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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 MARCH 31, 2003
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
CITIGROUP GLOBAL MARKETS 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
----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES NO X
----- -----
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE
HEREOF, 1,000 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 INSTRUCTION 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.
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2003
PAGE
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) - Three
months ended March 31, 2003 and 2002 1
Condensed Consolidated Statements of Financial Condition -
March 31, 2003 (Unaudited) and December 31, 2002 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three
months ended March 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 -12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 20- 21
Item 6. Exhibits and Reports on Form 8-K 21-22
Exhibit Index 22
Signatures 23
Certifications 24 - 25
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Dollars in millions
Three Months Ended March 31, 2003 2002
- ---------------------------- ---- ----
Revenues:
Investment banking $ 827 $ 916
Commissions 823 955
Asset management and administration fees 798 922
Principal transactions 621 607
Other 27 (4)
------- -------
Total noninterest revenues 3,096 3,396
------- -------
Interest and dividends 2,032 2,231
Interest expense 1,372 1,553
------- -------
Net interest and dividends 660 678
------- -------
Revenues, net of interest expense 3,756 4,074
------- -------
Noninterest expenses:
Compensation and benefits 2,035 2,257
Communications 167 152
Floor brokerage and other production 158 144
Occupancy and equipment 136 127
Professional services 80 53
Advertising and market development 60 69
Other operating and administrative expenses 82 70
------- -------
Total noninterest expenses 2,718 2,872
------- -------
Income before income taxes and cumulative
effect of change in accounting principle 1,038 1,202
Provision for income taxes 388 449
------- -------
Income before cumulative effect of change in
accounting principle 650 753
Cumulative effect of change in accounting principle
(net of tax benefit of $16) -- (24)
------- -------
Net income $ 650 $ 729
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
Dollars in millions 2003 2002
- ------------------- -------- ----------
(Unaudited)
Assets:
Cash and cash equivalents $ 3,700 $ 3,722
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,410 2,461
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $98,855 $94,775
Deposits paid for securities borrowed 52,732 45,439
------- -------
151,587 140,214
Financial instruments owned and contractual commitments:
(Approximately $38 billion and $34 billion were pledged to various
parties at March 31, 2003 and December 31, 2002, respectively)
U.S. government and government agency securities 42,799 34,610
Corporate debt securities 18,786 17,597
Contractual commitments 15,909 15,788
Non-U.S. government and government agency securities 15,083 9,989
Equity securities 8,726 9,531
Money market instruments 8,504 6,565
Mortgage loans and collateralized mortgage securities 6,711 7,512
Other financial instruments 6,947 6,548
------- -------
123,465 108,140
Receivables:
Customers 17,204 16,439
Brokers, dealers and clearing organizations 8,539 8,776
Other 2,528 2,858
------- -------
28,271 28,073
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,106 and
$1,048, respectively 955 1,025
Goodwill 1,530 1,530
Intangibles 805 808
Other assets 6,468 6,018
-------- --------
Total assets $319,191 $291,991
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
Dollars in millions, except share data 2003 2002
- -------------------------------------- -------- ----------
(Unaudited)
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $22,799 $22,619
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $134,715 $118,878
Deposits received for securities loaned 16,225 10,439
-------- --------
150,940 129,317
Financial instruments sold, not yet purchased,
and contractual commitments:
Non-U.S. government and government agency securities 23,327 21,783
Contractual commitments 13,932 14,821
U.S. government and government agency securities 12,641 13,133
Corporate debt securities and other 9,928 7,697
Equity securities 3,910 4,243
-------- --------
63,738 61,677
Payables and accrued liabilities:
Customers 18,485 16,724
Brokers, dealers and clearing organizations 6,932 5,074
Other 10,979 11,320
-------- --------
36,396 33,118
Term debt 31,613 32,302
Company-obligated mandatorily redeemable securities
of subsidiary trust holding solely junior subordinated debt
securities of the Company -- 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 3,522 3,016
Retained earnings 10,187 9,543
Accumulated changes in equity from nonowner sources (4) (1)
-------- --------
Total stockholder's equity 13,705 12,558
-------- --------
