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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
PAGE
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Nine months ended September 30, 2004 and 2003 1
Condensed Consolidated Statements of Financial Condition -
September 30, 2004 (Unaudited) and December 31, 2003 2 - 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5 - 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14 - 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22 - 23
Item 6. Exhibits 24
Signatures 25
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Dollars in millions Three Months Nine Months
Period Ended September 30, 2004 2003 2004 2003
- -------------------------- -------- -------- -------- --------
Revenues:
Commissions $ 934 $ 974 $ 3,117 $ 2,733
Asset management and administration fees 1,001 864 3,037 2,457
Investment banking 779 792 2,545 2,684
Principal transactions 222 383 787 1,624
Other 137 41 359 136
-------- -------- -------- --------
Total non-interest revenues 3,073 3,054 9,845 9,634
-------- -------- -------- --------
Interest and dividends 2,457 1,797 6,871 5,942
Interest expense 1,645 1,121 4,183 3,870
-------- -------- -------- --------
Net interest and dividends 812 676 2,688 2,072
-------- -------- -------- --------
Revenues, net of interest expense 3,885 3,730 12,533 11,706
-------- -------- -------- --------
Non-interest expenses:
Compensation and benefits 1,902 1,958 6,457 6,262
Communications 227 151 594 486
Floor brokerage and other production 181 155 563 493
Occupancy and equipment 140 134 411 405
Professional services 152 91 403 268
Advertising and market development 97 67 266 196
Other operating and administrative expenses 221 105 6,958 283
-------- -------- -------- --------
Total non-interest expenses 2,920 2,661 15,652 8,393
-------- -------- -------- --------
Income (loss) before income taxes 965 1,069 (3,119) 3,313
Provision (benefit) for income taxes 345 406 (1,232) 1,261
-------- -------- -------- --------
Net income (loss) $ 620 $ 663 ($ 1,887) $ 2,052
======== ======== ======== ========
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
September 30, December 31,
Dollars in millions 2004 2003
- ------------------- ------------- ------------
(Unaudited)
Assets:
Cash and cash equivalents $ 5,761 $ 6,312
Cash segregated and on deposit for Federal and other regulations
or deposited with clearing organizations 3,755 2,806
Collateralized short-term financing agreements:
Securities purchased under agreements to resell $132,604 $108,984
Deposits paid for securities borrowed 67,062 50,192
-------- --------
199,666 159,176
Financial instruments owned and contractual commitments:
(Approximately $95 billion and $63 billion were pledged to various
parties at September 30, 2004 and December 31, 2003, respectively)
U.S.government and government agency securities 52,762 51,205
Corporate debt securities 42,736 33,221
Equity securities 29,955 19,610
Non-U.S. government and government agency securities 19,263 11,929
Contractual commitments 14,124 15,554
Mortgage loans and collateralized mortgage obligations 11,428 8,275
Municipal securities 10,117 7,736
Money market instruments 3,338 5,369
Other financial instruments 518 946
-------- --------
184,241 153,845
Receivables:
Customers 21,873 18,831
Brokers, dealers and clearing organizations 16,004 7,560
Other 3,688 2,865
-------- --------
41,565 29,256
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $1,191 and
$1,081, respectively 1,544 1,384
Goodwill 1,811 1,531
Intangibles 838 800
Other assets 9,368 6,151
-------- --------
Total assets $448,549 $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
September 30, December 31,
Dollars in millions, except share data 2004 2003
- -------------------------------------- -------------- -------------
(Unaudited)
Liabilities and Stockholder's Equity:
Commercial paper and other short-term borrowings $ 27,878 $ 22,644
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $165,199 $135,301
Deposits received for securities loaned 23,596 19,503
-------- --------
188,795 154,804
Financial instruments sold, not yet purchased, and
contractual commitments:
U.S. government and government agency securities 31,253 16,524
Non-U.S. government and government agency securities 23,824 24,373
Contractual commitments 18,997 18,698
Corporate debt securities and other 16,069 10,593
Equity securities 8,900 4,436
-------- --------
99,043 74,624
Payables and accrued liabilities:
Customers 30,371 23,848
Brokers, dealers and clearing organizations 7,908 11,317
Other 23,820 14,660
-------- --------
