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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 10013
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL
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 JUNE 30, 2004
PAGE
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations (Unaudited) -
Three and six months ended June 30, 2004 and 2003 1
Condensed Consolidated Statements of Financial Condition -
June 30, 2004 (Unaudited) and December 31, 2003 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 30, 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 - 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 23 - 24
Item 6. Exhibits and Reports on Form 8-K 25 - 26
Exhibit Index 26
Signatures 27
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
Commissions $ 986 $ 936 $ 2,183 $ 1,759
Asset management and administration fees 1,031 795 2,036 1,593
Investment banking 884 1,065 1,766 1,892
Principal transactions 255 620 565 1,241
Other 178 68 222 95
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest revenues 3,334 3,484 6,772 6,580
- -----------------------------------------------------------------------------------------------------------------------
Interest and dividends 2,220 2,113 4,414 4,145
Interest expense 1,308 1,377 2,538 2,749
- -----------------------------------------------------------------------------------------------------------------------
Net interest and dividends 912 736 1,876 1,396
- -----------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 4,246 4,220 8,648 7,976
- -----------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 2,200 2,269 4,555 4,304
Floor brokerage and other production 191 180 382 338
Communications 226 168 367 335
Occupancy and equipment 134 135 271 271
Professional services 123 97 251 177
Advertising and market development 93 69 169 129
Other operating and administrative expenses 6,656 96 6,737 178
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 9,623 3,014 12,732 5,732
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (5,377) 1,206 (4,084) 2,244
Provision (benefit) for income taxes (2,049) 467 (1,577) 855
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) ($ 3,328) $ 739 ($ 2,507) $ 1,389
=======================================================================================================================
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
- -----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
Dollars in millions 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and cash equivalents $ 4,861 $ 6,312
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 5,568 2,806
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $129,693 $108,984
Deposits paid for securities borrowed 53,263 50,192
-------- --------
182,956 159,176
Financial instruments owned and contractual commitments:
(Approximately $70 billion and $63 billion were pledged to various
parties at June 30, 2004 and December 31, 2003, respectively)
U.S. government and government agency securities 40,812 51,205
Corporate debt securities 34,890 33,221
Equity securities 26,982 19,610
Non-U.S. government and government agency securities 20,140 11,929
Contractual commitments 14,329 15,554
Mortgage loans and collateralized mortgage obligations 10,385 8,275
Money market instruments 4,164 5,369
Other financial instruments 9,168 8,682
-------- --------
160,870 153,845
Receivables:
Customers 23,445 18,831
Brokers, dealers and clearing organizations 18,243 7,560
Other 6,137 2,865
-------- --------
47,825 29,256
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,128 and
$1,081, respectively 1,584 1,384
Goodwill 1,531 1,531
Intangibles 807 800
Other assets 9,124 6,151
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $415,126 $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
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
Dollars in millions, except share data 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 26,675 $ 22,644
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 143,379 $135,301
Deposits received for securities loaned 21,596 19,503
--------- --------
164,975 154,804
Financial instruments sold, not yet purchased, and
contractual commitments:
U.S. government and government agency securities 28,496 16,524
Non-U.S. government and government agency securities 26,421 24,373
Contractual commitments 18,791 18,698
Corporate debt securities and other 13,769 10,593
Equity securities 6,312 4,436
--------- --------
93,789 74,624
Payables and accrued liabilities:
Customers 29,300 23,848
Brokers, dealers and clearing organizations 10,499 11,317
Other 23,721 14,660
--------- --------
63,520 49,825
Term debt 49,624 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 8,404 4,241
Retained earnings 8,130 11,375
Accumulated changes in equity from nonowner sources 9 6
--------- --------
Total stockholder's equity 16,543 15,622
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $415,126 $361,261
===============================================================================================================================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
Dollars in millions
Six Months Ended June 30, 2004 2003
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) ($ 2,507) $ 1,389
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 171 221
Net change in:
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (2,762) (365)
Securities borrowed or purchased under agreements to resell (23,780) (19,149)
Financial instruments owned and contractual commitments (7,025) (15,586)
Receivables (18,569) (19,660)
Goodwill, intangibles and other assets, net (3,811) 469
Securities loaned or sold under agreements to repurchase 10,171 11,522
Financial instruments sold, not yet purchased, and contractual commitments 19,165 12,437
Payables and accrued liabilities 13,695 28,230
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (15,252) (492)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in commercial paper and other short-term borrowings 4,031 1,171
Proceeds from issuance of term debt 18,110 8,086
Term debt maturities and repurchases (11,343) (7,856)
Repayment of mandatorily redeemable securities of subsidiary trust -- (400)
Capital contribution from Parent 4,100 500
Dividends paid (738) (347)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,160 1,154
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Property, equipment and leasehold improvements, net (359) (690)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (359) (690)
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,451) (28)
Cash and cash equivalents at January 1, 6,312 3,722
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30, $ 4,861 $ 3,694
==========================================================================================================
Cash payments for interest were $1.6 billion and $2.3 billion for the six months
ended June 30, 2004 and 2003, respectively.
