UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 1-12484
SMITH BARNEY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1274088
------------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
388 Greenwich Street
New York, New York 10013
-------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 816-6000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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The registrant is a wholly owned subsidiary of Travelers Group Inc. As of the
date hereof, 100 shares of the registrant's common stock, par value $.10 per
share, were issued and outstanding.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instructions H 1 (a)
and (b) of Form 10-Q and therefore is filing this form with the reduced
disclosure format contemplated thereby.
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION Page Number
--------------------- -----------
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations
(Unaudited) - Three and Six Months Ended
June 30, 1996 and 1995 3
Condensed Consolidated Statements of Financial Condition -
June 30, 1996 (Unaudited) and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows (Unaudited)-
Six Months Ended June 30, 1996 and 1995 5 - 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 19
Part II. OTHER INFORMATION
------------------
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
2
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Commissions $ 577 $ 491 $1,182 $ 939
Principal trading 265 225 543 507
Investment banking 298 226 576 342
Asset management fees 331 242 648 479
Other 30 32 57 60
------ ------ ------ ------
Total non-interest revenues 1,501 1,216 3,006 2,327
------ ------ ------ ------
Interest and dividends 463 470 908 877
Interest expense 363 373 713 688
------ ------ ------ ------
Net interest and dividends 100 97 195 189
------ ------ ------ ------
Net revenues 1,601 1,313 3,201 2,516
------ ------ ------ ------
Expenses, excluding interest:
Employee compensation and benefits 898 788 1,811 1,530
Communications, occupancy and equipment 139 147 278 293
Floor brokerage and other production 35 33 74 67
Other operating and administrative expenses 155 115 298 221
------ ------ ------ ------
Total expenses, excluding interest 1,227 1,083 2,461 2,111
------ ------ ------ ------
Income before provision for income taxes 374 230 740 405
Provision for income taxes 145 97 288 173
------ ------ ------ ------
Net income $ 229 $ 133 $ 452 $ 232
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In millions, except share data)
June 30, December 31,
ASSETS 1996 1995
------ ----------- ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 259 $ 612
Cash segregated and on deposit
for Federal and other regulations 1,068 1,072
Securities purchased under agreements to resell 12,461 12,087
Deposits paid for securities borrowed 8,785 7,514
Receivable from brokers and dealers 446 510
Receivable from customers 6,769 6,048
Securities owned, at market value 10,851 8,984
Property, equipment and leasehold improvements,
at cost, net of accumulated depreciation and
amortization of $203 and $168, respectively 437 448
Excess of purchase price over fair value of net
assets acquired, net of accumulated amortization
of $65 and $61, respectively 283 287
Other assets 2,591 3,397
------- -------
$43,950 $40,959
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Commercial paper and other short-term borrowings $ 3,483 $ 2,955
Securities sold under agreements to repurchase 18,421 17,167
Deposits received for securities loaned 3,172 2,899
Payable to brokers and dealers 147 227
Payable to customers 3,346 4,176
Securities sold not yet purchased, at market value 6,282 4,563
Notes payable 1,985 1,885
Accounts payable and accrued liabilities 4,340 4,389
Subordinated indebtedness 246 224
------- -------
41,422 38,485
------- -------
Stockholder's equity:
Common stock ($.10 par value, 1,000 shares authorized;
100 shares issued and outstanding)
Additional paid-in capital 1,803 1,803
Retained earnings 720 666
Cumulative translation adjustment 5 5
------- -------
2,528 2,474
------- -------
$43,950 $40,959
======= =======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 452 $ 232
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 91 76
Deferred tax (benefit) provision 2 (22)
Other 17 16
(Increase) decrease in operating assets:
Cash segregated and on deposit for
Federal and other regulations 4 (1)
Securities purchased under agreements to resell (374) (3,911)
Deposits paid for securities borrowed (1,271) 9,515
Receivable from brokers and dealers 64 (171)
Receivable from customers (721) 1,834
Securities owned, at market value (1,867) (1,193)
Other assets 825 782
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase 1,254 3,336
Deposits received for securities loaned 273 (4,000)
Payable to brokers and dealers (80) (905)
Payable to customers (830) (3,897)
Securities sold not yet purchased,
at market value 1,719 690
Accounts payable and accrued liabilities (50) 128
------- -------
Cash (used in) provided by operating activities (492) 2,509