62,099 49,825
Term debt 53,856 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 8,425 4,241
Retained earnings 8,445 11,375
Accumulated changes in equity from nonowner sources 8 6
-------- --------
Total stockholder's equity
16,878 15,622
-------- --------
Total liabilities and stockholder's equity $448,549 $361,261
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Dollars in millions
Nine Months Ended September 30, 2004 2003
- ------------------------------- -------- --------
Cash flows from operating activities:
Net income (loss) ($ 1,887) $ 2,052
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 257 301
Net change in:
Cash segregated and on deposit for Federal and other regulations or
deposited with clearing organizations (949) (57)
Securities borrowed or purchased under agreements to resell (40,490) (19,359)
Financial instruments owned and contractual commitments (30,396) (20,637)
Receivables (12,309) (10,801)
Goodwill, intangibles and other assets, net (3,453) 1,077
Securities loaned or sold under agreements to repurchase 33,991 15,742
Financial instruments sold, not yet purchased, and contractual commitments 24,419 12,464
Payables and accrued liabilities 12,274 16,959
-------- --------
Net cash used in operating activities (18,543) (2,259)
-------- --------
Cash flows from financing activities:
Increase in commercial paper and other short-term borrowings 5,234 386
Proceeds from issuance of term debt 23,669 15,009
Term debt maturities and repurchases (13,236) (11,234)
Repayment of mandatorily redeemable securities of subsidiary trust - (400)
Capital contribution from Parent 4,100 500
Dividends paid (1,024) (694)
Other capital transactions - (28)
-------- --------
Net cash provided by financing activities 18,743 3,539
-------- --------
Cash flows from investing activities:
Property, equipment, leasehold improvements and business acquisitions (751) (612)
-------- --------
Net cash used in investing activities (751) (612)
-------- --------
Net increase (decrease) in cash and cash equivalents (551) 668
Cash and cash equivalents at January 1, 6,312 3,722
-------- --------
Cash and cash equivalents at September 30, $ 5,761 $ 4,390
======== ========
Cash payments for interest were $3.6 billion and $3.8 billion for the nine
months ended September 30, 2004 and 2003, respectively.
Cash paid for income taxes, net of refunds, amounted to $942 million during the
nine months ended September 30, 2004 and cash paid for income taxes, net of
refunds, amounted to $982 million during the nine months ended September 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
Accounting 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, which on the average is approximately four years. The impact
of this change in application was a $153 million pre-tax reduction in revenue,
net of amortization, for the nine months ended September 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 (loss) and other changes
in stockholder's equity from nonowner sources, which, for the Company, are
comprised of cumulative translation adjustments and unrealized gains and losses
on certain investments held by equity method investees, net of tax:
Dollars in millions Three Months Nine Months
Period ended September 30, 2004 2003 2004 2003
- -------------------------- ------- ------- ------- -------
Net income (loss) $ 620 $ 663 ($1,887) $ 2,052
Other changes in equity from
nonowner sources (1) 19 2 15
------- ------- ------- -------
Total comprehensive income $ 619 $ 682 ($1,885) $ 2,067
======= ======= ======= =======
NOTE 3. CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to securities and commodities
regulations and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. Capital
requirements related to CGMHI's principal regulated subsidiaries at September
30, 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) $3,705 $3,149
Citigroup Global Markets Limited United Kingdom's Financial Services Authority $6,927 $2,092
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc.
("Swapco"), an indirect wholly owned subsidiary of CGMHI, must maintain minimum
levels of capital in accordance with agreements with its rating agencies. At
September 30, 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,
8
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
"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." Revenues generated from these contractual commitments
are reported primarily as "Principal transactions" and include realized gains
and losses as well as unrealized gains and losses resulting from changes in the
market or fair value of such instruments.