Cash paid for income taxes, net of refunds, amounted to $514 million during the
six months ended June 30, 2004 and cash paid for income taxes, net of refunds,
amounted to $471 million during the six months ended June 30, 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 Statement of Financial
Account Standards ("SFAS") No. 94, "Consolidation of All Majority-Owned
5
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Subsidiaries" ("SFAS 94"). 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 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 $114 million
pre-tax reduction in revenue for the six months ended June 30, 2004. 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 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 Six Months
Period ended June 30, 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------
Net income ($3,328) $739 ($2,507) $1,389
Other changes in equity from
nonowner sources 4 (1) 3 (4)
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income ($3,324) $738 ($2,504) $1,385
============================================================================================================
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 June 30,
2004, are as follows:
NET
CAPITAL
(U.S.) OR
(DOLLARS IN MILLIONS) FINANCIAL EXCESS OVER
SUBSIDIARY JURISDICTION RESOURCES MINIMUM
(U.K.) REQUIREMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
Citigroup Global Markets Inc. U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $3,833 $3,264
Citigroup Global Markets Limited United Kingdom's Financial Services Authority $6,375 $2,064
- ----------------------------------------- ------------------------------------------------------------ ------------ --------------
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
June 30, 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
8
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
exists, and are netted across products and against cash collateral when such
provisions are stated in the master netting agreement. Contractual commitments
in a net receivable position, as well as options owned and warrants held, are
reported as assets in "Contractual commitments." Similarly, contractual
commitments in a net payable position, as well as options written and warrants
issued are reported as liabilities in "Contractual commitments." Revenues
generated from these contractual commitments are reported primarily as
"Principal transactions" and include realized gains and losses as well as
unrealized gains and losses resulting from changes in the market or fair value
of such instruments.
A summary of the Company's contractual commitments as of June 30, 2004 and
December 31, 2003 are as follows:
JUNE 30, 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) $ 360.3 $ - $ - $ 314.1 $ - $ -
Other exchange-traded products:
Equity options 112.4 .9 .8 50.5 1.7 1.8
Fixed income options 49.6 - - 11.6 - -
Foreign exchange options and commodity contracts 4.1 - - 3.4 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total exchange-traded products 526.4 .9 .8 379.6 1.7 1.8
- ---------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options, caps,
floors and forward rate agreements:
Swaps 2,925.1 2,136.5
Swap options written 94.1 81.2
Swap options purchased 55.0 62.2
Caps, floors and forward rate agreements 163.3 151.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps, floors and forward
rate agreements (b) 3,237.5 8.1 9.9 2,431.4 9.1 8.7
- ---------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 106.6 1.8 4.9 85.4 1.9 4.9
Options and forward contracts on fixed
income securities 486.4 3.0 2.6 469.3 1.7 2.0
Foreign exchange contracts and options (b) 132.4 .3 .4 131.0 1.1 1.2
Commodity contracts 10.7 .2 .2 9.0 .1 .1
- ---------------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,500.0 $ 14.3 $ 18.8 $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 $17.0 billion and $3.5 billion at June 30, 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 Six Months
Period ended June 30, 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense:
Investment Services $ 2,386 $ 2,549 $ 4,803 $ 4,769
Private Client Services 1,533 1,419 3,220 2,718
Asset Management 327 252 625 489
- --------------------------------------------------------------------------------------------------------------------
Total $ 4,246 $ 4,220 $ 8,648 $ 7,976
====================================================================================================================
Total non-interest expenses:
Investment Services $ 8,199 $ 1,712 $ 9,806 $ 3,223
Private Client Services 1,226 1,154 2,538 2,221
Asset Management 198 148 388 288