Total liabilities and stockholder's equity $319,191 $291,991
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Dollars in millions
Three Months Ended March 31, 2003 2002
- ---------------------------- ---- ----
Cash flows from operating activities:
Net income $ 650 $ 729
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 75 82
Cumulative effect of change in accounting principle -- 24
Net change in:
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations 51 2,397
Securities borrowed or purchased under agreements to resell (11,373) (20,717)
Financial instruments owned and contractual commitments (15,325) 106
Receivables (198) 8,413
Goodwill, intangibles and other assets, net (382) 1,884
Securities loaned or sold under agreements to repurchase 21,623 8,516
Financial instruments sold, not yet purchased, and contractual commitments 2,061 4,333
Payables and accrued liabilities 3,278 (11,708)
-------- --------
Net cash provided by (used in) operating activities 460 (5,941)
-------- --------
Cash flows from financing activities:
Increase in commercial paper and other short-term borrowings 180 4,302
Proceeds from issuance of term debt 2,440 4,090
Term debt maturities and repurchases (3,194) (2,660)
Repayment of mandatorily redeemable securities of subsidiary trust (400) --
Capital contribution from Parent 500 --
Dividends paid (6) (266)
Other capital transactions -- 4
-------- --------
Net cash (used in) provided by financing activities (480) 5,470
-------- --------
Cash flows from investing activities:
Property, equipment and leasehold improvements, net (2) (49)
-------- --------
Net cash used in investing activities (2) (49)
-------- --------
Net decrease in cash and cash equivalents (22) (520)
Cash and cash equivalents at January 1, 3,722 3,018
-------- --------
Cash and cash equivalents at March 31, $ 3,700 $ 2,498
======== ========
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 $470 million during
the three months ended March 31, 2003 and paid cash for income taxes, net of
refunds of $1,438 million during the three months ended March 31, 2002.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CITIGROUP GLOBAL MARKETS 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
Citigroup Global Markets Holdings Inc. (formerly, Salomon Smith Barney Holdings
Inc.) ("CGMHI"), 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 CGMHI's Annual
Report on Form 10-K for the year ended December 31, 2002.
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
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the Financial Accounting Standards Board ("FASB") 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 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. The adoption of SFAS 146 did not materially
affect the Company's condensed consolidated financial statements.
GUARANTEES AND INDEMNIFICATIONS
On January 1, 2003, the Company adopted the recognition and measurement
provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), which requires that, for guarantees within the scope of FIN
45 issued or amended after December 31, 2002, a liability for the fair value of
the obligation undertaken in issuing the guarantee be recognized. The impact of
adopting FIN 45 did not materially affect the Company's condensed consolidated
financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This Interpretation changes the method
of determining whether certain entities, including securitization entities,
should be included in the Company's consolidated financial statements. An entity
is subject to FIN 46 and is called a variable interest entity ("VIE") if it has
equity that is insufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties, or equity
investors that cannot make significant decisions about the entity's operations,
or that do not absorb the expected losses or receive the expected returns of the
entity. All other entities evaluate consolidation in accordance with SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries." A VIE is consolidated by
its primary beneficiary, which is the party involved with the VIE that has a
majority of the expected losses or a majority of the expected residual returns
or both.
The provisions of FIN 46 are to be applied immediately to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains an interest after
that date. For VIEs in which an enterprise holds a variable interest that it
acquired before February 1, 2003, FIN 46 applies in the first fiscal period
beginning after June 15, 2003. For any VIEs that must be consolidated under FIN
46 that were created before February 1, 2003, the assets, liabilities and
noncontrolling interest of the VIE would be initially measured at their carrying
amounts with any difference between the net amount added to the balance sheet
and any previously recognized interest being recognized as the cumulative effect
of an accounting change. If determining the carrying amounts is not practicable,
fair value at the date FIN 46 first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE.
