UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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
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SMITH BARNEY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1274088
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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6 5/8% Notes due June 1, 2000 New York Stock Exchange
Smith Barney S&P 500 Equity Chicago Board Options Exchange
Linked Notes due August 13, 2001 and New York Stock Exchange
Smith Barney S&P 500 Equity Chicago Board Options Exchange
Linked Notes due March 11, 2002
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share.
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 Travelers Group Inc.,
none of the registrant's outstanding voting stock is held by nonaffiliates of
the registrant. As of the date hereof, 100 shares of the registrant's Common
Stock, $.10 par value, were issued and outstanding.
Documents Incorporated by Reference: None
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SMITH BARNEY HOLDINGS INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
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TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PAGE
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PART I
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1. Business............................................................ 1
2. Properties.......................................................... 9
3. Legal Proceedings................................................... 10
4. Omitted Pursuant to General Instruction I
PART II
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5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................... 11
6. Omitted Pursuant to General Instruction I
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 12
8. Financial Statements and Supplementary Data......................... 17
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 17
PART III
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10-13 Omitted Pursuant to General Instruction I
PART IV
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14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................... 17
Exhibit Index....................................................... 19
Signatures.......................................................... 21
Index to Consolidated Financial Statements and Schedules............ F-1
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PART I
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ITEM 1. BUSINESS.
THE COMPANY
Smith Barney Holdings Inc. ("SB Holdings") provides investment banking,
asset management, brokerage and other financial services through its wholly
owned subsidiaries. Its principal operating subsidiary is Smith Barney Inc.
("SBI"), an investment banking, securities trading and brokerage firm that
traces its origins back to 1873. As used in this Form 10-K, unless the context
otherwise requires, the "Company" refers to SB Holdings and its consolidated
subsidiaries.
The Company operates through approximately 450 offices throughout the
United States, and 17 offices in 15 foreign countries. With approximately 10,400
Financial Consultants, the Company believes that it is currently the second
largest domestic brokerage firm in the United States.
The Company is a wholly owned subsidiary of Travelers Group Inc.
("Travelers Group"), a financial services holding company engaged, through its
subsidiaries, principally in four business segments: (i) Investment Services
(primarily through the Company); (ii) Consumer Finance Services; (iii) Property
& Casualty Insurance Services; and (iv) Life Insurance Services. The periodic
reports of Travelers Group 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. The Company was
incorporated in Delaware in 1989.
INVESTMENT BANKING AND SECURITIES BROKERAGE
The Company is an investment banking and securities trading and brokerage
firm serving United States and foreign corporations, governments and
institutional and individual investors. Its business includes securities,
options and commodities brokerage for domestic and international institutional
and individual clients; underwriting and distribution of securities; arranging
for the private placement of securities; assisting in mergers and acquisitions
and providing other financial advisory services; market making and trading in
corporate debt and equity, United States government and agency, mortgage-related
and municipal securities and foreign exchange, futures and forward contracts;
customer financing activities; securities lending activities; investment
management and advisory services; securities research; and other related
activities.
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The Company's investment banking services include the underwriting of debt
and equity issues for United States and foreign corporations and for state,
local and other governmental and government sponsored authorities. The Company
frequently acts as managing underwriter in corporate and public securities
offerings. The Company also acts as a private placement agent for various
clients, and as such helps to place securities for clients with large
institutions and other qualified investors. The Company also provides financial
advice to investment banking clients on a wide variety of transactions including
mergers and acquisitions, exchanges of securities and corporate restructurings.
The Company executes securities brokerage transactions on all major United
States securities exchanges and distributes a wide variety of financial
products. It makes inter-dealer markets and trades as principal in corporate
debt and equity securities, primarily of United States 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. The firm carries inventories of securities to facilitate sales to
customers and other dealers and with a view to realizing trading gains. SBI is
one of the leading dealers in municipal securities and is a "Primary Dealer" in
United States government securities, as designated by the Federal Reserve Bank
of New York. Its daily trading inventory positions in United States government
and agency securities are financed largely through the use of repurchase
agreements pursuant to which the Company sells the securities and simultaneously
agrees to repurchase them at a future date. The Company also acts as an
intermediary between borrowers and lenders of short-term funds utilizing
repurchase and reverse repurchase agreements. The Company uses derivative
financial instruments to facilitate customer transactions and to manage exposure
to interest rate, currency and market risk. In addition, for its own account the
Company engages in a limited manner in certain arbitrage activities, which
primarily seek to benefit from temporary price discrepancies that occur with
respect to related securities or to the same security on different markets. The
Company also engages in the borrowing and lending of securities. The Company's
network of Financial Consultants also sells variable annuities and other
individual products of Travelers Life and Annuity, a unit of The Travelers
Insurance Group Inc., an indirect wholly owned subsidiary of Travelers Group.
The Company 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 common stocks, convertible preferred stocks, warrants and other
securities traded on the NASDAQ system or otherwise in the over-the-counter
market. The Company also maintains trading positions in equity options,
convertible securities, debt options, foreign exchange and commodities
instruments. It executes significant client transactions in both listed and
unlisted options and in foreign exchange, and often acts as principal to
facilitate these transactions. The Company also sells various types of
structured securities on both a principal and an agency basis. The Company's
securities trading and investment activities involve significant risk in that
the values of positions carried in its trading
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and investment accounts are subject to market fluctuations. The Company engages
in a variety of financial techniques designed to manage this risk.
CUSTOMER FINANCING
Customers' securities transactions are executed on either a cash or margin
basis. Federal regulations prescribe the minimum original margin that must be
deposited by securities purchasers, and exchange regulations prescribe the
minimum margins that must be maintained by customers. The Company imposes margin
maintenance requirements that are equal to or exceed those required by exchange
regulations. Such requirements are intended to reduce the risk assumed by the
Company that a market decline will reduce the value of a customer's collateral
below the amount of the customer's indebtedness before the collateral can be
sold. Substantially all transactions in commodities futures contracts are on
margin subject to individual exchange regulations. Margin, in the case of
commodities futures contracts, is primarily funded in the form of cash or United
States Treasury securities. Commodities transactions involve substantial risk,
principally because of low margin requirements permitted by the exchanges.
Income earned on financing customers' securities transactions provides the
Company with an additional source of income. Credit losses may arise as a result
of this financing activity; however, such losses have not been material.
ASSET MANAGEMENT
The Company provides discretionary and non-discretionary asset management
and consulting 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 Company typically receives ongoing fees from its asset
management and consulting clients, generally stated as a percentage of the
client's assets with respect to which the Company's services are rendered. At
December 31, 1996, such client assets in the aggregate exceeded $111.8 billion,
as compared to approximately $96.2 billion at December 31, 1995 and
approximately $78.0 billion at December 31, 1994.
At December 31, 1996, the Company sponsored 59 mutual funds (open-end
investment companies) with aggregate assets of approximately $69.7 billion
distributed through its sales force of Financial Consultants. Of these, ten are
taxable and tax-exempt money market funds, with assets of approximately $41.2
billion. At December 31, 1995, aggregate assets in Company-sponsored mutual
funds were approximately $61.6 billion, of which approximately $35.6 billion
related to money market funds, compared to aggregate assets in such funds at
December 31, 1994 of approximately $50.6 billion, $28.6 billion of which related
to money market funds. A wholly owned subsidiary of SB Holdings serves as
investment manager to these mutual funds, as well as to twelve closed-end
investment companies, the shares of which are listed for trading on one or more
securities exchanges. At December 31, 1996 and December 31, 1995, assets of
these closed-end funds aggregated approximately $2.8 billion, as compared to
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approximately $2.5 billion at December 31, 1994. The open-end and closed-end
funds sponsored and managed by the Company have various investment objectives,
including growth, growth and income, taxable income and tax-exempt income. In
addition, at December 31, 1996, the Company managed 25 mutual fund portfolios
serving as funding vehicles for variable annuity contracts, with aggregate
assets of approximately $2.3 billion. At December 31, 1995 and December 31,
1994, aggregate assets in the mutual fund portfolios managed by the Company were
approximately $1.8 billion and $1.4 billion, respectively. This includes six
mutual fund portfolios that are investment options for the Travelers Universal
variable annuity contracts. The Company also sponsors and manages nine mutual
funds domiciled outside the U.S. which are offered to the Company's non-resident
alien client base. At December 31, 1996, these off-shore funds had aggregate
assets of approximately $1.2 billion, as compared to approximately $980 million
at December 31, 1995 and $780 million at December 31, 1994.
In 1996, the Company launched The Concert Series-SM-, a group of mutual
funds that invests in various of the Company's mutual funds instead of directly
in stocks, bonds or other securities. The Concert Series-SM- simplifies the
process of investing and enables investors to achieve a broad diversification of
their investments. The Concert Series-SM- is sold through the Company's
Financial Consultants and the sales force of the Primerica Financial Services
group of companies, which are subsidiaries of Travelers Group.
In addition to these proprietary funds, the Company also sells through its
Financial Consultants a large number of mutual funds sponsored and managed by
unaffiliated entities. The Company receives commissions and other sales and
service revenues from this activity.
The Company 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 the Company; other trusts are jointly
sponsored through a syndicate of major broker-dealers of which the Company is a
member. At December 31, 1996, outstanding unit trust assets held by the
Company's clients exceeded $8.6 billion, as compared to approximately $7.2
billion at December 31, 1995 and approximately $6.4 billion at December 31,
1994.
The Company's asset management units provide separate account
discretionary investment management services to a wide variety of individual and
institutional clients, including private and public retirement plans,
endowments, municipalities and other institutions. Client relationships may be
introduced through the Company's network of Financial Consultants or independent
from such network (e.g., through traditional pension plan consultants
unaffiliated with the Company). Assets under the Company's management exceeded
$24.0 billion at December 31, 1996, as compared to approximately $20.4 billion
at December 31, 1995 and approximately $15.7 billion at December 31, 1994.
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The Company's Consulting Group ("CG") provides a variety of investment
management and consulting services to institutional and individual clients. CG
sponsors a number of different "wrap fee" programs, in which CG and the Company
typically provide: an analysis of the client's financial situation, investment
needs and risk tolerance; a recommendation that the client retain one or more
investment management firms (which may be affiliated or unaffiliated with the
Company); ongoing monitoring of the performance and suitability of the
investment manager(s) retained; securities execution and custody; and client
reporting and recordkeeping. In such programs, the client generally pays a
single bundled fee for the services provided. CG also 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.
CG's programs and services generally are delivered through the Company's
Financial Consultants, many of whom specialize in such programs and services. As
of December 31, 1996, the Company provided consulting services with respect to
client assets aggregating approximately $49.1 billion, excluding the TRAK-R-
program described below, as compared to approximately $39.1 billion at December
31, 1995 and approximately $29.7 billion at December 31, 1994.
