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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 SEPTEMBER 30, 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 1-15286
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 SEPTEMBER 30, 2003
PAGE
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three and nine months ended September 30, 2003 and 2002 1
Condensed Consolidated Statements of Financial Condition -
September 30, 2003 (Unaudited) and December 31, 2002 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15 - 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22-23
Item 6. Exhibits and Reports on Form 8-K 23-24
Exhibit Index 24
Signatures 25
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Dollars in millions Three Months Nine Months
Period Ended September 30, 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Commissions $ 974 $ 952 $ 2,733 $ 2,910
Investment banking 792 757 2,684 2,631
Asset management and administration fees 864 868 2,457 2,746
Principal transactions 383 (35) 1,624 628
Other 41 113 136 187
- --------------------------------------------------------------------------------------------------------------------
Total non-interest revenues 3,054 2,655 9,634 9,102
- --------------------------------------------------------------------------------------------------------------------
Interest and dividends 1,797 2,475 5,942 7,189
Interest expense 1,121 1,829 3,870 5,084
- --------------------------------------------------------------------------------------------------------------------
Net interest and dividends 676 646 2,072 2,105
- --------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,730 3,301 11,706 11,207
- --------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 1,958 1,719 6,262 6,076
Floor brokerage and other production 155 162 493 488
Communications 151 161 486 475
Occupancy and equipment 134 136 405 402
Professional services 91 89 268 211
Advertising and market development 67 66 196 212
Other operating and administrative expenses 105 129 283 313
Restructuring credit - (9) - (9)
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,661 2,453 8,393 8,168
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,069 848 3,313 3,039
Provision for income taxes 406 319 1,261 1,138
- --------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 663 529 2,052 1,901
Cumulative effect of change in accounting principle
(net of tax benefit of $16 ) - - - (24)
- --------------------------------------------------------------------------------------------------------------------
Net income $ 663 $ 529 $ 2,052 $ 1,877
====================================================================================================================
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
September 30, December 31,
Dollars in millions 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and cash equivalents $ 4,390 $ 3,722
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,518
2,461
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $109,603 $94,775
Deposits paid for securities borrowed 49,874 45,439
-------- -------
159,477 140,214
Financial instruments owned and contractual commitments:
(Approximately $52 billion and $34 billion were pledged to various
parties at September 30, 2003 and December 31, 2002, respectively)
U.S. government and government agency securities 36,541 34,610
Corporate debt securities 28,616 17,597
Contractual commitments 15,216 15,788
Non-U.S. government and government agency securities 13,533 9,989
Equity securities 13,386 9,531
Mortgage loans and collateralized mortgage obligations 8,970 7,512
Money market instruments 5,571 6,565
Other financial instruments 6,732 6,548
-------- -------
128,565 108,140
Receivables:
Customers 23,220 16,439
Brokers, dealers and clearing organizations 12,145 8,776
Other 3,047 2,858
-------- -------
38,412 28,073
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,065 and
$1,048, respectively 1,429 1,025
Goodwill 1,531 1,530
Intangibles 799 808
Other assets 5,455 6,018
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $342,576 $ 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
September 30, December 31,
Dollars in millions, except share data 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 22,938 $ 22,619
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $126,640 $118,878
Deposits received for securities loaned 18,419 10,439
-------- --------
145,059 129,317
Financial instruments sold, not yet purchased, and
contractual commitments:
Non-U.S. government and government agency securities 24,098 21,783
Contractual commitments 16,918 14,821
U.S. government and government agency securities 16,827 13,133
Corporate debt securities and other 11,092 7,697
Equity securities 4,661 4,243
-------- --------
73,596 61,677
Payables and accrued liabilities:
Customers 29,464 16,724
Brokers, dealers and clearing organizations 7,926 5,074
Other 12,654 11,320
-------- --------
50,044 33,118
Term debt 36,478 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 3,552 3,016
Retained earnings 10,895 9,543
Accumulated changes in equity from nonowner sources 14 (1)
-------- --------
Total stockholder's equity 14,461 12,558
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $342,576 $ 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
Nine Months Ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,052 $ 1,877
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 209 242
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 (57) 2,688
Securities borrowed or purchased under agreements to resell (19,359) (19,830)
Financial instruments owned and contractual commitments (20,637) (10,445)
Receivables (10,801) 14,630
Goodwill, intangibles and other assets, net 1,164 2,291
Securities loaned or sold under agreements to repurchase 15,742 9,195
Financial instruments sold, not yet purchased, and contractual commitments 12,464 11,728
Payables and accrued liabilities 16,959 (16,938)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,264) (4,538)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in commercial paper and other short-term borrowings 386 3,100
Proceeds from issuance of term debt 15,009 9,034
Term debt maturities and repurchases (11,234) (6,552)
Repayment of mandatorily redeemable securities of subsidiary trust (400) -
Capital contribution from Parent 500 -
Dividends paid (694) (954)
Other capital transactions (28) 12
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,539 4,640
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Property, equipment and leasehold improvements, net (607) (109)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (607) (109)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 668 (7)
Cash and cash equivalents at January 1, 3,722 3,018
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30, $ 4,390 $ 3,011
==================================================================================================================
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 $982 million during
the nine months ended September 30, 2003 and paid cash for income taxes, net of
refunds of $1,620 million during the nine months ended September 30, 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.
