Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-15286
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2418067
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. AS OF THE DATE
HEREOF, 1,000 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE,
WERE ISSUED AND OUTSTANDING.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
AVAILABLE ON THE WEB @ WWW.CITIGROUP.COM.
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2004
PAGE
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income (Unaudited) -
Three months ended March 31, 2004 and 2003 1
Condensed Consolidated Statements of Financial Condition -
March 31, 2004 (Unaudited) and December 31, 2003 2-3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three months ended March 31, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22-24
Item 6. Exhibits and Reports on Form 8-K 24-25
Exhibit Index 25
Signatures 26
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Dollars in millions
Three Months Ended March 31, 2004 2003
- ---------------------------------------------------------------------------------
Revenues:
Commissions $ 1,197 $ 823
Asset management and administration fees 1,005 798
Investment banking 882 827
Principal transactions 310 621
Other 44 27
- ---------------------------------------------------------------------------------
Total non-interest revenues 3,438 3,096
- ---------------------------------------------------------------------------------
Interest and dividends 2,194 2,032
Interest expense 1,230 1,372
- ---------------------------------------------------------------------------------
Net interest and dividends 964 660
- ---------------------------------------------------------------------------------
Revenues, net of interest expense 4,402 3,756
- ---------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 2,355 2,035
Floor brokerage and other production 191 158
Communications 141 167
Occupancy and equipment 137 136
Professional services 128 80
Advertising and market development 76 60
Other operating and administrative expenses 81 82
- ---------------------------------------------------------------------------------
Total non-interest expenses 3,109 2,718
- ---------------------------------------------------------------------------------
Income before income taxes 1,293 1,038
Provision for income taxes 472 388
- ---------------------------------------------------------------------------------
Net income $ 821 $ 650
=================================================================================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
1
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
Dollars in millions 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and cash equivalents $ 5,279 $ 6,312
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 3,830 2,806
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $ 110,875 $ 108,984
Deposits paid for securities borrowed 57,402 50,192
--------- ----------
168,277 159,176
Financial instruments owned and contractual commitments:
(Approximately $66 billion and $63 billion were pledged to various
parties at March 31, 2004 and December 31, 2003, respectively)
U.S. government and government agency securities 41,013 51,205
Corporate debt securities 36,359 33,221
Equity securities 24,979 19,610
Contractual commitments 15,208 15,554
Non-U.S. government and government agency securities 13,417 11,929
Mortgage loans and collateralized mortgage obligations 9,231 8,275
Money market instruments 3,338 5,369
Other financial instruments 7,871 8,682
--------- ----------
151,416 153,845
Receivables:
Customers 20,214 18,831
Brokers, dealers and clearing organizations 14,968 7,560
Other 3,141 2,865
--------- ----------
38,323 29,256
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,106 and
$1,081, respectively 1,333 1,384
Goodwill 1,531 1,531
Intangibles 801 800
Other assets 7,015 6,151
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 377,805 $ 361,261
================================================================================================================================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
Dollars in millions, except share data 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 27,376 $ 22,644
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 127,721 $ 135,301
Deposits received for securities loaned 25,268 19,503
--------- ----------
152,989 154,804
Financial instruments sold, not yet purchased, and
contractual commitments:
Non-U.S. government and government agency securities 26,339 24,373
U.S. government and government agency securities 18,798 16,524
Contractual commitments 18,578 18,698
Corporate debt securities and other 13,060 10,593
Equity securities 5,011 4,436
--------- ----------
81,786 74,624
Payables and accrued liabilities:
Customers 30,599 23,848
Brokers, dealers and clearing organizations 5,253 11,317
Other 15,927 14,660
--------- ----------
51,779 49,825
Term debt 47,818 43,742
Stockholder's equity:
Common stock (par value $.01 per share 1,000 shares
authorized; 1,000 shares issued and outstanding) - -
Additional paid-in capital 4,282 4,241
Retained earnings 11,770 11,375
Accumulated changes in equity from nonowner sources 5 6
--------- ----------
Total stockholder's equity 16,057 15,622
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 377,805 $ 361,261
================================================================================================================================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Dollars in millions
Three Months Ended March 31, 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 821 $ 650
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 84 102
Net change in:
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (1,024) 51
Securities borrowed or purchased under agreements to resell (9,101) (11,373)
Financial instruments owned and contractual commitments 2,429 (15,325)
Receivables (9,067) (198)
Goodwill, intangibles and other assets, net (998) (382)
Securities loaned or sold under agreements to repurchase (1,815) 21,623
Financial instruments sold, not yet purchased, and contractual commitments 7,162 2,061
Payables and accrued liabilities 1,954 3,278
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (9,555) 487
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in commercial paper and other short-term borrowings 4,732 180
Proceeds from issuance of term debt 8,494 2,440
Term debt maturities and repurchases (4,245) (3,194)
Repayment of mandatorily redeemable securities of subsidiary trust - (400)
Capital contribution from Parent - 500
Dividends paid (426) (6)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,555 (480)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Property, equipment and leasehold improvements, net (33) (29)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (33) (29)
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,033) (22)
Cash and cash equivalents at January 1, 6,312 3,722
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $ 5,279 $ 3,700
===========================================================================================================================
Interest paid did not differ materially from the amount of interest expense
recorded for financial statement purposes.
The Company paid cash for income taxes, net of refunds, of $400 million during
the three months ended March 31, 2004 and paid cash for income taxes, net of
refunds of $470 million during the three months ended March 31, 2003.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements reflect the accounts
of Citigroup Global Markets Holdings Inc. (formerly, Salomon Smith Barney
Holdings Inc.) ("CGMHI"), a New York corporation, and its subsidiaries
(collectively, the "Company"). The Company is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup"). Material intercompany transactions have been
eliminated.
