FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 1994
Commission File Number 1-4346
SALOMON INC
(Exact name of registrant as specified in its charter)
Delaware 22-1660266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Seven World Trade Center, New York, New York 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 783-7000
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
Number of shares of common stock outstanding
at July 31, 1994: 105,736,736
<PAGE>1
XXX BEGIN PAGE 2 XXX
SALOMON INC
Form 10-Q
PART I FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited):
Consolidated Statement of Income -
Three and Six months ended June 30, 1994 and 1993 3
Condensed Consolidated Statement of Financial Condition
June 30, 1994 and December 31, 1993 4-5
Summary of Options and Contractual Commitments -
June 30, 1994 and December 31, 1993 6
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1994 and 1993 7
Notes to Unaudited Condensed Consolidated Financial
Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19-20
Item 6 . Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<PAGE>2
XXX BEGIN PAGE 3 XXX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<CAPTION>
Dollars in millions, except per share amounts Three months Six months
Period ended June 30, 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues:
Interest and dividends $ 1,345 $ 1,392 $ 2,647 $ 2,812
Principal transactions (238) 949 (41) 899
Investment banking 86 178 256 327
Commissions 84 79 174 145
Other 6 (13) 16 (7)
Total revenues 1,283 2,585 3,052 4,176
Interest expense 1,112 1,080 2,170 2,248
Revenues, net of interest expense 171 1,505 882 1,928
Noninterest expenses:
Compensation and employee-related 338 524 755 862
Technology 61 67 122 130
Occupancy 51 94 89 143
Professional services and business development 39 38 73 66
Clearing and exchange fees 15 15 34 29
Other 13 14 43 58
Total noninterest expenses 517 752 1,116 1,288
Income (loss) before taxes and cumulative
effect of change in accounting principles (346) 753 (234) 640
Income taxes (142) 320 (96) 272
Income (loss) before cumulative
effect of change in accounting principles (204) 433 (138) 368
Cumulative effect of change in accounting principles,
net of tax benefit of $28 - - - (37)
Net income (loss) $ (204) $ 433 $ (138) $ 331
Per common share:
Primary earnings (loss) before cumulative effect of
change in accounting principles $ (2.08) $ 3.75 $ (1.54) $ 3.00
Cumulative effect of change in accounting principles - - - (0.34)
Primary earnings (loss) $ (2.08) $ 3.75 $ (1.54) $ 2.66
Fully diluted earnings (loss) before cumulative
effect of change in accounting principles $ (2.08) $ 3.32 $ (1.54) $ 2.81
Cumulative effect of change in accounting principles - - - (0.29)
Fully diluted earnings (loss) $ (2.08) $ 3.32 $ (1.54) $ 2.52
Dividends $ 0.16 $ 0.16 $ 0.32 $ 0.32
Weighted average shares of common stock
outstanding (in thousands):
For primary earnings per share 105,800 110,900 107,900 110,800
For fully diluted earnings per share 105,800 129,900 107,900 129,800
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral
part of this statement.
</TABLE>
<PAGE>3
XXX BEGIN PAGE 4 XXX
<TABLE>
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
<caption)>
Dollars in millions June 30, 1994 December 31, 1993
<S> <C> <C> <C> <C>
ASSETS
Cash $ 720 $ 908
Financial instruments:
U.S. government and agency securities $28,905 $42,485
Non-U.S. government and agency securities 35,565 39,190
Corporate debt securities 10,277 11,876
Options and contractual commitments 9,253 8,485
Equity securities 5,522 7,178
Mortgage loans and collateralized
mortgage securities 2,977 3,316
Money markets, municipal securities
and other 6,777 6,278
99,276 118,808
Commodities-related products and instruments:
Crude oil, refined products and other
physical commodities 817 488
Options and contractual commitments 347 366
1,164 854
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 40,802 36,924
Securities borrowed and other 18,163 11,965
58,965 48,889
Receivables 9,993 9,659
Assets securing collateralized mortgage obligations 3,490 3,887
Property, plant and equipment, net 1,116 1,122
Other assets, including intangibles 804 708
Total assets $175,528 $184,835
<FN>
<fn1>The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
</TABLE>
<PAGE>4
XXX BEGIN PAGE 5 XXX
<TABLE>
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited)
<CAPTION>
Dollars in millions June 30, 1994 December 31, 1993
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings:
Securities sold under agreements to repurchase $75,328 $86,066
Bank borrowings 3,146 3,644
Securities loaned 1,914 2,172
Deposit liabilities 1,295 1,293
Commercial paper 913 1,344
Other 1,866 3,371
$ 84,462 $ 97,890
Financial and commodities-related instruments
sold, not yet purchased, and other contractual
commitments:
U.S. government and agency securities 19,376 30,714
Non-U.S. government securities 23,540 9,604
Financial options and contractual
commitments 7,849 10,619
Equity securities 3,901 3,434
Corporate debt securities 1,878 1,635
Commodities, including options and contractual
commitments 586 464
57,130 56,470
Payables and accrued liabilities 11,574 9,644
Collateralized mortgage obligations 3,339 3,808
Term debt 14,228 11,692
Total liabilities 170,733 179,504
Commitments and contingencies (Note 2)
Redeemable preferred stock, Series A 700 700
Stockholders' equity:
Preferred stock, Series C and D 312 312
Common stock 156 156
Additional paid-in capital 299 295
Retained earnings 5,007 5,208
Cumulative translation adjustments (1) (11)
Equity Partnership Plan, net (21) 85
Common stock held in treasury, at cost (1,657) (1,414)
Total stockholders' equity 4,095 4,631
Total liabilities and stockholders' equity $175,528 $184,835
<FN>
<fn1> The accompanying Notes to Unaudited Condensed Consolidated Financial
Statements are an integral part of this statement.
