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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-4346
SALOMON SMITH BARNEY HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2418067
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE
HEREOF, 1000 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE,
WERE ISSUED AND OUTSTANDING.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H (1) (a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
AVAILABLE ON THE WEB @ www.citigroup.com.
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2002
PAGE
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three and six months ended June 30, 2002 and 2001 1
Condensed Consolidated Statements of Financial Condition -
June 30, 2002 (Unaudited) and December 31, 2001 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 21
Exhibit Index 22
Signatures 23
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Dollars in millions Three Months Six Months
Period Ended June 30, 2002 2001 2002 2001
--------------------- ---- ---- ---- ----
Revenues:
Commissions $ 1,003 $ 921 $ 1,958 $ 1,934
Investment banking 958 1,010 1,874 2,118
Asset management and administration fees 853 816 1,684 1,657
Principal transactions 56 581 663 1,733
Other 181 86 268 303
------- ------- ------- -------
Total noninterest revenues 3,051 3,414 6,447 7,745
------- ------- ------- -------
Interest and dividends 2,483 3,956 4,714 8,058
Interest expense 1,702 3,426 3,255 7,127
------- ------- ------- -------
Net interest and dividends 781 530 1,459 931
------- ------- ------- -------
Revenues, net of interest expense 3,832 3,944 7,906 8,676
------- ------- ------- -------
Noninterest expenses:
Compensation and benefits 2,100 2,075 4,357 4,565
Floor brokerage and other production 182 163 326 366
Communications 162 167 314 337
Occupancy and equipment 139 157 266 320
Advertising and market development 77 86 146 204
Professional services 69 65 122 167
Other operating and administrative expenses 114 53 184 280
Restructuring charge -- 42 -- 112
------- ------- ------- -------
Total noninterest expenses 2,843 2,808 5,715 6,351
------- ------- ------- -------
Income before income taxes and cumulative
effect of changes in accounting principles 989 1,136 2,191 2,325
Provision for income taxes 370 402 819 824
------- ------- ------- -------
Income before cumulative effect of changes
in accounting principles 619 734 1,372 1,501
Cumulative effect of changes in accounting principles
(net of tax benefits of $16 and $1, respectively) -- -- (24) (1)
------- ------- ------- -------
Net income $ 619 $ 734 $ 1,348 $ 1,500
======= ======= ======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
Dollars in millions 2002 2001
- ------------------- ---- ----
(Unaudited)
Assets:
Cash and cash equivalents $ 3,169 $ 3,018
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 3,456 5,327
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $105,026 $ 94,204
Deposits paid for securities borrowed 49,817 45,337
-------- --------
154,843 139,541
Financial instruments owned and contractual commitments:
(Approximately $24 billion and $34 billion were pledged to various
parties at June 30, 2002 and December 31, 2001, respectively)
U.S. government and government agency securities 37,997 45,813
Equity securities 15,873 10,987
Corporate debt securities 15,209 13,463
Non-U.S. government and government agency securities 12,984 8,084
Contractual commitments 11,653 9,333
Mortgage loans and collateralized mortgage securities 7,067 6,868
Money market instruments 5,535 4,663
Other financial instruments 3,938 5,157
-------- --------
110,256 104,368
Receivables:
Customers 17,263 19,353
Brokers, dealers and clearing organizations 3,555 15,441
Other 2,092 2,793
-------- --------
22,910 37,587
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,017 and
$959, respectively 1,132 1,204
Goodwill 1,523 1,400
Intangibles 787 941
Other assets 5,616 7,466
-------- --------
Total assets $303,692 $300,852
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
Dollars in millions, except share data 2002 2001
- -------------------------------------- ---- ----
(Unaudited)
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $20,801 $18,890
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $138,472 $126,118
Deposits received for securities loaned 18,470 13,050
-------- --------
156,942 139,168
Financial instruments sold, not yet purchased,
and contractual commitments:
Non-U.S. government and government agency securities 16,983 14,970
U.S. government and government agency securities 13,700 20,024
Contractual commitments 11,136 9,542
Corporate debt securities and other 6,683 6,034
Equity securities 4,677 5,670
-------- --------
53,179 56,240
Payables and accrued liabilities:
Customers 15,544 20,463
Brokers, dealers and clearing organizations 5,111 13,382
Other 10,358 13,392
-------- --------
31,013 47,237
Term debt 28,976 27,219
Company-obligated mandatorily redeemable securities of
subsidiary trust holding solely junior subordinated
debt securities of the Company 400 400
Stockholder's equity:
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) -- --
Additional paid-in capital 2,497 2,479
Retained earnings 9,884 9,224
Accumulated changes in equity from nonowner sources -- (5)
-------- --------
Total stockholder's equity 12,381 11,698
-------- --------
Total liabilities and stockholder's equity $303,692 $300,852
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Dollars in millions
Six Months Ended June 30, 2002 2001
------------------------- ---- ----
Cash flows from operating activities:
Net income $ 1,348 $ 1,500
Depreciation and amortization 164 269
-------- --------
Net income adjusted for noncash items 1,512 1,769
-------- --------
(Increase) decrease in operating assets -
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations 1,871 (1,045)
Collateralized short-term financing agreements (15,302) (29,172)
Financial instruments owned and contractual commitments (5,888) (16,754)
Receivables 14,677 3,417
Goodwill, intangibles and other assets, net 2,274 139
-------- --------
Increase in operating assets (2,368) (43,415)
-------- --------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 17,774 42,382
Financial instruments sold, not yet purchased, and contractual commitments (3,061) (2,242)
Payables and accrued liabilities (16,272) 597
-------- --------
Increase (decrease) in operating liabilities (1,559) 40,737
-------- --------
Net cash used in operating activities (2,415) (909)
-------- --------
Cash flows from financing activities:
Increase (decrease) in commercial paper and other short-term borrowings 1,911 (3,902)
Proceeds from issuance of term debt 5,944 9,112
Term debt maturities and repurchases (4,567) (3,320)
Repayment of mandatorily redeemable securities of subsidiary trust -- (345)
Dividends paid (640) (863)
Other capital transactions 4 203
-------- --------
Net cash provided by financing activities 2,652 885
-------- --------
Cash flows from investing activities:
Property, equipment and leasehold improvements, net (86) (300)
-------- --------
Cash used in investing activities (86) (300)
-------- --------
Increase (decrease) in cash and cash equivalents 151 (324)
Cash and cash equivalents at January 1, 3,018 2,623
-------- --------
Cash and cash equivalents at June 30, $ 3,169 $ 2,299
======== ========
Interest paid did not differ materially from the amount of interest expense
recorded for financial statement purposes.
