ongoing and the enhancement of risk
management systems and reporting, including the development and utilization of
quantitative tools, is of major importance.
THE COMPANY'S RISK MANAGEMENT CONTROL FRAMEWORK
The Company's risk management control framework is based upon the ongoing
participation of senior management, business unit managers and the coordinated
efforts of various support units throughout the firm.
The Company's risk management efforts include the establishment of appropriate
market and credit risk controls, policies and procedures; appropriate senior
management risk oversight with thorough risk analysis and reporting; and
independent risk management with capabilities to evaluate and monitor risk
limits.
VALUATION AND CONTROL OF TRADING POSITIONS
With regard to the Company's trading positions (financial instruments,
commodities and contractual commitments), the Chairman and Chief Executive
Officer determines the appropriate risk profile of the Company with assistance
from the Risk Management Committee. This
25
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
committee, which is comprised of the Chief Executive Officer, senior business
managers, the Chief Financial Officer, the Citigroup Chief Risk Officer, the
Global Market Risk Manager and Credit Risk Manager, reviews appropriate levels
of risk, reviews risk capital allocations, balance sheet and regulatory capital
usage by business units and overall risk policies and controls. Lastly, an
independent Global Market Risk Management Group provides technical and
quantitative analysis of the market risk associated with trading positions to
the Chairman and Chief Executive Officer and members of the Risk Management
Committee on a frequent basis.
Trading positions are necessary for an active market maker, but can be a major
source of liquidity risk. Monitoring the Company's trading inventory levels and
composition and oversight for pricing is the responsibility of the Global Market
Risk Management Group and various support units, which monitor trading positions
on a position by position level, and employ specific risk models to track
inventory exposure in credit markets, emerging markets and the mortgage market.
The Company also provides for liquidity risk by imposing markdowns as the age of
the inventory increases. Inventory event risk, both for issuer credit and
emerging markets, is analyzed with the involvement of senior traders, economists
and credit department personnel. Market scenarios for the major emerging markets
are maintained and updated to reflect the event risk for the emerging market
positions. In addition, the Company, as a dealer of securities in the global
capital markets, has risk to issuers of fixed income securities for the timely
payment of principal and interest. Principal risk is reviewed by the Global
Market Risk Management Group, which identifies and reports major risks
undertaken by the trading businesses. The Credit Department (the "Department")
combines principal risk positions with credit risks resulting from market and
delivery risk to review aggregate exposures by counterparty, industry and
country.
RISK LIMITS
The Company's trading businesses have implemented business unit limits on
exposure to risk factors. These limits, which are intended to enforce the
discipline of communicating and gaining approval for higher risk positions, are
reviewed by the Global Market Risk Management Group. Business units may not
exceed risk limits without prior approval.
TOOLS FOR RISK MANAGEMENT AND REPORTING
The Company's market risk measurement begins with the identification of relevant
market risk factors. These core risk factors vary from market to market, and
region to region. Risk factors are used in three types of analysis: Stress
analysis, scenario analysis and value-at-risk analysis.
STRESS ANALYSIS The Company performs stress analysis by repricing inventory
positions for specified upward and downward moves in risk factors, and computing
the revenue implications of these repricings. Stress analysis is a useful tool
for identifying exposures that appear to be relatively small in the current
environment but grow more than proportionately with changes in risk factors.
Such risk is typical of a number of derivative instruments, including options
sold,
26
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
many mortgage derivatives and a number of structured products. Stress analysis
provides for the measurement of the potential impact of extremely large moves in
risk factors, which, though infrequent, can be expected to occur from time to
time.
SCENARIO ANALYSIS Scenario analysis is a tool that generates forward-looking
"what-if" simulations for specified changes in market factors. For example, the
scenario analysis simulates the impact of significant changes in domestic and
foreign interest rates. The revenue implications of the specified scenario are
quantified on a business unit and geographic basis.
VALUE AT RISK Value at risk ("VAR") is a statistical tool for measuring the
potential variability of trading revenue. The VAR reported is an estimate of the
potential range of loss in the market value of the trading portfolio, over a
one-day period, at the 99% confidence level, assuming a static portfolio. This
level implies that on 99 trading days out of 100, the mark-to-market of the
portfolio will likely either (1) increase in value, or (2) decrease in value by
less than the VAR estimate; and that on 1 trading day out of 100, the
mark-to-market of the portfolio will likely decrease in value by an amount that
will exceed the VAR estimate.
Value at risk is calculated by simulating changes in the key underlying market
risk factors (e.g., interest rates, interest rate spreads, equity prices,
foreign exchange rates, commodity prices, option volatilities) to calculate the
potential distribution of changes in the market value of the Company's
portfolios of market risk sensitive financial instruments.
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 VAR models are relatively
sophisticated, they have several known limitations. Most significantly, standard
VAR models do not incorporate the potential loss caused by very unusual market
events. Stress testing is necessary as a complement to VAR to measure this
potential risk.
27
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table summarizes the Company's VAR at the 99% confidence level as
of December 31, 1999 and 1998 along with the 1999 average, and the high and low
(based on quarter-end VARs). The VAR relating to non-trading financial
instruments has been excluded from this analysis.
<TABLE>
<CAPTION>
RISK EXPOSURES December 31, December 31,
($ IN MILLIONS) 1999 1999 Average 1999 High 1999 Low 1998
- --------------- ---- ------------ --------- -------- ----
<S> <C> <C> <C> <C> <C>
Interest rate $ 20 $ 37 $71 $17 $ 75
Equities 6 5 16 1 15
Commodities 8 10 16 5 11
Currency - 5 13 - 3
Diversification Benefit (11) (18) N/A N/A (33)
----- ----- --- --- ----
Total $ 23 $ 39 $72 $17 $ 71
===== ===== === === ====
</TABLE>
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at December 31, 1999, 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 December 31, 1999, and is not a predictor of future
results.
The following describes the components of market risk:
INTEREST RATE RISK
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of financial instruments. In connection with the Company's
dealer and proprietary trading activities, including market-making in OTC
derivative contracts, the Company is exposed to interest rate risk, arising from
changes in the level or volatility of interest rates, mortgage prepayment speeds
or the shape and slope of the yield curve. The Company's corporate bond
activities expose it to the risk of loss related to changes in credit spreads.
When appropriate, the Company attempts to hedge its exposure to interest rate
risk by entering into transactions such as interest rate swaps, options, U.S.
and non-U.S. government securities and futures and forwards contracts designed
to mitigate such exposure.
EQUITY PRICE RISK
The Company is exposed to equity price risk as a consequence of making markets
in equity securities and equity derivatives. Equity price risk results from
changes in the level or volatility
28
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
of equity prices, which affect the value of equity securities, or instruments
that derive their value from a particular stock, a basket of stocks or a stock
index. The Company attempts to reduce the risk of loss inherent in its inventory
in equity securities by entering into hedging transactions, including equity
options and futures, designed to mitigate the Company's market risk profile.
COMMODITY PRICE RISK
Commodity price risk results from the possibility that the price of the
underlying commodity may rise or fall. Commodity contracts principally relate to
energy and precious metals.
CURRENCY RISK
Currency risk arises from the possibility that changes in foreign exchange rates
will impact the value of financial instruments. When the Company buys or sells a
foreign currency or financial instrument denominated in a currency other than
the U.S. dollar, exposure exists from a net open currency position. Until the
position is covered by selling or buying an equivalent amount of the same
currency or by entering into a financing arrangement denominated in the same
currency, the Company is exposed to a risk that the exchange rate may move
against it.
CREDIT RISK
Credit risk represents the loss the Company could incur if an issuer or
counterparty is unable or unwilling to perform on its commitments, including the
timely payment of principal and interest or settlement of swap and foreign
exchange transactions, repurchase agreements, securities purchases and sales,
and other contractual obligations. The Company's credit risk management process
considers the many factors that influence the probability of a potential loss,
including, but not limited to, the issuer's or counterparty's financial profile,
its business prospects and reputation, the specific terms and duration of the
transactions, the exposure of the transactions to market risk, macroeconomic
developments and sovereign risk.
ORIGIN OF CREDIT RISK
In the normal course of its operations, the Company and its subsidiaries enter
into various transactions that give rise to credit risk. Credit risk is
generally attributable to one or more of the following risks: market, delivery
and default of principal. Market and delivery risks create credit risk with
respect to transactions with counterparties. Default of principal risk is the
risk of nonpayment of the principal and interest of a security.
The components of market risk such as absolute and relative price movements,
price volatility, changes in yield curves, currency fluctuations, and changes in
market liquidity, result in credit risk when a counterparty's obligation to the
Company exceeds the obligation of the Company to the counterparty. Delivery risk
arises from the requirement, in certain circumstances, to release cash or
securities before receiving payment. For both market and delivery risk, the
Department
29
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
sets credit limits or requires specific approvals that anticipate the potential
exposure of transactions.
CREDIT RISK MANAGEMENT AT SALOMON SMITH BARNEY HOLDINGS INC.
The Chief Credit Officer, who is independent of any revenue-generating function,
manages the Department, whose professionals assess, approve, monitor, and
coordinate the extension of credit on a global basis. In considering such risk,
the Department evaluates the risk/return trade-offs as well as current and
potential credit exposures to a counterparty or to groups of counterparties that
are related because of industry, geographic, or economic characteristics. The
Department also has established various credit policies and control procedures
used singularly or in combination, depending upon the circumstances.
CREDIT RISK MANAGEMENT OF COMMODITIES-RELATED TRANSACTIONS
Phibro's credit department determines the credit limits for counterparties in
its commodities-related activities. Exposure reports, which contain detailed
information about cash flows with customers, goods in transit and forward
mark-to-market positions, are reviewed daily.
CREDIT EXPOSURE FROM DERIVATIVE ACTIVITIES
The Company's credit exposure for swap agreements, swap options, caps and floors
and foreign exchange contracts and options at December 31, 1999, as represented
by amounts reported on the Company's consolidated statement of financial
condition, are primarily with investment grade counterparties. These amounts do
not present potential credit exposure that may result from factors that
influence market risk or from the passage of time. Severe changes in market
factors may cause credit exposure to increase suddenly and dramatically. Swap
agreements, swap options, caps and floors include transactions with both short-
and long-term periods of commitment. See Note 17 to the consolidated financial
statements for further discussion of credit exposure from derivative activities.
With respect to sovereign risk related to derivatives, credit exposure at
December 31, 1999 was primarily to counterparties in the U.S. ($1.6 billion),
Germany ($.7 billion), France ($.4 billion), United Kingdom ($.3 billion),
Sweden ($.3 billion), Japan ($.2 billion), and Switzerland ($.2 billion).
OPERATIONAL RISK
As a major intermediary in financial and commodities markets, the Company is
directly exposed to market risk and credit risk, which arise in the normal
course of its business activities. Slightly less direct, but of critical
importance, are risks pertaining to operational and back office support. This is
particularly the case in a rapidly changing and increasingly global environment
with
30
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
increasing transaction volumes and an expansion in the number and complexity of
products in the marketplace.
Such risks include:
- - Operational/Settlement Risk - the risk of financial and opportunity loss
and legal liability attributable to operational problems, such as
inaccurate pricing of transactions, untimely trade execution, clearance
and/or settlement, or the inability to process large volumes of
transactions. The Company is subject to increased risks with respect to
its trading activities in emerging market securities, where clearance,
settlement, and custodial risks are often greater than in more
established markets.
- - Technological Risk - the risk of loss attributable to technological
limitations or hardware failure that constrain the Company's ability to
gather, process, and communicate information efficiently and securely,
without interruption, with customers, among units within the Company, and
in the markets where the Company participates.
- - Legal/Documentation Risk - the risk of loss attributable to deficiencies
in the documentation of transactions (such as trade confirmations) and
customer relationships (such as master netting agreements) or errors that
result in noncompliance with applicable legal and regulatory
requirements.
- - Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls
ensure that assets are safeguarded, that transactions are executed in
accordance with management's authorization, and that financial
information utilized by management and communicated to external parties,
including the Company's stockholder, creditors, and regulators, is free
of material errors.
As the preceding risks are largely interrelated, so are the Company's actions to
mitigate and manage them. The Company's Chief Administrative Officer is
responsible for, among other things, oversight of global operations and
technology. An essential element in mitigating the risks noted above is the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data.
31
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR 2000
The Company's computer systems and business processes successfully handled the
date change from December 31, 1999 to January 1, 2000. The Company is not aware
of any significant year 2000 problems encountered internally or with the third
parties with which it interfaces, including customers and counterparties, the
global financial market infrastructure, and the utility infrastructure on which
all corporations rely.
Based on operations since January 1, 2000, the Company does not expect any
significant impact to its ongoing business as a result of the year 2000 issue.
However, it is possible that the full impact of year 2000 issues has not been
fully recognized and no assurances can be given that year 2000 problems will not
emerge.
The pretax costs associated with required system modifications and conversions
totaled approximately $130 million. These costs were funded through operating
cash flow and expensed in the period in which they were incurred.
ENVIRONMENTAL RISK
The Company is subject to environmental risk from two primary sources:
discontinued commodities processing and oil refining operations, and existing
energy-related transportation activities.
The Company is subject to uncertain remedial liability as a result of
commodities-related industrial operations, which were discontinued in or prior
to 1984. Such liability arises under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
which provides that potentially responsible parties ("PRPs"), including waste
generators and past and present site owners and operators, may be held jointly
and severally liable for the entire cost of site clean-up. The Company may also
be subject to liability under state or other U.S. environmental laws.
The process of remediating hazardous waste sites under CERCLA is normally
lengthy and involves a series of events including initial site identification,
environmental site studies and evaluations, issuance of the "Preliminary
Identification of Remedial Alternatives," completion of the "Remedial
Investigation and Feasibility Study," selection of an appropriate site remedy
and its related cost estimate known as the "Record of Decision," performance of
site remediation and post-remediation site monitoring. Factors that influence
the cost and time of completion include the remediation method selected; the
number of financially solvent PRPs responsible for payment; whether PRPs were
owners, operators or generators; determination of cost allocation among PRPs,
and the ongoing development of more efficient and effective remediation
technologies. The process may take ten years or more from site identification to
completion and may be further complicated by protracted legal proceedings
involving numerous PRPs.
32
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SALOMON SMITH BARNEY HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The ultimate share of remediation costs that will be borne by the Company and
its subsidiaries cannot be predicted with accuracy. The Company has incurred and
will continue to incur costs related to remediation at certain sites already
identified. Further, it is possible that the Company will be named as a PRP at
additional sites. Management believes, based upon currently known facts and
established reserves, that the ultimate disposition of these matters will not
have a material adverse effect on the Company's financial condition.
Phibro has potential environmental exposure in connection with activities in
which cargoes of products are transported and stored. Phibro mitigates this
exposure through insurance coverage and consideration of ports of delivery and
storage terminals.
FORWARD LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: changes in
economic conditions, including the performance of global financial markets, and
risks associated with fluctuating currency values and interest rates;
competitive, regulatory or tax changes that affect the cost of or the demand for
the Company's products; the resolution of legal proceedings and environmental
matters; and the ability of the Company generally to achieve anticipated levels
of operational efficiencies related to recent mergers and acquistions, as well
as achieving its other cost-savings initiatives. Readers are also directed to
other risks and uncertainties discussed in documents filed by the Company with
the Securities and Exchange Commission.
33
<PAGE> 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 10 is omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 11 is omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 12 is omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 13 is omitted.
34
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated
Financial Statements and Schedules on page F-1
hereof.
(2) Financial Statement Schedules. See Index to
Consolidated Financial Statements and Schedules on
page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 13, 1999, the Company filed a Current Report on
Form 8-K, dated October 11, 1999, filing certain exhibits
under Item 7 thereof relating to the offer and sale of its
Call Warrants on 1999 TEN+(SM) Index Expiring on October
11, 2001.
On October 18, 1999, the Company filed a Current Report on
Form 8-K, dated October 18, 1999, reporting under Item 5
thereof the results of its operations for the three and
nine month periods ended September 30, 1999 and 1998.
No other reports on Form 8-K were filed during the fourth
quarter of 1999; however, on January 18, 2000, the Company
filed a Current Report on Form 8-K, dated January 18,
2000, reporting under Item 5 thereof the agreement by the
Company to acquire the global investment banking business
of Schroders PLC and the results of its operations for the
three and twelve month periods ended December 31, 1999 and
1998.
35
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.01 Restated Certificate of Incorporation of Salomon Smith Barney
Holdings Inc. (the "Company"), effective July 1, 1999,
incorporated by reference to Exhibit 3.2 to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form
S-3 (No. 333-38931).
3.02 By-Laws of the Company, incorporated by reference to Exhibit
3.3 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-3 (No. 333-38931).
10.01 Amended and Restated Lease dated as of March 27, 1998 between
State Street Bank and Trust Company of Connecticut, National
Association, as Trustee (Lessor), and Smith Barney Inc.,
Salomon Brothers Inc, Travelers Group Inc., Mutual Management
Corp., Smith Barney Capital Services Inc., Smith Barney
Commercial Corp., Smith Barney Futures Management Inc. and
Smith Barney Global Capital Management, Inc., as tenants in
common (Lessee) , incorporated by reference to Exhibit 10.01 to
the Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 1998 (File No. 1-4346).
10.02 Lease dated November 23, 1988 between 7 World Trade Company and
Salomon Inc, incorporated by reference to Exhibit 10(a) to the
Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 1991 (File No. 1-4346).
12.01+ Computation of ratio of earnings to fixed charges.
21.01 Pursuant to General Instruction I of Form 10-K, the list of
subsidiaries of the Company is omitted.
23.01+ Consent of PricewaterhouseCoopers L.L.P.
27.01+ Financial Data Schedule.
</TABLE>
- --------------------
+ Filed herewith.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the SEC upon request.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page to security holders who make written request therefor to Salomon
Smith Barney Holdings Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Corporate Secretary.
36
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the
13th day of March, 2000.
SALOMON SMITH BARNEY HOLDINGS INC.
(Registrant)
By: /s/ Michael A. Carpenter
..........................................
Michael A. Carpenter, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on the 13th day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Michael A. Carpenter
................................................. Chairman, Chief Executive Officer (Principal Executive
Michael A. Carpenter Officer) and Director
/s/ Charles W. Scharf
................................................. Chief Financial Officer (Principal
Charles W. Scharf Financial Officer)
/s/ Michael J. Day
................................................. Controller (Principal Accounting Officer)
Michael J. Day
/s/ Deryck C. Maughan
................................................. Director
Deryck C. Maughan
</TABLE>
37
<PAGE> 41
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998 F-4
Consolidated Statements of Changes in Stockholder's Equity
for the years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
QUARTERLY FINANCIAL DATA (UNAUDITED)
</TABLE>
F-1
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Salomon Smith Barney Holdings Inc. and Subsidiaries:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, changes in stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Salomon Smith Barney Holdings Inc. and its Subsidiaries (the
"Company") at December 31, 1999 and December 31, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated financial statements for the year ended December 31, 1997 give
retroactive effect to the merger of Salomon Inc and Smith Barney Holdings Inc.
on November 28, 1997, which has been accounted for in a manner similar to a
pooling of interests as described in Note 3 to the consolidated financial
statements. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 18, 2000
F-2
<PAGE> 43
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions $ 3,642 $ 3,214 $ 2,967
Investment banking 3,012 2,320 2,118
Principal transactions 2,562 (113) 2,504
Asset management and administration fees 2,650 2,165 1,715
Other 297 185 130
- --------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 12,163 7,771 9,434
- --------------------------------------------------------------------------------------------------------------------
Interest and dividends 11,275 12,902 12,043
Interest expense 9,681 11,466 10,530
- --------------------------------------------------------------------------------------------------------------------
Net interest and dividends 1,594 1,436 1,513
- --------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 13,757 9,207 10,947
- --------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and benefits 6,847 5,848 6,037
Communications 504 477 495
Occupancy and equipment 447 429 432
Floor brokerage and other production 465 446 389
Advertising and market development 339 312 276
Professional services 259 245 210
Other operating and administrative expenses 643 408 450
Restructuring (credit) charge, net (243) (274) 838
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 9,261 7,891 9,127
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 4,496 1,316 1,820
Provision for income taxes 1,669 498 675
- --------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 2,827 818 1,145
Cumulative effect of change in accounting principle
(net of tax benefit of $12) (15) - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 2,812 $ 818 $ 1,145
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 44
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,624 $ 2,261
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,421 2,358
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $74,138 $38,691
Deposits paid for securities borrowed 35,979 49,392
------- -------
110,117 88,083
Financial instruments and commodities owned and contractual commitments:
U.S. government and government agency securities 25,734 24,643
Contractual commitments 12,464 14,319
Corporate debt securities 9,755 11,347
Money market instruments 7,383 5,153
Equity securities 7,291 4,860
Non-U.S. government and government agency securities 6,638 18,632
Mortgage loans and collateralized mortgage securities 5,622 6,066
Commodities 49 245
Other financial instruments 2,602 3,372
------- -------
77,538 88,637
Receivables:
Customers 19,377 14,130
Brokers, dealers and clearing organizations 1,767 4,234
Receivable for securities provided as collateral 1,550 3,101
Other 2,754 2,709
------- -------
25,448 24,174
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $787 and
$1,032, respectively 953 1,114
Other assets 5,733 5,274
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $223,834 $211,901
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 45
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 17,827 $ 15,495
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $75,801 $61,024
Deposits received for securities loaned 10,279 7,712
------- -------
86,080 68,736
Financial instruments and commodities sold, not yet purchased,
and contractual commitments:
U.S. government and government agency securities 24,664 32,538
Contractual commitments 16,432 15,698
Non-U.S. government and government agency securities 15,402 10,719
Equity securities 4,298 4,224
Corporate debt securities and other 2,156 3,103
------- -------
62,952 66,282
Payables and accrued liabilities:
Customers 13,779 13,119
Obligation to return securities received as collateral 3,203 5,348
Brokers, dealers and clearing organizations 1,122 3,406
Other 9,979 9,851
------- -------
28,083 31,724
Term debt 18,821 20,151
Company-obligated mandatorily redeemable securities
of subsidiary trusts holding solely junior subordinated
debt securities of the Company 745 745
Stockholder's equity:
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 1,626 1,589
Retained earnings 7,686 7,159
Accumulated changes in equity from nonowner sources 14 20
------- -------
Total stockholder's equity 9,326 8,768
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $223,834 $211,901
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 46
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Changes In Equity Total
Preferred Common Paid-In Retained From Nonowner Treasury Stockholder's
Dollars in millions Stock Stock Capital Earnings Sources Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 450 $ - $ 2,399 $ 6,433 $ 10 $(1,677) $ 7,615
Net income 1,145 1,145
Common dividends (581) (581)
Preferred dividends* (54) (54)
Merger-related capital
transactions (450) (1,035) 1,764 279
Other capital transactions 210 (87) 123
Net change in cumulative
translation adjustments (9) (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 - - 1,574 6,943 1 - 8,518
Net income 818 818
Common dividends (602) (602)
Other capital transactions 15 15
Net change in cumulative
translation adjustments 19 19
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 - - 1,589 7,159 20 - 8,768
Net income 2,812 2,812
Common dividends (2,285) (2,285)
Other capital transactions 37 37
Net change in cumulative
translation adjustments (6) (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ - $ - $ 1,626 $ 7,686 $ 14 $ - $ 9,326
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Net of after-tax impact of related interest rate swaps that effectively
convert fixed rate dividend obligations to variable rate obligations.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 47
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,812 $ 818 $ 1,145
Deferred income tax provision/(benefit) 7 (254) (675)
Depreciation and amortization 372 331 290
- ---------------------------------------------------------------------------------------------------------------------------------
Net income adjusted for noncash items 3,191 895 760
- ---------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (63) (324) (588)
Collateralized short-term financing agreements (22,034) 21,576 (11,749)
Financial instruments and commodities owned and contractual commitments 11,099 51,095 (13,159)
Receivables (1,274) (6,085) (4,818)
Other assets (767) (442) 223
- ---------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets (13,039) 65,820 (30,091)
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 17,344 (50,835) 16,777
Financial instruments and commodities sold, not yet purchased, and contractual
commitments (3,330) (29,884) 4,025
Payables and accrued liabilities (3,564) 10,473 4,330
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities 10,450 (70,246) 25,132
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 602 (3,531) (4,199)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in commercial paper and other short-term borrowings 2,332 4,031 1,444
Proceeds from issuance of term debt 3,981 5,831 8,059
Term debt maturities and repurchases (5,072) (5,093) (4,397)
Collateralized mortgage obligations (84) (101) (185)
Dividends paid (2,285) (732) (604)
Issuance of mandatorily redeemable securities of subsidiary trusts - 400 -
Other capital transactions 37 - (95)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (1,091) 4,336 4,222
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Sales (purchases) of subsidiaries and affiliates - (129) 365
Assets securing collateralized mortgage obligations 88 117 175
Property, equipment and leasehold improvements, net (236) (365) (220)
Other - 25 (142)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities (148) (352) 178
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (637) 453 201
Cash and cash equivalents at beginning of year 2,261 1,808 1,607
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,624 $ 2,261 $ 1,808
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest paid did not differ materially from the amount of interest expense
recorded for financial statement purposes in 1999, 1998 and 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 48
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of Salomon Smith
Barney Holdings Inc. ("SSBH" and, collectively, with its subsidiaries, the
"Company"), a New York corporation (the successor to Salomon Smith Barney
Holdings Inc., a Delaware corporation). The Company is a wholly owned subsidiary
of Citigroup Inc. ("Citigroup").