</TABLE>
<PAGE>5
XXX BEGIN PAGE 6 XXX
<TABLE>
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
(unaudited)
Market or Fair Value Recorded as Assets on the Statement of Financial Condition
<CAPTION>
Six
June 30, Month-end Month-end Month December 31,
Dollars in billions 1994 High Low Average 1993
<S> <C> <C> <C> <C> <C>
Swap agreements, swap options, caps and floors $ 5.7 $ 8.0 $ 5.2 $ 6.0 $ 6.0
Index and equity options and warrants 1.8 1.8 1.2 1.3 1.1
Foreign exchange contracts and options 1.4 1.6 .8 1.2 1.1
Other .4 .5 .3 .4 .3
Total market or fair value of financial options
and contractual commitments $ 9.3 $ 8.9 $ 8.5
Commodities-related instruments $ .3 $ .5 $ .3 $ .4 $ .4
</TABLE>
<TABLE>
Credit Exposure, Net of Collateral, By Risk Class*
<CAPTION>
June 30, 1994
Transactions With More
All Transactions Than 3 Years to Maturity
dollars in billions Banks NonBanks Banks NonBanks
<S> <C> <C> <C> <C>
Swap agreements, swap options, caps and floors:
Risk classes 1 and 2 $ .8 $ .4 $ .3 $ .2
Risk class 3 .4 .8 .2 .4
Risk classes 4 and 5 .5 .6 .3 .3
Risk classes 6, 7 and 8 - .1 - -
$ 1.7 $ 1.9 $ .8 $ .9
Foreign exchange contracts and options:
Risk classes 1 and 2 $ .2 $ .1 $ - $ -
Risk class 3 .1 .2 - -
Risk classes 4 and 5 .1 .3 - -
$ .4 $ .6 $ - $ -
<FN>
<fn1>*To monitor credit risk, the Company utilizes a series of eight internal designations of counterparty credit
quality. These designations are analogous to external credit ratings whereby risk classes one through three are
high quality investment grades. Risk classes four and five include counterparties ranging from the lowest
investment grade to the highest non-investment grade level. Risk classes six, seven and eight represent higher risk
counterparties.
<fn2>Note: The substantial majority of index and equity options and warrants and other options owned (primarily options
on government securities) are actively traded in organized markets. With respect to commodities-related instruments,
the majority of the Company's counterparties are of investment grade quality.
</TABLE>
<TABLE>
Notional Amounts
<CAPTION>
June 30, December 31,
Dollars in billions 1994 1993
<S> <C> <C>
Financial futures contracts $ 701 $ 473
Swap Agreements 324 233
Financial options and warrants sold or written 125 102
Forward securities contracts 83 98
Forward currency contracts 57 51
Interest rate cap and floor agreements written 41 32
Commodities-related contractual commitments and options written 23 10
</TABLE>
<PAGE>6
XXX BEGIN PAGE 7 XXX
<TABLE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<CAPTION>
Dollars in millions
Six months ended June 30, 1994 1993
<S> <C> <C>
Cash used in operating activities $ (1,893) $ (1,200)
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 3,898 3,009
Issuance of preferred stock - 200
Employee stock purchase and option plans 9 18
Total cash proceeds from financing activities 3,907 3,227
Payments for -
Term debt maturities and repurchases 1,647 1,882
Collateralized mortgage obligations 586 535
Purchase of common stock for treasury 252 -
Dividends on common stock 35 35
Dividends on preferred stock* 28 36
Equity Partnership Plan, net 106 38
Total cash payments for financing activities 2,654 2,526
Cash provided by financing activities 1,253 701
Cash flows from investing activities:
Proceeds from -
Assets securing collateralized mortgage obligations 514 689
Total cash proceeds from investing activities 514 689
Payments for -
Property, plant and equipment 62 90
Total cash payments for investing activities 62 90
Cash provided by investing activities 452 599
Increase (decrease) in cash (188) 100
Cash at January 1 908 620
Cash at June 30 $ 720 $ 720
<FN>
<fn1> The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral
part of this statement.
<fn2> * For the six months ended June 30, 1994, dividends on preferred stock were reduced by the aftertax
impact ($17 million) of interest rate swaps that effectively convert the Company's fixed-rate dividend
obligations to variable-rate obligations. In the six months ended June 30, 1993, the impact of the swaps
related to the Series A Preferred was included in reported earnings.
</TABLE>
<PAGE>7
XXX BEGIN PAGE 8 XXX
Notes to Unaudited Condensed Consolidated Financial
Statements
1. Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements
include the accounts of Salomon
Inc and all majority-owned subsidiaries for which control is
deemed to be other than temporary
(collectively, the "Company"). These financial statements
include all adjustments necessary for
a fair presentation of financial condition, results of
operations and cash flows. The Unaudited
Condensed Consolidated Financial Statements should be read
in conjunction with the audited
financial statements included in the Company's Annual Report
on Form 10-K for the year ended
December 31, 1993. Certain prior period amounts have been
reclassified to conform with the
current presentation.
2. Legal Proceedings
Outstanding legal and environmental matters are discussed in
Note 14 to the Consolidated
Financial Statements included in the Company's Annual Report
on Form 10-K for the year
ended December 31, 1993. In management's opinion, there
have been no changes in the status
of, nor additions to, such matters that will result in any
material adverse impact on the
Company's financial condition.
3. Net Capital
Certain U.S. and non-U.S. subsidiaries are subject to
various securities and commodities
regulations and capital adequacy requirements promulgated by
the regulatory and exchange
authorities of the countries in which they operate. The
Company's principal regulated
subsidiaries are discussed below.
Salomon Brothers Inc is registered as a broker-dealer with
the U.S. Securities and Exchange
Commission ("SEC") and is subject to the SEC's Uniform Net
Capital Rule, Rule 15c3-1,
which requires net capital, as defined under the alternative
method, of not less than the greater
of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds
required to be segregated for customers' regulated commodity
accounts, as defined. Although
net capital, aggregate debit items and funds required to be
segregated change from day to day,
at June 30, 1994, SBI's net capital was $1,353 million,
$1,294 million in excess of regulatory
requirements.