6
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company is evaluating the impact of applying FIN 46 to existing VIEs in
which it has variable interests and has not yet completed this analysis. The
Company is actively pursuing certain restructuring solutions that would enable
certain VIEs to meet the criteria for non-consolidation. However, at this time,
it is anticipated that the effect on the Company's condensed consolidated
statement of financial condition could be an increase of as much as $1.4 billion
to assets and liabilities, primarily due to several structured finance entities
in which the Company is involved if these non-consolidation solutions are not
successful. As the Company continues to evaluate the impact of applying FIN 46,
additional entities may be identified that would need to be consolidated by the
Company.
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 2003, the Company adopted the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS 123")
prospectively to all awards granted, modified, or settled after January 1, 2003.
The prospective method is one of the adoption methods provided for under SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
issued in December 2002. SFAS 123 requires that compensation cost for all stock
awards be calculated and recognized over the service period (generally equal to
the vesting period). This compensation cost is determined using option pricing
models, intended to estimate the fair value of the awards at the grant date.
Similar to Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" the alternative method of accounting, an offsetting
increase to stockholder's equity under SFAS 123 is recorded equal to the amount
of compensation expense charged.
Had the Company applied SFAS 123 in accounting for the Company's stock option
plans for all options granted, net income would have been the pro forma amounts
indicated below:
Dollars in millions
Three months ended March 31, 2003(1) 2002
- ---------------------------- -------- ----
Compensation expense related to stock As reported $ 3 --
option plans, net of tax Pro forma 34 42
Net income As reported $650 $729
Pro forma 619 687
(1) The $3 million "As reported" for the three months ended March 31, 2003,
represents two months of the expense (net of tax) recognized for options
granted in 2003. The "Pro Forma" amounts reflect the expense that would
have been recognized had all issued option grants been expensed.
The Company, through its parent, has made changes to various stock-based
compensation plan provisions for awards granted in 2003. For example, the
vesting period and the term of stock options granted after 2002 have been
shortened to three and six years, respectively. In addition, the sale of
underlying shares acquired through the exercise of options granted after
December 31, 2002 is restricted for a two-year period. The Company, through its
parent, continues its existing stock ownership commitment for senior executives,
which requires executives to retain at least 75% of the shares they own and
acquire from the Company, subject to minimum ownership guidelines, over the term
of their employment. Original option grants in 2003 and thereafter will not have
a reload feature; however, previously granted options will retain that feature.
Other changes also may be made that may impact the expense recognized under SFAS
123.
7
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133. In
particular SFAS 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 and is not expected to have a material
impact on the Company's condensed consolidated financial statements.
NOTE 2. 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 ended March 31, 2003 2002
- ---------------------------- ---- ----
Net income $ 650 $ 729
Other changes in equity from
nonowner sources (3) --
----- -----
Total comprehensive income $ 647 $ 729
===== =====
NOTE 3. 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 CGMHI's principal regulated subsidiaries at March 31,
2003 are as follows:
EXCESS OVER
(DOLLARS IN MILLIONS) NET CAPITAL MINIMUM
SUBSIDIARY JURISDICTION OR EQUIVALENT REQUIREMENTS
- ---------- ------------ ------------- ------------
Citigroup Global Markets Inc. U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $3,799 $3,374
Citigroup Global Markets Limited United Kingdom's Financial Services Authority $3,217 $ 430
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc.
