UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12484
SMITH BARNEY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1274088
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
388 Greenwich Street
New York, New York 10013
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(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.
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SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
-----------------
Part I. FINANCIAL INFORMATION Page Number
--------------------- -----------
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months Ended
March 31, 1996 and 1995 3
Condensed Consolidated Statements of Financial Condition -
March 31, 1996 (Unaudited) and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows (Unaudited)-
Three Months Ended March 31, 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 - 18
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
2
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SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions)
Three months ended
March 31,
-------------------
1996 1995
---- ----
Revenues:
Commissions $ 605 $ 448
Principal trading 283 282
Investment banking 273 116
Asset management fees 317 237
Other 27 28
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Total non-interest revenues 1,505 1,111
Interest and dividends 445 407
Interest expense 350 315
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Net interest and dividends 95 92
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Net revenues 1,600 1,203
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Expenses, excluding interest:
Employee compensation and benefits 913 742
Communications, occupancy and equipment 139 146
Floor brokerage and other production 39 34
Other operating and administrative
expenses 143 106
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Total expenses, excluding interest 1,234 1,028
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Income before provision for income
taxes 366 175
Provision for income taxes 143 76
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Net income $ 223 $ 99
======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
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SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In millions, except share data)
March 31, December 31,
ASSETS 1996 1995
------ ----------- ------------
(Unaudited)
Cash and cash equivalents $ 218 $ 612
Cash segregated and on deposit
for Federal and other regulations 1,025 1,072
Securities purchased under agreements to resell 12,626 12,087
Deposits paid for securities borrowed 8,690 7,514
Receivable from brokers and dealers 2,239 510
Receivable from customers 6,369 6,048
Securities owned, at market value 10,345 8,984
Property, equipment and leasehold improvements,
at cost, net of accumulated depreciation and
amortization of $186 and $168, respectively 445 448
Excess of purchase price over fair value of net
assets acquired, net of accumulated amortization
of $63 and $61, respectively 285 287
Other assets 2,628 3,397
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$44,870 $40,959
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Commercial paper and other short-term borrowings $ 2,690 $ 2,955
Securities sold under agreements to repurchase 18,676 17,167
Deposits received for securities loaned 3,188 2,899
Payable to brokers and dealers 659 227
Payable to customers 3,683 4,176
Securities sold not yet purchased, at market value 7,009 4,563
Notes payable 2,135 1,885
Accounts payable and accrued liabilities 4,134 4,389
Subordinated indebtedness 222 224
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42,396 38,485
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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 666 666
Cumulative translation adjustment 5 5
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2,474 2,474
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$44,870 $40,959
======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
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SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three months ended
March 31,
------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 223 $ 99
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 46 37
Deferred tax provision 30 7
Other (3) 9
(Increase) decrease in operating assets:
Cash segregated and on deposit for
Federal and other regulations 47 (66)
Securities purchased under agreements to resell (539) (4,696)
Deposits paid for securities borrowed (1,176) 7,818
Receivable from brokers and dealers (1,729) 85
Receivable from customers (321) 1,443
Securities owned, at market value (1,361) (1,154)
Other assets 776 696
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase 1,509 4,149
Deposits received for securities loaned 289 (3,713)
Payable to brokers and dealers 432 (911)
Payable to customers (493) (3,841)
Securities sold not yet purchased,
at market value 2,446 2,853
Accounts payable and accrued liabilities (289) (367)
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Cash (used in) provided by operating activities (113) 2,448
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Cash flows from investing activities:
Purchase of property, equipment and
leasehold improvements (23) (55)
Other (53) (50)
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Cash used in investing activities (76) (105)
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(continued on next page)
5
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SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
(continued)
Three months ended
March 31,
-------------------
1996 1995
---- ----