Salomon Brothers International Limited ("SBIL") is
authorized to conduct investment business
in the United Kingdom by the Securities and Futures
Authority ("SFA") in accordance with the
Financial Services Act 1986 (the "Act"). The SFA requires
SBIL to have available at all times
financial resources, as defined, sufficient to demonstrate
continuing compliance with its rules.
At June 30, 1994, SBIL's financial resources were $741
million in excess of regulatory
requirements.
Salomon Brothers Asia Limited ("SBAL") and Salomon Brothers
AG ("SBAG") are also subject
to regulation in the countries in which they do business.
Such regulations include requirements
to maintain specified levels of net capital or its
equivalent. At June 30, 1994, SBAL's net
capital was $382 million above the minimum required by
Japan's Ministry of Finance. SBAG's
net capital was $138 million above the minimum required by
Germany's Banking Supervisory
Authority.
XXX BEGIN PAGE 9 XXX
4. Industry Segment Reporting
The accompanying Management's Discussion and Analysis
section includes a discussion of the
operating results of the Company's industry segments. The
Company's investment banking and
securities activities are conducted by Salomon Brothers
Holding Company Inc and its
subsidiaries ("Salomon Brothers"). Commodities trading
activities are conducted by the Phibro
Division of Salomon Inc ("Phibro Division") and crude oil
refining activities and certain other
asset-based businesses are conducted by Phibro Energy USA,
Inc. ("Phibro USA"). Results of
The Mortgage Corporation Group Limited ("TMC"), an indirect
wholly-owned subsidiary of the
Company, are included in "Corporate and Other". Prior to
the third quarter of 1993, TMC's
results were included in the Salomon Brothers segment.
Prior period results have not been
restated due to immateriality. The results of Phibro Energy
Production, Inc. ("PEPI"), a
partner in the White Nights Russian-American oil joint
venture, are also included in "Corporate
and Other." Industry segment financial information is
prepared in accordance with generally
accepted accounting principles in the United States.
Segment results for all periods presented include a
partial allocation of Salomon Inc corporate-
level expenses. Expenses incurred for the benefit of a
particular operating segment are allocated
directly to that segment. Those that cannot be directly
associated with the Company's operating
segments are included in "Corporate and Other."
<PAGE> 9
XXX BEGIN PAGE 10 XXX
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
<TABLE>
SUMMARY OF CONSOLIDATED OPERATING RESULTS
<CAPTION>
Dollars in millions, except per share amounts Three months Six months
Period ended June 30, 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Income (loss) before taxes and cumulative effect
of change in accounting principles by segment:
Salomon Brothers $ (410) $ 783 $ (371) $ 694
Phibro Division 82 3 132 9
Phibro USA (10) (2) 17 (15)
Corporate and Other (8) (31) (12) (48)
Total income (loss) before taxes and cumulative
effect of change in accounting principles (346) 753 (234) 640
Income taxes (142) 320 (96) 272
Income (loss) before cumulative effect
of change in accounting principles (204) 433 (138) 368
Cumulative effect of change in accounting principles,
net of tax benefit - - - (37)
Net income (loss) $ (204) $ 433 $ (138) $ 331
Per Common Share:*
Primary earnings (loss) $ (2.08) $ 3.75 $ (1.54) $ 2.66
Fully diluted earnings (loss)** (2.08) 3.32 (1.54) 2.52
Cash dividends 0.16 0.16 0.32 0.32
Book value at period-end 35.51 35.00 35.51 35.00
Annualized return on average common stockholders' equity:*
Primary method (21.9)% 46.1% (7.9)% 18.8%
Fully diluted method** (21.9)% 40.0% (7.9)% 17.1%
<FN>
<fn1>*Primary and fully diluted earnings per share data for the 1993 six month period include reductions
of $.34 and $.29, respectively, related to a cumulative change in accounting for certain postretirement benefits;
return on average common stockholders' equity was calculated on earnings before the cumulative effect of the change
in accounting principles.
<fn2>**Assumes conversion of convertible notes and redeemable preferred stock, unless such assumptions
result in higher returns on equity or earnings per share than determined under the primary method.
</TABLE>
Salomon Inc reported a net loss of $204 million, or $2.08
per share, for the 1994 second quarter. In
the comparable 1993 second quarter, Salomon Inc recorded net
income of $433 million, or $3.32 per
share on a fully diluted basis. The Company's net loss for
the six months ended June 30, 1994 was
$138 million, or $1.54 per share, compared with net income
of $331 million, or $2.52 per share (fully
diluted), in the comparable 1993 six-month period.
The Company's three operating segments are diverse. Results
of Salomon Brothers' Client-Driven and
Proprietary Trading Businesses and Phibro Division's
commodities trading business are not closely
correlated. Consequently, it is not unusual for the Company
to generate positive results in certain of
such businesses during periods when opportunities to
generate profits are declining in other areas. For
example, during the first six months of 1994, the Phibro
Division generated strong results in a period
characterized by upward trending and volatile commodities
prices, particularly with respect to oil. In
the same period, Salomon Brothers' Client-Driven Businesses
generated poor results in a very difficult
period for the securities industry. These results contrast
sharply with the comparable 1993 period,
when Salomon Brothers' Client-Driven Businesses benefited
from very favorable market conditions in
global securities markets while the Phibro Division
generated only modest profits under less favorable
market conditions.
<PAGE> 10
XXX BEGIN PAGE 11 XXX
Earnings volatility is inherent in the Company's businesses.
Salomon Brothers' Proprietary Trading
Businesses have historically been the largest source of this
volatility. Because strategies are frequently
designed with time horizons of one year or more but are
marked to market continually, profits or losses
reported in interim periods are extremely sensitive to
changes in market prices and can, and do, vary
considerably from period to period. When measured over more
meaningful time periods such as four
quarters, Proprietary Trading results are less volatile and
have been consistently profitable.