("Citigroup"). 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 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
BUSINESS COMBINATIONS, GOODWILL AND OTHER 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 indefinite-lived intangible assets resulting
from business combinations consummated after June 30, 2001. The new rules
require that all business combinations consummated 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.
There was no impairment of goodwill upon adoption of SFAS 142. The adoption
resulted in a cumulative adjustment of $24 million (net of tax benefit of $16
million) reported 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
On January 1, 2003, the Company adopted 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, other
than in a business combination, be recognized when the liability is incurred.
Previous generally accepted accounting principles provided 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 be
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 impact of adopting SFAS 146 was not
material.
GUARANTEES AND INDEMNIFICATIONS
On January 1, 2003, the Company adopted the recognition and measurement
provisions of Financial Accounting Standards Board ("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 was not
material.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). The provisions of FIN 46 are to be
applied immediately to variable interest entities ("VIEs") created after January
31, 2003, and to VIEs in which an enterprise obtains an interest after that
date. In October 2003, the FASB announced that the effective date of FIN 46 was
deferred from July 1, 2003 to periods ending after December 15, 2003 for VIEs
created prior to February 1, 2003. The Company elected to adopt the remaining
provisions of FIN 46 in the third quarter of 2003. FIN 46 changes the method of
determining whether certain entities, including securitization entities, should
be included in the Company's Condensed Consolidated Financial Statements. An
entity is subject to FIN 46 and is called a VIE if it has (1) equity that is
insufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or (2) 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 are evaluated for consolidation under 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.
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. The implementation of FIN 46 on July 1,
2003, resulted in the consolidation of VIEs increasing both total assets and
total liabilities by approximately $712 million.
6
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The implementation of FIN 46 encompassed a review of thousands of entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. The FASB continues to
provide additional guidance on implementing FIN 46 through FASB Staff Positions.
In addition, a draft interpretation of FIN 46 has been issued for comment. As
this guidance is finalized, the Company will continue to review the status of
the VIEs it is involved with. As a result of changes in the guidance, additional
VIEs may ultimately be required to be consolidated.
The following table represents the carrying amounts and classification of
consolidated assets that are collateral for VIE obligations, including VIEs that
were consolidated prior to the implementation of FIN 46 under existing guidance
and VIEs that the Company became involved with after July 1, 2003:
IN MILLIONS OF DOLLARS September 30, 2003
- --------------------------------------------------------------------------------------
Cash $ 87
Financial Instruments Owned & Contractual
Commitments 2,199
Receivables - Other 329
Other Assets 656
--------
Total Assets of Consolidated VIEs $ 3,271
========
The consolidated VIEs included in the table above represent hundreds of separate
entities with which the Company is involved and includes approximately $712
million related to VIEs newly consolidated as a result of adopting FIN 46.
Approximately $1.5 billion of the total assets of consolidated VIEs represents
structured transactions where the Company packages and securitizes assets
purchased in the financial markets or from clients in order to create new
security offerings and financing opportunities for its clients. Approximately
$1.8 billion of the total assets of consolidated VIEs represents investment
vehicles that were established to provide a return to the investors in the
vehicles.
The Company may provide liquidity facilities to the VIEs, may be a party to
derivative contracts with VIEs, may provide second loss enhancement in the form
of guarantees to the VIEs, and may also have an ownership interest or other
investment in certain VIEs. In general, the investors in the obligations of
consolidated VIEs have recourse only to the assets of those VIEs and do not have
recourse to the Company except where the Company has provided a liquidity
facility to the VIE, a guarantee to the investors, or is the counterparty to a
derivative transaction involving the VIE.