The unaudited condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the use of management's best judgment and estimates.
Estimates, including the fair value of financial instruments and contractual
commitments, the outcome of litigation, realization of deferred tax assets and
other matters that affect the reported amounts and disclosures of contingencies
in the unaudited condensed consolidated financial statements, may vary from
actual results. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation have been
reflected. Certain prior period amounts have been reclassified to conform to the
current period presentation.
These unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
CGMHI's Annual Report on Form 10-K for the year ended December 31, 2003.
Certain financial information that is normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, but that is not required for interim reporting
purposes, has been condensed or omitted.
ACCOUNTING CHANGES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On January 1, 2004, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN 46-R"), which includes substantial changes from
the original FIN 46. Included in these changes, the calculation of expected
losses and expected residual returns has been altered to reduce the impact of
decision maker and guarantor fees in the calculation of expected residual
returns and expected losses. In addition, the definition of a variable interest
has been changed in the revised guidance. The cumulative effect of adopting FIN
46-R was an increase to assets and liabilities of approximately $510 million,
primarily due to certain structured finance transactions.
FIN 46 and FIN 46-R change 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 FIN 46-R
and is called a variable interest entity (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" ("SFAS 94"). A VIE is consolidated by its
primary beneficiary, which is the party involved with the VIE
5
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 interests of the VIE. In October 2003, FASB announced that the
effective date of FIN 46 was deferred from July 1, 2003 to periods ending after
December 15, 2003 for VIEs created prior to February 1, 2003. The Company
elected to implement the provisions of FIN 46 in the third quarter of 2003,
resulting in the consolidation of VIEs increasing both total assets and total
liabilities by approximately $712 million. The implementation of FIN 46
encompassed a review of thousands of entities to determine the impact of
adoption and considerable judgment was used in evaluating whether or not a VIE
should be consolidated. See Note 8 to the condensed consolidated financial
statements.
PROFIT RECOGNITION ON BIFURCATED HYBRID INSTRUMENTS
On January 1, 2004, the Company revised the application of Derivatives
Implementation Group ("DIG") Issue B6, "Embedded Derivatives: Allocating the
Basis of a Hybrid Instrument to the Host Contract and the Embedded Derivative."
In December 2003, the Securities and Exchanges Commission ("SEC") staff gave a
speech which revised the accounting for derivatives embedded in financial
instruments ("hybrid instruments") to preclude the recognition of any profit on
the trade date for hybrid instruments that must be bifurcated for accounting
purposes. The trade-date profit must instead be amortized over the life of the
hybrid instrument. The impact of this change in application was a $51 million
pretax reduction in revenue in the 2004 first quarter. This revenue will be
recognized over the life of the transactions.
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
were effective for exit or disposal activities initiated after December 31,
2002. The impact of adopting SFAS 146 was not material.
GUARANTEES AND INDEMNIFICATIONS
On January 1, 2003, the Company adopted the recognition and measurement
provisions of Financial Accounting Standards Board ("FASB") Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), which
requires that, for guarantees within the scope of FIN 45 issued or amended after
December 31, 2002, a liability for the fair value of the obligation undertaken
in issuing the guarantee be recognized. The impact of adopting FIN 45 was not
material. FIN 45 also requires additional disclosures in financial statements
for periods ending after December 15, 2002. Accordingly, these disclosures are
included in Note 7 to the condensed consolidated financial statements.
6
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
STOCK-BASED COMPENSATION
On January 1, 2003, the Company adopted the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
prospectively to all awards granted, modified, or settled after December 31,
2002. 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. During the first
quarter of 2004, the Company changed its option valuation method from the
Black-Scholes model to the binomial method. The impact of this change was not
material.
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 133. In particular, SFAS 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS 149 is generally effective for
contracts entered into or modified after June 30, 2003, and did not have a
material impact on the Company's condensed consolidated financial statements.
LIABILITIES AND EQUITY
On July 1, 2003, the Company adopted 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 condition. It requires that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances) when that financial instrument embodies an
obligation of the issuer. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective July 1,
2003, and did not have a material impact on the Company's condensed consolidated
financial statements.
7
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and other changes in
stockholder's equity from nonowner sources, which, for the Company, are
comprised of cumulative translation adjustments and unrealized gains and losses
on certain investments held by equity method investees, net of tax:
Dollars in millions
Three months ended March 31, 2004 2003
- --------------------------------------------------------------------------------
Net income $ 821 $ 650
Other changes in equity from nonowner sources (1) (3)
- --------------------------------------------------------------------------------
Total comprehensive income $ 820 $ 647
================================================================================
NOTE 3. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to securities and commodities
regulations and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. Capital
requirements related to CGMHI's principal regulated subsidiaries at March 31,
2004, are as follows:
NET
CAPITAL
(U.S.) OR
FINANCIAL EXCESS OVER
(DOLLARS IN MILLIONS) RESOURCES MINIMUM
SUBSIDIARY JURISDICTION (U.K.) REQUIREMENTS
- ---------------------------------------------------------------------------------------------------------------------
Citigroup Global Markets Inc. U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $ 3,086 $ 2,588
Citigroup Global Markets Limited United Kingdom's Financial Services Authority $ 5,754 $ 1,859
- ---------------------------------------------------------------------------------------------------------------------
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc.
