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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION
OR ORGANIZATION) NO.)
388 GREENWICH STREET, NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 816-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
________________
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
BECAUSE THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC., NONE OF
THE REGISTRANT'S OUTSTANDING VOTING STOCK IS HELD BY NONAFFILIATES OF THE
REGISTRANT. AS OF THE DATE HEREOF, 1,000 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.01 PAR VALUE, WERE ISSUED AND OUTSTANDING.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2). YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE: NONE
AVAILABLE ON THE WEB @ WWW.CITIGROUP.COM
[COVER PAGE 1 OF 3 PAGES.]
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
EQUITY LINKED NOTES BASED UPON THE DOW JONES INDUSTRIAL CHICAGO BOARD OPTIONS EXCHANGE
AVERAGE (SM) DUE SEPTEMBER 6, 2005
PRINCIPAL-PROTECTED EQUITY LINKED NOTES BASED UPON THE S&P AMERICAN STOCK EXCHANGE
500(R) INDEX DUE 2005
PRINCIPAL-PROTECTED EQUITY LINKED NOTES BASED UPON THE S&P CHICAGO BOARD OPTIONS EXCHANGE
500(R) INDEX DUE 2005
CALLABLE PRINCIPAL-PROTECTED EQUITY LINKED NOTES BASED UPON CHICAGO BOARD OPTIONS EXCHANGE
THE S&P 500(R) INDEX DUE 2006
CALLABLE EQUITY LINKED NOTES BASED UPON THE THESTREET.COM AMERICAN STOCK EXCHANGE
INTERNET SECTOR INDEX DUE 2006
0.25% CASH EXCHANGEABLE NOTES LINKED TO A BASKET OF AMERICAN STOCK EXCHANGE
TELECOMMUNICATIONS STOCKS DUE 2005
0.25% NOTES EXCHANGEABLE FOR A BASKET OF SELECTED TECHNOLOGY AMERICAN STOCK EXCHANGE
STOCKS, DUE 2005
0.25% NOTES EXCHANGEABLE FOR A BASKET OF SELECTED TECHNOLOGY AMERICAN STOCK EXCHANGE
STOCKS, DUE 2007
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF THE
HOME DEPOT, INC.
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF GENERAL
ELECTRIC COMPANY
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF
AMERICAN EXPRESS COMPANY
NOTES EXCHANGEABLE FOR THE COMMON STOCK OF PFIZER INC., DUE AMERICAN STOCK EXCHANGE
2008
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF PFIZER
INC.
PRINCIPAL-PROTECTED KNOCK-OUT NOTES LINKED TO THE NASDAQ-100 AMERICAN STOCK EXCHANGE
INDEX(R) DUE 2004
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF
WAL-MART STORES, INC.
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF THE
WALT DISNEY COMPANY
95% PRINCIPAL-PROTECTED NOTES LINKED TO THE S&P 500(R) INDEX AMERICAN STOCK EXCHANGE
DUE 2004
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF BANK
ONE CORPORATION
[COVER PAGE 2 OF 3 PAGES.]
PRINCIPAL-PROTECTED NOTES LINKED TO THE S&P 500(R) INDEX DUE AMERICAN STOCK EXCHANGE
2007
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF AMGEN
INC.
PRINCIPAL-PROTECTED NOTES LINKED TO THE NASDAQ-100 INDEX(R) AMERICAN STOCK EXCHANGE
DUE 2007
PRINCIPAL-PROTECTED NOTES LINKED TO THE DOW JONES EURO STOXX AMERICAN STOCK EXCHANGE
50 INDEX (SM) DUE 2007
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF DELL
COMPUTER CORPORATION
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF
INTERNATIONAL BUSINESS MACHINES CORPORATION
STOCK MARKET UPTURN NOTES (SM) BASED UPON THE DOW JONES AMERICAN STOCK EXCHANGE
INDUSTRIAL AVERAGE (SM) DUE 2005
STOCK MARKET UPTURN NOTES (SM) LINKED TO THE NASDAQ-100 AMERICAN STOCK EXCHANGE
INDEX(R) DUE 2006
SELECT EQUITY INDEXED NOTES (SM) BASED UPON THE COMMON STOCK OF AMERICAN STOCK EXCHANGE
INTEL CORPORATION DUE 2005
EQUITY LINKED SECURITIES (ELKS (SM)) BASED UPON THE COMMON AMERICAN STOCK EXCHANGE
STOCKS OF AMERICAN INTERNATIONAL GROUP, INC., DELL COMPUTER
CORPORATION, E.I. DU PONT DE NEMOURS AND COMPANY, MCDONALD'S
CORPORATION AND WAL-MART STORES, INC. DUE 2004
SELECT EQUITY INDEXED NOTES (SM) BASED UPON THE COMMON STOCK OF AMERICAN STOCK EXCHANGE
TEXAS INSTRUMENTS INCORPORATED DUE 2005
EQUITY LINKED SECURITIES (ELKS (SM)) BASED UPON THE COMMON AMERICAN STOCK EXCHANGE
STOCKS OF APPLIED MATERIALS, INC., GENERAL ELECTRIC COMPANY,
THE HOME DEPOT, INC., J.P. MORGAN CHASE & CO. AND PFIZER INC.
DUE 2004
SELECT EQUITY INDEXED NOTES (SM) BASED UPON THE CLASS A SPECIAL AMERICAN STOCK EXCHANGE
COMMON STOCK OF COMCAST CORPORATION DUE 2005
EQUITY LINKED SECURITIES (ELKS (SM)) BASED UPON THE COMMON AMERICAN STOCK EXCHANGE
STOCKS OF CISCO SYSTEMS, INC., KOHL'S CORPORATION, MERCK &
CO., INC., THE COCA-COLA COMPANY AND WELLS FARGO & COMPANY
DUE 2004
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF TIME
WARNER INC.
7.5% MEDIUM-TERM EQUITY LINKED SECURITIES (ELKS (SM)) BASED ON AMERICAN STOCK EXCHANGE
THE COMMON STOCK OF HEWLETT-PACKARD COMPANY DUE 2005
SELECT EQUITY INDEXED NOTES (SM) BASED UPON THE COMMON STOCK OF AMERICAN STOCK EXCHANGE
APPLIED MATERIALS, INC. DUE 2006
TARGETED GROWTH ENHANCED TERMS SECURITIES (TARGETS (SM)) OF AMERICAN STOCK EXCHANGE
SUBSIDIARY TRUST WITH RESPECT TO THE COMMON STOCK OF CISCO
SYSTEMS, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
[COVER PAGE 3 OF 3 PAGES.]
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PAGE
- ----------- ----'
PART I
1. Business............................................................................................. 1
2. Properties........................................................................................... 10
3. Legal Proceedings.................................................................................... 10
4. Omitted Pursuant to General Instruction I
PART II
5. Market For Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities........................................................................................... 15
6. Omitted Pursuant to General Instruction I
7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 16
7A. Quantitative and Qualitative Disclosures About Market Risk........................................... 44
8. Financial Statements And Supplementary Data.......................................................... 44
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 44
9A. Controls and Procedures.............................................................................. 44
PART III
10-13. Omitted Pursuant to General Instruction I
14. Principal Accountant Fees and Services............................................................... 45
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 47
Exhibit Index........................................................................................ 48
Signatures........................................................................................... 49
Index to Consolidated Financial Statements and Schedules............................................. F-1
PART I
ITEM 1. BUSINESS.
Citigroup Global Markets Holdings Inc. (formerly Salomon Smith Barney Holdings
Inc.) ("CGMHI"), operating through its subsidiaries, engages in full-service
investment banking and securities brokerage business. As used in this Form 10-K,
"Citigroup Global Markets" and the "Company" refer generally to CGMHI and its
consolidated subsidiaries, and where the context requires refer to specific
subsidiaries. Citigroup Global Markets provides a full range of financial
advisory, research and capital raising services to corporations, governments and
individuals. Citigroup Global Markets operates in three business segments: (i)
Investment Services, (ii) Private Client Services and (iii) Asset Management,
and through these business segments, the Company provides investment banking,
securities and commodities trading, capital raising, asset management, advisory,
research, brokerage and other financial services to its customers, and executes
proprietary trading strategies on its own behalf.
Citigroup Inc. ("Citigroup"), CGMHI's parent, is a diversified holding company
whose businesses provide a broad range of financial services to consumer and
corporate customers around the world. Citigroup's activities are conducted
through the Global Consumer, Global Corporate and Investment Bank, Private
Client Services, Global Investment Management, and Proprietary Investment
Activities business segments. The periodic reports of Citigroup provide
additional business and financial information concerning that company and its
consolidated subsidiaries.
The principal offices of CGMHI are located at 388 Greenwich Street, New York,
New York 10013, telephone number (212) 816-6000. CGMHI was incorporated in New
York in 1977 and is the successor to Salomon Smith Barney Holdings Inc., a
Delaware corporation, following a statutory merger effective on July 1, 1999,
for the purpose of changing its state of incorporation. On April 7, 2003, CGMHI
filed a Restated Certificate of Incorporation in the State of New York changing
its name from Salomon Smith Barney Holdings Inc. to Citigroup Global Markets
Holdings Inc.
INVESTMENT SERVICES
INVESTMENT BANKING AND TRADING
The Company's global investment banking services encompass a full range of
capital market activities, including the underwriting and distribution of debt
and equity securities for United States and foreign corporations and for state,
local and other governmental and government sponsored authorities. Citigroup
Global Markets frequently acts as an underwriter or private placement agent in
corporate and public securities offerings and provides alternative financing
options. It also provides financial advice to investment banking clients on a
wide variety of transactions including mergers and acquisitions, divestitures,
leveraged buyouts, financial restructurings and a variety of cross-border
transactions.
Citigroup Global Markets executes securities and commodity futures brokerage
transactions on all major United States securities and futures exchanges and
major international exchanges on behalf of customers and for its own account.
Citigroup
1
Global Markets' significant capital base and extensive distribution capabilities
also enable it to provide liquidity to investors across a broad range of markets
and financial instruments, and to execute capital-intensive transactions on
behalf of its customers and for its own account. It executes transactions in
large blocks of exchange-listed stocks, usually with institutional investors,
and often acts as principal to facilitate these transactions. It makes markets,
buying and selling as principal, in approximately 870 equity securities traded
on the NASDAQ system. Additionally, Citigroup Global Markets makes markets in
convertible and preferred stocks, warrants and other equity securities.
The Company also engages in principal transactions in fixed income securities,
and it is a major dealer in government securities in New York, London, Frankfurt
and Tokyo. Citigroup Global Markets makes inter-dealer markets and trades as
principal in corporate debt and equity securities, including those of United
States and foreign corporate issuers, United States and foreign government and
agency securities, mortgage-related securities, whole loans, municipal and other
tax-exempt securities, commercial paper and other money market instruments as
well as emerging market debt securities and foreign exchange. It also enters
into repurchase and reverse repurchase agreements to provide financing for
itself and its customers, and engages in securities lending and borrowing
transactions.
Citigroup Global Markets is a major participant in the over-the-counter ("OTC")
market for derivative instruments involving a wide range of products, including
interest rate, equity, currency, and commodity swaps, caps and floors, options,
warrants, and other derivative products. It also creates and sells various types
of structured securities. Citigroup Global Markets' ability to execute
transactions is enhanced by its established presence in international capital
markets, its use of information technology and quantitative risk management
tools, its research capabilities, and its knowledge and experience in various
derivative markets.
Citigroup Global Markets also trades for its own account in various markets
throughout the world, and uses many different strategies involving a broad
spectrum of financial instruments and derivative products. Historically, these
trading strategies have primarily involved the fixed income securities of the
G-7 countries, but they also involve the trading of fixed income securities
globally (including emerging markets) as well as currencies and equities.
Because these trading strategies are often designed with time horizons of one
year or more, profits or losses reported in interim periods can be volatile and
may not reflect the ultimate success or failure of these strategies. For a
discussion of certain of the risks involved in CGMHI's securities trading and
investment activities, and its strategies to manage these risks, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TRUST SERVICES
Certain subsidiaries of Citigroup are chartered as trust companies and provide a
full range of fiduciary services with a particular emphasis on personal trust
services. Another Citigroup subsidiary offers a broad range of trustee services
for qualified retirement plans, with particular emphasis on the 401(k) plan
market. Each of these trust companies is subject to supervision by either
federal or state banking authorities, as appropriate, based upon the
jurisdiction in which such trust
2
company is chartered, and uses the distribution network of Citigroup Global
Markets to market its services. Citigroup Global Markets provides certain
advisory and support services to the trust companies and receives fees for such
services. Certain subsidiaries of CGMHI also operate a private trust services
business that is licensed as a bank and trust company in the Cayman Islands.
PHIBRO
Phibro conducts a global proprietary commodities trading and dealer business
through its offices in Westport (Connecticut), London and Singapore. Commodities
traded include crude oil, refined oil products, natural gas, metals and various
soft commodities. Phibro makes extensive use of futures markets and is a
participant in the OTC physical and derivatives markets. Its principal
competitors are major integrated oil companies, other commodity trading
companies, certain investment banks, utility companies and other financial
institutions.
Phibro's strategy is to focus on taking positions in commodities on a
longer-term horizon while also trading with counterparties on a short-term
basis. Phibro's operating results are subject to a high degree of volatility,
particularly on a quarterly basis, due to the predominance of directional
positions in commodities that have a longer-term horizon until realization.
Thus, results are better evaluated over the longer term.
PRIVATE CLIENT SERVICES
Private Client Services provides investment advice, financial planning and
brokerage services to affluent individuals, small and mid-size companies,
non-profits and large corporations primarily through a network of more than
12,200 Smith Barney Financial Consultants in more than 500 offices worldwide. In
addition, Private Client Services provides independent client-focused research
to individuals and institutions around the world.
A significant portion of Private Client Services revenue is generated from fees
earned by managing client assets as well as commissions earned as a broker for
its clients in the purchase and sale of securities. Additionally, Private Client
Services generates net interest revenue by financing customers' securities
transactions and other borrowing needs through securities-based lending. Private
Client Services also receives commissions and other sales and service revenues
through the sale of proprietary and third-party mutual funds. As part of Private
Client Services, Global Equity Research produces equity research to serve both
institutional and individual investor clients. The majority of expenses for
Global Equity Research are allocated to the Global Equities business and Private
Client Services businesses.
3
ASSET MANAGEMENT
The portion of Citigroup's Asset Management segment housed within CGMHI is
comprised primarily of two asset management business platforms: Salomon Brothers
Asset Management and Smith Barney Asset Management (the "Asset Management
Group"). These platforms offer a broad range of asset management products and
services from global investment centers, including mutual funds, closed-end
funds and managed accounts. In addition, the Asset Management Group offers a
broad range of unit investment trusts.
Clients include private and public retirement plans, endowments, foundations,
banks, insurance companies, other corporations, government agencies, high net
worth and other individuals. Client relationships may be introduced through
Smith Barney's network of Financial Consultants and other cross-marketing and
distribution opportunities within the Citigroup structure, through the Asset
Management Group's own sales force or through independent sources.
The Company receives ongoing fees, generally stated as a percentage of the
client's assets, from asset management clients. At December 31, 2003 client
assets under management were approximately $303.6 billion, as compared to
approximately $256.6 billion at December 31, 2002 and approximately $273.1
billion at December 31, 2001. These amounts include separately managed accounts
with assets of approximately $114.4 billion at December 31, 2003, approximately
$85.6 billion at December 31, 2002 and approximately $93.6 billion at December
31, 2001.
The following table shows the aggregate assets in, and number of, investment
companies managed by the Asset Management Group at December 31st for each of the
last three years.
INVESTMENT COMPANY ASSETS UNDER MANAGEMENT
DECEMBER 31,
------------------------------------------------
2003 2002 2001
-------------- --------------- ---------------
(Dollars in billions)
NO. OF NO. OF NO. OF
FUNDS ASSETS FUNDS ASSETS FUNDS ASSETS
------ ------ ------ ------- ------ -------
Money market 35 $ 93.9 29 $ 97.0 32 $ 97.7
Mutual funds 173 73.8 171 56.5 156 62.4
Annuity funds 36 7.6 36 6.0 37 6.7
Closed-end funds 22 8.3 20 6.2 21 6.2
--- ------ --- ------- --- -------
Total 266 $183.6 256 $ 165.7 246 $ 173.0
=== ====== === ======= === =======
At December 31, 2003, the Asset Management Group managed 208 mutual funds
(open-end investment companies), including taxable and tax-exempt money market
funds, equity funds, and taxable and tax-exempt fixed income funds sold
primarily through Smith Barney Financial Consultants, the sales force of
Primerica Financial Services, an affiliate of CGMHI, and other affiliates of
CGMHI. In addition, certain of the funds are sold through a variety of other
national and regional brokerage firms pursuant to dealer agreements. Of the
mutual funds managed by the Asset Management Group, 57 are domiciled outside the
United States and are offered to non-resident aliens through Citigroup Global
Markets and other
4
financial intermediaries. In addition, at December 31, 2003, the Asset
Management Group managed 36 mutual fund portfolios serving as funding vehicles
for variable annuity contracts, including certain variable annuities and other
individual products of the Travelers Life and Annuity unit of Citigroup, which
are sold by Smith Barney Financial Consultants. The Asset Management Group also
serves as the primary investment manager to 22 closed-end investment companies,
the shares of which are listed for trading on one or more securities exchanges.
At December 31, 2003, the Asset Management Group managed approximately $8.3
billion of closed-end investment company assets.
The Asset Management Group provides separate account discretionary and
non-discretionary investment management services to a wide variety of individual
and institutional clients, including private and public retirement plans,
endowments, foundations, banks, insurance companies, other corporations and
government agencies. Client relationships may be introduced through
cross-marketing and distribution opportunities within the Citigroup structure,
including Smith Barney's network of Financial Consultants, through the Asset
Management Group's own sales force, or through independent sources such as
consultant evaluations as well as through individual and institutional client
relationships.
The Asset Management Group also sponsors and oversees the portfolios of a large
number of unit investment trusts, which are unmanaged investment companies, the
portfolios of which are generally static. Such unit investment trusts may hold
domestic and foreign equity and debt securities, including municipal bonds.
Certain trusts are sponsored and overseen solely by the Asset Management Group;
other trusts are jointly sponsored through a syndicate of major broker-dealers
of which Citigroup Global Markets is a member. At December 31, 2003, outstanding
unit trust assets held by Citigroup Global Markets' clients were approximately
$5.6 billion, as compared to approximately $5.3 billion at December 31, 2002 and
approximately $6.9 billion at December 31, 2001.
5
OTHER INFORMATION
OPERATIONS BY GEOGRAPHIC AREA
For a summary of the Company's operations by geographic area, see Note 5 to the
consolidated financial statements.
DERIVATIVES AND RISK MANAGEMENT
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. Citigroup Global Markets enters
into various financial contracts involving future settlement, which are based
upon a predetermined principal or par value (referred to as the "notional"
amount). Such instruments include swaps, swap options, caps and floors, futures
contracts, forward currency contracts, option contracts and warrants.
Derivatives activities, like Company's other ongoing business activities, give
rise to market, credit and operational risks, although the Company also uses
derivative instruments to manage these risks in its other businesses. For a more
complete discussion of Citigroup Global Markets' use of derivative financial
instruments and certain of the related risks, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 1, 4, 7, 12, 14, 15 and 17 to the consolidated financial statements.
COMPETITION
The businesses in which Citigroup Global Markets is engaged are highly
competitive. The principal factors affecting competition in the investment
banking and brokerage industry are the quality and ability of professional
personnel and the relative prices of services and products offered. In addition
to competition from other investment banking firms, both domestic and
international, and securities brokerage companies and discount and on-line
securities brokerage operations, including regional firms in the United States,
there has been increasing competition from other sources, such as commercial
banks, insurance companies and other major companies that have entered the
investment banking and securities brokerage industry, in many cases through
acquisitions. Certain of those competitors may have greater capital and other
resources than CGMHI. Competitors of the mutual funds and asset management
groups include a large number of mutual fund management and sales companies,
asset management firms, banks and insurance companies. Competition in mutual
fund sales and investment management is based on a variety of factors, including
investment performance, service to clients and product design.
REGULATION
Certain of CGMHI's subsidiaries are subject to various securities and
commodities regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the jurisdictions in which they operate.
Some subsidiaries are registered as broker-dealers and as investment advisers
with the U.S. Securities and Exchange Commission (the "SEC") and as futures
commission merchants and as commodity pool operators with the Commodity Futures
Trading
6
Commission ("CFTC"). Certain of CGMHI's subsidiaries are also members of the New
York Stock Exchange, Inc. (the "NYSE") and other principal United States
securities exchanges, as well as the National Association of Securities Dealers,
Inc. ("NASD") and the National Futures Association ("NFA"), a not-for-profit
membership corporation designated as a registered futures association by the
CFTC. CGMHI's primary U.S. broker-dealer subsidiary, Citigroup Global Markets
Inc. ("CGMI"), is registered as a broker-dealer in all 50 states, the District
of Columbia, Puerto Rico, Taiwan and Guam. CGMI is also a primary dealer in U.S.
Treasury securities and a member of the principal United States futures
exchanges. CGMI is subject to extensive regulation, including minimum capital
requirements, which are promulgated and enforced by, among others, the SEC, the
CFTC, the NFA, the NASD, the NYSE, various other self-regulatory organizations
of which CGMI is a member and the securities administrators of the 50 states,
the District of Columbia, Puerto Rico and Guam. The SEC and the CFTC also
require certain registered broker-dealers (including CGMI) to maintain records
concerning certain financial and securities activities of affiliated companies
that may be material to the broker-dealer, and to file certain financial and
other information regarding such affiliated companies.
CGMHI's operations abroad are conducted through various subsidiaries and
affiliates, principally Citigroup Global Markets Limited in London and Nikko
Citigroup Limited (a joint venture formed in February 1999, between the Company
(49%) and The Nikko Securities Co., Ltd (51%)) in Tokyo. Its activities in the
United Kingdom, which include investment banking, trading, brokerage and asset
management services, are subject to the Financial Services and Markets Act 2000,
which regulates organizations that conduct investment businesses in the United
Kingdom (including imposing capital and liquidity requirements), and to the
rules of the Securities and Futures Authority and the Investment Management
Regulatory Organisation. Nikko Citigroup Limited is a registered foreign
securities company in Japan and, as such, its activities in Japan are subject to
Japanese law applicable to non-Japanese securities firms and are regulated
principally by the Financial Services Agency. These and other subsidiaries of
CGMHI are also members of various securities and commodities exchanges and are
subject to the rules and regulations of those exchanges. Citigroup Global
Markets' other offices are also subject to the jurisdiction of local financial
services regulatory authorities.