- --------------------------------------------------------------------------------------------------------------------
Total $ 9,623 $ 3,014 $ 12,732 $ 5,732
====================================================================================================================
Net income (loss):
Investment Services $ (3,592) $ 512 $ (3,066) $ 960
Private Client Services 185 162 414 305
Asset Management 79 65 145 124
- --------------------------------------------------------------------------------------------------------------------
Total $ (3,328) $ 739 $ (2,507) $ 1,389
====================================================================================================================
Total assets of the Investment Services, Private Client Services and Asset
Management segments were $397.0 billion, $16.2 billion and $1.9 billion,
respectively, at June 30, 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. 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 the 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. In connection with the settlement
of the WorldCom class action lawsuit, the Company reevaluated its reserves for
these matters. As a result of the reevaluation, the Company increased its
reserve for these matters by approximately $3.8 billion pre-tax (in addition to
the amount of the WorldCom class action settlement). The Company's litigation
reserve for these matters following payment of the WorldCom settlement will be
$4.7 billion on a pre-tax basis.
The Company believes that this reserve 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
10
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
exceed or be below the reserve. The Company will continue to
defend itself vigorously in these cases, and seek to resolve them in the manner
management believes is in the best interest of the Company.
In addition, in the ordinary course of business, the Company and its
subsidiaries are defendants or co-defendants or parties in various litigation
and regulatory matters incidental to and typical of the businesses in which they
are engaged. In connection with its discontinued commodities processing
operations, the Company and certain of its subsidiaries are subject to claims
asserted by the U.S. Environmental Protection Agency, certain state agencies and
private parties in connection with environmental matters. In the opinion of the
Company's management, the ultimate resolution of these legal and regulatory
proceedings would not be likely to have a material adverse effect on the
consolidated financial condition of the Company but, if involving monetary
liability, may be material to the Company's operating results for any particular
period.
NOTE 7. OBLIGATIONS UNDER GUARANTEES
The Company provides a variety of guarantees and indemnifications to customers
to enhance their credit standing and enable them to complete a wide variety of
business transactions. The Company believes the guarantees which are provided
relate to an asset, liability, or equity security of the guaranteed parties. In
the normal course of business, the Company provides standard representations and
warranties to counterparties in contracts in connection with numerous
transactions and also provides indemnifications that protect the counterparties
to contracts in the event that additional taxes are owed due either to a change
in the tax law or an adverse interpretation of the tax law. Counterparties to
these transactions provide the Company with comparable indemnifications. While
such representations, warranties and tax indemnifications are essential
components of many contractual relationships, they do not represent the
underlying business purpose for the transactions. The indemnification clauses
are often standard contractual terms related to the Company's own performance
under the terms of a contract and are entered into in the normal course of
business based on an assessment that the risk of loss is remote. Often these
clauses are intended to ensure that terms of a contract are met at inception. No
compensation is received for these standard representations and warranties and
it is not possible to determine their fair value because they rarely, if ever,
result in payment. In many cases, there are no stated or notional amounts
included in the indemnification clauses and the contingencies potentially
triggering the obligation to indemnify have not occurred and are not expected to
occur. There are no amounts reflected on the accompanying condensed consolidated
statement of financial condition as of June 30, 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
June 30, 2004 and December 31, 2003 for potential obligations that could arise
from the Company's involvement with VTN associations.