A summary of the Company's contractual commitments as of September 30, 2004 and
December 31, 2003 are as follows:
SEPTEMBER 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) $ 280.4 $ - $ - $ 314.1 $ - $ -
Other exchange-traded products:
Equity options 94.3 .9 .8 50.5 1.7 1.8
Fixed income options 42.9 - - 11.6 - -
Foreign exchange options and commodity contracts 5.0 - - 3.4 - -
-------- -------- -------- -------- ------- --------
Total exchange-traded products 422.6 .9 .8 379.6 1.7 1.8
-------- -------- -------- -------- ------- --------
Over-the-counter ("OTC") swaps, swap options, caps,
floors and forward rate agreements:
Swaps 3,132.6 2,136.5
Swap options written 90.8 81.2
Swap options purchased 55.7 62.2
Caps, floors and forward rate agreements 150.5 151.5
-------- -------- -------- -------- ------- --------
Total OTC swaps, swap options, caps, floors and forward
rate agreements (b) 3,429.6 8.7 10.4 2,431.4 9.1 8.7
-------- -------- -------- -------- ------- --------
Other options and contractual commitments:
Options and warrants on equities and equity indices 114.5 1.7 5.7 85.4 1.9 4.9
Options and forward contracts on fixed income
securities 633.2 2.3 1.7 469.3 1.7 2.0
Foreign exchange contracts and options (b) 148.9 .3 .2 131.0 1.1 1.2
Commodity contracts 11.1 .2 .2 9.0 .1 .1
-------- -------- -------- -------- ------- --------
Total contractual commitments $4,759.9 $ 14.1 $ 19.0 $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 unaudited 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 $15.4 billion and $1.5 billion at September 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 Nine Months
Period ended September 30, 2004 2003 2004 2003
- -------------------------- -------- -------- -------- --------
Revenues, net of interest expense:
Investment Services $ 2,100 $ 1,997 $ 6,903 $ 6,766
Private Client Services 1,479 1,459 4,699 4,177
Asset Management 306 274 931 763
-------- -------- -------- --------
Total $ 3,885 $ 3,730 $ 12,533 $ 11,706
======== ======== ======== ========
Total non-interest expenses:
Investment Services $ 1,502 $ 1,342 $ 11,308 $ 4,564
Private Client Services 1,197 1,162 3,735 3,383
Asset Management 221 157 609 446
-------- -------- -------- --------
Total $ 2,920 $ 2,661 $ 15,652 $ 8,393
======== ======== ======== ========
Net income (loss):
Investment Services $ 401 $ 409 $ (2,665) $ 1,369
Private Client Services 172 182 586 488
Asset Management 47 72 192 195
-------- -------- -------- --------
Total $ 620 $ 663 $ (1,887) $ 2,052
======== ======== ======== ========
Total assets of the Investment Services, Private Client Services and Asset
Management segments were $430.6 billion, $15.9 billion and $2.0 billion,
respectively, at September 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
In addition to the matters described under Part II, Item 1 of this Form 10-Q,
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. Although the Company's management believes the ultimate resolution of
these lawsuits and other proceedings is not likely to have a material adverse
effect on the consolidated financial condition of the Company, such resolution
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
10
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 unaudited condensed consolidated
statement of financial condition as of September 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 unaudited condensed consolidated statement of financial
condition as of September 30, 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 September 30, 2004 and December
31, 2003, the carrying amount of the liabilities related to these derivatives
was $1.4 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 September
30, 2004, the maximum potential loss at notional value related to credit default
swaps and total rate of return swaps amounted to $195.9 billion, of which $18.8
billion expires within one year and $177.1 billion expires 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 September 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 $0.5 billion and $2.1 billion, respectively.