Corporate and Other includes certain Salomon Inc corporate-
level expenses that cannot be attributed to
any of the Company's operating segments, as well as the
results of PEPI, whose primary asset is its
investment in the White Nights Russian-American oil
production joint venture. The 1994 results of
Corporate and Other also include the results of TMC. TMC
was included in Salomon Brothers' 1993
results. The 1993 second quarter and six month results of
Corporate and Other include a $20 million
charge to write down the carrying value of PEPI's investment
in White Nights. The 1993 six months
results of Corporate and Other also include an $8 million
addition to the Company's reserve for
environmental matters.
PEPI's investment in White Nights had a carrying value of
$64 million at June 30, 1994, unchanged
from year-end 1993. The future of White Nights continues to
be subject to great uncertainty, mainly as
a result of current Russian tax policies, and in particular,
when, whether and to what extent these
policies will be changed so as to reduce materially the tax
burden that must be borne by oil production
activities.
Subsequent to June 30, 1994, one rating agency, while
affirming Salomon's credit rating, revised its
credit outlook to negative and indicated that given the
current weak market conditions, a combination
of reduced client-related volume and poor proprietary
trading results could prompt a ratings downgrade
within the next six months. Other rating agencies either
took no action or affirmed Salomon's existing
ratings. In the event of such downgradings, there would be
a negative impact on the Company's
funding costs and derivatives businesses and a potential for
reduced access to borrowings.
<PAGE> 11
XXX BEGIN PAGE 12 XXX
SALOMON BROTHERS
<TABLE>
Results of Operations
<CAPTION>
Dollars in millions
Three months Six months
Period ended June 30, 1994 1993 Change 1994 1993 Change
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Client-Driven Businesses:
Global investment banking $ 86 $ 178 $ (92) $ 256 $ 327 $ (71)
U.S. secondary markets (36) 394 (430) 214 665 (451)
International secondary markets (27) 262 (289) (95) 457 (552)
Foreign exchange 55 57 (2) (56) 84 (140)
Private Investment Department and asset
management 17 22 (5) 31 39 (8)
Total revenues from Client-Driven Businesses 95 913 (818) 350 1,572 (1,222)
Proprietary Trading Businesses (60) 584 (644) 281 330 (49)
Total revenues, net of interest expense $ 35 $ 1,497 $ (1,462) $ 631 $1,902 $ (1,271)
Income (loss) before taxes and cumulative effect
of change in accounting principles:
Client-Driven Businesses $ (291) $ 383 $ (674) $(464) $ 613 $ (1,077)
Proprietary Trading Businesses (119) 400 (519) 93 81 12
Total income (loss) before taxes and cumulative
effect of change in accounting principles $ (410) $ 783 $ (1,193) $(371) $ 694 $ (1,065)
</TABLE>
Salomon Brothers, the Company's global investment banking
and securities business, incurred a pretax
loss of $410 million for the 1994 second quarter,
principally attributable to a pretax loss of $291
million for Client-Driven Businesses. The Proprietary
Trading Businesses reported a pretax loss of
$119 million. In the second quarter of 1993, Salomon
Brothers reported pretax income of $783 million:
pretax earnings of $383 million for Client-Driven Businesses
and $400 million for Proprietary Trading
Businesses.
For the six month period ended June 30, 1994, Salomon
Brothers incurred a pretax loss of $371 million
attributable to a pretax loss of $464 million incurred in
Client-Driven Businesses. The Proprietary
Trading Businesses reported pretax income of $93 million for
the first six months of 1994. Salomon
Brothers reported pretax income of $694 million in the first
six months of 1993, which was composed
of pretax earnings of $613 million for Client-Driven
Businesses and $81 million for the Proprietary
Trading Businesses.
The 1994 decline in Salomon Brothers' Client-Driven
Businesses was broad-based, both geographically
and across businesses. Management believes that for the
rest of the year these businesses will continue
to produce lower levels of profitability than were generated
in 1993, while projecting results beyond
1994 is very difficult. The 1994 second quarter results
reflect the impact of reduced customer flow,
inventory losses and, to a lesser extent, an element of
proprietary trading losses.
As a market intermediary, Salomon Brothers' Client-Driven
Businesses maintain significant securities
inventories to facilitate client-related market making
activities. During the second quarter, liquidity and
prices of certain products, particularly fixed income
products, declined significantly, contributing to
significant inventory losses. To a much lesser extent,
losses were incurred in connection with position-
taking in which certain Client-Driven Businesses express
short-term views about changes in price and
volatility. Proprietary trading of this nature has been
most significant in foreign exchange trading
activities and, within Salomon Brothers' international
secondary markets, its European equities
business. Proprietary trading will continue to be an
element of foreign exchange trading activities,
together with its customer flow business.
<PAGE> 12
XXX BEGIN PAGE 13 XXX
The lower revenues experienced by Investment Banking in the
second quarter of 1994 reflect an overall
decrease in the volume of capital markets activities and a
shift toward debt issuers with lower overall
underwriting spreads. While for the first six months of
1994, Salomon Brothers' underwriting rankings
improved compared with its 1993 rankings, its second quarter
rankings declined due to a shift toward
real estate issuers with primarily a retail market focus.
The second quarter pretax loss of $119 million for Salomon
Brothers' Proprietary Trading Businesses
followed strong first quarter earnings of $212 million
before taxes. Earnings volatility is not unusual
for these businesses and, therefore, results are better
evaluated over longer term periods of at least one
year. For the four quarters ended June 30, 1994,
Proprietary Trading Businesses' pretax profits were
$428 million.