11
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2004 and December 31,
2003, the carrying amount of the liabilities related to these derivatives was
$2.3 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 June 30,
2004, the maximum potential loss at notional value related to credit default
swaps and total rate of return swaps amounted to $112.2 billion, of which $16.3
billion expire within one year and $95.9 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 June 30, 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 $1.5 billion and $2.1 billion, respectively.
Guarantees to joint ventures and other third parties primarily include
guarantees of their debt obligations. At June 30, 2004, the carrying amount and
the maximum potential loss related to these joint ventures and other third party
guarantees were $151 million, of which $50 million expires within one year and
$101 million expires after one year. 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. Securities and other marketable assets held
as collateral to reimburse losses under other third party guarantees amounted to
$47 million and $48 million at June 30, 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 June 30,
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 JUNE 30, 2004 DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------------
Cash $ 895 $ 25
Financial Instruments Owned & Contractual
Commitments 2,602 3,127
Receivables Other 327 124
Other Assets 926 753
------- -------
Total Assets of Consolidated VIEs $ 4,750 $ 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 June 30, 2004 and December 31, 2003, approximately $1.5 billion and $1.8
billion,
12
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2004 and December 31,
2003, approximately $3.2 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 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 June 30, 2004 and December 31, 2003, such
transactions involved VIEs with approximately $8.7 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 June 30, 2004 and December 31, 2003, such
transactions involved VIEs with approximately $60.0 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 $11.2 billion and $8.6 billion at June
30, 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.
13
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. 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.
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 ON WORLDCOM CLASS ACTION LITIGATION AND CHARGE FOR REGULATORY AND
LEGAL MATTERS
During the 2004 second quarter, the Company recorded a charge of $6.5 billion
($4.1 billion after-tax) related to a settlement on class action litigation
brought on behalf of purchasers of WorldCom securities and an increase in
litigation reserves (the "WorldCom and Litigation Reserve Charge").
Under the terms of the settlement, the Company will make a payment of $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
yet been determined) will come out of the settlement amount.
In connection with the settlement of the WorldCom class action lawsuit, the
Company has reevaluated its reserves for the numerous lawsuits and other legal
proceedings arising out of the transactions and activities that were the
subjects of:
(i) the April 2003 settlement of the 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.
Accordingly, the Company increased its reserve for these matters. The Company
believes that this reserve 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 seek to resolve them in the manner
management believes is in the best interest of the Company.
The Company's litigation reserve for these matters following payment of the
WorldCom settlement will be $4.7 billion on a pre-tax basis.
15
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended June 30, 2004 (the "2004 Quarter"), the Company
recorded a net loss of $3,328 million compared to net income of $739 million for
the three months ended June 30, 2003 (the "2003 Quarter"). The decline is the
result of the WorldCom and Litigation Reserve Charge, which was recorded in the
2004 Quarter. Revenues, net of interest expense, were $4,246 million in the 2004
Quarter, up slightly from the 2003 Quarter. Commission revenues increased
slightly in the 2004 Quarter to $986 million as a result of an increase in OTC
commissions. Asset management and administration fees increased significantly to
$1,031 million in the 2004 Quarter, primarily as a result of positive market
action and cumulative net flows, increased customer trading volumes and higher
asset-based revenue, reflecting increased client asset levels. Investment
banking revenues declined to $884 million in the 2004 Quarter as the result of
decreases in equity, high yield and high grade debt underwritings, partially
offset by an increase in merger and acquisition fees. Principal transactions
revenues decreased to $255 million in the 2004 Quarter primarily as the result
of decreases in fixed income and global equity trading. Net interest and
dividend income increased to $912 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. Total non-interest expenses increased to $9,623 million in the