Guarantees to joint ventures and other third parties primarily include
guarantees of their debt obligations. At September 30, 2004, the carrying amount
and the maximum potential loss related to these joint ventures and other third
party guarantees were $148 million, of which $50 million expires within one year
and $98 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
11
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
held as collateral to reimburse losses under other third party guarantees
amounted to $47 million and $48 million at September 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
September 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 SEPTEMBER 30, 2004 DECEMBER 31, 2003
- ---------------------- ------------------ -----------------
Cash $ 28 $ 25
Financial Instruments Owned & Contractual
Commitments 4,280 3,127
Receivables - Other 368 124
Other Assets 873 753
------ ------
Total Assets of Consolidated VIEs $5,549 $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 September 30, 2004 and December 31, 2003, approximately $2.1 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 September
30, 2004 and December 31, 2003, approximately $3.4 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
12
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2004 and December
31, 2003, such transactions involved VIEs with approximately $9.5 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 September 30, 2004 and December 31, 2003, such
transactions involved VIEs with approximately $72.6 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 $20.2 billion and $8.6 billion at
September 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.
NOTE 9. RELATED PARTY BALANCES
The Company has related party balances with Citigroup and certain of its
subsidiaries and affiliates including cash accounts, collateralized financing
transactions, margin accounts, short-term borrowings, receivables and payables
from securities and underwriting transactions, derivative trading and charges
for operational support. The Company also has long-term borrowings from
Citigroup of $12.1 billion at September 30, 2004 of which $2 billion are
subordinated borrowings. Related party transactions 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.
13
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 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 of class action litigation
brought on behalf of purchasers of WorldCom securities and an increase in
litigation reserves (the "WorldCom and Litigation Reserve Charge").
On November 5, 2004, the United States District Court for the Southern District
of New York approved the class settlement between plaintiffs and the
Citigroup-related defendants in IN RE WORLDCOM, INC. SECURITIES LITIGATION. The
Court's approval is subject to possible appeal by plaintiffs. Subject to the
terms of the settlement and the resolution of any appeals, the Company will make
a payment of $2.58 billion, or $1.60 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
will come out of the settlement amount.
In connection with the settlement of the WorldCom class action lawsuit, the
Company 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.
14
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 September 30, 2004 (the "2004 Quarter"), the Company
recorded net income of $620 million compared to net income of $663 million for
the three months ended September 30, 2003 (the "2003 Quarter"). Revenues, net of
interest expense, were $3,885 million in the 2004 Quarter, up slightly from the
$3,730 million in the 2003 Quarter. Commission revenues decreased slightly in
the 2004 Quarter to $934 million as a result of a decrease in listed commissions
offset partially by an increase in OTC commissions. Asset management and
administration fees increased significantly to $1,001 million in the 2004
Quarter, primarily as a result of positive market action and cumulative net
flows, and higher asset-based revenue, reflecting increased client asset levels,
partially offset by lower transaction volume. Investment banking revenues of
$779 million in the 2004 Quarter were essentially unchanged compared to the 2003
Quarter. Principal transactions revenues decreased to $222 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 $812 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 municipal holdings. Total non-interest expenses increased to
$2,920 million in the 2004 Quarter as a result of increased voice and market
data communication expense, increased floor brokerage and an increase in other
operating and administrative expense primarily as a result of increased legal
reserves. This increase was offset partially by a decrease in compensation and
benefits expense.
For the nine months ended September 30, 2004 (the "2004 Period"), the Company
recorded a net loss of $1,887 million compared to net income of $2,052 million
for the nine months ended September 30, 2003 (the "2003 Period"). The decline is
the result of the WorldCom and Litigation Reserve Charge, which was recorded in
the 2004 second quarter. Revenues, net of interest expense, were $12,533 million
in the 2004 Period compared to $11,706 million in the 2003 Period. Commission
revenues increased in the 2004 Period to $3,117 million as a result of an
increase in OTC commissions. Asset management and administration fees increased
significantly to $3,037 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 $2,545 million in the 2004
Period as a result of decreases in high grade debt underwriting, partially
offset by an increases in equity underwriting. Principal transactions revenues
decreased to $787 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 $2,688 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 and municipal holdings.