-------- -------
Cash flows from investing activities:
Purchase of property, equipment and
leasehold improvements (43) (103)
Other (55) ( 50)
------- --------
Cash used in investing activities (98) (153)
------- -------
</TABLE>
(continued on next page)
5
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
(continued)
<TABLE>
<CAPTION>
Six Months ended
June 30,
-----------------
1996 1995
---- ----
Cash flows from financing activities:
<S> <C> <C>
Proceeds from (repayments of) commercial paper
and other short-term borrowings, net $ 528 $(2,120)
Proceeds from notes payable 250 675
Repayments of notes payable (150) (408)
Proceeds from subordinated indebtedness 26
Repayments of subordinated indebtedness (4) (155)
Dividends paid to Travelers Group Inc. (409) (89)
------- -------
Cash provided by (used in) financing activities 241 (2,097)
------- -------
Effect of exchange rate changes on cash (4) 1
------- -------
Net change in cash and cash equivalents (353) 260
Cash and cash equivalents, beginning of period 612 217
------- -------
Cash and cash equivalents, end of period $ 259 $ 477
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 706 $ 657
======= =======
Income taxes $ 243 $ 130
======= =======
Dividends declared but not paid $ 175 $ 67
======= =======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
6
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements include the
accounts of Smith Barney Holdings Inc., a wholly owned subsidiary of Travelers
Group Inc., and its subsidiaries (the "Company"). The Company's principal
operating subsidiary is Smith Barney Inc. ("Smith Barney"). All material
intercompany balances and transactions have been eliminated. The interim
condensed consolidated financial statements are unaudited; however, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected.
These interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Certain financial information that is normally included in financial statements
prepared in accordance with generally accepted accounting principles but is not
required for interim reporting purposes has been condensed or omitted. Certain
reclassifications have been made to prior period amounts to conform to current
period presentations.
2. Securities, at Market Value
---------------------------
Securities consisted of the following:
June 30, December 31,
Securities owned 1996 1995
- ---------------- --------- ------------
U.S. Government and agencies
obligations $ 6,021 $ 4,224
Corporate debt 2,241 2,019
Commercial paper and
other short-term debt 613 815
State and municipal obligations 701 698
Corporate convertibles, equities
and other securities 1,275 1,228
------- -------
$10,851 $ 8,984
======= =======
7
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
2. Securities, at Market Value (Cont'd)
------------------------------------
June 30, December 31,
Securities sold not yet purchased 1996 1995
- --------------------------------- --------- ------------
U.S. Government and agencies
obligations $5,253 $3,493
Corporate debt 370 385
Corporate convertibles, equities
and other securities 659 685
------ ------
$6,282 $4,563
====== ======
3. Commercial Paper and Other Short-term Borrowings
------------------------------------------------
Commercial paper and other short-term borrowings include commercial paper,
collateralized and uncollateralized borrowings used to finance operations,
including the securities settlement process. The collateralized and
uncollateralized borrowings bear interest at variable rates based primarily on
the Federal Funds interest rate. Smith Barney's commercial paper program
consists of both discounted and interest-bearing paper.
Commercial paper and other short-term borrowings consisted of the following:
June 30, December 31,
1996 1995
--------- ------------
Commercial paper $3,205 $2,401
Uncollateralized borrowings 278 399
Collateralized borrowings 155
------ ------
$3,483 $2,955
====== ======
In addition to the revolving credit agreements referenced in Note 4, 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.
8
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
4. Notes Payable and Subordinated Indebtedness
-------------------------------------------
Notes payable consisted of the following:
June 30, December 31,
1996 1995
--------- ------------
5 3/8% Notes due 1996 $ $ 150
7.4% Medium-term Note due 1996 50 50
6% Notes due 1997 200 200
5 5/8% Notes due 1998 150 150
5 1/2% Notes due 1999 200 200
7 7/8% Notes due 1999 150 150
6 5/8% Notes due 2000 150 150
7.98% Notes due 2000 200 200
7% Notes due 2000 150 150
5 7/8% Notes due 2001 250
6 1/2% Notes due 2002 150 150
7.50% Notes due 2002 150 150
6 7/8% Notes due 2005 175 175
Other 10 10
------ ------
$1,985 $1,885
====== ======
The Company has a $1,000 revolving credit agreement with a bank syndicate that
extends through May 1999. The Company also has a $500 364-day revolving credit
agreement that extends through May 1997. As of June 30, 1996, there were no
borrowings outstanding under either of these agreements.