The Company paid cash for income taxes, net of refunds, of $1,163 million during
the six months ended June 30, 2002 and received net refunds of $226 million
during the six months ended June 30, 2001.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements reflect the accounts of Salomon
Smith Barney Holdings Inc. ("SSBH"), a New York corporation, and its
subsidiaries (collectively, the "Company"). The Company is a wholly owned
subsidiary of Citigroup Inc. Material intercompany transactions have been
eliminated.
The condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of management's best judgment and estimates. Estimates,
including the fair value of financial instruments and contractual commitments,
the outcome of litigation, realization of deferred tax assets and other matters
that affect the reported amounts and disclosures of contingencies in the
condensed consolidated financial statements, may vary from actual results. The
condensed consolidated financial statements are unaudited; however, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected. Certain
prior period amounts have been reclassified or restated to conform to the
current period presentation.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in SSBH's Annual
Report on Form 10-K for the year ended December 31, 2001.
Certain financial information that is normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, but that is not required for interim reporting
purposes, has been condensed or omitted.
ACCOUNTING CHANGES
GOODWILL AND INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations and
certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
142") as required for goodwill and intangible assets resulting from business
combinations consummated after June 30, 2001. The new rules require that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method. The nonamortization provisions of the new rules affecting
goodwill and intangible assets deemed to have indefinite lives are effective for
all purchase business combinations completed after June 30, 2001.
On January 1, 2002, the Company adopted the remaining provisions of SFAS 142,
when the rules became effective for calendar year companies. Under the new
rules, effective January 1, 2002, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized, but are subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives.
The Company has performed the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. There was no
impairment of goodwill upon adoption of SFAS 142. The initial adoption resulted
in a cumulative adjustment of $24 million (net of tax benefit of $16 million)
recorded as a charge to earnings related to the impairment of certain intangible
assets related to the Asset Management segment.
5
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Net income for the first six months of 2002 and 2001 adjusted to exclude
amortization expense (net of taxes) related to goodwill and indefinite lived
intangible assets are as follows:
(In millions) Three Months Six Months
------------ ----------
Period ended June 30, 2002 2001 2002 2001
--------------------- ---- ---- ---- ----
Net income:
Reported net income $619 $734 $ 1,348 $1,500
Goodwill amortization 15 31
Indefinite lived intangible assets 10 20
==== ==== ======= ======
Adjusted net income $619 $759 $ 1,348 $1,551
==== ==== ======= ======
During the three and six months ended June 30, 2001, the after-tax amortization
expense related to goodwill and indefinite lived intangible assets which are no
longer amortized included $15 million and $31 million, respectively, related to
the Investment Services segment and $10 million and $20 million, respectively,
related to the Asset Management segment.
Net income for the years ended December 31, 2001, 2000, and 1999 adjusted to
exclude amortization expense (net of taxes) related to goodwill and indefinite
lived intangible assets are as follows:
(In millions)
Year ended 2001 2000 1999
- ---------- ---- ---- ----
Net income:
Reported net income $2,627 $3,032 $ 2,812
Goodwill amortization 63 45 26
Indefinite lived intangible assets 39 45 46
====== ====== =======
Adjusted net income $2,729 $3,122 $ 2,884
====== ====== =======
For the years ended December 31, 2001, 2000 and 1999, the after-tax amortization
expense related to goodwill and indefinite lived intangible assets which are no
longer amortized included $63 million, $49 million and $37 million,
respectively, related to the Investment Services segment and $39 million, $41
million and $35 million, respectively, related to the Asset Management segment.
At January 1, 2002, the goodwill balance was $1,366 million for the Investment
Services segment and $34 million for the Asset Management segment. During the
first six months of 2002, no goodwill was impaired or written off. In connection
with the adoption of SFAS 142, the Company reviewed the classification of
intangible assets and determined that $117 million of workforce in-place should
be reclassified to goodwill at January 1, 2002. During the first six months of
2002, the Company recorded additional goodwill of $6 million primarily related
to an adjustment to the purchase price of AST StockPlan, Inc. Each of these
changes related to the Investment Services segment. The Company's goodwill
balance at June 30, 2002 was $1,488 million for the Investment Services segment
and $35 million for the Asset Management segment.
At June 30, 2002, $760 million of the Company's acquired intangible assets,
primarily asset management and administration contracts, were considered to be
of indefinite life and not subject to amortization.
6
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All other acquired intangible assets are subject to amortization. During the
first six months of 2002, the Company acquired $7 million in software licenses
which will be amortized over approximately 3 years. No significant residual
value is estimated for these intangible assets. Intangible assets amortization
expense for the three and six months ended June 30, 2002 was $4 million and $7
million, respectively, and $2 million and $3 million for the three and six
months ended June 30, 2001, respectively. The components of intangible assets
that are subject to amortization were as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In millions) Amount Amortization Amount Amortization
- ------------- ------ ------------ ------ ------------
Software licenses $49 $22 $42 $15
=== === === ===
Intangible assets amortization expense is estimated to be $5 million for the
remainder of 2002, $7 million in 2003, $6 million in 2004, $4 million in 2005,
$4 million in 2006, and $1 million in 2007.
SFAS 133
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended ("SFAS 133"), on January 1, 2001 and recorded a
cumulative after-tax transition charge of $1 million.
Under SFAS 133, an entity is required to recognize all freestanding and embedded
derivative instruments at fair value in earnings unless the derivative
instruments can be designated as hedges of certain exposures for which specific
hedge accounting is prescribed. If certain conditions are met, a derivative
instrument may be designated as a hedge of the fair value changes of a
recognized asset, liability or an unrecognized firm commitment; or a hedge of
the exposure to variable cash flows of a recognized asset, liability or a
forecasted transaction; or a hedge of the foreign currency exposure of a
recognized asset, liability, a net investment in a foreign operation, an
unrecognized firm commitment or a forecasted transaction. If certain conditions
are met, a non-derivative instrument may be designated as a fair value hedge of
a foreign currency denominated unrecognized firm commitment or a hedge of the
foreign currency exposure of a net investment in a foreign operation.