<TABLE>
Noninterest Expenses
<CAPTION>
Dollars in millions
Three months Percent Six months Percent
Period ended June 30, 1994 1993 Change 1994 1993 Change
<S> <C> <C> <C> <C> <C> <C>
Compensation and employee-related expenses $ 281 $ 504 (44) % $ 669 $ 824 (19) %
Recurring non-compensation expenses:
Technology $ 57 $ 63 (10) % $ 114 $ 123 (7) %
Occupancy 38 47 (19) 77 93 (17)
Professional services and business development 34 30 13 62 52 19
Clearing and exchange fees 14 15 (7) 33 28 18
Other 9 10 (10) 35 43 (19)
Total recurring non-compensation expenses 152 165 (8) 321 339 (5)
Non-recurring non-compensation expenses 12 45 (73) 12 45 (73)
Total non-compensation expenses $ 164 $ 210 (22) % $ 333 $ 384 (13) %
</TABLE>
Compensation and employee-related expenses is the largest
component of noninterest expense.
Salomon Brothers' compensation for its business units is
formula-driven, with aggregate compensation
for each business unit based upon the results for that unit
but subject to specified minimums for each
unit. Business units are entitled to incremental
compensation for earnings generated above targeted
levels. Under this approach, Salomon Brothers' total
compensation expense is affected not only by the
level of earnings, but by the mix of earnings among the
business units. Salomon Brothers' earnings
before taxes and compensation were $298 million for the
first six months of 1994 compared with a six
month average of $1,692 million for 1993. The $1,394
million decline in 1994 was accompanied by a
$236 million decline in compensation expense from the 1993
average.
Recurring non-compensation expenses in the 1994 second
quarter were 8% below the 1993 second
quarter. For the 1994 six month period, these expenses were
5% below the comparable 1993 period.
The most significant source of the decreases was occupancy
expense, which decreased 19% and 17%,
respectively, in the quarter and six months ended June 30,
1994 from the comparable 1993 periods.
These decreases reflect prior expense reduction initiatives
including the reduction of leased office space
in New York and Tokyo.
<PAGE> 13
XXX BEGIN PAGE 14 XXX
Non-recurring expenses in the second quarter and first six
months of 1993 consist of occupancy charges
related to decisions to reduce office space in New York and
Tokyo. The 1994 non-recurring expenses
include an occupancy charge related to a decision to
relocate leased office space in Tokyo.
PHIBRO DIVISION
<TABLE>
Condensed Statement of Income
<CAPTION>
Dollars in millions
Three months Percent Six months Percent
Period ended June 30, 1994 1993 Change 1994 1993 Change
<S> <C> <C> <C> <C> <C> <C>
Revenues, net of interest $ 132 $ 18 633 % $ 205 $ 38 439 %
Overhead (including minimum compensation) 20 15 33 33 29 14
Variable compensation 30 - N/A 40 - N/A
Total noninterest expenses 50 15 233 73 29 152
Income before taxes and cumulative
effect of change in accounting principles $ 82 $ 3 2,633 % $ 132 $ 9 1,367 %
</TABLE>
The Phibro Division, which is the Company's commodities
trading business, had pretax earnings of
$82 million in the 1994 second quarter compared with
earnings of $3 million in the 1993 second
quarter. Trading results were again very strong as the
Division continued to take advantage of
opportunities created in the oil markets. Revenues from
precious metals and natural gas trading were
lower in the first six months of 1994 than the comparable
period in 1993. For the six months ended
June 30, 1994, the Division earned $132 million before taxes
compared with $9 million in the
comparable 1993 period.
Although the majority of the Division's 1994 earnings
resulted from strong oil trading results, the
Division continued to diversify its trading activities,
particularly in soft commodities (which include
coffee, grains, cocoa and sugar). The Division's activities
in soft commodities, together with its
metals, natural gas, petrochemicals, coal, coke and
fertilizer trading activities, better position the
Division to take advantage of future opportunities across a
broad and diverse range of markets.
<PAGE> 14
XXX BEGIN PAGE 15 XXX
PHIBRO USA
<TABLE>
Condensed Statement of Income
<CAPTION>
Dollars in millions
Three months Percent Six months Percent
Period ended June 30, 1994 1993 Change 1994 1993 Change
<S> <C> <C> <C> <C> <C> <C>
Sales $1,587 $2,103 (25) % $ 3,198 $ 4,264 (25) %
Cost of sales 1,583 2,088 (24) 3,147 4,246 (26)
Operating profit 4 15 (73) 51 18 183
Net interest and other (3) (5) 40 (8) (11) 27
Operating profit, net of
interest and other 1 10 (90) 43 7 514
Compensation and employee-related expenses 7 8 (13) 17 14 21
Other expenses 4 4 - 9 8 13
Total noninterest expenses 11 12 (8) 26 22 18
Income (loss) before taxes and cumulative
effect of change in accounting principles $ (10) $ (2) N/A % $ 17 (15) N/A %
</TABLE>
Phibro USA, the Company's oil refining business, incurred a
second quarter pretax loss of $10 million
compared with a $2 million loss in the 1993 second quarter.
In the most recent quarter, prices for
refined products did not rise in line with higher crude oil
prices. Consequently, spreads tightened
significantly, particularly as compared with the first
quarter when margins benefited from strong
weather-related demand for refined products. Despite the
second quarter loss, Phibro USA generated
pretax earnings of $17 million for the six months ended June
30, 1994, compared with a $15 million
pretax loss in the comparable 1993 period.
During the second quarter, Phibro USA changed the
depreciable lives of certain refinery assets to better
reflect their useful service lives and to be more consistent
with industry practices. The change in
estimate reduced cost of sales by $3 million for the second
quarter and first six months of 1994. Phibro
USA's minimum physical inventory of crude oil and other
energy products, which is recorded at the
lower of cost or market value, was carried at $181 million at
June 30, 1994, $59 million less than its
aggregate market value. In July 1994, Phibro USA sold its
land-based drilling operation; the impact on
third quarter earnings will not be significant.