The Company'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 13 mutual funds
each corresponding to a particular asset class and investment style, or from
among the selected fund offerings of 28 no-load or load-waived mutual fund
families (including Smith Barney's family of funds) corresponding to the same
asset class and investment style criteria. At December 31, 1996, TRAK-R- assets
exceeded $6.6 billion, as compared to approximately $4.8 billion at December 31,
1995 and approximately $3.3 billion at December 31, 1994. The Company 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.
MISCELLANEOUS ACTIVITIES
Certain subsidiaries of Travelers Group are chartered as trust companies
and provide a full range of fiduciary services with a particular emphasis on
personal trust services. Another subsidiary of Travelers Group 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
the supervision of the state banking authority where it was chartered and uses
the distribution network of SBI to market its services. The Company provides
certain advisory and support services to the trust companies and receives fees
for such services.
In 1996, the Company formed a joint venture with the Korea Exchange Bank.
The venture, a brokerage and underwriting company based in Seoul, South Korea,
that is owned 49% by the Company, is engaged in the securities brokerage and
underwriting business in the Korean
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markets. The venture is licensed with the Korea Ministry of Finance and Economy
to conduct securities activities in Korea.
COMPETITION
The businesses in which the Company is engaged are highly competitive. The
principal factors affecting competition in the investment banking and securities
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 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 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.
The Federal Reserve Board has substantially removed the barrier originally
erected by the Glass-Steagall Act restricting investment banking activities of
commercial banks and their affiliates, by permitting certain commercial banks to
engage, through affiliates, in the underwriting of and dealing in certain types
of securities, subject to certain limitations. Proposed legislation has been
introduced in Congress from time to time that would modify certain other
provisions of the Glass-Steagall Act and other laws and regulations affecting
the financial services industry. The potential impact of such legislation on the
Company's businesses cannot be predicted at this time.
Competitors of the Company's mutual funds and asset management groups
include a large number of mutual fund management and sales companies and asset
management firms. Competition in mutual fund sales and investment management is
based on investment performance, service to clients and product design.
REGULATION
Certain of the Company's subsidiaries are registered as broker-dealers and
as investment advisers with the Securities and Exchange Commission (the
"Commission") and as futures commission merchants and as commodity pool
operators with the Commodity Futures Trading Commission ("CFTC"). SBI and The
Robinson-Humphrey Company, Inc., an investment banking and financial services
subsidiary of SBI ("R-H"), are 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 which has
been designated as a registered futures association by the CFTC. SBI and 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. SBI is also a reporting dealer to the
Federal Reserve Bank of New York, a member of the principal United States
futures exchanges and a registered broker-dealer in Guam. Both SBI and R-H are
subject
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to extensive regulation, primarily for the benefit of their customers, including
minimum capital requirements, which are promulgated and enforced by, among
others, the Commission, the CFTC, the NFA, the NYSE, various self-regulatory
organizations of which SBI and R-H are members and the securities administrators
of the 50 states, the District of Columbia and Puerto Rico and, in SBI's case,
Guam. The Commission and the CFTC also require certain registered broker-dealers
(including SBI) 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.
The Company's operations abroad, described in this paragraph, are
conducted through various subsidiaries. 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. The Company is a member of the International Petroleum Exchange,
the London Metals Exchange and the London International Financial Futures and
Options Exchange and, as such, is subject to the rules and regulations of those
Exchanges. In Ireland, a subsidiary of the Company that sponsors
commodities-related pooled investment funds is subject to the supervision of the
Central Bank of Ireland. In France, the Company operates as a regulated
securities house and an authorized mutual fund manager. The Company is a
licensed securities company in Japan and, as such, its activities in Japan are
subject to Japanese law applicable to securities firms. The Company is also a
member of the Tokyo Stock Exchange and the Osaka Stock Exchange, and its
activities in Japan are therefore subject to the rules and regulations of those
Exchanges. The Company conducts securities and commodities businesses in
Singapore and Hong Kong that are regulated by the Monetary Authority of
Singapore and the Hong Kong Securities and Futures Commission, respectively. The
Company also is a "B license holder" with the Zurich Stock Exchange.
Additionally, certain subsidiaries of the Company are licensed as an
"international dealer," an "international adviser" and an "investment dealer"
with the Ontario Securities Commission, and as broker-dealers with the
Securities Board of The Netherlands. The Company's representative offices in
Mexico City, Mexico, Paris, France, Beijing, People's Republic of China, Manama,
Bahrain and Taipei, Taiwan are also subject to the jurisdiction of local
financial services regulatory authorities. The Company also operates a private
trust services business that is licensed as a bank and trust company in the
Cayman Islands, and is subject to the regulation of the Director of Financial
Services, Banks & Trust Companies Supervision Department of the Cayman Islands.
In connection with the mutual funds business, the Company and its
subsidiaries must comply with regulations of a number of regulatory agencies and
organizations, including the Commission and the NASD. The Company is the direct
or indirect parent of investment advisers registered and regulated under the
Investment Advisers Act of 1940, and of companies that distribute shares of
mutual funds pursuant to distribution agreements subject to regulation under the
Investment Company Act of 1940. Under those Acts, the advisory contracts between
the
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Company's investment adviser subsidiaries and the mutual funds they serve
("Affiliated Funds"), as well as the mutual fund distribution agreements, would
automatically terminate upon an assignment of such contracts by the investment
adviser or the fund distribution company, as the case may be. Such an assignment
would be presumed to have occurred if any party were to acquire more than 25% of
Travelers Group's voting securities. Continuation of advisory and distribution
relationships under these circumstances could be achieved only by obtaining
consent to the assignment from the shareholders of the Affiliated Funds
involved. In addition, SBI and the Affiliated Funds are subject to certain
restrictions in their dealings with each other. For example, SBI 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; SBI may
not, however, conduct principal transactions with an Affiliated Fund. Further,
an Affiliated Fund may acquire securities during the existence of an
underwriting where SBI is a principal underwriter only in certain limited
situations.
SBI 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, the Company has purchased additional coverage of up
to $150 million for eligible customers, approximately $50 million of which is
from a subsidiary of Travelers Group.
As registered broker-dealers, SBI and R-H are subject to the Commission's
net capital rule, Rule 15c3-1 (the "Net Capital Rule"), promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). SBI and R-H
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 Commission 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 Commission 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
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excess net capital. Finally, the Net Capital Rule authorizes the Commission 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 Commission 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 the Company's ability to withdraw capital from SBI and R-H which
in turn could limit the Company's ability to pay dividends and make payments on
its debt. See Note 12 of Notes to Consolidated Financial Statements. At December
31, 1996, SBI had net capital, computed in accordance with the Net Capital Rule,
of $1.216 billion, which exceeded its minimum net capital requirement by $1.060
billion.
OTHER INFORMATION
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.
At December 31, 1996, the Company had approximately 26,600 full-time and
1,450 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's subsidiaries, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," and Notes 3 and 4 of Notes to Consolidated
Financial Statements.
TAXATION
For a discussion of tax matters affecting the Company and its operations,
see Note 11 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in New York City. In
addition, SBI owns two office buildings in New York City, which total
approximately 627,000 square feet. Most of SBI's other offices are located in
leased premises, the leases for which expire at various times.
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The Company leases two buildings, located at 388 and 390 Greenwich Street
and totaling approximately 2,300,000 square feet, through 1999. The Company has
a purchase option with respect to these properties.
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 5 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 the Company or
any of its subsidiaries is a party or to which any of their property is subject.
For information concerning several purported class action lawsuits filed
against SBI in connection with three funds managed by Hyperion Capital
Management Inc., see the description that appears in the third paragraph on page
2 of the Company's Current Report on Form 8-K dated November 9, 1993, the second
paragraph on page 10 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and the first paragraph on page 19 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, which
descriptions are incorporated by reference herein. A copy of the pertinent
paragraphs of such filings is included as an exhibit to this Form 10-K.
Plaintiffs' petition for a rehearing en banc was denied in January 1997.
For information concerning two purported class actions filed in October
1994 and one purported class action filed in October 1996 in connection with
certain public offering documents of Greyhound Bus Lines, Inc., see the
descriptions that appear in the second paragraph on page 16 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, the
fourth paragraph on page 10 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and the second paragraph on page 19 of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, which descriptions are incorporated by reference herein. A copy of the
pertinent paragraphs of such filings is included as an exhibit to this Form
10-K. In December 1996, the Company filed a plea and abatement in Clarkson v.
Greyhound Lines, Inc., et al.
For information concerning actions filed against a number of
broker-dealers, including SBI, relating to trading practices on the National
Association of Securities Dealers Automated Quotation system, see the
descriptions that appear in the third paragraph on 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 descriptions are incorporated by reference
herein. A copy of the pertinent paragraphs of such filings is included as an
exhibit to this Form 10-K. In March 1996, plaintiffs filed a motion for class
certification.
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For information concerning a complaint seeking equitable relief that was
filed by the U.S. Department of Justice, naming 24 major brokerage firms,
including SBI, see the description that appears in the second paragraph on page
2 of the Company's Current Report on Form 8-K dated August 7, 1996 (filed August
7, 1996), which description is incorporated by reference herein. A copy of the
pertinent paragraph of such filing is included as an exhibit to this Form 10-K.
For information concerning a complaint seeking unspecified monetary
damages that was filed by Orange County, California against numerous brokerage
firms, including SBI, see the description that appears in the Company's Current
Report on Form 8-K dated March 6, 1997 (filed March 7, 1997), which description
in incorporated by reference herein. A copy of the pertinent paragraph of such
filing is included as an exhibit to this Form 10-K.
Various subsidiaries of the Company have been named as defendants in
numerous civil actions, arbitration proceedings and other matters incident to
and typical of the businesses in which they are engaged, including actions
arising in the normal course of business out of activities as a broker and
dealer in securities, as an underwriter, as an investment banker or otherwise.
In the opinion of the Company's management, none of these actions is expected to
have a material adverse effect on the consolidated financial condition,
liquidity or results of operations of the Company and its subsidiaries.
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 Travelers
Group.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction I of Form 10-K, the information required
by Item 6 is omitted.
11
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis reflects the financial condition and
results of operations of the Company and its consolidated subsidiaries for the
periods presented.
RESULTS OF OPERATIONS
For the years ended December 31, 1996 and 1995
The Company reported record net income of $883 million for the year ended
December 31, 1996, an increase of 48% from the $595 million reported for the
year ended December 31, 1995. This increase is primarily attributable to
continued strength in the financial markets as the Dow Jones Industrial Average
reached record levels throughout the year, as well as to improved performance in
most of the Company's product categories. Return on equity reached a record
34.5% for 1996, compared to 24.6% for 1995. Pre-tax profit margin increased to
23.2% for 1996 compared to 18.9% for 1995. Revenue, net of interest expense
increased 16% to $6,267 million in 1996 from $5,408 million in 1995.