In addition to the VIEs that are consolidated in accordance with FIN 46, the
Company has significant variable interests in certain other VIEs that are not
consolidated because the Company is not the primary beneficiary. These include
collateralized debt obligations ("CDOs"), structured finance transactions, and
various investment funds and are explained in the paragraphs which follow.
The Company also securitizes clients' debt obligations in transactions involving
SPEs that issue CDOs. A majority of the transactions are on behalf of clients
where the Company first purchases the assets at the request of the clients and
warehouses them until the securitization transaction is executed. Other CDOs are
structured where the underlying debt obligations are purchased directly in the
open market or from issuers. Some CDOs have static unmanaged portfolios of
assets, while others have more actively managed portfolios of financial assets.
The Company receives market-rate fees for structuring and distributing the CDO
securities to investors. At September 30, 2003, assets in the CDOs amounted to
$7.7 billion.
7
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company packages and securitizes assets purchased in the financial markets
or from clients in order to create new security offerings and financing
opportunities for institutional and private bank clients as well as retail
customers, including hedge funds, mutual funds, unit investment trusts, and
other investment funds that match the clients' investment needs and preferences.
These transactions include trust preferred entities, investment vehicles and
other structured transactions. At September 30, 2003, such transactions involved
VIEs with approximately $33.4 billion in assets.
As previously mentioned, the Company may provide liquidity facilities to the
VIEs, may be a party to derivative contracts with VIEs, may provide second loss
enhancement in the form of guarantees to the VIEs and may also have an ownership
interest in certain VIEs. Although actual losses are not expected to be
material, the Company's maximum exposure to loss as a result of its involvement
with VIEs that are not consolidated was $3.6 billion at September 30, 2003. For
this purpose, maximum exposure is considered to be the notional amounts of
guarantees and liquidity facilities, the notional amounts of credit default
swaps and certain total return swaps, and the amount invested where the Company
has an ownership interest in the VIEs.
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, including options granted before January 1, 2003,
net income would have been the pro forma amounts indicated below:
Dollars in millions Three Months Nine Months
Period ended September 30, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
Compensation expense
related to stock option As reported $ 16 $ - $ 27 $ -
plans, net of tax Pro forma 35 39 103 128
Net income As reported 663 529 2,052 1,877
Pro forma 644 490 1,976 1,749
=======================================================================================================
The Company, through its parent, Citigroup, has made changes to various
stock-based compensation plan provisions for awards granted after 2002. 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, with
certain limited exceptions in certain overseas locations, the sale of underlying
shares acquired through the exercise of options granted in 2003 is restricted
for a two-year period. The Company, through its parent, Citigroup, continues its
existing stock ownership commitment for senior executives which requires
executives to retain at least 75% of the shares
8
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
they own and acquire from the Company over the term of their employment.
Original option grants in 2003 and thereafter will not have a reload feature;
however, previously granted options which carry a reload feature will retain
that feature. Other changes may also be made that may impact the SFAS 123
adoption estimates disclosed on the preceding page.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments 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 did not have a material impact on the
Company's condensed consolidated financial statements.
LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer measures certain financial
instruments with characteristics of both liabilities and equity and classifies
them in its statement of financial position. It requires that an issuer classify
a financial instrument that is within its scope as a liability (or an asset in
some circumstances) when that financial instrument embodies an obligation of the
issuer. SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective July 1, 2003, and did not 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 and unrealized gains and losses
on certain investments held by equity method investees, net of tax:
Dollars in millions Three Months Nine Months
Period ended September 30, 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------
Net income $ 663 $ 529 $ 2,052 $1,877
Other changes in equity from nonowner sources 19 (3) 15 2
- ---------------------------------------------------------------------------------------------------------
Total comprehensive income $ 682 $ 526 $ 2,067 $1,879
=========================================================================================================
9
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September
30, 2003, are as follows:
NET
CAPITAL
(U.S.) OR
FINANCIAL EXCESS OVER
(DOLLARS IN MILLIONS) RESOURCES MINIMUM
SUBSIDIARY JURISDICTION (U.K.) REQUIREMENTS
- ------------------------------------------------------------------------------------------------------------------------
Citigroup Global Markets Inc. U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $ 3,913 $ 3,298
Citigroup Global Markets Limited United Kingdom's Financial Services Authority $ 3,235 $ 175
- ------------------------------------------------------------------------------------------------------------------------
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
September 30, 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.