In connection with the mutual funds business, CGMHI and its subsidiaries must
comply with regulations of a number of regulatory agencies and organizations,
including the SEC, the NASD and regulatory agencies in several foreign
countries. CGMHI is the direct or indirect parent of investment advisers
registered and regulated under the Investment Advisers Act of 1940. Such
investment advisers are subject to the Investment Company Act of 1940 in
advising mutual funds registered under such Act. Under these Acts, the advisory
contracts between CGMHI's registered investment adviser subsidiaries and the
registered mutual funds they serve ("Registered Funds") would automatically
terminate upon an assignment of such contracts by the investment adviser. Such
an assignment would be presumed to have occurred if any party were to acquire
more than 25% of Citigroup's voting securities. In that event, consent to the
assignment from the shareholders of the Registered Funds involved would be
needed for the advisory relationships to continue. In addition, CGMHI's
affiliates, including its registered investment adviser subsidiaries, and the
Registered Funds are subject to certain restrictions in their dealings with each
other. For example, CGMI may act as broker to a Registered Fund in a transaction
involving an exchange-traded security only when that fund maintains procedures
that govern, among other things, the execution price of the
7
transaction and the commissions paid; it may not, however, conduct principal
transactions with a Registered Fund. Further, a Registered Fund may acquire
securities during the existence of an underwriting where CGMI is a principal
underwriter only in certain limited situations.
CGMI is a member of the Securities Investor Protection Corporation ("SIPC"),
which, in the event of liquidation of a broker-dealer, provides protection for
customers' securities accounts held by the firm of up to $500,000 for each
eligible customer, subject to a limitation of $100,000 for claims for cash
balances. To supplement the SIPC coverage, CGMI has purchased additional
protection, subject to a $150,000,000 per customer loss limit ($900,000 of which
may be in cash) and an aggregate loss limit of $600,000,000.
CAPITAL REQUIREMENTS
As a registered broker-dealer, CGMI is subject to the SEC's net capital rule,
Rule 15c3-1 (the "Net Capital Rule"), promulgated under the Exchange Act. CGMI
computes net capital under the alternative method of the Net Capital Rule, which
requires the maintenance of minimum net capital, as defined. A member of the
NYSE may be required to reduce its business if its net capital is less than 4%
of aggregate debit balances (as defined) and may also be prohibited from
expanding its business or paying cash dividends if resulting net capital would
be less than 5% of aggregate debit balances. Furthermore, the Net Capital Rule
does not permit withdrawal of equity or subordinated capital if the resulting
net capital would be less than 5% of such aggregate debit balances.
The Net Capital Rule also limits the ability of broker-dealers to transfer large
amounts of capital to parent companies and other affiliates. Under the Net
Capital Rule, equity capital cannot be withdrawn from a broker-dealer without
the prior approval of that broker-dealer's designated examining authority (in
the case of CGMI, the NYSE) in certain circumstances, including when net capital
after the withdrawal would be less than (i) 120% of the minimum net capital
required by the Net Capital Rule, or (ii) 25% of the broker-dealer's securities
position "haircuts," i.e., deductions from capital of certain specified
percentages of the market value of securities to reflect the possibility of a
market decline prior to disposition. In addition, the Net Capital Rule requires
broker-dealers to notify the SEC and the appropriate self-regulatory
organization two business days before a withdrawal of excess net capital if the
withdrawal would exceed the greater of $500,000 or 30% of the broker-dealer's
excess net capital, and two business days after a withdrawal that exceeds the
greater of $500,000 or 20% of excess net capital. Finally, the Net Capital Rule
authorizes the SEC to order a freeze on the transfer of capital if a
broker-dealer plans a withdrawal of more than 30% of its excess net capital and
the SEC believes that such a withdrawal would be detrimental to the financial
integrity of the firm or would jeopardize the broker-dealer's ability to pay its
customers.
Compliance with the Net Capital Rule could limit those operations of the Company
that require the intensive use of capital, such as underwriting and trading
activities and the financing of customer account balances, and also could
restrict CGMHI's ability to withdraw capital from its broker-dealer
subsidiaries, which in turn could limit CGMHI's ability to pay dividends and
make payments on its debt.
8
At December 31, 2003, CGMI had net capital, computed in accordance with the Net
Capital Rule, of $4.4 billion, which exceeded the minimum net capital
requirement by $4.0 billion. For further discussion of capital requirements
related to the Company's principal regulated subsidiaries, see Note 9 to the
consolidated financial statements.
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of CGMHI and
its subsidiaries is dependent upon a single customer or group of customers, the
loss of any one of which would have a materially adverse effect on CGMHI, and no
one customer or group of affiliated customers accounts for as much as 10% of
CGMHI's consolidated revenues.
At December 31, 2003, CGMHI had approximately 37,000 full-time and 2,000
part-time employees.
SOURCE OF FUNDS
For a discussion of CGMHI's sources of funds and maturities of the long-term
debt of CGMHI and its subsidiaries, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources," and Notes 6 and 7 to the consolidated financial statements.
TAXATION
For a discussion of tax matters affecting CGMHI and its operations, see Note 11
to the consolidated financial statements.
CODE OF ETHICS
CGMHI has adopted a code of ethics for financial professionals which applies to
CGMHI's principal executive officer, principal financial officer and principal
accounting officer. The code of ethics for financial professionals is listed on
the Exhibit Index to this Form 10-K.
9
ITEM 2. PROPERTIES.
CGMHI's principal executive offices are located at 388 Greenwich Street, New
York, New York. The Company owns two buildings located at 388 and 390 Greenwich
Street, New York, totaling approximately 2,300,000 square feet.
Most of the Company's other offices are located in leased premises, the leases
for which expire at various times. CGMHI believes that these facilities are
adequate for the purposes for which they are used and are well maintained. For
further information concerning leases, see Note 8 to the consolidated financial
statements.
ITEM 3. LEGAL PROCEEDINGS.
SETTLEMENT OF CERTAIN LEGAL AND REGULATORY MATTERS
On April 28, 2003, Citigroup Global Markets Inc. ("CGMI") (formerly known as
Salomon Smith Barney Inc.) announced final agreements with the SEC, the National
Association of Securities Dealers ("NASD"), the New York Stock Exchange ("NYSE")
and the New York Attorney General to resolve on a civil basis all of their
outstanding investigations into its research and IPO allocation and distribution
practices (the "Research Settlement"). To effectuate the Research Settlement,
the SEC filed a Complaint and Final Judgment in the United States District Court
for the Southern District of New York. On October 31, 2003, final judgment was
entered against CGMI and nine other investment banks. The NASD has accepted the
Letter of Acceptance, Waiver and Consent entered into with CGMI in connection
with the Research Settlement. In May 2003, the NYSE advised CGMI that the
Hearing Panel's Decision, in which it accepted the Research Settlement, had
become final. As required by the Research Settlement, CGMI has entered into
separate settlement agreements with 48 states and various U.S. territories and
is in settlement negotiations with the remaining 2 states.
ENRON CORP.
In April 2002, Citigroup Inc. ("Citigroup") was named as a defendant along with,
among others, commercial and/or investment banks, certain current and former
Enron officers and directors, lawyers and accountants in a putative consolidated
class action complaint that was filed in the United States District Court for
the Southern District of Texas seeking unspecified damages. The action, brought
on behalf of individuals who purchased Enron securities (NEWBY, ET AL. V. ENRON
CORP., ET AL.), alleges violations of Sections 11 and 15 of the Securities Act
of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended. Citigroup's motion to dismiss the complaint was denied in
December 2002, and Citigroup filed an answer in January 2003. In May 2003,
plaintiffs filed an amended consolidated class action complaint, and Citigroup
filed a motion to dismiss in June 2003. Plaintiffs filed a motion for class
certification in May 2003. Discovery is proceeding pending the Court's decision
on class certification.
10
Additional actions have been filed against Citigroup and certain of its
affiliates, including CGMI, along with other parties, including (i) actions
brought by a number of pension and benefit plans, investment funds, mutual
funds, and other individual and institutional investors in connection with the
purchase of Enron and Enron-related equity and debt securities, alleging
violations of various state and federal securities laws, state unfair
competition statutes, common law fraud, misrepresentation, unjust enrichment,
breach of fiduciary duty, conspiracy, and other violations of state law; (ii) an
action by banks that participated in two Enron revolving credit facilities,
originally alleging fraud, gross negligence, breach of implied duties, aiding
and abetting and civil conspiracy in connection with defendants' administration
of a credit facility with Enron; the Court granted Citigroup's motion to dismiss
with respect to all claims except for certain claims of aiding and abetting and
civil conspiracy; (iii) an action brought by several funds in connection with
secondary market purchases of Enron debt securities, alleging violations of the
federal securities law, including Section 11 of the Securities Act of 1933, as
amended, and claims for fraud and misrepresentation; (iv) a series of putative
class actions by purchasers of NewPower Holdings common stock, alleging
violations of the federal securities law, including Section 11 of the Securities
Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of
1934, as amended; (v) a putative class action brought by clients of CGMI in
connection with research reports concerning Enron, alleging breach of contract;
(vi) an action brought by a retirement and health benefits plan in connection
with the purchase of certain Enron notes, alleging violation of federal
securities law, including Section 11 of the Securities Act of 1933, as amended,
violations of state securities and unfair competition law, and common law fraud
and breach of fiduciary duty; (vii) an action brought by the Attorney General of
Connecticut in connection with various commercial and investment banking
services provided to Enron; (viii) an action brought by purchasers in the
secondary market of Enron bank debt, alleging claims for common law fraud,
conspiracy, gross negligence, negligence and breach of fiduciary duty; (ix) an
action brought by an investment company, alleging that Enron fraudulently
induced it to enter into a commodity sales contract; (x) five adversary
proceedings filed by Enron in its chapter 11 bankruptcy proceedings to recover
alleged preferential payments and fraudulent transfers involving Citigroup,
certain of its affiliates and other entities, and to disallow or to subordinate
claims that Citigroup and other entities have filed against Enron; (xi)
third-party actions brought by former Enron officers and directors, alleging
violation of state securities and other laws and a right to contribution from
Citigroup, in connection with claims under state securities and common law
brought against the officers and directors and others; and (xii) a purported
class action brought on behalf of Connecticut municipalities, alleging violation
of state statutes, conspiracy to commit fraud, aiding and abetting a breach of
fiduciary duty and unjust enrichment. Several of these cases have been
consolidated or coordinated with the NEWBY action and are now generally inactive
pending the Court's decision on the pending motion on class certification.
DYNEGY INC.
On June 6, 2003, the complaint in a pre-existing putative class action pending
in the United States District Court for the Southern District of Texas (IN RE:
DYNEGY INC. SECURITIES LITIGATION) brought by purchasers of publicly traded debt
and equity securities of Dynegy Inc. was amended to add Citigroup, Citibank and
CGMI as defendants. The plaintiffs allege violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended, against the Citigroup
defendants.
11
WORLDCOM, INC.
Citigroup, CGMI and certain executive officers and current and former employees
have been named as defendants -- along with twenty-two other investment banks,
certain current and former WorldCom officers and directors, and WorldCom's
former auditors -- in a consolidated class action brought on behalf of
individuals and entities who purchased or acquired publicly traded securities of
WorldCom between April 29, 1999 and June 25, 2002 (IN RE: WORLDCOM INC.
SECURITIES LITIGATION). The class action complaint asserts claims against CGMI
under (i) Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, in
connection with certain bond offerings in which it served as underwriter, and
(ii) Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated under Section 10(b), alleging that it
participated in the preparation and/or issuance of misleading WorldCom
registration statements and disseminated misleading research reports concerning
WorldCom stock. On May 19, 2003, the Court denied CGMI's motion to dismiss the
consolidated class action complaint. On October 24, 2003, the Court granted the
plaintiffs' motion for class certification. On December 31, 2003, the United
States Court of Appeals for the Second Circuit granted CGMI's petition seeking
leave for an interlocutory appeal of the class certification order. The District
Court has scheduled trial to begin in January 2005.
Pursuant to an order entered May 28, 2003, the District Court consolidated
approximately seventy individual actions with the class action for pretrial
proceedings. Certain individual plaintiffs have appealed the district court's
order denying their motions to remand. The claims asserted in these individual
actions are substantially similar to the claims alleged in the class action and
assert state and federal securities law claims based on CGMI's research reports
concerning WorldCom and/or CGMI's role as an underwriter in WorldCom offerings.
Numerous other actions asserting claims against CGMI in connection with its
research reports about WorldCom and/or its role as an investment banker for
WorldCom are pending in other federal and state courts. These actions have been
remanded to various state courts, are pending in other federal courts, or have
been conditionally transferred to the United States District Court for the
Southern District of New York to be consolidated with the class action. In
addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its WorldCom research reports are pending in numerous
arbitrations around the country. These arbitration proceedings assert claims
that are substantially similar to the claims asserted in the class action.
GLOBAL CROSSING
On or about January 28, 2003, lead plaintiff in a consolidated putative class
action in the United States District Court for the Southern District of New York
(IN RE: GLOBAL CROSSING, LTD. SECURITIES LITIGATION) filed a consolidated
complaint on behalf of purchasers of the securities of Global Crossing and Asia
Global Crossing, which names as defendants, among others, Citigroup, CGMI, CGMHI
and certain executive officers and current and former employees. The putative
class action complaint asserts claims against these Citigroup defendants under
(i) Sections 11, 12(a)(2) and 15 of the
12
Securities Act of 1933, as amended, and Section 14(a) of the Securities Exchange
Act of 1934, as amended and Rule 14A-9A promulgated thereunder, in connection
with certain offerings in which CGMI served as underwriter and in connection
with certain transactions in which CGMI issued fairness opinions, and (ii)
Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5 promulgated thereunder, alleging that they disseminated misleading
research reports concerning Global Crossing and Asia Global Crossing. The
Citigroup-related defendants have moved to dismiss these claims.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its Global Crossing research reports are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the putative
class action.
ADELPHIA COMMUNICATIONS CORPORATION
On July 6, 2003, an adversary proceeding was filed by the Official Committee of
Unsecured Creditors on behalf of Adelphia Communications Corporation against
certain lenders and investment banks, including CGMI, Citibank, N.A., Citicorp
USA, Inc., and Citigroup Financial Products, Inc. (together, the Citigroup
Parties). The complaint alleges that the Citigroup Parties and numerous other
defendants committed acts in violation of the Bank Holding Company Act and the
common law. The complaints seek equitable relief and an unspecified amount of
compensatory and punitive damages. In November 2003, a similar adversary
proceeding was filed by the Equity Holders Committee of Adelphia.
In addition, CGMI is among the underwriters named in numerous civil actions
brought to date by investors in Adelphia debt securities in connection with
Adelphia securities offerings between September 1997 and October 2001. Three of
the complaints also assert claims against Citigroup Inc. and Citibank, N.A. All
of the complaints allege violations of federal securities laws, and certain of
the complaints also allege violations of state securities laws and the common
law. The complaint seeks unspecified damages. In December 2003, a second amended
complaint was filed and consolidated before the same judge of the United States
District Court for the Southern District of New York.
MUTUAL FUNDS
In 2003, several issues in the mutual fund industry have come under the scrutiny
of federal and state regulators. The Company has received subpoenas and other
requests for information from various government regulators regarding market
timing, fees, sales practices and other mutual fund issues in connection with
various investigations, including an investigation by the Securities and
Exchange Commission and a United States Attorney into the arrangements under
which we became the transfer agent for many of the mutual funds in the Smith
Barney fund complex. We are cooperating fully with all such reviews.
RESEARCH
Since May 2002, Citigroup, CGMI and certain executive officers and current and
former employees have been named as defendants in numerous putative class action
complaints, individual actions, and arbitration demands by purchasers of various
securities, alleging that they violated federal securities law, including
Sections 10 and 20 of the Securities Exchange Act of
13
1934, as amended, and certain state laws for allegedly issuing research reports
without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with companies in connection with published investment
research, including AT&T Corp., Winstar Communications, Inc., Rhythm
NetConnections, Inc., Level 3 Communications, Inc., Metromedia Fiber Network,
Inc., XO Communications, Inc., Williams Communications Group Inc., and Qwest
Communications International Inc. The putative class actions relating to
research of these companies are pending before a single judge in the United
States District Court for the Southern District of New York for coordinated
proceedings. The Court has consolidated these actions into separate proceedings
corresponding to the companies named above. On January 30, 2004, plaintiffs in
the Rhythm NetConnections, Inc. action voluntarily dismissed their complaint
with prejudice.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its research reports on these companies are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the class and
individual actions.
Three additional putative class actions are pending in federal courts against
Citigroup and certain of its affiliates, including CGMI, and certain of their
current and former directors, officers and employees, along with other parties,
on behalf of persons who maintained accounts with CGMI. These actions assert,
among other things, common law claims, claims under state statutes, and claims
under the Investment Advisers Act of 1940, for allegedly failing to provide
objective and unbiased investment research and investment management, seeking,
among other things, return of fees and commissions. In all three of these
actions, the Citigroup-related defendants have moved to dismiss the complaints.
In two of these putative class actions, these motions were granted and appeals
are now pending.
In May 2003, the SEC, NYSE and NASD issued a subpoena and letters to CGMI
requesting documents and information with respect to their continuing
investigation of individuals in connection with the supervision of the research
and investment banking departments of CGMI. Other parties to the Research
Settlement have received similar subpoena and letters.
On June 23, 2003, the West Virginia Attorney General filed an action against
CGMI and nine other firms that were parties to the Research Settlement. The West
Virginia Attorney General alleges that the firms violated the West Virginia
Consumer Credit and Protection Act in connection with their research activities
and seeks monetary penalties. CGMI and the other defendants have moved to
dismiss the action.
OTHER
In March 1999, a complaint seeking in excess of $250 million was filed by a
hedge fund and its investment advisor against CGMI in the Supreme Court of the
State of New York, County of New York (MKP MASTER FUND, LDC ET AL. V. SALOMON
SMITH BARNEY INC.). Plaintiffs allege that while acting as their prime broker
CGMI breached its contracts with plaintiffs, converted plaintiffs' monies and
engaged in tortious conduct, including breaching its fiduciary duties. In
October 1999, the court dismissed plaintiffs' tort claims, including the breach
of fiduciary duty claims, but allowed the breach
14
of contract and conversion claims to stand. In December 1999, CGMI filed an
answer and asserted counterclaims against the investment advisor. In response to
plaintiffs' motion to strike the counterclaims, in January 2000, CGMI amended
its counterclaims against the investment advisor to seek indemnification and
contribution. Plaintiffs moved to strike CGMI's amended counterclaims in
February 2000. In September 2000, the court denied plaintiffs' motion to dismiss
CGMI's counterclaims based on indemnification and contribution. In July 2003,
the court granted CGMI's motion for summary judgment and plaintiffs subsequently
filed a notice of appeal.
In April 2002, consolidated amended complaints were filed against CGMI and other
investment banks named in numerous putative class actions filed in the United
States District Court for the Southern District of New York, alleging violations
of certain federal securities laws (including Section 11 of the Securities Act
of 1933, as amended, and Section 10(b) of the Securities Exchange Act of 1934,
as amended) with respect to the allocation of shares for certain initial public
offerings and related aftermarket transactions and damage to investors caused by
allegedly biased research analyst reports. On February 19, 2003, the Court
issued an opinion denying defendants' motion to dismiss. Also filed in the
Southern District of New York against CGMI and other investment banks were
several putative class actions that were consolidated into a single class
action, alleging violations of certain federal and state antitrust laws in
connection with the allocation of shares in initial public offerings when acting
as underwriters. On November 3, 2003, the Court granted CGMI's motion to dismiss
the consolidated amended complaint in the antitrust case.
Additional lawsuits containing similar claims to those described above may be
filed in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to General Instruction I of Form 10-K, the information required by Item
4 is omitted.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES.
All of the outstanding common stock of the Company is owned by Citigroup Inc.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction I of Form 10-K, the information required by Item
6 is omitted.
15
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SETTLEMENT OF CERTAIN LEGAL AND REGULATORY MATTERS
On July 28, 2003, Citigroup entered into final settlement agreements with the
Securities and Exchange Commission ("SEC"), the Office of the Comptroller of the
Currency ("OCC"), the Federal Reserve Bank of New York and the Manhattan
District Attorney's Office that resolve on a civil basis their investigations
into Citigroup's structured finance work for Enron. Citigroup also announced
that its settlement agreement with the SEC concludes that agency's
investigations into certain Citigroup work with Dynegy. The agreements were
reached by Citigroup (and, in the case of the agreement with the OCC, Citibank,
N.A.) without admitting or denying any wrongdoing or liability, and the
agreements do not establish wrongdoing or liability for the purpose of civil
litigation or any other proceeding. The Company and certain other Citigroup
subsidiaries have paid from previously established reserves an aggregate amount
of $145.5 million in connection with these settlements.
On April 28, 2003, Salomon Smith Barney Inc., now named Citigroup Global Markets
Inc. ("CGMI"), announced final agreements with the SEC, 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 ("the Research
Settlement"). CGMI reached these final settlement agreements without admitting
or denying any wrongdoing or liability. The Research Settlement does not
establish wrongdoing or liability for purposes of any other proceeding. The
Company has paid from previously established reserves an aggregate amount of
$300 million and committed to spend an additional $75 million to provide
independent third-party research at no charge to clients in connection with
these settlements.
CHARGE FOR REGULATORY AND LEGAL MATTERS
During the 2002 fourth quarter, the Company recorded an $863 million after-tax
charge related to the establishment of reserves for regulatory settlements and
related civil litigation.
EVENTS OF SEPTEMBER 11, 2001
As a result of the September 11, 2001 terrorist attack, the Company experienced
a disruption in business, as well as significant property loss. The Company and
its parent, Citigroup, were insured against certain of these losses. The Company
initially recorded insurance recoveries up to the net book value of the assets
written off. These items were recorded in the consolidated statement of income
in "Other operating and administrative expenses." The Company recorded a
receivable of $199 million relating to these insurance recoveries in 2001.
During 2002, additional
16
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
insurance recoveries were recorded when realized. Through December 31, 2003, the
Company and its parent collected all of this balance.
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies, including a discussion of
recently-issued accounting pronouncements. Certain of these policies, as well as
estimates made by management, are considered to be important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments and estimates, some of which may
relate to matters that are inherently uncertain. These policies include
accounting for securitizations, the valuation of financial instruments and
contractual commitments, and legal reserves. Additional information about these
policies can be found in Note 1 to the consolidated financial statements.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 43.
SECURITIZATIONS
Securitization is a process by which a legal entity issues certain securities to
investors, which securities pay a return based on the principal and interest
cash flows from a pool of loans or other financial assets. The Company
securitizes financial assets that it originated and/or purchased and also
assists its clients in securitizing the clients' financial assets. The Company
may provide administrative, underwriting, liquidity facilities and/or other
services to the resulting securitization entities. See the Off-Balance Sheet
Arrangements section of Management's Discussion and Analysis for additional
information about our securitization programs.
There are two key accounting determinations that must be made relating to
securitizations. In the case where the Company originated or previously owned
the financial assets transferred to the securitization entity, a decision must
be made as to whether that transfer would be considered a sale under accounting
principles generally accepted in the United States of America. This would result
in the transferred assets being removed from the Company's consolidated
statement of financial condition with a gain or loss recognized. Alternatively,
the transfer would be considered a financing resulting in recognition of a
liability in the Company's consolidated statement of financial condition. The
second key determination to be made is whether the securitization entity should
be consolidated by the Company and be included in the Company's consolidated
financial statements or whether the entity is sufficiently independent that it
does not need to be consolidated.
17
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
If the securitization entity's activities are sufficiently restricted to meet
certain accounting requirements to be considered a qualifying special purpose
entity ("QSPE"), the securitization entity is not consolidated by the seller of
the transferred assets. In January 2003, the Financial Accounting Standards
Board ("FASB") issued a new interpretation on consolidation that was adopted by
the Company on July 1, 2003. Under this interpretation, FASB Interpretation No.