Total non-interest expenses increased to $15,562 million in the 2004 Period as a
result of the WorldCom and Litigation Reserve Charge, increased compensation and
benefits, voice and market data communication, and floor brokerage and other
production expenses.
15
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 Nine Months
Period Ended September 30, 2004 2003 2004 2003
-------- -------- -------- --------
Revenues, net of interest expense $ 2,100 $ 1,997 $ 6,903 $ 6,766
Total non-interest expense 1,502 1,342 11,308 4,564
Income (loss) before income taxes 598 655 (4,405) 2,202
Provision (benefit) for income taxes 197 246 (1,740) 833
-------- -------- -------- --------
Net income (loss) $ 401 $ 409 ($ 2,665) $ 1,369
======== ======== ======== ========
The Company's Investment Services segment recorded net income of $401 million in
the 2004 Quarter and a net loss of $2,665 in the 2004 Period, compared to net
income of $409 million in the 2003 Quarter and $1,369 million in the 2003
Period.
Revenues, net of interest expense, increased 5% to $2.1 billion in the 2004
Quarter. Revenues in the 2004 Period increased to $6.9 billion compared to $6.8
billion in the 2003 Period. Principal transactions revenues decreased in the
2004 Quarter and in the 2004 Period as a result of lower fixed income and global
equity trading. Investment banking revenues declined in the 2004 Quarter and in
the 2004 Period as a result of lower high grade debt and public finance
underwriting, offset partially by an increase in equity underwriting fees.
Commission revenue increased in the 2004 Quarter, primarily due to an increase
in OTC and futures commissions, offset partially by a decline in listed
commissions. Commission revenues increased in the 2004 Period as a result of
increases in listed, and futures 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 municipal holdings. Net
interest and dividends was also favorably impacted in the 2004 Period by
increased interest income resulting from higher U.S. mortgage inventory levels.
Total non-interest expenses increased to $1.5 billion in the 2004 Quarter as a
result of increased employee compensation and benefits, floor brokerage and
other production related expenses, voice and market data expense and increased
legal reserves. The total non-interest expense increased to $11.3 billion in the
2004 Period, primarily due to the WorldCom and Litigation Reserve Charge.
16
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRIVATE CLIENT SERVICES
Dollars in millions Three Months Nine Months
Period Ended September 30, 2004 2003 2004 2003
- ------------------------- ------ ------ ------ ------
Revenues, net of interest expense $1,479 $1,459 $4,699 $4,177
Total non-interest expense 1,197 1,162 3,735 3,383
Income before income taxes 282 297 964 794
Provision for income taxes 110 115 378 306
------ ------ ------ ------
Net income $ 172 $ 182 $ 586 $ 488
====== ====== ====== ======
Private Client Services net income of $172 million in the 2004 Quarter decreased
$10 million or 6% from the 2003 Quarter, primarily due to higher legal expenses
and lower transactional revenue, partially offset by higher fee revenue. Net
income of $586 million in the 2004 Period increased $98 million or 20% 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 $1,479 million in the 2004 Quarter
increased $20 million or 1% 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 $102 million or 16%, resulting from
growth in assets under fee-based management. Transactional revenue decreased $82
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 $4,699 million increased $522 million or 12% from the 2003 Period, reflecting
increases in both asset-based fee revenue and transactional revenue. Fee-based
revenue increased $426 million or 24%, resulting from growth in assets under
fee-based management. Transactional revenue increased $96 million or 5%,
primarily due to increased customer trading volumes resulting in higher total
commissions.
Total assets under fee-based management were $220.9 billion as of September 30,
2004, up $28.8 billion or 15% from the prior-year period. Total client assets,
including assets under fee-based management, of $1,087 billion in the 2004
Quarter increased $89 billion or 9% compared to the 2003 Quarter, principally
due to market appreciation and positive net inflows. Net inflows were $3 billion
in the 2004 Quarter compared to $5 billion in the 2003 Quarter and $14 billion
in the 2004 Period compared to $19 billion in the 2003 Period.