2004 Quarter as a result of the WorldCom and Litigation Reserve Charge.
For the six months ended June 30, 2004 (the "2004 Period"), the Company recorded
a net loss of $2,507 million compared to net income of $1,389 million for the
six months ended June 30, 2003 (the "2003 Period"). The decline is the result of
the WorldCom and Litigation Reserve Charge, which was recorded in the 2004
Quarter. Revenues, net of interest expense, were $8,648 million in the 2004
Period compared to $7,976 million in the 2003 Period. Commission revenues
increased in the 2004 Period to $2,183 million as a result of increases in
listed, OTC and mutual fund commissions. Asset management and administration
fees increased significantly to $2,036 million in the 2004 Period, primarily as
a result of positive market action and cumulative net flows, increased customer
trading volumes and higher asset-based revenue, reflecting increased client
asset levels. Investment banking revenues declined to $1,766 million in the 2004
Period as a result of decreases in high grade debt underwriting and bank loan
arrangement fees, partially offset by increases in equity underwriting and
merger and acquisition fees. Principal transactions revenues decreased to $565
million in the 2004 Period primarily as the result of decreases in fixed income
and global equity trading. Net interest and dividend income increased to $1,876
million in the 2004 Period, 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.
Total non-interest expenses increased to $12,732 million in the 2004 Period as a
result of the WorldCom and Litigation Reserve Charge, increased compensation and
benefits and floor brokerage and other production expense.
16
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is a discussion of the results of operations of the Company's three
operating segments, Investment Services, Private Client Services and Asset
Management.
INVESTMENT SERVICES
- -------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $2,386 $2,549 $4,803 $4,769
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expense 8,199 1,712 9,806 3,223
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes (5,813) 837 (5,003) 1,546
Provision for income taxes (2,221) 325 (1,937) 586
- -------------------------------------------------------------------------------------------------------------------
Net income ($3,592) $ 512 ($3,066) $ 960
===================================================================================================================
The Company's Investment Services segment recorded a net loss of $3,592 million
in the 2004 Quarter and $3,066 in the 2004 Period, compared to net income of
$512 million in the 2003 Quarter and $960 million in the 2003 Period.
Revenues, net of interest expense, decreased 6% to $2.4 billion in the 2004
Quarter. Revenues in the 2004 Period increased slightly compared to the 2003
Period. Principal transactions revenue decreased in the 2004 Quarter and 2004
Period as a result of lower fixed income and global equity trading. Investment
banking revenues declined in the 2004 Quarter as a result of lower equity, high
yield and high grade debt underwriting offset partially by an increase in merger
and acquisition fees. Investment banking revenues decreased in the 2004 Period
due to decreases in high grade debt and public finance underwritings, offset
partially by an increase in equity underwriting. Commission revenue increased in
the 2004 Quarter, as OTC, mutual funds and futures commissions increased.
Commission revenues increased in the 2004 Period as a result of increases in
listed and OTC commissions. Net interest and dividend income increased in the
2004 Quarter and 2004 Period 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.
Total non-interest expenses increased to $8.2 billion in the 2004 Quarter and
$9.8 billion in the 2004 Period, primarily due to the WorldCom and Litigation
Reserve Charge.
PRIVATE CLIENT SERVICES
- -------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $1,533 $1,419 $3,220 $2,718
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expense 1,226 1,154 2,538 2,221
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 307 265 682 497
Provision for income taxes 122 103 268 192
- -------------------------------------------------------------------------------------------------------------------
Net income $ 185 $ 162 $ 414 $ 305
===================================================================================================================
17
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Private Client Services net income of $185 million in the 2004 Quarter increased
$23 million or 14% from the 2003 Quarter, primarily due to higher asset-based
fee revenue, partially offset by increases in production-related compensation,
higher legal expense, and lower transactional revenue. Net income of $414
million in the 2004 Period increased $109 or 36% from the 2003 Period, primarily
due to increases in both asset-based revenue and transactional revenue,
partially offset by higher production-related compensation and legal costs.
Revenues, net of interest expense, of $1,533 million in the 2004 Quarter
increased $114 million or 8% from the 2003 Quarter, primarily due to increases
in asset-based fee revenue reflecting higher assets under fee-based management,
partially offset by decreases in transactional revenue reflecting lower customer
trading volumes. Fee-based revenue increased $184 million or 28%, resulting from
growth in assets under fee-based management. Transactional revenue decreased $70
million or 11%, primarily due to decreased customer trading volumes resulting in
lower total commissions. Revenues, net of interest expense, in the 2004 Period
of $3,220 million increased $502 million or 19% from the 2003 Period, reflecting
increases in both and asset-based fee revenue and transactional revenue.