("Swapco"), an indirect wholly owned subsidiary of CGMHI, must maintain minimum
levels of capital in accordance with agreements with its rating agencies. At
March 31, 2003, Swapco was in compliance with all such agreements. Swapco's
capital requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
8
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. 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 March 31, 2003 and
December 31, 2002 is as follows:
MARCH 31, 2003 DECEMBER 31, 2002
--------------------------------------- ----------------------------------------
Notional Current Market or Notional Current Market or
or Contractual Fair Value or Contractual Fair Value
Amounts ----------------------- Amounts -----------------------
-------------- --------------
Dollars in billions Assets Liabilities Assets Liabilities
- ------------------- ------ ----------- ------ -----------
Exchange-traded products:
Futures contracts (a) $ 176.9 $ -- $ -- $ 192.2 $ -- $ --
Other exchange-traded products:
Equity contracts 56.7 2.4 3.0 50.8 1.4 2.0
Fixed income and commodity contracts 13.5 -- -- 9.5 -- --
-------- ------ ------ -------- ------ -------
Total exchange-traded products 247.1 2.4 3.0 252.5 1.4 2.0
-------- ------ ------ -------- ------ -------
Over-the-counter ("OTC") swaps, swap options,
caps, floors and forward rate agreements:
Swaps 2,423.5 2,567.7
Swap options written 70.0 60.1
Swap options purchased 66.7 52.7
Caps, floors and forward rate agreements 180.9 181.9
-------- ------ ------ -------- ------ -------
Total OTC swaps, swap options, caps, floors
and forward rate agreements (b) 2,741.1 10.7 7.6 2,862.4 11.9 9.4
-------- ------ ------ -------- ------ -------
Other options and contractual commitments:
Options and warrants on equities and
equity indices 76.4 1.5 2.5 73.5 1.1 2.4
Options and forward contracts on
fixed-income securities 936.4 .9 .3 628.7 .8 .4
Foreign exchange contracts and options(b) 72.7 .3 .3 58.7 .5 .5
Commodity contracts 9.8 .1 .2 9.2 .1 .1
-------- ------ ------ -------- ------ -------
Total contractual commitments $4,083.5 $ 15.9 $ 13.9 $3,885.0 $ 15.8 $ 14.8
======== ====== ====== ======== ====== =======
(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 $14.6 billion and $4.5 billion at March 31, 2003,
respectively, and $14.3 billion and $4.1 billion at December 31, 2002,
respectively.
9
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. SEGMENT INFORMATION
The following table summarizes the results of operations for the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
Dollars in millions
Three months ended March 31, 2003 2002
- ---------------------------- ---- ----
Revenues, net of interest expense:
Investment Services $2,210 $2,283
Private Client Services 1,309 1,493
Asset Management 237 298
------ ------
Total $3,756 $4,074
====== ======
Total non-interest expenses:
Investment Services $1,510 $1,550
Private Client Services 1,068 1,160
Asset Management 140 162
------ ------
Total $2,718 $2,872
====== ======
Net Income:
Investment Services $ 442 $ 460
Private Client Services 148 211
Asset Management 60 58
------ ------
Total $ 650 $ 729
====== ======
Total assets of the Investment Services, Private Client Services and Asset
Management segments were $306.1 billion, $11.4 billion and $1.7 billion,
respectively, at March 31, 2003 and $278.5 billion, $11.9 billion and $1.6
billion, respectively, at December 31, 2002. For further discussion of the
Company's operating segments, please refer to the Results of Operations section
of Management's Discussion and Analysis.
10
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. LEGAL PROCEEDINGS
For a discussion of certain legal proceedings, see Part II, Item 1 of this Form
10-Q. In addition, in the ordinary course of business, the Company and its
subsidiaries are defendants or co-defendants or parties in various litigation
and other regulatory matters incidental to and typical of the business in which
they are engaged. 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. In the opinion of the
Company's management, the ultimate resolution of these legal and regulatory
proceedings would not be likely to have a material adverse effect on the
consolidated financial condition of the Company but, if involving monetary
liability, may be material to the Company's operating results for any particular
period.
NOTE 7. OBLIGATIONS UNDER GUARANTEES
The Company provides a variety of guarantees and indemnifications to customers
to enhance their credit standing and enable them to complete a wide variety of
business transactions. The Company believes the guarantees which are provided
relate to an asset, liability, or equity security of the guaranteed parties.
In the normal course of business, the Company provides standard representations
and warranties to counterparties in contracts in connection with numerous
transactions and also provides indemnifications that protect counterparties to
contracts in the event that additional taxes are owed due either to a change in
the tax law or an adverse interpretation of the tax law. Counterparties to these
transactions provide the Company with comparable indemnifications. In addition,
the Company is a member of numerous value transfer networks ("VTNs") (payment,
clearing and settlement systems as well as securities exchanges) around the
world. As a condition of membership, many of these VTNs require that members
stand ready to backstop the net effect on the VTNs of a member's default on its
obligations. The indemnification clauses are often standard contractual terms
and were entered into in the normal course of business based on an assessment
that the risk of loss would be remote. In many cases, there are no stated or
notional amounts included in the indemnification clauses and the contingencies
triggering the obligation to indemnify have not occurred and are not expected to
occur. There are no amounts reflected on the statement of financial condition as
of March 31, 2003, related to these indemnifications.