Subordinated indebtedness consists of deferred compensation of $246 and $224 at
June 30, 1996, and December 31, 1995, respectively. These deferred
compensation plans have various maturities, primarily ranging from 1996 to
2000, with interest based on the 30-day Treasury Bill rate.
9
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
5. Derivative Financial Instruments
--------------------------------
Derivative financial instruments traded by the Company include forwards,
futures, swaps and options, whose value is based upon an underlying asset, index
or reference rate, and generally represent future commitments to exchange
currencies or cash flows, or to purchase or sell other financial instruments at
specific terms at specified future dates. The Company uses derivative financial
instruments in the normal course of its business to facilitate customer
transactions, to manage exposure from loss due to interest rate, currency and
market risk and in its proprietary activities. Trading activities are primarily
generated by client order flow. To the extent that the Company's activities are
related to servicing customer business, the objective is to minimize market risk
as much as possible.
The Company's derivatives contracts are generally short-term, with a weighted
average maturity of approximately seven months at June 30, 1996 and December 31,
1995.
The notional or contractual amounts of these instruments, while appropriately
not recorded in the financial statements, reflect the extent of the Company's
involvement in these instruments, and are shown in the table below.
Notional/Contract Amount
June 30, 1996 December 31, 1995
---------------- -----------------
Purchase Sale Purchase Sale
-------- ---- -------- ----
Mortgage-backed
contracts (TBA) $ 9,826 $10,564 $ 6,907 $ 7,479
Forward contracts:
Foreign currency $12,503 $13,406 $ 6,127 $ 7,568
Precious metals $ 421 $ 420 $ 465 $ 465
Interest rate and other $ 350 $ 297
Futures contracts:
Foreign currency $ 1,315 $ 524 $ 1,458 $ 11
Financial $ 2,802 $ 571 $ 2,889 $ 493
Commodities $ 5 $ 7 $ 9 $ 8
Held Written Held Written
---- ------- ---- -------
Options:
Foreign currency $ 5,982 $ 6,184 $ 3,266 $ 3,502
Exchange-traded $ 2,019 $ 49 $ 2,201 $ 62
Interest rate caps,
floors and swaptions $ 926 $ 1,995 $ 550 $ 1,197
OTC debt and equity $ 225 $ 199 $ 210 $ 207
Open Contracts Open Contracts
-------------- --------------
Interest rate and other swaps $2,912 $2,305
10
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
5. Derivative Financial Instruments (Cont'd)
-----------------------------------------
Written foreign currency options consist of $2,668 and $3,516 of put and call
contracts, respectively, at June 30, 1996 and $1,799 and $1,703 of put and call
contracts, respectively, at December 31, 1995.
The Company's exposure to credit risk associated with counterparty non-
performance is limited to the net replacement cost of over-the-counter contracts
(including options held) in a gain position. Options written do not give rise
to counterparty credit risk since they obligate the Company (not its
counterparty) to perform. Exchange-traded financial instruments such as futures
and options on futures generally do not give rise to significant counterparty
exposure due to the margin requirements of the individual exchanges.
6. Commitments and Contingencies
-----------------------------
The Company trades "when-issued" fixed income securities, both to facilitate
customer transactions and to hedge proprietary inventory positions. At June 30,
1996, the Company had commitments to purchase and sell $305 and $700,
respectively, of when-issued fixed income securities. At December 31, 1995, the
Company had commitments to purchase and sell $369 and $324, respectively, of
when-issued fixed income securities.
The Company had outstanding commitments to underwrite variable rate municipal
securities totaling $346 and $800 at June 30, 1996 and December 31, 1995,
respectively; conditions of the offerings include bond insurance and liquidity
support facilities.
At June 30, 1996 and December 31, 1995, the Company borrowed securities having a
market value of $971 and $451, respectively, against which it pledged securities
having a market value of $985 and $459, respectively.