Fee-based revenue increased $356 million or 27%, resulting from growth in assets
under fee-based management. Transactional revenue increased $146 million or 11%,
primarily due to increased customer trading volumes resulting in higher total
commissions.
Total assets under fee-based management were $222 billion as of June 30, 2004,
up $40 billion or 22% from the prior-year period. Total client assets, including
assets under fee-based management, of $1,087 billion in the 2004 Quarter
increased $128 billion or 13% compared to the 2003 Quarter, principally due to
market appreciation and positive net inflows. Net inflows were $5 billion in the
2004 Quarter compared to $9 billion in the 2003 Quarter and $11 billion in the
2004 Period compared to $14 billion in the 2003 Period.
Operating expenses of $1,226 million in the 2004 Quarter and $2,538 million in
the 2004 Period, increased $72 million or 6% and $317 million or 14%,
respectively, from the comparable 2003 Quarter and Period. The increases were
mainly due to higher production-related compensation reflecting increased
revenue and higher legal costs.
Assets under fee-based management were as follows:
- ---------------------------------------------------------------------------------------
Dollars in billions
At June 30, 2004 2003
- ---------------------------------------------------------------------------------------
Financial Consultant managed accounts $ 76.1 $ 60.9
Consulting Group and internally managed assets 146.3 121.5
- ---------------------------------------------------------------------------------------
Total assets under fee-based management (1) $ 222.4 $ 182.4
- ---------------------------------------------------------------------------------------
(1) Includes certain assets managed jointly with Citigroup Asset Management.
18
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSET MANAGEMENT
- ---------------------------------------------------------------------------------------------------------------------
Dollars in millions Three Months Six Months
Period Ended June 30, 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $327 $252 $625 $489
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 198 148 388 288
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 129 104 237 201
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes 50 39 92 77
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 79 $ 65 $145 $124
- ---------------------------------------------------------------------------------------------------------------------
The Company's Asset Management segment revenues, net of interest expense,
increased to $327 million and $625 million in the 2004 Quarter and 2004 Period,
respectively, compared to $252 million and $489 million in the 2003 Quarter and
2003 Period, respectively. The primary revenue for the Asset Management segment
is asset management and administration fees, which increased to $319 million and
$612 million in the 2004 Quarter and 2004 Period, respectively, compared to $244
million in the 2003 Quarter and $478 million in the 2003 Period. The increase in
revenues in the 2004 Quarter and 2004 Period is primarily due to the positive
market action and cumulative net flows. The increased fee revenues primarily
resulted from changes in product mix, partially offset by a change in the
presentation of certain fee sharing arrangements which decreased both revenues
and expenses by $5 million and $9 million in the 2004 Quarter and 2004 Period,
respectively.
Assets under management for the segment were $305.9 billion at June 30, 2004,
compared to $264.6 billion at June 30, 2003. This increase is primarily due to
positive market action and the impact of positive net flows.
Total non-interest expenses were $198 million and $388 million in the 2004
Quarter and 2004 Period, respectively, compared to $148 million and $288 million
in the 2003 Quarter and 2003 Period, respectively. The increase in expenses is
due to higher compensation and legal expense and was partially offset by a
change in the presentation of certain fee sharing arrangements, which decreased
both revenue and expenses by $5 million and $9 million in the 2004 Quarter and
2004 Period, respectively.
19
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Assets under fee-based management were as follows:
- ------------------------------------------------------------------------------------
Dollars in billions
At June 30, 2004 2003
- ------------------------------------------------------------------------------------
Money market funds $ 92.7 $ 87.0
Mutual funds 90.3 77.5
Managed accounts 117.6 94.8
Unit investment trusts held in client accounts 5.3 5.3
- ------------------------------------------------------------------------------------
Total $ 305.9 $ 264.6
- ------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $415 billion at June 30, 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
FASB 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 $256.6 billion at June 30, 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 $25.7 billion at June 30, 2004.