For the three and six months ended June 30, 2002 and 2001, hedge ineffectiveness
resulting from designating interest rate swaps as fair value hedges of fixed
rate term debt was reported in the condensed consolidated statement of income in
"Other revenue" and was not material.
For the three and six months ended June 30, 2002 and 2001, hedges of net
investments in foreign operations were considered effective. Losses of $80
million and $83 million for the three and six months ended June 30, 2002,
respectively, and a loss of $7 million and gain of $67 million for the three and
six months ended June 30, 2001, respectively, that pertained to the designated
hedging instruments are included in cumulative translation adjustments, a
component of "Accumulated changes in equity from nonowner sources" in the
condensed consolidated statement of financial condition.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146").
SFAS 146 requires that a liability for costs associated with exit or disposal
activities be recognized when the liability is incurred. Existing generally
accepted accounting principles provide for the recognition of such costs at the
date of management's commitment to an exit plan. In
7
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
addition, SFAS 146 requires that the liability be measured at fair value and
adjusted for changes in estimated cash flows.
The provisions of the new standard are effective for exit or disposal activities
initiated after December 31, 2002. It is not expected that SFAS 146 will
materially affect the Company's financial statements.
NOTE 2. RESTRUCTURING CHARGES
During 2001, the Company recorded restructuring charges of $70 million ($41
million after tax), $42 million ($26 million after tax) and $5 million ($3
million after tax) in the first, second and fourth quarters of 2001,
respectively, for severance and related costs associated with the reduction of
staffing in certain businesses and are expected to be fully paid out by the end
of 2002. These amounts apply to the involuntary termination of approximately
2,000 employees (90% located in the United States and 10% overseas). The second
quarter charge is net of a reversal of $18 million ($11 million after tax) which
relates to the accrual in the first quarter of 2001 of severance and other
related costs associated with the reduction of staffing in certain businesses
which were subsequently sold. These related costs were not borne by the Company
in the sale which closed in the third quarter of 2001. At June 30, 2002, the
remaining restructuring reserve balance of $11 million is included in the
condensed consolidated statement of financial condition in "Payables and accrued
liabilities-other".
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and other changes in
stockholder's equity from nonowner sources which, for the Company, are comprised
of cumulative translation adjustments, net of tax:
Dollars in millions Three Months Six Months
Period ended June 30, 2002 2001 2002 2001
--------------------- ---- ---- ---- ----
Net income $619 $734 $1,348 $1,500
Other changes in equity from nonowner
sources 5 7 5 (1)
---- ---- ------ ------
Total comprehensive income $624 $741 $1,353 $1,499
==== ==== ====== ======
NOTE 4. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to securities and commodities
regulations and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. Capital
requirements related to SSBH's principal regulated subsidiaries at June 30, 2002
are as follows:
NET EXCESS OVER
(DOLLARS IN MILLIONS) CAPITAL MINIMUM
SUBSIDIARY JURISDICTION OR EQUIVALENT REQUIREMENTS
- ---------- ------------ ------------- ------------
Salomon Smith Barney Inc. U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $3,112 $2,709
Salomon Brothers International Limited United Kingdom's Financial Services Authority $2,789 $ 555
8
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc.
("Swapco"), an indirect wholly owned subsidiary of SSBH, must maintain minimum
levels of capital in accordance with agreements with its rating agencies. At
June 30, 2002, Swapco was in compliance with all such agreements. Swapco's
capital requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
NOTE 5. CONTRACTUAL COMMITMENTS
Contractual commitments used for trading purposes include derivative instruments
such as interest rate, equity, currency and commodity swap agreements, swap
options, caps and floors, options, warrants and financial commodity futures and
forward contracts. The fair values (unrealized gains and losses) associated with
contractual commitments are reported net by counterparty, provided a legally
enforceable master netting agreement exists, and are netted across products and
against cash collateral when such provisions are stated in the master netting
agreement. Contractual commitments in a net receivable position, as well as
options owned and warrants held, are reported as assets in "Contractual
commitments." Similarly, contractual commitments in a net payable position, as
well as options written and warrants issued, are reported as liabilities in
"Contractual commitments." Revenues generated from these contractual commitments
are reported primarily as "Principal transactions" and include realized gains
and losses as well as unrealized gains and losses resulting from changes in the
market or fair value of such instruments.
A summary of the Company's contractual commitments as of June 30, 2002 and
December 31, 2001 is as follows:
JUNE 30, 2002 DECEMBER 31, 2001
---------------------------------------- -------------------------------------
Notional Notional
or Contractual Current Market or or Contractual Current Market or
Amounts Fair Value Amounts Fair Value
-------------- ------------------------ -------------- ---------------------
Dollars in billions Assets Liabilities Assets Liabilities
- ------------------- -------------- -------- ----------- -------------- -------- -----------
Exchange-traded products:
Futures contracts (a) $ 183.9 $- $- $ 172.5 $- $-
Other exchange-traded products:
Equity contracts 195.1 .6 .9 86.2 .4 .5
Fixed income contracts 12.2 -- -- 26.1 -- --
Commodity contracts 1.4 -- -- 1.0 -- --
-------- -------- -------- -------- -------- --------
Total exchange-traded products 392.6 .6 .9 285.8 .4 .5
-------- -------- -------- -------- -------- --------
Over-the-counter ("OTC") swaps, swap options, caps,
floors and forward rate agreements:
Swaps 2,725.0 2,603.1
Swap options written 56.5 86.2
Swap options purchased 49.0 50.4
Caps, floors and forward rate agreements 171.4 181.4
-------- -------- -------- -------- -------- --------
Total OTC swaps, swap options, caps, floors and
forward rate agreements (b) 3,001.9 7.8 7.0 2,921.1 6.7 5.9
-------- -------- -------- -------- -------- --------
Other options and contractual commitments:
Options and warrants on equities and equity
indices 66.8 1.4 2.4 66.8 1.1 2.2
Options and forward contracts on fixed-income
securities 655.1 1.3 .3 1,134.8 .5 .3
Foreign exchange contracts and options(b) 70.5 .5 .4 49.1 .5 .5
Commodity contracts 14.7 .1 .1 9.9 .1 .1
-------- -------- -------- -------- -------- --------
Total contractual commitments $4,201.6 $ 11.7 $ 11.1 $4,467.5 $ 9.3 $ 9.5
======== ======== ======== ======== ======== ========
(a) Margin on futures contracts is included in receivable/payables to brokers,
dealers and clearing organizations on the condensed consolidated
statements of financial condition.