Derivative instruments which include guarantees are credit default swaps, total
return swaps, written foreign exchange options, written put options, written
equity warrants, and written caps and floors. At March 31, 2003, the carrying
amount of the liabilities related to these derivatives was $3.3 billion.
The maximum potential loss represents the amounts that could be lost under the
guarantees if there were a total default by the guaranteed parties, without
consideration of possible recoveries under recourse provisions or from
collateral held or pledged. Such amounts bear no relationship to the anticipated
losses on these guarantees and greatly exceed anticipated losses. At March 31,
2003, the maximum potential loss at notional value related to credit default
swaps and total rate of return swaps amounted to $40.1 billion, of which $4.4
billion expire within one year and $35.7 billion expire after one year. At March
31, 2003, the maximum potential loss at fair value related to derivative
guarantees other than credit default swaps and total rate of return swaps
amounted to $3.1 billion.
Guarantees to joint ventures primarily include guarantees of their debt
obligations. At March 31, 2003, the
11
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
carrying amount of the liabilities and the maximum potential loss related to
these joint venture guarantees were $484 million and $485 million, respectively.
Guarantees of collection of contractual cash flows protect investors in
securitization trusts from loss of principal and interest relating to
insufficient collections on the underlying receivables in the trust. At March
31, 2003, the carrying amounts of the liabilities and the maximum potential loss
related to guarantees of collection of contractual cash flows were $22 million
and $24 million, respectively.
The Company has provided a residual value guarantee of $78 million in connection
with the lease of buildings occupied by the Company's executive offices and New
York operations. The residual value guarantee provides that the guarantor will
pay the difference between the fair value of the guaranteed property and the
value specified in the contract to the guarantor at the termination or renewal
date of the operating lease.
12
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
RESULTS OF OPERATIONS
For the three months ended March 31, 2003 (the "2003 Quarter"), the Company
recorded net income of $650 million compared to $729 million for the three
months ended March 31, 2002 (the "2002 Quarter"). Revenues, net of interest
expense, were $3,756 million in the 2003 Quarter compared to $4,074 million in
the 2002 Quarter.
In the 2002 Quarter, the Company recorded a cumulative after-tax loss of $24
million (net of tax benefit of $16 million) which related to the adoption of
Statement on Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142").
Investment banking revenues decreased 10% in the 2003 Quarter as a result of a
decline in equity underwriting, partially offset by increases in high yield and
high grade debt underwriting, as well as merger and acquisition and bank loan
arrangement fees. Included in investment banking revenues in the 2002 Quarter
were fees from the Travelers Property Casualty Corp. initial public offering.
Commission revenues decreased 14% primarily as a result of a decrease in listed
commissions. Asset management and administration fees decreased 13% primarily as
a result of negative market action and declines in fees from managed accounts.
Total non-interest expenses decreased 5% in the 2003 Quarter due to a decrease
in production-related compensation and benefits expenses reflecting reduced
revenues of the Company.
13
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is a discussion of the results of operations of the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
INVESTMENT SERVICES
Dollars in millions
For the three months ended March 31, 2003 2002
- ------------------------------------ ---- ----
Revenues, net of interest expense $2,210 $2,283
------ ------
Total non-interest expenses 1,510 1,550
------ ------
Income before income taxes 700 733
Provision for income taxes 258 273
------ ------
Net income $ 442 $ 460
====== ======
The Company's Investment Services segment recorded net income in the 2003
Quarter of $442 million compared to $460 million in the 2002 Quarter.
Revenues, net of interest expense, decreased 3% to $2.2 billion in the 2003
Quarter. Commission revenues decreased in 2003 as a result of a decrease in
listed commissions, partially offset by an increase in OTC commissions.