("Swapco"), an indirect wholly owned subsidiary of CGMHI, must maintain minimum
levels of capital in accordance with agreements with its rating agencies. At
March 31, 2004, 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 4. CONTRACTUAL COMMITMENTS
Contractual commitments used for trading purposes include derivative instruments
such as interest rate, equity, currency and commodity swap agreements, swap
options, caps and floors, options, warrants and financial commodity futures and
forward contracts. The fair values (unrealized gains and losses) associated with
contractual commitments are reported net by counterparty, in accordance with
FASB Interpretation No. 39, "Offsetting of Amounts Relating to Certain
Contracts", 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."
8
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenues generated from these contractual commitments are reported primarily as
"Principal transactions" and include realized gains and losses as well as
unrealized gains and losses resulting from changes in the market or fair value
of such instruments.
A summary of the Company's contractual commitments as of March 31, 2004 and
December 31, 2003 are as follows:
MARCH 31, 2004 DECEMBER 31, 2003
---------------------------------- --------------------------------
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) $ 301.2 $ - $ - $ 314.1 $ - $ -
Other exchange-traded products:
Equity options 72.6 .8 .8 50.5 1.7 1.8
Fixed income options 30.8 - - 11.6 - -
Foreign exchange options and commodity contracts 4.2 - - 3.4 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total exchange-traded products 408.8 .8 .8 379.6 1.7 1.8
- ------------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps, floors
and forward rate agreements:
Swaps 2,496.6 2,136.5
Swap options written 91.9 81.2
Swap options purchased 66.3 62.2
Caps, floors and forward rate agreements 160.7 151.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps, floors and forward rate
agreements (b) 2,815.5 9.4 10.3 2,431.4 9.1 8.7
- ------------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 99.1 2.1 5.3 85.4 1.9 4.9
Options and forward contracts on fixed income securities 696.9 1.7 1.0 469.3 1.7 2.0
Foreign exchange contracts and options (b) 160.6 1.0 1.1 131.0 1.1 1.2
Commodity contracts 9.4 .2 .1 9.0 .1 .1
- ------------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,190.3 $ 15.2 $ 18.6 $ 3,505.7 $ 15.6 $ 18.7
====================================================================================================================================
(a) Margin on futures contracts is included in receivables/payables to
brokers, dealers and clearing organizations on the condensed consolidated
statements of financial condition.
(b) Includes notional values of swap agreements and forward currency contracts
for non-trading activities (primarily related to the Company's fixed-rate
long-term debt) of $15.5 billion and $5.2 billion at March 31, 2004,
respectively, and $14.4 billion and $5.0 billion at December 31, 2003,
respectively.
9
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. SEGMENT INFORMATION
The following table summarizes the results of operations for the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
Dollars in millions
Three months ended March 31, 2004 2003
- ---------------------------------------------------------------------
Revenues, net of interest expense:
Investment Services $ 2,417 $ 2,219
Private Client Services 1,687 1,300
Asset Management 298 237
- ---------------------------------------------------------------------
Total $ 4,402 $ 3,756
=====================================================================
Total non-interest expenses:
Investment Services $ 1,607 $ 1,510
Private Client Services 1,312 1,068
Asset Management 190 140
- ---------------------------------------------------------------------
Total $ 3,109 $ 2,718
=====================================================================
Net Income:
Investment Services $ 526 $ 448
Private Client Services 229 142
Asset Management 66 60
- ---------------------------------------------------------------------
Total $ 821 $ 650
=====================================================================
Total assets of the Investment Services, Private Client Services and Asset
Management segments were $360.3 billion, $15.7 billion and $1.8 billion,
respectively, at March 31, 2004 and $346.0 billion, $13.6 billion and $1.7
billion, respectively, at December 31, 2003. For further discussion of the
Company's operating segments, please refer to the Results of Operations section
of Management's Discussion and Analysis.
NOTE 6. LEGAL PROCEEDINGS
For a discussion of certain legal proceedings, see Part II, Item 1 of this Form
10-Q. In addition, in the ordinary course of business, the Company and its
subsidiaries are defendants or co-defendants or parties in various litigation
and other regulatory matters incidental to and typical of the business in which
they are engaged. In connection with its discontinued commodities processing
operations, the Company and certain of its subsidiaries are subject to claims
asserted by the U.S. Environmental Protection Agency, certain state agencies and
private parties in connection with environmental matters. In the opinion of the
Company's management, the ultimate resolution of these legal and regulatory
proceedings would not be likely to have a material adverse effect on the
consolidated financial condition of the Company, but, if involving monetary
liability, may be material to the Company's operating results for any particular
period.
NOTE 7. OBLIGATIONS UNDER GUARANTEES
The Company provides a variety of guarantees and indemnifications to customers
to enhance their credit standing and enable them to complete a wide variety of
business transactions. The Company believes the guarantees which are provided
relate to an asset, liability, or equity security of the guaranteed parties.
10
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the normal course of business, the Company provides standard representations
and warranties to counterparties in contracts in connection with numerous
transactions and also provides indemnifications that protect the counterparties
to contracts in the event that additional taxes are owed due either to a change
in the tax law or an adverse interpretation of the tax law. Counterparties to
these transactions provide the Company with comparable indemnifications. While
such representations, warranties and tax indemnifications are essential
components of many contractual relationships, they do not represent the
underlying business purpose for the transactions. The indemnification clauses
are often standard contractual terms related to the Company's own performance
under the terms of a contract and are entered into in the normal course of
business based on an assessment that the risk of loss is remote. Often these
clauses are intended to ensure that terms of a contract are met at inception. No
compensation is received for these standard representations and warranties and
it is not possible to determine their fair value because they rarely, if ever,
result in payment. In many cases, there are no stated or notional amounts
included in the indemnification clauses and the contingencies potentially
triggering the obligation to indemnify have not occurred and are not expected to
occur. There are no amounts reflected on the accompanying condensed consolidated
statement of financial condition as of March 31, 2004 and December 31, 2003
related to these indemnifications.