46, "Consolidation of Variable Interest Entities" ("FIN 46"), if the
securitization entities other than QSPE's meet the definition of a variable
interest entity ("VIE"), the Company must evaluate whether it is the primary
beneficiary of the entity and, if so, must consolidate it. The entity would be
considered a VIE if it requires additional subordinated support or if the equity
investors lack certain characteristics of a controlling financial interest. In
December 2003, FASB issued a revised version of FIN 46 ("FIN 46-R"), which the
Company will adopt in the first quarter of 2004. This revised interpretation may
change certain of the consolidation determinations reached under FIN 46. Most of
the Company's securitization transactions are structured to meet the criteria
for sale accounting and non-consolidation.
The Company's securitization activities are conducted on behalf of our clients
and to generate revenues for services provided to the special purpose entities
("SPEs"). The Company uses SPEs for securitizing mortgage-backed securities and
clients' trade receivables, to create investment opportunities for clients
through collateralized debt obligations ("CDOs"), and to meet other client needs
through structured financing transactions. All the mortgage-backed securities
transactions use QSPEs, as do certain CDOs and structured finance transactions.
At December 31, 2003, the Company was involved with SPEs with assets of $709.2
billion, including SPEs with assets of $4.0 billion that were consolidated by
the Company and QSPEs with assets amounting to $426 billion. This compares with
December 31, 2002, where the Company was involved with SPEs with assets of
$479.1 billion, including SPEs with assets of $3.0 billion that were
consolidated by the Company and QSPEs with assets amounting to $247.4 billion.
Additional information on the Company's securitization activities can be found
in Note 17 to the consolidated financial statements.
VALUATIONS OF FINANCIAL INSTRUMENTS AND CONTRACTUAL COMMITMENTS
Financial instruments and contractual commitments include fixed maturity and
equity securities, commodities, derivatives and structured securities. The
Company's policy is to carry its financial instruments and contractual
commitments at market value, or when market prices are not readily available,
fair value. For the substantial majority of our portfolios, fair values are
determined based upon quoted prices or validated models with externally
verifiable model inputs. Changes in the fair value of trading account assets and
liabilities are recognized in earnings. Changing economic conditions - global,
regional, or related to specific issuers or industries - could adversely affect
these values.
18
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
If available, quoted market prices are generally the best indication of value.
If quoted market prices are not available for fixed maturity securities, equity
securities, derivatives or commodities, the Company discounts the expected cash
flows using market interest rates commensurate with the credit quality and
duration of the investment. Alternatively, matrix or model pricing may be used
to determine an appropriate fair value. It is the Company's policy that all
models used to produce valuations for the published financial statements be
validated by qualified personnel independent from those who created the models.
The determination of market or fair value considers various factors, including
time value and volatility factors, underlying options, warrants, and
derivatives; price activity for equivalent synthetic instruments; counterparty
credit quality; the potential impact on market prices or fair value of
liquidating the Company's positions in an orderly manner over a reasonable
period of time under current market conditions; and derivative transaction
maintenance costs during the period. For derivative transactions, trading profit
at inception is recognized when the fair value of that derivative is obtained
from a quoted market price, supported by comparison to other observable market
transactions, or based upon a valuation technique incorporating observable
market data. The Company defers trade-date gains or losses on derivative
transactions where the fair value is not determined based upon observable market
transactions and market data. The deferral is recognized in income when the
market data becomes observable or over the life of the transaction. Changes in
assumptions could affect the fair value of financial instruments and contractual
commitments.
In certain situations (primarily equity securities), including thinly-traded
securities, large block holdings, restricted shares or other special situations,
the quoted market price is adjusted to produce an estimate of the attainable
fair value for the securities. For investments that are not publicly-traded,
estimates of fair value are made based upon a review of the investee's financial
results, condition and prospects, together with comparisons to similar companies
for which quoted market prices are available.
For the Company's trading portfolios amounting to assets of $153.8 billion and
$108.1 billion and liabilities of $74.6 billion and $61.7 billion at December
31, 2003 and 2002, respectively, fair values were verified in the following
ways: externally verified via comparison to quoted market prices or third-party
broker quotations; by using models that were validated by qualified personnel
independent of the area that created the models and inputs that were verified by
comparison to third party broker quotations or other third party sources; or by
using alternative procedures such as comparison to comparable securities and/or
subsequent liquidation prices. At December 31, 2003 and 2002, respectively,
approximately 95% and 97% of the trading portfolios gross assets and liabilities
were considered verified and approximately 5% and 3% were considered unverified.
Of the unverified assets at December 31, 2003 and 2002, respectively,
approximately 69% and 65% consists of cash products, where independent quotes
were not available and/or alternative procedures were not feasible, and 31% and
35% consists of derivative products where either the model was not validated or
the inputs were not verified due to lack of appropriate market quotations. Such
values are actively reviewed by management.
19
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In determining the fair values of our securities portfolios, management also
reviews the length of time trading positions have been held to identify aged
inventory. During 2003, the average monthly aged inventory designated as
available for immediate sale was approximately $5.3 billion compared to $4.2
billion in 2002. Inventory positions that are aged and whose values are
unverified amounted to approximately $2.1 billion at both December 31, 2003 and
2002. The fair value of the aged inventory is actively monitored and, where
appropriate, is discounted to reflect the implied illiquidity for positions that
have been available for immediate sale longer than 90 days. At December 31, 2003
and 2002, such valuation adjustments amounted to $64 million and $55 million,
respectively.
LEGAL RESERVES
The Company is subject to legal, regulatory, and other proceedings and claims
arising from conduct in the ordinary course of business. These proceedings
include actions brought against the Company in its various roles, including
acting as an underwriter, broker-dealer or investment adviser. Reserves are
established for legal and regulatory claims based upon the probability and
estimability of losses and to fairly present, in conjunction with the
disclosures of these matters in the Company's financial statements and SEC
filings, management's view of the Company's exposure. The Company reviews
outstanding claims with internal as well as external counsel to assess
probability and estimates of loss. The risk of loss is reassessed as new
information becomes available and reserves are adjusted, as appropriate. The
actual cost of resolving a claim may be substantially higher than the amount of
the recorded reserve. See Note 13 to the consolidated financial statements and
the discussion of "Legal Proceedings" beginning on page 10.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 to the consolidated financial statements for a discussion of the
future application of accounting standards.
RESULTS OF OPERATIONS
In 2003, the Company recorded net income of $2,893 million compared to $1,787
million and $2,627 million for the years ended December 31, 2002 and 2001,
respectively. The increase in 2003 reflects an improvement in the financial
markets during the year. During 2002, the Company recorded an after-tax charge
for legal and regulatory settlements of $863 million which resulted in a decline
in net income. Revenues, net of interest expense, were $15.7 billion in 2003
compared to $14.4 billion and $15.4 billion in 2002 and 2001, respectively.
In 2002, the Company recorded a cumulative after-tax loss of $24 million (net of
tax benefit of $16 million) which related to the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets." Net income for 2001 was
20
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
reduced by a cumulative after tax loss of $1 million, which related to the
adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
Principal transactions revenues contributed largely to the increase in revenue
in 2003 due to an increase in fixed income trading. Investment banking revenues
increased as a result of increases in high-grade debt and high yield
underwriting, partially offset by a decrease in merger and acquisition fees.
Included in investment banking revenues for 2002 were fees from the Travelers
Property Casualty Corp. initial public offering. Commission revenues decreased
in 2003 compared to 2002 due to lower over-the-counter ("OTC") commissions.
Total non-interest expenses decreased 3% in 2003 compared to 2002. The decrease
was primarily the result of a charge to earnings in 2002 relating to the
establishment of reserves for the cost of the previously announced proposed
settlement-in-principle with regulators and toward estimated costs of the
private litigation related to the matters that were the subject of the
settlement as well as the regulatory inquiries and private litigation related to
Enron. The charge was included in "Other operating and administrative expenses"
in the accompanying consolidated statement of income. The decrease was partially
offset by an increase in compensation and benefits expense in 2003 reflecting
increased revenues of the Company.
Principal transactions revenues contributed largely to the decline in revenue in
2002 compared to 2001 due to decreases in global equities and fixed income
trading. For fixed income, the decline was more than offset by increased net
interest revenue related to fixed income trading activities. Investment banking
revenues decreased 13% compared to 2001 as a result of declines in high-grade
debt underwriting and merger and acquisition fees, partially offset by an
increase in equity underwriting. Commission revenues increased in 2002 compared
to 2001 due to higher OTC commissions, offset to an extent by a decrease in
listed commissions. Total non-interest expenses increased 2%, excluding the
restructuring charge in 2002 compared to 2001. The increase was primarily the
result of a charge to earnings relating to the establishment of reserves for the
cost of the previously announced proposed settlement-in-principle with
regulators and toward estimated costs of the private litigation related to the
matters that were the subject of the settlement as well as the regulatory
inquiries and private litigation related to Enron. The increase was partially
offset by a decrease in compensation and benefits and savings realized from
restructuring actions initiated in the first and second quarters of 2001.
Following is a discussion of the results of operations of the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
21
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INVESTMENT SERVICES
Dollars in millions
For the year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------
Revenues, net of interest expense $8,862 $7,481 $8,209
- -----------------------------------------------------------------------------------
Total non-interest expenses 5,766 6,154 5,877
- -----------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 3,096 1,327 2,332
- -----------------------------------------------------------------------------------
Provision for income taxes 1,173 588 829
- -----------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle (net of tax benefit of $1) - - (1)
- -----------------------------------------------------------------------------------
Net income $1,923 $ 739 $1,502
===================================================================================
The Company's investment services segment recorded net income in 2003 of $1.92
billion compared to $739 million and $1.50 billion for the years ended December
31, 2002 and 2001, respectively. During 2002 and 2001, the segment recorded a
restructuring credit of $9 million ($5 million net of tax) and a restructuring
charge of $107 million ($64 million net of tax), respectively.
Revenues, net of interest expense, increased 18% to $8.9 billion in 2003 and
decreased 9% to $7.5 billion in 2002. Following is a discussion of the
significant changes to the segment's revenues. Principal transactions revenues
increased significantly in 2003 as a result of an increase in global fixed
income trading. In 2002, principal transactions revenue decreased significantly
as the result of decreases in global equities and fixed income trading. For
fixed income in 2002, the decline was more than offset by increased net interest
revenue related to fixed income trading activities. For further information
related to principal transactions revenues, see Note 4 to the consolidated
financial statements. Investment banking revenues increased in 2003 compared to
2002 as a result of increases in high grade debt and high yield underwritings
offset by declines in equity underwriting and merger and acquisition fees. In
2002, investment banking revenues declined compared to 2001 as a result of a
decrease in high-grade debt underwritings and merger and acquisition fees. These
decreases were partially offset by an increase in equity underwriting. Included
in investment banking revenues in 2002 were fees from the Travelers Property
Casualty Corp. initial public offering which occurred in the first quarter of
2002. Commission revenues were down in 2003, as compared to 2002, due to a
decrease in listed commissions. Commission revenues increased in 2002, compared
to 2001, as a result of an increase in OTC commissions.
Net interest and dividends increased in 2003 and 2002. In 2003, the increase
primarily related to increased dividend income and widening spreads in equity
financing. In 2002, the increase was due primarily to widening spreads in fixed
income products, particularly mortgage-backed securities.
22
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Total non-interest expenses, excluding restructuring-related items, decreased 6%
in 2003 compared to 2002 primarily due to a charge related to the establishment
of reserves in 2002 for the proposed settlement-in-principle with regulators and
toward estimated costs of the private litigation related to the matters that
were the subject of the settlement as well as the regulatory inquiries and
private litigation related to Enron. Also contributing to the decrease were
reduced communications, occupancy and equipment and floor brokerage and other
production expenses. These decreases were partially offset by an increase in
compensation and benefits expense reflecting increased revenues of the Company.
In 2002, total non-interest expenses, excluding restructuring related items,
increased 6% as a result of the establishment of reserves for the proposed
settlement-in-principle with regulators and toward estimated costs of the
private litigation related to the matters that were the subject of the
settlement as well as the regulatory inquiries and private litigation related to
Enron. This increase was partially offset by a decrease in compensation and
benefit expense, reduced communications, occupancy and floor brokerage expense
and savings from restructuring actions initiated during the first and second
quarters of 2001. Also partially offsetting the increase in 2002 was the absence
of goodwill and other indefinite-lived intangible amortization due to the
adoption of SFAS 141 and SFAS 142. For further discussion of the
restructuring-related items, net, see Note 2 to the consolidated financial
statements.
PRIVATE CLIENT SERVICES
Dollars in millions
For the year ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------
Revenues, net of interest expense $5,746 $5,768 $6,034
- --------------------------------------------------------------------------------------------------
Total non-interest expenses 4,552 4,536 4,677
- --------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,194 1,232 1,357
- --------------------------------------------------------------------------------------------------
Provision for income taxes 460 459 492
- --------------------------------------------------------------------------------------------------
Net income $ 734 $ 773 $ 865
==================================================================================================
Private Client Services net income was $734 million in 2003 compared to $773
million in 2002 and $865 million in 2001. Private Client Services net income
decreased $39 million or 5% during 2003 primarily reflecting decreases in
customer transaction volumes, net interest revenue on security-based lending and
asset-based fee revenue. Net income of $773 million in 2002 decreased $92
million or 11% compared to 2001 primarily due to lower asset-based fee revenue,
a decline in net interest revenue on securities-based lending and lower
transaction volumes, which were partially offset by lower production-related
compensation and the impact of continued expense control initiatives.
Revenues, net of interest expense, decreased $22 million in 2003 to $5.7
billion, primarily due to declines in fees from managed accounts, lower net
interest revenue on security-based lending and lower customer transaction
23
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
volumes. Revenues, net of interest expense, decreased $266 million or 4% in 2002
to $5.8 billion, primarily due to declines in fees from managed accounts, lower
net interest revenue on security-based lending and lower customer transaction
volumes, partially offset by higher revenue from the bank deposit program.
Total assets under fee-based management were $208.8 billion, $157.8 billion and
$185.0 billion as of December 31, 2003, 2002 and 2001, respectively (see table
below for detail of Private Client Services assets under fee-based management).
The increase in 2003 was primarily due to an increase in market values, while
the decrease in 2002 resulted from decreased market values. Total client assets,
including assets under fee-based management of $1,068 billion in 2003 increased
$177 billion or 20% from $891 billion in 2002. The increase in 2003 primarily
reflects market appreciation and net positive flows of $28 billion. Balances in
Smith Barney's bank deposit program totaled $41 billion in 2003 which was
essentially unchanged from 2002.
Operating expenses were essentially unchanged in 2003 compared to 2002 and
decreased $141 million in 2002 compared to 2001. This decrease primarily
reflects lower production-related compensation resulting from decreased
revenues. The decrease for 2002, as compared to 2001, reflects a prior-year
pre-tax restructuring-related charge of $9 million. For further information
concerning the restructuring-related items, see Note 2 to the consolidated
financial statements.
Assets under fee-based management were as follows:
Dollars in billions
At December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------
Financial Consultant managed accounts $ 71.7 $ 52.2 $ 58.6
Consulting Group and internally managed assets 137.1 105.6 126.4
- --------------------------------------------------------------------------------------
Total assets under fee-based management (1) $208.8 $157.8 $185.0
- --------------------------------------------------------------------------------------
(1) Includes assets managed jointly with Citigroup Asset Management.
24
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ASSET MANAGEMENT
Dollars in millions
For the year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------
Revenues, net of interest expense $1,054 $1,157 $1,144
- ---------------------------------------------------------------------------------
Total non-interest expenses 671 663 713
- ---------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 383 494 431
- ---------------------------------------------------------------------------------
Provision for income taxes 147 195 171
- ---------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle (net of tax benefit of $16) - (24) -
- ---------------------------------------------------------------------------------
Net income $ 236 $ 275 $ 260
=================================================================================
The asset management segment revenues, net of interest expense, of $1.05
billion, $1.16 billion and $1.14 billion for the years ended 2003, 2002, and
2001, respectively, decreased $103 million or 9% from 2002 and increased $13
million or 1% from 2001. The primary revenue component for the asset management
segment is asset management and administration fees, which were $1.02 billion in
2003, $1.12 billion in 2002 and $1.11 billion in 2001. The results for 2003
reflect the impact of weakness in global equity markets on average, reduced fee
revenues and the impact of a decrease in U.S. retail money market funds. The
reduced fee revenues primarily resulted from changes in product mix, revenue
sharing arrangements with internal Citigroup distributors and a change in
presentation of certain fee-sharing arrangements which decreased revenues and
expenses by $41 million. Assets under management for the segment increased 18%
in 2003 and decreased 6% in 2002 (see the table on the following page for
details of assets under fee-based management).
Total non-interest expenses were $671 million in 2003 compared to $663 million
in 2002 and $713 million in 2001. The 1% increase in 2003 is primarily due to
the increase in variable expenses and higher expenses related to legal matters.
The 7% decrease in 2002 was driven by the absence of goodwill/intangible
amortization as a result of adopting SFAS 141 and SFAS 142, which offset the
increase in variable expenses primarily relating to distribution fees. Included
in total expenses in 2001 were restructuring charges of $1 million. For further
information concerning the restructuring-related items, net, see Note 2 to the
consolidated financial statements.
25
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Assets under fee-based management were as follows:
Dollars in billions
At December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Money market funds $ 93.9 $ 97.0 $ 97.7
Mutual funds 89.7 68.7 74.9
Managed accounts 114.4 85.6 93.6
Unit investment trusts held in client accounts 5.6 5.3 6.9
- --------------------------------------------------------------------------------
Total $303.6 $256.6 $273.1
- --------------------------------------------------------------------------------
OUTLOOK
The Company's business is significantly affected by the levels of activity in
the securities markets, which, in turn, are influenced by the level and trend of
interest rates, the general state of the global economy and the national and
worldwide political environments, among other factors.
26
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAPITAL AND LIQUIDITY MANAGEMENT
Management of capital and liquidity is critical to a financial institution such
as the Company. It is the policy of the Company to maintain sufficient capital
to support all business initiatives and to ensure access to funding under all
market conditions. The confidence of creditors and counterparties in the
Company's ability to perform pursuant to its contractual obligations is
essential to the Company's continued success.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $361 billion at December 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
significantly from period to period.
The Company's 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 are 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
$234.5 billion at December 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
funding source. Sources of short-term uncollateralized borrowings include
commercial paper, unsecured bank borrowings, promissory notes and corporate
loans. Short-term uncollateralized borrowings totaled $21.6 billion at December
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 $4.85 billion 364-day committed uncollateralized revolving
line of credit with unaffiliated banks. Commitments to lend under this facility
terminate in May 2004. Any borrowings under this facility would mature in
27
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
May 2006. The Company also has $1.88 billion in committed uncollateralized
364-day facilities with unaffiliated banks that extend through various dates in
2004, and a $100 million 364-day collateralized facilities that extend through
December 2004. The Company may borrow under these revolving credit facilities at
various interest rate options (LIBOR or base rate) and compensates the banks for
these facilities through facility fees. At December 31, 2003, there were no
outstanding borrowings under these facilities. The Company also has committed
long-term financing facilities with unaffiliated banks. At December 31, 2003,
the Company had drawn down the full $1.7 billion then available under these
facilities. 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
agreements). At December 31, 2003, this requirement was exceeded by
approximately $7.5 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.
Unsecured term debt is a significant component of the Company's long-term
capital. Term debt totaled $43.7 billion at December 31, 2003, compared with
$32.3 billion at December 31, 2002. The Company utilizes interest rate swaps to
convert the majority of its fixed rate term debt used to fund inventory-related
working capital requirements into variable rate obligations. Term debt issuances
denominated in currencies other than the U.S. dollar that are not used to
finance assets in the same currency are effectively converted to U.S. dollar
obligations through the use of cross-currency swaps and forward currency
contracts. At December 31, 2003, the average remaining maturity of the Company's
term debt was 5.2 years, including pass-through entities whose debt of $1.6
billion matures in periods ranging from 2004 to 2097 and are required to be
consolidated under accounting principles generally accepted in the United States
of America. The average remaining maturity of the Company's term debt excluding
these pass-through entities was 4.6 years at December 31, 2003. See Note 7 to
the consolidated financial statements for additional information regarding term
debt and an analysis of the impact of interest rate swaps on term debt.
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.
28
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is involved with several types of off-balance sheet arrangements,
including SPEs, lines and letters of credit, and loan commitments. The volume
and types of our loan commitments and lines and letters of credit are described
in the following section.
SECURITIZATIONS AND SPEs
The principal uses of SPEs are to obtain sources of liquidity while reducing
credit risk by securitizing the Company's financial assets, to assist our
clients in securitizing their financial assets, or to create customized
investment products for specific investors.
SPEs may be organized as trusts, partnerships, or corporations. In a
securitization, the company transferring assets to an SPE converts those assets
into cash before they would have been realized in the normal course of business.
The SPE obtains the cash needed to pay the transferor for the assets received by
issuing securities to investors in the form of debt instruments, certificates,
commercial paper, and other notes of indebtedness. Investors usually have
recourse to the assets in the SPE, and often benefit from other enhancements,
such as excess assets in the SPE, a liquidity facility, or credit insurance.
Accordingly, the SPE can typically obtain a more favorable credit rating from
rating agencies, such as Standard and Poor's, Moody's Investors Service, or
Fitch Ratings, than the transferor could obtain for its own debt issuances,
resulting in less expensive financing costs. The cash proceeds from the sale are
used for other business purposes. The SPE may also enter into derivative
contracts, typically a swap, in order to convert the yield or currency of the
underlying assets to match the needs of the SPE's investors or limit or change
the credit risk of the SPE. The company may be the counterparty to any such
derivative. The securitization process enhances the liquidity of the financial
markets, may spread credit risk among several market participants, and makes new
funds available to extend credit to consumers and commercial entities.
29
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CREATION OF INVESTMENT AND FINANCING PRODUCTS
The Company acts as an intermediary or agent for its corporate clients,
assisting them in obtaining sources of liquidity by selling the clients'
financial assets to an SPE.
The Company packages and securitizes assets purchased in the financial markets
in order to create new security offerings, including arbitrage CDOs and
synthetic CDOs for institutional clients and retail customers, that match the
clients' investment needs and preferences. Typically, these instruments
diversify investors' risk to a pool of assets as compared with investments in an
individual asset. The VIEs, which are issuers of CDO securities, are generally
organized as limited liability corporations. The Company typically receives fees
for structuring and/or distributing the securities sold to investors. In some
cases, the Company may repackage the investment with higher-rated debt CDO
securities or U. S. Treasury securities to provide a greater or a very high
degree of certainty, respectively, of the return of invested principal. A
third-party manager is typically retained by the VIE to select collateral for
inclusion in the pool and then actively manage it or, in other cases, only to
manage work-out credits.
The Company packages and securitizes assets purchased in the financial markets
in order to create new security offerings, including hedge funds, mutual funds,
unit investment trusts, and other investment funds, for institutional and
Citigroup's Private Banking clients as well as retail customers, that match the
clients' investment needs and preferences. The SPEs may be credit-enhanced by
excess assets in the investment pool or by third-party insurers assuming the
risks of the underlying assets, thus reducing the credit risk assumed by the
investors and diversifying investors' risk to a pool of assets as compared with
investments in individual assets. The Company typically manages the SPEs for
market-rate fees. In addition, the Company may be one of several liquidity
providers to the SPEs and may place the securities with investors.