The 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 Company provides investment banking, asset management, brokerage, securities
trading, advisory and other financial services to customers, and engages in
proprietary trading activities for its own account.
Material intercompany transactions have been eliminated in consolidation.
Long-term investments in operating joint ventures and affiliated (20% to 50%
owned) companies are carried on the equity method of accounting and are included
in "Other assets." The Company's equity in the earnings of joint ventures and
affiliates is reported in "Other" revenues.
Assets and liabilities denominated in non-U.S. dollar currencies are translated
into U.S. dollar equivalents using year-end spot foreign exchange rates.
Revenues and expenses denominated in non-U.S. dollar currencies are translated
monthly at amounts that approximate weighted average exchange rates, with
resulting gains and losses included in income. The effects of translating the
statements of financial condition of non-U.S. subsidiaries with functional
currencies other than the U.S. dollar are recorded, net of related hedge gains
and losses and income taxes, as cumulative translation adjustments, a separate
component of stockholder's equity. Hedges of such exposure include forward
currency contracts and, to a lesser extent, designated issues of non-U.S. dollar
term debt.
ACCOUNTING CHANGE
During 1999 the Company recorded the cumulative effect of change in accounting
principle of $15 million (net of tax benefit of $12 million) which relates to
the write-off of certain capitalized closed-end fund distribution costs in
connection with the adoption of AICPA Statement of Position 98-5, Reporting on
the Cost of Start-Up Activities.
F-8
<PAGE> 49
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS The Company defines "Cash and cash equivalents" as
highly liquid investments with original maturities of three months or less at
the time of purchase, other than investments held for sale in the ordinary
course of business.
COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS Securities purchased under
agreements to resell ("reverse repurchase agreements") and securities sold under
agreements to repurchase ("repurchase agreements") are collateralized
principally by government and government agency securities and generally have
terms ranging from overnight to up to one year and are carried at their
contractual amounts, including accrued interest as specified in the respective
agreements. In the determination of income, certain financing transactions are
marked to fair value and are included in the Company's results of operations.
It is the Company's policy to take possession of the underlying collateral,
monitor its market value relative to the amounts due under the agreements, and,
when necessary, require prompt transfer of additional collateral or reduction in
the loan balance in order to maintain contractual margin protection. In the
event of counterparty default, the financing agreement provides the Company with
the right to liquidate the collateral held. Reverse repurchase and repurchase
agreements are reported net by counterparty, when applicable, pursuant to the
provisions of Financial Accounting Standards Board ("FASB") Interpretation 41,
Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements ("FIN 41"). Excluding the impact of FIN 41, reverse repurchase
agreements totaled $119.7 billion and $89.2 billion at December 31, 1999 and
1998, respectively. At December 31, 1999, and 1998, the market value of
securities collateralizing reverse repurchase agreements was $120.7 billion and
$91.2 billion, respectively.
Deposits paid for securities borrowed ("securities borrowed") and deposits
received for securities loaned ("securities loaned") are recorded at the amount
of cash advanced or received and are collateralized principally by government
and government agency securities, corporate debt and equity securities. The
Company monitors the market value of securities borrowed and securities loaned
daily, and additional collateral is obtained as necessary. Excluding the impact
of FIN 41, securities borrowed totaled $36.0 and $50.2 billion, respectively at
December 31, 1999 and 1998. At December 31, 1999 and 1998, the market value of
securities collateralizing securities borrowed was $35.5 billion and $49.3
billion, respectively.
FINANCIAL INSTRUMENTS, COMMODITIES AND CONTRACTUAL COMMITMENTS Financial
instruments, commodities and contractual commitments (also referred to as
"derivative instruments"), including derivatives used for trading purposes, are
recorded at either market value or, when market prices are not readily
available, fair value, which is determined under an alternative approach, such
as matrix or model pricing. The determination of market or fair
F-9
<PAGE> 50
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value considers various factors, including: closing exchange or over-the-counter
("OTC") market price quotations; time value and volatility factors underlying
options, warrants and contractual commitments; price activity for equivalent or
synthetic instruments in markets located in different time zones; counterparty
credit quality; and the potential impact on market prices or fair value of
liquidating the Company's positions in an orderly manner over a reasonable
period of time under current market conditions. Financial instruments,
commodities and contractual commitments include related accrued interest or
dividends.
The majority of the Company's financial instruments, commodities and contractual
commitments are recorded on a trade date basis. Recording the remaining
instruments on a trade date basis would not materially affect the consolidated
financial statements. Customer securities transactions are recorded on a
settlement date basis with the related revenue and expense recorded on trade
date. Commissions, underwriting, and principal transaction revenues and related
expenses are recognized in income on a trade date basis.
DERIVATIVE INSTRUMENTS
Derivatives Used for Trading Purposes
Derivatives used for trading purposes include interest rate, equity, currency
and commodity swap agreements, swap options, caps and floors, options, warrants
and financial and commodity futures and forward contracts. The fair values
(unrealized gains and losses) associated with contractual commitments are
reported net by counterparty, provided a legally enforceable master netting
agreement exists, and are netted across products and against cash collateral
when such provisions are stated in the master netting agreement. Contractual
commitments in a net receivable position, as well as options owned and warrants
held, are reported as assets in "Contractual commitments." Similarly,
contractual commitments in a net payable position, as well as options written
and warrants issued, are reported as liabilities in "Contractual commitments."
This category also includes the Company's long-term obligations that have
principal repayments directly linked to equity securities of unaffiliated
issuers for which the Company holds in inventory a note exchangeable for the
same equity securities. Cash collateral received in connection with interest
rate swaps totaled $3,651 million and $4,178 million at December 31, 1999 and
1998, respectively, and cash collateral paid totaled $3,556 million and $4,385
million, respectively. Revenues generated from derivative instruments used for
trading purposes are reported as "Principal transactions" and include realized
gains and losses as well as unrealized gains and losses resulting from changes
in the market or fair value of such instruments.
Margin on futures contracts is included in "Receivables - Brokers, dealers and
clearing organizations" and "Payables and accrued liabilities - Brokers, dealers
and clearing organizations."
F-10
<PAGE> 51
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivatives Used for Non-Trading Purposes
Non-trading derivative instruments that are designated as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the derivative contract.
Accordingly, changes in the market or fair value of the derivative instrument
must be highly correlated with changes in the market or fair value of the
underlying hedged item. The Company monitors the effectiveness of its hedges by
periodically comparing the change in value of the derivative instrument with the
change in value of the underlying hedged item. Derivatives used as hedges
include interest rate swaps, cross currency swaps and forward currency
contracts.
Interest rate and cross currency swaps are utilized to effectively convert a
portion of the Company's short-term borrowings and the majority of its fixed
rate term debt to variable rate instruments. These swaps are recorded
"off-balance sheet," with accrued inflows and outflows reflected as adjustments
to interest expense. Upon early termination of an underlying hedged instrument,
the derivative is accounted for at market or fair value and the impact is
recognized currently in income. Changes in market or fair value of such
instruments, or realized gains or losses resulting from the termination of such
instruments, are also recognized currently in income.
The Company utilizes forward currency contracts to hedge a portion of the
currency exchange rate exposure relating to non-U.S. dollar term debt issued by
the Company. The impact of translating the forward currency contracts and the
related debt to prevailing exchange rates is recognized currently in income. The
Company also utilizes forward currency contracts to hedge certain investments in
subsidiaries with functional currencies other than the U.S. dollar. The impact
of marking open contracts to prevailing exchange rates and the impact of
realized gains or losses on maturing contracts, both net of the related tax
effects, are included in cumulative translation adjustments in stockholder's
equity as is the impact of translating the investments being hedged.
Derivative instruments that do not meet the criteria to be designated as hedges
are considered trading derivatives and are recorded at market or fair value.
See Note 9 to the consolidated financial statements for a further discussion of
the use of interest rate swaps and forward currency contracts for non-trading
purposes.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold
improvements are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are recorded substantially on a straight-line
basis over the lesser of the estimated useful lives of the related assets or
noncancelable lease terms, as appropriate. Maintenance and repairs are charged
to occupancy expense as incurred.
F-11
<PAGE> 52
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS The excess of purchase price over fair value of net assets
acquired, which amounted to $364 million at December 31, 1999, is being
amortized over remaining periods ranging from 22 to 29 years. The Company
amortizes other intangible assets, which are included in "Other assets," on a
straight-line basis over remaining periods ranging from 4 to 14 years.
NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the 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 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.
NOTE 2. BANK HOLDING COMPANY REGULATION
Citigroup is a bank holding company within the meaning of the U.S. Bank Holding
Company Act of 1956 (the "BHC Act") registered with, and subject to examination
by, the Federal Reserve Board (the "FRB"). The activities of U.S. bank holding
companies are generally limited to the business of banking, managing or
controlling banks, and other activities that the FRB determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In addition, under the Gramm-Leach-Bliley Act (the "GLB Act"), which
became effective in most significant respects on March 11, 2000, bank holding
companies, such as Citigroup, all of whose controlled depository institutions
are "well capitalized" and "well managed", as defined in Federal Reserve
Regulation Y, and which obtain satisfactory Community Reinvestment Act ratings,
will have the ability to declare themselves to be "financial holding companies"
and engage in a broader spectrum of activities than those generally permitted,
including insurance underwriting and brokerage (including annuities), and
underwriting and dealing securities without a revenue limit and without limits
on the amounts of equity securities it may hold in conducting its underwriting
and dealing activities. Citigroup anticipates that its declaration to become a
financial holding company will become effective shortly after the effective date
of the GLB Act. Financial holding companies that do not continue to meet all of
the requirements for such status will, depending on which requirement they fail
to meet, face not being able to undertake new activities or acquisitions that
are financial in nature, or losing their ability to continue those activities
that are not generally permissible for bank holding companies. Under the BHC Act
in its current form, after two years from the date as of which Citigroup became
a bank holding company, Citigroup will be required to conform any activities
that are not considered to be closely related to banking or financial in nature
F-12
<PAGE> 53
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the BHC Act. This two-year period may be extended by the FRB for three
additional one-year periods, upon application by Citigroup and finding by the
FRB that such an extension would not be detrimental to the public interest.