Cash flows from financing activities:
Repayments of commercial paper
and other short-term borrowings, net $ (265) $(2,180)
Proceeds from notes payable 250 200
Repayments of notes payable (132)
Repayments of subordinated indebtedness (2) (153)
Dividends paid to Travelers Group Inc. (186) (40)
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Cash used in financing activities (203) (2,305)
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Effect of exchange rate changes on cash (2) 6
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Net change in cash and cash equivalents (394) 44
Cash and cash equivalents, beginning of period 612 217
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Cash and cash equivalents, end of period $ 218 $ 261
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 353 $ 312
======= =======
Income taxes $ 34 $ 24
======= =======
Dividends declared but not paid $ 223 $ 49
======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
6
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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:
March 31, December 31,
Securities owned 1996 1995
- - ---------------- --------- ------------
U.S. Government and agencies
obligations $ 5,745 $4,224
Corporate debt 2,465 2,019
Commercial paper and
other short-term debt 484 815
State and municipal obligations 502 698
Corporate convertibles, equities
and other securities 1,149 1,228
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$10,345 $8,984
======= ======
7
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SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In millions)
2. Securities, at Market Value (Cont'd)
------------------------------------
March 31, December 31,
Securities sold not yet purchased 1996 1995
- - --------------------------------- --------- ------------
U.S. Government and agencies
obligations $5,901 $3,493
Corporate debt 365 385
Corporate convertibles, equities
and other securities 743 685
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$7,009 $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:
March 31, December 31,
1996 1995
--------- ------------
Commercial paper $2,463 $2,401
Uncollateralized borrowings 227 399
Collateralized borrowings 155
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$2,690 $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
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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:
March 31, December 31,
1996 1995
--------- ------------
5 3/8% Notes due 1996 $ 150 $ 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
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$2,135 $1,885
====== ======
The Company has a $1,000 revolving credit agreement with a bank syndicate that
extends through May 1998. The Company also has a $750 364-day revolving credit
agreement that extends through May 1996. Any amounts outstanding on the 364-
day revolving credit agreement's termination date of May 1996 are due in May
1997. As of March 31, 1996, there were no borrowings outstanding under either
of these agreements.
The Company issued $250 aggregate principal amount of 5 7/8% Notes due February
1, 2001 during the first three months of 1996.
Subordinated indebtedness consists of deferred compensation of $222 and $224 at
March 31, 1996, and December 31, 1995, respectively. These plans have various
maturities, primarily ranging from 1996 to 2000, with interest based on the 30-
day Treasury Bill rate.
9
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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 five months at March 31, 1996 and seven
months at 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
March 31, 1996 December 31, 1995
----------------- -----------------
Purchase Sale Purchase Sale
-------- ---- -------- ----
Mortgage-backed
contracts (TBA) $12,613 $12,864 $ 6,907 $ 7,479
Forward contracts:
Foreign currency $12,790 $13,844 $ 6,127 $ 7,568
Precious metals $ 415 $ 414 $ 465 $ 465
Interest rate and other $ 147 $ 297
Futures contracts:
Foreign currency $ 1,740 $ 705 $ 1,458 $ 11
Financial $ 670 $ 570 $ 2,889 $ 493
Commodities $ 9 $ 6 $ 9 $ 8
Held Written Held Written
---- ------- ---- -------
Options:
Foreign currency $ 4,070 $ 4,251 $ 3,266 $ 3,502
Exchange-traded $ 3,083 $ 145 $ 2,201 $ 62
Interest rate caps,
floors and swaptions $ 500 $ 1,242 $ 550 $ 1,197
OTC debt and equity $ 400 $ 295 $ 210 $ 207
Open Contracts Open Contracts
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Interest rate and other swaps $2,000 $2,305
10
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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 $2,120 and $2,131 of put and call
contracts, respectively, at March 31, 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 March
31, 1996, the Company had commitments to purchase and sell $280 and $36,
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 $472 and $800 at March 31, 1996 and December 31, 1995,
respectively; conditions of the offerings include bond insurance and liquidity
support facilities.
At March 31, 1996 and December 31, 1995, the Company borrowed securities having
a market value of $369 and $451, respectively, against which it pledged
securities having a market value of $379 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 March 31, 1996 and December 31, 1995
was $543 and $475, respectively.
At March 31, 1996 and December 31, 1995, the Company had outstanding forward
repurchase agreements totaling $1,354 and $1,200 respectively, and forward
reverse repurchase agreements totaling $20 and $625, respectively. These
commitments represent forward financing transactions with agreed upon
interest rates and principal amounts.