Operating expenses of $1,197 million in the 2004 Quarter and $3,735 million in
the 2004 Period, increased $35 million or 3% and $352 million or 10%,
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.
17
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Assets under fee-based management were as follows:
Dollars in billions
At September 30, 2004 2003
- ---------------- ------ ------
Financial Consultant managed accounts $ 76.3 $ 64.3
Consulting Group and internally managed assets 144.6 127.8
------- -------
Total assets under fee-based management (1) $ 220.9 $ 192.1
======= =======
(1) Includes certain assets managed jointly with Citigroup Asset
Management.
ASSET MANAGEMENT
Dollars in millions Three Months Nine Months
Period Ended September 30, 2004 2003 2004 2003
- -------------------------- ---- ---- ---- ----
Revenues, net of interest expense $306 $274 $931 $763
Total non-interest expense 221 157 609 446
Income before income taxes 85 117 322 317
Provision for income taxes 38 45 130 122
---- ---- ---- ----
Net income $ 47 $ 72 $192 $195
==== ==== ==== ====
The Company's Asset Management segment revenues, net of interest expense,
increased to $306 million and $931 million in the 2004 Quarter and 2004 Period,
respectively, compared to $274 million and $763 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 $297 million and
$908 million in the 2004 Quarter and 2004 Period, respectively, compared to $264
million in the 2003 Quarter and $742 million in the 2003 Period. The increase in
revenues in the 2004 Quarter and 2004 Period is primarily due to positive market
action and cumulative net flows, partially offset by a change in the
presentation of certain fee sharing arrangements which decreased both revenues
and expenses by $4 million and $13 million in the 2004 Quarter and 2004 Period,
respectively.
Assets under management for the segment were $306.5 billion at September 30,
2004, compared to $275.7 billion at September 30, 2003. This increase is
primarily due to positive market action and the impact of positive net flows.
Total non-interest expenses were $221 million and $609 million in the 2004
Quarter and 2004 Period, respectively, compared to $157 million and $446 million
in the 2003 Quarter and 2003 Period, respectively. The increase in expenses is
due to higher legal expense and was partially offset by a change in the
presentation of certain fee sharing arrangements, which decreased both revenue
and expenses by $4 million and $13 million in the 2004 Quarter and 2004 Period,
respectively.
18
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Assets under fee-based management were as follows:
Dollars in billions
At September 30, 2004 2003
- ---------------- ------ ------
Money market funds $ 91.0 $ 92.2
Mutual funds 89.3 80.5
Managed accounts 120.9 97.8
Unit investment trusts held in client accounts 5.3 5.2
------ ------
Total $306.5 $275.7
====== ======
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $449 billion at September 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 $275.1 billion at September 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 $27.2 billion at September 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 2007. The Company also has three-year
facilities totaling $1.4 billion with unaffiliated banks with any borrowings
maturing in May 2007 and $1.6 billion in committed uncollateralized 364-day
facilities with unaffiliated banks that extend through various dates through
2007. 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 September 30, 2004, there were no
outstanding borrowings under these facilities. The Company also has committed
long-term financing facilities with unaffiliated banks. At September 30, 2004,
the Company had
19
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 September 30, 2004, this requirement was exceeded by approximately $6.7
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 September 30, 2004 and December 31, 2003. The VAR relating to
accrual portfolios has been excluded from this analysis.
20
CITIGROUP GLOBAL MARKETS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RISK EXPOSURES September 30, Third Quarter Third Quarter Third Quarter December 31,
($ IN MILLIONS) 2004 2004 Average 2004 High 2004 Low 2003
- --------------- ------------- ------------- ------------- -------------- ------------
Interest rate $133 $103 $ 151 $82 $73
Equities 24 24 33 18 21
Commodities 15 18 26 10 7
Currency 6 10 14 6 9
Diversification Benefit (39) (49) N/A N/A (34)
---- ---- ----- --- ---
Total* $139 $106 $ 151 $85 $76
==== ==== ===== === ===
* Includes diversification benefit.