Section 20 of the Glass-Steagall Act, which prohibited a member bank of the
Federal Reserve System, such as Citibank, from being affiliated with a company
that is principally engaged in underwriting and dealing in securities, was
repealed, effective March 11, 2000, as part of the GLB Act. Accordingly,
Citigroup and its affiliates (including the Company) will be permitted to
operate without regard to revenue limits on "ineligible" securities activities
and to acquire other securities firms without regard to such limits. The repeal
of Section 20 will also permit Citigroup's securities subsidiaries (including
the Company) to organize, sponsor, distribute and advise open-end mutual funds
in the United States, as well as outside the United States.
Under the BHC Act, nonbank acquisitions in the U.S. have generally been limited
to 5% of voting shares unless the FRB determines that the acquisition is so
closely related to banking as to be a proper incident to banking or managing or
controlling banks. Under the GLB Act, financial holding companies will be able
to make acquisitions in companies that engage in activities that are financial
in nature, both in the U.S. and outside of the United States. No prior approval
of the FRB will be required for such acquisitions, although it is possible that
the FRB will issue regulations imposing some limitations or conditions on such
acquisitions. In addition, under a new merchant banking authority added by the
GLB Act, financial holding companies will be authorized to invest in companies
that engage in activities that are not financial in nature, as long as the
financial holding company makes its investment with the intention of limiting
the investment in duration, does not manage the company on a day-to-day basis,
and the investee company does not cross-market with any of the financial holding
company's controlled depository institutions. This authority applies to
investments both in the U.S. and outside the United States. It is possible that
regulations interpreting and conditioning this authority may be promulgated.
Bank holding companies will also retain their authority, subject to prior
specific or general FRB consent, to acquire less than 20 percent of the voting
securities of a company that does not do business in the United States, and 20
percent or more of the voting securities of any such company if the FRB finds by
regulation or order that its activities are usual in connection with banking or
finance outside the United States. In general, bank holding companies that are
not financial holding companies may engage in a broader range of activities
outside the United States, including sponsoring, distributing and advising
open-end mutual funds and underwriting and dealing in debt, and to a limited
extent, equity securities, subject to local country laws.
F-13
<PAGE> 54
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. MERGERS AND RESTRUCTURING CHARGES
On November 28, 1997, a newly formed, wholly owned subsidiary of Travelers Group
Inc. ("Travelers") was merged into Salomon Inc ("Salomon"). Following this
merger, Salomon and Smith Barney Holdings Inc. ("Smith Barney") were merged (the
"Merger") to form SSBH. The transaction was a tax free exchange.
The 1997 consolidated financial statements give retroactive effect to the Merger
as a combination of entities under common control in a transaction accounted for
in a manner similar to a pooling of interests. The pooling of interests method
of accounting requires the restatement of all periods presented as if Salomon
and Smith Barney had always been combined. Certain reclassifications have been
made to conform the accounting policies of Salomon and Smith Barney.
As a result of the Merger, the Company recorded a pre-tax restructuring charge
of $838 million ($496 million after tax) in the fourth quarter of 1997. The
material components of the restructuring reserve were as follows:
<TABLE>
<CAPTION>
Restructuring Reserve
Restructuring Reserve as Charges and Credits through Balance at
Dollars in Millions Originally Recorded December 31, 1999 December 31, 1999
- ------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
Seven World Trade Center lease $ 610 $(610) * $ -
Other facilities 53 (53) ** -
- ----------------------------------------------------------------------------------------------------------------------------
Total facilities 663 (663) -
Severance 161 (161) ** -
Other 14 (14) ** -
- ----------------------------------------------------------------------------------------------------------------------------
$ 838 $(838) $ -
</TABLE>
* In the second quarter of 1998, the Company recorded an adjustment of $324
million ($191 million after tax) to the restructuring reserve relating to
the Seven World Trade Center lease. This reduction in the reserve resulted
from negotiations on a sublease which indicated that excess space would be
disposed of on terms more favorable than had been originally estimated. In
the first quarter of 1999, the Company recorded an adjustment of $211
million ($124 million after tax) to the restructuring reserve relating to
the Seven World Trade Center lease. This reduction in the reserve resulted
from a current reassessment of space needs due to the Citigroup merger.
This reassessment indicated the need for increased occupancy by the Company
utilizing space previously considered excess. In the third quarter of 1999,
the Company recorded a reduction of $1.4 million ($849 thousand after tax)
to the restructuring reserve relating to the Seven World Trade Center
lease.
** In the fourth quarter of 1998, the Company recorded an adjustment of $30
million ($18 million after tax) to the restructuring reserve. The
components of the reduction are as follows: severance $10 million; other
facilities $11 million; other $9 million. The reduction in severance
reserves was due to a higher level of attrition than originally
anticipated. The reduction in reserves related to other facilities was
mainly due to the abandonment of space on terms more favorable than
originally anticipated. The other reserve reversal was mainly due to
anticipated duplicate contract payments which were avoided due to favorable
negotiations. In the fourth quarter of 1999, the Company recorded an
adjustment of $1.3 million ($775 thousand after tax) to the restructuring
reserve. This reduction related to other facilities.
On October 8, 1998, Travelers and Citicorp completed their merger of equals,
pursuant to which Citicorp merged with and into a newly formed wholly owned
subsidiary of Travelers. Following the merger Travelers changed its name to
Citigroup.
F-14
<PAGE> 55
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon consummation of the merger, Citigroup became a bank holding company subject
to regulation under the BHC Act, the requirements of the Glass-Steagall Act and
certain other laws and regulations. See Note 2 to the consolidated financial
statements for further discussion of the BHC Act.
As a result of the Citigroup merger, the Company recorded a pre-tax
restructuring charge of $80 million ($47 million after tax) in the fourth
quarter of 1998. The material components of the restructuring reserve were as
follows:
<TABLE>
<CAPTION>
Restructuring Reserve
Restructuring Reserve as Charges and Credits through Balance at
Dollars in Millions Originally Recorded December 31, 1999 December 31, 1999
- ------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
Severance $69 $(69)** $-
Facilities 9 (6)** 3
Other 2 (2) -
- ---------------------------------------------------------------------------------------------------------------------
$80 $(77) $3*
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* All cash components
** In the third quarter of 1999, the Company recorded an adjustment of $29
million ($16 million after tax) to the restructuring reserve. The components
are as follows: severance $27 million; facilities $2 million. In the fourth
quarter of 1999, the Company recorded an adjustment of $696 thousand ($452
thousand after tax) to the restructuring reserve which related to
facilities. These reductions were the result of changes in staffing and
space requirements as integration of the Company and Citigroup progressed.
Facilities costs include lease payments, which represent the difference between
contractual obligations and the estimated fair market rental obtainable through
sublease from the date that such facilities are expected to be vacated, and
other costs incidental to sublease. These contractual lease payments are
estimated to be expended over the remaining term of approximately 4 years. The
facilities are located in various foreign locations and generally support
multiple lines of business. The assets have not been reclassified to a held for
sale category since substantially all are subject to abandonment and will not be
realized through sale.
All of the amounts were determined in accordance with the guidelines included in
Emerging Issues Task Force 94-3 and represent costs that are not associated
with future revenues and are either incremental or contractual with no
economic benefit. None of the amounts included in the restructuring charges
represent operating losses or income. All components of these restructuring
costs will be funded from working capital and will not require any incremental
funding source.
The remaining balance in the restructuring reserve is included in the
consolidated statements of financial condition in "Payables and accrued
liabilities - Other."
F-15
<PAGE> 56
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. THE NIKKO SECURITIES CO., LTD.
On February 26, 1999, the Company and The Nikko Securities Co., Ltd ("Nikko")
formed a joint venture. The joint venture, Nikko Salomon Smith Barney Limited
("Nikko Salomon Smith Barney"), provides investment banking, sales and trading
and research services for corporate and institutional clients in Japan and other
foreign jurisdictions. Nikko Salomon Smith Barney is headquartered in Tokyo and
works closely with staff in Salomon Smith Barney entities globally that cover
the Japanese institutional securities business.
Nikko Salomon Smith Barney is owned 51% by Nikko and 49% by the Company. A
shareholder agreement further provides for operating standards as to how the
entity operates as a joint venture.
NOTE 5. 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
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 2,812 $ 818 $ 1,145
Other changes in equity from non-owner sources (6) 19 (9)
--------------------------------------------------------------------------------------------
Total comprehensive income $ 2,806 $ 837 $ 1,136
--------------------------------------------------------------------------------------------
</TABLE>
NOTE 6. PRINCIPAL TRANSACTION REVENUES
The following table presents principal transaction revenues by business activity
for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income $1,378 $ (869) $1,882
Equities 954 536 397
Commodities 192 205 218
Other 38 15 7
-------------------------------------------------------------------------------------------------
Total principal transaction revenues $2,562 $ (113) $2,504
-------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE> 57
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIXED INCOME Fixed income revenues include realized and unrealized gains and
losses arising from the proprietary and customer trading of government and
government agency securities, investment and non-investment grade corporate
debt, municipal securities, preferred stock, mortgage securities (primarily U.S.
government agencies, including interest only and principal only strips), and
emerging market fixed income securities and derivatives. Revenues also include
realized and unrealized gains and losses generated from a variety of fixed
income securities utilized in arbitrage strategies for the Company's own
account, and realized and unrealized gains and losses arising from the spot and
forward trading of currencies and exchange-traded and OTC currency options. In
1999 and 1998, the Company restructured and significantly decreased the risk
profile of the global fixed income arbitrage groups because of lessening profit
opportunities and growing risk and volatility. Realized and unrealized gains and
losses resulting from changes in the market or fair value of options on fixed
income securities, interest rate swaps, currency swaps, swap options, caps and
floors, financial futures, options and forward contracts on fixed income
securities are reflected as fixed income revenue.
EQUITIES Revenues from equities consist of realized and unrealized gains and
losses arising from proprietary and customer trading of U.S. and non-U.S. equity
securities, including common and convertible preferred stock, convertible
corporate debt, equity-linked notes, equity swaps and exchange-traded and OTC
equity options and warrants. Revenues also include realized and unrealized gains
and losses on equity securities and related derivatives utilized in arbitrage
strategies for the Company's own account.
COMMODITIES The Company, primarily through its wholly owned subsidiary Phibro
Inc. and its wholly owned subsidiaries (collectively, "Phibro"), conducts a
commodities trading and dealer business. Commodities traded include crude oil,
refined oil products, natural gas, electricity, metals and other commodities.
During 1997 and 1998, Phibro significantly reduced the scope of some of its
activities. Commodity revenues consist of realized and unrealized gains and
losses from trading these commodities and related derivative instruments.
NOTE 7. SEGMENT INFORMATION
The Company's reportable segments include investment services and asset
management. The investment services segment includes investment banking and
trading, and retail brokerage as well as related derivative and commodity
trading. The Company's global investment banking services encompasses a full
range of capital market activities, including the underwriting and distribution
of debt and equity securities for United States and foreign corporations and for
state, local and other governmental and government sponsored authorities.
Investment services executes securities and commodities futures brokerage
transactions on all major exchanges on behalf of its customers and its own
account. Investment services engages in principal transactions in fixed income
securities and is a major participant in the OTC market for various derivative
instruments. The segment earns commissions as a broker for
F-17
<PAGE> 58
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
its clients in the purchase and sale of securities. Investment services also
generates revenue from fees received from the internal management of client
assets by Financial Consultants, as well as client assets managed externally
through the segment's Consulting Group. The asset management segment provides
discretionary and non-discretionary asset management services to a wide array of
mutual funds and institutional and individual investors, with respect to
domestic and foreign equity and debt securities, municipal bonds, money market
instruments, and related options and futures contracts. The segment receives
ongoing fees, generally determined as a percentage of the client's assets, from
asset management clients.