The Company has entered into purchase agreements with various municipal issuers,
whereby the Company has purchased securities for forward delivery. These
securities have been sold to the public for the same forward delivery dates.
The total value of these commitments at June 30, 1996 and December 31, 1995 was
$593 and $475, respectively.
At June 30, 1996 and December 31, 1995, the Company had outstanding forward
repurchase agreements totaling $600 and $1,200 respectively, and forward reverse
repurchase agreements totaling $1,650 and $625, respectively. These commitments
represent forward financing transactions with agreed upon interest rates and
principal amounts.
11
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
6. Commitments and Contingencies(Cont'd)
-------------------------------------
In management's opinion, commitments outstanding will settle without a material
adverse effect on the financial position or the results of operations of the
Company.
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
the opinion of management, based on consultation with legal counsel, these
actions would not be likely to have a material adverse effect on the results of
operations or the financial position or liquidity of the Company.
7. Concentrations of Credit Risk
-----------------------------
A substantial portion of the Company's securities and commodities transactions
is collateralized and executed with and on behalf of commercial banks and other
institutional investors, including other brokers and dealers. The Company's
exposure to credit risk associated with the non-performance of these customers
and counterparties in fulfilling their contractual obligations can be directly
impacted by volatile or illiquid trading markets which may impair the ability of
customers and counterparties to satisfy their obligations to the Company.
Substantially all of the collateral held by the Company for reverse repurchase
agreements and bonds borrowed, which together represented 39% of total assets
at June 30, 1996, consisted of securities issued by the U.S. Government or
federal agencies. The Company's most significant counterparty concentrations
are other brokers and dealers, commercial banks and institutional clients and
other financial institutions. This concentration arises in the normal course
of the Company's business.
8. Net Capital Requirements
------------------------
Smith Barney, as a broker-dealer, is subject to the Uniform Net Capital Rule of
the Securities and Exchange Commission (Rule 15c3-1). Under the alternative
method permitted by this rule, net capital, as defined, shall not be less than
2% of aggregate debit items arising from customer transactions, as defined. At
June 30, 1996, Smith Barney's net capital of $1,124 exceeded the minimum
requirement by $978.
The Robinson-Humphrey Company, Inc. ("RH Co."), a broker-dealer and a wholly
owned subsidiary of Smith Barney, is also subject to Rule 15c3-1. Under the
basic method permitted by this rule, RH Co., as a block positioner pursuant to
Rule 97.30 of the New York Stock Exchange, Inc., is required to maintain net
capital of $1. At June 30, 1996, RH Co.'s net capital, as defined, of $77
exceeded the minimum requirement by $76.
12
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
8. Net Capital Requirements (Cont'd)
---------------------------------
Smith Barney Europe, Ltd., a United Kingdom registered broker-dealer and a
wholly owned subsidiary of the Company ("Smith Barney Europe"), is subject to
capital requirements of the Securities and Futures Authority ("SFA"). Financial
resources must exceed the financial resources requirement as defined by the
SFA. At June 30, 1996, Smith Barney Europe's financial resources of $101
exceeded the minimum requirement by $75.
13
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended June 30, 1996 and 1995
The Company reported net income of $229 million for the three months ended June
30, 1996 (the "1996 Quarter"), an increase of 72% from the $133 million reported
for the three months ended June 30, 1995 (the "1995 Quarter"). This represented
the Company's fourth consecutive quarter of record earnings. Return on equity
reached a record 36.6% in the 1996 Quarter, up from 22.3% in the 1995 Quarter.
Pre-tax profit margin increased to 23.4% in the 1996 Quarter compared to 17.5%
in the 1995 Quarter. Revenues, net of interest expense, increased 22% to a
record $1,601 million in the 1996 Quarter compared to $1,313 million in the 1995
Quarter.
Commission revenues increased to $577 million in the 1996 Quarter, up 18% from
the $491 million in the 1995 Quarter. The increase is a result of strong
activity in the listed and over-the-counter securities markets as well as
increased mutual fund sales.
Principal trading revenues increased to $265 million in the 1996 Quarter, up 18%
from the $225 million reported in the 1995 Quarter, with particular strength in
over-the-counter equities and municipal trading.