<PAGE> 15
XXX BEGIN PAGE 16 XXX
SALOMON INC
CAPITAL and LIQUIDITY MANAGEMENT
<TABLE>
<CAPTION>
Dollars in millions
June 30, March 31, December 31, September 30, June 30,
Quarter ended 1994 1994 1993 1993 1993
<S> <C> <C> <C> <C> <C>
Long-term capital at period end:
Common equity capital* $ 4,483 $ 4,795 $ 5,019 $ 4,504 $ 4,564
Perpetual preferred stock 312 312 312 312 312
Term debt and other 13,107 12,679 11,588 9,258 8,661
Total long-term capital $ 17,902 $ 17,786 $ 16,919 $ 14,074 $ 13,537
AVERAGE WEEKLY BALANCE SHEET INFORMATION:
U.S. government and agency securities $ 31,398 $ 39,779 $ 45,227 $ 44,753 $ 40,486
Non-U.S. government and agency securities 32,518 36,434 37,069 38,176 33,688
Financial options and contractual commitments 9,580 7,904 8,857 8,167 8,155
Other financial instruments owned 25,151 28,530 23,132 20,541 17,935
Total inventories 98,647 112,647 114,285 111,637 100,264
Collateralized short-term financing agreements 56,653 53,876 51,396 57,912 58,690
Other assets 20,434 17,588 15,004 12,984 14,122
Average total assets $ 175,734 $ 184,111 $ 180,685 $ 182,533 $ 173,076
Period-end total assets $ 175,528 $ 173,316 $ 184,835 $ 172,863 $ 169,265
Period-end net assets** $ 116,563 $ 123,401 $ 135,946 $ 124,866 $ 116,036
Period-end working capital usage $ 16,110 $ 15,700 $ 12,900 $ 12,900 $ 13,500
Ratios at period end:
Working capital coverage 111% 113% 132% 109% 100%
Working capital uses to equity 3.36 3.07 2.41 2.68 2.77
Average assets to ending equity 36.6 36.1 33.9 37.9 35.5
Total capital basis double leverage 0.88 0.94 0.95 1.13 1.10
Equity capital basis double leverage 1.30 1.33 1.42 1.58 1.54
Common shares outstanding (in millions) 105.7 105.9 110.6 110.8 110.4
<FN>
<fn1>*Including convertible preferred stock.
<fn2>**Total assets less collateralized short-term financing agreements.
</TABLE>
The Company's long-term capital, which includes common
equity, convertible preferred stock,
perpetual preferred stock, unsecured obligations maturing
beyond one year, portions of unsecured
obligations maturing within one year (weighted by maturity)
and long-term deferred taxes was $17,902
million at June 30, 1994, an increase of $983 million since
December 31, 1993.
Presented in the accompanying table is average weekly
balance sheet information. Average assets for
the 1994 second quarter were $176 billion, up from $173
billion in last year's second quarter. Much of
the year-to-year increase was attributable to higher
inventories of financial options and contractual
commitments and other financial instruments owned, primarily
corporate securities. Increases in these
financial instruments, however, were partially offset by
lower levels of U.S. government securities
owned. Since December 31, 1993, inventories in Salomon
Brothers' Client-Driven Businesses have
declined by 24% to under $50 billion while inventories in
Salomon Brothers' Proprietary Businesses
have remained unchanged.
<PAGE> 16
XXX BEGIN PAGE 17 XXX
Salomon Brothers' trading portfolio of high-yield
securities, carried at market value, totaled $2.1
billion at June 30, 1994, down from $2.6 billion at year-end
1993. High-yield securities include
corporate debt, convertible debt, preferred and convertible
preferred equity securities rated lower than
"triple B-" by internationally recognized rating agencies as
well as sovereign debt issued by less
developed countries in currencies other than their local
currencies and which are not collateralized by
U.S. government securities. Unrated securities with market
yields comparable to entities rated below
"triple B-" are also included in high-yield securities. The
largest single high-yield exposure was $73
million at June 30, 1994.
During the second quarter of 1994, the Company repurchased
304,000 of its common shares for
treasury at an aggregate cost of $15 million, or $48.94 per
share. For the six months ended June 30,
1994, the Company repurchased 5.2 million of its common
shares for treasury at an aggregate cost of
$252 million, or $48.57 per share. Book value per share
declined from $38.57 at December 31, 1993
to $35.51 at June 30, 1994.
In May 1994, the Company's Board of Directors authorized the
repurchase of up to 10 million shares
of its common stock, including 4.6 million shares remaining
under a previous authorization. In
addition, the Board of Directors waived a previous
contractual restriction pursuant to which neither
Berkshire Hathaway nor its affiliates were permitted to
acquire more than 20% of the Company's
outstanding voting securities prior to October 1, 1994
without prior consent of the Company. At June
30, 1994, shares authorized for additional repurchase
totaled 9.8 million.
<PAGE>17
XXX BEGIN PAGE 18 XXX
<TABLE>
SUMMARY OF SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
<CAPTION>
Three Months Ended
June 30, March 31, December 31, September 30, June 30,
Dollars in millions, except per share amounts 1994 1994 1993 1993 1993
<S> <C> <C> <C> <C> <C>
For the quarter:
Revenues:
Principal transactions, including net interest
and dividends $ (5) $ 441 $1,344 $ 298 $ 1,261
Investment banking 86 170 250 214 178
Commissions and other 90 100 90 75 66
Revenues, net of interest expense 171 711 1,684 587 1,505
Noninterest expenses:
Compensation and employee-related 338 417 655 383 524
Other noninterest expenses 179 182 222 186 228
Total noninterest expenses 517 599 877 569 752
Income (loss) before taxes (346) 112 807 18 753
Income taxes (142) 46 331 (2) 320
Net income (loss) $ (204) $ 66 $ 476 $ 20 $ 433
Annualized return on average common stockholders'
equity:
Primary (21.9) % 4.9% 47.2% 0.1% 46.1%
Fully diluted* (21.9) % 4.9% 39.5% 0.1% 40.0%
Income (loss) before taxes by segment:
Salomon Brothers $ (410) $ 39 $ 862 $ 19 $ 783
Phibro Division 82 50 (21) (3) 3
Phibro USA (10) 27 (31) 0 (2)
Corporate and Other (8) (4) (3) 2 (31)
Total income (loss) before taxes $ (346) $ 112 $ 807 $ 18 $ 753
Per common share:
Primary earnings (loss) $ (2.08) $0.48 $4.33 $ 0.01 $ 3.75
Fully diluted earnings (loss)* (2.08) 0.48 3.64 0.01 3.32
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 52 5/8 52 3/4 50 1/2 51 7/8 39 3/8
Low market price 47 1/4 44 3/4 41 1/2 37 5/8 34 3/8
Ending market price 47 3/4 48 1/2 47 5/8 47 3/4 38 1/4
Book value at period-end 35.51 38.23 38.57 34.33 35.00
<FN>
<fn1>*Assumes conversion of convertible notes and redeemable preferred stock, unless such assumptions result in higher
returns or earnings per share than determined under the primary method.