Segment data presented includes the allocation of all corporate overhead to each
segment. Intersegment revenue and expense are eliminated between segments.
Information concerning operations in the Company's segments of business is as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Dollars in millions 1999 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest revenues:
Investment Services $ 11,037 $ 6,847 $ 8,654
Asset Management 1,126 924 780
===============================================================================================
Total $ 12,163 $ 7,771 $ 9,434
===============================================================================================
Net interest and dividends:
Investment Services $ 1,610 $ 1,456 $ 1,533
Asset Management (16) (20) (20)
===============================================================================================
Total $ 1,594 $ 1,436 $ 1,513
===============================================================================================
Income before cumulative effect of change in
accounting principle:
Investment Services $ 2,491 $ 566 $ 937
Asset Management 336 252 208
===============================================================================================
Total $ 2,827 $ 818 $ 1,145
===============================================================================================
Year-end total assets:
Investment Services $ 222,373 $210,577 $275,440
Asset Management 1,461 1,324 1,180
===============================================================================================
Total $ 223,834 $211,901 $276,620
===============================================================================================
</TABLE>
F-18
<PAGE> 59
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying table summarizes the Company's operations by geographic areas
which are determined principally by the respective legal jurisdictions of SSBH's
subsidiaries. Substantially all amounts for the asset management segment are
included in North America. For purposes of this disclosure, North America
consists of the United States and Canada; Europe primarily consists of the
United Kingdom and Germany; Asia and other primarily consists of Japan and
Australia. Because of the global nature of the markets in which the Company
competes and the integration of the Company's worldwide business activities, the
Company believes that amounts determined in this manner are not particularly
useful in understanding its business.
<TABLE>
<CAPTION>
Revenues
Before Income (Loss)
Interest Before Income Total
Dollars in millions Expense Taxes Assets
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1999
North America $20,006 $ 4,074 $175,770
Europe 2,945 344 44,377
Asia and other 487 78 3,687
---------------------------------------------------------------------------------------------------------
Consolidated $23,438 $ 4,496 $223,834
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
North America $18,270 $ 2,873 $140,532
Europe 1,845 (1,483) 47,785
Asia and other 558 (74) 23,584
---------------------------------------------------------------------------------------------------------
Consolidated $20,673 $ 1,316 $211,901
---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
North America $16,601 $ 1,376 $162,684
Europe 4,506 351 82,497
Asia and other 370 93 31,439
---------------------------------------------------------------------------------------------------------
Consolidated $21,477 $ 1,820 $276,620
---------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE> 60
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Information regarding the Company's short-term borrowings used to finance
operations, including the securities settlement process, is presented below.
Average balances were computed based on month-end outstanding balances.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Bank borrowings:
Balance at year-end $4,529 $1,743
Weighted average interest rate 5.6% 4.2%
Annual averages --
Amount outstanding $1,671 $2,175
Weighted average interest rate 3.8% 5.3%
Maximum amount outstanding at any month-end $4,529 $3,532
-----------------------------------------------------------------------------------------------
Commercial paper:
Balance at year-end $12,578 $10,493
Weighted average interest rate 6.0% 5.3%
Annual averages --
Amount outstanding $10,691 $12,140
Weighted average interest rate 5.3% 5.6%
Maximum amount outstanding at any month-end $12,617 $14,187
-----------------------------------------------------------------------------------------------
Other short-term borrowings:
Balance at year-end $ 720 $3,259
Weighted average interest rate 5.8% 2.1%
Annual averages --
Amount outstanding $1,055 $3,141
Weighted average interest rate 5.4% 3.0%
Maximum amount outstanding at any month-end $1,657 $4,992
===============================================================================================
Total commercial paper and other short term borrowings $17,827 $15,495
===============================================================================================
</TABLE>
Outstanding bank borrowings include both U.S. dollar and non-U.S. dollar
denominated loans. The non-U.S. dollar loans are denominated in various
currencies including Japanese yen, German mark, U.K. sterling and European
Monetary unit. Included in bank borrowings at December 31, 1999, are $3.25
billion in loans with Citigroup bearing interest at various rates which were
repaid in January 2000. All of the Company's commercial paper outstanding at
December 31, 1999 and 1998 was U.S. dollar denominated. Also included in
short-term borrowings are deposit liabilities and other short-term obligations.
F-20
<PAGE> 61
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a $3.5 billion 364-day revolving credit agreement that extends
through May 2000. The Company may borrow under its revolving credit facility at
various interest rate options (LIBOR, CD or base rate) and compensates the banks
for the facility through facility fees. Under this facility the Company is
required to maintain a certain level of consolidated adjusted net worth (as
defined in the agreement). At December 31, 1999, this requirement was exceeded
by $3.5 billion. At December 31, 1999, there were no outstanding borrowings
under this facility. In addition, 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.
NOTE 9. TERM DEBT
Term debt consists of issues with original maturities in excess of one year.
Certain issues are redeemable, in whole or in part, at par or at premiums prior
to maturity.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Rate
Obligations Fixed Rate Total Fixed Variable
Swapped to Obligations Rate Rate Total Total
Dollars in millions Variable Not Swapped Obligations Obligations Dec. 31, 1999 Dec. 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated:
Salomon Smith Barney Holdings
Inc. (SSBH) $ 9,467 $2,059 $11,526 $3,633 $15,159 $15,524
Subsidiaries 236 - 236 299 535 1,683
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. dollar denominated 9,703 2,059 11,762 3,932 15,694 17,207
- ----------------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated:
Salomon Smith Barney Holdings
Inc. (SSBH) 989 - 989 1,266 2,255 1,812
Subsidiaries 846 - 846 26 872 1,132
- ----------------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated 1,835 - 1,835 1,292 3,127 2,944
- ----------------------------------------------------------------------------------------------------------------------------------
Term debt $11,538 $2,059 $13,597 $5,224 $18,821 $20,151
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The maturity structure of the Company's term debt, based on contractual
maturities or the earliest date on which the debt is repayable at the option of
the holder, was as follows at December 31, 1999:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Salomon Smith Barney
Holdings Inc.
Dollars in millions (SSBH) Subsidiaries Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 3,436 $ 285 $ 3,721
2001 2,657 251 2,908
2002 3,481 139 3,620
2003 3,334 131 3,465
2004 1,635 74 1,709
Thereafter 2,871 527 3,398
----------------------------------------------------------------------------------------------------
Total $17,414 $1,407 $18,821
----------------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE> 62
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company issues U.S. dollar and non-U.S. dollar denominated fixed and
variable rate term debt. Fixed rate debt matures at various dates through 2023.
The contractual interest rates on fixed rate debt ranged from .42% (Japanese yen
denominated) to 11.82% (U.S. dollar denominated) at December 31, 1999 and 1.25%
(U.S. dollar denominated) to 23.0% (Korean won denominated) at December 31,
1998. The weighted average contractual rate on total fixed rate term debt (both
U.S. dollar denominated and non-U.S. dollar denominated) was 6.22% at December
31, 1999 and 6.69% at December 31, 1998. The Company utilizes interest rate swap
agreements to convert most of its fixed rate term debt to variable rate
obligations. The maturity structure of the swaps generally corresponds with the
maturity structure of the debt being hedged.
The Company's non-U.S. dollar fixed rate term debt includes Japanese yen, German
mark, U.K. sterling, Italian lira, French franc, Portuguese escudos, European
Monetary unit and, consequently, bears a wide range of interest rates.
At December 31, 1999, the Company had outstanding approximately $3.1 billion of
non-U.S. dollar denominated term debt, which included $1.0 billion of German
mark denominated, $.6 billion of Japanese yen denominated, $.5 billion of U.K.
sterling denominated, and $.6 billion of European Monetary unit denominated
(converted at the December 31, 1999 spot rates). Of the $3.1 billion,
approximately $.5 billion of SSBH non-U.S. dollar denominated debt has been
designated as a hedge of investments in subsidiaries with functional currencies
other than the U.S. dollar. Another $1.3 billion of SSBH debt has been
effectively converted to U.S. dollar denominated obligations using
cross-currency swaps. The remaining $1.3 billion is used for general corporate
purposes.
F-22
<PAGE> 63
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company's fixed rate term debt that is
swapped to variable rate obligations using interest rate swaps at December 31,
1999 and 1998. The variable rates presented are indicative of the Company's
actual costs related to such obligations.
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- ---------------------------------------------
Contractual Contractual
Weighted Weighted
Average Fixed Weighted Average Fixed Weighted
Rate on Average Rate on Average
Principal Swapped Fixed Variable Rate Principal Swapped Fixed Variable Rate
(Dollars in millions) Balance Rate Term Debt Debt Balance Rate Term Debt Debt
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated $ 9,703 6.4% 6.2% $10,745 6.7% 5.5%
German mark denominated 846 7.3 3.6 1,045 7.4 3.5
Japanese yen denominated 303 1.0 .6 44 4.5 0.6
Japanese yen swapped to
U.S. dollar denominated 170 4.8 5.8 193 4.0 4.7
French francs swapped to
U.S. dollar denominated 153 5.4 6.2 181 5.4 5.5
Italian lira swapped to
U.S. dollar denominated 171 1.4 6.2 100 2.1 5.2
U.K. sterling denominated 121 7.8 5.3 129 7.8 7.6
Portuguese escudos swapped
to U.S. dollar denominated 13 7.5 6.1 78 5.0 4.9
European Monetary units
swapped to U.S. dollar
denominated 58 4.6 5.9 12 3.1 5.2
Korean won swapped to U.S
dollar denominated - - - 11 23.0 4.7
- ---------------------------------------------------------------------------------------------------------------------------
Total swapped
fixed rate term debt $11,538 6.2% 5.9% $12,538 6.6% 5.3%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Variable rate term debt matures at various dates through 2026. The interest
rates are determined periodically by reference to money market rates, or in
certain instances, are calculated based on stock or bond market indices as
specified in the agreements governing the respective issues. The interest rates
on variable rate term debt ranged from 0.25% (Japanese yen denominated) to 8.64%
(U.S. dollar denominated) at December 31, 1999 and 0.96% (Japanese yen
denominated) to 8.75% (U.S. dollar denominated) at December 31, 1998. The
weighted average contractual rate on total variable rate term debt (both U.S.
dollar denominated and non-U.S. denominated) was 5.53% at December 31, 1999 and
5.14% at December 31, 1998.
Term debt includes subordinated debt, which totaled $26 million at December 31,
1999 and $30 million at December 31, 1998. At December 31, 1999 and 1998,
subordinated debt included approximately $5 million and $6 million of
convertible restricted notes, convertible at the rate of $5.46 per share
into 837,526 and 1,002,781 shares of Citigroup common stock, respectively.
At December 31, 1999, the Company had outstanding $254 million of term debt
for which the principal repayment is linked to certain equity securities of
unaffiliated issuers.
The Company has a $1.5 billion revolving credit agreement with a bank syndicate
that extends through May 2001, under which it may borrow at various interest
rate options (LIBOR, CD or base rate) and compensates the banks for the facility
through facility fees. At December 31, 1999, there were no outstanding
borrowings under this facility.
F-23
<PAGE> 64
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under this facility the Company is required to maintain a certain level of
consolidated adjusted net worth (as defined in the agreement). At December 31,
1999, this requirement was exceeded by $3.5 billion.
NOTE 10. LEASE COMMITMENTS
The Company has noncancelable leases covering office space and equipment
expiring on various dates through 2012. Presented below is a schedule of minimum
future rentals on noncancelable operating leases, net of subleases, as of
December 31, 1999. Various leases contain provisions for lease renewals and
escalation of rent based on increases in certain costs incurred by the lessors.