(b) Includes notional values of swap agreements and forward currency contracts
for non-trading activities (primarily related to the Company's fixed-rate
long-term debt) of $15.3 billion and $4.9 billion at June 30, 2002 and
$14.1 billion and $2.7 billion at December 31, 2001, respectively.
9
\ SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. SEGMENT INFORMATION
The following table summarizes the results of operations for the Company's two
operating segments, Investment Services and Asset Management.
Dollars in millions Three Months Six Months
Period ended June 30, 2002 2001 2002 2001
------- ------- ------- -------
Noninterest revenues:
Investment Services $ 2,708 $ 3,088 $ 5,772 $ 7,098
Asset Management 343 326 675 647
------- ------- ------- -------
Total $ 3,051 $ 3,414 $ 6,447 $ 7,745
======= ======= ======= =======
Net interest and dividends:
Investment Services $ 783 $ 531 $ 1,461 $ 935
Asset Management (2) (1) (2) (4)
------- ------- ------- -------
Total $ 781 $ 530 $ 1,459 $ 931
======= ======= ======= =======
Income before cumulative effect of changes
in accounting principles:
Investment Services $ 525 $ 648 $ 1,177 $ 1,334
Asset Management 94 86 195 167
------- ------- ------- -------
Total $ 619 $ 734 $ 1,372 $ 1,501
======= ======= ======= =======
Total assets of the Investment Services and Asset Management segments were
$301.9 billion and $1.8 billion, respectively, at June 30, 2002 and $299.2
billion and $1.7 billion, respectively, at December 31, 2001. For further
discussion of the Company's operating segments, please refer to the Results of
Operations section of Management's Discussion and Analysis.
10
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. TERM DEBT
Term debt consists of issues with original maturities in excess of one year.
Certain issues are redeemable, in whole or in part, at par or at premiums prior
to maturity.
Fixed Rate
Obligations Fixed Rate Total Fixed Variable Equity-Linked
Swapped to Obligations Rate Rate & Indexed Total Total
Dollars in millions Variable Not Swapped Obligations Obligations Obligations(1) June 30, 2002 Dec. 31, 2001
------- ------- ------- ------- -------------- ------- -------
U.S. dollar denominated:
Salomon Smith Barney Holdings
Inc. (SSBH) $ 7,936 $ 269 $ 8,205 $11,771 $1,329 $21,305 $19,947
Subsidiaries (1) -- -- -- 415 1,912 2,327 2,750
------- ------- ------- ------- ------ ------- -------
U.S. dollar denominated $ 7,936 $ 269 $ 8,205 $12,186 $3,241 $23,632 $22,697
------- ------- ------- ------- ------ ------- -------
Non-U.S. dollar denominated:
Salomon Smith Barney Holdings
Inc. (SSBH) 1,745 -- 1,745 2,284 499 4,528 4,020
Subsidiaries 454 10 464 352 -- 816 502
------- ------- ------- ------- ------ ------- -------
Non-U.S. dollar denominated 2,199 10 2,209 2,636 499 5,344 4,522
------- ------- ------- ------- ------ ------- -------
Term debt $10,135 $ 279 $10,414 $14,822 $3,740 $28,976 $27,219
======= ======= ======= ======= ====== ======= =======
(1) Includes Targeted Growth Enhanced Term Securities ("TARGETS") with
carrying values of $449 million issued by TARGETS Trusts III through XV at
June 30, 2002 and $460 million issued by TARGETS Trusts III through XIII
at December 31, 2001 (collectively the "Trusts"). The Company owns all of
the voting securities of the Trusts which are consolidated in the
Company's condensed consolidated statements of financial condition. The
Trusts have no assets, operations, revenues or cash flows other than those
related to the issuance, administration, and repayment of the TARGETS and
the Trusts' common securities. The Trusts' obligations under the TARGETS
are fully and unconditionally guaranteed by the Company.
NOTE 8. LEGAL PROCEEDINGS
In addition to those matters discussed under Part II, Item 1, "Legal
Proceedings", the Company has also been named as a defendant in legal actions
relating to its operations, some of which seek damages of material or
indeterminate amounts. From time to time, the Company is also a party to
examinations and inquiries by various regulatory and self-regulatory bodies. In
connection with its discontinued commodities processing operations, the Company
and certain of its subsidiaries are subject to claims asserted by the U.S.
Environmental Protection Agency, certain state agencies and private parties in
connection with environmental matters. Management of the Company, after
consultation with outside legal counsel, believes that the ultimate resolution
of legal proceedings and environmental matters (net of applicable reserves) will
not have a material adverse effect on the Company's financial condition;
however, such resolution could have a material adverse impact on operating
results in future periods depending in part on the results for such period.
11
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
RESULTS OF OPERATIONS
The Company recorded net income of $619 million for the three months ended June
30, 2002 (the "2002 Quarter") compared to net income of $734 million for the
three months ended June 30, 2001 (the "2001 Quarter"). Revenues, net of interest
expense, were $3,832 million in the 2002 Quarter compared to $3,944 million in
the 2001 Quarter. Principal transaction revenues decreased to $56 million in the
2002 Quarter as a result of declines in fixed income and equity trading. For
fixed income, the decline was more than offset by increased net interest revenue
related to fixed income trading activities. Investment banking revenues declined
to $958 million in the 2002 Quarter compared to $1,010 million in the 2001
Quarter as a result of declines in merger and acquisition fees and high grade
debt underwriting, offset to an extent by increased equity underwriting.
For the six months ended June 30, 2002 (the "2002 Period"), net income decreased
to $1,348 million compared to $1,500 million recorded for the six months ended
June 30, 2001 (the "2001 Period"). Revenues, net of interest expense, were
$7,906 million in the 2002 Period compared to $8,676 million in the 2001 Period.