In addition, the Company securitizes purchased mortgage loans, creating
collateralized mortgage obligations ("CMOs") and other mortgage-backed
securities ("MBSs") and distributes them to investors. Since January 1, 2000,
the Company has organized 158 mortgage securitizations with assets of $203.6
billion at December 31, 2003. For 2003 and 2002, the Company's revenues were
$418 million and $383 million, respectively, and estimated expenses were $84
million and $65 million, respectively. Expenses have been estimated based upon a
percentage of product revenues to total business revenues.
CONTRACTUAL OBLIGATIONS
The following table includes aggregated information about the Company's
contractual obligations. These contractual obligations impact the Company's
short- and long-term liquidity and capital resource needs. The table includes
information about payments due under specified contractual obligations,
aggregated by type of contractual
30
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
obligation, including the maturity profile of the Company's consolidated
long-term debt payments and operating leases at December 31, 2003. In addition,
the Company's contractual obligations include other purchase obligations that
are enforceable and legally binding on the Company. For the purposes of the
table below, purchase obligations are included through the termination date
specified in the respective agreements even if the contract is renewable. Many
of the agreements for the purchase of goods and services include clauses that
would allow the Company to cancel the agreement prior to the expiration of the
contract within a specified notice period; however, the table includes the
Company's obligations without regard to these termination clauses (unless actual
notice of the Company's intention to terminate the agreement has been
communicated to the counterparty).
Contractual Obligations By Year
-----------------------------------------------------------
In millions of dollars 2004 2005 2006 2007 2008 Thereafter
-----------------------------------------------------------
Long-term debt obligations (1) $ 8,757 $6,421 $6,066 $1,754 $4,702 $ 16,042
Operating lease obligations (2) 155 147 131 109 84 162
Purchase obligations 150 52 13 - - -
Repurchase agreements 134,200 151 200 100 550 100
Investment contracts 18 13 13 12 11 4
Other long-term liabilities
reflected on the
Company's balance sheet 86 34 36 28 20 6
-----------------------------------------------------------
Total $143,366 $6,818 $6,459 $2,003 $5,367 $ 16,314
===========================================================
(1) For additional information about long-term debt, see Note 7 to the
Consolidated Financial Statements.
(2) For additional information about leases, see Note 8 to the Consolidated
Financial Statements.
OTHER COMMERCIAL COMMITMENTS
A summary of the Company's Other Commercial Commitments at December 31, 2003 are
as follows:
Other Commercial Total Less
Commitments Amounts than 1-3 4-5 Over 5
(Dollars in millions) Committed 1 Year Years Years Years
- ----------------------------------------------------------------------------
Loan commitments $ 1,039 $ 823 $ 215 $ 1 $ -
Guarantees 630 433 13 - 184
Lines of credit 258 258 - - -
Other commitments 95 95 - - -
- ----------------------------------------------------------------------------
Total Commercial
Commitments $ 2,022 $1,609 $ 228 $ 1 $ 184
============================================================================
The loan commitments in the above table primarily consist of agreements to
deliver secured financing that is more than 100% collateralized by securities
issued by G-7 governments or other highly-rated securities.
31
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
DERIVATIVE INSTRUMENTS
Derivatives are an integral element of the world's financial and commodity
markets. Globalization of economic activity has brought more market participants
in contact with foreign exchange and interest rate risk at a time when market
volatility has increased. The Company has developed many techniques using
derivatives to enhance the efficiency of capital and trading risk management.
DERIVATIVE INSTRUMENTS - OVERVIEW
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. The markets for these instruments
have grown tremendously over the past decade. A vast increase in the types of
derivative users and their motivations in using these products has resulted in
an expansion of geographic coverage, transaction volume and liquidity, and the
number of underlying products and instruments.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, considering such factors as taxes, regulations,
capital and liquidity, they provide the most efficient means of taking a desired
market position. These are just a few of the business objectives for which
derivatives are used.
Derivatives are accounted for and settled differently than cash instruments and
their use requires special management oversight. Such oversight should ensure
that management understands the transactions to which it commits their firm and
that the transactions are executed in accordance with sensible corporate risk
policies and procedures.
Derivatives activities, like the Company's other ongoing business activities,
give rise to market, credit, and operational risks. Market risk represents the
risk of loss from adverse market price movements. While market risk relating to
derivatives is clearly an important consideration for intermediaries such as the
Company, such risk represents only a component of the Company's overall market
risk, which arises from activities in non-derivative instruments as well.
Consequently, the scope of the Company's market risk management procedures
extends beyond derivatives to include all financial instruments and commodities.
Credit risk is the loss that the Company would incur if counterparties failed to
perform pursuant to their contractual obligations. While credit risk is not a
principal consideration with respect to exchange-traded instruments, it is a
major factor with respect to non-exchange-traded
32
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OTC instruments. Whenever possible, the Company uses industry master netting
agreements to reduce aggregate credit exposure. Swap and foreign exchange
agreements are generally documented utilizing counterparty master netting
agreements supplemented by trade confirmations. The Company's funding and risk
management of its derivatives activities have been enhanced through the
increased use of bilateral security agreements. Based on notional amounts, at
December 31, 2003 and 2002, approximately 93% and 94%, respectively, of the
Company's swap portfolio (the largest component of the Company's derivative
portfolio) was subject to the bilateral exchange of collateral. See "Risk
Management" for discussions of the Company's management of market, credit, and
operational risks.
NATURE AND TERMS OF DERIVATIVE INSTRUMENTS
The Company enters into various financial contracts involving future settlement,
which are based upon a predetermined principal or par value (referred to as the
"notional" amount). Such instruments include swaps, swap options, caps and
floors, futures contracts, forward purchase and sale agreements, option
contracts and warrants. Transactions are conducted either through organized
exchanges or OTC. For a discussion of the nature and terms of these instruments
see Notes 1 and 14 to the consolidated financial statements.
THE COMPANY'S USE OF DERIVATIVE INSTRUMENTS
The Company's use of derivatives can be broadly classified between trading and
non-trading activities. The vast majority of the Company's derivatives use is in
its trading activities, which include market-making activities for customers and
the execution of trading strategies for its own account ("proprietary trading").
The Company's derivative counterparties consist primarily of other major
derivative dealers, financial institutions, insurance companies, pension funds
and investment companies, and other corporations. The scope of permitted
derivatives activities both for trading and non-trading purposes for each of the
Company's businesses is defined by senior management.
TRADING ACTIVITIES
A fundamental activity of the Company is to provide market liquidity to its
customers across a broad range of financial instruments, including derivatives.
The Company also seeks to generate returns by executing proprietary trading
strategies. By their very nature, proprietary trading activities represent the
assumption of risk. However, trading positions are constructed in a manner that
seeks to define and limit risk taking only to those risks that the Company
intends to assume. The most significant derivatives-related activity conducted
by the Company is in fixed-income derivatives, which include interest rate
swaps, financial futures, swap options, and caps and floors. Other derivative
transactions, such as currency swaps, forwards and options as well as
derivatives linked to equities, are
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CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
also regularly executed by the Company. The Company generally earns a spread
from market-making transactions involving derivatives, as it generally does from
its market-making activities for non-derivative transactions. The Company also
utilizes derivatives to manage the market risk inherent in the securities
inventories and derivative portfolios it maintains for market-making purposes as
well as its "book" of swap agreements and related transactions with customers.
The Company conducts its commodities dealer activities in spot and forward
physical markets, organized futures exchanges as well as in OTC
financially-settled markets where the Company executes transactions involving
commodities options, forwards and swaps, much in the same manner as it does in
the financial markets.
NON-TRADING ACTIVITIES
The Company also makes use of financial derivatives for non-trading, or end
user, purposes. These instruments include interest rate swaps, cross-currency
swaps and forward currency contracts, which provide the Company with added
flexibility in the management of its capital and funding costs. Interest rate
swaps are utilized to effectively convert the majority of the Company's
fixed-rate term debt to variable-rate obligations. Cross-currency swaps are
utilized to effectively convert a portion of its non-U.S. dollar denominated
term debt to U.S. dollar denominated obligations. Forward currency contracts are
utilized to minimize the variability in equity otherwise attributable to
exchange rate movements.
For additional derivatives-related disclosures contained in the consolidated
financial statements see the following:
- Note 1 - Summary of Significant Accounting Policies
- Note 4 - Principal Transactions Revenues
- Note 7 - Term Debt
- Note 12 - Pledged Assets, Commitments, Contingencies, and
Guarantees
- Note 14 - Financial Instruments and Contractual Commitments and
Related Risks
- Note 15 - Fair Value Information
- Note 17 - Securitizations and Variable Interest Entities
34
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RISK MANAGEMENT
Effective management of the risks inherent in the Company's businesses is
critical. The following section discusses certain of the risks inherent in the
Company's businesses, procedures in place to manage such risks, and initiatives
underway to continue to enhance the Company's management of risk.
MARKET RISK
Market risk represents the potential loss or decrease in economic value the
Company may incur as a result of absolute and relative price movements in
financial instruments, commodities and contractual commitments due to price
volatility, changes in yield curves, currency fluctuations and changes in market
liquidity. The Company manages aggregate market risk across both on- and
off-balance sheet products and, therefore, a separate discussion of market risk
for individual products, including derivatives, is not meaningful. See "Risk
Management - Credit Risk - Credit Exposure from Derivative Activities."
Within the Company's trading businesses, sound management of market risk has
always been a critical consideration. The sections that follow discuss
organizational elements of market risk management, as well as specific risk
management tools and techniques. The Company has sought to institutionalize
these elements across all its businesses. Efforts to further strengthen the
Company's management of market risk are ongoing and the enhancement of risk
management systems and reporting, including the development and utilization of
quantitative tools, is of major importance.
THE COMPANY'S RISK MANAGEMENT CONTROL FRAMEWORK
The Company's risk management control framework is based upon the ongoing
participation of senior management and business unit managers and the
coordinated efforts of various support units throughout the Company.
The Company's risk management efforts include the establishment of market and
credit risk controls, policies and procedures; senior management risk oversight
with thorough risk analysis and reporting; and independent risk management with
capabilities to evaluate and monitor risk limits.
VALUATION AND CONTROL OF TRADING POSITIONS
With regard to the Company's trading positions (financial instruments,
commodities and contractual commitments), the Chairman and Chief Executive
Officer determines the desired risk profile of the Company with assistance from
35
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
the Risk Management Committee. This Committee, chaired by the Senior Risk
Officer, is comprised of the Chief Executive Officer, senior business managers,
and the Chief Financial Officer and is documented by the Market Risk Officer as
Secretary. The Committee reviews appropriate levels of risk, risk capital
allocations, balance sheet and regulatory capital usage by business units and
overall risk policies and controls. An independent Global Market Risk Management
Group provides technical and quantitative analysis of the market risk associated
with trading positions to the Senior Risk Officer and the Chief Executive
Officer on a frequent basis.
Trading positions are necessary for an active market maker, but can be a major
source of liquidity risk. Monitoring the Company's trading inventory levels and
composition is the responsibility of the Global Market Risk Management Group and
various support units, which monitor trading positions on a position by position
level and employ specific risk models to track inventory exposure in credit
markets, emerging markets and the mortgage markets. Independent oversight of
pricing is the responsibility of the Controller's organization, with review by
the Risk Management Group. The Company also provides for liquidity risk by
imposing markdowns for illiquid concentrated positions. Additionally, inventory
event risk, both for issuer credit and emerging markets, is analyzed with the
involvement of senior traders, economists and credit department personnel.
Market scenarios for the major emerging markets are maintained and updated to
reflect the event risk for the emerging market positions. In addition, the
Company, as a dealer of securities in the global capital markets, has risk to
issuers of fixed income securities for the timely payment of principal and
interest. Principal risk is reviewed by the Global Market Risk Management Group,
which identifies and reports major risks undertaken by the trading businesses.
The Credit Department (the "Department") combines principal risk positions with
credit risks resulting from counterparty pre-settlement and settlement risk to
review aggregate exposures by counterparty, industry and country.
RISK LIMITS
The Company's trading businesses have implemented business unit limits on
exposure to risk factors. These limits, which are intended to enforce the
discipline of communicating and gaining approval for higher risk positions are,
by policy, set by the Senior Risk Officer. Business units may not exceed these
risk limits without prior approval from the Global Market Risk Management Group.
TOOLS FOR RISK MANAGEMENT AND REPORTING
The Company's market risk measurement begins with the identification of relevant
market risk factors. These core risk factors vary from market to market, and
region to region. Risk factors are used in three types of analysis: stress
analysis, scenario analysis and value-at-risk analysis.
36
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
STRESS ANALYSIS The Company performs stress analysis by repricing inventory
positions for specified upward and downward moves in risk factors, and computing
the revenue implications of these repricings. Stress analysis is a useful tool
for identifying exposures that appear to be relatively small in the current
environment but grow more than proportionately with changes in risk factors.
Such risk is typical of a number of derivative instruments, including options
sold, mortgage derivatives and structured products. Stress analysis provides for
the measurement of the potential impact of extremely large moves in risk
factors, which, though infrequent, can be expected to occur from time to time.
SCENARIO ANALYSIS Scenario analysis is a tool that generates forward-looking
"what-if" simulations for specified changes in market factors. For example, the
scenario analysis simulates the impact of significant changes in domestic and
foreign interest rates. The revenue implications of the specified scenario are
quantified on a business unit and geographic basis.
VALUE AT RISK ANALYSIS Value at risk ("VAR") is a statistical tool for measuring
the potential variability of trading revenue. The VAR reported is an estimate of
the potential range of loss in the market value of the trading portfolio, over a
one-day period, at the 99% confidence level, assuming a static portfolio. This
level implies that on 99 trading days out of 100, the mark-to-market of the
portfolio will likely either (1) increase in value, or (2) decrease in value by
less than the VAR estimate; and that on 1 trading day out of 100, the
mark-to-market of the portfolio will likely decrease in value by an amount that
will exceed the VAR estimate.
VAR is calculated by simulating changes in the key underlying market risk
factors (e.g., interest rates, interest rate spreads, equity prices, foreign
exchange rates, commodity prices, and option volatilities) to calculate the
potential distribution of changes in the market value of the Company's
portfolios of market risk sensitive financial instruments.
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 VAR models are relatively
sophisticated, they have several known limitations. Most significantly, standard
VAR models do not incorporate the potential loss caused by very unusual market
events. Stress testing is necessary as a complement to VAR to measure this
potential risk.
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CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table summarizes the Company's VAR at the 99% confidence level,
which includes all of the Company's financial assets and liabilities which are
marked-to-market, as of December 31, 2003 and 2002, along with the 2003 daily
average, high and low (based on daily VARs). The VAR relating to accrual
portfolios has been excluded from this analysis.
RISK EXPOSURES December 31, December 31,
($ IN MILLIONS) 2003 2003 Average 2003 High 2003 Low 2002
- -------------------------------------------------------------------------------------------------
Interest rate $ 73 $ 73 $ 117 $ 49 $ 63
Equities 21 21 88 9 12
Commodities 7 7 17 3 5
Currency 9 6 9 3 4
Diversification Benefit (34) (30) N/A N/A (18)
- ---------------------------------------------------------------------------------------------
Total* $ 76 $ 77 $ 123 $ 50 $ 66
=============================================================================================
*Includes diversification benefit
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at December 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 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 December
31, 2003 and is not a predictor of future results.
The following describes the components of market risk:
INTEREST RATE RISK
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of financial instruments. In connection with the Company's
dealer and proprietary trading activities, including market-making in OTC
derivative contracts, the Company is exposed to interest rate risk arising from
changes in the level or volatility of interest rates, mortgage prepayment speeds
or the shape and slope of the yield curve. The Company's corporate bond
activities expose it to the risk of loss related to changes in credit spreads.
When appropriate, the Company attempts to hedge its exposure to interest rate
risk by entering into transactions such as interest rate swaps, options, U.S.
and non-U.S. government securities and futures and forward contracts designed to
mitigate such exposure.
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CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EQUITY PRICE RISK
The Company is exposed to equity price risk as a consequence of making markets
in equity securities and equity derivatives. Equity price risk results from
changes in the level or volatility of equity prices, which affect the value of
equity securities, or instruments that derive their value from a particular
stock, a basket of stocks or a stock index. The Company attempts to reduce the
risk of loss inherent in its inventory in equity securities by entering into
hedging transactions, including equity options and futures, designed to mitigate
the Company's market risk profile.
COMMODITY PRICE RISK
Commodity price risk results from the possibility that the price of the
underlying commodity (principally oil, natural gas and metals) may rise or fall.
CURRENCY RISK
Currency risk arises from the possibility that changes in foreign exchange rates
will impact the value of financial instruments. When the Company buys or sells a
foreign currency or financial instrument denominated in a currency other than
the local currency of the trading center, exposure exists from a net open
currency position. Until the position is covered by selling or buying an
equivalent amount of the same currency or by entering into a financing
arrangement denominated in the same currency, the Company is exposed to a risk
that the exchange rate may move against it.
CREDIT RISK
Credit risk represents the loss the Company could incur if a debtor, an issuer
or counterparty is unable or unwilling to perform on its commitments, including
the timely payment of principal and interest or settlement of swap and foreign
exchange transactions, repurchase agreements, securities purchases and sales,
and other contractual obligations. The Company's credit risk management process
considers the many factors that influence the probability of a potential loss,
including, but not limited to, the issuer's or counterparty's financial profile,
its business prospects and reputation, the specific terms and duration of the
transactions, the pledging of collateral, the exposure of the transactions to
market risk, macroeconomic developments and sovereign risk.
39
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ORIGIN OF CREDIT RISK
In the normal course of its operations, the Company enters into various
transactions that may give rise to various types of credit risk. The different
forms of credit risk to which the Company may be exposed include:
- - LENDING CREDIT RISK: The risk that an obligor may default on principal
or interest payments of a loan.
- - ISSUER CREDIT RISK: The risk that the issuer of a security will default
on principal or interest payments. One component of the market risk of
securities and derivatives on particular securities is that caused by
the credit risk of the issuer. This component of market risk is also
called the specific risk component of market risk.
- - COUNTERPARTY CREDIT RISK: The risk that a counterparty to a trade will
default on its obligations. Counterparty credit risk takes two forms:
- SETTLEMENT RISK: The risk that a counterparty will fail to
perform during an exchange of cash or other assets. This risk
arises from the requirement, in certain circumstances, to
release cash or securities before receiving payment.
- PRE-SETTLEMENT CREDIT RISK: The risk that a counterparty to a
forward, derivative or repurchase transaction will default
prior to the final cash settlement of the transaction. The
magnitude of pre-settlement credit exposure depends on the
potential market value of the contracts and on the presence of
any legally enforceable risk mitigating agreements that have
been entered into, such as netting, margin or an option to
early termination.
For both forms of counterparty credit risk, the Company sets credit
limits or requires specific approvals that attempt to anticipate the
potential exposure of transactions.
CREDIT RISK MANAGEMENT
The Senior Risk Officer, who is independent of any revenue-generating function,
manages the Department, whose professionals assess, approve, monitor, and
coordinate the extension of credit on a global basis. In considering such risk,
the Department evaluates the risk/return trade-offs as well as current and
potential credit exposures to a counterparty or to groups of counterparties that
are related because of industry, geographic, or economic characteristics. The
Department also has established various credit policies and control procedures
used singularly or in combination, depending upon the circumstances.
40
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CREDIT RISK MANAGEMENT OF COMMODITIES-RELATED TRANSACTIONS
Credit limits for counterparties in commodities-related activities are
determined by independent credit management. Exposure reports, which contain
detailed information about cash flows with customers, goods in transit and
pre-settlement and settlement exposures, are reviewed daily.
CREDIT EXPOSURE FROM DERIVATIVE ACTIVITIES
The Company's credit exposure for swap agreements, swap options, caps and floors
and foreign exchange contracts and options at December 31, 2003, as represented
by amounts reported on the Company's consolidated statement of financial
condition, are primarily with investment grade counterparties. These amounts do
not present potential credit exposure that may result from factors that
influence market risk or from the passage of time. Severe changes in market
factors may cause credit exposure to increase suddenly and dramatically. Swap
agreements, swap options, caps and floors include transactions with both short-
and long-term periods of commitment. See Note 14 to the consolidated financial
statements for further discussion of credit exposure from derivative activities.
With respect to sovereign risk related to derivatives, credit exposure at
December 31, 2003 was primarily to counterparties in the U.S. ($5.4 billion),
United Kingdom ($1.3 billion), Germany ($.7 billion), Kenya ($.7 billion) and
France ($.5 billion).
OPERATIONAL RISK
As a major intermediary in financial and commodities markets, the Company is
directly exposed to market risk and credit risk which arise in the normal course
of its business activities. Slightly less direct, but of critical importance,
are risks pertaining to operational and back office support. This is
particularly the case in a rapidly changing and increasingly global environment
with increasing transaction volumes and an expansion in the number and
complexity of products in the marketplace.
Such risks include:
- - Operational/Settlement Risk - the risk of financial and opportunity
loss and legal liability attributable to operational problems, such as
inaccurate pricing of transactions, untimely trade execution, clearance
and/or settlement, or the inability to process large volumes of
transactions. The Company is subject to increased risks with respect to
its trading activities in emerging market securities, where clearance,
settlement, and custodial risks are often greater than in more
established markets.
41
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - Technological Risk - the risk of loss attributable to technological
limitations or hardware failure that constrain the Company's ability to
gather, process, and communicate information efficiently and securely,
without interruption, with customers, among units within the Company,
and in the markets where the Company participates.
- - Legal/Documentation Risk - the risk of loss attributable to
deficiencies in the documentation of transactions (such as trade
confirmations) and customer relationships (such as master netting
agreements) or errors that result in noncompliance with applicable
legal and regulatory requirements.
- - Financial Control Risk - the risk of loss attributable to limitations
in financial systems and controls. Strong financial systems and
controls ensure that assets are safeguarded, that transactions are
executed in accordance with management's authorization, and that
financial information utilized by management and communicated to
external parties, including the Company's stockholder, creditors, and
regulators, is free of material errors.
As the preceding risks are largely interrelated, so are the Company's actions to
mitigate and manage them. The Company's Chief Administrative Officer is
responsible for, among other things, oversight of global operations and
technology. Essential elements in mitigating the risks noted above are the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data.
ENVIRONMENTAL RISK
The Company may be subject to environmental risk from two primary sources:
discontinued commodities processing and oil refining operations, and existing
energy-related transportation activities.
The Company may be subject to remedial liability as a result of
commodities-related industrial operations, which were discontinued in or prior
to 1984. Such liability arises under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
which provides that potentially responsible parties ("PRPs") may be held jointly
and severally liable for the cost of site clean-up. The Company may also be
subject to liability under state or other U.S. environmental laws. Management
believes, based upon currently known facts and established reserves, that the
ultimate disposition of these matters will not have a material adverse effect on
the Company's financial condition.
42
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may increase," "may fluctuate" and similar
expressions or future or conditional verbs such as "will," "should," "would" and
"could". These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: global 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; the resolution of
environmental matters; and the resolution of legal and regulatory proceedings
and related matters. Readers are also directed to other risks and uncertainties
discussed in documents filed by the Company with the Securities and Exchange
Commission.