Investment banking revenues declined in the 2003 Quarter as a result of a
decrease in equity underwritings. This decrease was partially offset by
increases in high yield and high-grade debt underwritings, and merger and
acquisition and bank loan arrangement fees. Included in investment banking
revenues in the 2002 Quarter were fees from the Travelers Property Casualty
Corp. initial public offering. Principal transactions revenue and net interest
and dividends were essentially unchanged from the 2002 Quarter.
Total non-interest expenses decreased 3% in the 2003 Quarter primarily due to a
decrease in production-related compensation and benefits expense and reduced
floor brokerage and other production expense.
PRIVATE CLIENT SERVICES
Dollars in millions
For the three months ended March 31, 2003 2002
- ------------------------------------ ---- ----
Revenues, net of interest expense $1,309 $1,493
------ ------
Total non-interest expenses 1,068 1,160
------ ------
Income before income taxes 241 333
Provision for income taxes 93 122
------ ------
Net income $ 148 $ 211
====== ======
Private Client Services net income was $148 million in the 2003 Quarter, down
$63 million or 30% from the prior year, primarily due to lower asset-based fee
revenue, a decline in net interest revenue from securities-based lending, and
lower transaction volumes, which were partially offset by lower
production-related compensation, and the impact of continued expense control
initiatives.
14
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenues, net of interest expense, of $1,309 million in the 2003 Quarter
decreased $184 million or 12% from the prior-year period, primarily due to
declines in fees from managed accounts, lower net interest revenue on
security-based lending and lower customer transaction volumes.
Total assets under fee-based management were $159.8 billion as of March 31,
2003, down $30.6 billion or 16% from the prior-year quarter, primarily due to a
decline in market values. Total client assets, including assets under fee-based
management, of $882 billion in the 2003 Quarter decreased $103 billion or 10%
compared to the prior year quarter principally due to market depreciation,
partially offset by positive net inflows.
Total non-interest expenses of $1,068 million in the 2003 Quarter, decreased $92
million or 8% from the 2002 Quarter, primarily reflecting lower
production-related compensation resulting from a decline in revenue combined
with the impact of expense control initiatives.
Assets under fee-based management were as follows:
Dollars in billions
At March 31, 2003 2002
- ------------ ---- ----
Financial Consultant managed accounts $ 53.2 $ 60.3
Consulting Group and internally managed assets 106.6 130.1
------- -------
Total assets under fee-based management (1) $ 159.8 $ 190.4
======= =======
(1) Includes certain assets managed jointly with Citigroup Asset
Management.
15
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT
Dollars in millions
For the three months ended March 31, 2003 2002
- ------------------------------------ ---- ----
Revenues, net of interest expense $ 237 $ 298
----- -----
Total non-interest expenses 140 162
----- -----
Income before income taxes and cumulative effect of change in
accounting principle 97 136
----- -----
Provision for income taxes 37 54
Cumulative effect of change in accounting
principle (net of tax benefit of $16) -- (24)
----- -----
Net income $ 60 $ 58
===== =====
The Company's Asset Management segment revenues, net of interest expense,
decreased to $237 million in the 2003 Quarter compared to $298 million in the
2002 Quarter. The primary revenue for the Asset Management segment is asset
management and administration fees, which decreased to $234 million in the 2003
Quarter compared to $288 million in the 2002 Quarter. The decrease in revenues
in the 2003 Quarter reflects the impact of negative market action, reduced fee
revenues and the impact of outflows of U.S. retail money market funds. The
reduced fee revenues primarily resulted from changes in product mix and revenue
sharing arrangements with internal Citigroup distributors and a change in the
presentation of certain fee sharing arrangements which decreased both revenues
and expenses by $11 million in the 2003 Quarter.
Assets under management for the segment were $250.1 billion at March 31, 2003,
compared to $283.3 billion at March 31, 2002. This decrease is primarily due to
the impact of negative market action as well as the impact of transfers of U.S.
retail money market assets to the Smith Barney Bank Deposit Program. These
decreases were partially offset by positive net flows.
Total noninterest expenses were $140 million in the 2003 Quarter compared to
$162 million in the 2002 Quarter. The decrease in expenses is due to reduced
compensation and benefits expense and the change in the presentation of certain
fee sharing arrangements.