<TABLE>
<CAPTION>
------------------------------------------------
Dollars in millions
------------------------------------------------
<S> <C>
2000 $ 243
2001 243
2002 217
2003 156
2004 119
Thereafter 478
------------------------------------------------
Minimum future rentals $1,456
------------------------------------------------
</TABLE>
Rent expense under operating leases from continuing operations totaled $291
million, $259 million and $258 million for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 11. MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
SSBH has formed two statutory business trusts under the laws of the state of
Delaware that exist for the exclusive purposes of (i) issuing trust securities
representing undivided beneficial interests in the assets of the Trust; (ii)
investing the gross proceeds of the trust securities in subordinated debt
securities of SSBH (in the case of SI Financing Trust I) and junior subordinated
deferrable interest debt securities of SSBH (in the case of SSBH Capital I); and
(iii) engaging in only those activities necessary or incidental thereto. These
subordinated debt securities and the related income effects are eliminated in
the consolidated financial statements. Distributions on the mandatorily
redeemable securities of subsidiary trusts below have been classified as
interest expense in the consolidated statement of income.
F-24
<PAGE> 65
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the financial structure of SSBH's subsidiary
trusts at December 31, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SI Financing SSBH
Trust I Capital I
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Trust Securities
Issuance date July 1996 January 1998
Securities issued 13,800,000 16,000,000
Liquidation preference per security $ 25 $ 25
Liquidation value (in millions) $345 $400
Coupon rate 9.25% 7.20%
Distributions payable Quarterly Quarterly
Distributions guaranteed by SSBH SSBH
Common securities issued to SSBH 426,800 494,880
Subordinated Debt Securities:
Amount owned (in millions) $356 $412
Coupon rate 9.25% 7.20%
Interest payable Quarterly Quarterly
Maturity date June 30, 2026 January 28, 2038
Redeemable by issuer on or after June 30, 2001 January 28, 2003
- -----------------------------------------------------------------------------------------------
</TABLE>
SI Financing Trust I, a wholly owned subsidiary of SSBH, issued TRUPS(R) units
to the public. Each TRUPS(R) unit includes a security of SI Financing Trust I,
as shown in the table above, and a purchase contract that requires the holder to
purchase, in 2021 (or earlier if SSBH elects to accelerate the contract), one
depositary share representing a one-twentieth interest in a share of Citigroup
9.50% Cumulative Preferred Stock, Series L. SSBH is obligated under the terms of
each purchase contract to pay contract fees of 0.25% per annum.
NOTE 12. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to various securities and
commodities regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the countries in which they operate.
Capital requirements related to the Company's principal regulated subsidiaries
are as follows:
<TABLE>
<CAPTION>
Excess over
Dollars in millions Net Capital minimum
Subsidiary Jurisdiction or equivalent requirement
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salomon Smith Barney Inc. U.S. Securities and Exchange Commission Uniform Net $3,204 $2,732
Capital Rule (Rule 15c3-1)
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $3,675 $ 963
Salomon Brothers AG Germany's Banking Supervisory Authority $ 206 $ 179
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE> 66
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advances, dividend payments and other equity withdrawals from regulated
subsidiaries are restricted by the regulations of the U.S. Securities and
Exchange Commission, the New York Stock Exchange and other regulatory agencies
and by certain covenants contained in the Company's revolving credit facilities.
See Notes 8 and 9 to the consolidated financial statements. These restrictions
may limit the amounts that these subsidiaries pay as dividends or advances to
the Company. In addition, in order to maintain its triple-A rating, Salomon
Swapco Inc ("Swapco"), an indirect wholly owned subsidiary of the Company, must
maintain minimum levels of capital in accordance with agreements with its
rating agencies. At December 31, 1999, Swapco was in compliance with all such
agreements. Swapco's capital requirements are dynamic, varying with the size
and concentration of its counterparty receivables.
NOTE 13. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company participates in defined benefit pension plans that cover certain
U.S. and Non-U.S. employees. These plans resulted in expenses from operations of
$41 million, $53 million and $53 million in 1999, 1998 and 1997, respectively.
The Company has defined contribution employee savings plans covering certain
eligible employees. The costs relating to these plans were $7 million, $23
million and $34 million in 1999, 1998 and 1997, respectively.
HEALTH CARE AND LIFE INSURANCE
The Company provides certain health care and life insurance benefits for its
active employees, qualifying retired U.S. employees and certain non-U.S.
employees who reach the retirement criteria specified by the various plans. At
December 31, 1999, there were approximately 32,300 active and 1,500 retired
employees eligible for such benefits.
Expenses recorded for health care and life insurance benefits from continuing
operations were $123 million, $109 million, and $121 million in 1999, 1998 and
1997, respectively.
EMPLOYEE INCENTIVE PLANS
The Company participates in a stock option plan sponsored by Citigroup that
provides for the granting of stock options in Citigroup common stock to officers
and key employees. SFAS 123, Accounting for Stock-Based Compensation ("SFAS
123"), allows the fair value of stock-based compensation to be included in
expense over the period earned; alternatively, if the fair value of stock-based
compensation awards is not included in expense, SFAS 123 requires disclosure of
net income, on a pro forma basis, as if expense treatment had been applied. As
permitted by SFAS 123, the Company continues to account for such compensation
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, pursuant to which no compensation cost has been recognized in
connection with the issuance of stock options. Had the Company applied SFAS 123
in accounting for stock options, net income would have been reduced by $114
million, $79 million and $40 million in 1999, 1998 and 1997, respectively.
F-26
<PAGE> 67
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following assumptions were used to calculate the effect of SFAS 123:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Assumptions 1999 1998 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 46.0% 35.1% 31.8%
Risk-free interest rate 5.08% 5.05% 5.77%
Expected annual dividends per share $0.63 $0.43 $0.31
Expected annual forfeiture rate 5% 5% 5%
----------------------------------------------------------------------------------------------------
</TABLE>
In 1998 certain employees of the Company received Deferred Stock Awards ("DSA").
A DSA award is an unfunded promise to deliver shares at the end of a three-year
deferral period. It is comprised of a basic award representing a portion of the
participant's prior year incentive award which vests immediately upon grant, and
an additional premium award amounting to 33% of the basic award which vests
one-third per year over a three year period. The entire award is forfeited if
the participant leaves the Company to join a competitor within three years after
the award date. Participants may elect to receive a portion of their award in
the form of stock options. The basic portion of the award is expensed in the
bonus year that it was earned. The expense associated with the additional 33%
premium award is amortized over the appropriate vesting period. After-tax
expense of approximately $150 million was recognized during 1998 for 1998 awards
that were granted in January 1999.
The Company has various incentive plans, including the Equity Partnership Plan,
under which stock of Citigroup is purchased for subsequent distribution to
employees, subject to vesting requirements. These plans resulted in expenses of
$340 million, $312 million and $301 million for the years ended December 31,
1999, 1998 and 1997, respectively.
NOTE 14. INCOME TAXES
The components of income taxes reflected on the consolidated statements of
income are:
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision/(benefit):
U.S. federal $1,302 $ 649 $ 817
State and local 192 117 250
Non-U.S. 168 (14) 283
----------------------------------------------------------------------------------------
Total current tax provision 1,662 752 1,350
----------------------------------------------------------------------------------------
Deferred tax provision/(benefit):
U.S. federal 22 (293) (424)
State and local - (21) (142)
Non-U.S. (15) 60 (109)
----------------------------------------------------------------------------------------
Total deferred tax provision/(benefit) 7 (254) (675)
----------------------------------------------------------------------------------------
Provision for income taxes $1,669 $ 498 $ 675
----------------------------------------------------------------------------------------
</TABLE>
F-27
<PAGE> 68
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS 109, Accounting for Income Taxes, temporary differences between
recorded amounts and the tax bases of assets and liabilities are measured using
the enacted tax rates and laws that will be in effect when such differences are
expected to reverse.
At December 31, 1999 and December 31, 1998, respectively, the Company's
consolidated statements of financial condition included net deferred tax assets
of $1,087 million and $1,100 million, comprised of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee benefits and deferred compensation $1,298 $1,191
U.S. taxes provided on the undistributed earnings of non-U.S subsidiaries 81 67
Other deferred tax assets 316 488
---------------------------------------------------------------------------------------------------------
Total deferred tax assets 1,695 1,746
---------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Intangible assets (358) (302)
Investment position activity (5) (10)
Cumulative translation adjustments (73) (89)
Lease obligations and fixed assets (92) (2)
Other deferred tax liabilities (80) (243)
---------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (608) (646)
---------------------------------------------------------------------------------------------------------
Net deferred tax asset $1,087 $1,100
---------------------------------------------------------------------------------------------------------
</TABLE>
The Company had no deferred tax valuation allowance at December 31, 1999 or
December 31, 1998.
Tax benefits (liabilities) allocated directly to stockholder's equity were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation $ 10 $ (10) $ (11)
Employee stock plans 12 8 82
Hedge of preferred stock dividends paid - - (10)
---------------------------------------------------------------------------------------------------------------------
Total tax benefits (liabilities) allocated directly to stockholder's
equity $ 22 $ (2) $ 61
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company paid taxes, net of refunds, of $1,610 million, $693 million and $918
million in 1999, 1998 and 1997, respectively.
The Company provides income taxes on the undistributed earnings of foreign
subsidiaries except to the extent that such earnings are indefinitely invested
outside the United States. At December 31, 1999, $1.3 billion of the
F-28
<PAGE> 69
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's accumulated undistributed earnings was indefinitely invested. At the
existing U.S. federal income tax rate, additional taxes of $399 million would
have to be provided if such earnings were remitted to the United States.
The following table reconciles the U.S. federal statutory income tax rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate for corporations 35% 35% 35%
Impact of:
State and local (net of U.S. federal tax) and foreign taxes 3 5 4
Tax advantaged income (1) (3) (3)
Other, net - 1 1
---------------------------------------------------------------------------------------------------------------
Effective tax rate 37% 38% 37%
---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15. PLEDGED ASSETS, COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the approximate market values of securities sold under
agreements to repurchase or other assets pledged by the Company, excluding the
impact of FIN 41, were:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Dollars in millions
------------------------------------------------------------------------------------------------------
<S> <C>
For securities sold under agreements to repurchase $138,331
As collateral for securities borrowed of approximately equivalent value 69,187
For securities loaned 11,923
As collateral on bank loans 3,862
To clearing organizations or segregated under securities laws and regulations 1,732
Other 928
------------------------------------------------------------------------------------------------------
Repurchase agreements and securities pledged $225,963
------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, the Company had $2.2 billion of outstanding letters of
credit from banks to satisfy various collateral and margin requirements.
OTHER CONTINGENCIES
The Company has provided a residual guarantee of $586 million in connection with
the lease of buildings occupied by the Company's executive offices and New York
operations.
On July 31, 1993, Smith Barney Holdings Inc. (a predecessor of Salomon Smith
Barney Holdings Inc.) ("Smith Barney"), along with certain of its affiliates and
Citigroup (formerly known as Travelers Group Inc.), acquired the domestic retail
brokerage and asset management businesses (the "Shearson Acquisition") of Lehman
Brothers Holdings Inc. (then known as Shearson Lehman Brothers Holdings Inc.)
and its subsidiaries. In conjunction with the Shearson Acquisition, Smith Barney
has agreed to pay American Express Company additional amounts contingent upon
Smith Barney's future performance, including 10% of its after-tax profits in
excess of $250 million
F-29
<PAGE> 70
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
per year over a five-year period (1998 was the final year for this portion of
the payout.) Amounts paid under this agreement in 1999 were $75 million
(representing the 1998 payout) and $75 million in 1997. The contingent
consideration is accounted for prospectively, as additional purchase price, and
results in amortization over periods of up to 20 years.