In addition, the Company is a member of or shareholder in numerous value
transfer networks ("VTNs") (payment, clearing and settlement systems as well as
securities exchanges) around the world. As a condition of membership, many of
these VTNs require that members stand ready to backstop the net effect on the
VTNs of a member's default on its obligations. The Company's potential
obligation as a shareholder or member of VTN associations are excluded from the
scope of FIN 45, since the shareholders and members represent subordinated
classes of investors in the VTNs. Accordingly, there are no amounts reflected on
the accompanying condensed consolidated statement of financial condition as of
March 31, 2004 and December 31, 2003 for potential obligations that could arise
from the Company's involvement with VTN associations.
Derivative instruments which include guarantees are credit default swaps, total
return swaps, written foreign exchange options, written put options, written
equity warrants, and written caps and floors. At March 31, 2004 and December 31,
2003, the carrying amount of the liabilities related to these derivatives was
$2.5 billion and $2.4 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 March 31,
2004, the maximum potential loss at notional value related to credit default
swaps and total rate of return swaps amounted to $81.1 billion, of which $7.4
billion expire within one year and $73.7 billion expire after one year. 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.
At March 31, 2004 and December 31, 2003, the maximum potential loss at fair
value related to derivative guarantees other than credit default swaps and total
rate of return swaps amounted to $2.2 billion and $2.1 billion, respectively.
Guarantees to joint ventures and other third parties primarily include
guarantees of their debt obligations. At March 31, 2004, the carrying amount and
the maximum potential loss related to these joint venture and other third party
guarantees were $584 million, of which $481 million expires within one year and
$103 million expires after one year. At December 31, 2003, the carrying amount
and the maximum potential loss related to
11
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
these joint venture and other third party guarantees were $589 million.
Securities and other marketable assets held as collateral to reimburse losses
under other third party guarantees amounted to $47 million and $48 million at
March 31, 2004 and December 31, 2003, respectively.
Guarantees of collection of contractual cash flows protect investors in
securitization trusts from loss of principal and interest relating to
insufficient collections on the underlying receivables in the trust. At March
31, 2004 and December 31, 2003 the carrying amount and the maximum potential
loss related to guarantees of collection of contractual cash flows were $24
million.
NOTE 8. 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 MARCH 31, 2004 DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
Cash $ 860 $ 25
Financial Instruments Owned & Contractual
Commitments 3,275 3,127
Receivables - Other 181 124
Other Assets 593 753
---------------------------------
Total Assets of Consolidated VIEs $ 4,909 $ 4,029
=================================
The consolidated VIEs included in the table above represent hundreds of separate
entities with which the Company is involved and includes approximately $510
million related to VIEs newly consolidated as a result of adopting FIN 46-R. As
of March 31, 2004 and December 31, 2003, approximately $1.6 billion and $1.8
billion, respectively, of the total assets of consolidated VIEs represent
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. As of March 31,
2004 and December 31, 2003, approximately $3.3 billion and $2.2 billion,
respectively, of the total assets of consolidated VIEs represents investment
vehicles that were established to provide a return to the investors in the
vehicles.
The Company may provide liquidity facilities to the VIEs, may be a party to
derivative contracts with VIEs, may provide 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-R, 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
12
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
March 31, 2004 and December 31, 2003, such transactions involved VIEs with
approximately $8.6 billion and $8.0 billion in assets, respectively.
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 March 31, 2004 and December 31, 2003, such
transactions involved VIEs with approximately $57.8 billion and $50.4 billion in
assets, respectively.
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 $10.4 billion and $8.6 billion at March
31, 2004 and December 31, 2003, respectively. 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.
NOTE 9. SUBSEQUENT EVENT
On May 6, 2004, the Company, through its parent, Citigroup reached a settlement
of class action litigation brought on behalf of purchasers of WorldCom
securities which was pending in the United States District Court for the
Southern District of New York as In re WorldCom, Inc. Securities Litigation, No.
02 Civ. 3288 (DLC). The settlement is subject to Court approval. Under the terms
of the settlement, the Company will pay $2.65 billion, or $1.64 billion after
tax, to the settlement class, which consists of all persons who purchased or
otherwise acquired publicly traded securities of WorldCom during the period from
April 29, 1999 through and including June 25, 2002. The payment will be
allocated between purchasers of WorldCom stock and purchasers of WorldCom bonds.
Plaintiffs' attorneys' fees (the amount has not been determined) will come out
of the settlement amount.
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. On May 10, 2004, Citigroup Inc. announced that it was taking a charge
of $4.95 billion after-tax to cover the cost of resolving the lawsuits and other
legal proceedings in connection with these matters, including the cost of the
settlement of the WorldCom class action announced on the same date. Subject to
further review and adjustment, it is anticipated that the Company will record an
after-tax charge of approximately $4.0 billion in the second quarter of 2004
related to these matters.
13
The Company believes that its reserve, subject to any further adjustments in
allocation, is adequate to meet all of its remaining exposure for these matters.
However, in view of the large number of these matters, the uncertainties of the
timing and outcome of this type of litigation, and the significant amounts
involved, it is possible that the ultimate costs of these matters may exceed or
be below the reserve. The Company will continue to defend itself vigorously in
these cases, and to resolve them in the manner management believes is in the
best interest of 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.