Assets under fee-based management were follows:
Dollars in billions
At March 31, 2003 2002
- ------------ ---- ----
Money market funds $ 90.3 $ 101.1
Mutual funds 68.8 75.7
Managed accounts 85.9 99.5
Unit investment trusts held in client
accounts 5.1 7.0
------- -------
Total Citigroup Asset Management $ 250.1 $ 283.3
======= =======
16
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $319 billion at March 31, 2003, an increase from
$292 billion at year-end 2002. 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, 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 $235.2 billion at
March 31, 2003. 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 less expensive 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 $22.8 billion at
March 31, 2003. On March 3, 2003, the Company redeemed for cash all of the
mandatorily redeemable securities of SSBH Capital I, a wholly-owned subsidiary
trust, at the redemption price of $25 per preferred security plus any accrued
interest and unpaid distributions thereon.
The Company has a $5.0 billion 364-day committed uncollateralized revolving line
of credit with unaffiliated banks. Commitments under this facility terminate in
May 2003. Any borrowings under this facility would mature in May 2005. The
Company also has a $100 million committed uncollateralized 364-day facility with
an unaffiliated bank that extends through June 2003, with any borrowings under
this facility maturing in June 2004, and a $100 million 364-day collateralized
facility that extends through December 2003. 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
March 31, 2003, there were no outstanding borrowings under these facilities. The
Company also has committed long-term financing facilities of $1.7 billion with
unaffiliated banks which were fully drawn at March 31, 2003. A bank can
terminate its facility by giving the Company prior notice (generally one year).
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 agreement). At March
31, 2003, this requirement was exceeded by approximately $5.9 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, including affiliates, from which it draws funds.
The volume of the Company's borrowings generally fluctuates
17
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
18
CITIGROUP GLOBAL MARKETS 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 all of the Company's financial assets and liabilities which are marked
to market at March 31, 2003 and December 31, 2002. The VAR relating to accrual
portfolios has been excluded from this analysis.
RISK EXPOSURES March 31, First Quarter First Quarter First Quarter December 31,
($ IN MILLIONS) 2003 2003 Average 2003 High 2003 Low 2002
--------------- ---- ------------ --------- -------- ----
Interest rate $ 56 $ 60 $ 71 $ 49 $ 63
Equities 18 19 88 10 12
Commodities 8 7 11 4 5
Currency 4 4 6 3 4
Diversification Benefit (25) (24) N/A N/A (18)
---- ---- ---- ---- ----
Total* $ 61 $ 66 $123 $ 50 $ 66
==== ==== ==== ==== ====
* Includes diversification benefit.
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at March 31, 2003, 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 60% 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 March
31, 2003, 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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's reports
filed or submitted under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been
any significant changes in the Company's internal controls or in other factors
that could significantly affect such controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information supplements and amends our discussion set forth under
Part I, Item 3 "Legal Proceedings" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
SETTLEMENT OF CERTAIN REGULATORY MATTERS
On April 28, 2003, Salomon Smith Barney Inc. (SSB), now named Citigroup Global
Markets Inc., announced final agreements with the Securities and Exchange
Commission, the National Association of Securities Dealers, the New York Stock
Exchange and the New York Attorney General (as lead state among the 50 states,
the District of Columbia and Puerto Rico) to resolve on a civil basis all of
their outstanding investigations into its research and IPO allocation and
distribution practices. As part of the settlements, SSB has consented to the
entry of (1) an injunction under the federal securities laws to be entered in
the United States District Court for the Southern District of New York, barring
SSB from violating provisions of the federal securities laws and related NASD
and NYSE rules relating to research, certain IPO allocation practices, the
safeguarding of material nonpublic information, and the maintenance of required
books and records and requiring SSB to adopt and enforce new restrictions on the
operation of research; (2) an NASD Acceptance Waiver and Consent requiring SSB
to cease and desist from violations of corresponding NASD rules and requiring
SSB to adopt and enforce the same new restrictions; (3) an NYSE Stipulation and
Consent requiring SSB to cease and desist from violations of corresponding NYSE
rules and requiring SSB to adopt and enforce the same new restrictions; and (4)
an Assurance of Discontinuance with the New York Attorney General containing
substantially the same or similar restrictions. As required by the settlements,
SSB expects to enter into related settlements with each of the other states, the
District of Columbia and Puerto Rico. Consistent with the
settlement-in-principle announced in December 2002, these settlements require
SSB to pay $300 million for retrospective relief, plus $25 million for investor
education, and commit to spend $75 million to provide independent third-party
research to its clients at no charge. SSB reached these final settlement
agreements without admitting or denying any
20
wrongdoing or liability. The settlements do not establish wrongdoing or
liability for purposes of any other proceeding. The $300 million was accrued
during the 2002 fourth quarter.