NOTE 16. 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 results of operations, financial
condition, or liquidity; 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 17. FINANCIAL INSTRUMENTS, COMMODITIES AND CONTRACTUAL COMMITMENTS AND
RELATED RISKS
The Company and its subsidiaries enter into a variety of contractual
commitments, such as swaps, cap and floor agreements, swap options, futures
contracts, forward currency contracts, forward purchase and sale agreements,
option contracts and warrants. These transactions generally require future
settlement, and are either executed on an exchange or traded as OTC instruments.
Contractual commitments have widely varying terms, and durations that range from
a few days to a number of years depending on the instrument.
Interest rate swaps are OTC instruments where two counterparties agree to
exchange periodic interest payment streams calculated on a predetermined
notional principal amount. The most common interest rate swaps generally involve
one party paying a fixed interest rate and the other party paying a variable
rate. Other types of swaps include basis swaps, cross-currency swaps, equity
swaps and commodity swaps. Basis swaps consist of both parties paying variable
interest streams based on different reference rates. Cross-currency swaps
involve the exchange of coupon payments in one currency for coupon payments in
another currency. An equity swap is an agreement to exchange cash flows on a
notional amount based on changes in the values of a referenced index, such as
the Standard & Poor's 500 Index. Commodity swaps involve the exchange of a fixed
price of a commodity for a floating price or the exchange of one floating price
for a different floating price, throughout the swap term. The most common
commodity swaps involve oil and natural gas.
F-30
<PAGE> 71
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Caps are contractual commitments that require the writer to pay the purchaser an
excess amount, if the reference rate exceeds a contractual rate at specified
times during the contract. Likewise, a floor is a contractual commitment that
requires the writer to pay an excess amount, if any, of a contractual rate over
a reference rate at specified times over the life of the contract. Swap options
are OTC contracts that entitle the holder to either enter into an interest rate
swap at a future date or to cancel an existing swap at a future date.
Futures contracts are exchange-traded contractual commitments to either receive
(purchase) or deliver (sell) a standard amount or value of a commodity or
financial instrument at a specified future date and price (or, with respect to
futures contracts on indices, the net cash amount). Maintaining a futures
contract will typically require the Company to deposit with the futures exchange
(or other financial intermediary), as security for its obligations, an amount of
cash or other specified asset ("initial margin") that typically ranges from 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited daily as the mark-to-market value of the futures contract
fluctuates. Futures contracts may be settled by physical delivery of the
underlying asset or cash settlement (for index futures) on the settlement date,
or by entering into an offsetting futures contract with the futures exchange
prior to the settlement date. Forward contracts are OTC contractual commitments
to purchase or sell a specified amount of foreign currency, financial
instruments, or commodities at a future date at a predetermined price. The
notional amount for forward settling securities transactions represents the
amount of cash that will be paid or received by the counterparties when the
transaction settles. Upon settlement, the security is reflected on the statement
of financial condition as either financial instruments and commodities owned and
contractual commitments or financial instruments and commodities sold, not yet
purchased, and contractual commitments.
Option contracts are contractual agreements that give the purchaser the right,
but not the obligation, to purchase or sell a currency, financial instrument or
commodity at a predetermined price. In return for this right, the purchaser pays
a premium to the seller (or writer) of the option. Option contracts also exist
for various indices and are similar to options on a security or other
instruments except that, rather than settling by physical delivery of the
underlying instrument, they are settled in cash. Options on futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract. Warrants have characteristics similar to those
of options whereby the buyer has the right, but not the obligation, to purchase
a certain instrument at a specific future date and price. The seller (or writer)
of the option/warrant is subject to the risk of an unfavorable change in the
underlying financial instrument, commodity, or currency. The purchaser is
subject to market risk to the extent of the premium paid and credit risk. The
Company is obligated to post margin for options on futures. Option contracts may
be either exchange-traded or OTC. Exchange-traded options issued by certain
regulated intermediaries, such as the Options Clearing Corporation, are the
obligations of the issuing intermediary. In contrast to such options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including the method of settlement, term, exercise price,
premium, guarantees and security, are determined by negotiation of the
F-31
<PAGE> 72
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
parties, and there is no intermediary between the parties to assume the risks of
performance. The Company issues warrants that entitle holders to cash
settlements on exercise based upon movements in market prices of specific
financial instruments and commodities, foreign exchange rates and equity
indices.
The Company sells various financial instruments that have not been purchased
("short sales"). In order to sell them short, the Company borrows these
securities, or receives the securities as collateral in conjunction with
short-term financing agreements and, at a later date, must deliver (i.e.
replace) like or substantially the same financial instruments or commodities to
the parties from which they were originally borrowed. The Company is exposed to
market risk for short sales. If the market value of an instrument sold short
increases, the Company's obligation, reflected as a liability, would increase
and revenues from principal transactions would be reduced.
The way in which the Company accounts for and presents contractual commitments
in its financial statements depends on both the type and purpose of the
contractual commitment held or issued. As discussed in Note 1 to the
consolidated financial statements, the Company records all derivatives used for
trading purposes, including those used to hedge trading positions, at market or
fair value. Consequently, changes in the amounts recorded in the Company's
consolidated statements of financial condition resulting from movements in
market or fair value are included in "Principal transactions" in the period in
which they occur. The accounting and reporting treatment of derivatives used for
non-trading purposes varies, depending on the nature of exposure being hedged.
Contractual commitments and short sales risk may expose the Company to both
market risk and credit risk in excess of the amount recorded on the consolidated
statements of financial condition. These off-balance sheet risks are discussed
in more detail below.
Market Risk
Market risk is the potential loss the Company may incur as a result of changes
in the market or fair value of a particular financial instrument, commodity
or contractual commitment. All financial instruments, commodities and
contractual commitments, including short sales, are subject to market risk. The
Company's exposure to market risk is determined by a number of factors,
including the size, duration, composition and diversification of positions held,
the absolute and relative levels of interest rates and foreign currency exchange
rates, as well as market volatility and illiquidity. For instruments such as
options and warrants, the time period during which the options or warrants may
be exercised and the relationship between the current market price of the
underlying instrument and the option's or warrant's contractual strike or
exercise price also affect the level of market risk. The most significant factor
influencing the overall level of market risk to which the Company is exposed is
its use of hedging techniques to mitigate such risk. The Company manages market
risk by setting risk limits and monitoring the effectiveness of its hedging
policies and strategies.
F-32
<PAGE> 73
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and SFAS 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, require the disclosure of the notional amounts
of derivative financial instruments, distinguishing between those used for
trading purposes and those used for purposes other than trading. The
determination of notional amounts does not consider any of the market risk
factors discussed above. Notional amounts are indicative only of the volume of
activity and are not a measure of market risk. Market risk is influenced by the
nature of the items that comprise a particular category of financial instrument.
Market risk is also influenced by the relationship among the various off-balance
sheet categories as well as the relationship between off-balance sheet items and
items recorded in the Company's consolidated statements of financial condition.
For all of these reasons, the interpretation of notional amounts as a measure of
market risk could be materially misleading.
F-33
<PAGE> 74
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of contractual commitments as of December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
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) $ 528.1 $ - $ - $ 858.3 $ - $ -
Other exchange-issued products:
Equity contracts 8.4 .3 .3 9.5 .1 .2
Fixed income contracts 1.2 - - 118.1 - .1
Physical commodities contracts 1.2 - - 1.3 - -
- --------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 538.9 .3 .3 987.2 .1 .3
- --------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps
and floors:
Swaps 2,752.0 2,395.3
Swap options written 100.2 81.7
Swap options purchased 84.6 85.4
Caps and floors 274.9 191.8
- --------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors (b) 3,211.7 5.5 8.1 2,754.2 8.2 8.8
- --------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 34.1 .1 .1 146.7 1.0 1.3
Options written 8.2 - .2 52.3 - .8
Options purchased 7.8 .2 - 47.3 1.1 -
- --------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 50.1 .3 .3 246.3 2.1 2.1
- --------------------------------------------------------------------------------------------------------------------------------
Other contractual commitments:
Options and warrants on equities and equity indices 62.6 5.4 6.6 63.3 3.1 3.2
Options and forward contracts on fixed income securities 210.2 .8 1.0 383.8 .6 1.1
Physical commodities contracts 12.4 .2 .1 7.0 .2 .2
- --------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,085.9 $12.5 $16.4 $4,441.8 $14.3 $15.7
================================================================================================================================
</TABLE>
(a) Margin on futures contracts is included in receivables/payables to brokers,
dealers and clearing organizations on the 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 $15.5 billion and $2.1 billion at December 31, 1999 and
$16.2 billion and $6.1 billion at December 31, 1998, respectively.
The annual average balances of the Company's contractual commitments, based on
month-end balances, are as follows:
<TABLE>
<CAPTION>
1999 1998
Average Average Average Average
Dollars in billions Assets Liabilities Assets Liabilities
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swaps, swap options, caps and floors $ 6.1 $ 7.3 $ 7.2 $ 7.8
Index and equity contracts and options 3.6 4.2 2.6 3.3
Foreign exchange contracts and options 1.1 1.1 2.2 2.1
Physical commodities contracts .2 .1 .3 .2
Forward contracts on fixed income securities .9 .9 .6 1.0
------------------------------------------------------------------------------------------------------------
Total contractual commitments $11.9 $13.6 $12.9 $14.4
============================================================================================================
</TABLE>
Credit Risk
The Company regularly transacts business with retail customers, and
transacts with, or owns securities issued by, a broad range of corporations,
governments, international organizations, central banks and other financial
institutions. Phibro regularly transacts business with independent and
government-owned oil producers, a wide variety of end users, trading companies
and financial institutions. Credit risk is measured by the loss the Company
would record if its counterparties failed to perform pursuant to the terms of
their contractual obligations and the value of collateral held, if any, was not
adequate to cover such losses. The Company has established controls to monitor
the creditworthiness of counterparties, as well as the quality of pledged
collateral, and uses bilateral security
F-34
<PAGE> 75
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreements and master netting agreements whenever possible to mitigate the
Company's exposure to counterparty credit risk. Master netting agreements enable
the Company to net certain assets and liabilities by counterparty. The Company
also nets across product lines and against cash collateral, provided such
provisions are established in the master netting and cash collateral agreements.
The Company may require counterparties to submit additional collateral pursuant
to the above agreements when deemed necessary.
The Company enters into collateralized financing agreements in which it extends
short-term credit, primarily to major financial institutions. The Company
controls access to the collateral pledged by the counterparties, which consists
largely of securities issued by the G-7 governments or their agencies, that may
be liquidated in the event of counterparty default.
In addition, margin levels are monitored daily and additional collateral must be
deposited as required. If customers cannot meet collateral requirements, the
Company will liquidate sufficient underlying financial instruments to bring the
account in compliance with the required margin level.
Concentrations of Credit Risk
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of issuers or counterparties
have similar business characteristics or are engaged in like activities that
would cause their ability to meet their contractual commitments to be adversely
affected, in a similar manner, by changes in the economy or other market
conditions. The Company monitors credit risk on both an individual and group
counterparty basis. The Company's largest single concentration of credit risk
is with securities issued by the U.S. government and its agencies, which
totaled $25.7 billion at December 31, 1999 and $24.6 billion at December 31,
1998. With the addition of U.S. government and U.S. government agency
securities pledged as collateral by counterparties in connection with
collateralized financing activity, the Company's total holdings of U.S.
government securities were $130.2 billion or 48% of the Company's total assets
before FIN 41 netting at December 31, 1999 and $114.1 billion or 43% of the
Company's total assets before FIN 41 netting at December 31, 1998. Similarly,
concentrations with non-U.S. governments totaled $34.4 billion at December 31,
1999 and $47.6 billion at December 31, 1998. These consist predominantly of
securities issued by the governments of major industrial nations. Remaining
concentrations arise principally from contractual commitments with
counterparties in financial or commodities transactions involving future
settlement and fixed income securities owned. Excluding governments, no
concentration with a single counterparty exceeded 1% of total assets at
December 31, 1999 or 1998. North America and Europe represent the largest
geographic concentrations. Among industries, other major derivatives dealers
represent the largest group of counterparties.