10
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 September 30, 2003 and
December 31, 2002 is as follows:
SEPTEMBER 30, 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) $ 241.6 $ - $ - $ 192.2 $ - $ -
Other exchange-traded products:
Equity contracts 34.4 2.3 2.6 50.8 1.4 2.0
Fixed income, foreign exchange and commodity
contracts 18.0 - - 9.5 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total exchange-traded products 294.0 2.3 2.6 252.5 1.4 2.0
- ----------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps,
floors and forward rate agreements:
Swaps 2,080.7 2,567.7
Swap options written 73.7 60.1
Swap options purchased 60.3 52.7
Caps, floors and forward rate agreements 163.9 181.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps, floors and
forward rate agreements (b) 2,378.6 9.2 7.9 2,862.4 11.9 9.4
- ----------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 107.5 2.1 5.0 73.5 1.1 2.4
Options and forward contracts on fixed-income
securities 506.0 .8 .5 628.7 .8 .4
Foreign exchange contracts and options (b) 126.7 .7 .8 58.7 .5 .5
Commodity contracts 8.2 .1 .1 9.2 .1 .1
- ----------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $ 3,421.0 $ 15.2 $ 16.9 $ 3,885.0 $ 15.8 $ 14.8
==================================================================================================================================
(a) Margin on futures contracts is included in receivables/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 $13.9 billion and $5.0 billion
at September 30, 2003, respectively, and $14.3 billion and $4.1 billion
at December 31, 2002, respectively.
11
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 Nine Months
Period ended September 30, 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense:
Investment Services $ 1,986 $ 1,609 $ 6,733 $ 5,879
Private Client Services 1,470 1,411 4,210 4,440
Asset Management 274 281 763 888
- ------------------------------------------------------------------------------------------------------------------
Total $ 3,730 $ 3,301 $ 11,706 $ 11,207
==================================================================================================================
Total non-interest expenses:
Investment Services $ 1,342 $ 1,174 $ 4,564 $ 4,197
Private Client Services 1,162 1,128 3,383 3,479
Asset Management 157 151 446 492
- ------------------------------------------------------------------------------------------------------------------
Total $ 2,661 $ 2,453 $ 8,393 $ 8,168
==================================================================================================================
Net income:
Investment Services $ 402 $ 272 $ 1,349 $ 1,054
Private Client Services 189 179 508 608
Asset Management 72 78 195 215
- ------------------------------------------------------------------------------------------------------------------
Total $ 663 $ 529 $ 2,052 $ 1,877
==================================================================================================================
Total assets of the Investment Services, Private Client Services and Asset
Management segments were $328.4 billion, $12.5 billion and $1.7 billion,
respectively, at September 30, 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.
12
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. LEGAL PROCEEDINGS
During the third quarter of 2003, the Company, through Citigroup, resolved
certain Enron-related investigations that were conducted by the SEC, the bank
regulators, and the Manhattan District Attorney. With regard to Enron, the
Company made payments totaling $25.35 million. Those payments and payments for
the retrospective portions of the settlements of the global research settlement
announced last April are covered by the reserves previously established toward
the anticipated cost of resolving these regulatory inquiries as well as
associated litigation matters. These remaining matters continue to be at early
stages and therefore reserves may be subject to further revision.
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 the 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. While
such representations, warranties and tax indemnifications are essential
components of many contractual relationships, they do not represent the
underlying business purpose for the transactions. The indemnification clauses
are often standard contractual terms related to the Company's own performance
under the terms of a contract and are entered into in the normal course of
business based on an assessment that the risk of loss is remote. Often these
clauses are intended to ensure that terms of a contract are met at inception. No
compensation is received for these standard representations and warranties and
it is not possible to determine their fair value because they rarely, if ever,
result in payment. In many cases, there are no stated or notional amounts
included in the indemnification clauses and the contingencies potentially
triggering the obligation to indemnify have not occurred and are not expected to
occur. There are no amounts reflected on the accompanying condensed consolidated
statement of financial condition as of September 30, 2003 related to these
indemnifications.
In addition, the Company is a member of or shareholder in 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 Company's potential
obligation as a shareholder or member of VTN
13
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
associations are excluded from the scope of FIN 45, since the shareholders and
members represent subordinated classes of investors in the VTNs. Accordingly,
there are no amounts reflected on the accompanying condensed consolidated
statement of financial condition as of September 30, 2003 for potential
obligations that could arise from the Company's involvement with VTN
associations.
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 September 30, 2003, the
carrying amount of the liabilities related to these derivatives was $947
million.