Investment banking revenues increased 32% to a record $298 million in the 1996
Quarter compared to $226 million in the 1995 Quarter. The increase reflects
strong volume in equity, high yield, corporate debt and public finance
underwritings, as well as fee income from merger and acquisition advisory
activity.
Asset management fees rose to a record $331 million in the 1996 Quarter, an
increase of 37% from the $242 million reported in the 1995 Quarter. The
increase reflects growth in assets under management, which increased to a record
$103.7 billion at June 30, 1996 compared to $87.4 billion at June 30, 1995.
This increase also reflects fees associated with bringing in-house all the
administrative functions for proprietary mutual funds and money funds in the
third quarter of 1995.
Net interest and dividends increased 3% to $100 million for the 1996 Quarter
compared to $97 million in the 1995 Quarter primarily due to increased margin
lending to clients.
Total expenses, excluding interest, increased 13% to $1,227 million in the 1996
Quarter compared to $1,083 million in the 1995 Quarter. This increase is
primarily attributable to higher production related compensation and benefits
expense. Employee compensation and benefits expense, as a percentage of net
revenues, for the 1996 Quarter declined to 56.1% compared to 60.0% in the 1995
Quarter and the ratio of non-compensation expenses to net revenues stood at
20.6% in the 1996 Quarter compared to 22.5% in the 1995 Quarter. The Company
continues to maintain its focus on controlling fixed expenses.
14
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's business is significantly affected by the levels of activity in
the securities markets. Many factors have an impact on securities markets
including the level and trend of interest rates, the general state of the
economy and the national and worldwide political environments. An increasing
interest rate environment could have an adverse impact on the Company's
businesses, including commissions (which are linked in part to the economic
attractiveness of securities relative to time deposits) and investment banking
(which is affected by the relative benefit to corporations and other entities of
issuing debt and/or equity versus other avenues for raising capital). Such
effects, however, could be at least partially offset by a strengthening U.S.
economy that would include growth in the business sector -- accompanied by an
increase in the demand for capital -- and an increase in the capacity of
individuals to invest. A decline in interest rates could favorably impact the
Company's business. The Company will continue to concentrate on building its
asset management business, which tends to provide a more predictable and steady
income stream than its other businesses. The Company continues to maintain
tight expense controls that management believes will help the firm weather
periodic downturns in market conditions.
The Company's principal business activities are, by their nature, highly
competitive and subject to various risks, particularly volatile trading markets
and fluctuations in the volume of market activity. While higher volatility can
increase risk, it can also increase order flow, which drives many of the
Company's businesses. Other market and economic conditions and the size, number
and timing of transactions, may also affect net income. As a result, revenues
and profitability can vary significantly from year to year, and from quarter to
quarter.
For the six months ended June 30, 1996 and 1995
The Company reported net income of $452 million for the six months ended June
30, 1996 (the "1996 Period"), an increase of 95% from the $232 million reported
for the six months ended June 30, 1995 (the "1995 Period"). Return on equity
reached 36.3% in the 1996 Period compared to 19.6% in the 1995 Period. Pre-tax
profit margin increased to 23.1% in the 1996 Period compared to 16.1% in the
1995 Period. Revenues, net of interest expense, increased 27% to $3,201 million
in the 1996 Period compared to $2,516 million in the 1995 Period.
Commission revenues increased 26% to $1,182 million in the 1996 Period compared
to $939 million in the 1995 Period. This increase reflects strong activity in
listed and over-the-counter securities as well as mutual fund sales.
Principal trading revenues increased 7% to $543 million in the 1996 Period
compared to $507 million in the 1995 Period. This increase is a result of a
strong performance in over-the-counter equities offset by a decline in municipal
trading.
Investment banking revenues increased 68% to $576 million in the 1996 Period
compared to $342 million in the 1995 Period. The increase reflects strong
volume in equity, high yield, corporate debt, and public finance underwritings,
as well as fee income from merger and acquisition advisory activity.
15
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset management fees increased 35% to $648 million in the 1996 Period compared
to $479 million in the 1995 Period. This increase reflects growth in assets
under management which increased to a record $103.7 billion at June 30, 1996
compared to $87.4 billion at June 30, 1995. This increase also reflects fees
associated with bringing in-house all the administrative functions for
proprietary mutual funds and money funds in the third quarter of 1995.