</TABLE>
<PAGE> 18
XXX BEGIN PAGE 19 XXX
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Proceedings:
In July 1994, a lawsuit was filed in federal court in Texas
against Phibro Energy USA, Inc., a
subsidiary of the Company, by the Friends of the Earth, Inc.
The action is a citizen's suit brought
under Section 505 of the Federal Water Pollution Control Act
alleging violations by Phibro USA of the
monitoring, record keeping and discharge limitations of its
Houston refinery wastewater discharge
permit during the period from September 1989 to the date of
the suit. Subsequent to the filing of this
lawsuit, the EPA filed an Administrative Complaint against
Phibro USA, with a proposed penalty of
$125,000, alleging substantially the same violations under
the Clean Water Act and implementing
regulations.
On June 21, 1994, the Company's subsidiary, Philipp
Brothers, Inc., received from the Attorney
General of Texas a Notice of Potential Liability, under the
Texas Solid Waste Disposal Act and the
Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), with respect
to the Industrial Road/Industrial Metals Site (the "Site")
in Corpus Christi, Texas. The State of Texas
has estimated that complete remediation of the Site and
post-closure care will cost approximately $7.2
million. The State has claimed that Philipp Brothers,
Inc.'s share of such cost is approximately
$487,000. Philipp Brothers, Inc. has advised the State of
Texas that it has been incorrectly identified
as a PRP at the Site. The extent of Philipp Brothers,
Inc.'s liability with respect to the State's claim
cannot be determined at this time.
Other Legal Proceedings:
With respect to the U.S. Treasury auction and related
matters discussed under Item 3 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1993 (the "1993 Form 10-K"):
(i) On June 15, 1994, the court approved the settlement of
the consolidated
securities class action. Under the terms of the settlement,
as approved, $54.5 million
will be paid to the plaintiff class out of the $100 million
claims fund established pursuant
to the May 1992 settlement of the U.S. Treasury auction
matters with U.S.
governmental authorities. The court awarded plaintiffs'
attorney's fees and expenses in
the amount of $9.6 million to be paid by the Company. This
settlement is now final.
(ii) On July 26, 1994, the court approved of the settlement
of the class actions included
in the consolidated Treasury litigation. Under the terms of
the settlement, which also
involves other parties, the Company will pay $66 million.
Plaintiffs' attorneys' fees and
expenses related to claims against the Company are included
in this amount. Almost
two-thirds of this payment is expected to be reimbursed to
the Company out of the $100
million claims fund referred to above.
<PAGE> 19
XXX BEGIN PAGE 20 XXX
(iii) On May 13, 1994, a New York Stock Exchange arbitration
panel denied in their
entirety the employment-related compensation claims of a
former officer of the
Company, John Gutfreund.
(iv) As part of the May 1992 settlement of the U.S.
Treasury auction matters with U.S.
governmental authorities, the Company and Salomon Brothers
Inc ("SBI") consented to
an injunction against violating certain recordkeeping and
anti-fraud provisions of the
Federal securities laws based on allegations that
transactions in certain securities during
1986 were pre-arranged to accelerate the recognition of
losses for Federal income tax
purposes. In connection with audits of the Company's
Federal income tax returns, the
Internal Revenue Service is contemplating claims for civil
penalties in connection with
such transactions during 1984 and 1986. The transactions as
to which penalties are
contemplated were apparently effected solely by employees
who have left the Company
and were in violation of Company policy. The principal
impact of such transactions was
deferral of taxes. Promptly after it discovered the
transactions, the Company informed
the Internal Revenue Service and paid the taxes due and
interest.
Since May 1994, the Company's indirect wholly-owned
subsidiary Salomon Brothers Inc
("SBI") has been named as a defendant in several federal
court and state court lawsuits, principally alleging that
numerous companies that
make markets in securities traded on the National
Association of Securities Dealers Automated
Quotation System ("NASDAQ") violated antitrust laws by
conspiring to maintain a minimum spread of
$.25 between the price bid and the price asked for such
securities. In addition, several other
court lawsuits have been filed that make similar allegations
but in which SBI has not to date been
named as a defendant. The plaintiffs in these lawsuits
purport to represent various classes of persons
who bought and sold securities on NASDAQ. They seek
unspecified amounts as damages, which
would be trebled under the antitrust laws. The plaintiffs
also seek injunctive relief, as well as
attorney's fees and the costs of the actions.
With respect to the three class actions (one in Federal
court, two in Humboldt County Superior Court
in California) relating to the 1985 acquisition of The
Pacific Lumber Company by MAXXAM Group,
Inc., in which SBI acted as financial advisor to The Pacific
Lumber Company, as discussed under Item
3 of the 1993 Form 10-K, all the plaintiffs and defendants
(including SBI) have agreed in principle to
settle those actions in their entirety and dismiss them with
prejudice. The settlement is subject to court
approval.