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 September
30, 2003, the maximum potential loss at notional value related to credit default
swaps and total rate of return swaps amounted to $50.2 billion, of which $5.3
billion expire within one year and $44.9 billion expire after one year. At
September 30, 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 $2.2 billion.
Guarantees to joint ventures and other third parties primarily include
guarantees of their debt obligations. At September 30, 2003, the amount and the
maximum potential loss related to these joint venture and other third party
guarantees were $566 million, of which $412 million expires within one year and
$154 million expires after one year. Securities and other marketable assets held
as collateral to reimburse losses under other third party guarantees amounted to
$47 million at September 30, 2003.
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
September 30, 2003, the amount and the maximum potential loss related to
guarantees of collection of contractual cash flows were $24 million.
14
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
SETTLEMENT OF CERTAIN LEGAL AND REGULATORY MATTERS
On July 28, 2003, Citigroup entered into a final settlement agreement with the
Securities and Exchange Commission ("SEC") to resolve the SEC's outstanding
investigations into Citigroup transactions with Enron and Dynegy. Pursuant to
the settlement, Citigroup has, among other terms, (1) consented to the entry of
an administrative cease and desist order, which bars Citigroup from committing
or causing violations of provisions of the federal securities laws, and (2)
agreed to pay $120 million ($101.25 million allocable to Enron and $18.75
million allocable to Dynegy). Citigroup entered into this settlement without
admitting or denying any wrongdoing or liability, and the settlement does not
establish wrongdoing or liability for purposes of any other proceeding.
Citigroup has made full payment to the SEC. On July 28, 2003, Citibank, N.A.
entered into an agreement with the Office of the Comptroller of the Currency
("OCC") and Citigroup entered into an agreement with the Federal Reserve Bank of
New York ("FED") to resolve their inquiries into certain of Citigroup's
transactions with Enron. Pursuant to the agreements, Citibank and Citigroup have
submitted plans to the OCC and FED, respectively, regarding the handling of
complex structured finance transactions. Also on July 28, 2003, Citigroup
entered into a settlement agreement with the Manhattan District Attorney's
Office to resolve its investigation into certain of Citigroup's transactions
with Enron; pursuant to the settlement, Citigroup has agreed to pay $25.5
million and to abide by its agreements with the SEC, OCC and FED. Citigroup has
made full payment to the Manhattan District Attorney's Office. The Company and
certain other Citigroup subsidiaries had previously established reserves for the
cost of these settlements.
RESULTS OF OPERATIONS
For the three months ended September 30, 2003 (the "2003 Quarter"), the Company
recorded net income of $663 million compared to $529 million for the three
months ended September 30, 2002 (the "2002 Quarter"). Revenues, net of interest
expense, were $3,730 million in the 2003 Quarter compared to $3,301 million in
the 2002 Quarter. Principal transactions revenues increased significantly to
$383 million in the 2003 Quarter compared to a loss of $35 million in the 2002
Quarter primarily as the result of an increase in fixed income trading.
Investment banking revenues increased in the 2003 Quarter to $792 million as the
result of increases in high yield and high grade debt underwritings, partially
offset by declines in public finance underwriting and private placement and
public financing fees. Commission revenues and asset management and
administration fees were essentially unchanged in the 2003 Quarter as compared
to the 2002 Quarter. Net interest and dividends increased to $676 million in the
2003 Quarter primarily as a result of reduced financing costs for European
equity trading, offset partially by reduced dividend income. Total non-interest
expenses increased 8% in the 2003 Quarter to $2,661 million as a result of
increased compensation and benefits expense.
For the nine months ended September 30, 2003 (the "2003 Period"), the Company
recorded net income of $2,052 million compared to $1,877 million for the nine
months ended September 30, 2002 (the "2002 Period"). Revenues, net of interest
expense, were $11,706 million in the 2003 Period compared to $11,207 million in
the 2002 Period. Principal transactions revenues increased significantly to
$1,624 million in the 2003 Period compared to $628 million in the 2002 Period
primarily as the result of an increase in fixed income trading. Commission
revenues decreased to $2,733 million primarily as a result of a decrease in
listed commissions. Asset management and administration fees decreased 11%
primarily as a result of market weakness and declines in asset-based fee revenue
along with lower transactional volumes. Net interest and dividends of $2,072
million in the 2003 Period was essentially unchanged compared to the 2002
Period. Total non-interest expenses in the
15
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2003 Period increased to $8,393 million as a result of increased compensation
and benefits expense and professional services expense, offset partially by a
decline in advertising and market development expense.