Commission revenues increased 12% to $2.2 billion, compared to $2.0 billion in
1995. This is attributable to increases in listed and over-the-counter
securities, as well as increased insurance and annuity sales.
Principal trading revenues declined 3% to $990 million compared to $1.02 billion
in 1995. This decline is the result of lower activity in taxable fixed income
and municipal trading, offset to an extent by gains in equity trading.
Investment banking revenues increased 36% to $1.1 billion in 1996 compared to
$847 million in 1995. The increase reflects continued strength in equity, high
yield, public finance, high grade debt and unit trust underwritings.
Asset management fees rose to a record $1.3 billion in 1996, up 28% from the
$1.1 billion reported in 1995. This increase is to a great extent directly
related to the increase in assets under management, as well as bringing in-house
all of the administrative functions for proprietary mutual funds and money funds
in the third quarter of 1995. Internally managed assets reached a record $111.8
billion at December 31, 1996 compared to $96.2 billion at December 31, 1995.
Internally managed assets are comprised of money market funds, mutual funds,
managed accounts, and accounts managed by financial consultants.
Net interest and dividends increased 11% to a record $419 million in 1996
compared to $377 million in 1995. The increase is primarily due to increased
margin lending to clients and increased taxable fixed income inventories.
Total expenses, excluding interest increased 10% to $4.8 billion in 1996
compared to $4.4 billion in 1995. This increase is primarily the result of
higher production-related employee compensation
12
<PAGE>
and benefits expense, and other operating expenses. These increases were
partially offset by a decline in communications occupancy and equipment expense.
Expenses other than interest and employee compensation and benefits expense were
$1.3 billion compared to $1.2 billion in 1995. Employee compensation and
benefits expense as a percentage of net revenues in 1996 declined to 56.2% from
59.0% in 1995 and the ratio of non-compensation expense as a percentage of net
revenues was 20.6% in 1996 compared to 22.1% in 1995. The Company continues to
maintain its focus on controlling fixed expenses. At December 31, 1996 the
number of non-production employees has decreased 3% since the fourth quarter of
1995.
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's asset management business provides 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 years ended December 31, 1995 and 1994
The Company reported net income of $595 million for the year ended December 31,
1995, an increase of 53% from the $388 million reported for the year ended
December 31, 1994. Net income in 1994 includes a $21 million after-tax gain from
the sale of the Company's interest in HG Asia. This increase is primarily
attributable to strong financial markets throughout 1995 compared to 1994.
Commission revenues increased by 12% to $2.0 billion in 1995 compared to $1.8
billion in 1994. The increase is a result of gains in listed, over-the-counter,
and options activity, offset by declines in futures, mutual fund and insurance
activity.
Principal trading revenues increased 13% to $1.02 billion in 1995 compared to
$900 million in 1994. The increase resulted primarily from improved performance
in equities and taxable fixed income, offset by a decline in municipal trading.
13
<PAGE>
Investment banking revenues increased 25% to $847 million in 1995 compared to
$680 million in 1994. The increase reflects strong volume in equity, high yield,
unit trust and high grade corporate debt underwritings, as well as merger and
acquisition fees. The Company's market share in a number of categories,
particularly equity IPOs, continued to advance during 1995.
Asset management fees rose to $1.1 billion in 1995, an increase of 12% from the
$941 million reported in 1994. This increase reflects growth in assets under
management which increased to a record $96.2 billion in 1995 compared to $78.0
billion in 1994. 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 revenue increased 15% to $377 million in 1995
compared to $329 million in 1994. This increase is primarily attributable to an
increase in net interest-earning assets.
Total expenses, excluding interest, increased 7% to $4.4 billion in 1995
compared to $4.1 billion in 1994. This increase is primarily attributable to
higher production related compensation and benefit expense reflecting increased
revenues of the Company, as well as an increase in depreciation expense driven
by the upgrade in systems and infrastructure to support the Company's expanded
business activities. These increases were offset, in part, by a decline in
communications, occupancy and equipment expense as a result of further
consolidation of the Company's executive operations and certain other New York
City operations. At December 31, 1995 the number of non-production employees has
decreased 6% since the fourth quarter of 1994. Employee compensation and benefit
expense as a percentage of net revenues for 1995 declined to 59.0% compared to
62.2% in 1994.
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,
repurchase transactions and securities lending arrangements. The maturities of
borrowings generally correspond to the anticipated holding periods of the assets
being financed. At December 31, 1996, there was $1,500 million in committed
uncollateralized revolving lines of credit available, none of which was
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 1996, the Company increased its long-term funding by issuing on January
30, 1996, $250 million aggregate principal amount of 5 7/8% Notes due 2001. On
August 12, 1996, the Company
14
<PAGE>
issued $40 million aggregate principal amount of S&P 500 Equity Linked Notes due
2001. On October 10, 1996, the Company issued $200 million aggregate principal
amount of 7 1/8 Notes due 2006. On November 18, 1996, the Company issued $200
million aggregate principal amount of 6 5/8 Notes due 2003. As of December 31,
1996, total long-term public debt was $2,369 million, of which $200 million will
mature on March 15, 1997.
On March 11, 1997, the Company issued $66 million aggregate principal amount of
S&P 500 Equity Linked Notes due 2002. On March 13, 1997, the Company issued
$250 million aggregate principal amount of 7% Notes due 2004. As of March 21,
1997, the Company had $684 million of debt securities 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.
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 December 31, 1996 and 1995 was 18.6x
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 Company's Credit Analysis Group.
EFFECTS OF INFLATION
Because the Company's assets are, to a large extent, liquid in nature, they are
not significantly affected by inflation. However, the rate of inflation affects
the Company's expenses, such as employee compensation, office space leasing
costs and communications charges, which may not be
15
<PAGE>
readily recoverable in the price of services transacted by the Company. To the
extent inflation results in rising interest rates and has other adverse effects
upon the securities markets, it may adversely affect the Company's financial
position and results of operations in certain businesses.
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 $51.2 billion at
December 31, 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. The increase in securities sold not yet purchased, at
market value relates to the hedging of market risk and increased financing
requirements associated with this increased trading activity. Securities
purchased under agreements to resell and securities sold under agreements to
repurchase were impacted by higher levels of "matched book" activity. Deposits
paid for securities borrowed and deposits received for securities loaned were
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
Consolidated Statement of Financial Condition 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.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page F-1
hereof. There is also incorporated by reference herein in response to this Item
the Company's Consolidated Financial Statements and the notes thereto and the
material under the caption "Quarterly Financial Data (Unaudited)" set forth in
the Consolidated Financial Statements.
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.
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
17
<PAGE>
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 9, 1996, the Company filed a Current Report on Form 8-K
dated October 7, 1996, filing certain exhibits under Item 7 thereof
relating to the offer and sale of the Company's 7 1/8% Notes due
October 1, 2006.
On October 15, 1996, the Company filed a Current Report on Form 8-K
dated October 14, 1996, reporting under Item 5 thereof the results
of its operations for the three and nine months ended September 30,
1996, and certain additional financial information.
On November 15, 1996, the Company filed a Current Report on Form 8-K
dated November 13, 1996, filing certain exhibits under Item 7
thereof relating to the offer and sale of the Company's 6 5/8% Notes
due November 15, 2003.
No other reports on Form 8-K have been filed by the Company during
the last quarter of the period covered by this report; however, on
January 21, 1997, the Company filed a Current Report on Form 8-K,
dated January 21, 1997, reporting under Item 5 thereof the results
of its operations for the three months and twelve months ended
December 31, 1996, and certain additional financial information; on
March 7, 1997, the Company filed a Current Report on Form 8-K, dated
March 6, 1997, reporting under Item 5 thereof certain additional
information regarding legal proceedings involving the Company; on
March 7, 1997, the Company filed a Current Report on Form 8-K, dated
March 6, 1997, filing certain exhibits under Item 7 thereof relating
to the offer and sale of the Company's Smith Barney S&P 500 Equity
Linked Notes due March 11, 2002; and on March 12, 1997, the Company
filed a Current Report on Form 8-K, dated March 10, 1997, filing
certain exhibits under Item 7 thereof relating to the offer and sale
of the Company's 7% Notes due March 15, 2004.
18
<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 3.2 to
the Company's 1994 10-K.
10.01.1 Three-Year Competitive Advance and Revolving Credit
Facility Agreement (the "Three-Year Competitive Advance
and Revolving Credit Facility Agreement") dated as of
July 23, 1993, as amended and restated as of May 31,
1994, among the Company, the Lenders named therein,
Chemical Bank, Citibank, N.A. and Credit Lyonnais New
York Branch as Managing Agents, the banks named therein
as Co-Agents and Chemical Bank as Administrative Agent,
incorporated by reference to Exhibit 10.02 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1994 (File No. 1-12484)
(the "Company's September 30, 1994 10-Q").
10.01.2 Cumulative Amendment dated as of May 28, 1996 to the
Three-Year Competitive Advance and Revolving Credit
Facility Agreement, incorporated by reference to
Exhibit 10.01 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1996
(File No. 1-12484) (the "Company's September 30, 1996
10-Q").
10.02 Amended and Restated Lease dated as of December 30,
1994 between State Street Bank and Trust Company of
Connecticut, National Association, as Trustee
(Lessor), and Smith Barney Inc., Mutual Management Corp.,
Smith Barney Mutual Funds Management Inc. and The
Travelers Inc., as tenants in common (Lessee),
incorporated by reference to Exhibit 10.03 to the
Company's 1994 10-K.
12.01 Computation of ratio of earnings to fixed charges. Electronic
21.01 Pursuant to General Instruction I of Form 10-K, the
list of subsidiaries of the Company is omitted.
19
<PAGE>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
- ------ ---------------------- ------
23.01 Consent of Coopers & Lybrand L.L.P. Electronic
24.01 Powers of Attorney of certain directors of the Company. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The third paragraph on page 2 of the Company's Current Electronic
Report on Form 8-K dated November 9, 1993, the second
paragraph on page 10 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995
(the "Company's 1995 10-K") and the first paragraph on
page 19 of the Company's September 30, 1996 10-Q.
99.02 The second paragraph on page 16 of the Company's Electronic
September 30, 1994 10-Q, the fourth paragraph on page
10 of the Company's 1995 10-K and the second paragraph
on page 19 of the Company September 30, 1996 10-Q.
99.03 The third paragraph on page 16 of the Company's Electronic
September 30, 1994 10-Q and the last paragraph on page
10 of the Company's 1995 10-K.
99.04 The second paragraph on page 2 of the Company's Current Electronic
Report on Form 8-K dated August 7, 1996 (filed August
7, 1996).
99.05 The second paragraph on page 2 of the Company's Current Electronic
Report on Form 8-K dated March 6, 1997 (filed March 7,
1997).
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.
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 Smith Barney Holdings
Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Corporate Secretary.
20
<PAGE>
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 26th day of
March, 1997.