11
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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 38% of total assets
at March 31, 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
March 31, 1996, net capital of $989 exceeded the minimum requirement by $847.
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 March 31, 1996, RH Co.'s net capital, as defined, of $70
exceeded the minimum requirement by $69.
12
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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, 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 March 31, 1996,
financial resources of $106 exceeded the minimum requirement by $85.
13
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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 March 31, 1996 and 1995
Continued strength in the financial markets contributed to the Company's third
consecutive quarter of record earnings. The Company reported net income of $223
million for the three months ended March 31, 1996 (the "1996 Quarter"), an
increase of 125% from the $99 million reported for the three months ended March
31, 1995 (the "1995 Quarter"). Revenues, net of interest expense, increased 33%
to a record $1,600 million in the 1996 Quarter compared to $1,203 million in the
1995 Quarter.
Commission revenues increased to a record $605 million in the 1996 Quarter, up
35% from the $448 million in the 1995 Quarter. The increase is a result of
higher activity in the listed and over-the-counter securities markets as well
as increased mutual fund sales.
Investment banking revenues increased 135% to a record $273 million in the 1996
Quarter compared to $116 million in the 1995 Quarter. The increase reflects
strong volume in equity, high yield, and corporate debt underwritings, as well
as fee income from merger and acquisition activity.
Principal trading revenues reached a record $283 million in the 1996 Quarter, up
slightly from the $282 million reported in the 1995 Quarter. This was the
result of strong performances in over-the-counter equities and taxable fixed
income securities, offset by a decline in municipal trading.
Asset management fees rose to a record $317 million in the 1996 Quarter, an
increase of 34% from the $237 million reported in the 1995 Quarter. The
increase reflects growth in assets under management, which increased to a record
$102.2 billion at March 31, 1996 compared to $82.1 billion at March 31, 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 $95 million for the 1996 Quarter
compared to $92 million in the 1995 Quarter as a result of higher levels of
interest-earning net assets.
Total expenses, excluding interest, increased 20% to $1,234 million in the 1996
Quarter compared to $1,028 million in the 1995 Quarter. This increase is
primarily attributable to higher production-related compensation and benefits
expense reflecting increased revenues of the Company. Employee compensation and
benefits expense as a percentage of net revenues for the 1996 Quarter declined
to 57.1% compared to 61.7% in the 1995 Quarter. The Company continues to
maintain its focus on controlling fixed expenses, and its ratio of non-
compensation expenses to net revenues stood at 20.1% in the 1996 Quarter
compared to 23.8% in the 1995 Quarter.
14
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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.
15
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 March 31, 1996, there were $1,750 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.
During the first three months of 1996, the Company continued to increase its
long-term funding by issuing on January 30, 1996, $250 million aggregate
principal amount of 5 7/8% Notes due February 1, 2001. As of March 31, 1996,
total long-term public debt was $2,125 million, of which $200 million will
mature in 1996, compared with $1,875 million at December 31, 1995. As of May
10, 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.
16
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 March 31, 1996 and December 31, 1995
was 18.1x 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.
The Company's total assets increased to $44.9 billion at March 31, 1996 from
$41.0 billion at December 31, 1995. Securities owned, at market value and
receivables from brokers and dealers 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 these increased trading activities. Deposits paid
for securities borrowed 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).
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)
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>
PART II
Item 1. Legal Proceedings
For information concerning actions filed against a number of broker-
dealers, including Smith Barney, relating to trading practices on the National
Association of Securities Dealers Automated Quotation system, see the
description that appears in the third paragraph of page 16 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, and the
last paragraph on page 10 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, which description is incorporated by reference
herein. A copy of the pertinent paragraphs are included as an exhibit to this
Form 10-Q. In March 1996, plaintiffs filed a motion for class certification.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On January 17, 1996, the Company filed a Current Report on Form
8-K, dated January 16, 1996, reporting under Item 5 thereof the results of
its operations for the three months and twelve months ended December 31,
1995, and certain other selected financial data.
On January 29, 1996, the Company filed a Current Report on Form
8-K, dated January 25, 1996, filing certain exhibits under Item 7 thereof
relating to the offer and sale of the Company's 5 7/8% Notes due February
1, 2001.