In the 2002 Period, 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 No. 142, "Goodwill and Other
Intangible Assets."
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 Three Months Nine Months
Period Ended September 30, 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $ 1,986 $ 1,609 $ 6,733 $ 5,879
- ---------------------------------------------------------------------------------------------------------
Total non-interest expense 1,342 1,174 4,564 4,197
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 644 435 2,169 1,682
Provision for income taxes 242 163 820 628
- ---------------------------------------------------------------------------------------------------------
Net income $ 402 $ 272 $ 1,349 $ 1,054
=========================================================================================================
The Company's Investment Services segment recorded net income of $402 million in
the 2003 Quarter and $1,349 million in the 2003 Period, compared to $272 million
and $1,054 million in the 2002 Quarter and the 2002 Period, respectively.
Revenues, net of interest expense, increased 23% and 15% to $2.0 billion and
$6.7 billion in the 2003 Quarter and the 2003 Period, respectively. Principal
transactions revenues increased significantly in the 2003 Quarter and 2003
Period as a result of improved results in fixed income, municipal and
commodities trading. Commission revenues decreased in the 2003 Quarter and the
2003 Period as a result of a decrease in listed commissions. Investment banking
revenues increased in the 2003 Quarter as a result of an increase in high yield
underwriting. In the 2003 Period, the increase was attributable to increased
high yield and high grade debt underwriting, partially offset by a decline in
equity underwriting. Included in investment banking revenues in the 2002 Period
were fees from the Travelers Property Casualty Corp. initial public offering.
Total non-interest expenses increased to $1.3 billion and $4.6 billion in the
2003 Quarter and the 2003 Period, respectively, primarily due to an increase in
compensation and benefits expense, partially offset by reduced floor brokerage
and other production expenses.
16
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRIVATE CLIENT SERVICES
Dollars in millions Three Months Nine Months
Period Ended September 30, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $ 1,470 $ 1,411 $ 4,210 $ 4,440
- -------------------------------------------------------------------------------------------------------------
Total non-interest expense 1,162 1,128 3,383 3,479
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 308 283 827 961
Provision for income taxes 119 104 319 353
- -------------------------------------------------------------------------------------------------------------
Net income $ 189 $ 179 $ 508 $ 608
=============================================================================================================
Private Client Services net income was $189 million in the 2003 Quarter, an
increase of $10 million or 6% from the 2002 Quarter, primarily reflecting higher
commissions due to increased customer trading activity and increased asset-based
fee revenues reflecting higher client asset levels. These increases were
partially offset by a decline in net interest revenue from securities-based
lending, higher production-related compensation, advertising and marketing
expenses, and legal expenses. Net income declined in the 2003 Period primarily
due to lower asset-based fee revenue.
Revenues, net of interest expense, of $1,470 million in the 2003 Quarter
increased 4% from the 2002 Quarter, reflecting increases in both transactional
and fee-based revenues. Transactional revenues increased $43 million in the 2003
Quarter primarily reflecting higher customer activity. Fee-based revenues
increased $16 million in the 2003 Quarter reflecting higher client asset levels.
The decrease in the 2003 Period was primarily due to lower asset-based fee
revenue along with lower transactional volumes.
Total assets under fee-based management were $192.1 billion as of September 30,
2003, up $40 billion or 26% from September 30, 2002, primarily due to an
increase in market values and positive net flows. Total client assets, including
assets under fee-based management, were $998 billion as of September 30, 2003,
an increase of $148 billion or 17% compared to the prior-year period. This
increase was principally due to market appreciation and positive net flows. Net
flows were $5 billion in the 2003 Quarter, down $2 billion from the prior-year
period.
Operating expenses of $1,162 million in the 2003 Quarter increased 3% from the
2002 Quarter primarily reflecting higher production-related compensation, higher
advertising and marketing expenses and higher legal expenses. Operating expenses
of $3,383 million in the 2003 Period declined 3% from the 2002 Period, 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 September 30, 2003 2002
- -------------------------------------------------------------------------------
Financial Consultant managed accounts $ 64.3 $ 49.5
Consulting Group and internally managed assets 127.8 102.6
- -------------------------------------------------------------------------------
Total assets under fee-based management (1) $ 192.1 $ 152.1
- -------------------------------------------------------------------------------
(1) Includes certain assets managed jointly with Citigroup Asset Management.