During 1994, certain customers of SBI's Private Investment
Department indicated that they will assert
claims against SBI with respect to transactions involving
collateralized mortgage obligations.
Arbitrations have been filed on behalf of certain of these
customers with the National Association of
Securities Dealers, Inc. and the American Arbitration
Association with respect to such claims.
In addition, as discussed in Item 3 of the 1993 Form 10-K,
other legal proceedings are pending against
the Company and its subsidiaries, including the U.S.
Treasury auction and related matters. Based on
information currently available and established reserves,
the Company believes that the ultimate
disposition of legal proceedings involving the Company and
its subsidiaries will not have a material
adverse effect on the Company's consolidated financial
condition.
<PAGE> 20
XXX BEGIN PAGE 21 XXX
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12(a) Calculation of ratio of earnings to fixed
charges*
12(b) Calculation of ratio of earnings to combined
fixed charges and preferred dividends*
*filed herewith
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated
April 25, 1994, reporting under Item 5
("Other Events") and Item 7 ("Financial Statements, Pro
Forma Financial Information and
Exhibits") the issuance of a press release.
The Company filed a Current Report on Form 8-K dated
July 6, 1994, reporting under Item 5
("Other Events") the issuance of a press release.
The Company filed a Current Report on Form 8-K dated
July 21, 1994, reporting under Item 5
("Other Events") and Item 7 ("Financial Statements, Pro
Forma Financial Information and
Exhibits") the issuance of a press release.
<PAGE> 21
XXX BEGIN PAGE 22 XXX
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.
Salomon Inc
(Registrant)
Date August 12, 1994 /s/ David C. Fisher
Controller
Date August 12, 1994 /s/ Arnold S. Olshin
Secretary
<PAGE> 22
XXX BEGIN PAGE 23 XXX
Form 10-Q Exhibit Index
The following exhibits are filed herewith:
Exhibit Number
12(a) Calculation of ratio of earnings
to fixed charges
12(b) Calculation of ratio of earnings
to combined fixed charges and
preferred dividends
<PAGE>23
<TABLE>
EXHIBIT 12(a)
SALOMON INC AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<CAPTION>
Six
Months
Ended
June 30, Years Ended December 31,
Dollars in millions 1994 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before taxes and
cumulative effect of
change in accounting
principles $ (234) $ 1,465 $ 1,056 $ 919 $ 506 $ 740
Add fixed charges (see below) 2,182 4,644 4,373 5,704 6,032 6,147
Other adjustments (1) 22 20 (4) (16) (10)
------- ------- ------- ------- ------- -------
Earnings as defined $ 1,947 $ 6,131 $ 5,449 $ 6,619 $ 6,522 $ 6,877
Fixed Charges and
Preferred Dividends:
Interest expense $ 2,170 $ 4,600 $ 4,324 $ 5,638 $ 5,959 $ 6,093
Other adjustments 12 44 49 66 73 54
------- ------- ------- ------- ------- -------
Fixed charges as defined $ 2,182 $ 4,644 $ 4,373 $ 5,704 $ 6,032 $ 6,147
Ratio of earnings to
fixed charges 0.89* 1.32 1.25 1.16 1.08 1.12
======= ======= ======= ======= ======= =======
<FN>
<fn1>
NOTE:
The ratio of earnings to fixed charges is calculated by dividing fixed charges into the sum of income before taxes and fixed
charges.
Fixed charges consist of interest expense, including capitalized interest and a portion of rental expense representative of the
interest factor.
* For the six months ended June 30, 1994, earnings as defined were inadequate to cover fixed charges. The amount by which
fixed charges exceeded earnings as defined for the six-month period was $235 million.
</TABLE>
<TABLE>
EXHIBIT 12(b)
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
<CAPTION>
Six
Months
Ended
June 30, Years Ended December 31,
Dollars in millions 1994 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before taxes and
cumulative effect of
change in accounting
principles $ (234) $ 1,465 $ 1,056 $ 919 $ 506 $ 740
Add fixed charges (see below) 2,182 4,644 4,373 5,704 6,032 6,147
Other adjustments (1) 22 20 (4) (16) (10)
------- ------- ------- ------- ------- -------
Earnings as defined $ 1,947 $ 6,131 $ 5,449 $ 6,619 $ 6,522 $ 6,877
Fixed Charges and
Preferred Dividends:
Interest expense $ 2,170 $ 4,600 $ 4,324 $ 5,638 $ 5,959 $ 6,093
Other adjustments 12 44 49 66 73 54
------- ------- ------- ------- ------- -------
Fixed charges as defined 2,182 4,644 4,373 5,704 6,032 6,147
Preferred dividends (tax
equivalent basis) 47 83 131 121 105 99
------- ------- ------- ------- ------- -------
Combined fixed charges
and preferred dividends $ 2,229 $ 4,727 $ 4,504 $ 5,825 $ 6,137 $ 6,246
======= ======= ======= ======= ======= =======
Ratio of earnings to combined
fixed charges and preferred
dividends 0.87* 1.30 1.21 1.14 1.06 1.10
======= ======= ======= ======= ======= =======
<FN>
<fn1>
NOTES:
<fn1>
The ratio of earnings to combined fixed charges and preferred dividends was calculated by dividing
the sum of fixed charges and tax equivalent preferred dividends into the sum of earnings before taxes
and fixed charges.
Fixed charges consist of interest expense, including capitalized interest and a
portion of rental expense representative of the interest factor.
Tax equivalent preferred dividends represent the pretax earnings necessary to cover preferred
stock dividend requirements, assuming such earnings are taxed at the Company's consolidated
effective income tax rate.
* For the six months ended June 30, 1994, earnings as defined were inadequate to cover fixed charges,
including preferred dividends. The amount by which fixed charges, including preferred dividends,
exceeded earnings as defined for the six-month period was $282 million.
</TABLE>