43
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page
F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. 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 ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 10 is omitted.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 11 is omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 12 is omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction I of Form 10-K, the information
required by Item 13 is omitted.
44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following is a description of the fees earned by KPMG, independent auditors
for the Company, which include those fees billed to the Company as well as
those not yet billed, for services rendered to the Company for the years ended
December 31, 2003 and 2002:
AUDIT FEES: Audit fees include fees paid by the Company to KPMG in connection
with the annual audit of the Company's consolidated financial statements, KPMG's
audits of subsidiary financial statements and KPMG's review of the Company's
interim financial statements. Audit fees also include fees for services
performed by KPMG that are closely related to the audit and in many cases could
only be provided by our independent auditors. Such services include comfort
letters and consents related to SEC registration statements and other capital
raising activities and certain reports relating to the Company's regulatory
filings, reports on internal control reviews required by regulators, due
diligence on completed acquisitions, and accounting advice on completed
transactions. The aggregate fees earned by KPMG for audit services rendered to
the Company and its subsidiaries for the years ended December 31, 2003 and
December 31, 2002 totaled approximately $6.7 million and $7.3 million,
respectively.
AUDIT RELATED FEES: Audit related services include due diligence services
related to contemplated mergers and acquisitions, accounting consultations,
internal control reviews not required by regulators, securitization related
services, employee benefit plan audits and certain attest services as well as
certain agreed upon procedures. The aggregate fees earned by KPMG for audit
related services rendered to the Company and its subsidiaries for the years
ended December 31, 2003 and December 31, 2002 totaled approximately $0.8 million
and $0.6 million, respectively.
TAX FEES: Tax fees include corporate tax compliance, counsel and advisory
services. The aggregate fees earned by KPMG for the tax related services
rendered to the Company and its subsidiaries for the years ended December 31,
2003 and December 31, 2002 totaled approximately $1.0 million and $1.4 million,
respectively.
Of the $1.0 million of tax fees earned by KPMG in 2003, approximately $0.9
million was related to tax compliance services and the balance, approximately
$0.1 million, was related to tax counsel and advisory services. The $1.4 million
of tax fees earned by KPMG in 2002 was related to tax compliance, tax counsel
and advisory services.
ALL OTHER FEES: The aggregate fees earned by KPMG for all other services
rendered to the Company and its subsidiaries for matters such as general
consulting totaled approximately $16 thousand for each of the years ended
December 31, 2003 and December 31, 2002.
The fees earned by KPMG in 2003 and 2002 were for services contracted for prior
to the Company's adoption of its policy prohibiting the engagement of its
primary independent auditors for non-audit services. The Company has not engaged
KPMG for any additional non-audit services other than those permitted under its
policy unless such services were individually approved by the Citigroup audit
and risk management committee.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: The Company did
not engage KPMG to provide advice to the Company regarding financial information
systems design and implementation during the years ended December 31, 2003 and
December 31, 2002.
APPROVAL OF INDEPENDENT AUDITOR SERVICES AND FEES
Citigroup's audit and risk management committee has reviewed and approved all
fees charged by the Company's independent auditors, and actively monitored the
relationship between audit and non-audit services provided. The audit and risk
management committee has concluded that the provision of services by KPMG was
consistent with the maintenance of the external auditors' independence in the
conduct of its auditing functions. Effective January 1, 2003, the Company
adopted a policy that it would no longer engage its primary independent auditors
for non-audit services other than "audit related services," as defined by the
SEC, certain tax services, and other permissible non-audit services as
specifically approved by the chair of the audit and risk management committee
and presented to the full committee at its next regular meeting. The policy also
includes limitations on the hiring of KPMG partners and other professionals to
ensure that we satisfy the SEC's auditor independence rules.
45
Under the Citigroup policy approved by the audit and risk management committee,
the committee must pre-approve all services provided by the Company's
independent auditors and fees charged. The committee will consider annually the
provision of audit services and, if appropriate, pre-approve certain defined
audit fees, audit related fees, tax fees and other fees with specific dollar
value limits for each category of service. During the year, the committee will
periodically monitor the levels of KPMG fees against the pre-approved limits.
The audit and risk management committee will also consider on a case by case
basis and, if appropriate, approve specific engagements that are not otherwise
pre-approved. Any proposed engagement that does not fit within the definition of
a pre-approved service may be presented to the chair of the audit and risk
management committee for approval and to the full audit and risk management
committee at its next regular meeting.
Administration of the policy is centralized within, and monitored by, Citigroup
senior corporate financial management, which reports throughout the year to the
audit and risk management committee.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated
Financial Statements and Schedules on page F-1
hereof.
(2) Financial Statement Schedules. See Index to
Consolidated Financial Statements and Schedules on
page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 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.
On November 28, 2003, the Company filed a Current Report on
Form 8-K, dated November 21, 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 November 29, 2004.
No other reports on Form 8-K were filed during the fourth
quarter of 2003, however:
On January 20, 2004, the Company filed a Current Report on
Form 8-K, dated January 20, 2004, reporting under Item 5
thereof the results of its operations for the twelve-month
periods ended December 31, 2003 and 2002.
On January 29, 2004, the Company filed a Current Report on
Form 8-K, dated January 21, 2004, filing certain exhibits
under Item 7 thereof relating to the offer and sale of the
Company's Variable Rate Exchangeable Notes Due April 6, 2009
(SynDECS).
On January 30, 2004, the Company filed a Current Report on
Form 8-K, dated January 26, 2004, 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 common
stock of Applied Materials, Inc. due January 30, 2006.
On March 1, 2004, the Company filed a Current Report on Form
8-K, dated February 19, 2004, 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 2004-1 Dynamic
Portfolio Index due February 26, 2009.
47
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.
14.01 Code of Ethics, incorporated by reference to Exhibit 14.01 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002 (File No. 1-4346).
21.01 Pursuant to General Instruction I of Form 10-K, the list of
subsidiaries of the Company is omitted.
23.01+ Consent of KPMG LLP.
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.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page to security holders who make written request therefor to Citigroup
Global Markets Holdings Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Corporate Secretary.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 17th day of
March, 2004.
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
(Registrant)
By: /s/ Robert Druskin
----------------------------------
Robert Druskin,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on the 17th day of March, 2004.
SIGNATURE TITLE
--------- -----
/s/ Robert Druskin
- -------------------------------- Chairman and Chief Executive Officer
Robert Druskin (Principal Executive Officer)
/s/ John C. Morris
- --------------------------------
John C. Morris Director and Chief Financial Officer
(Principal Financial Officer)
/s/ William T. Bozarth
- -------------------------------- Principal Accounting Officer
William T. Bozarth
49
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001 F-3
Consolidated Statements of Financial Condition as of
December 31, 2003 and 2002 F-4
Consolidated Statements of Changes in Stockholder's Equity
for the years ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
QUARTERLY FINANCIAL DATA (UNAUDITED) F-46
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder of
Citigroup Global Markets Holdings Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of Citigroup Global Markets Holdings Inc. (formerly Salomon Smith Barney
Holdings Inc.) and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in stockholder's equity and
cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citigroup Global
Markets Holdings Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2003 the
Company changed its methods of accounting for variable interest entities and
stock-based compensation and in 2002 the Company changed its methods of
accounting for goodwill and intangible assets. Also, as discussed in Note 1 to
the consolidated financial statements, in 2001 the Company changed its method of
accounting for derivative instruments and hedging activities.
/s/ KPMG LLP
New York, New York
February 26, 2004
F-2
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Revenues:
Commissions $ 3,749 $ 3,845 $ 3,619
Investment banking 3,607 3,420 3,914
Asset management and administration fees 3,378 3,547 3,358
Principal transactions 1,886 576 1,783
Other 181 262 463
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest revenues 12,801 11,650 13,137
- ----------------------------------------------------------------------------------------------------------------------
Interest and dividends 7,921 9,600 14,237
Interest expense 5,060 6,844 11,987
- ----------------------------------------------------------------------------------------------------------------------
Net interest and dividends 2,861 2,756 2,250
- ----------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 15,662 14,406 15,387
- ----------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 8,008 7,425 8,140
Floor brokerage and other production 712 710 697
Communications 633 664 668
Occupancy and equipment 545 554 604
Professional services 384 312 302
Advertising and market development 276 289 360
Other operating and administrative expenses 431 1,408 379
Restructuring charge (credit), net - (9) 117
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 10,989 11,353 11,267
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of changes in accounting principles 4,673 3,053 4,120
Provision for income taxes 1,780 1,242 1,492
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 2,893 1,811 2,628
Cumulative effect of changes in accounting principles
(net of tax benefit of $16 and $1, respectively) - (24) (1)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 2,893 $ 1,787 $ 2,627
======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------
Dollars in millions
December 31, 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 6,312 $ 3,722
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 2,806 2,461
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $ 108,984 $ 94,775
Deposits paid for securities borrowed 50,192 45,439
---------- ---------
159,176 140,214
Financial instruments owned and contractual commitments:
(Approximately $63 billion and $34 billion were pledged to
various parties at December 31, 2003 and 2002)
U.S. government and government agency securities 51,205 34,610
Corporate debt securities 33,221 17,597
Equity securities 19,610 9,531
Contractual commitments 15,554 15,788
Non-U.S. government and government agency securities 11,929 9,989
Mortgage loans and collateralized mortgage securities 8,275 7,512
Money market instruments 5,369 6,565
Other financial instruments 8,682 6,548
---------- ---------
153,845 108,140
Receivables:
Customers 18,831 16,439
Brokers, dealers and clearing organizations 7,560 8,776
Other 2,865 2,858
---------- ---------
29,256 28,073
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,081 and
$1,048, respectively 1,384 1,025
Goodwill 1,531 1,530
Intangibles 800 808
Other assets 6,151 6,018
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 361,261 $ 291,991
=====================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------
Dollars in millions, except share data
December 31, 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 22,644 $ 22,619
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 135,301 $ 118,878
Deposits received for securities loaned 19,503 10,439
---------- ---------
154,804 129,317
Financial instruments sold, not yet purchased, and
contractual commitments:
Non-U.S. government and government agency securities 24,373 21,783
Contractual commitments 18,698 14,821
U.S. government and government agency securities 16,524 13,133
Corporate debt securities and other 10,593 7,697
Equity securities 4,436 4,243
---------- ---------
74,624 61,677
Payables and accrued liabilities:
Customers 23,848 16,724
Brokers, dealers and clearing organizations 11,317 5,074
Other 14,660 11,320
---------- ---------
49,825 33,118
Term debt 43,742 32,302
Company-obligated mandatorily redeemable securities
of subsidiary trusts 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 4,241 3,016
Retained earnings 11,375 9,543
Accumulated changes in equity from nonowner sources 6 (1)
---------- ---------
Total stockholder's equity 15,622 12,558
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 361,261 $ 291,991
=====================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
- ---------------------------------------------------------------------------------------------------------
Accumulated
Changes In
Additional Equity From Total
Common Paid-In Retained Nonowner Stockholder's
Dollars in millions Stock Capital Earnings Sources Equity
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ - $ 1,854 $ 9,183 $ 2 $ 11,039
Net income 2,627 2,627
Common dividends (2,586) (2,586)
Other capital transactions 625 625
Other comprehensive income (7) (7)
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 - 2,479 9,224 (5) 11,698
Net income 1,787 1,787
Common dividends (1,468) (1,468)
Capital contribution from Parent 500 500
Other capital transactions 37 37
Other comprehensive income 4 4
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 - 3,016 9,543 (1) 12,558
Net income 2,893 2,893
Common dividends (1,061) (1,061)
Capital contributions from Parent 1,152 1,152
Other capital transactions 73 73
Other comprehensive income 7 7
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ - $ 4,241 $ 11,375 $ 6 $ 15,622
=========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
Dollars in millions
Year Ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,893 $ 1,787 $ 2,627
Adjustments to reconcile net income to net cash used in operating
activities:
Deferred income tax provision (benefit) 69 (25) (31)
Depreciation and amortization 387 323 522
Cumulative effect of changes in accounting principles - 24 1
Net change in:
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (345) 2,866 (2,629)
Securities borrowed or purchased under agreements to resell (19,058) (673) (36,305)
Financial instruments owned and contractual commitments (45,265) (3,772) (12,609)
Receivables (1,645) 9,514 (9,493)
Other assets 1,159 1,983 (2,065)
Securities loaned or sold under agreements to repurchase 25,487 (9,851) 36,257
Financial instruments sold, not yet purchased, and contractual commitments 13,492 5,437 932
Payables and accrued liabilities 16,740 (13,860) 20,536
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (6,086) (6,247) (2,257)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in commercial paper and other short-term borrowings 92 3,729 (1,532)
Proceeds from issuance of term debt 24,996 12,776 13,139
Term debt maturities and repurchases (14,690) (8,207) (5,697)
Dividends paid (1,056) (1,727) (2,660)
Repayment of mandatorily redeemable securities of subsidiary trusts (400) - (345)
Capital contribution from Parent 500 500 -
Other capital transactions (26) 12 203
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,416 7,083 3,108
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of subsidiaries and affiliates - - (198)
Property, equipment and leasehold improvements, net (740) (132) (258)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (740) (132) (456)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,590 704 395
Cash and cash equivalents at beginning of year 3,722 3,018 2,623
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,312 $ 3,722 $ 3,018
=======================================================================================================================
Interest paid did not differ materially from the amount of interest expense
recorded for financial statement purposes in 2003, 2002 and 2001.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of Citigroup Global
Markets Holdings Inc. (formerly Salomon Smith Barney Holdings Inc.) ("CGMHI"
and, collectively with its subsidiaries, the "Company"), a New York corporation
(the successor to Salomon Smith Barney Holdings Inc., a Delaware corporation).
The Company is a direct wholly owned subsidiary of Citigroup Inc. ("Citigroup").
The Company provides investment banking, asset management, brokerage, securities
trading, advisory and other financial services to customers, and engages in
proprietary trading activities for its own account.
The 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 consolidated financial
statements, may vary from actual results. Certain prior period amounts have been
reclassified to conform to current period presentation.
Material intercompany transactions have been eliminated in consolidation.
Long-term investments in operating joint ventures and affiliated (20% to 50%
owned) companies are carried on the equity method of accounting and are included
in "Other assets." The Company's equity in the earnings of joint ventures and
affiliates is reported in "Other" revenues.
Assets and liabilities denominated in non-U.S. dollar currencies are translated
into U.S. dollar equivalents using year-end spot foreign exchange rates.
Revenues and expenses denominated in non-U.S. dollar currencies are translated
monthly at amounts that approximate weighted average exchange rates, with
resulting gains and losses included in income. The effects of translating the
statements of financial condition of non-U.S. subsidiaries with functional
currencies other than the U.S. dollar are recorded, net of related hedge gains
and losses and income taxes, as cumulative translation adjustments, a separate
component of stockholder's equity. Hedges of such exposure include forward
currency contracts and, to a lesser extent, designated issues of non-U.S. dollar
term debt.
ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company defines "Cash and cash equivalents" as
highly liquid investments with original maturities of three months or less,
other than investments held for sale in the ordinary course of business.
CASH AND SECURITIES SEGREGATED AND ON DEPOSIT FOR FEDERAL AND OTHER REGULATIONS
OR DEPOSITED WITH CLEARING ORGANIZATIONS - Cash and securities segregated and on
deposit for Federal and other regulations or deposited with clearing
F-8
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
organizations include cash and securities segregated in compliance with Federal
and other regulations and represent funds deposited by customers and funds
accruing to customers as a result of trades or contracts. Also included are
funds segregated and held in separate accounts in accordance with Section 4d(2)
and Regulation 30.7 of the Commodity Exchange Act and Rule 4.3.3 of the
Financial Services Authority of the United Kingdom.
COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS - Securities purchased under
agreements to resell ("reverse repurchase agreements") and securities sold under
agreements to repurchase ("repurchase agreements") are collateralized
principally by government and government agency securities and generally have
terms ranging from overnight to up to one year and are carried at their
contractual amounts, including accrued interest as specified in the respective
agreements.
It is the Company's policy to take possession of the underlying collateral,
monitor its market value relative to the amounts due under the agreements, and,
when necessary, require prompt transfer of additional collateral or a reduction
in the loan balance in order to maintain contractual margin protection. In the
event of counterparty default, the financing agreement provides the Company with
the right to liquidate the collateral held. Reverse repurchase and repurchase
agreements are reported net by counterparty, when applicable, pursuant to the
provisions of Financial Accounting Standards Board ("FASB") Interpretation No.
41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements ("FIN 41"). Excluding the impact of FIN 41, reverse repurchase
agreements totaled $187.7 billion and $155.5 billion at December 31, 2003 and
2002, respectively.
Deposits paid for securities borrowed ("securities borrowed") and deposits
received for securities loaned ("securities loaned") are recorded at the amount
of cash advanced or received and are collateralized principally by government
and government agency securities, corporate debt and equity securities. The
Company monitors the market value of securities borrowed and securities loaned
daily, and additional collateral is obtained as necessary.
FINANCIAL INSTRUMENTS AND CONTRACTUAL COMMITMENTS - Financial instruments and
contractual commitments (also referred to as "derivatives" or "derivative
instruments"), are recorded at either market value or, when market prices are
not readily available, fair value, which is determined under an alternative
approach, such as matrix or model pricing. It is the Company's policy that all
models used to produce valuations for the published financial statements be
validated by qualified personnel independent from those who created the models.
The determination of market or fair value considers various factors, including:
closing exchange or over-the-counter ("OTC") market price quotations; prices of
other transactions with similarly rated counterparties; derivative transaction
maintenance costs during that period; time value and volatility factors of
underlying options, warrants and contractual commitments; price activity for
equivalent or synthetic instruments in markets located in different time zones;
counterparty credit quality; and the potential impact on market prices or fair
value of liquidating the Company's positions in an orderly manner over a
reasonable period of time under current market conditions. The fair value of
aged inventory is actively monitored and, where appropriate, is discounted to
reflect the implied illiquidity for positions that have been
available-for-immediate-sale for longer than 90 days. Financial instruments and
contractual commitments include related accrued interest or dividends.
F-9
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The majority of the Company's financial instruments and contractual commitments
are recorded on a trade date basis. Recording the remaining instruments on a
trade date basis would not materially affect the consolidated financial
statements. Customer securities transactions are recorded on a settlement date
basis with the related revenue and expense recorded on trade date. Commissions,
underwriting, and principal transaction revenues and related expenses are
recognized in income on a trade date basis. Fees for mergers and acquisition
advisory services are accrued when services for the transactions are
substantially completed.
DERIVATIVE INSTRUMENTS
Derivatives Used for Trading Purposes
Derivatives used for trading purposes include interest rate, equity, currency
and commodity swap agreements, swap options, caps and floors, options, warrants
and financial and commodity futures and forward contracts. The fair values
(unrealized gains and losses) associated with contractual commitments are
reported net by counterparty, in accordance with FASB Interpretation No. 39,
"Offsetting of Amounts Relating to Certain Contracts," ("FIN 39"), 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." Cash collateral received in connection
with derivative transactions totaled $6,255 million and $7,543 million at
December 31, 2003 and 2002, respectively, and cash collateral paid totaled
$8,374 million and $9,162 million, respectively. Revenues generated from
derivative instruments used for trading purposes are reported 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. During the fourth quarter of 2002, the Company adopted EITF Issue
No. 02-3, "Issues Involved in Accounting for Derivative Contracts Held for
Trading Purposes and Contracts Involved in Energy Trading and Risk Management
Activities" ("EITF 02-3"). Under EITF 02-3, recognition of a trading profit at
inception of a derivative transaction is prohibited unless the fair value of
that derivative is obtained from a quoted market price, supported by comparison
to other observable market transactions, or based upon a valuation technique
incorporating observable market data. The Company defers trade date gains or
losses on derivative transactions where the fair value is not determined based
upon observable market transactions and market data. The deferral is recognized
in income when the market data becomes observable or over the life of the
transaction.
Margin on futures contracts is included in "Receivables - Brokers, dealers and
clearing organizations" and "Payables and accrued liabilities - Brokers, dealers
and clearing organizations" in the consolidated statement of financial
condition.
Derivatives Used for Non-Trading Purposes
The Company uses interest rate swaps to effectively convert the majority of its
fixed rate term debt to variable rate term debt. Certain interest rate swap
transactions have been designated as fair value hedges under Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). Where such designations have
been made, the changes in the fair value of the swaps and the gain or loss on
the hedged term debt are
F-10
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded currently in the consolidated statement of income in "Other revenue."
To the extent that these two amounts do not offset, hedge ineffectiveness is
therefore deemed to result and is recognized in income. The Company monitors the
effectiveness of interest rate swaps designated as hedges on a daily basis.
Upon early termination of a designated hedging relationship, hedge accounting
will cease. Derivatives previously designated are then marked to market in
earnings with no offset of fair value changes from the hedged debt.
See Notes 7 and 14 to the consolidated financial statements for a further
discussion of the use of interest rate swaps for non-trading purposes.
The Company also designates forward currency contracts and non-U.S. dollar term
debt issued by the Company as hedges of net investments in certain subsidiaries
with functional currencies other than the U.S. dollar. To the extent that the
hedge is effective, the impact of marking the forward contracts to prevailing
forward rates and the impact of revaluing non-U.S. dollar term debt to
prevailing exchange rates, both net of the related tax effects, are included in
cumulative translation adjustments, a component of "Accumulated changes in
equity from nonowner sources" in the consolidated statement of financial
condition, to offset the impact of translating the investments being hedged. The
Company monitors the effectiveness of forward currency contracts designated as
hedges at least quarterly.
See Note 7 to the consolidated financial statements for a further discussion of
the use of forward currency contracts for non-trading purposes.
Derivative instruments that do not meet the criteria to be designated as hedges
are considered trading derivatives and are recorded at market or fair value.
RECEIVABLES AND PAYABLES AND ACCRUED LIABILITIES - CUSTOMERS - Receivables from
and payables to customers include amounts due on cash and margin transactions.
Securities owned by customers, including those that collateralize margin or
similar transactions are not reflected on the consolidated statement of
financial condition.
RECEIVABLES AND PAYABLES AND ACCRUED LIABILITIES - BROKERS, DEALERS AND CLEARING
ORGANIZATIONS - Receivables from brokers, dealers and clearing organizations
include amounts receivable for securities not delivered by the Company to a
purchaser by the settlement date ("fails to deliver"), margin deposits,
commissions and net receivables arising from unsettled trades. Payables to
brokers and dealers include amounts payable for securities not received by the
Company from a seller by the settlement date ("fails to receive"), and net
payables arising from unsettled trades.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Property, equipment and
leasehold improvements are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded substantially on a
straight-line basis over the lesser of the estimated useful lives of the related
assets or noncancelable lease terms, as appropriate. Maintenance and repairs are
charged to "Occupancy and equipment" expense as incurred. Certain internal use
software costs
F-11
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are capitalized and amortized on a straight-line basis over the lesser of the
estimate useful lives of the related asset or three years.