17
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT
Dollars in millions Three Months Nine Months
Period Ended September 30, 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------
Revenues, net of interest expense $274 $281 $763 $888
- --------------------------------------------------------------------------------------------------
Total non-interest expense 157 151 446 492
- --------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 117 130 317 396
- --------------------------------------------------------------------------------------------------
Provision for income taxes 45 52 122 157
Cumulative effect of change in accounting
principle (net of tax benefit of $16) - - - (24)
- --------------------------------------------------------------------------------------------------
Net income $ 72 $ 78 $195 $215
==================================================================================================
The Company's Asset Management segment revenues, net of interest expense, of
$274 million and $763 million in the 2003 Quarter and 2003 Period, respectively,
decreased $7 million or 2% from the 2002 Quarter and $125 million or 14% from
the 2002 Period. The primary revenue for the Asset Management segment is asset
management and administration fees, which decreased to $264 million and $742
million in the 2003 Quarter and 2003 Period, respectively, compared to $272
million in the 2002 Quarter and $859 million in the 2002 Period. The decrease in
revenues in the 2003 Quarter and 2003 Period reflects the impact of weakness in
global equity markets versus the prior year, reduced fee revenues and the impact
of a decrease in U.S. retail money market funds, partially offset by positive
market action in the 2003 Quarter and cumulative positive net flows in the 2003
Quarter and the 2003 Period. 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 $9 million and $29
million in the 2003 Quarter and 2003 Period, respectively.
Assets under management for the segment were $275.7 billion at September 30,
2003, compared to $245.6 billion at September 30, 2002. This increase is due to
positive net flows and positive market action, which was partially offset by a
decline of U.S. retail money market funds. The increase was also partially due
to a transfer of certain institutional managed accounts of $3 billion from
Citicorp, an affiliate.
Total non-interest expenses were $157 million and $446 million in the 2003
Quarter and 2003 Period, respectively, compared to $151 million and $492 million
in the 2002 Quarter and 2002 Period, respectively. The increase in the 2003
Quarter is due to increased compensation and benefits expense and was partially
offset by the change in the presentation of certain fee sharing arrangements.
The decline in the 2003 Period primarily reflected continued expense management
and a decline in incentive compensation.
18
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Assets under fee-based management were as follows:
Dollars in billions
At September 30, 2003 2002
- ------------------------------------------------------------------------------------
Money market funds $ 92.2 $ 92.4
Mutual funds 80.5 65.5
Managed accounts 97.8 82.2
Unit investment trusts held in client accounts 5.2 5.5
- ------------------------------------------------------------------------------------
Total Citigroup Asset Management $ 275.7 $ 245.6
- ------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $343 billion at September 30, 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 $213.4 billion at
September 30, 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, promissory notes and corporate loans. Short-term uncollateralized
borrowings totaled $22.3 billion at September 30, 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 $4.85 billion 364-day committed uncollateralized revolving
line of credit with unaffiliated banks. Commitments under this facility
terminate in May 2004. Any borrowings under this facility would mature in May
2006. The Company also has a $125 million committed uncollateralized 364-day
facility with an unaffiliated bank that extends through May 2004, with any
borrowings under this facility maturing in May 2005, 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
19
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
compensates the banks for these facilities through facility fees. At September
30, 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 September 30, 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
September 30, 2003, this requirement was exceeded by approximately $6.3 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 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. 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.
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 September 30, 2003 and December 31, 2002. The VAR relating to
accrual portfolios has been excluded from this analysis.
20
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RISK EXPOSURES September 30, Third Quarter Third Quarter Third Quarter December 31,
($ IN MILLIONS) 2003 2003 Average 2003 High 2003 Low 2002
- -------------------------------------------------------------------------------------------------------------------------
Interest rate $ 70 $ 76 $ 91 $ 60 $ 63
Equities 26 17 29 12 12
Commodities 6 6 8 4 5
Currency 5 6 9 5 4
Diversification Benefit (32) (28) N/A N/A (18)
- -------------------------------------------------------------------------------------------------------------------------
Total* $ 75 $ 77 $ 93 $ 65 $ 66
=========================================================================================================================
* Includes diversification benefit.
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at September 30, 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 65% 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
September 30, 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.
21
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
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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, as updated by our Quarterly Reports
on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003 and our
Current Report on Form 8-K dated April 28, 2003.
ENRON
TITTLE, ET AL. v. ENRON CORP., ET AL.
On September 30, 2003, all of the claims against Citigroup in this litigation
were dismissed.