SMITH BARNEY HOLDINGS INC.
(Registrant)
By: /s/ James Dimon
--------------------------------------
James Dimon, Chairman of the Board 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 26th day of March, 1997.
SIGNATURE TITLE
--------- -----
/s/ James Dimon Chairman of the Board, Chief Executive
- ------------------------------ Officer (Principal Executive Officer) and
James Dimon Director
/s/ Charles w. Scharf Vice President and Chief Financial Officer
- ------------------------------ (Principal Financial Officer)
Charles W. Scharf
/s/ Michael J. Day Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
Michael J. Day
* Director
- ------------------------------
Steven D. Black
* Director
- ------------------------------
James S. Boshart, III
21
<PAGE>
SIGNATURE TITLE
--------- -----
* Director
- ------------------------------
Robert A. Case
* Director
- ------------------------------
Robert Druskin
* Director
- ------------------------------
Robert H. Lessin
* Director
- ------------------------------
William J. Mills, II
* Director
- ------------------------------
Michael B. Panitch
* Director
- ------------------------------
Paul Underwood
*By: /s/ James Dimon
- ------------------------------
James Dimon
Attorney-in-fact
22
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Accountants F-2
- ---------------------------------
Consolidated Financial Statements
- ---------------------------------
Consolidated Statements of Financial Condition
for the years ended December 31, 1996 and 1995 F-3
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Changes in Stockholder's Equity
for the years ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-24
Schedules
- ---------
Schedule I - Condensed Financial Information F-25 - F-29
Schedules other than the one listed above are omitted since they
are not required or are not applicable or the information is
furnished elsewhere in the consolidated financial statements or
the notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Smith Barney Holdings Inc. and Subsidiaries:
We have audited the consolidated financial statements and the financial
statement schedule of Smith Barney Holdings Inc. (a wholly owned subsidiary of
Travelers Group Inc.) and Subsidiaries (the Company) listed on the index on Page
F-1 of this Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Smith Barney
Holdings Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 15, 1997.
F-2
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In millions, except share data)
December 31,
----------------
ASSETS 1996 1995
------ ------- -------
Cash and cash equivalents $ 405 $ 612
Cash segregated and on deposit for
Federal and other regulations 1,256 1,072
Securities purchased under agreements to resell 16,345 12,087
Deposits paid for securities borrowed 8,935 7,514
Receivable from brokers and dealers 323 510
Receivable from customers 6,981 6,048
Securities owned, at market value 12,465 8,984
Property, equipment and leasehold improvements,
at cost, net of accumulated depreciation and
amortization of $242 and $168, respectively 438 448
Excess of purchase price over fair value of net
assets acquired, net of accumulated amortization of
$70 and $61, respectively 278 287
Other assets 3,807 3,397
------- -------
$51,233 $40,959
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Commercial paper and other short-term borrowings $ 3,217 $ 2,955
Securities sold under agreements to repurchase 19,637 17,167
Deposits received for securities loaned 4,034 2,899
Payable to brokers and dealers 221 227
Payable to customers 5,588 4,176
Securities sold not yet purchased, at market value 8,378 4,563
Notes payable 2,379 1,885
Accounts payable and accrued liabilities 4,795 4,389
Subordinated indebtedness 226 224
------- -------
48,475 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 951 666
Cumulative translation adjustment 4 5
------- -------
2,758 2,474
------- -------
$51,233 $40,959
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year ended December 31,
-----------------------
1996 1995 1994
------ ------ ------
Revenues:
Commissions $2,250 $2,008 $1,800
Principal trading 990 1,016 900
Investment banking 1,148 847 680
Asset management fees 1,349 1,052 941
Other 111 108 98
------ ------ ------
Total non-interest revenues 5,848 5,031 4,419
Interest and dividends 1,926 1,752 1,099
Interest expense 1,507 1,375 770
------ ------ ------
Net interest and dividends 419 377 329
------ ------ ------
Net revenues 6,267 5,408 4,748
------ ------ ------
Expenses, excluding interest:
Employee compensation and benefits 3,522 3,193 2,953
Communications, occupancy and equipment 565 572 574
Floor brokerage and other production 147 137 138
Other operating and administrative
expenses 579 485 441
------ ------ ------
Total expenses, excluding interest 4,813 4,387 4,106
------ ------ ------
Gain on sale of equity investment 34
------
Income before provision for income taxes 1,454 1,021 676
Provision for income taxes 571 426 288
------ ------ ------
Net income $ 883 $ 595 $ 388
====== ====== ======
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(In millions, except share data)
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Paid-in Retained Translation Stockholder's
Stock* Capital Earnings Adjustment Equity
------ ---------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $1,803 $ 315 $ 2 $ 2,120
Net income 388 388
Dividends (194) (194)
Translation adjustment 2 2
------ ------ ----- --- -------
Balance, December 31, 1994 1,803 509 4 2,316
Net income 595 595
Dividends (438) (438)
Translation adjustment 1 1
------ ------ ----- --- -------
Balance, December 31, 1995 1,803 666 5 2,474
Net income 883 883
Dividends (598) (598)
Translation adjustment (1) (1)
------ ------ ----- --- -------
Balance, December 31, 1996 $1,803 $ 951 $ 4 $ 2,758
====== ====== ===== === =======
</TABLE>
* $.10 par value, 1,000 shares authorized; 100 shares issued and outstanding.
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 883 $ 595 $ 388
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Gain on sale of equity investment (34)
Depreciation and amortization 188 160 123
Deferred tax (benefit) provision (47) (37) 26
(Increase) decrease in operating assets:
Cash segregated and on deposit for
Federal and other regulations (184) (256) 98
Securities purchased under agreements to resell (4,258) (3,781) (3,894)
Deposits paid for securities borrowed (1,421) 9,835 (6,602)
Receivable from brokers and dealers 187 225 328
Receivable from customers (933) 1,454 (398)
Securities owned, at market value (3,481) (2,039) (1,082)
Other assets (278) (108) (882)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase 2,470 2,545 9,540
Deposits received for securities loaned 1,135 (4,099) 454
Payable to brokers and dealers (6) (932) (682)
Payable to customers 1,412 (2,472) 1,477
Securities sold not yet purchased, at market value 3,815 218 510
Accounts payable and accrued liabilities 497 691 (196)
------- ------- -------
Cash provided by (used in) operating activities (21) 1,999 (826)
------- ------- -------
Cash flows from investing activities:
Purchase of property, equipment and
leasehold improvements (96) (152) (250)
Proceeds from sale of equity investment 55
Other (159) (84) (69)
------- ------- -------
Cash used in investing activities (255) (236) (264)
------- ------- -------
</TABLE>
(continued on next page)
F-6
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(continued)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from (repayments of) commercial paper
and other short-term borrowings, net $ 262 $(1,419) $ 922
Proceeds from notes payable 690 825 600
Repayments of notes payable (200) (408) (426)
Proceeds from subordinated indebtedness 71 109 112
Repayments of subordinated indebtedness (69) (176) (176)
Dividends paid to Travelers Group (684) (299) (217)
------- ------- -----
Cash provided by (used in) financing activities 70 (1,368) 815
------- ------- -----
Effect of exchange rate changes on cash (1) 4
------- ------- -----
Net change in cash and cash equivalents (207) 395 (271)
Cash and cash equivalents, beginning of year 612 217 488
------- ------- -----
Cash and cash equivalents, end of year $ 405 $ 612 $ 217
======= ======= =====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,483 $ 1,376 $ 722
======= ======= =====
Income taxes $ 596 $ 350 $ 278
======= ======= =====
Dividends declared but not paid $ 100 $ 186 $ 47
======= ======= =====
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Smith
Barney Holdings Inc., a wholly owned subsidiary of Travelers Group Inc.
("Travelers Group"), and its subsidiaries (the "Company"). The Company's
principal operating subsidiary, Smith Barney Inc. ("Smith Barney"), is primarily
engaged in the securities industry in the United States and has operations in
various foreign countries whose currencies are freely convertible into U.S.
dollars. Financial statements pertaining to foreign operations are generally
translated at current exchange rates. All material intercompany balances and
transactions have been eliminated. Certain reclassifications have been made to
prior year amounts to conform to current year presentations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Accounting Policies
Proprietary transactions are recorded in the consolidated statement of financial
condition on a trade date basis. Customer transactions are recorded on a
settlement date basis. Commissions, underwriting and principal trading revenues
and related expenses are recognized in income on trade date, as are unrealized
gains and losses on proprietary futures and forward contracts. Securities owned
and securities sold not yet purchased are valued at market and the resulting
unrealized gains and losses are included in income.
Cash equivalents consist of highly liquid investments with a maturity of three
months or less when purchased, other than those held for sale in the ordinary
course of business.
Securities purchased under agreements to resell ("reverse repurchase
agreements") and securities sold under agreements to repurchase ("repurchase
agreements") are treated as collateralized financing transactions and are
recorded at the amount at which the securities will be subsequently resold or
reacquired, including accrued interest, as specified in the respective
agreements. It is the Company's policy to take possession of securities
purchased under agreements to resell. The Company monitors the market value of
securities to be repurchased and resold daily, and additional collateral is
obtained as necessary to protect against credit exposure.
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. Securities borrowed transactions require the
Company to deposit cash or other collateral with the lender.
F-8
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
1. Summary of Significant Accounting Policies (Cont'd)
---------------------------------------------------
With respect to securities loaned, the Company receives cash collateral in an
amount generally in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and securities loaned daily,
and additional collateral is obtained as necessary.
The Company has receivables and payables for financial instruments sold to and
purchased from broker-dealers. The Company is exposed to risk of loss from the
inability of broker-dealers to pay for purchases or to deliver the financial
instruments sold, in which case the Company would have to sell or purchase the
financial instruments at prevailing market prices.
The Company seeks to protect itself from the risks associated with customer
activities by requiring customers to maintain margin collateral in compliance
with regulatory requirements and its own internal guidelines, which are
generally more stringent than regulatory margin requirements. Margin levels are
monitored daily and additional collateral must be deposited as required. Where
customers cannot meet collateral requirements, the Company will liquidate
sufficient underlying financial instruments to bring the account in compliance
with the required margin level.
Exposure to credit risk is impacted by the markets for financial instruments,
which can be volatile and may impair both the ability of clients to satisfy
their obligations to the Company, as well as the Company's ability to liquidate
any underlying collateral in the event of default. Credit limits are established
and closely monitored for customers and broker-dealers engaged in futures,
forwards and other transactions deemed to be credit-sensitive.
Property, equipment and leasehold improvements are reported at cost, net of
accumulated depreciation and amortization. Property includes buildings and
related capital improvements which are depreciated on a straight-line basis over
estimated useful lives of ten to forty years. Depreciation of furniture and
equipment is provided on either a straight-line or accelerated method, over
estimated useful lives of three to ten years. Leasehold improvements are
amortized over the lesser of the estimated useful life of the asset or the
remaining terms of the leases.