ENRON:
Hudson Soft Co. Ltd. v. Credit Suisse First Boston Corp., et al.
A proposed second amended complaint dropped as defendants Citigroup, SSB,
and affiliate officers and employees.
New Power Holdings Actions
On April 17, 2003 the motion to dismiss the complaints in the putative class
actions relating to the New Power Holdings common stock was denied.
Additional Actions
On March 5, 2003 an action was brought on behalf of the purchasers of the
Yosemite Notes and Enron Credit Linked Notes, alleging violations of federal
securities laws.
On April 9, 2003 an action was brought by a group of related mutual funds that
purchased certain Yosemite Notes, alleging violations of state securities law
and common law claims.
RESEARCH:
In Re At&T Corporation Securities Litigation
By order dated March 27, 2003, the court denied plaintiffs' leave to amend their
complaint to add as defendants Citigroup, SSB, and certain of their executive
officers and current and former employees.
Additional Actions
On March 31, 2003 an action was filed in the United States District Court for
the Southern District of New York by twenty institutional investors alleging
individual claims under Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934 in connection with their purchase of common stock of
Winstar Communications, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
On January 22, 2003, the Company filed a Current Report on Form 8-K, dated
January 21, 2003, reporting under Item 5 thereof the results of its operations
for 2002 and 2001.
21
No other reports on Form 8-K were filed during the first quarter of 2003,
however:
On April 7, 2003, the Company filed a Current Report on Form 8-K, dated April 7,
2003, (a) reporting under Item 5 thereof that it had filed a Restated
Certificate of Incorporation with the Secretary of State of the State of New
York changing its name from Salomon Smith Barney Holdings Inc. to Citigroup
Global Markets Holdings Inc. and (b) filing as an exhibit under Item 7 thereof
its Restated Certificate of Incorporation.
On April 14, 2003, the Company filed a Current Report on Form 8-K, dated April
14, 2003, reporting under Item 5 thereof the results of its operations for the
three-month periods ended March 31, 2003 and 2002.
On April 28, 2003, the Company filed a Current Report on Form 8-K, dated April
28, 2003, (a) reporting under Item 5 thereof the settlement by Citigroup Global
Markets Inc. (formerly Salomon Smith Barney Inc.) with the SEC, the NASD, the
NYSE and the New York Attorney General of all outstanding investigations into
research, IPO allocation and distribution practices and (b) filing as an exhibit
under Item 7 thereof a copy of the related press release dated April 28, 2003.
On April 30, 2003, the Company filed a Current Report on Form 8-K, dated April
24, 2003, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's Stock Market Upturn Notes based upon the Dow Jones
Industrial Average Due April 29, 2005.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Citigroup Global
Markets Holdings Inc. (the "Company"), effective April 7,
2003, incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed on April 7, 2003
(File No. 1-4346).
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.
- --------------------
+ 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.
22
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.
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
(Registrant)
Date: May 14, 2003 By: /s/ Charles Prince
---------------------------------
Charles Prince
Chief Executive Officer
By: /s/ John C. Morris
---------------------------------
John C. Morris
Chief Financial Officer
23
CERTIFICATIONS
I, Charles Prince, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citigroup
Global Markets Holdings Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003
By: /s/ Charles Prince , Chief Executive Officer
-----------------------------------------------------------------------------
24
I, John C. Morris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citigroup Global
Markets Holdings Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003
By: /s/John C. Morris , Chief Financial Officer
- --------------------------------------------------------------------------------
25