14
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2.
RECENT EVENTS
SETTLEMENT OF CERTAIN LEGAL MATTERS
On May 6, 2004, the Company, through its parent, Citigroup reached a settlement
of class action litigation brought on behalf of purchasers of WorldCom
securities which was pending in the United States District Court for the
Southern District of New York as In re WorldCom, Inc. Securities Litigation, No.
02 Civ. 3288 (DLC). The settlement is subject to Court approval. Under the terms
of the settlement, the Company will pay $2.65 billion, or $1.64 billion after
tax, to the settlement class, which consists of all persons who purchased or
otherwise acquired publicly traded securities of WorldCom during the period from
April 29, 1999 through and including June 25, 2002. The payment will be
allocated between purchasers of WorldCom stock and purchasers of WorldCom bonds.
Plaintiffs' attorneys' fees (the amount has not been determined) will come out
of the settlement amount.
CHARGE FOR REGULATORY AND LEGAL MATTERS
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. On May 10, 2004, Citigroup Inc. announced that it was taking a charge
of $4.95 billion after-tax to cover the cost of resolving the lawsuits and other
legal proceedings in connection with these matters, including the cost of the
settlement of the WorldCom class action announced on the same date. Subject to
further review and adjustment, it is anticipated that the Company will record an
after-tax charge of approximately $4.0 billion in the second quarter of 2004
related to these matters.
The Company believes that its reserve, subject to any further adjustments in
allocation, is adequate to meet all of its remaining exposure for these matters.
However, in view of the large number of these matters, the uncertainties of the
timing and outcome of this type of litigation, and the significant amounts
involved, it is possible that the ultimate costs of these matters may exceed or
be below the reserve. The Company will continue to defend itself vigorously in
these cases, and to resolve them in the manner management believes is in the
best interest of 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.
CERTAIN REGULATORY MATTERS
The Company's parent, Citigroup, has disclosed that the Securities and Exchange
Commission is conducting a non-public investigation, which Citigroup believes
originated with its accounting treatment regarding its investments and business
activities, and loan loss allowances, with respect to Argentina in the 4th
15
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
quarter of 2001 and the 1st quarter of 2002; it is also addressing the timing
and support documentation for certain accounting entries or adjustments. In
connection with these matters, the SEC has requested certain accounting and
internal controls-related information for the years 2001, 2002 and 2003. The SEC
has recently scheduled testimony which began in May 2004. Citigroup is
cooperating with the SEC in its investigation. Citigroup cannot predict the
outcome of the investigation.
RESULTS OF OPERATIONS
For the three months ended March 31, 2004 (the "2004 Quarter"), the Company
recorded net income of $821 million compared to $650 million for the three
months ended March 31, 2003 (the "2003 Quarter"). Revenues, net of interest
expense, were $4,402 million in the 2004 Quarter compared to $3,756 million in
the 2003 Quarter. Commission revenues increased significantly in the 2004
Quarter to $1,197 million as a result of increases in listed, OTC and mutual
fund commissions. Asset management and administration fees increased to $1,005
million in the 2004 Quarter, primarily as a result of a strengthening equity
market, increased customer trading volumes and higher asset-based revenue,
reflecting increased client asset levels. Investment banking revenues increased
in the 2004 Quarter to $882 million as the result of increases in equity and
high yield underwritings, partially offset by declines in high grade debt
underwriting and merger and acquisition fees. Principal transactions revenues
decreased to $310 million in the 2004 Quarter compared to $621 million in the
2003 Quarter, primarily as the result of a decrease in fixed income trading. Net
interest and dividend income increased to $964 million in the 2004 Quarter,
primarily driven by increased dividend income in the European Equity Finance and
European Equity Derivative businesses and increased interest income due to
higher U.S. mortgage inventory levels and widening spreads. Total non-interest
expenses increased 14% in the 2004 Quarter to $3,109 million as a result of
increased compensation and benefits and floor brokerage and other production
expenses. These increases were partially offset by a decrease in communications
expense.
Following is a discussion of the results of operations of the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
INVESTMENT SERVICES
Dollars in millions
For the three months ended March 31, 2004 2003
- ----------------------------------------------------------------------
Revenues, net of interest expense $ 2,417 $ 2,219
- ----------------------------------------------------------------------
Total non-interest expenses 1,607 1,510
- ----------------------------------------------------------------------
Income before income taxes 810 709
Provision for income taxes 284 261
- ----------------------------------------------------------------------
Net income $ 526 $ 448
======================================================================
The Company's Investment Services segment recorded net income of $526 million in
the 2004 Quarter compared to $448 million in the 2003 Quarter. Revenues, net of
interest expense, increased 9% to $2.4 billion in the 2004 Quarter. Commission
revenue was a primary component of the increase in revenue, as listed and OTC
commissions increased. Net interest and dividend income increased in the 2004
Quarter, primarily driven by increased dividend income in the European Equity
Finance and European Equity Derivative businesses and increased interest income
due to higher U.S. mortgage inventory levels and widening spreads. These
16
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
increases were partially offset by reduced principal transactions revenue due to
declines in fixed income trading. Investment banking revenues were essentially
unchanged in the 2004 Quarter compared to the 2003 Quarter.
Total non-interest expenses increased to $1.6 billion in the 2004 Quarter,
primarily due to an increase in compensation and benefits and floor brokerage
and other production expenses, partially offset by a decrease in communication
expense.