No other reports on Form 8-K have been filed by the Company
during the quarter ended March 31, 1996; however, 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.
19
<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 third paragraph of page 16 of the Company's Electronic
Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1994 (File No. 1-12484) and the
last paragraph of page 10 of the Company's Annual
Report on Form 10-K for the year ended December 31,
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.
20
<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: May 14, 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
21
<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 third paragraph of page 16 of the Company's Electronic
Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1994 (File No. 1-12484) and the
last paragraph of page 10 of the Company's Annual
Report on Form 10-K for the year ended December 31,
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)
Three months ended
March 31,
--------------------
1996 1995
---- ----
Earnings before income taxes $ 366 $ 175
----- -----
Interest expense 350 315
Portion of rentals deemed
to be interest 15 15
----- -----
Total fixed charges 365 330
----- -----
Earnings before income taxes and
fixed charges $ 731 $ 505
===== =====
Ratio of earnings to fixed charges 2.00 1.53
===== =====
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,243<F1>
<RECEIVABLES> 8,608<F2>
<SECURITIES-RESALE> 12,626
<SECURITIES-BORROWED> 8,690
<INSTRUMENTS-OWNED> 10,345
<PP&E> 445
<TOTAL-ASSETS> 44,870
<SHORT-TERM> 2,690
<PAYABLES> 4,342<F3>
<REPOS-SOLD> 18,676
<SECURITIES-LOANED> 3,188
<INSTRUMENTS-SOLD> 7,009
<LONG-TERM> 2,357<F4>
0<F6>
0<F6>
<COMMON> 0<F6>
<OTHER-SE> 2,474<F5>
<TOTAL-LIABILITY-AND-EQUITY> 44,870
<TRADING-REVENUE> 283
<INTEREST-DIVIDENDS> 445
<COMMISSIONS> 605
<INVESTMENT-BANKING-REVENUES> 273
<FEE-REVENUE> 317
<INTEREST-EXPENSE> 350
<COMPENSATION> 913
<INCOME-PRETAX> 366
<INCOME-PRE-EXTRAORDINARY> 366
<EXTRAORDINARY> 0<F6>
<CHANGES> 0<F6>
<NET-INCOME> 223
<EPS-PRIMARY> 0<F6>
<EPS-DILUTED> 0<F6>
<FN>
<F1>Includes the following items from the financial statements: Cash and cash
equivalents $218; Cash segregated and on deposit for Federal and other
regulations $1,025.
<F2>Includes the following items from the financial statements: Receivable from
brokers and dealers $2,239; Receivable from customers $6,369.
<F3>Includes the following items from the financial statements: Payable to
brokers and dealers $659; Payable to customers $3,683.
<F4>Includes the following items from the financial statements: Notes payable
$2,135; Subordinated indebtedness $222.
<F5>Includes the following items from the financial statements: Additional
paid-in capital $1,803; Retained earnings $666; 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 10-Q
September 30, 1994
Page 16
In June 1994, several actions relating to trading practices on the
National Association of Securities Dealers Automated Quotation system
were filed against a number of major broker/dealers, including SBI, in
various federal courts. In October, 1994, the actions were consolidated
in the Federal District Court for the Southern District of New York. The
plaintiffs purport to represent a class of purchasers of stock trading in
that system over the last four years. The claims generally alledge
price-fixing violations under the federal antitrust laws and violations of
the federal securities laws relating to the use of even-eighth price
quotes instead of odd-eighth bid and asked quotes. A consolidated amended
complaint is expected to be filed in mid-December 1994. The Company is
reviewing these allegations, believes that it has meritorious defenses
and intends to vigorously defend against these claims.
<PAGE>
COMPANY'S FORM 10-K
December 31, 1995
Page 10
For information concerning actions filed against a number of
broker-dealers, including SBI, relating to trading practices on the
National Assocation of Securities Dealers Automated Quotation system,
see the description that appears in the third paragraph of page 16 of the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, which description is incorporated by reference herein. A copy
of the pertinent paragraph is included as an Exhibit to this Form 10-K.
A consolidated amended complaint was filed in December 1994. In August
1995, the defendants' motion to dismiss was granted with leave to
replead, and a consolidated amended complaint was filed.