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating VAR at September 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
September 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.
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, as updated by the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June
30, 2004 and the Company's Current Reports on Form 8-K dated July 21, 2004 and
October 21, 2004.
ENRON CORP.
A Citigroup affiliate, along with other defendants, settled all claims against
it in IN RE NEWPOWER HOLDINGS SECURITIES LITIGATION, a class action brought on
behalf of certain investors in NewPower securities. Citigroup reached this
settlement agreement without admitting any wrongdoing. On September 13, 2004,
the United States District Court for the Southern District of New York
preliminarily approved the settlement.
DYNEGY INC.
On October 7, 2004, the United States District Court for the Southern District
of Texas granted the motion to dismiss all claims against the Citigroup
defendants in IN RE DYNEGY INC. SECURITIES LITIGATION. The District Court also
denied lead plaintiff's request for leave to replead. The case was a putative
class action brought on behalf of purchasers of publicly traded Dynegy debt and
equity securities.
WORLDCOM, INC.
The United States Court of Appeals for the Second Circuit has affirmed the
orders of the United States District Court for the Southern District of New York
denying plaintiffs' motions to remand to state court a large group
22
of WorldCom-related actions. On September 13, 2004, plaintiffs filed a petition
for a writ of certiorari to the United States Supreme Court seeking review of
the Second Circuit's ruling.
On September 17, 2004, WEINSTEIN, ET AL. V. EBBERS, ET AL., a putative class
action against Citigroup Global Markets Inc. ("CGMI") and others brought on
behalf of holders of WorldCom securities asserting claims based on, among other
things, CGMI's research reports concerning WorldCom, was dismissed with
prejudice in its entirety by the United States District Court for the Southern
District of New York. Plaintiffs have noticed an appeal of the dismissal to the
United States Court of Appeals for the Second Circuit.
Citigroup and CGMI, along with a number of other defendants, have settled
RETIREMENT SYSTEMS OF ALABAMA, ET AL. V. J.P. MORGAN CHASE & CO., ET AL., a
WorldCom individual action that had been remanded to the Circuit Court of
Montgomery County, Alabama. The settlement became final on September 30, 2004.
On June 28, 2004, the United States District Court for the Southern District of
New York dismissed all claims under the Securities Act of 1933 and certain
claims under the Securities Exchange Act of 1934 in IN RE TARGETS SECURITIES
LITIGATION, a putative class action against Citigroup and CGMI and certain
former employees, leaving only claims under the 1934 Act for purchases of
Targeted Growth Enhanced Terms Securities With Respect to the Common Stock of
MCI WorldCom, Inc. ("TARGETS") after July 30, 1999. On October 20, 2004, the
parties signed a Memorandum of Understanding setting forth the terms of a
settlement of all remaining claims in this action. The settlement must be
approved by the Court.
On November 5, 2004, the United States District Court for the Southern District
of New York approved the class settlement between plaintiffs and the
Citigroup-related defendants in IN RE WORLDCOM, INC. SECURITIES LITIGATION. The
Court's approval is subject to possible appeal by plaintiffs.
RESEARCH
Several individual actions have been filed against Citigroup and CGMI relating
to, among other things, research on Qwest Communications International, Inc.
alleging violations of state and federal securities laws.
OTHER
On October 13, 2004, the United States District Court for the Southern District
of New York certified a class in various representative cases with respect to
the allocation of shares for certain initial public offerings and related
aftermarket transactions.
An appeal of the dismissal granted to CGMI in November 2003 with respect to the
antitrust case relating to the allocation of shares for certain initial public
offerings is scheduled to be argued in December 2004.
23
ITEM 6. EXHIBITS
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.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
(Registrant)
Date: November 12, 2004 By: /s/ Robert Druskin
------------------------------------
Robert Druskin
President and Chief Executive Officer
By: /s/ John C.Morris
------------------------------------
John C. Morris
Chief Financial Officer
25