ADDITIONAL ACTIONS
Several additional actions, previously identified, have been consolidated or
coordinated with the Newby action and are stayed, except with respect to certain
discovery, until after the Court's decision on class certification. In addition,
on August 15, 2003, a purported class action was brought by purchasers of Enron
stock alleging state law claims of negligent misrepresentation, fraud, breach of
fiduciary duty and aiding and abetting a breach of fiduciary duty. On August 29,
2003, an investment company filed a lawsuit alleging that Citigroup, CGMI and
several other defendants (including, among others, Enron's auditor, financial
institutions, outside law firms and rating agencies) engaged in a conspiracy,
which purportedly caused plaintiff to lose credit (in the form of a commodity
sales contract) it extended to an Enron subsidiary in purported reliance on
Enron's financial statements. On September 24, 2003, Enron filed an adversary
proceeding in its chapter 11 bankruptcy proceedings to recover alleged
preferential payments and fraudulent transfers involving Citigroup, CGMI and
other entities, and to disallow or to subordinate bankruptcy claims that
Citigroup, CGMI and other entities have filed against Enron.
22
RESEARCH
In connection with the global research settlement, on October 31, 2003, final
judgment was entered against CGMI and nine other investment banks. In addition,
CGMI has entered into separate settlement agreements with numerous states and
certain U.S. territories.
WORLDCOM
Citigroup and/or CGMI are now named in approximately 35 individual state court
actions brought by pension funds and other institutional investors based on
underwriting of debt securities of WorldCom. Most of these actions have been
removed to federal court and transferred to the United States District Court for
the Southern District of New York for centralized pretrial hearings with other
WorldCom actions. On October 24, 2003, the court granted plaintiffs' motion to
have this matter certified as a class action.
OTHER
On November 3, 2003, the United States District Court for the Southern District
of New York granted the Company's motion to dismiss the consolidated amended
complaint asserting violations of certain federal and state antitrust laws in
connection with the allocation of shares in initial public offerings when acting
as underwriters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
On July 14, 2003, the Company filed a Current Report on Form 8-K, dated July 11,
2003, filing as an exhibit under Item 7 thereof the Global Selling Agency
Agreement relating to the offer and sale of the Company's Medium-Term Senior
Notes, Series A, and Medium-Term Subordinated Notes, Series B.
On July 15, 2003, the Company filed a Current Report on Form 8-K, dated July 14,
2003, reporting under Item 5 thereof the results of its operations for the
three- and six-month periods ended June 30, 2003 and 2002.
On July 31, 2003, the Company filed a Current Report on Form 8-K, dated July 25,
2003, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's 8% Select Equity Indexed Notes based upon the common stock
of Texas Instruments Incorporated due July 25, 2005.
On August 28, 2003, the Company filed a Current Report on Form 8-K, dated August
22, 2003, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's Equity Linked Securities (ELKS) based upon the common
stocks of five companies due August 30, 2004.
On September 22, 2003, the Company filed a Current Report on Form 8-K, dated
September 22, 2003, filing as an exhibit under Item 7 thereof the Global Selling
Agency Agreement relating to the offer and sale of the Company's Retail
Medium-Term Notes, Series C.
On September 30, 2003, the Company filed a Current Report on Form 8-K, dated
September 24, 2003, filing certain exhibits under Item 7 thereof relating to the
offer and sale of the Company's 7% Select Equity Indexed Notes based upon the
Class A Special common stock of Comcast Corporation due September 29, 2005.
No other reports on Form 8-K were filed during the third quarter of 2003,
however:
23
On October 20, 2003, the Company filed a Current Report on Form 8-K, dated
October 20, 2003, reporting under Item 5 thereof the results of its operations
for the three- and nine-month periods ended September 30, 2003 and 2002.
On November 5, 2003, the Company filed a Current Report on Form 8-K, dated
October 28, 2003, filing certain exhibits under Item 7 thereof relating to the
offer and sale of the Company's Enhanced Income Strategy Principal-Protected
Notes with Income and Appreciation Potential Linked to the Dynamic Portfolio
Index due November 4, 2008.
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 4(b) to the Company's
Registration Statement on Form S-3 (No. 333-106272).
12.01+ Computation of ratio of earnings to fixed charges.
31.01+ Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.02+ Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01+ 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.
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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.
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
(Registrant)
Date: November 13, 2003 By: /s/ Robert Druskin
-------------------------------
Robert Druskin
President and Chief Executive Officer
By: /s/ John C. Morris
-------------------------------
John C. Morris
Chief Financial Officer
25