PRIVATE CLIENT SERVICES
Dollars in millions
For the three months ended March 31, 2004 2003
- ----------------------------------------------------------------------
Revenues, net of interest expense $ 1,687 $ 1,300
- ----------------------------------------------------------------------
Total non-interest expenses 1,312 1,068
- ----------------------------------------------------------------------
Income before income taxes 375 232
Provision for income taxes 146 90
- ----------------------------------------------------------------------
Net income $ 229 $ 142
======================================================================
Private Client Services net income was $229 million in the 2004 Quarter, up $87
million or 61% from the 2003 Quarter, primarily due to higher commissions as a
result of increased customer trading volumes and higher asset-based revenue
reflecting increased client asset levels. The revenue increase was partially
offset by higher production-related compensation and legal costs.
Revenues, net of interest expense, of $1,687 million in the 2004 Quarter
increased $387 million or 30% from the prior-year period, reflecting increases
in both transactional and asset-based fee revenue. Transactional revenue
increased $217 million or 34%, primarily reflecting higher customer trading
volumes. Fee-based revenue increased $170 million or 26%, reflecting higher
client asset levels.
Total assets under fee-based management were $220 billion as of March 31, 2004,
up $60 billion or 38% from the prior-year period. Total client assets, including
assets under fee-based management, of $1,087 billion in the 2004 Quarter
increased $205 billion or 23% compared to the prior year, principally due to
market appreciation and positive net inflows. Net inflows were $6 billion in the
2004 Quarter compared to $5 billion in the prior year.
Operating expenses of $1,312 million in the 2004 Quarter increased 23% from the
prior-year period, primarily reflecting higher production-related compensation
and higher legal expenses.
17
Assets under fee-based management were as follows:
Dollars in billions
At March 31, 2004 2003
- ------------------------------------------------------------------------
Financial Consultant managed accounts $ 75.9 $ 53.2
Consulting Group and internally managed assets 144.0 106.6
- ------------------------------------------------------------------------
Total assets under fee-based management (1) $ 219.9 $ 159.8
- ------------------------------------------------------------------------
(1) Includes certain assets managed jointly with Citigroup Asset Management.
ASSET MANAGEMENT
Dollars in millions
For the three months ended March 31, 2004 2003
- ------------------------------------------------------------------------
Revenues, net of interest expense $ 298 $ 237
- ------------------------------------------------------------------------
Total non-interest expenses 190 140
- ------------------------------------------------------------------------
Income before income taxes 108 97
- ------------------------------------------------------------------------
Provision for income taxes 42 37
- ------------------------------------------------------------------------
Net income $ 66 $ 60
========================================================================
The Company's Asset Management segment revenues, net of interest expense,
increased 26% to $298 million in the 2004 Quarter compared to $237 million in
the 2003 Quarter. The primary revenue for the Asset Management segment is asset
management and administration fees, which increased to $292 million in the 2004
Quarter compared to $234 million in the 2003 Quarter. The increase in revenues
in 2004 is primarily due to the strengthening equity market and is partially
offset by the impact of a decrease in U.S. retail money market funds and a
change in the presentation of certain fee sharing arrangements, which decreased
both revenues and expenses by $5 million in the 2004 Quarter.
Assets under management for the segment increased to $309 billion at March 31,
2004, compared to $250 billion at March 31, 2003. The increase is primarily due
to positive market action and the impact of positive net flows.
Total non-interest expenses were $190 million in the 2004 Quarter compared to
$140 million the 2003 Quarter. The increase in the 2004 Quarter is due to higher
compensation and legal expenses and was partially offset by a
18
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
change in the presentation of certain fee sharing arrangements, which decreased
both revenues and expenses by $5 million in the 2004 Quarter.
Assets under fee-based management were as follows:
Dollars in billions
At March 31, 2004 2003
- ------------------------------------------------------------------------
Money market funds $ 94.6 $ 90.3
Mutual funds 91.8 68.8
Managed accounts 117.1 85.9
Unit investment trusts held in client accounts 5.5 5.1
- ------------------------------------------------------------------------
Total $ 309.0 $ 250.1
- ------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $378 billion at March 31, 2004, an increase from
$361 billion at year-end 2003. Due to the nature of the Company's trading
activities, it is not uncommon for the Company's asset levels to fluctuate from
period to period.
The Company's condensed consolidated statement of financial condition is highly
liquid, with the vast majority of its assets consisting of marketable securities
and collateralized short-term financing agreements arising from securities
transactions. The highly liquid nature of these assets provides the Company with
flexibility in financing and managing its business. The Company monitors and
evaluates the adequacy of its capital and borrowing base on a daily basis in
order to allow for flexibility in its funding, to maintain liquidity, and to
ensure that its capital base supports the regulatory capital requirements of its
subsidiaries.
The Company funds its operations through the use of collateralized and
uncollateralized short-term borrowings, long-term borrowings, and its equity.
Collateralized short-term financing, including repurchase agreements, and
secured loans 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 No. 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 $233.1 billion at March 31, 2004. 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 $26.4 billion at March 31,
2004.
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 $2.13 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
19
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
facilities through facility fees. At March 31, 2004, there were no outstanding
borrowings under these facilities. The Company also has committed long-term
financing facilities with unaffiliated banks. At March 31, 2004, the Company had
drawn down the full $1.7 billion then available under these facilities. A bank
can terminate these facilities by giving the Company prior notice (generally one
year). The Company compensates the banks for these 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 March 31, 2004, this requirement was exceeded by approximately $7.9 billion.