Net interest and dividends increased 3% to $195 million in the 1996 Period
compared to $189 million in the 1995 Period primarily due to increased margin
lending to clients.
Total expenses, excluding interest, increased 17% to $2,461 million for the 1996
Period compared to $2,111 million in the 1995 Period. This increase is primarily
the result of higher production related employee compensation and benefits
expense. Employee compensation and benefits expense as a percentage of net
revenues for the 1996 Period declined to 56.6% compared to 60.8% in the 1995
Period and the ratio of non-compensation expenses to net revenues stood at 20.3%
in the 1996 Period compared to 23.1% in the 1995 Period. The Company continues
to maintain its focus on controlling fixed expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a highly liquid balance sheet, with substantially all of
its assets consisting of marketable securities and short-term collateralized
receivables 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 its equity, long-term
borrowings, commercial paper, collateralized and uncollateralized borrowings
(through both committed and uncommitted facilities), internally generated funds,
repurchase transactions and securities lending arrangements. The maturities of
borrowings generally correspond to the anticipated holding periods of the assets
being financed. At June 30, 1996, there were $1,500 million in committed
uncollateralized revolving lines of credit available, none of which were
utilized. In addition, the Company 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.
16
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of June 30, 1996, total long-term public debt was $1,975 million, of which
$50 million will mature in 1996, compared to total long-term public debt of
$1,875 million at December 31, 1995. As of August 6, 1996, the Company had $725
million available for issuance under a shelf registration statement filed with
the Securities and Exchange Commission.
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 securities inventories, customer balances, the amount of reverse
repurchase transactions outstanding (i.e., purchases of securities under
agreements to resell the same security) 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. Commercial paper is marketed through the Company's
own sales force as well as on a direct basis, thereby achieving a broader
investor diversification.
The Company monitors liquidity by tracking asset levels, collateral and funding
availability to maintain flexibility to meet its financial commitments. As a
policy, the Company attempts to maintain sufficient capital and funding sources
in order to have the capacity to finance itself on a fully collateralized basis
at all times, including periods of financial stress. In addition, the Company
monitors its leverage and capital ratios on a daily basis. The Company's
leverage ratio (total assets to equity) at June 30, 1996 and December 31, 1995
was 17.4x and 16.6x, respectively.
For significant transactions, the Company's credit review process includes an
initial evaluation of the counterparty's creditworthiness, with periodic reviews
of credit standing, and collateral and various other credit enhancements
obtained in certain circumstances. The Company establishes general counterparty
credit limits by product type, taking into account the perceived risk associated
with the product. Increases to these credit limits are determined individually
based on the underlying financial strength and management of the counterparty.
The usage and resultant exposure from these credit limits are monitored daily by
the Credit Analysis group.
ASSETS AND LIABILITIES
Asset and liability levels are primarily determined by order flow and can
fluctuate depending upon economic and market conditions, customer demand and
transactional volume.
17
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSETS AND LIABILITIES (Cont'd)
The Company's total assets increased to $43.9 billion at June 30, 1996 from
$41.0 billion at December 31, 1995. Securities owned at market value increased
due to trading activities, primarily in U.S. Government and agencies
obligations. Increases in securities sold not yet purchased, at market value
and securities sold under agreements to repurchase relate to the hedging of
market risk and increased financing requirements associated with this increased
trading activity. Deposits paid for securities borrowed and deposits received
for securities loaned were also impacted by higher levels of "conduit"
transactions.
The Company engages in "matched book" transactions in government and mortgage-
backed securities as well as "conduit" transactions in corporate equity and debt
securities. These transactions are similar in nature. A "matched book"
transaction involves a security purchased under an agreement to resell (i.e.,
reverse repurchase transaction) and simultaneously sold under an agreement to
repurchase (i.e., repurchase transaction). A "conduit" transaction involves the
borrowing of a security from a counterparty and the simultaneous lending of the
security to another counterparty. These transactions are reported gross in the
Condensed Consolidated Statement of Financial Position and typically yield
interest spreads ranging from 10 to 30 basis points. The interest spread results
from the net of interest received on the reverse repurchase or security borrowed
transaction and the interest paid on the corresponding repurchase or security
loaned transaction. Interest rates charged or credited in these activities are
usually based on current Federal Funds rates but can fluctuate based on security
availability and other market conditions. The size of balance sheet positions
resulting from these activities can vary significantly, depending primarily on
levels of activity in the bond markets, but would not materially impact net
income.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation
("FAS 123"), is effective for 1996 reporting. This statement addresses the
accounting for the cost of stock-based compensation, such as stock options and
restricted stock. FAS 123 permits either expensing the value of stock-based
compensation over the period earned or disclosing in the financial statement
footnotes the pro forma impact to net income as if the value of stock-based
compensation awards had been expensed. The value of awards would be measured at
the grant date based upon estimated fair value, using option pricing models.