The excess of the allocated purchase price over the fair value of the Company's
net assets, which resulted from the 1988 acquisition by Travelers Group, is
being amortized over forty years on a straight-line basis. The Company amortizes
other intangible assets on a straight-line basis over their estimated useful
lives ranging from four to twenty years.
F-9
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
1. Summary of Significant Accounting Policies (Cont'd)
---------------------------------------------------
Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 125").
SFAS 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. SFAS 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; however, the FASB
has issued Statement of Financial Accounting Standards No. 127 which delays
until January 1, 1998 the effective date of certain provisions. Earlier or
retroactive application is not permitted. The adoption of the provisions of this
statement effective January 1, 1997, will not have a material impact on the
results of operations, financial condition or liquidity of the Company. The
Company is currently evaluating the impact of the provisions whose effective
date has been delayed until January 1, 1998.
2. Securities, at Market Value
---------------------------
Securities consisted of the following:
December 31,
----------------------
1996 1995
------- ------
Securities owned
- ----------------
U.S. Government and agencies
obligations $ 6,564 $4,224
Corporate debt 2,841 2,019
Commercial paper and
other short-term debt 958 815
State and municipal obligations 818 698
Corporate convertibles, equities
and other securities 1,284 1,228
------- ------
$12,465 $8,984
======= ======
Securities sold not yet purchased
- ---------------------------------
U.S. Government and agencies
obligations $ 7,388 $3,493
Corporate debt 348 385
Corporate convertibles, equities
and other securities 642 685
------- ------
$ 8,378 $4,563
======= ======
F-10
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
2. Securities, at Market Value (Cont'd)
------------------------------------
Securities owned and securities sold not yet purchased are recorded at their
current market values. Securities sold not yet purchased must be ultimately
acquired in the marketplace at the then prevailing prices, which may differ from
the values reflected on the consolidated statement of financial condition.
3. Commercial Paper and Other Short-term Borrowings
------------------------------------------------
Commercial paper and other short-term borrowings include commercial paper, and
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:
December 31,
--------------------
1996 1995
------ ------
Commercial paper $3,028 $2,401
Uncollateralized borrowings 189 399
Collateralized borrowings 155
------ ------
$3,217 $2,955
====== ======
At December 31, 1995 the market value of securities pledged as collateral for
borrowings was $171.
The weighted average interest rate on the Company's commercial paper and other
short-term borrowings was 5.7% at December 31, 1996, and 5.9% at December 31,
1995.
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.
F-11
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
4. Notes Payable and Subordinated Indebtedness
-------------------------------------------
Notes payable consisted of the following:
December 31,
1996 1995
---- ----
5 3/8% Notes due 1996 $ 150
7.4% Medium-term Note due 1996 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
S&P 500 Equity Linked Notes due 2001 44
6 1/2% Notes due 2002 150 150
7.50% Notes due 2002 150 150
6 5/8% Notes due 2003 200
6 7/8% Notes due 2005 175 175
7 1/8% Notes due 2006 200
Other 10 10
------ ------
$2,379 $1,885
====== ======
The Company has a $1,000 revolving credit agreement with a bank syndicate that
extends through May 1999. In addition, the Company has a $500 364-day revolving
credit agreement that extends through May 1997. Any amounts outstanding on the
364-day revolving credit agreement's termination date in May 1997 are due in May
1998. The total of these revolving credit agreements of $1,500 was available and
undrawn at December 31, 1996.
The Company is limited by covenants in these revolving credit facilities as to
the amount of dividends that may be paid to Travelers Group. The amount of
dividends varies based upon, among other things, levels of net income of the
Company. At December 31, 1996, the Company would have been able to remit
approximately $659 to Travelers Group under its most restrictive covenants.
At December 31, 1996 and 1995, the fair value of notes payable was approximately
$2,384 and $1,939, respectively. Fair value of long-term debt was estimated
using quoted market prices.
Subordinated indebtedness consists of employee deferred compensation plans of
$226 and $224 at December 31, 1996 and 1995, respectively. These plans have
various maturities, primarily ranging from 1997 to 2001 with interest accrued
based on the 30-day Treasury Bill rate.
F-12
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
4. Notes Payable and Subordinated Indebtedness (Cont'd)
----------------------------------------------------
Notes payable and subordinated indebtedness at December 31, 1996 mature as
follows:
Principal
Year Amount
---- ---------
1997 $ 273
1998 209
1999 375
2000 510
2001 297
Thereafter 941
------
$2,605
======
5. Lease Commitments
-----------------
The Company leases certain office facilities and operating equipment under
noncancelable and cancelable agreements. At December 31, 1996, future minimum
rental commitments under long-term noncancelable lease agreements, expiring in
various years to 2012, net of cumulative sublease income of $26, are as follows:
Annual Lease Commitments
------------------------
1997 $146
1998 137
1999 111
2000 51
2001 38
Thereafter 88
----
$571
====
Rent expense was $174, $184 and $200 for the years ended December 31, 1996, 1995
and 1994, respectively.
The Company, together with certain of its affiliates, leases, with an option to
purchase, two buildings in New York City with a remaining lease term of three
years.
6. Fair Value of Financial Instruments
-----------------------------------
At December 31, 1996, substantially all of the Company's financial instruments
are carried at fair value or amounts approximating fair value, except for notes
payable for which the fair value was $2,384 and $1,939 at December 31, 1996 and
1995, respectively (book value was $2,379 and $1,885, respectively, see note 4)
and the Company's end user interest rate swaps, for which the fair value was $5
and $2 at December 31, 1996 and 1995, respectively (see Note 8). Financial
instruments recorded at quoted market value in the Company's consolidated
statement of financial condition include securities owned and securities sold
not yet purchased.
F-13
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
6. Fair Value of Financial Instruments (Cont'd)
-------------------------------------------
The Company's financial instruments are short-term and carried at amounts which
approximate fair value. These instruments include cash and cash equivalents,
cash segregated and on deposit for federal and other regulations, reverse
repurchase and repurchase agreements, securities borrowed and loaned, receivable
from and payable to brokers and dealers and customers, commercial paper and
other short-term borrowings, and accounts payable and accrued liabilities. At
December 31, 1996 and 1995, the carrying value of subordinated indebtedness also
approximates fair value.
7. Trading Activities
------------------
The Company trades both cash and derivative financial instruments. While trading
activities are primarily generated by client order flow, the Company also takes
proprietary positions in interest rate, foreign exchange, debt, equity and
commodity instruments based on expectations of future market movements and
conditions. The Company's trading strategies rely on the joint management of its
client-driven and proprietary transactions, along with the hedging and financing
of these positions. This strategy helps reduce market risk and volatility in
principal trading revenues.
Detailed information on principal trading revenues by product category follows:
1996 1995 1994
---- ------ ----
Equities $493 $ 459 $392
Taxable fixed-income 257 305 239
Municipals 189 216 248
Foreign exchange, and other
derivative financial instruments 51 36 21
---- ------ ----
Total principal trading revenues $990 $1,016 $900
==== ====== ====
The revenue amounts presented include gains and losses from cash instruments and
related derivatives, including swaps, forwards, futures and options.
Equity revenues include realized and unrealized gains and losses on
market-making and trading, primarily in over-the-counter, listed and convertible
securities and options.
Taxable fixed-income revenues include realized and unrealized gains and losses
on market-making and trading, primarily in U.S. Government and agencies
obligations, mortgage and asset-backed securities and corporate debt and
preferred securities, net of hedges in financial futures, options on financial
futures and forward contracts.
Municipal revenues include realized and unrealized gains and losses in
market-making and trading municipal and tax-exempt securities.
Foreign exchange revenues include realized and unrealized gains and losses in
currency forward and options contracts.
F-14
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
7. Trading Activities (Cont'd)
---------------------------
Other derivative financial instrument revenues include realized and unrealized
gains and losses on swaps, caps, floors, and swaptions, net of related hedges,
including financial futures and options, and non-derivative (or cash) financial
instruments.
8. 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 on specified future dates. A derivative contract may be traded on
an exchange or over-the-counter ("OTC"). Exchange-traded derivatives are
standardized and include futures and certain option contracts. OTC derivative
contracts are negotiated between contracting parties and include forwards, swaps
and certain options, including interest rate caps, floors and swaptions.
Derivative and non-derivative (or cash) financial instruments are subject to
similar market and credit risks. The Company uses cash and derivative financial
instruments in the normal course of its business primarily to facilitate
customer transactions, and to manage exposure from loss due to interest rate,
currency and market risk and in its proprietary activities. The risks of
derivatives should not be viewed in isolation but rather should be considered on
an aggregate basis along with risks related to the Company's non-derivative
trading and other activities.
Market risk is the potential change in value caused by fluctuations in interest
rates, foreign exchange rates, or market prices of an underlying financial
instrument or index. Market risk is directly impacted by the volatility and
liquidity in the markets in which financial instruments are traded. The Company
seeks to control market risk related to trading financial instruments by
measuring and monitoring risk limits across trading activities. In many cases,
derivative financial instruments are used to hedge other on- and off-balance
sheet transactions.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. The Company's
exposure to the credit risk associated with counterparty non-performance is
limited to the net replacement cost of OTC 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 certain options
generally do not give rise to significant counterparty exposure due to the
margin requirements of the individual exchanges.
F-15
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
8. Derivative Financial Instruments (Cont'd)
-----------------------------------------
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 Company's Credit Analysis Group.
The Company's derivative contracts are generally short-term, with a weighted
average maturity of approximately 7 1/2 months at December 31, 1996, and 7
months at December 31, 1995. The gross notional or contractual amounts of these
derivative financial instruments set forth below do not represent the amounts
subject to market risk, but are an indication of the volume of these
transactions. In many cases, these financial instruments limit the Company's
exposure to losses from market risk by hedging other on- and off-balance sheet
transactions.
Notional/Contract Amount
December 31, 1996 December 31, 1995
----------------- -----------------
Purchase Sale Purchase Sale
-------- ---- -------- ----
Mortgage-backed
contracts (TBA) $10,997 $11,490 $6,907 $7,479
Forward contracts:
Foreign currency $13,081 $14,174 $6,127 $7,568
Precious metals 359 359 465 465
Interest rate and other 150 297
Futures contracts:
Foreign currency $ 1,469 $ 520 $1,458 $ 11
Financial 467 3,110 2,889 493
Commodities 3 11 9 8
Held Written Held Written
---- ------- ---- -------
Options:
OTC foreign currency $ 5,849 $ 5,511 $3,266 $3,502
Exchange-traded 1,295 1,128 2,201 62
Interest rate caps,
floors and swaptions 2,035 2,571 550 1,197
OTC debt and equity 756 682 210 207
Open Contracts Open Contracts
-------------- --------------
Interest rate and other swaps $5,393 $2,305
F-16
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
8. Derivative Financial Instruments (Cont'd)
-----------------------------------------
Written foreign currency options consist of $2,373 and $3,138 of put and call
contracts, respectively, at December 31, 1996 and $1,799 and $1,703 of put and
call contracts, respectively, at December 31, 1995.