The Company also has substantial borrowing arrangements consisting of facilities
that the Company has been advised are available, but where no contractual
lending obligation exists. These arrangements are reviewed on an ongoing basis
to ensure flexibility in meeting the Company's short-term requirements.
The Company's borrowing relationships are with a broad range of banks, financial
institutions and other firms, including affiliates, from which it draws funds.
The volume of the Company's borrowings generally fluctuates in response to
changes in the level of the Company's financial instruments, commodities and
contractual commitments, customer balances, the amount of securities purchased
under agreements to resell and securities borrowed transactions. As the
Company's activities increase, borrowings generally increase to fund the
additional activities. Availability of financing to the Company can vary
depending upon market conditions, credit ratings and the overall availability of
credit to the securities industry. The Company seeks to expand and diversify its
funding mix as well as its creditor sources. Concentration levels for these
sources, particularly for short-term lenders, are closely monitored both in
terms of single investor limits and daily maturities.
The Company monitors liquidity by tracking asset levels, collateral and funding
availability to maintain flexibility to meet its financial commitments. As a
policy, the Company attempts to maintain sufficient capital and funding sources
in order to have the capacity to finance itself on a fully collateralized basis
in the event that the Company's access to uncollateralized financing is
temporarily impaired. The Company's liquidity management process includes a
contingency funding plan designed to ensure adequate liquidity even if access to
unsecured funding sources is severely restricted or unavailable. This plan is
reviewed periodically to keep the funding options current and in line with
market conditions. The management of this plan includes an analysis used to
determine the Company's ability to withstand varying levels of stress, including
ratings downgrades, which could impact its liquidation horizons and required
margins. The Company maintains a loan value of unencumbered securities in excess
of its outstanding short-term unsecured liabilities. The Company monitors its
leverage and capital ratios on a daily basis.
RISK MANAGEMENT
MARKET RISK
Measuring market risk using statistical risk management models has recently
become the main focus of risk management efforts by many companies whose
earnings are exposed to changes in the fair value of financial instruments.
Management believes that statistical models alone do not provide a reliable
method of monitoring and controlling risk. While Value at Risk ("VAR") models
are relatively sophisticated, they are of limited use for internal risk
management because they do not give any indication of the direction or magnitude
of individual risk exposures or which market scenarios represent the largest
risk exposures. These models are used by the Company only as a supplement to
other risk management tools.
The following table shows the results of the Company's VAR analysis, which
includes all of the Company's financial assets and liabilities which are marked
to market at March 31, 2004 and December 31, 2003. The
20
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
VAR relating to accrual portfolios has been excluded from this analysis.
RISK EXPOSURES March 31, First Quarter First Quarter First Quarter December 31,
($ IN MILLIONS) 2004 2004 Average 2004 High 2004 Low 2003
- -------------------------------------------------------------------------------------------------------------
Interest rate $ 89 $ 101 $ 170 $ 75 $ 73
Equities 36 44 191 21 21
Commodities 20 13 21 5 7
Currency 9 10 13 8 9
Diversification Benefit (56) (56) N/A N/A (34)
- -------------------------------------------------------------------------------------------------------------
Total* $ 98 $ 112 $ 256 $ 76 $ 76
=============================================================================================================
* Includes diversification benefit.
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at March 31, 2004, 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 has nearly completed a large-scale, long-term process of calculating its
VAR by a more robust methodology. Approximately 90% of the total portfolio is
calculated under the new methodology, which simulates tens of thousands of
market factors to measure VAR. The previous methodology simulated fewer market
factors to measure VAR. VAR reflects the risk profile of the Company at March
31, 2004, and is not a predictor of future results.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: changes in
economic conditions, including the performance of global financial markets, and
risks associated with fluctuating currency values and interest rates;
competitive, regulatory or tax changes that affect the cost of or the demand for
the Company's products; the impact of the implementation of new accounting
rules; and the resolution of legal proceedings and environmental matters.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information supplements and amends our discussion set forth under
Part I, Item 3 "Legal Proceedings" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003.
ENRON
In NEWBY, ET AL. V. ENRON CORP., ET AL., the Citigroup defendants' motion to
dismiss plaintiffs' consolidated amended class action complaint was denied in
March 2004.
Additional Actions
Additional actions have been filed against Citigroup and certain of its
affiliates, including CGMI, along with other parties, including (i) actions by
banks that participated in Enron credit facilities, alleging fraud, gross
negligence, breach of implied duties, aiding and abetting, and civil conspiracy
in connection with the defendants' administration of a credit facility with
Enron; in one such case, the Court granted Citigroup's motion to dismiss with
respect to all such claims except for certain claims of aiding and abetting and
civil conspiracy; and (ii) actions brought by the Attorney General of
Connecticut in connection with various commercial and investment banking
services provided to Enron.
WORLDCOM, INC.
On February 25, 2004, the United States District Court for the Southern District
of New York consolidated for all purposes two putative class actions as IN RE
TARGETS SECURITIES LITIGATION. This consolidated putative class action involves
claims asserted under federal securities laws against Citigroup, CGMI and
22
certain former employees on behalf of purchasers and acquirers of Targeted
Growth Enhanced Terms Securities With Respect to the Common Stock of MCI
WorldCom, Inc. ("TARGETS") based on CGMI's research reports concerning WorldCom
and CGMI's role as underwriter of TARGETS. The District Court then consolidated
the TARGETS class action with the WorldCom class action, IN RE WORLDCOM, INC.
SECURITIES LITIGATION, for pre-trial proceedings. Citigroup and CGMI filed a
motion to dismiss the TARGETS action on April 2, 2004, which remains pending
before the District Court.