GOODWILL - Goodwill represents an acquired company's acquisition cost less the
fair value of net tangible and intangible assets. Through the end of 2001,
goodwill related to purchase acquisitions completed prior to June 30, 2001 was
amortized on a straight-line basis over its estimated useful life. Effective
January 1, 2002, amortization ceased on this goodwill. Goodwill related to
purchase acquisitions after June 30, 2001 is not amortized. Goodwill is subject
to annual impairment tests whereby goodwill is allocated to the Company's
reporting units and an impairment is deemed to exist if the carrying value of a
reporting unit exceeds its estimated fair value. Furthermore, on any business
dispositions, goodwill s allocated to the business disposed of based on the
ratio of the fair value of the business disposed to the fair value of the
reporting unit.
SECURITIZATIONS - The Company securitizes various types of assets including
commercial and residential mortgages, high yield bonds, government, agency and
corporate securities, and municipal bonds. In connection with these activities,
the Company utilizes special purpose entities principally for (but not limited
to) the securitizations of these financial assets. The Company derecognizes
financial assets transferred in securitizations provided the Company has
relinquished control over such assets. The Company may retain an interest in the
financial assets it securitizes ("retained interests") which may include assets
in the form of residual interest in the special purpose entities established to
facilitate the securitization. Any retained interests are included in "Financial
instruments owned and contractual commitments" within the consolidated statement
of financial condition. The Company values retained interests at fair value
using either financial models, quoted market prices, or sales of similar assets.
Where quoted market prices are not available, the Company estimates the fair
value of these retained interests by determining the present value of future
expected cash flows using modeling techniques that incorporate management's best
estimates of key assumptions, including prepayment speeds, credit losses, and
discount rates. Changes in the fair value of retained interests are recorded in
the consolidated statement of income as principal transaction revenues.
For each securitization entity with which the Company is involved, the Company
makes a determination of whether the entity should be consolidated by the
Company and be included in the Company's consolidated financial statements or
whether the entity is sufficiently independent that it does not need to be
consolidated. If the securitization entity's activities are sufficiently
restricted to meet certain accounting requirements to be a qualifying special
purpose entity, the securitization entity is not consolidated by the Company as
seller of the transferred assets. If the securitization entity is determined to
be a variable interest entity ("VIE"), the Company consolidates the VIE if it is
the primary beneficiary. For all other securitizations in which the Company
participates, a consolidation decision is made by evaluating several factors,
including how much of the entity's ownership is in the hands of third party
investors, who controls the securitization entity, and who reaps the rewards and
bears the risks of the entity. Only securitization entities controlled by the
Company are consolidated (See note 17 to the consolidated financial statements
for further discussion on securitizations).
INCOME TAXES - Deferred taxes are recorded for the future tax consequences of
events that have been recognized in the consolidated financial statements or tax
returns, based upon enacted tax laws and rates. Deferred tax assets are
recognized
F-12
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject to management's judgment that realization is more likely than not. The
Company and its wholly-owned domestic subsidiaries file a consolidated Federal
income tax return with its parent.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Prior to January 1, 2003, the Company applied Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and the
related interpretations in accounting for its stock-based compensation plans.
Under APB 25 there is generally no charge to earnings for employee stock option
awards because the options granted under these plans have an exercise price
equal to the market value of the underlying common stock on the grant date.
Alternatively, SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), allows companies to recognize compensation expense over the related
service period based on the grant date fair value of the stock award. On January
1, 2003, the Company adopted SFAS 123.
Had the Company applied SFAS 123 in accounting for all the Company's stock
option plans net income would have been the pro forma amounts indicated below:
Dollars in millions
Twelve months ended December 31, 2003 2002 2001
- -------------------------------------------- ----- ----- -----
Compensation expense
related to stock option As reported $ 41 $ - $ -
plans, net of tax Pro forma 142 163 189
Net income As reported 2,893 1,787 2,627
Pro forma 2,792 1,624 2,438
===== ===== =====
ACCOUNTING CHANGES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On July 1, 2003, the Company adopted 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 No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). In particular, SFAS 149 clarifies under what
circumstances a contract with an initial net investment meets the
characteristics 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 consolidated financial
statements.
EITF 02-3
During the fourth quarter of 2002, the Company adopted EITF 02-3. Under EITF
02-3, recognition of a trading profit at inception of a derivative transaction
is prohibited unless the fair value of that derivative is obtained from a quoted
market
F-13
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
price, supported by comparison to other observable market transactions, or based
upon a valuation technique incorporating observable market data. The initial
adoption and ongoing effects of EITF 02-3 are not material to the Company's
consolidated financial statements.
BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted the provisions of SFAS 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 in the Asset Management segment.
Net income adjusted to exclude amortization expense (net of taxes) related to
goodwill and indefinite lived intangible assets are as follows:
(In millions)
Year ended 2003 2002 2001
- ---------- ------ ------ ------
Net income:
Reported net income $2,893 $1,787 $2,627
Goodwill amortization - - 63
Indefinite lived intangible assets - - 39
------ ------ ------
Adjusted net income $2,893 $1,787 $2,729
====== ====== ======
For the year ended December 31, 2001 the after-tax amortization expense related
to goodwill and indefinite lived intangible assets which are no longer amortized
included $53 million related to the Investment Services segment, $40 million
related to the Asset Management segment and $9 million related to the Private
Client Services Segment.
F-14
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At January 1, 2003, the goodwill balance was $1,114 million for the Investment
Services segment, $381 million for the Private Client Services segment, and $35
million for the Asset Management segment. During 2003, no goodwill was impaired
or written off. During the year the Company transferred $12 million of goodwill
related to the acquisition of the Geneva Companies from the Private Client
segment to the Investment Services segment. The Company's goodwill balances at
December 31, 2003 were $1,127 million for the Investment Services segment, $369
million for the Private Client Group segment, and $35 million for the Asset
Management segment.
At December 31, 2003, $776 million of the Company's acquired intangible assets,
primarily asset management and administration contracts, were considered to be
of indefinite life and not subject to amortization.
All other acquired intangible assets are subject to amortization. During 2003
and 2002, the Company acquired $5 million and $26 million, respectively, in
software licenses, which will be amortized over approximately 3 years. No
significant residual value is estimated for these intangible assets. Intangible
assets amortization expense for the twelve months ended December 31, 2003 and
2002 was $17 million, and $16 million, respectively. The components of
intangible assets that are subject to amortization were as follows:
December 31, 2003 December 31, 2002
----------------------------- -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(In millions) Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Software licenses $ 73 $ 49 $ 68 $ 32
======== ============ ======== ===========
Intangible assets amortization expense is estimated to be $11 million in 2004,
$7 million in 2005, $5 million in 2006, and $1 million in 2007.
DERIVATIVES AND HEDGE ACCOUNTING
On January 1, 2001, the Company adopted SFAS 133. This Statement changed the
accounting treatment of derivative contracts (including foreign exchange
contracts) that are employed to manage risk outside of the Company's trading
activities, as well as certain derivative instruments embedded in other
contracts.
Under SFAS 133, an entity is required to recognize all freestanding and embedded
derivative instruments at fair value in earnings unless the derivative
instruments can be designated as hedges of certain exposures for which specific
hedge accounting is prescribed. If certain conditions are met, a derivative
instrument may be designated as a hedge of the fair value changes of a
recognized asset, liability or an unrecognized firm commitment; or a hedge of
the exposure to variable cash flows of a recognized asset, liability or a
forecasted transaction; or a hedge of the foreign currency exposure of a
recognized asset, liability, a net investment in a foreign operation, an
unrecognized firm commitment or a forecasted transaction. If certain conditions
are met, a non-derivative instrument may be designated as a fair value hedge of
a foreign currency denominated unrecognized firm commitment or a hedge of the
foreign currency exposure of a net investment in a foreign
F-15
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operation. The majority of the Company's derivatives were entered into for
trading purposes and were not impacted by the adoption of SFAS 133. The
cumulative effect of adopting SFAS 133 at January 2001, was an after-tax
transition charge of $1 million.
For the twelve months ended December 31, 2003, hedge ineffectiveness resulting
from designating interest rate swaps as fair value hedges of fixed rate term
debt was reported in the consolidated statement of income in "Other revenue" and
was not material.
For the twelve months ended December 31, 2003 and 2002, hedges of net
investments in foreign operations were considered effective and the losses of
$141 million and $105 million, net of tax, respectively, that pertained to the
designated hedging instruments was included in cumulative translation
adjustments, a component of "Accumulated changes in equity from nonowner
sources" in the consolidated statement of financial condition.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 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 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 interests of the
VIE are 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.
In December 2003, FASB released a revision of FIN 46 ("FIN 46-R") which includes
substantial changes from the original. The calculation of expected losses and
expected residual returns have both been altered to reduce the impact of
decision maker and guarantor fees in the calculation of expected residual
returns and expected losses. In addition, FIN 46-R changes the definition of a
variable interest. This interpretation permits adoption of either the original
or the revised versions of FIN 46 until the first quarter of 2004, at which time
FIN 46-R must be adopted. The Company's year end 2003 financial statements are
in accordance with the original FIN 46.
F-16
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is evaluating the impact of applying FIN 46-R to existing VIEs in
which it has variable interests and has not yet completed this analysis. The
Company is revising its calculations of expected losses and expected residual
returns to reflect the new guidance in FIN 46-R to determine whether any changes
to its consolidation decisions under FIN 46 will be needed. Depending on the
results of these calculations, the Company will also consider restructuring
alternatives that would enable certain VIEs to continue to meet the criteria for
non-consolidation. At this time, it is anticipated that the effect on the
Company's balance sheet could be an increase of $485 million to assets and
liabilities. If consolidation is required for additional VIEs, the future
viability of these businesses will be assessed. As we continue to evaluate the
impact of applying FIN 46-R, additional entities may be identified that would
need to be consolidated by the Company. See Note 17 to the consolidated
financial statements.
GUARANTEES AND INDEMNIFICATIONS
In November 2002, FASB issued 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. On January 1, 2003, the Company adopted the recognition
and measurement provisions of FIN 45. The impact of adopting FIN 45 was not
material. FIN 45 also requires additional disclosures in financial statements
for periods ending after December 15, 2002. Accordingly, these disclosures are
included in Note 12 to the consolidated financial statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION
On July 1, 2003, the Company adopted the fair value recognition provisions of
SFAS No. 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. See Accounting
Policies section for the impact in 2003 of adopting SFAS 123.
The Company, through its parent, Citigroup, has made changes to various
stock-based compensation plan provisions for future awards. For example, the
vesting period and the term of stock options granted in 2003 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 they own and acquire from the Company over the term
of their employment. Original option grants
F-17
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in 2003 and thereafter will not have a reload feature; however, previously
granted options will retain that feature. Other changes may also be made that
may impact the SFAS 123 adoption estimates previously disclosed.
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.
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 consolidated financial statements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB released a revision of FIN 46 ("FIN 46-R"). See
Consolidation of Variable Interest Entities in the Accounting Changes section of
this Note.
NOTE 2. RESTRUCTURING CHARGE (CREDIT), NET
In the third quarter of 2002, the Company recorded an adjustment of $9 million
($5 million after tax) to the restructuring reserve, which was recorded in 2001.
The adjustment relates to severance related costs, which were lower than
originally anticipated.
During 2001, the Company recorded restructuring charges totaling $117 million
($70 million after tax) for severance and related costs associated with the
reduction of staffing in certain businesses. These amounts apply to the
involuntary
F-18
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
termination of approximately 2,000 employees (90% located in the
United States and 10% overseas). The charges are net of a reversal of $18
million ($11 million after tax) which relates to the accrual in the first
quarter of severance and other related costs associated with the reduction of
staffing in certain businesses which were subsequently sold. These related costs
will not be borne by the Company due to the sale which closed in the third
quarter of 2001. At December 31, 2002, this reserve had been fully charged off.
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and other changes in
stockholder's equity from nonowner sources which, for the Company, are comprised
of cumulative translation adjustments and unrealized gains and losses on certain
investments held by equity method investees, net of tax:
Dollars in Millions
Year Ended December 31, 2003 2002 2001
- ------------------------ ------- ------- -------
Net income $ 2,893 $ 1,787 $ 2,627
Other changes in equity from non-owner sources 7 4 (7)
------- ------- -------
Total comprehensive income $ 2,900 $ 1,791 $ 2,620
======= ======= =======
NOTE 4. PRINCIPAL TRANSACTIONS REVENUES
The following table presents principal transactions revenues by business
activity for the years ended December 31, 2003, 2002 and 2001:
Dollars in millions
Year Ended December 31, 2003 2002 2001
- ----------------------- ------ ----- ------
Fixed income $1,711 $499 $1,008
Commodities 108 62 39
Equities 105 45 700
Other (38) (30) 36
------ ----- ------
Total principal transactions revenues $1,886 $576 $1,783
====== ===== ======
FIXED INCOME Fixed income revenues include realized and unrealized gains and
losses arising from the proprietary and customer trading of government and
government agency securities, investment and non-investment grade corporate
debt, municipal securities, preferred stock, mortgage securities (primarily U.S.
government agencies, including interest only and principal only strips), and
emerging market fixed income securities and derivatives. Revenues also include
realized and unrealized gains and losses arising from the spot and forward
trading of currencies and exchange-traded and OTC currency options. Revenues
also included realized and unrealized gains and losses from changes in the
market or fair value of options
F-19
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on fixed income securities, interest rate swaps, currency swaps, swap options,
caps and floors, financial futures, options and forward contracts on fixed
income securities are reflected as fixed income revenue.
COMMODITIES The Company, primarily through its wholly owned subsidiary Phibro
Inc. and its wholly owned subsidiaries (collectively, "Phibro"), conducts a
commodities trading and dealer business. Commodities traded include crude oil,
refined oil products, natural gas, metals and other commodities. Commodity
revenues consist of realized and unrealized gains and losses from trading these
commodities and related derivative instruments.
EQUITIES Revenues from equities consist of realized and unrealized gains and
losses arising from proprietary and customer trading of U.S. and non-U.S. equity
securities, including common and convertible preferred stock, convertible
corporate debt, equity-linked notes, equity swaps and exchange-traded and OTC
equity options and warrants. Revenues also include realized and unrealized gains
and losses on equity securities and related derivatives utilized in arbitrage
strategies for the Company's own account.
NOTE 5. SEGMENT INFORMATION
The Company's reportable segments include Investment Services, Private Client
Services and Asset Management. The Investment Services segment includes
investment banking and trading, as well as related derivative and commodity
trading. The Company's global investment banking services encompass a full range
of capital market activities, including the underwriting and distribution of
debt and equity securities for United States and foreign corporations and for
state, local and other governmental and government sponsored authorities.
Investment Services executes securities and commodities futures brokerage
transactions on all major exchanges on behalf of its customers and its own
account. Investment services engages in principal transactions in fixed income
securities and is a major participant in the OTC market for various derivative
instruments. The segment earns commissions as a broker for its clients in the
purchase and sale of securities.
Private Client Services provides investment advice and financial planning and
brokerage services, primarily through the network of the Company's Financial
Consultants. A significant portion of Private Client Services' revenue is
generated from the commissions earned as a broker for its clients in the
purchase and sale of securities as well as fees earned by managing client
assets. Private Client Services generates additional revenue by financing
customers' securities transactions through secured margin lending. Private
Client Services also receives commissions and other sales and service revenues
through the sale of proprietary mutual funds and third-party mutual funds. As
part of Private Client Services, Global Equity Research creates equity research
to serve both institutional and individual investor clients and as such the
group's expenses are allocated primarily to the Global Equities and Global
Private Client businesses.
The Asset Management segment provides discretionary and non-discretionary asset
management services to a wide array of mutual funds and institutional and
individual investors, with respect to domestic and foreign equity and debt
securities, municipal bonds, money market instruments and related options and
futures contracts. The segment receives ongoing fees, generally determined as a
percentage of the client's assets, from asset management clients.
F-20
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment data presented includes the allocation of all corporate overhead.
Inter-segment revenues and expenses have been eliminated. Information concerning
operations in the Company's business segments is as follows:
Year ended December 31,
Dollars in millions 2003 2002 2001
- ---------------------- --------- --------- ----------
Revenues, net of interest expense:
Investment Services $ 8,862 $ 7,481 $ 8,209
Private Client Services 5,746 5,768 6,034
Asset Management 1,054 1,157 1,144
--------- --------- ---------
Total $ 15,662 $ 14,406 $ 15,387
========= ========= =========
Total expenses:
Investment Services $ 5,766 $ 6,154 $ 5,877
Private Client Services 4,552 4,536 4,677
Asset Management 671 663 713
--------- --------- ---------
Total $ 10,989 $ 11,353 $ 11,267
========= ========= =========
Net income:
Investment Services $ 1,923 $ 739 $ 1,502
Private Client Services 734 773 865
Asset Management 236 275 260
--------- --------- ---------
Total $ 2,893 $ 1,787 $ 2,627
========= ========= =========
Year-end total assets:
Investment Services $ 345,950 $ 278,462 $ 285,395
Private Client Services 13,601 11,884 13,818
Asset Management 1,710 1,645 1,639
--------- --------- ---------
Total $ 361,261 $ 291,991 $ 300,852
========= ========= =========
F-21
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company's operations by geographic areas
which are determined principally by the respective legal jurisdictions of
CGMHI's subsidiaries. Substantially all amounts for the asset management segment
are included in North America. For purposes of this disclosure, North America
consists of the United States and Canada; Europe primarily consists of the
United Kingdom and Germany; and Asia and other primarily consists of Japan, Hong
Kong and Australia. Because of the global nature of the markets in which the
Company competes and the integration of the Company's worldwide business
activities, the Company believes that amounts determined in this manner are not
particularly useful in understanding its business.
Revenues Income Before Income
Before Taxes and Cumulative
Interest Effect of Changes in Year End
Dollars in millions Expense Accounting Principles Total Assets
- ------------------- --------- --------------------- ------------
Year Ended December 31, 2003
North America $ 15,246 $ 4,221 $ 261,209
Europe 4,686 291 91,922
Asia and other 790 161 8,130
--------- ------------- ----------
Consolidated $ 20,722 $ 4,673 $ 361,261
========= ============= ==========
Year Ended December 31, 2002
North America $ 16,583 $ 2,920 $ 217,169
Europe 3,932 21 70,895
Asia and other 735 112 3,927
--------- ------------- ----------
Consolidated $ 21,250 $ 3,053 $ 291,991
========= ============= ==========
Year Ended December 31, 2001
North America $ 22,701 $ 3,834 $ 243,839
Europe 4,221 196 54,061
Asia and other 452 90 2,952
--------- ------------- ----------
Consolidated $ 27,374 $ 4,120 $ 300,852
========= ============= ==========
F-22
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Information regarding the Company's short-term borrowings used to finance
operations, including the securities settlement process, is presented below.
Average balances were computed based on month-end outstanding balances.
Dollars in millions
Year Ended December 31, 2003 2002
- ----------------------- ------- -------
Bank borrowings:
Balance at year-end $ 918 $ 1,326
Weighted average interest rate 1.7% 3.5%
Annual averages --
Amount outstanding $ 1,372 $ 1,732
Weighted average interest rate 2.6% 3.4%
Maximum amount outstanding at any month-end $ 2,085 $ 2,382
Commercial paper:
Balance at year-end $17,626 $18,293
Weighted average interest rate 1.1% 1.4%
Annual averages --
Amount outstanding $15,872 $15,363
Weighted average interest rate 1.2% 1.7%
Maximum amount outstanding at any month-end $19,216 $18,293
Other short-term borrowings:
Balance at year-end $ 4,100 $ 3,000
Weighted average interest rate 3.1% 5.5%
Annual averages --
Amount outstanding $ 4,088 $ 2,186
Weighted average interest rate 4.5% 5.9%
Maximum amount outstanding at any month-end $ 6,405 $ 3,503
------- -------
Total commercial paper and other short term borrowings $22,644 $22,619
======= =======
Outstanding bank borrowings include both U.S. dollar and non-U.S. dollar
denominated loans. The non-U.S. dollar loans are denominated in various
currencies including Japanese yen, EURO, and U.K. sterling. All of the Company's
commercial paper outstanding at December 31, 2003 and 2002 was U.S. dollar
denominated. Included in "other short-term borrowings" at December 31, 2003, was
$202 million of borrowings with Citigroup and certain of its affiliates bearing
interest at various rates.
The Company has a $4.85 billion 364-day committed uncollateralized revolving
line of credit with unaffiliated banks. Commitments to lend under this facility
terminate in May 2004. Any borrowings under this facility would mature in May
2006. The Company also has $1.88 billion in committed uncollateralized 364-day
facilities with unaffiliated banks that extend through various dates in 2004,
and a $100 million 364-day collateralized facility that extends through December
2004. The Company may borrow under these revolving credit facilities at various
interest rate options (LIBOR or base rate), and compensates the banks for these
facilities through facility fees. At December 31, 2003, there were no
outstanding
F-23
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
borrowings under these facilities. The Company also has committed
long-term financing facilities with unaffiliated banks. At December 31, 2003,
the Company had drawn down the full $1.7 billion then available under these
facilities. 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
agreements). At December 31, 2003, this requirement was exceeded by
approximately $7.5 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.
NOTE 7. TERM DEBT
Term debt consists of issues with original maturities in excess of one year.
Certain issues are redeemable, in whole or in part, at par or at premiums prior
to maturity.
Equity-
Fixed Rate Fixed Rate Linked &
Obligations Obligations Total Variable Indexed Total Total
Swapped to Not Fixed Rate Rate Obligations December December
Dollars in millions Variable Converted Obligations Obligations (1)(2) 31, 2003 31, 2002
- ------------------- ---------- ---------- ---------- ----------- ----------- -------- ----------
U.S. dollar denominated:
Citigroup Global Markets
Holdings Inc. (CGMHI) $ 6,349 $ 199 $ 6,548 $ 17,108 $ 2,008 $ 25,664 $ 22,497
Subsidiaries - 7 7 679 5,635 6,321 3,480
---------- ---------- ---------- ---------- --------- --------- ---------
U.S. dollar denominated 6,349 206 6,555 17,787 7,643 31,985 25,977
---------- ---------- ---------- ---------- --------- --------- ---------
Non-U.S. dollar denominated:
Citigroup Global Markets
Holdings Inc. (CGMHI) 2,968 6 2,974 2,438 753 6,165 4,769
Subsidiaries - - - 444 5,148 5,592 1,556
---------- ---------- ---------- ---------- --------- --------- ---------
Non-U.S. dollar denominated 2,968 6 2,974 2,882 5,901 11,757 6,325
---------- ---------- ---------- ---------- --------- --------- ---------
Term debt $ 9,317 $ 212 $ 9,529 $ 20,669 $ 13,544 $ 43,742 $ 32,302
========== ========== ========== ========== ========= ========= =========
(1) Includes Targeted Growth Enhanced Term Securities ("TARGETS")
with carrying values of $541 million issued by TARGETS Trusts
VIII through XIX at December 31, 2003 and $368 million issued
by TARGETS Trusts V through XVII at December 31, 2002
(collectively the "Trusts"). The Company owns all of the
voting securities of the Trusts which are consolidated in the
Company's consolidated statements of financial condition. The
Trusts have no assets, operations, revenues or cash flows
other than those related to the issuance, administration, and
repayment of the TARGETS and the Trusts' common securities.
The Trusts' obligations under the TARGETS are fully and
unconditionally guaranteed by the Company.
(2) Approximately $11 billion of debt is included based on the
requirements of certain accounting pronouncements, primarily
FIN 46, SFAS 133 and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Liabilities, a
replacement of FASB Statement No. 125".