The Company has a $2.5 billion 364-day committed uncollateralized revolving line
of credit with unaffiliated banks. This facility has a two-year term-out
provision with any borrowings maturing in May 2007. The Company has a $1.0
billion three-year facility with unaffiliated banks with any borrowings maturing
in May, 2007. The Company also has $2.13 billion in committed uncollateralized
364-day facilities with unaffiliated banks that extend through various dates in
2004 and 2005. The Company may borrow under these revolving credit facilities at
various interest rate options (LIBOR or base rate) and compensates the banks for
these facilities through facility fees. At June 30, 2004, there were no
outstanding borrowings under these facilities. The Company also has committed
long-term financing facilities with unaffiliated banks. At June 30, 2004, the
Company had drawn down the full $1.7 billion then available under these
facilities. A bank can terminate these
20
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 June 30,
2004, this requirement was exceeded by approximately $6.6 billion. The Company
also has substantial borrowing arrangements consisting of facilities that the
Company has been advised are available, but where no contractual lending
obligation exists. These arrangements are reviewed on an ongoing basis to ensure
flexibility in meeting the Company's short-term requirements.
The Company's borrowing relationships are with a broad range of banks, financial
institutions and other firms, 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.
21
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows the results of the Company's VAR analysis, which
includes all of the Company's financial assets and liabilities which are marked
to market at June 30, 2004 and December 31, 2003. The VAR relating to accrual
portfolios has been excluded from this analysis.
- -----------------------------------------------------------------------------------------------------------------------
RISK EXPOSURES June 30, Second Quarter Second Quarter Second Quarter December 31,
($ IN MILLIONS) 2004 2004 Average 2004 High 2004 Low 2003
- -----------------------------------------------------------------------------------------------------------------------
Interest rate $ 84 $ 89 $ 122 $ 64 $ 73
Equities 28 27 48 17 21
Commodities 25 20 25 16 7
Currency 11 9 12 8 9
Diversification Benefit (53) (49) N/A N/A (34)
- -----------------------------------------------------------------------------------------------------------------------
Total* $ 95 $ 96 $ 125 $ 73 $ 76
=======================================================================================================================
* Includes diversification benefit.
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at June 30, 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 June 30,
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.
22
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, as updated by the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and the
Company's Current Report on Form 8-K dated July 21, 2004.
ENRON CORP.
In NEWBY, ET AL. V. ENRON CORP., ET AL., Citigroup has answered the complaint
and discovery is ongoing.
Additional actions have been filed against Citigroup and certain of its
affiliates, including Citigroup Global Markets Inc. ("CGMI"), along with other
parties, including (i) actions brought by the Attorney General of Connecticut in
connection with various commercial and investment banking services provided to
Enron; in one such case, the Attorney General of Connecticut voluntarily
dismissed all claims against Citigroup; and (ii) a third-party action brought by
Arthur Andersen as a defendant in an Enron-related litigation pending in Texas
state court, alleging a right to contribution from Citigroup.
WORLDCOM, INC.
On May 10, 2004, the Company, through its parent, Citigroup, announced that it
had agreed to settle all claims against it in IN RE WORLDCOM, INC. SECURITIES
LITIGATION, a class action brought on behalf of certain investors in WorldCom
securities. Under the terms of the settlement, Citigroup will make a payment of
$2.65 billion ($1.64 billion after-tax) to the settlement class. Citigroup
reached this settlement agreement without admitting any wrongdoing or liability,
and the agreement reflects that Citigroup denies that it or its subsidiaries
committed any act or omission giving rise to any liability and/or violation of
the law. On July 20,
23
2004, the District Court entered an order preliminarily approving the
settlement, setting a schedule for various notices and the filing of claims, and
setting November 5 as the date of a hearing for the determination of whether or
not the settlement should be finally approved.