The fair values of these instruments at December 31, 1996 and 1995, which are
recorded in the statements of financial condition, and the average fair values
for the years, based on month-end balances, were as follows:
Average Fair Value
Fair Value Year Ended
December 31, 1996 December 31, 1996
----------------- -----------------
Asset Liability Asset Liability
----- --------- ----- ---------
Mortgage-backed
contracts (TBA) $ 46 $ 25 $ 47 $ 45
Forward contracts:
Foreign currency 296 261 321 272
Precious metals 5 4 5 5
Interest rate and other 1
Options:
OTC foreign currency 73 75 60 65
Exchange-traded 5 7 10 9
Interest rate caps,
floors and swaptions 41 33 26 20
OTC debt and equity 35 29 29 15
Interest rate and other swaps 16 47 19 46
---- ---- ---- ----
Total $517 $481 $518 $477
==== ==== ==== ====
Average Fair Value
Fair Value Year Ended
December 31, 1995 December 31, 1995
----------------- -----------------
Asset Liability Asset Liability
----- --------- ----- ---------
Mortgage-backed
contracts (TBA) $ 45 $ 38 $ 40 $ 39
Forward contracts:
Foreign currency 156 101 273 242
Precious metals 5 5 12 12
Interest rate and other 7 3 1
Options:
OTC foreign currency 39 48 73 74
Exchange-traded 9 6 11 10
Interest rate caps,
floors and swaptions 62 39 40 27
OTC debt and equity 66 13 34 13
Interest rate and other swaps 37 90 34 59
---- ---- ---- ----
Total $426 $340 $520 $477
==== ==== ==== ====
F-17
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
8. Derivative Financial Instruments (Cont'd)
-----------------------------------------
The fair values do not include receivables or payables related to
exchange-traded futures contracts. Fair values for certain exchange-traded
derivatives, principally futures and certain options, are based on quoted market
prices. Futures contracts are settled in cash daily and therefore the receivable
or payable is limited to one day's price move.
The fair value of a derivative contract represents the amount the Company would
have to pay a third party to assume its obligations under the contract or the
amount a third party would pay to receive the Company's benefits under the
contract. The Company's OTC derivative financial instruments, principally
forwards, options, and swaps, are generally marked-to-market by pricing models
based on the present value of future cash flows, with adjustments, as required,
for credit, liquidity and other costs. These adjustments are integral components
of the mark to market process. Realized and unrealized gains and losses from
derivatives are recognized on a trade date basis in the consolidated statement
of operations in principal trading revenues. Following is a discussion of the
Company's principal derivatives activities.
Mortgage-Backed Securities Contracts -- The Company trades mortgage-backed "to
be announced" securities ("TBA") to facilitate customer transactions and to
hedge proprietary inventory positions. At December 31, 1996 and 1995, over
$9,005 and $5,674, respectively, of purchase and sale contracts represent
offsetting purchases and sales of the same security, and substantially all of
the total contract values were for settlement within 60 days.
Foreign Currency Contracts -- In its role as a market intermediary, the Company
acts as a principal in currency forward and options contracts, primarily to
facilitate customer transactions. These transactions expose the firm to foreign
exchange rate risk, which is generally hedged by entering into foreign currency
forward, futures and options contracts with inverse market risk profiles.
At December 31, 1996 and 1995, approximately 81% and 83%, respectively, of
foreign currency derivative instruments were for settlement within 90 days, and
related primarily to major currencies such as the Japanese yen, German mark and
British pound.
Financial Futures and Options on Futures Contracts -- The Company trades
financial futures contracts and options on financial futures, primarily to hedge
proprietary inventory positions.
Precious Metals Contracts -- Forward precious metals contracts are entered into
to facilitate customer transactions. These contracts call for settlement in the
London Bullion Market, which is used globally for hedging and trading purposes.
The Company may use precious metals futures as hedges of its forward inventory
to reduce market risk.
F-18
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
8. Derivative Financial Instruments (Cont'd)
-----------------------------------------
Interest Rate Products -- The Company structures interest rate swaps and writes
interest rate caps, floors and swaptions as part of its proprietary trading
strategy. These instruments are hedged with derivative financial instruments,
including financial futures and options, and non-derivative (or cash) financial
instruments.
In addition, the Company has entered into an interest rate swap contract as an
end user to manage interest rate risk related to certain variable rate
obligations. Under this swap, the Company has fixed $475 of its variable rate
obligations at an average rate of 5.2%. This swap is accounted for as a hedge of
the related liabilities; therefore an unrealized gain on this swap of $5 and $2
at December 31, 1996 and 1995 resepectively, is not recorded in the consolidated
financial statements. The difference to be received or paid on the swap is
recorded as an adjustment to expense as incurred and any related receivable from
or payable to the counterparty is recorded as an asset or liability,
accordingly.
Option Contracts -- As a writer of option contracts, the Company receives a fee
to become obligated to buy or sell financial instruments for a period of time at
the holder's option. During this period, the Company bears the risk of an
unfavorable change in the market value of the financial instrument underlying
the option, but has no credit risk, as the counterparty has no performance
obligation to the Company once it has paid its cash premium.
9. Commitments and Contingencies
-----------------------------
The Company trades "when-issued" fixed income securities, primarily to
facilitate customer transactions and to hedge proprietary inventory positions.
At December 31, 1996, the Company had commitments to purchase and sell $281 and
$20, respectively, of when-issued fixed income securities. At December 31, 1995,
the Company had commitments to purchase and sell $369 and $324, of when-issued
fixed income securities.
The Company had outstanding commitments to underwrite variable rate municipal
securities totaling $346 and $800 at December 31, 1996 and 1995, respectively;
conditions of the offerings include bond insurance and liquidity support
facilities.
The Company had obtained letters of credit aggregating $147 and $119 at December
31, 1996 and 1995, respectively, of which $147 and $112, respectively, were used
to satisfy various collateral and deposit requirements principally with clearing
organizations.
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 December 31, 1996 and 1995, is $438 and
$475, respectively.
F-19
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
9. Commitments and Contingencies (Cont'd)
--------------------------------------
At December 31, 1996 and 1995, the Company borrowed securities having a market
value of $2,085 and $451, respectively, against which it pledged securities
having a market value of $2,132 and $459, respectively.
At December 31, 1996 and 1995, the Company had outstanding forward repurchase
agreements totaling $725 and $1,200, respectively, and forward reverse
repurchase agreements totaling $500 and $625, respectively. These commitments
represent forward financing trades with agreed upon interest rates, principal
amounts and delivery dates.
The Company has provided a residual value guarantee of $586 in connection with
the lease of the buildings occupied by the Company's executive offices and New
York operations.
On July 31, 1993, Smith Barney (then known as Smith Barney, Harris Upham & Co.
Incorporated), along with certain of its affiliates and Travelers Group (then
known as Primerica Corporation), 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, the Company has
agreed to pay American Express Company additional amounts contingent upon the
Company's future performance, consisting of up to $50 per year for three years
based upon the Company's revenues and 10% of the Company's after-tax profits in
excess of $250 per year over a five-year period. Amounts paid under this
agreement amounted to $110 and $76 in 1996 and 1995, respectively. The
contingent consideration will be accounted for prospectively, as additional
purchase price, which will result in amortization over periods of up to 20
years.
In management's opinion, commitments outstanding will settle without a material
adverse effect on the financial position, liquidity 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
addition, from time to time the Company is a party to examinations and inquiries
by various regulatory and self-regulatory bodies. In the opinion of management,
based on consultation with legal counsel, these matters would not be likely to
have a material adverse effect on the results of operations, the financial
position or liquidity of the Company.
10. Concentrations of Credit Risk
-----------------------------
As a major securities firm, the Company is actively involved in securities
underwriting, brokerage, distribution and trading. These and other related
services are provided on a worldwide basis to a large and diversified group of
clients and customers, including multinational corporations, governments,
emerging growth companies, financial institutions and individual investors.
F-20
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
10. Concentrations of Credit Risk (Cont'd)
--------------------------------------
A substantial portion of the Company's securities and commodities transactions
are 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 bonds held by the Company for reverse
repurchase agreements and bonds borrowed (included in securities borrowed),
which together represented 39% of total assets at December 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, institutional clients and other financial institutions. This
concentration arises in the normal course of the Company's business.
11. Income Taxes
------------
Under an income tax allocation agreement with Travelers Group, the Company's
federal, state and local income taxes are provided on a separate return basis
and are subject to the utilization of tax attributes in Travelers Group's
consolidated income tax provision.
The following summarizes the provision for income taxes:
Year ended December 31,
-----------------------
1996 1995 1994
----- ----- ----
Current tax provision:
Federal $ 507 $ 354 $196
State and local 103 105 65
Foreign 8 4 1
Deferred tax (benefit)/provision:
Federal (35) (29) 18
State and local (12) (8) 8
----- ----- ----
$ 571 $ 426 $288
===== ===== ====
The net asset for deferred income taxes relates to the following:
December 31,
--------------
Deferred tax assets: 1996 1995
----- -----
Compensation and related benefits $ 334 $ 277
Other deferred tax assets 109 105
----- -----
443 382
----- -----
Deferred tax liabilities:
Intangible assets (293) (339)
Depreciation and related costs (59) (24)
Other deferred tax liabilities (36) (11)
----- -----
(388) (374)
----- -----
Net deferred tax asset $ 55 $ 8
===== =====
F-21
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
11. Income Taxes (Cont'd)
---------------------
The following is a reconciliation of the income tax provision to the amount
computed by applying the federal statutory rate to income before taxes:
Year ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
Income tax provision computed
at federal statutory rate $ 509 $ 357 $ 237
Changes resulting from the tax effect of:
Foreign, state and local taxes,
net of federal benefit 61 63 47
Other, net 1 6 4
------ ------ -----
$ 571 $ 426 $ 288
====== ====== =====
12. Net Capital Requirements
------------------------
Smith Barney, as a broker-dealer, is subject to the Uniform Net Capital Rule of
the Securities and Exchange Commission ("SEC") (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 December 31, 1996, net capital of $1,216 exceeded the requirement by
$1,060. At December 31, 1995, net capital of $1,139 exceeded the requirement by
$1,007.
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 December 31, 1996, RH Co.'s net capital, as defined, of $79
exceeded the minimum requirement by $78. At December 31, 1995 net capital of $65
exceeded the minimum requirement by $64.
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 December 31, 1996,
financial resources of $150 exceeded the minimum requirement by $104. At
December 31, 1995, financial resources of $111 exceeded the minimum requirement
by $63.