F-24
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The maturity structure of the Company's term debt was as follows at December 31,
2003:
Citigroup Global Markets
Holdings Inc.
Dollars in millions (CGMHI) Subsidiaries Total
- ------------------ ------------------------- ------------ --------
2004 $ 7,810 $ 947 $ 8,757
2005 5,509 912 6,421
2006 5,037 1,029 6,066
2007 940 814 1,754
2008 2,146 2,556 4,702
Thereafter 10,387 5,655 16,042
-------- ------- -------
Total $ 31,829 $11,913 $43,742
======== ======= =======
The Company issues U.S. dollar and non-U.S. dollar denominated fixed and
variable rate term debt. The contractual interest rates on fixed rate debt
ranged from .01% (Yen denominated) to 12% (U.S. dollar denominated) at December
31, 2003 and from .45% (Yen denominated) to 9.13% (U.S. dollar denominated) at
December 31, 2002. The weighted average contractual rate on total fixed rate
term debt (both U.S. dollar denominated and non-U.S. dollar denominated) was
4.9% at December 31, 2003 and 5.66% at December 31, 2002. The Company utilizes
interest rate swap agreements to convert most of its fixed rate term debt to
variable rate obligations. The maturity structure of the swaps generally
corresponds with the maturity structure of the debt being hedged.
The Company's non-U.S. dollar fixed and variable rate term debt includes Euro,
Yen, Sterling, Hong Kong dollar, Australian dollar, Canadian dollar, Swiss
franc, and, consequently, bears a wide range of interest rates.
At December 31, 2003, the Company had outstanding approximately $11.8 billion of
non-U.S. dollar denominated term debt, which included $6.7 billion of EURO
denominated, $4.3 billion of Yen denominated, and $.7 billion of Sterling
denominated. Of the $11.8 billion, approximately $0.8 billion of CGMHI Yen
denominated debt has been designated as a hedge of net investments in certain
subsidiaries with functional currencies other than the U.S. dollar. Another $1.5
billion of CGMHI debt has been effectively converted to U.S. dollar denominated
obligations using interest rate, cross-currency swaps and basis swaps. The
remaining $9.5 billion is used to finance other non-U.S. denominated assets.
F-25
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the significant components of the Company's fixed
rate term debt that is converted to variable rate obligations at December 31,
2003 and 2002.
2003 2002
------------------------------------------- ----------------------------------------------
Contractual Contractual
Weighted Weighted Weighted Weighted
Average Fixed Average Average Fixed Average
Rate on Variable Rate Rate on Variable Rate
Principal Swapped Fixed on Swapped Term Principal Swapped Fixed on Swapped Term
(Dollars in millions) Balance Rate Term Debt Debt Balance Rate Term Debt Debt
- --------------------- -------- -------------- -------------- -------- -------------- ---------------
U.S. dollar $ 6,349 6.1% 2.0% $ 7,684 6.5% 2.4%
Yen 1,362 2.5 0.2 1,026 1.1 0.9
Yen swapped to
U.S. dollar 688 3.0 0.3 662 2.9 1.7
Euro 722 3.6 2.3 499 6.5 3.1
Sterling 135 7.8 4.3 125 7.8 4.5
-------- ------------- -------------- -------- -------------- ---------------
The interest rates on variable rate term debt ranged from 0.01% (Yen
denominated) to 9.13% (U.S. dollar denominated) at December 31, 2003 and from
..08% (Yen denominated) to 5.03% (Australian dollar denominated) at December 31,
2002. The weighted average contractual rates on total variable rate term debt
(both U.S. dollar denominated and non-U.S. denominated) was 1.72 % and 1.73% at
December 31, 2003 and 2002, respectively.
The following table summarizes the significant components of the Company's
variable rate term debt that is swapped at December 31, 2003 and 2002:
2003 2002
------------------------------------------- ----------------------------------------------
Contractual Contractual
Weighted Weighted Weighted Weighted
Average Rate Average Average Rate Average
on Swapped Variable Rate on Swapped Variable Rate
Principal Variable Rate on Swapped Principal Variable Rate on Swapped
(Dollars in millions) Balance Term Debt Term Debt Balance Term Debt Term Debt
- --------------------- --------- ------------- ------------- -------- ------------ ------------
U.S. dollar $153 1.6% 1.2% $150 2.4% 2.2%
Euro swapped to
U.S. dollar 92 2.6 1.5 104 3.6 2.1
Yen swapped to
U.S. dollar - - - 177 0.2 1.6
--------- ------------- ------------- -------- ------------ ------------
Term debt includes subordinated debt, which totaled $130 million at December 31,
2003 and $103 million at December 31, 2002. Included in term debt at December
31, 2003, was $8 billion of U.S. dollar denominated variable rate debt with
Citigroup. This debt bears interest at rates ranging from 1.54% to 2.0% and
matures on various dates in 2012 and 2013.
The Company has a $4.85 billion 364-day committed uncollateralized revolving
line of credit with unaffiliated banks. Commitments to lend under this facility
terminate in May 2004. Any borrowings under this facility would mature in May
2006. The Company also has $1.88 billion in committed uncollateralized 364-day
facilities with unaffiliated banks that extend through various dates in 2004,
and a $100 million 364-day collateralized facility that extends through December
2004. The Company may borrow under these revolving credit facilities at various
interest rate options (LIBOR or base rate), and compensates the banks for these
facilities through facility fees. At December 31, 2003, there were no
outstanding borrowings under these facilities. The Company also has committed
long-term financing facilities with unaffiliated banks. At December 31, 2003,
the Company had drawn down the full $1.7 billion then available under these
facilities. 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
F-26
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjusted net worth (as defined in the agreements). At December 31, 2003, this
requirement was exceeded by approximately $7.5 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.
NOTE 8. LEASE COMMITMENTS
The Company has noncancelable leases covering office space and equipment
expiring on various dates through 2018. Presented below is a schedule of minimum
future rentals on noncancelable operating leases, net of subleases, as of
December 31, 2003. Various leases contain provisions for lease renewals and
escalation of rent based on increases in certain costs incurred by the lessors.
Dollars in millions
- --------------------
2004 $155
2005 147
2006 131
2007 109
2008 84
Thereafter 162
----
Minimum future rentals $788
====
Rent expense totaled $442 million, $475 million, and $425 million for the years
ended December 31, 2003, 2002, and 2001, respectively.
NOTE 9. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. broker/dealer subsidiaries are subject to various
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 the Company's principal regulated
subsidiaries are as follows:
Net Capital
(U.S.) or
Financial Excess over
Dollars in millions Resources minimum
Subsidiary Jurisdiction (U.K.) requirement
- -------------------------------- --------------------------------------------------- ----------- -----------
Citigroup Global Markets Inc. U.S. Securities and Exchange Commission Uniform Net $4,415 $3,955
Capital Rule (Rule 15c3-1)
Citigroup Global Markets Limited United Kingdom's Financial Services Authority $3,964 $ 852
-------- ----------
Advances, dividend payments and other equity withdrawals from regulated
subsidiaries are restricted by the regulations of the U.S. Securities and
Exchange Commission, the New York Stock Exchange and other regulatory agencies
and by certain
F-27
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
covenants contained in the Company's revolving credit facilities. See Notes 6
and 7 to the consolidated financial statements. These restrictions may limit the
amounts that these subsidiaries pay as dividends or advances to the Company.
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc.
("Swapco"), an indirect wholly owned subsidiary of the Company, must maintain
minimum levels of capital in accordance with agreements with its rating
agencies. At December 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.
NOTE 10. EMPLOYEE BENEFIT AND INCENTIVE PLANS
RETIREMENT PLANS
The Company participates in defined benefit pension plans through Citigroup that
cover certain U.S. and non-U.S. employees. These plans resulted in expenses of
$103 million, $60 million, and $42 million in 2003, 2002, and 2001,
respectively. The Company has defined contribution employee savings plans
through Citigroup covering certain eligible employees. The costs relating to
these plans were $16 million, $17 million, and $7 million in 2003, 2002, and
2001, respectively.
HEALTH CARE AND LIFE INSURANCE
The Company participates in various benefit plans through Citigroup which
provide certain health care and life insurance benefits for its active
employees, qualifying retired U.S. employees and certain non-U.S. employees who
reach the retirement criteria specified by the various plans. At December 31,
2003, there were approximately 32,200 active and 1,900 retired employees
eligible for such benefits.
Expenses recorded for health care and life insurance benefits from continuing
operations were $188 million, $180 million, and $129 million in 2003, 2002, and
2001, respectively.
INCENTIVE PLANS
The Company, through Citigroup, has adopted a number of equity compensation
plans under which it administers stock options, restricted/deferred stock and
stock purchase programs to attract, retain, and motivate officers and employees,
to compensate them for their contributions to the growth and profits of the
Company, and to encourage employee stock ownership. All of these plans are
administered by the Personnel and Compensation of the Citigroup Board of
Directors, which is comprised entirely of independent non-employee directors.
PRO FORMA EFFECT OF SFAS 123
Prior to January 1, 2003, the Company applied APB 25 and the related
interpretations in accounting for its stock-based compensation plans. Under APB
25 there is generally no charge to earnings for employee stock option awards
because the options granted under these plans have an exercise price equal to
the market value of the underlying common stock on the grant date. Alternatively
SFAS 123 allows companies to recognize compensation expense over the related
service period based on the grant-date fair value of the stock award. Refer to
Note 1 for a further description of these accounting standards and a
presentation of the effect on net income had the Company applied SFAS 123 in
accounting for the Company's stock
F-28
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
option plans. The pro forma adjustments relate to stock options granted from
1995 through 2002, for which the fair value on the date of the grant was
determined using a Black-Scholes option pricing model. In accordance with SFAS
123, no effect has been given to options granted prior to 1995. The fair values
of stock-based awards are based on assumptions that were determined at the grant
date.
SFAS 123 requires that reload options be treated as separate grants from the
related original grants. Under the Company's reload program, upon exercise of an
option, employees use previously owned shares to pay the exercise price and
surrender shares otherwise to be received for related tax withholding, and
receive a reload option covering the same number of shares used for such
purposes. Reload options vest at the end of a six month period. Reload options
are intended to encourage employees to exercise options at an earlier date and
to retain the shares so acquired, in furtherance of the Company's long standing
policy of encouraging increased employee stock ownership. The result of this
program is that employees generally will exercise options as soon as they are
able and, therefore these options have shorter expected lives. Shorter option
lives result in lower valuations using a Black-Scholes option model. However,
such values are expensed more quickly due to the shorter vesting period of
reload options. In addition, since reload options are treated as separate
grants, the existence of the reload feature results in a greater number of
options being valued.
Shares received through option exercises under the reload program, as well as
certain other options granted, are subject to restrictions on sale. Discounts
have been applied to the fair value of options granted to reflect these sale
restrictions. The following assumptions were used to calculate the effect of
SFAS 123:
Assumptions 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Expected volatility 37.7% 37.2% 38.6%
Risk-free interest rate 2.00% 3.90% 4.66%
Expected annual dividends per share prior to July 14, 2003 $ 0.92 $ 0.92 $ 0.92
Expected annual dividends per share on or
after July 14, 2003 $ 1.54 - -
Expected annual forfeiture rate - original & reload grants 7% 7% 5%
Expected annual forfeiture rate-Stock Purchase Program
Grants 10% - -
RESTRICTED STOCK PLANS
The Company has various restricted stock plans through Citigroup, including the
Capital Accumulation Plan, under which stock of Citigroup is issued in the form
of restricted stock to participating officers and employees. The restricted
stock generally vests after a two- or three-year period. Except under limited
circumstances, during the vesting period the stock cannot be sold or transferred
by the participant, and is subject to total or partial cancellation if the
participant's employment is terminated. Certain participants may elect to
receive part of their awards in restricted stock and part in stock options.
Unearned compensation associated with the restricted stock grants is included in
"Other assets" in the consolidated statement of financial condition and
represents the market value of Citigroup common stock at the date of grant and
is recognized as a
F-29
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
charge to income ratably over the vesting period. These plans resulted in
expenses of $1,174 million, $1,111 million, and $873 million for the years ended
December 31, 2003, 2002, and 2001, respectively.
NOTE 11. INCOME TAXES
Under income tax allocation agreements with Citigroup, the Company's U.S.
federal, state and local income taxes are provided on a separate return basis
and are subject to the utilization of tax attributes in Citigroup's consolidated
income tax provision. Under the tax sharing agreement with Citigroup, the
Company remits its current tax liabilities to Citigroup throughout the year
except for certain liabilities expected to be payable as a separate taxpayer.
The components of income taxes reflected on the consolidated statements of
income are:
Dollars in millions
Year Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------
Current tax provision:
U.S. federal $ 1,294 $ 972 $ 1,108
State and local 285 261 265
Non-U.S 132 34 150
------- ------- -------
Total current tax provision 1,711 1,267 1,523
------- ------- -------
Deferred tax provision/(benefit):
U.S. federal 95 (91) (13)
State and local 38 24 (18)
Non-U.S (64) 42 -
------- ------- -------
Total deferred tax provision/(benefit) 69 (25) (31)
------- ------- -------
Provision for income taxes $ 1,780 $ 1,242 $ 1,492
======= ======= =======
Under SFAS 109, "Accounting for Income Taxes," temporary differences between
recorded amounts and the tax bases of assets and liabilities are measured using
the enacted tax rates and laws that will be in effect when such differences are
expected to reverse.
F-30
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003 and December 31, 2002, respectively, the Company's
consolidated statements of financial condition included net deferred tax assets
of $960 million and $1,002 million, comprised of the following:
Dollars in millions
Year Ended December 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Employee benefits and deferred compensation $ 1,023 $ 1,123
Restructuring and settlement reserves 319 374
U.S. taxes provided on the undistributed earnings of non-U.S subsidiaries 41 22
Cumulative translation adjustments 17 17
Other deferred tax assets 372 322
------- -------
Total deferred tax assets 1,772 1,858
------- -------
Deferred tax liabilities:
Intangible assets (269) (331)
Investment position activity (48) (61)
Lease obligations and fixed assets (360) (391)
Other deferred tax liabilities (135) (73)
------- -------
Total deferred tax liabilities (812) (856)
------- -------
Net deferred tax asset $ 960 $ 1,002
======= =======
The Company had no deferred tax asset valuation allowance at December 31, 2003
or December 31, 2002.
Management believes that the realization of the recognized net deferred tax
asset of $960 million is more likely than not based on future reversals of
existing temporary differences and current expectations as to future taxable
income in the jurisdictions in which it operates. Under a tax sharing agreement
with Citigroup, the Company is entitled to a current benefit if it incurs losses
which are utilized in Citigroup's consolidated return. Citigroup, which has a
history of strong earnings, has reported pretax financial statement income from
continuing operations of approximately $22 billion, on average, over the last
three years.
Tax benefits (liabilities) allocated directly to stockholder's equity were as
follows:
Dollars in millions
Year Ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------
Foreign currency translation $ 19 $ 5 $ (5)
Other comprehensive income (5) - -
Employee stock plans 35 18 17
---- ---- ----
Total tax benefits allocated directly to stockholder's equity $ 49 $ 23 $ 12
==== ==== ====
The Company paid taxes of $1.5 billion and $2.1 billion in 2003 and 2002,
respectively, and received net tax refunds of $114 million in year 2001. At
December 31, 2003, the Company had a net income tax payable of $1.3 billion
included in the accompanying consolidated statement of financial condition.
Approximately $500 million of the net income tax payable was due to Citigroup.
As a result of the September 11, 2001 terrorist attack, the United States
Internal Revenue Service allowed
F-31
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
affected taxpayers, including the Company to postpone year 2001's third and
fourth quarter estimated tax payments until January 15, 2002.
Foreign pretax earnings approximated $474.1 million in 2003, $104.8 million in
2002, and $275.3 million in 2001. As a U.S. corporation, Citigroup and its U.S.
subsidiaries are subject to U.S. taxation currently on all foreign pretax
earnings earned by a foreign branch. Pretax earnings of a foreign subsidiary or
affiliate are subject to U.S. taxation when effectively repatriated. The Company
provides income taxes on the undistributed earnings of foreign subsidiaries
except to the extent that such earnings are indefinitely invested outside the
United States. At December 31, 2003, $1.3 billion of the Company's accumulated
undistributed earnings was indefinitely invested. At the existing U.S. federal
income tax rate, additional taxes of $399 million would have to be provided if
such earnings were remitted to the United States.
The following table reconciles the U.S. federal statutory income tax rate to the
Company's effective tax rate:
Year Ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Statutory U.S. federal income tax rate for corporations 35% 35% 35%
Impact of:
State and local (net of U.S. federal tax) and foreign taxes 5 5 4
Tax advantaged income (2) (1) (1)
Other, net - 2 (2)
-- -- --
Effective tax rate 38% 41% 36%
== == ==
NOTE 12. PLEDGED ASSETS, COMMITMENTS, CONTINGENCIES, AND GUARANTEES
At December 31, 2003 and 2002, the approximate market values of collateral
received that can be sold or repledged by the Company, excluding the impact of
FIN 41, were:
(Dollars in millions)
Sources of collateral 2003 2002
- -------------------------------------------------------------------------------------------------------
Securities purchased under agreements to resell $194,899 $164,569
Securities received in securities borrowed vs. pledged transactions 73,257 56,559
Securities received in securities borrowed vs. cash transactions 48,767 44,612
Collateral received in margined broker loans 21,806 19,827
Collateral received in securities loaned vs. pledged transactions 6,444 4,450
Collateral received in derivative transactions and other 852 1,914
-------- --------
Total $346,025 $291,931
======== ========
F-32
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003 and 2002, almost all collateral received was sold or
repledged. At December 31, 2003 and 2002, the approximate market values of the
portion of the above collateral, as well as financial instruments owned by the
Company that were sold or repledged by the Company, excluding the impact of FIN
41, were:
(Dollars in millions)
Uses of collateral and trading securities 2003 2002
- ----------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase $242,790 $212,523
Collateral pledged out in securities borrowed vs. pledged transactions 63,206 51,206
Financial instruments sold, not yet purchased 55,926 46,856
Securities loaned out in securities loaned vs. cash transactions 20,665 9,780
Collateral pledged to clearing organization or segregated under
securities laws and regulations 15,615 7,936
Securities loaned out in securities loaned vs. pledged transactions 13,295 12,288
Other 1,182 1,871
-------- --------
Total $412,679 $342,460
======== ========
OTHER CONTINGENCIES
The Company had $1.1 billion and $962 million of outstanding letters of credit
from banks to satisfy various collateral and margin requirements at December 31,
2003 and 2002, respectively.
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 such guarantees 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
F-33
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are not expected to occur. There are no amounts reflected on the accompanying
consolidated statement of financial condition as of December 31, 2003 and 2002
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 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 consolidated statement of financial condition as of December
31, 2003 and 2002 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 December 31, 2003 and 2002, the
carrying amount of the liabilities related to these derivatives was $2.4 billion
and $2.8 billion, respectively.
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 December
31, 2003, the maximum potential loss at notional value related to credit default
swaps and total rate of return swaps amounted to $62.7 billion, of which $6.5
billion expire within one year and $56.2 billion expire after one year. At
December 31, 2002, the maximum potential loss at notional value related to
credit default swaps and total rate of return swaps amounted to $38.8 billion.
At December 31, 2003 and 2002, the maximum potential loss at fair value related
to derivative guarantees other than credit default swaps and total rate of
return swaps amounted to $2.1 billion and $2.3 billion, respectively.
Guarantees to joint ventures and other third parties primarily include
guarantees of their debt obligations. At December 31, 2003, the carrying amount
and the maximum potential loss related to these joint venture and other
third-party guarantees were $589 million, of which $433 million expires within
one year and $156 million expires after one year. At December 31, 2002, the
carrying amount and the maximum potential loss related to joint venture and
other third-party guarantees was $495 million. Securities and other marketable
assets held as collateral to reimburse losses under other third-party guarantees
amounted to $48 million and $42 million at December 31, 2003 and 2002,
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 December
31, 2003 and 2002, the amount and the maximum potential loss related to
guarantees of collection of contractual cash flows were $24 million and $22
million, respectively.
F-34
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. LEGAL PROCEEDINGS
As described in the "Legal Proceedings" discussion on page 10, the Company is a
defendant in numerous lawsuits and other legal proceedings arising out of the
transactions and activities that were the subjects of (i) the April 2003
settlement of research and IPO spinning-related inquiries conducted by the
Securities and Exchange Commission, the National Association of Securities
Dealers, the New York Stock Exchange and the New York Attorney General, (ii) the
July 2003 settlement of the Enron-related inquiries conducted by the Securities
and Exchange Commission, the Federal Reserve Bank of New York, the Office of the
Comptroller of the Currency, and the Manhattan District Attorney, (iii)
underwritings for, and research coverage of, WorldCom, and (iv) the allocation
of, and aftermarket trading in, securities sold in initial public offerings. The
Company's reserve toward the costs of resolving the lawsuits and other legal
proceedings in connection with these matters was $900 million at December 31,
2003. The total reserve established in 2002 amounted to approximately $1.2
billion pre-tax and an after-tax amount of $863 million.
It is not possible to predict the ultimate outcome of these lawsuits and other
legal proceedings, or the timing of their resolution. Management reviews the
status of these matters on an ongoing basis and will exercise its judgment in
resolving them in such manner as it believes to be in the best interests of the
Company. The Company will defend itself vigorously in these cases and believes
that it has substantial defenses to the claims asserted. However, given the
uncertainties of the timing and outcome of this type of litigation, the large
number of cases, the multiple defendants in many of them, the very large
aggregate damages sought by the plaintiffs, the novel issues presented, the
length of time before these cases will be resolved by settlement or through
litigation, and the current difficult litigation environment, it is not
presently possible to determine the Company's ultimate exposure for these
matters and there is no assurance that the ultimate resolution of these matters
will not significantly exceed the reserve accrued by the Company. In the opinion
of the Company's management, the ultimate resolution of these lawsuits and other
proceedings, while not likely to have a material adverse effect on the
consolidated financial condition of the Company, may be material to the
Company's operating results for any particular period.
NOTE 14. FINANCIAL INSTRUMENTS AND CONTRACTUAL COMMITMENTS AND RELATED RISKS
The Company and its subsidiaries enter into a variety of contractual
commitments, such as interest rate, equity, currency and commodity swap
agreements, cap and floor agreements, swap options, forward purchase and sale
agreements, option contracts, warrants and commodity and financial futures and
forward contracts. These transactions generally require future settlement, and
are either executed on an exchange or traded as OTC instruments. Contractual
commitments have widely varying terms, and durations that range from a few days
to a number of years depending on the instrument.
Interest rate swaps are OTC instruments where two counterparties agree to
exchange periodic interest payment streams calculated on a predetermined
notional principal amount. The most common interest rate swaps generally involve
one party paying a fixed interest rate and the other party paying a variable
rate. Other types of swaps include basis swaps, currency swaps, equity swaps,
commodity swaps and swap options. Basis swaps consist of both parties paying
variable interest streams
F-35
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on different reference rates. Cross-currency swaps involve the exchange of
coupon payments in one currency for coupon payments in another currency. An
equity swap is an agreement to exchange cash flows on a notional amount based on
changes in the values of a referenced index, such as the Standard & Poor's 500
Index. Commodity swaps involve the exchange of a fixed price of a commodity for
a floating price or the exchange of one floating price for a different floating
price, throughout the swap term. The most common commodity swaps entered into by
the Company include crude oil, refined oil products and natural gas.