The Company along with affiliated companies participates in stock option and
other stock-based incentive plans sponsored by Travelers Group Inc. The Company
has selected the disclosure alternative that requires such pro forma disclosures
to be included in annual financial statements.
18
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUTURE APPLICATION OF ACCOUNTING STANDARDS (Cont'd)
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities ("FAS 125"). FAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are based
on consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. FAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The Company is currently
evaluating the impact of this statement.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning a class action filed
purportedly on behalf of a class of persons who purchased debt instruments
issued by Orange County California or other public entities located therein, see
the description that appears in the second paragraph of page 2 of the Company's
Current Report on Form 8-K, dated February 23, 1995 and filed February 24, 1995,
which description is incorporated by reference herein. A copy of the pertinent
paragraph is included as an exhibit to this Form 10-Q. The parties have reached
a settlement of this action, and a hearing on court approval of the settlement
is scheduled for December 1996.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On April 15, 1996, the Company filed a Current Report on
Form 8-K, dated April 15, 1996, reporting under Item 5 thereof the results of
its operations for the three months ended March 31, 1996, and certain other
selected financial data.
No other reports on Form 8-K have been filed by the
Company during the quarter ended June 30, 1996; however, on July 15, 1996 the
Company filed a Current Report on Form 8-K dated July 15, 1996, reporting under
Item 5 thereof the results of its operations for the three months and six months
ended June 30, 1996, and certain other selected financial data; on August 7,
1996 the Company filed a Current Report on Form 8-K, dated August 7, 1996
reporting under Item 5 thereof certain additional information regarding legal
proceedings involving the Company; and on August 9, 1996, the Company filed a
Current Report on Form 8-K, dated August 7, 1996 filing certain exhibits under
Item 7 thereof relating to the offer and sale of the Company's S&P 500 Equity
Linked Notes due August 13, 2001.
20
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of Smith Barney
Holdings Inc. (the "Company") and the Certificate of
Amendment thereto, effective June 1, 1994,
incorporated by reference to Exhibit 3.01 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 1-12484) (the
"Company's 1994 10-K").
3.02 Restated By-Laws of the Company, as amended September
26, 1994, incorporated by reference to Exhibit 3.02
to the Company's 1994 10-K.
12.01 Computation of ratio of earnings to fixed charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The second paragraph of page 2 of the Company's Electronic
Current Report on Form 8-K dated February 23, 1995
and filed February 24, 1995 (File No. 1-12484).
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 Commission upon request.
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SMITH BARNEY HOLDINGS INC.
--------------------------
(Registrant)
Date: August 13, 1996 By: /s/ Charles W. Scharf
-----------------------------------
Charles W. Scharf
Vice President and Chief Financial
Officer
By: /s/ Michael J. Day
-----------------------------------
Michael J. Day
Vice President and Controller
22
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of Smith Barney
Holdings Inc. (the "Company") and the Certificate of
Amendment thereto, effective June 1, 1994,
incorporated by reference to Exhibit 3.01 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 1-12484) (the
"Company's 1994 10-K").
3.02 Restated By-Laws of the Company, as amended September
26, 1994, incorporated by reference to Exhibit 3.02
to the Company's 1994 10-K.
12.01 Computation of ratio of earnings to fixed charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The second paragraph of page 2 of the Company's Electronic
Current Report on Form 8-K dated February 23, 1995
and filed February 24, 1995 (File No. 1-12484).
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 Commission upon request.