Advances, dividend payments and other equity withdrawals from Smith Barney and
other regulated subsidiaries are restricted by the regulations of the SEC, New
York Stock Exchange and other regulatory agencies. These regulatory restrictions
may limit the amounts that these subsidiaries pay as dividends or advances to
the Company.
F-22
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
13. Employee Benefit Plans
----------------------
The Company participates in a noncontributory defined benefit pension plan with
Travelers Group that covers substantially all U.S. employees. Separate plans are
maintained to cover foreign employees. These plans resulted in expenses of $21,
$45 and $41 for the years ended December 31, 1996, 1995 and 1994, respectively.
In addition, the Company provides other postretirement and postemployment
benefits, primarily related to disability and severance related costs. During
1996, 1995 and 1994, expenses for these benefits totaled $7, $6, and $11,
respectively.
The Company, through Travelers Group, has a defined contribution employee
savings plan covering substantially all U.S. employees. In addition, the Company
has various incentive plans under which stock of Travelers Group is purchased
for subsequent distribution to employees, subject to vesting requirements. These
plans resulted in expenses of $186, $163 and $126 for the years ended December
31, 1996, 1995 and 1994, respectively.
The Company participates in a stock option plan sponsored by Travelers Group
that provides for the granting of stock options in Travelers Group common stock
to officers and key employees. The Company applies Accounting Principles Board
Opinion No. 25 ("APB 25") and related interpretations in accounting for stock
options. Since stock options are issued at fair market value on the date of
award, no compensation cost has been recognized for these awards. In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). This statement provides an alternative to APB 25 whereby fair values may
be ascribed to options using a valuation model and amortized to compensation
cost over the vesting period of the options. Had the Company applied SFAS 123 in
accounting for stock options, net income would have been reduced by $14 and $5
in 1996 and 1995, respectively.
14. Related Party Transactions
--------------------------
The Company has entered into various related party transactions with Travelers
Group. Other than the transactions disclosed in the Financial Statements and
elsewhere in the Notes, these amounts are immaterial at December 31, 1996. The
Company believes that amounts arising through related party transactions are
reasonable and approximate the amounts that would have been incurred if the
Company operated as an unaffiliated entity.
15. Other Events
------------
In November 1994, the Company sold a 20% equity investment in HG Asia Holdings
Ltd., which was acquired in 1992, for $55, recording an after-tax gain of $21
($34 pre-tax).
F-23
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
16. Quarterly Financial Data (unaudited)
------------------------------------
Quarterly results for the year ended December 31, 1996 were as follows:
Quarter ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Non-interest revenues $1,505 $1,501 $1,394 $1,448
Net interest and dividends 95 100 106 118
------ ------ ------ ------
Net revenues 1,600 1,601 1,500 1,566
Expenses, excluding interest 1,234 1,227 1,159 1,193
------ ------ ------ ------
Income before provision
for income taxes 366 374 341 373
Provision for income taxes 143 145 134 149
------ ------ ------ ------
Net income $ 223 $ 229 $ 207 $ 224
====== ====== ====== ======
Quarterly results for the year ended December 31, 1995 were as follows:
Quarter ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Non-interest revenues $1,111 $1,216 $1,330 $1,374
Net interest and dividends 92 97 93 95
------ ------ ------ ------
Net revenues 1,203 1,313 1,423 1,469
Expenses, excluding interest 1,028 1,083 1,123 1,153
------ ------ ------ ------
Income before provision
for income taxes 175 230 300 316
Provision for income taxes 76 97 123 130
------ ------ ------ ------
Net income $ 99 $ 133 $ 177 $ 186
====== ====== ====== ======
F-24
<PAGE>
Schedule I
SMITH BARNEY HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Parent Company Only)
(In millions, except share data)
ASSETS December 31,
------ ----------------
1996 1995
------ ------
Investment in subsidiaries, at equity $2,744 $2,539
Receivable from subsidiaries 1,754 1,148
Notes receivable 709 715
Subordinated notes receivable 800 766
Other assets 410 277
------ ------
$6,417 $5,445
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Short-term borrowings $ 97 $ 140
Drafts payable 895 598
Notes payable 2,382 1,891
Accounts payable and accrued liabilities 285 342
------ ------
3,659 2,971
------ ------
Stockholder's equity:
Common stock ($.10 par, 1,000 shares authorized;
100 shares issued and outstanding)
Additional paid-in capital 1,803 1,803
Retained earnings 951 666
Cumulative translation adjustment 4 5
------ ------
2,758 2,474
------ ------
$6,417 $5,445
====== ======
The accompanying notes are an integral part
of these condensed financial statements.
F-25
<PAGE>
Schedule I
SMITH BARNEY HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(Parent Company Only)
(In millions)
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues:
Interest and dividends $163 $142 $121
Other 5 7 14
---- ---- ----
Total revenues 168 149 135
Interest expense 143 126 103
---- ---- ----
Revenues, net of interest expense 25 23 32
---- ---- ----
Total expenses, excluding interest 4 6 1
---- ---- ----
Gain on sale of equity investment 34
----
Income before provision for income taxes
and equity in earnings of subsidiaries 21 17 65
Provision for income taxes 8 7 25
---- ---- ----
Income before equity in earnings of
subsidiaries 13 10 40
Equity in earnings of subsidiaries 870 585 348
---- ---- ----
Net income $883 $595 $388
==== ==== ====
The accompanying notes are an integral part
of these condensed financial statements.
F-26
<PAGE>
Schedule I
SMITH BARNEY HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company Only)
(In millions)
Year ended December 31,
-----------------------
1996 1995 1994
----- ----- -----
Cash flows from operating activities:
Net income $ 883 $ 595 $ 388
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Equity in earnings of subsidiaries (870) (585) (348)
Gain on sale of equity investment (34)
Net change in operating assets and liabilities:
Receivable from subsidiaries (656) (511) 93
Dividends received from subsidiaries 730 358 218
Other assets (133) (87) (59)
Accounts payable and accrued liabilities 36 70 26
----- ----- -----
Cash (used in) provided by operating activities (10) (160) 284
----- ----- -----
Cash flows from investing activities:
Capital contributions to subsidiaries (20) (66) (35)
Payments of notes receivable 15
Issuance of notes receivable (9) (26) (134)
Issuance of subordinated notes receivable (34) (84) (200)
Proceeds from sale of equity investment 55
----- ----- -----
Cash used in investing activities (48) (176) (314)
----- ----- -----
Cash flows from financing activities:
(Repayments of) proceeds from short-term
borrowings, net (43) (257) 212
Proceeds from drafts payable, net 297 476 3
Proceeds from notes payable 690 825 608
Repayments of notes payable (202) (409) (426)
Repayments of subordinated indebtedness (150)
Dividends paid to Travelers Group (684) (299) (217)
----- ----- -----
Cash provided by financing activities 58 336 30
----- ----- -----
Change in cash during the year 0 0 0
Cash at beginning of year 0 0 0
----- ----- -----
Cash at end of year $ 0 $ 0 $ 0
===== ===== =====
Supplemental disclosure of cash flow information:
Dividends declared but not paid $ 100 $ 186 $ 47
===== ===== =====
The accompanying notes are an integral part
of these condensed financial statements.
F-27
<PAGE>
Schedule I
SMITH BARNEY HOLDINGS INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
(In millions)
1. Basis of presentation
---------------------
The condensed financial statements of Smith Barney Holdings Inc. ("SBH"), a
wholly owned subsidiary of Travelers Group Inc., should be read in
conjunction with the consolidated financial statements of SBH and its
subsidiaries. Certain reclassifications have been made to prior year
amounts to conform to current year presentations.
2. Notes Payable
-------------
Notes payable consisted of the following:
December 31,
-----------------
1996 1995
------ ------
5 3/8% Notes due 1996 $ 150
7.4% Medium-term Note due 1996 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
S&P 500 Equity Linked Notes due 2001 44
6 1/2% Notes due 2002 150 150
7.50% Notes due 2002 150 150
6 5/8% Notes due 2003 200
6 7/8% Notes due 2005 175 175
7 1/8% Notes due 2006 200
Other 13 16
------ ------
$2,382 $1,891
====== ======
SBH has a $1,000 revolving credit agreement with a bank syndicate that
extends through May 1999. In addition, SBH has a $500 364-day revolving
credit agreement that extends through May 1997. Any amounts outstanding on
the 364-day revolving credit agreement's termination date in May 1997 are
due in May 1998. The total of these revolving credit agreements of $1,500
was available and undrawn at December 31, 1996.
F-28
<PAGE>
Schedule I
SMITH BARNEY HOLDINGS INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
(In millions)
2. Notes Payable (Cont'd)
----------------------
Notes payable at December 31, 1996 mature as follows:
Principal
Year Amount
---- ---------
1997 $ 213
1998 150
1999 350
2000 500
2001 294
Thereafter 875
------
$2,382
======
3. Related Party Transactions
--------------------------
SBH engages in various transactions with its subsidiaries that are
characteristic of a consolidated group under common control. As a public
debt issuer, SBH has access to long-term sources of funds which are loaned
from SBH to certain of its subsidiaries. Such intercompany advances are
payable on demand and bear interest at varying rates.
Dividends and capital distributions declared to SBH by its subsidiaries for
the three years ended December 31, 1996, 1995 and 1994 were $681, $486 and
$191, respectively.
F-29
<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 3.2 to
the Company's 1994 10-K.
10.01.1 Three-Year Competitive Advance and Revolving Credit
Facility Agreement (the "Three-Year Competitive Advance
and Revolving Credit Facility Agreement") dated as of
July 23, 1993, as amended and restated as of May 31,
1994, among the Company, the Lenders named therein,
Chemical Bank, Citibank, N.A. and Credit Lyonnais New
York Branch as Managing Agents, the banks named therein
as Co-Agents and Chemical Bank as Administrative Agent,
incorporated by reference to Exhibit 10.02 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1994 (File No. 1-12484)
(the "Company's September 30, 1994 10-Q").
10.01.2 Cumulative Amendment dated as of May 28, 1996 to the
Three-Year Competitive Advance and Revolving Credit
Facility Agreement, incorporated by reference to
Exhibit 10.01 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1996
(File No. 1-12484) (the "Company's September 30, 1996
10-Q").
10.02 Amended and Restated Lease dated as of December 30,
1994 between State Street Bank and Trust Company of
Connecticut, National Association, as Trustee
(Lessor), and Smith Barney Inc., Mutual Management Corp.,
Smith Barney Mutual Funds Management Inc. and The
Travelers Inc., as tenants in common (Lessee),
incorporated by reference to Exhibit 10.03 to the
Company's 1994 10-K.
12.01 Computation of ratio of earnings to fixed charges. Electronic
21.01 Pursuant to General Instruction I of Form 10-K, the
list of subsidiaries of the Company is omitted.