F-35
<PAGE> 76
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. FAIR VALUE INFORMATION
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires the
disclosure of the fair value of all financial instruments. The following
information is presented to help users gain an understanding of the relationship
between the amounts reported in the Company's financial statements and the
related market or fair values. Specific accounting policies are discussed in
Note 1 to the consolidated financial statements.
At December 31, 1999, $217 billion or 97% of the Company's total assets and $200
billion or 94% of the Company's total liabilities were carried at market value
or fair value or at amounts that approximate such values. At December 31, 1998,
$206 billion or 97% of the Company's total assets and $188 billion or 93% of the
Company's total liabilities were carried at either market or fair values or at
amounts that approximate such values. Financial instruments recorded at market
or fair value include cash and cash equivalents, financial instruments,
commodities and contractual commitments used for trading purposes.
Financial instruments recorded at contractual amounts that approximate market or
fair value include collateralized short-term financing agreements, receivables,
commercial paper and other short-term borrowings, payables and accrued
liabilities, and variable rate term debt. The market values of such items are
not materially sensitive to shifts in market interest rates because of the
limited term to maturity of many of these instruments and/or their variable
interest rates.
The following table reflects financial instruments which are recorded at
contractual or historical amounts that do not necessarily approximate market or
fair value. Such instruments include U.S. dollar denominated collateralized
mortgage obligations ("CMOs") and the assets securing U.S. dollar denominated
CMOs, the Company's fixed rate term debt, as well as the fair value of
derivative instruments that are used for non-trading, or end user, purposes.
Dollars in billions
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
Assets Liabilities Assets Liabilities
Carrying Fair Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value Value Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial instruments primarily recorded at
contractual amounts or historical amounts
that do not necessarily approximate market
or fair value:
Assets securing U.S. dollar denominated CMOs
(fixed rate) $ - $ - $ .1 $ .1
U.S. dollar denominated CMOs (fixed rate) $ - $ - $ .1 $ .1
Fixed rate term debt 13.6 13.5 14.6 15.1
- --------------------------------------------------------------------------------------------------------------------------
Derivatives used for non-trading purposes $ - $ - $ - $ .1 $ - $ .6 $ - $ .2
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE> 77
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of fixed rate term debt has been estimated by using a discounted
cash flow analysis. The Company's U.S. dollar denominated fixed rate CMOs and
assets securing U.S. dollar denominated fixed rate CMOs are carried at their
contractual amounts. CMOs and the assets that secure them should not be viewed
independently. Taken together, the fair value of the Company's dollar
denominated CMOs and the assets securing them is the present value of the
difference between future cash inflows from the CMO collateral and cash outflows
to service the CMOs.
NOTE 19. RELATED PARTY BALANCES
The Company has related party balances with Citigroup, certain of its
subsidiaries and affiliates. These balances, which are short-term in nature,
include cash accounts, collateralized financing transactions, margin accounts,
derivative trading, charges for operational support and the borrowing and
lending of funds and are entered into in the ordinary course of business.
NOTE 20. OTHER EVENTS
In March 1997, the Board of Directors of Salomon approved a non-binding letter
of intent to sell all of the outstanding stock of Basis Petroleum to Valero
Energy Corporation ("Valero") and a plan of disposition for Basis Petroleum. The
sale was completed on May 1, 1997. Proceeds from the sale included cash of $365
million, Valero common stock with a market value of $120 million and
participation payments based on a fixed notional throughput and the difference,
if any, between an average market crackspread, as defined, and a base
crackspread, as defined, over each of the next ten years. The total of the
participation payments is capped at $200 million, with a maximum of $35 million
per year. During 1999, the Company did not receive any participation payments
from Valero, in 1998 the Company received $11 million in participation payments.
In addition, as a result of Valero's merger agreement with PG&E Corporation,
Valero's common stock was exchanged for stock of PG&E Corporation and a new
stock of the "spin-off" company ("New Valero"), representing Valero's refining
assets. In the third quarter of 1997, the Company liquidated its interest in the
PG&E and New Valero common stock. In July 1997, the Company paid Valero $3
million in connection with the final determination of working capital. The
Company's investment in Genesis Energy, L.P., a publicly traded crude oil
gathering, marketing and transportation partnership, was not transferred to
Valero.
F-37
<PAGE> 78
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. SSBH ONLY CONDENSED FINANCIAL STATEMENTS
The following are condensed financial statements of Salomon Smith Barney
Holdings Inc. (SSBH Only):
SSBH ONLY CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues, net of interest expense $ 64 $202 $ 213
Restructuring (credit) charge, net (121) - 180
Noninterest expenses 76 94 154
-------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 109 108 (121)
Provision/ (benefit) for income taxes 23 (24) (57)
Equity in earnings of subsidiaries 2,726 686 1,209
-------------------------------------------------------------------------------------------------------
Net income $2,812 $818 $1,145
=======================================================================================================
</TABLE>
SSBH ONLY CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Dollars in millions
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ - $ 3
Financial instruments owned and contractual commitments 194 152
Receivables 503 349
Receivable from subsidiaries (1) 32,525 32,570
Investment in subsidiaries 8,367 7,293
Property, equipment and leasehold improvements, net 12 216
Other assets 2,297 1,818
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 43,898 $ 42,401
==================================================================================================================================
Liabilities and stockholder's equity:
Commercial paper and other short-term borrowings $ 13,080 $ 11,210
Financial instruments sold, not yet purchased, and
contractual commitments 432 863
Other liabilities 2,878 3,456
Term debt 17,414 17,336
Subordinated debt payable to SI Financing Trust I 356 356
Subordinated debt payable to SSBH Capital Trust I 412 412
-------- --------
Total liabilities 34,572 33,633
Stockholder's equity 9,326 8,768
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 43,898 $ 42,401
==================================================================================================================================
</TABLE>
(1) Includes $3.2 billion and $3.8 billion of subordinated note receivables at
December 31, 1999 and December 31, 1998, respectively.
F-38
<PAGE> 79
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SSBH ONLY CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Dollars in millions
Year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in commercial paper and other short-term
borrowings $ 1,870 $ 2,487 $ 6,603
Proceeds from issuance of term debt 3,795 4,155 7,984
Term debt maturities and repurchases (3,590) (4,837) (3,955)
Other capital transactions 37 - (95)
Dividends paid (2,285) (732) (604)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (173) 1,073 9,933
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in receivables from subsidiaries, net 349 (2,150) (11,356)
Dividends received from subsidiaries 1,975 841 834
Capital infusions and other capital transactions with subsidiaries (242) (166) (69)
Purchases of property, equipment and leasehold improvements - - (9)
Proceeds from sale of Basis Petroleum - - 365
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities 2,082 (1,475) (10,235)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (1,912) 405 299
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3) 3 (3)
Cash and cash equivalents at beginning of year 3 0 3
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 0 $ 3 $ 0
============================================================================================================================
</TABLE>
BASIS OF PRESENTATION
The accompanying condensed financial statements, which include the accounts of
SSBH, a wholly owned subsidiary of Citigroup, should be read in conjunction with
the consolidated financial statements of the Company.
Investments in subsidiaries are accounted for under the equity method. For
information regarding the Company's term debt see Note 9 to the consolidated
financial statements.
RELATED PARTY TRANSACTIONS
SSBH engages in various transactions with its subsidiaries that are
characteristic of a consolidated group under common control. As a public debt
issuer, SSBH has access to long-term sources of funds that are loaned from SSBH
to certain of its subsidiaries. Such intercompany advances are payable on demand
and bear interest at varying rates.
F-39
<PAGE> 80
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results for the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
Dollars in millions March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest revenues $3,224 $3,084 $2,682 $3,173
Net interest and dividends 364 452 391 387
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,588 3,536 3,073 3,560
Expenses, excluding interest 2,256 2,434 2,209 2,362
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,332 1,102 864 1,198
Provision for income taxes 488 406 326 449
- ----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
Change in accounting principle 844 696 538 749
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle
(net of tax benefit of $12) (15) - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 829 $ 696 $ 538 $ 749
==================================================================================================================================
</TABLE>
Quarterly results for the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
Dollars in millions March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest revenues $2,733 $2,334 $ 588 $2,116
Net interest and dividends 395 401 325 315
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,128 2,735 913 2,431
Expenses, excluding interest 2,318 1,766 1,437 2,370
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 810 969 (524) 61
Provision/(benefit) for income taxes 308 368 (199) 21
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 502 $ 601 $ (325) $ 40
==================================================================================================================================
</TABLE>
F-40
<PAGE> 1
EXHIBIT 12.01
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
Calculation of Ratio of Earnings to Fixed Charges
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
Dollars in millions 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations:
Income from continuing operations before income taxes
and cumulative effect of change in accounting principles $ 4,496 $ 1,316 $ 1,820 $ 3,064 $ 1,820
Add fixed charges (see below) 9,778 11,523 10,626 8,265 8,890
Other adjustments 0 0 0 1 0
------- ------- ------- ------- -------
Earnings as defined $14,274 $12,839 $12,446 $11,330 $10,710
======= ======= ======= ======= =======
Fixed charges from continuing operations:
Interest expense $ 9,681 $11,466 $10,530 $ 8,175 $ 8,797
Other adjustments 97 57 96 90 93
------- ------- ------- ------- -------
Fixed charges from continuing operations as defined $ 9,778 $11,523 $10,626 $ 8,265 $ 8,890
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 1.46 1.11 1.17 1.37 1.20
======= ======= ======= ======= =======
</TABLE>
NOTES:
The ratio of earnings to fixed charges from continuing operations was calculated
by dividing the sum of 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.
<PAGE> 1
Exhibit 23.01
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Salomon Smith Barney Holdings Inc.
We consent to the incorporation by reference in the following Registration
Statements on Form S-3 of Salomon Smith Barney Holdings Inc.:
Nos. 33-40600, 33-41932, 33-48199, 33-49136, 33-57922, 33-
51269, 33-54929, 33-56481, 333-01807, 333-02897, 333-11881,
333-38931, 333-45529 and 333-71667
of our report dated January 18, 2000 relating to our audit of the consolidated
financial statements of Salomon Smith Barney Holdings Inc. and Subsidiaries
included in the Form 10-K of Salomon Smith Barney Holdings Inc. for the year
ended December 31, 1999, which report is included in such Form 10-K.
/s/ PricewaterhouseCoopers LLP
- -----------------------------
New York, New York
March 13, 2000
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,624
<RECEIVABLES> 25,448
<SECURITIES-RESALE> 74,138
<SECURITIES-BORROWED> 35,979
<INSTRUMENTS-OWNED> 77,538
<PP&E> 953
<TOTAL-ASSETS> 223,834
<SHORT-TERM> 17,827
<PAYABLES> 28,083
<REPOS-SOLD> 75,801
<SECURITIES-LOANED> 10,279
<INSTRUMENTS-SOLD> 62,952
<LONG-TERM> 18,821
0
0
<COMMON> 0
<OTHER-SE> 9,326
<TOTAL-LIABILITY-AND-EQUITY> 223,834
<TRADING-REVENUE> 2,562
<INTEREST-DIVIDENDS> 11,275
<COMMISSIONS> 3,642
<INVESTMENT-BANKING-REVENUES> 3,012
<FEE-REVENUE> 2,650
<INTEREST-EXPENSE> 9,681
<COMPENSATION> 6,847
<INCOME-PRETAX> 4,496
<INCOME-PRE-EXTRAORDINARY> 2,827
<EXTRAORDINARY> 0
<CHANGES> (15)
<NET-INCOME> 2,812
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