MUTUAL FUNDS
In connection with the investigation by the Securities and Exchange Commission
of transfer agent entities, the Staff of the SEC notified the Company that it is
considering recommending a civil injunctive action and/or an administrative
proceeding against certain of the advisory and transfer agent entities
affiliated with Citigroup relating to the creation and operation of an internal
transfer agent unit to serve primarily the Smith Barney family of funds. The
Staff of the SEC has not made a formal enforcement recommendation to the SEC.
Citigroup is cooperating fully in the investigation and will seek to resolve the
matter in discussions with the Staff of the SEC.
The Company and certain of its subsidiaries have been named in a series of class
actions in various federal and state courts concerning practices in connection
with the sale of mutual funds, including alleged incentive payments for the sale
of proprietary funds and breakpoint discounts for the sale of certain classes of
funds.
RESEARCH
On June 9, 2004, CGMI's motion to dismiss the putative class action in the
United States District Court for the Southern District of New York was denied.
This putative class action asserted violations of the Investment Advisers Act of
1940 and various common law claims in connection with certain investors who
maintained guided portfolio management accounts at Smith Barney.
On July 28, 2004, a putative class action by purchasers of Focal Communications
Corporation common stock was filed in the United States District Court for the
Southern District of New York, asserting claims under Section 10 and Section 20
of the Securities Exchange Act of 1934 against Citigroup, CGMI and Jack Grubman.
OTHER
On May 27, 2004, Citigroup reached agreement with the Official Committee of
Unsecured Creditors of Metromedia Fiber Network, Inc. on terms for a settlement
of the committee's claims against Citigroup and CGMI, which had been pending in
the Bankruptcy Court of the United States District Court for the Southern
District of New York.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index.
(b) Reports on Form 8-K:
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 (SEQUINS) based upon the
common stock of Hewlett-Packard Company due May 2, 2005.
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.
On June 3, 2004, the Company filed a Current Report on Form 8-K, dated May 25,
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 2004-2 Dynamic Portfolio Index
due May 26, 2010.
On June 22, 2004, the Company filed a Current Report on Form 8-K, dated June 16,
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 Nikkei 225 Stock Average due June 19, 2008.
On June 29, 2004, the Company filed a Current Report on Form 8-K, dated June 23,
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
Nasdaq-100 Index due September 28, 2009.
On June 30, 2004, the Company filed a Current Report on Form 8-K, dated June 24,
2004, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's 10% Equity Linked Securities (ELKS) based upon the common
stock of Yahoo! Inc. due June 30, 2005.
No other reports on Form 8-K were filed during the second quarter of 2004,
however:
On July 15, 2004, the Company filed a Current Report on Form 8-K, dated July 15,
2004, reporting under Item 5 thereof the results of its operations for the
three- and six-month periods ended June 30, 2004 and 2003.
25
On July 21, 2004, the Company filed a Current Report on Form 8-K, dated July 21,
2004, reporting under Item 5 thereof that Citigroup Inc. (Citigroup), the
Company's parent, had been notified by the Staff of the Securities and Exchange
Commission (SEC) that the Staff is considering recommending a civil injunctive
action and/or an administrative proceeding against certain advisory and transfer
agent entities affiliated with Citigroup relating to the creation and operation
of an internal transfer agent unit to serve primarily the Smith Barney family of
funds.
On July 29, 2004, the Company filed a Current Report on Form 8-K, dated July 23,
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 2004-3 Dynamic Portfolio Index
due February 26, 2010.
On July 29, 2004, the Company filed a Current Report on Form 8-K, dated July 26,
2004, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the Company's 8% Select EQUity Indexed Notes (SEQUINS) based upon the
common stock of Motorola, Inc. due August 1, 2005.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.01 Restated Certificate of Incorporation of Citigroup Global Markets Holdings Inc. (the
"Company"), effective April 7, 2003, incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed on April 7, 2003 (File No. 1-4346).
3.02 By-Laws of the Company, incorporated by reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-3 (No. 333-106272).
12.01+ Computation of ratio of losses 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.
26
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: August 13, 2004 By: /s/ Robert Druskin
---------------------------------
Robert Druskin
President and Chief Executive Officer
By: /s/ John C. Morris
---------------------------------
John C. Morris
Chief Financial Officer
27