This decrease is primarily the result of a decrease in principal transaction
revenues in the 2002 Period, particularly fixed income and equity trading. For
fixed income, the decline was more than offset by increased net interest revenue
related to fixed income trading activities. Investment banking revenue decreased
in the 2002 Period as a result of decreases in merger and acquisition fees and
high grade debt underwriting, partially offset by increases in equity
underwriting. Included in investment banking revenues for the 2002 Period were
fees from the Travelers Property Casualty Corp. initial public offering in the
first quarter of 2002.
Total expenses in the 2002 Quarter and 2002 Period increased $57 million and
decreased $448 million, respectively, from the appropriate 2001 periods,
excluding the restructuring charge in the 2001 Quarter and the impact of a
change in the presentation of intercompany balances and the absence of goodwill
and other indefinite-lived intangible amortization due to the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations ("SFAS 141") and certain provisions of SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS 142").
During the first two quarters of 2001, the Company recorded restructuring
charges of $70 million ($41 million after tax) and $42 million ($26 million
after tax), respectively, relating to severance and related costs associated
with the reduction of staffing in certain businesses (see Note 2 to the
condensed consolidated financial statements for further discussion of the
restructuring charges). In the first quarter of 2002, the Company recorded a
cumulative after-tax loss of $24 million (net of tax benefit of $16 million)
which related to the adoption of SFAS 142. During the first quarter of 2001, the
Company recorded a cumulative after-tax loss of $1 million (net of tax benefit
of $1 million) which related to the adoption of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
Following is a discussion of the Company's two operating segments, Investment
Services and Asset Management.
12
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INVESTMENT SERVICES
Dollars in millions Three Months Six Months
Period Ended June 30, 2002 2001 2002 2001
------ ------ ------ ------
Revenues:
Commissions $ 999 $ 918 $1,950 $1,929
Investment banking 954 1,004 1,866 2,099
Asset management and
administration fees 521 499 1,030 1,032
Principal transactions 56 584 661 1,741
Other 178 83 265 297
------ ------ ------ ------
Total noninterest revenues 2,708 3,088 5,772 7,098
------ ------ ------ ------
Net interest and dividends 783 531 1,461 935
------ ------ ------ ------
Revenues, net of interest expense 3,491 3,619 7,233 8,033
------ ------ ------ ------
Noninterest expenses:
Other operating and
administrative expenses 2,658 2,587 5,365 5,874
Restructuring charge -- 41 -- 111
------ ------ ------ ------
Total noninterest expense 2,658 2,628 5,365 5,985
------ ------ ------ ------
Income before income taxes and
cumulative effect of changes
in accounting principles 833 991 1,868 2,048
------ ------ ------ ------
Provision for income taxes 308 343 691 714
------ ------ ------ ------
Income before cumulative effect
of changes in accounting principles $ 525 $ 648 $1,177 $1,334
------ ------ ------ ------
The Company's Investment Services segment reported income of $525 million and
$1,177 million for the 2002 Quarter and 2002 Period, respectively, compared to
$648 million and $1,334 million for the 2001 Quarter and 2001 Period,
respectively. Revenues, net of interest expense, decreased to $3,491 million and
$7,233 million in the 2002 Quarter and 2002 Period, respectively, compared to
$3,619 million and $8,033 million in the 2001 Quarter and 2001 Period,
respectively.
Commission revenues increased to $999 million and $1,950 million in the 2002
Quarter and 2002 Period, respectively, compared to $918 million and $1,929
million in the 2001 Quarter and 2001 Period, respectively. These increases were
primarily the result of increases in OTC commissions, offset to an extent by
declines in listed and options commissions.
Investment banking revenues decreased to $954 million in the 2002 Quarter
compared to $1,004 million in the 2001 Quarter, primarily due to declines in
merger and acquisition fees and high grade debt underwriting, partially offset
by increases in equity underwriting. In the 2002 Period, investment banking
revenues decreased to $1,866 million. Included in investment banking revenues
for the 2002 Period were fees from the Travelers Property Casualty Corp. initial
public offering.
13
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Investment Services segment includes results from assets managed by the
Company's Financial Consultants and assets that are managed through the
Consulting Group. Asset management and administration fees increased to $521
million in the 2002 Quarter compared to $499 million in the 2001 Quarter, due
primarily to an increase in assets under fee-based management billings which are
calculated based on asset levels on a one quarter lag. Asset management and
administration fees were $1,030 million in the 2002 Period, relatively unchanged
from the 2001 Period.
Principal transactions revenues decreased to $56 million and $661 million in the
2002 Quarter and the 2002 Period, respectively, compared to $584 million and
$1,741 million the 2001 Quarter and the 2001 Period, respectively. These
decreases were the result of declines in fixed income and equity trading. For
fixed income, the decline was more than offset by increased net interest revenue
related to fixed income trading activities.
Other revenues increased to $178 million in the 2002 Quarter primarily due to a
change in the presentation of intercompany balances that had the effect of
reducing other revenues and other expenses in the 2001 Quarter. In the 2002
Period, other income decreased to $265 million as a result of decreased revenues
from Nikko Salomon Smith Barney Limited, the Company's joint venture with Nikko
Securities Co. Ltd.
Net interest and dividends increased 47% to $783 million in the 2002 Quarter and
56% to $1,461 million in the 2002 Period as a result of higher mortgage-backed
trading interest and increased dividend income.
Total expenses in the 2002 Quarter increased 3%, excluding interest and the
restructuring charge in the 2001 Quarter as a result of increased floor
brokerage expense and a change in the presentation of intercompany balances that
had the impact of reducing other revenue and other expense in the 2001 Quarter.
This increase was partially offset by the absence of goodwill and other
indefinite-lived intangible amortization due to the adoption of SFAS 141 and
SFAS 142 in 2002. Total expenses in the 2002 Period decreased 9%, excluding the
interest and the restructuring charge, to $5,365 million. This decrease was
primarily the result of a decrease in compensation and benefits expense, reduced
occupancy and floor brokerage expense and savings from restructuring actions
initiated during the first and second quarters of 2001. The Company continues to
maintain its focus on controlling fixed expenses. Also contributing to the
decrease in the 2002 Period was the absence of goodwill and other
indefinite-lived intangible amortization due to the adoption of SFAS 141 and
SFAS 142.