Caps are contractual commitments that require the writer to pay the purchaser an
excess amount, if the reference rate exceeds a contractual rate at specified
times during the contract. Likewise, a floor is a contractual commitment that
requires the writer to pay an excess amount, if any, of a contractual rate over
a reference rate at specified times over the life of the contract. Swap options
are OTC contracts that entitle the holder to either enter into an interest rate
swap at a future date or to cancel an existing swap at a future date.
Futures contracts are exchange-traded contractual commitments to either receive
(purchase) or deliver (sell) a standard amount or value of a commodity or
financial instrument at a specified future date and price (or, with respect to
futures contracts on indices, the net cash amount). Maintaining a futures
contract will typically require the Company to deposit with the futures exchange
(or other financial intermediary), as security for its obligations, an amount of
cash or other specified asset ("initial margin") that typically ranges from 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited daily as the mark-to-market value of the futures contract
fluctuates. Futures contracts may be settled by physical delivery of the
underlying asset or cash settlement (for index futures) on the settlement date,
or by entering into an offsetting futures contract with the futures exchange
prior to the settlement date. Forward contracts are OTC contractual commitments
to purchase or sell a specified amount of foreign currency, financial
instruments, or commodities at a future date at a predetermined price. The
notional amount for forward settling securities transactions represents the
amount of cash that will be paid or received by the counterparties when the
transaction settles. Upon settlement, the security is reflected on the
consolidated statement of financial condition as either financial instruments
owned and contractual commitments or financial instruments sold, not yet
purchased, and contractual commitments.
Option contracts are contractual agreements that give the purchaser the right,
but not the obligation, to purchase or sell a currency, financial instrument or
commodity at a predetermined price. In return for this right, the purchaser pays
a premium to the seller (or writer) of the option. Option contracts also exist
for various indices and are similar to options on a security or other
instruments except that, rather than settling by physical delivery of the
underlying instrument, they are settled in cash. Options on futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract. Warrants have characteristics similar to those
of options whereby the buyer has the right, but not the obligation, to purchase
a certain instrument at a specific future date and price. The seller (or writer)
of the option/warrant is subject to the risk of an unfavorable change in the
underlying financial instrument, commodity, or currency. The purchaser is
subject to market risk to the extent of the premium paid and credit risk. The
Company is obligated to post margin for options on futures. Option contracts may
be either exchange-traded or OTC. Exchange-traded options issued by certain
regulated intermediaries,
F-36
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
such as the Options Clearing Corporation, are the obligations of the issuing
intermediary. In contrast to such options, which generally have standardized
terms and performance mechanics, all of the terms of an OTC option, including
the method of settlement, term, exercise price, premium, guarantees and
security, are determined by negotiation of the parties, and there is no
intermediary between the parties to assume the risks of performance. The Company
issues warrants that entitle holders to cash settlements on exercise based upon
movements in market prices of specific financial instruments and commodities,
foreign exchange rates and equity indices.
The Company sells various financial instruments that have not been purchased
("short sales"). In order to sell them short, the Company borrows these
securities, or receives the securities as collateral in conjunction with
short-term financing agreements and, at a later date, must deliver (i.e.,
replace) like or substantially the same financial instruments or commodities to
the parties from which they were originally borrowed. The Company is exposed to
market risk for short sales. If the market value of an instrument sold short
increases, the Company's obligation, reflected as a liability, would increase
and revenues from principal transactions would be reduced.
The way in which the Company accounts for and presents contractual commitments
in its financial statements depends on both the type and purpose of the
contractual commitment held or issued. As discussed in Note 1 to the
consolidated financial statements, the Company records all derivatives,
including those used to hedge trading positions, at market or fair value.
Consequently, changes in the amounts recorded in the Company's consolidated
statements of financial condition resulting from movements in market or fair
value are included in "Principal transactions" in the period in which they
occur. The accounting and reporting treatment of derivatives used for
non-trading purposes varies, depending on the nature of exposure being hedged.
Contractual commitments and short sales risk may expose the Company to both
market risk and credit risk in excess of the amount recorded on the consolidated
statements of financial condition. These off-balance sheet risks are discussed
in more detail below.
MARKET RISK
Market risk is the potential loss or decrease in economic value the Company may
incur as a result of changes in the market or fair value of a particular
financial instrument, commodity or contractual commitment. All financial
instruments, commodities and contractual commitments, including short sales, are
subject to market risk. The Company's exposure to market risk is determined by a
number of factors, including the size, duration, composition and diversification
of positions held, the absolute and relative levels of interest rates and
foreign currency exchange rates, as well as market volatility and illiquidity.
For instruments such as options and warrants, the time period during which the
options or warrants may be exercised and the relationship between the current
market price of the underlying instrument and the option's or warrant's
contractual strike or exercise price also affect the level of market risk. The
most significant factor influencing the overall level of market risk to which
the Company is exposed is its use of hedging techniques to mitigate such risk.
The Company manages market risk by setting risk limits and monitoring the
effectiveness of its hedging policies and strategies.
F-37
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table on the following page includes the disclosure of the notional amounts
of the Company's derivative financial instruments. The determination of notional
amounts does not consider any of the market risk factors discussed above.
Notional amounts are indicative only of the volume of activity and are not a
measure of market risk. Market risk is influenced by the nature of the items
that comprise a particular category of financial instrument. Market risk is also
influenced by the relationship among the various off-balance sheet categories as
well as the relationship between off-balance sheet items and items recorded in
the Company's consolidated statements of financial condition. For all of these
reasons, the interpretation of notional amounts as a measure of market risk
could be materially misleading.
A summary of contractual commitments as of December 31, 2003 and 2002 is as
follows:
DECEMBER 31, 2003 DECEMBER 31, 2002
---------------------------------- ---------------------------------
Notional Current Market or Notional Current Market or
or Fair Value or Fair Value
Contractual Contractual
-------------------- --------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Exchange-traded products:
Futures contracts (a) $ 314.1 $ - $ - $ 192.2 $ - $ -
Other exchange-traded products:
Equity options 50.5 1.7 1.8 50.8 1.4 2.0
Fixed income options 11.6 - - 7.2 - -
Foreign exchange options and commodity contracts 3.4 - - 2.3 - -
---------- ------- ------- ---------- ------- -------
Total exchange-traded products 379.6 1.7 1.8 252.5 1.4 2.0
---------- ------- ------- ---------- ------- -------
Over-the-counter ("OTC") swaps, swap options, caps, floors
and forward rate agreements:
Swaps 2,136.5 2,567.7
Swap options written 81.2 60.1
Swap options purchased 62.2 52.7
Caps, floors and forward rate agreements 151.5 181.9
---------- ------- ------- ---------- ------- -------
Total OTC swaps, swap options, caps, floors and forward rate
agreements (b) 2,431.4 9.1 8.7 2,862.4 11.9 9.4
---------- ------- ------- ---------- ------- -------
Other options and contractual commitments:
Options and warrants on equities and equity indices 85.4 1.9 4.9 73.5 1.1 2.4
Options and forward contracts on fixed income securities 469.3 1.7 2.0 628.7 .8 .4
Foreign exchange contracts and options (b) 131.0 1.1 1.2 58.7 .5 .5
Commodity contracts 9.0 .1 .1 9.2 .1 .1
---------- ------- ------- ---------- ------- -------
Total contractual commitments $ 3,505.7 $ 15.6 $ 18.7 $ 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 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 $14.4 billion and $5.0 billion at December 31, 2003 and
$14.3 billion and $4.1 billion at December 31, 2002, respectively.)
The annual average balances of the Company's contractual commitments, based on
month-end balances, are as follows:
2003 2002
------------------------ ------------------------
Average Average Average Average
Dollars in billions Assets Liabilities Assets Liabilities
- -------------------------------------------------------------------------------------------------------------------
Swaps, swap options, caps, floors and
forward rate agreements $ 10.3 $ 8.3 $ 8.1 $ 7.4
Options and warrants on equities and equity indices 3.7 6.2 2.2 3.5
Foreign exchange contracts and options .6 .7 .3 .3
Commodity contracts .1 .1 .1 .1
Options on forward contracts on fixed income
securities 1.0 .6 .6 .4
------- ------- ------- -------
Total contractual commitments $ 15.7 $ 15.9 $ 11.3 $ 11.7
======= ======= ======= =======
F-38
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CREDIT RISK
The Company regularly transacts business with retail customers, and transacts
with, or owns securities issued by, a broad range of corporations, governments,
international organizations, central banks and other financial institutions.
Phibro regularly transacts business with independent and government-owned oil
producers, a wide variety of end users, trading companies and financial
institutions. Credit risk is measured by the loss the Company would record if
its counterparties failed to perform pursuant to the terms of their contractual
obligations and the value of collateral held, if any, was not adequate to cover
such losses. The Company has established controls to monitor the
creditworthiness of counterparties, as well as the quality of pledged
collateral, and uses bilateral security agreements and master netting agreements
whenever possible to mitigate the Company's exposure to counterparty credit
risk. In accordance with FIN 39, the Company utilizes master netting agreements
to net certain assets and liabilities by counterparty. The Company also nets
across product lines and against cash collateral, provided such provisions are
established in the master netting and cash collateral agreements. The Company
may require counterparties to submit additional collateral pursuant to the above
agreements when deemed necessary.
The Company enters into collateralized financing agreements in which it extends
short-term credit, primarily to major financial institutions. The Company
controls access to the collateral pledged by the counterparties, which consists
largely of securities issued by the G-7 governments or their agencies, that may
be liquidated in the event of counterparty default.
In addition, margin levels are monitored daily and additional collateral must be
deposited as required. If customers cannot meet collateral requirements, the
Company will liquidate sufficient underlying financial instruments to bring the
account in compliance with the required margin level.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk from financial instruments, including contractual
commitments, exist when groups of issuers or counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. The
Company monitors credit risk on both an individual and group counterparty basis.
The Company's largest single concentration of credit risk is in securities
issued by the U.S. government and its agencies, which totaled $51.2 billion at
December 31, 2003 and $34.6 billion at December 31, 2002. With the addition of
U.S. government and U.S. government agency securities pledged as collateral by
counterparties in connection with collateralized financing activity, the
Company's total holdings of U.S. government securities were $186.3 billion or
42% of the Company's total assets before FIN 41 netting at December 31, 2003 and
$153.0 billion or 43% of the Company's total assets before FIN 41 netting at
December 31, 2002. Concentrations with non-U.S. governments totaled $61.1
billion at December 31, 2003 and $53.8 billion at December 31, 2002. These
consist predominantly of securities issued by the governments of major
industrial nations. Remaining concentrations arise principally from contractual
commitments with counterparties in financial or commodities transactions
involving future settlement and fixed income securities owned. Excluding
governments, no concentration with a single counterparty exceeded 1% of total
assets at December 31, 2003 or 2002. North America and Europe represent the
largest geographic concentrations. Among industries, other major derivatives
dealers represent the largest group of counterparties.
F-39
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. FAIR VALUE INFORMATION
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the
disclosure of the fair value of all financial instruments. The following
information is presented to help the reader gain an understanding of the
relationship between the amounts reported in the Company's consolidated
financial statements and the related market or fair values. Specific accounting
policies are discussed in Note 1 to the consolidated financial statements.
At December 31, 2003, $351.4 billion or 97% of the Company's total assets and
$336.1 billion or 97% of the Company's total liabilities were carried at market
value or fair value or at amounts that approximate such values. At December 31,
2002, $282.6 billion or 97% of the Company's total assets and $268.7 billion or
96% of the Company's total liabilities were carried at either market or fair
values or at amounts that approximate such values. Financial instruments
recorded at market or fair value include cash and cash equivalents, financial
instruments, and contractual commitments.
Financial instruments recorded at contractual amounts that approximate market or
fair value include collateralized short-term financing agreements, receivables,
commercial paper and other short-term borrowings, payables and accrued
liabilities, and variable rate term debt. The market values of such items are
not materially sensitive to shifts in market interest rates because of the
limited term to maturity of many of these instruments and/or their variable
interest rates.
The following table reflects financial instruments which are recorded at
contractual or historical amounts that do not necessarily approximate market or
fair value.
2003 2002
Liabilities Liabilities
----------------- ----------------
Dollars in billions Carrying Fair Carrying Fair
December 31, Value Value Value Value
- --------------------------------------------------------------------------------------------
Financial instruments primarily recorded at
contractual amounts or historical amounts that do
not necessarily approximate market or fair value:
Fixed rate term debt $9.5 $9.3 $10.3 $10.3
---- ---- ----- -----
The fair value of fixed rate term debt has been estimated by using a discounted
cash flow analysis.
NOTE 16. RELATED PARTY BALANCES
The Company has related party balances with Citigroup and certain of its
subsidiaries and affiliates. These balances, which are short-term in nature,
include cash accounts, collateralized financing transactions, margin accounts,
receivables and payables, securities and underwriting transactions, derivative
trading, charges for operational support and the borrowing and lending of funds.
These balances result from related party transactions that are generally
conducted at prices equivalent to prices for transactions conducted at arm's
length with unrelated third parties. Amounts charged for operational support
represent an allocation of costs.
F-40
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
During 2003 and 2002, the Company securitized various types of assets including
commercial and residential mortgages, high yield bonds, government, agency and
corporate securities, and municipal bonds. Proceeds from these securitizations
were approximately $29 billion in 2003, $24 billion in 2002, $19 billion in
2001, which contributed to pre-tax gains and related fees of $125 million, $105
million, $97 million in 2003, 2002, and 2001, respectively.
To a limited extent, the Company also retains interests in these securitizations
for which the Company was the securitizer. Such retained positions are carried
at fair value with the changes in fair value reported in earnings. As of
December 31, 2003 and 2002, the largest portion of these retained positions was
in securitizations of commercial and residential mortgages, agency mortgage
securities and collateralized debt obligations which totaled $3.6 billion and
$1.0 billion, respectively.
The key assumptions used in estimating the fair value of these retained
interests at December 31, 2003 and 2002, were:
COMMERCIAL MORTGAGES
2003 2002
---- -----
Discount Rate 2%-9% 2%-28%
---- -----
RESIDENTIAL MORTGAGES
2003 2002
----- ------
Discount Rate 2%-81% 23%-40%
Expected Prepayment Rate 8%-48% 5%-40%
Anticipated Credit Loss 0%-80% 30%-50%
----- ------
AGENCY SECURITIES
2003 2002
----- ------
Discount Rate 2%-56% 2%-49%
Expected Prepayment Rate 8%-29% 15%-51%
----- ------
COLLATERALIZED DEBT OBLIGATIONS
2003 2002
------- ------
Discount Rate 0.4%-10% 1%-18%
Recovery Rate 30%-70% 40%-70%
------- ------
At December 31, 2003 and 2002, the impact of altering, on a pre-tax basis, each
of the assumptions to assumptions that are 10% and 20% less favorable and do not
include the impact of hedges that the Company has in place, is as follows:
COMMERCIAL MORTGAGES
2003 2002
---------------------------------------
(Dollars in millions) 10% 20% 10% 20%
---- ---- ---- ---
Discount Rate $0.3 $0.6 $1.5 $2.9
---- ---- ---- ---
F-41
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESIDENTIAL MORTGAGES
2003 2002
-------------------------------------------------------
(Dollars in millions) 10% 20% 10% 20%
------- ------- ------- -------
Discount Rate $ 12.2 $ 20.5 $ 1.8 $ 3.5
Expected Prepayment rate $ - $ 0.5 $ 0.5 $ 1.0
Anticipated Credit Loss $ 1.6 $ 2.1 $ 1.9 $ 3.9
------- ------- ------- -------
AGENCY SECURITIES
2003 2002
-------------------------------------------------------
(Dollars in millions) 10% 20% 10% 20%
------- ------- ------- -------
Discount Rate $ 33.5 $ 65.7 $ 11.3 $ 22.0
Expected Prepayment rate $ 0.2 $ 0.3 $ 4.0 $ 7.8
------- ------- ------- -------
COLLATERALIZED DEBT OBLIGATIONS
2003 2002
-------------------------------------------------------
(Dollars in millions) 10% 20% 10% 20%
------- ------- ------- -------
Discount Rate $ 5.1 $ 10.1 $ 2.5 $ 5.1
Recovery Rate $ - $ - $ - $ 0.1
------- ------- ------- -------
VARIABLE INTEREST ENTITIES
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 December 31, 2003
- --------------------------------------------------------------
Cash $ 25
Financial Instruments Owned & Contractual
Commitments 3,127
Receivables - Other 124
Other Assets 753
------
Total Assets of Consolidated VIEs $4,029
======
The consolidated VIEs included in the table above represent hundreds of separate
entities with which the Company is involved and includes approximately $563
million related to VIEs consolidated as a result of FIN 46. Approximately $1.8
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 $2.2 billion of the total
assets of consolidated VIEs represents investment vehicles that were established
to provide a return to the investors in the vehicles.
F-42
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company may provide liquidity facilities to the VIEs, may be a party to
derivative contracts with VIEs, may provide 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 packages and securitizes assets purchased in the financial markets
in order to create new security offerings, including arbitrage CDOs and
synthetic CDOs for institutional clients and retail customers, that match the
clients' investment needs and preferences. Typically these instruments diversify
investors' risk to a pool of assets as compared with investments in an
individual asset. The VIEs, which are issuers of CDO securities, are generally
organized as limited liability corporations. The Company typically receives fees
for structuring and/or distributing the securities sold to investors. In some
cases, the Company may repackage the investment with higher rated debt CDO
securities or U. S. Treasury securities to provide a greater or a very high
degree of certainty, respectively, of the return of invested principal. A
third-party manager is typically retained by the VIE to select collateral for
inclusion in the pool and then actively manage it, or, in other cases, only to
manage work-out credits. At December 31, 2003, such transactions involved VIEs
with approximately $8.0 billion in assets.
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 December 31, 2003, such transactions involved
VIEs with approximately $50.4 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 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 $8.6 billion at December 31, 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.
F-43
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. CGMHI ONLY CONDENSED FINANCIAL STATEMENTS
The following are condensed financial statements of Citigroup Global Markets
Holdings Inc. (CGMHI Only):
CGMHI ONLY CONDENSED STATEMENTS OF INCOME
Dollars in millions
Year Ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------
Revenues, net of interest expense $ 89 $ 100 $ (27)
Noninterest expenses 44 24 54
------- ------- -------
Income (loss) before income taxes 45 76 (81)
Provision for income taxes 151 28 26
Equity in earnings of subsidiaries 2,999 1,739 2,734
------- ------- -------
Net income $ 2,893 $ 1,787 $ 2,627
======= ======= =======
CGMHI ONLY CONDENSED STATEMENTS OF FINANCIAL CONDITION
Dollars in millions
December 31, 2003 2002
- -----------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ - $ -
Financial instruments owned and contractual commitments 323 143
Receivables 1,004 609
Receivable from subsidiaries (1) 59,658 51,753
Investment in subsidiaries 12,614 10,077
Other assets 1,653 1,665
------- -------
Total assets $75,252 $64,247
======= =======
Liabilities and stockholder's equity:
Commercial paper and other short-term borrowings $19,637 $20,180
Payable to subsidiaries 1,117 1,189
Financial instruments sold, not yet purchased, and
contractual commitments 3,747 647
Other liabilities 1,610 1,429
Term debt 33,519 27,832
Subordinated debt payable to SSBH Capital Trust I - 412
------- -------
Total liabilities 59,630 51,689
Stockholder's equity 15,622 12,558
------- -------
Total liabilities and stockholder's equity $75,252 $64,247
======= =======
(1) Includes $6.3 billion and $4.4 billion of subordinated note receivables at
December 31, 2003 and December 31, 2002, respectively.
F-44
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CGMHI ONLY CONDENSED STATEMENTS OF CASH FLOWS
Dollars in millions
Year ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in commercial paper
and other short-term borrowings $ (543) $ 4,139 $ (2,519)
Proceeds from issuance of term debt 15,429 8,898 10,530
Term debt maturities and repurchases (10,285) (6,034) (5,378)
Capital contribution from Parent 500 500 -
Other capital transactions (26) 12 203
Dividends paid (1,056) (1,727) (2,660)
-------- -------- --------
Cash provided by financing activities 4,019 5,788 176
-------- -------- --------
Cash flows from investing activities:
Increase in receivables from subsidiaries, net (7,891) (7,533) (5,418)
Dividends received from subsidiaries 1,170 2,236 2,723
Capital (infusions to) distributions from subsidiaries, net 41 (261) 14
-------- -------- --------
Cash used in investing activities (6,680) (5,558) (2,681)
-------- -------- --------
Cash provided by (used in) operating activities 2,661 (230) 2,505
-------- -------- --------
Increase in cash and cash equivalents 0 0 0
Cash and cash equivalents at beginning of year 0 0 0
-------- -------- --------
Cash and cash equivalents at end of year $ 0 $ 0 $ 0
======== ======== ========
BASIS OF PRESENTATION
The accompanying condensed financial statements, which include the accounts of
CGMHI, a direct wholly owned subsidiary of Citigroup, should be read in
conjunction with the consolidated financial statements of the Company.
Investments in subsidiaries are accounted for under the equity method. For
information regarding the Company's term debt and commercial paper and other
short term borrowings, see Notes 6 and 7 to the consolidated financial
statements.
RELATED PARTY TRANSACTIONS
CGMHI engages in various transactions with its subsidiaries that are
characteristic of a consolidated group under common control. As a public debt
issuer, CGMHI has access to long-term sources of funds that are loaned from
CGMHI to certain of its subsidiaries. Such intercompany advances are payable on
demand and bear interest at varying rates.
F-45
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results for the year ended December 31, 2003 were as follows:
Quarter Ended
Dollars in millions March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------
Noninterest revenues $3,096 $3,484 $3,054 $3,167
Net interest and dividends 660 736 676 789
------ ------ ------ ------
Revenues, net of interest expense 3,756 4,220 3,730 3,956
Expenses, excluding interest 2,718 3,014 2,661 2,596
------ ------ ------ ------
Income before income taxes 1,038 1,206 1,069 1,360
Provision for income taxes 388 467 406 519
------ ------ ------ ------
Net income $ 650 $ 739 $ 663 $ 841
====== ====== ====== ======
Quarterly results for the year ended December 31, 2002 were as follows:
Quarter Ended
Dollars in millions March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------
Noninterest revenues $ 3,396 $ 3,051 $ 2,655 $ 2,548
Net interest and dividends 678 781 646 651
------- ------- ------- -------
Revenues, net of interest expense 4,074 3,832 3,301 3,199
Expenses, excluding interest 2,872 2,843 2,453 3,185
------- ------- ------- -------
Income before income taxes and cumulative
effect of change in accounting principle 1,202 989 848 14
Provision for income taxes 449 370 319 104
------- ------- ------- -------
Income before cumulative effect of
change in accounting principle 753 619 529 (90)
------- ------- ------- -------
Cumulative effect of change in accounting principle
(net of tax benefit of $1) (24) - - -
------- ------- ------- -------
Net income (loss) $ 729 $ 619 $ 529 $ (90)
======= ======= ======= =======
F-46