23.01 Consent of Coopers & Lybrand L.L.P. Electronic
<PAGE>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
- ------ ---------------------- ------
24.01 Powers of Attorney of certain directors of the Company. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The third paragraph on page 2 of the Company's Current Electronic
Report on Form 8-K dated November 9, 1993, the second
paragraph on page 10 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995
(the "Company's 1995 10-K") and the first paragraph on
page 19 of the Company's September 30, 1996 10-Q.
99.02 The second paragraph on page 16 of the Company's Electronic
September 30, 1994 10-Q, the fourth paragraph on page
10 of the Company's 1995 10-K and the second paragraph
on page 19 of the Company September 30, 1996 10-Q.
99.03 The third paragraph on page 16 of the Company's Electronic
September 30, 1994 10-Q and the last paragraph on page
10 of the Company's 1995 10-K.
99.04 The second paragraph on page 2 of the Company's Current Electronic
Report on Form 8-K dated August 7, 1996 (filed August
7, 1996).
99.05 The second paragraph on page 2 of the Company's Current Electronic
Report on Form 8-K dated March 6, 1997 (filed March 7,
1997).
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.
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 Smith Barney Holdings Inc., 388 Greenwich Street, New York,
New York 10013, Attention: Corporate Secretary.
Exhibit 12.01
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings before income taxes and
cumulative effect of changes in
accounting principles $1,454 $1,021 $ 676 $536 $266
------ ------ ------ ---- ----
Interest expense 1,507 1,375 770 277 228
Portion of rentals deemed
to be interest 58 61 67 42 23
------ ------ ------ ---- ----
Total fixed charges 1,565 1,436 837 319 251
------ ------ ------ ---- ----
Earnings before income taxes,
cumulative effect of changes in
accounting principles and
fixed charges $3,019 $2,457 $1,513 $855 $517
====== ====== ====== ==== ====
Ratio of earnings to fixed charges 1.93 1.71 1.81 2.68 2.06
====== ====== ====== ==== ====
</TABLE>
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Smith Barney Holdings Inc.:
We consent to the incorporation by reference in the Registration Statement on
Form S-3 (Nos. 33-70340, 33-72856, 33-78010, 33-92706, and 333-17831) of Smith
Barney Holdings Inc. of our report dated January 15, 1997 relating to our audit
of the consolidated balance sheets of Smith Barney Holdings Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations and cash flows for each of the three years in the
period ended December 31, 1996, which report is included in the Annual Report on
Form 10-K of Smith Barney Holdings Inc.
/s/ Coopers & Lybrand L.L.P.
New York, New York
March 26, 1997
Exhibit 24.01
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Steven D. Black
---------------------------
Steven D. Black
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 14,
1997.
/s/ James S. Boshart, III
-----------------------------
James S. Boshart, III
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Robert A. Case
-----------------------------
Robert A. Case
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Robert Druskin
-----------------------------
Robert Druskin
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Robert H. Lessin
-----------------------------
Robert H. Lessin
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ William J. Mills, II
-----------------------------
William J. Mills, II
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Michael B. Panitch
-----------------------------
Michael B. Panitch
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Smith Barney Holdings Inc., a Delaware corporation, do hereby constitute and
appoint James Dimon, Steven D. Black and Charles W. Scharf, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Smith Barney Holdings Inc. for the fiscal year
ended December 31, 1996, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Paul Underwood
-----------------------------
Paul Underwood
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
Exhibit 27.01
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,661<F1>
<RECEIVABLES> 7,304<F2>
<SECURITIES-RESALE> 16,345
<SECURITIES-BORROWED> 8,935
<INSTRUMENTS-OWNED> 12,465
<PP&E> 438
<TOTAL-ASSETS> 51,233
<SHORT-TERM> 3,217
<PAYABLES> 5,809<F3>
<REPOS-SOLD> 19,637
<SECURITIES-LOANED> 4,034
<INSTRUMENTS-SOLD> 8,378
<LONG-TERM> 2,605<F4>
0<F5>
0<F5>
<COMMON> 0<F5>
<OTHER-SE> 2,758<F6>
<TOTAL-LIABILITY-AND-EQUITY> 51,233
<TRADING-REVENUE> 990
<INTEREST-DIVIDENDS> 1,926
<COMMISSIONS> 2,250
<INVESTMENT-BANKING-REVENUES> 1,148
<FEE-REVENUE> 1,349
<INTEREST-EXPENSE> 1,507
<COMPENSATION> 3,522
<INCOME-PRETAX> 1,454
<INCOME-PRE-EXTRAORDINARY> 1,454
<EXTRAORDINARY> 0<F5>
<CHANGES> 0<F5>
<NET-INCOME> 883
<EPS-PRIMARY> 0<F5>
<EPS-DILUTED> 0<F5>
<FN>
<F1> Includes the following items from the financial statements: Cash and cash
equivalents $405; Cash segregated and on deposit for Federal and other
regulations $1,256.
<F2> Includes the following items from the financial statements: Receivable
from brokers and dealers $323; Receivable from customers $6,981.
<F3> Includes the following items from the financial statements: Payable to
brokers and dealers $221; Payable to customers $5,588.
<F4> Includes the following items from the financial statements: Notes payable
$2,379; Subordinated indebtedness $226.
<F5> Items which are inapplicable relative to the underlying financial
statements are indicated with a zero as required.
<F6> Includes the following items from the financial statements: Additional
paid-in capital $1,803; Retained earnings $951; Cumulative translation
adjustment $4.
</FN>
</TABLE>
Exhibit 99.01
Company's Form 8-K
November 9, 1993
Page 2
In October 1993, several purported class action lawsuits were filed in the
Federal District Court for the Southern District of New York naming Smith
Barney, Harris Upham & Co. Incorporated ("SBS") as defendant. The cases arise
from SBS's participation as lead or co-underwriter in the initial public
offerings of three separate funds managed by Hyperion Capital Management Inc.
The plaintiffs have also named as defendants the funds' directors and the
co-underwriters and their representatives. Plaintiffs allege that the
registration statements and prospectuses by which the offerings were made
between June 1992 and October 1992 were materially false and misleading, and are
seeking unspecified damages in claims brought under the Federal securities laws.
The Company believes it has meritorious defenses to these actions and intends to
defend against them vigorously.
<PAGE>
Company's Form 10-K
December 31, 1995
Page 10
For information concerning several purported class action lawsuits filed
against SBI in connection with three funds managed by Hyperion Capital
Management Inc., see the description that appears in the third paragraph on page
2 of the Company's Current Report on Form 8-K dated November 9, 1993, which
description is incorporated by reference herein. A copy of the pertinent
paragraph of such filing is included as an exhibit to this Form 10-K. The
actions were consolidated under the title In re: Hyperion Securities Litigation.
SBI's motion to dismiss the claims was granted in July 1995. In August 1995, an
appeal was filed in the U.S. Court of Appeals for the Second Circuit.
<PAGE>
Company's Form 10-Q
September 30, 1996
Page 19
Item 1. Legal Proceedings.
For information concerning several class action lawsuits filed against
Smith Barney in connection with three funds managed by Hyperion Capital
Management Inc., see the descriptions that appear in the third paragraph on page
2 of the Company's Current Report on Form 8-K, dated November 9, 1993, and the
second paragraph on page 10 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, which descriptions are incorporated by reference
herein. A copy of the pertinent paragraphs of such filings is included as an
exhibit to this Form 10-Q. In October 1996, the U.S. Court of Appeals for the
Second Circuit affirmed the district court's dismissal of the claims. Plaintiffs
have applied for a rehearing en banc.
Exhibit 99.02
Company's Form 10-Q
September 30, 1994
Page 16
Item 1. Legal Proceedings.
Two purported class actions were filed in October 1994 against Greyhound
Bus Lines, Inc. ("Greyhound"), various of its officers and directors and SBI and
one of its managing directors, in the United States District Court for the
Northern District of Texas. The plaintiffs purport to represent purchasers of
senior notes, subordinated covertible debentures and common stock of Greyhound.
SBI was lead manager or co-lead manager on the underwritng of certain of these
securities. The actions allege, among other things, that the prospectuses and
other public statements contained inaccurate statements relating to Greyhound's
financial prospects. The plaintiffs are seeking money damages in an unspecified
amount. The Company is reviewing the allegations, believes that it has
meritorious defenses and intends to vigorously defend against these actions.
<PAGE>
Company's Form 10-K
December 31, 1995
Page 10
For information concerning two purported class actions filed in October
1994 in connection with certain public offering documents of Greyhound Bus
Lines, Inc., see the description that appears in the second 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. An amended
complaint was filed in July 1995, and the defendants filed a motion to dismiss
in September 1995. A motion to certify this matter as a class action was filed
in January 1996.
<PAGE>
Company's Form 10-Q
September 30, 1996
Page 19
For information concerning two purported class actions filed in October
1994 in connection with certain public offering documents of Greyhound Bus
Lines, Inc., see the descriptions that appear in the second paragraph on page 16
of the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994 and the fourth paragraph on page 10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, which descriptions are
incorporated by reference herein. A copy of the pertinent paragraphs of such
filings is included as an exhibit to this Form 10-Q. Although the defendants'
motion to dismiss was granted in October 1996, plaintiffs subsequently filed a
second amended complaint. In addition, in late October 1996, a purported class
action was filed against Smith Barney, among others, in the District Court,
Dallas County, Texas, entitled Clarkson v. Greyhound Lines, Inc., et al., with
allegations similar to those in the federal case referred to above. The Company
believes it has meritorious defenses to this action and intends to contest the
allegations.
Exhibit 99.03
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 allege 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
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 l0-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 l995, the defendants' motion to
dismiss was granted with leave to replead, and a consolidated amended complaint
was filed.
Exhibit 99.04
Company's Form 8-K
August 7, 1996
Page 2
In July 1996, a complaint seeking equitable relief was filed in the
U.S. District Court for the Southern District of New York by the U.S. Department
of Justice, naming twenty-four major brokerage firms, including the Company's
subsidiary Smith Barney Inc., as defendants. A proposed settlement has been
agreed to by the parties, subject to approval of the court. Pursuant to this
settlement, the defendants, without admitting any liability, would agree not to
engage in certain practices relating to the quoting of Nasdaq securities and
would further agree to implement a program to ensure compliance with federal
antitrust laws and with the terms of the settlement. No monetary fines or
penalties are imposed as part of the settlement.
<PAGE>
Exhibit 99.05
Company's Form 8-K
March 6, 1997
Page 2
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
Smith Barney Inc., in the U.S. Bankruptcy Court for the Central District of
California. Plaintiff alleges, among other things, that defendants recommended
and sold to plaintiff unsuitable securities. The Company believes it has
meritorious defenses to this action and intends to contest the allegations. The
case, entitled County of Orange et al. v. Bear, Stearns & Co. Inc. et al., has
been stayed by agreement of the parties.