14
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT
Dollars in millions Three Months Six Months
Period Ended June 30, 2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Asset management and administration
fees $332 $317 $654 $625
Other revenue, net 9 8 19 18
---- ---- ---- ----
Revenues, net of interest expense 341 325 673 643
---- ---- ---- ----
Noninterest expenses:
Other operating and
administrative expenses 185 179 350 365
Restructuring charge -- 1 -- 1
---- ---- ---- ----
Total noninterest expense 185 180 350 366
---- ---- ---- ----
Income before income taxes and
cumulative effect of changes in
accounting principles 156 145 323 277
---- ---- ---- ----
Provision for income taxes 62 59 128 110
---- ---- ---- ----
Income before cumulative effect of
changes in accounting principles $ 94 $ 86 $195 $167
==== ==== ==== ====
The Company's Asset Management segment revenues, net of interest expense, rose
to $341 million and $673 million in the 2002 Quarter and 2002 Period,
respectively, compared to $325 million and $643 million in the 2001 Quarter and
2001 Period, respectively. The primary revenue for the Asset Management segment
is asset management and administration fees, which were $332 million and $654
million in the 2002 Quarter and 2002 Period, respectively, compared to $317
million and $625 million in the 2001 Quarter and 2001 Period, respectively. The
increase in total revenues reflects growth in assets under management for the
2002 Quarter compared to the prior-year period. Assets under management for the
segment reached $270.2 billion at June 30, 2002, up from $268.1 billion at June
30, 2001. Other revenues include the net revenue contribution to the Asset
Management segment for the structuring of unit investment trusts, as well as
custody fees, and realized and unrealized investment income.
Total noninterest expenses were $185 million and $350 million in the 2002
Quarter and 2002 Period, respectively, compared to $180 million and $366 million
in the 2001 Quarter and 2001 Period, respectively. The increase in the 2002
Quarter reflects growth in variable expenses including increased incentive
compensation. The decrease in expenses for the 2002 Period over the prior-year
period is primarily due to the absence of goodwill/intangible amortization as a
result of adopting SFAS 141 and SFAS 142, as well as reduced occupancy expenses
and lower advertising and marketing expenses. Other operating and administrative
expenses includes amortization of deferred commissions which relate to the sale
of load mutual funds.
15
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Total assets under fee-based management were as follows:
Dollars in billions
At June 30, 2002 2001
------ ------
Money market and institutional liquidity
funds $ 98.8 $ 93.0
Mutual funds 71.4 73.9
Managed accounts 93.9 93.1
Unit investment trusts held in client
accounts 6.1 8.1
------ ------
Salomon Smith Barney Asset Management 270.2 268.1
Financial Consultant managed accounts* 49.5 57.0
Consulting Group and internally managed
assets* 137.4 149.3
------ ------
Total assets under fee-based management $457.1 $474.4
====== ======
* Related results included in Investment Services segment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $304 billion at June 30, 2002, an increase from
$301 billion at year-end 2001. Due to the nature of the Company's trading
activities, it is not uncommon for the Company's asset levels to fluctuate from
period to period.
The Company's condensed consolidated statement of financial condition is highly
liquid, with the vast majority of its assets consisting of marketable securities
and collateralized short-term financing agreements arising from securities
transactions. The highly liquid nature of these assets provides the Company with
flexibility in financing and managing its business. The Company monitors and
evaluates the adequacy of its capital and borrowing base on a daily basis in
order to allow for flexibility in its funding, to maintain liquidity, and to
ensure that its capital base supports the regulatory capital requirements of its
subsidiaries.
The Company funds its operations through the use of collateralized and
uncollateralized short-term borrowings, long-term borrowings, mandatorily
redeemable securities of subsidiary trusts, and its equity. Collateralized
short-term financing, including repurchase agreements and secured loans, is the
Company's principal funding source. Such borrowings are reported net by
counterparty, when applicable, pursuant to the provisions of Financial
Accounting Standards Board Interpretation 41, Offsetting of Amounts Related to
Certain Repurchase and Reverse Repurchase Agreements ("FIN 41"). Excluding the
impact of FIN 41, short-term collateralized borrowings totaled $231.2 billion at
June 30, 2002. Uncollateralized short-term borrowings provide the Company with a
source of short-term liquidity and are also utilized as an alternative to
secured financing when they represent a cheaper funding source. Sources of
short-term uncollateralized borrowings include commercial paper, unsecured bank
borrowings and letters of credit, deposit liabilities, promissory notes and
corporate loans. Short-term uncollateralized borrowings totaled $20.7 billion at
June 30, 2002.
The Company has a $5.0 billion 364-day committed uncollateralized revolving line
of credit with unaffiliated banks. Commitments to lend under this facility
terminate in May 2003. Any borrowings under this facility would mature in May
2005. The Company also has a $100 million 364-day committed uncollateralized
revolving line of credit with an unaffiliated bank that extends through June
2003, with any borrowings under this facility maturing in June 2004. The Company
may borrow under these revolving credit facilities at various interest rate
options (LIBOR or base rate), and compensates the banks for these facilities
through facility fees. At June 30, 2002, there were no outstanding borrowings
under these facilities. The Company also has committed
16
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
long-term financing facilities with unaffiliated banks. At June 30, 2002, the
Company had drawn down the full $1.4 billion then available under these
facilities. A bank can terminate its facility by giving the Company one year's
notice. The Company compensates the banks for the facilities through facility
fees. Under all of these facilities, the Company is required to maintain a
certain level of consolidated adjusted net worth (as defined in the respective
agreements). At June 30, 2002, these requirements were exceeded by approximately
$4.6 billion. The Company also has substantial borrowing arrangements consisting
of facilities that the Company has been advised are available, but where no
contractual lending obligation exists. These arrangements are reviewed on an
ongoing basis to ensure flexibility in meeting the Company's short-term
requirements.
The Company's borrowing relationships are with a broad range of banks, financial
institutions and other firms from which it draws funds. The volume of the
Company's borrowings generally fluctuates in response to changes in the level of
the Company's financial instruments, commodities and contractual commitments,
customer balances, the amount of securities purchased under agreements to resell
and securities borrowed transactions. As the Company's activities increase,
borrowings generally increase to fund the additional activities. Availability of
financing to the Company can vary depending upon market conditions, credit
ratings, and the overall availability of credit to the securities industry. The
Company seeks to expand and diversify its funding mix as well as its creditor
sources. Concentration levels for these sources, particularly for short-term
lenders, are closely monitored both in terms of single investor limits and daily
maturities.