On March 17, 2004, plaintiffs in WEINSTEIN, ET AL. V. EBBERS, a putative class
action brought on behalf of holders of WorldCom securities and consolidated with
IN RE WORLDCOM, INC. SECURITIES LITIGATION for pre-trial proceedings, amended
their complaint to add claims against CGMI and Jack Grubman, under Georgia
common law. A corrected second amended class action complaint was filed on May
5, 2004.
On May 10, 2004, the Company, through its parent, Citigroup, announced the
settlement of claims asserted by the certified plaintiff class in IN RE
WORLDCOM, INC. SECURITIES LITIGATION. Under the terms of the settlement, which
is subject to approval of the District Court, Citigroup will make a payment of
$2.65 billion, or $1.64 billion after tax, to the class, which includes all
persons who purchased or otherwise acquired WorldCom securities between April
29, 1999 and June 25, 2002. This settlement resolves the claims asserted against
Citigroup, CGMI, and certain affiliated entities and individuals under (i)
Sections 11 and 12(a) of the Securities Act of 1933 in connection with certain
WorldCom bond offerings in which CGMI served as an underwriter, and (ii)
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated under Section 10(b), alleging that CGMI, among others, participated
in the preparation and/or issuance of misleading WorldCom registration
statements and disseminated misleading research reports concerning WorldCom. The
settlement does not resolve the claims of any plaintiffs who (i) are not members
of the class, or (ii) opt out of the class.
On May 11, 2004, the United States Court of Appeals for the Second Circuit
affirmed the District Court's March 3, 2004 order denying motions to remand
certain individual actions that had been consolidated for pretrial purposes with
IN RE WORLDCOM, INC. SECURITIES LITIGATION.
GLOBAL CROSSING
On August 11, 2003, lead plaintiff in IN RE GLOBAL CROSSING, LTD. SECURITIES
LITIGATION amended its consolidated complaint to add claims on behalf of
purchasers of the securities of Asia Global Crossing. The added claims have been
asserted under federal securities laws and common law in connection with CGMI's
research reports about Global Crossing and Asia Global Crossing, and for its
roles as an investment banker for Global Crossing and an underwriter in Global
Crossing and Asia Global Crossing offerings. On March 22, 2004, while these
Citigroup defendants' and the other underwriters' motions to dismiss the amended
complaint were still pending, the lead plaintiff filed a second amended
consolidated class action complaint that modified allegations asserted
previously, but did not purport to add new claims against the Citigroup
defendants.
In addition, on or about January 27, 2004, the Global Crossing Estate
Representative filed in the United States Bankruptcy Court for the Southern
District of New York an adversary proceeding asserting claims against, among
others, Citigroup, CGMI and certain executive officers and current and former
employees, asserting claims under federal bankruptcy law and common law in
connection with CGMI's research reports about Global Crossing and for its role
as an underwriter in Global Crossing offerings.
RESEARCH
In 2003, United States District Courts dismissed two putative class actions that
had been brought on behalf of persons who maintained Smith Barney retail
brokerage accounts, asserting common law claims for restitution of all fees,
charges, or commissions paid to CGMI in connection with its published investment
23
research. The dismissals are on appeal to the United States Courts of Appeals
for the Third and Ninth Circuits. Two similar putative class actions are pending
against CGMI, one in the United States District Court for the Southern District
of New York, in which Citigroup's motion to dismiss is pending, and the other in
the United States District Court for the Southern District of Illinois.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
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.
On March 29, 2004, the Company filed a Current Report on Form 8-K, dated March
23, 2004, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's Index LeAding StockmarkEt Return Securities (Index LASERS)
based upon the Dow Jones Industrial Average due March 26, 2008.
No other reports on Form 8-K were filed during the first quarter of 2004,
however:
On April 1, 2004, the Company filed a Current Report on Form 8-K, dated March
25, 2004, 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
stock of Newmont Mining Corporation due March 31, 2005.
On April 15, 2004, the Company filed a Current Report on Form 8-K, dated April
15, 2004, reporting under Item 5 thereof the results of its operations for the
three-month periods ended March 31, 2004 and 2003.
On April 30, 2004, the Company filed a Current Report on Form 8-K, dated April
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 Hewlett-Packard Company due May 2, 2005.
24
On April 30, 2004, the Company filed a Current Report on Form 8-K, dated April
26, 2004, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's Principal-Protected Equity Linked Notes based upon the S&P
500 due October 29, 2009.
On April 30, 2004, the Company filed a Current Report on Form 8-K, dated April
26, 2004, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's 1.5% Principal-Protected Equity Linked Notes based upon
the Dow Jones Global Titans 50 Index due October 29, 2009.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.01 Restated Certificate of Incorporation of Citigroup Global Markets
Holdings Inc. (the "Company"), effective April 7, 2003, incorporated
by reference to Exhibit 99.1 to the Company's Current Report on Form
8-K filed on April 7, 2003 (File No. 1-4346).
3.02 By-Laws of the Company, incorporated by reference to Exhibit 4(b) to
the Company's Registration Statement on Form S-3 (No. 333-106272).
12.01+ Computation of ratio of earnings to fixed charges.
31.01+ Certification of principal executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.02+ Certification of principal financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01+ Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------
+ Filed herewith.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the SEC upon request.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
--------------------------------------------
(Registrant)
Date: May 14, 2004 By: /s/ Robert Druskin
-------------------------------------
Robert Druskin
President and Chief Executive Officer
By: /s/ John C. Morris
-------------------------------------
John C. Morris
Chief Financial Officer
26