Exhibit 12.01
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio)
Six months ended
June 30,
------------------
1996 1995
---- ----
Earnings before income taxes $ 740 $ 405
----- ------
Interest expense 713 688
Portion of rentals deemed
to be interest 29 29
------ ------
Total fixed charges 742 717
------ ------
Earnings before income taxes and
fixed charges $1,482 $1,122
====== ======
Ratio of earnings to fixed charges 2.00 1.56
====== ======
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1996 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SMITH BARNEY HOLDINGS INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,327<F1>
<RECEIVABLES> 7,215<F2>
<SECURITIES-RESALE> 12,461
<SECURITIES-BORROWED> 8,785
<INSTRUMENTS-OWNED> 10,851
<PP&E> 437
<TOTAL-ASSETS> 43,950
<SHORT-TERM> 3,483
<PAYABLES> 3,493<F3>
<REPOS-SOLD> 18,421
<SECURITIES-LOANED> 3,172
<INSTRUMENTS-SOLD> 6,282
<LONG-TERM> 2,231<F4>
0<F6>
0<F6>
<COMMON> 0<F6>
<OTHER-SE> 2,528<F5>
<TOTAL-LIABILITY-AND-EQUITY> 43,950
<TRADING-REVENUE> 543
<INTEREST-DIVIDENDS> 908
<COMMISSIONS> 1,182
<INVESTMENT-BANKING-REVENUES> 576
<FEE-REVENUE> 648
<INTEREST-EXPENSE> 713
<COMPENSATION> 1,811
<INCOME-PRETAX> 740
<INCOME-PRE-EXTRAORDINARY> 740
<EXTRAORDINARY> 0<F6>
<CHANGES> 0<F6>
<NET-INCOME> 452
<EPS-PRIMARY> 0<F6>
<EPS-DILUTED> 0<F6>
<FN>
<F1>INCLUDES THE FOLLOWING ITEMS FROM THE FINANCIAL STATEMENTS: CASH AND CASH
EQUIVALENTS $259; CASH SEGREGATED AND ON DEPOSIT FOR FEDERAL AND OTHER
REGULATIONS $1,068.
<F2>INCLUDES THE FOLLOWING ITEMS FROM THE FINANCIAL STATEMENTS: RECEIVABLE FROM
BROKERS AND DEALERS $446; RECEIVABLE FROM CUSTOMERS $6,769.
<F3>INCLUDES THE FOLLOWING ITEMS FROM THE FINANCIAL STATEMENTS: PAYABLE TO BROKERS
AND DEALERS $147; PAYABLE TO CUSTOMERS $3,346.
<F4>INCLUDES THE FOLLOWING ITEMS FROM THE FINANCIAL STATEMENTS: NOTES PAYABLE
$1,985; SUBORDINATED INDEBTEDNESS $246.
<F5>INCLUDES THE FOLLOWING ITEMS FROM THE FINANCIAL STATEMENTS: ADDITIONAL PAID-IN
CAPITAL $1,803; RETAINED EARNINGS $720; CUMULATIVE TRANSLATION ADJUSTMENT $5.
<F6>ITEMS WHICH ARE INAPPLICABLE RELATIVE TO THE UNDERLYING FINANCIAL STATEMENTS
ARE INDICATED WITH A ZERO AS REQUIRED.
</FN>
</TABLE>
EXHIBIT 99.01
COMPANY'S FORM 8-K
February 23, 1995
Page 2
A subsidiary of the Company has been named in a class action filed in
the United States District Court for the Central District of California in
December 1994, purportedly brought on behalf of a class of persons who purchased
bonds and other debt instruments issued by Orange County California or other
public entities located therein from 1993 through 1994. On December 6, 1994,
Orange County filed for bankruptcy protection under Chapter 9 of the U.S.
Bankruptcy Code after public disclosures were made regarding substantial losses
in the County investment pool. The complaint, which as amended also names as
defendants Merrill Lynch & Co., CS First Boston and certain individual employees
of the Orange County Treasurer's Office, alleges that the Official Statements
for the bond issues during the relevant time period misstated the risks of the
County investment pool, the assets of which were to support, in part, repayment
of the issued debt. The Company has not yet been able to ascertain the damages
sought, particularly since the complaint does not specify the bond issues
allegedly involved. The Company believes it has meritorious defenses to these
claims. An additional amended complaint is expected to be filed.