The Company monitors liquidity by tracking asset levels, collateral and funding
availability to maintain flexibility to meet its financial commitments. As a
policy, the Company attempts to maintain sufficient capital and funding sources
in order to have the capacity to finance itself on a fully collateralized basis
in the event that the Company's access to uncollateralized financing is
temporarily impaired. The Company's liquidity management process includes a
contingency funding plan designed to ensure adequate liquidity even if access to
unsecured funding sources is severely restricted or unavailable. This plan is
reviewed periodically to keep the funding options current and in line with
market conditions. The management of this plan includes an analysis used to
determine the Company's ability to withstand varying levels of stress, including
ratings downgrades, which could impact its liquidation horizons and required
margins. In addition, the Company monitors its leverage and capital ratios on a
daily basis.
RISK MANAGEMENT
MARKET RISK
Measuring market risk using statistical risk management models has recently
become the main focus of risk management efforts by many companies whose
earnings are exposed to changes in the fair value of financial instruments.
Management believes that statistical models alone do not provide a reliable
method of monitoring and controlling risk. While Value at Risk ("VAR") models
are relatively sophisticated, they are of limited use for internal risk
management because they do not give any indication of the direction or magnitude
of individual risk exposures or which market scenarios represent the largest
risk exposures. These models are used by the Company only as a supplement to
other risk management tools.
17
SALOMON SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows the results of the Company's VAR analysis, which
includes substantially all of the Company's financial assets and liabilities,
including all financial instruments owned and sold, contractual commitments,
repurchase and resale agreements, and related funding at June 30, 2002 and
December 31, 2001. The VAR relating to non-trading instruments has been excluded
from this analysis.
RISK EXPOSURES June 30, Second Quarter Second Quarter Second Quarter December 31,
($ IN MILLIONS) 2002 2002 Average 2002 High 2002 Low 2001
- --------------- ---- ------------ --------- -------- ----
Interest rate $ 41 $ 45 $ 68 $ 37 $ 37
Equities 28 20 37 7 4
Commodities 9 14 20 8 14
Currency -- -- -- -- --
Diversification Benefit (22) (24) N/A N/A (12)
---- ------------ --------- -------- ----
Total $ 56 $ 55 $ 74 $ 44 $ 43
==== ============ ========= ======== ====
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at June 30, 2002, the Company simulates changes
in market factors by using historical volatilities and correlations and assuming
lognormal distributions for changes in each market factor. VAR is calculated at
the 99% confidence level, assuming a static portfolio subject to a one-day
change in market factors. The historical volatilities and correlations used in
the simulation are calculated using a look back period of three years. The
Company is in the middle of a large-scale, long-term process of calculating its
VAR by a more robust methodology. Approximately 50% of the total portfolio is
calculated under the new methodology which simulates tens of thousands of market
factors to measure VAR. The previous methodology simulated fewer market factors
to measure VAR. VAR reflects the risk profile of the Company at June 30, 2002,
and is not a predictor of future results.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: changes in
economic conditions, including the performance of global financial markets, and
risks associated with fluctuating currency values and interest rates;
competitive, regulatory or tax changes that affect the cost of or the demand for
the Company's products; the impact of the implementation of new accounting
rules; and the resolution of legal proceedings and environmental matters.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Enron Corp.
In April 2002, Citigroup Inc. ("Citigroup") and, in one case, Salomon Smith
Barney Inc. ("SSB") were named as defendants along with, among others,
commercial and/or investment banks, certain current and former Enron officers
and directors, lawyers and accountants in two putative consolidated class action
complaints that were filed in the United States District Court for the Southern
District of Texas seeking unspecified damages. One action, brought on behalf of
individuals who purchased Enron securities (Newby, et al. v. Enron Corp., et
al.), alleges violations of Sections 11 and 15 of the Securities Act of 1933, as
amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and the other action, brought on behalf of current and former Enron
employees (Tittle, et al. v. Enron Corp., et al.), alleges violations of the
Employment Retirement Income Security Act of 1974, as amended ("ERISA"), and the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), as well as
negligence and civil conspiracy. On May 8, 2002, Citigroup and SSB filed motions
to dismiss the complaints, which are pending.
In July 2002, Citigroup, SSB and various of its affiliates and certain of their
officers and other employees were named as defendants, along with, among others,
commercial and/or investment banks, certain current and former Enron officers
and directors, lawyers and accountants in a putative class action filed in the
United States District Court for the Southern District of New York on behalf of
purchasers of the Yosemite Notes and Enron Credit-Linked Notes, among other
securities (Hudson Soft Co., Ltd v. Credit Suisse First Boston Corporation, et
al.). The complaint alleges violations of RICO and seeks unspecified damages.
Additional actions have been filed against Citigroup and certain of its
affiliates, along with other parties, including (i) an action brought in state
court by state pension plans for alleged violations of state securities law and
common law fraud and unjust enrichment; (ii) an action by banks that
participated in two Enron revolving credit facilities, alleging fraud, gross
negligence, and breach of implied duties in connection with defendants'
administration of a credit facility with Enron; (iii) an action brought by
several funds in connection with secondary market purchases of Enron Corp. debt
securities alleging violations of the federal securities law, including Section
11 of the Securities Act of 1933, as amended, fraud and misrepresentation; and
(iv) a series of putative class actions by purchasers of NewPower Holdings
common stock alleging violations of the federal securities law, including
Section 11 of the Securities Act of 1933, as amended, and Section 10(b) of the
Securities Exchange Act of 1934, as amended.
Additionally, Citigroup and certain of its affiliates have received inquiries
and requests for information from various regulatory and governmental agencies
and Congressional committees regarding certain transactions and business
relationships with Enron and its affiliates. Citigroup is cooperating fully with
all such requests.
RESEARCH
Since May 2002, SSB and Jack Grubman have been named as defendants in a number
of putative class action
19
complaints by purchasers of various securities alleging they violated federal
securities law, including Sections 10 and 20 of the Securities Exchange Act of
1934, as amended, by failing to disclose conflicts of interest in connection
with published investment research, including Global Crossing and WorldCom, Inc.
Actions concerning Global Crossing securities filed in the United States
District Court for the Southern District of New York include Rolseth, et al. v.
Salomon Smith Barney Inc., et al.; Roberts, et al. v. Salomon Smith Barney Inc.,
et al.; Musacchio, et al. v. Salomon Smith Barney Inc. et al.; Ovetzky-Weiss, et
al. v. Salomon Smith Barney Inc., et al.; Glindeman, Jr., et al. v. Salomon
Smith Barney Inc., et al.; Telesca, et al. v. Salomon Smith Barney Inc., et al.;
Kleinknecht, et al. v. Salomon Smith Barney Inc., et al.; Shuster, et al. v.
Salomon Smith Barney Inc., et al. Actions concerning WorldCom securities filed
in the United States District Court for the Southern District of New York
include Singleton v. Salomon Smith Barney Inc., et al.; Brakl, et al. v. Salomon
Smith Barney Inc., et al.; Berger, et al. v. Salomon Smith Barney Inc., et al.;
Emerson, et al. v. Salomon Smith Barney Inc., et al.; Garner, et al. v. Salomon
Smith Barney Inc., et al.; Spangler, et al. v. Salomon Smith Barney Inc., et
al.; Ackerman, et al. v. Salomon Smith Barney Inc., et al.; Mower, et al. v.
Salomon Smith Barney Inc., et al.; Criner, et al. v. Salomon Smith Barney Inc.,
et al.; Hallisey & Johnson Profit Sharing Plan, et al. v. Salomon Smith Barney
Inc., et al.; Balfus, et al. v. Salomon Smith Barney Inc., et al.; Kim, et al.
v. Salomon Smith Barney Inc., et al.; McCauley, et al. v. Salomon Smith Barney
Inc., et al; Herman, et al. v. Salomon Smith Barney Inc., et al.; Ripple, et al.
v. Salomon Smith Barney Inc., et al.
Since April 2002, SSB and several other broker dealers have received subpoenas
and/or requests for information from various governmental and self-regulatory
agencies and Congressional committees, including the National Association of
Securities Dealers which has raised issues about SSB's internal e-mail retention
practices and research on Winstar Communications, Inc. SSB is cooperating fully
with all such requests.
WORLDCOM, INC.
Citigroup and SSB are involved in a number of lawsuits arising out of the
underwriting of debt securities of WorldCom, Inc. These include putative class
actions filed in July 2002 by purchasers of WorldCom debt securities in the
United States District Court for the Southern District of New York (Above
Paradise Investments Ltd. v. WorldCom, Inc., et al.; Municipal Police Employees
Retirement System of Louisiana v. WorldCom, Inc., et al.), and in the United
States District Court for the Southern District of Mississippi (Longacre Master
Fund v. WorldCom, Inc., et al.). These complaints assert violations of federal
securities law, including Sections 11 and 12 of the Securities Act of 1933, as
amended, and seek unspecified damages from the underwriters.
Additional actions have been filed in various federal and state courts against
Citigroup and SSB, along with other parties, concerning WorldCom securities
including (i) individual state court actions brought by various pension funds in
connection with the underwriting of debt securities of WorldCom alleging
violations of Section 11 of the Securities Act of 1933, as amended, and, in one
case, violations of various state securities laws and common law fraud and (ii)
a putative class action on behalf of participants in WorldCom's 401(k) salary
savings plan and those WorldCom benefit plans covered by ERISA alleging
violations of ERISA and common law fraud.
OTHER
Additional lawsuits containing similar claims to those described above may be
filed in the future.
For information concerning a suit filed by Harris Trust and Savings Bank (as
trustee for Ameritech Pension Trust) and others against Salomon Brothers Inc.
and Salomon Brothers Realty Corporation, and a review by the
20
Department of Labor and the Internal Revenue Service of the related underlying
transactions, see the description that appears in the second and third
paragraphs under the caption "Legal Proceedings" beginning on page 11 of the
Annual Report on Form 10-K of SSBH for the year ended December 31, 2001 (File
No. 1-4346), which description is included as Exhibit 99.03 to this Form 10-Q
and incorporated by reference herein. In July 2002, the entire matter was
settled and all claims were resolved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
On April 16, 2002, the Company filed a Current Report on Form 8-K, dated April
15, 2002, reporting under Item 5 thereof the results of its operations for the
three-month periods ended March 31, 2002 and 2001.
On April 16, 2002, the Company filed a Current Report on Form 8-K, dated April
11, 2002, filing certain exhibits under Item 7 thereof relating to the offer and
sale of its Equity Linked Securities (ELKS) based on the common stock of Intel
Corporation due April 17, 2003.
On June 25, 2002, the Company filed a Current Report on Form 8-K, dated June 20,
2002, filing certain exhibits under Item 7 thereof relating to the offer and
sale of its Equity Linked Securities (ELKS) based on the common stock of Texas
Instruments Incorporated due June 26, 2003.
No other reports on Form 8-K were filed during the second quarter of 2002,
however:
On July 18, 2002, the Company filed a Current Report on Form 8-K, dated July 17,
2002, reporting under Item 5 thereof the results of its operations for the
three- and six-month periods ended June 30, 2002 and 2001.
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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3.01 Restated Certificate of Incorporation of Salomon Smith Barney
Holdings Inc. (the "Company"), effective July 1, 1999,
incorporated by reference to Exhibit 3.2 to Post-Effective
Amendment No. 1 to the Company's Registration Statement on
Form S-3 (No. 333-38931).
3.02 By-Laws of the Company, incorporated by reference to Exhibit
3.3 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-3 (No. 333-38931).
12.01+ Computation of ratio of earnings to fixed charges.
99.01+ Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.02+ Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.03+ Second and third paragraphs under the caption "Legal
Proceedings" beginning on page 11 of the Annual Report on Form 10-K
of the Company for the year ended December 31, 2001 (File No.
1-4346).
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+ Filed herewith.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the SEC upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALOMON SMITH BARNEY HOLDINGS INC.
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(Registrant)
Date: August 13, 2002 By: /s/ Barbara A. Yastine
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Barbara A. Yastine
Chief Financial Officer
By: /s/ Michael J. Day
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Michael J. Day
Controller
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