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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1993 Commission File Number 1-4346
SALOMON INC
(Exact name of registrant as specified in its charter)
Delaware 22-1660266
(State of incorporation) (I.R.S. Employer Identification No.)
Seven World Trade Center, New York, New York 10048 (212) 783-7000
(Address of principal executive offices) (Zip Code) (Registrant's telephone
number, including area
code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
Common Stock, par value $1 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Depositary Shares, Each Representing a
One-Twentieth Interest in a
Share of 9.50% Cumulative Preferred
Stock, Series C New York Stock Exchange
Depositary Shares, Each Representing a
One-Twentieth Interest in a Share of
8.08% Cumulative Preferred Stock,
Series D New York Stock Exchange
8% Notes due 1996 New York Stock Exchange
11 5/8% Debentures due 2015 New York Stock Exchange
6.750% DEC Common Equity-Linked
Securities due 1996 American Stock Exchange
7.25% ORCL Common Equity-Linked
Securities due 1996 American Stock Exchange
5.00% MSFT Common Equity-Linked
Securities due 1996 American Stock Exchange
5.25% HWP Common Equity-Linked
Securities due 1997 American Stock Exchange
7.625% SNPL Common Equity-Linked
Securities due 1997 American Stock Exchange
6.50% AMGN Common Equity-Linked
Securities due 1997 American Stock Exchange
6.125% PRI Common Equity-Linked
Securities due 1997 American Stock Exchange
AMEX Hong Kong 30 Index Call Warrants
expiring November 3, 1995 American Stock Exchange
Securities registered pursuant to Number of shares of common stock
Section 12(g) of the Act: outstanding at February 28, 1994:
NONE 109,739,338
Aggregate market value at
February 28, 1994:
$5.5 billion
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 and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Documents incorporated by reference:
Salomon Inc 1993 Annual Report Financial Information (incorporated in 10-K
Parts I, II and IV)
Proxy Statement for the 1994 Annual Meeting of Stockholders (incorporated, in
part, in 10-K Parts III and IV)
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PART I
ITEM 1. BUSINESS
Salomon Inc ("the Company") was incorporated in 1960 under the laws of
the State of Delaware. At December 31, 1993, its full time equivalent
number of employees was 8,640. Information concerning the business of
Salomon Inc under the following captions in Exhibit 13, "Salomon Inc 1993
Annual Report Financial Information," is deemed part of this Annual
Report on Form 10-K and is hereby incorporated herein by reference:
Salomon Inc - Overview of 1993 (on pages 13 through 19)
Salomon Brothers - Description of Business (on pages 21 through 23)
Phibro Division - Description of Business (on page 27)
Phibro USA - Description of Business (on pages 28 through 30)
Note 1. Industry Segment and Geographic Data (on pages 60 through
62)
Note 9. Net Capital (on pages 67 and 68)
ITEM 2. PROPERTIES
Information concerning the Company's properties under the following
captions in Exhibit 13, "Salomon Inc 1993 Annual Report Financial
Information," is deemed part of this Annual Report on Form 10-K and is
hereby incorporated herein by reference:
Salomon Brothers - Description of Business (on pages 21 through 23)
Phibro Division - Description of Business (on page 27)
Phibro USA - Description of Business (on pages 28 through 30)
Note 3. Property, Plant and Equipment (on page 63)
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ITEM 3. LEGAL PROCEEDINGS
I. U.S. Treasury Auction and Related Matters
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Governmental Actions
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On August 9, 1991, the Company announced that it had uncovered irregularities
by certain employees of its indirect wholly owned subsidiary Salomon Brothers
Inc ("SBI") in connection with certain auctions of U.S. Treasury securities.
During the 1991 third quarter the Company recorded a pretax charge of $200
million to establish a reserve for estimated monetary damages, settlement costs,
fines, penalties, legal expenses and other related costs expected to be incurred
in connection with the private actions and investigations by certain U.S.
governmental authorities, state agencies and self-regulatory authorities arising
out of this matter. In a settlement with U.S. governmental authorities
announced on May 20, 1992, the Company and SBI consented to various sanctions
including the payment of $190 million, the establishment of an additional $100
million private civil claims fund, the issuance of an injunction and the
adoption of an administrative order, and in connection with the matter SBI was
also temporarily suspended from dealing directly with the Federal Reserve Bank
and from executing customer transactions in Treasury auctions. As a result of
the settlement, the Company recorded an additional pretax charge of $185 million
in the 1992 second quarter. The settlement did not resolve the ongoing
industry-wide investigation by the Antitrust Division of the U.S. Department of
Justice into possible collusion by primary dealers and others in bidding at U.S.
Treasury auctions. In January and February of 1993, the Company and SBI made
payments of approximately $4 million to settle claims with 42 states and the
District of Columbia arising out of the U.S. Treasury auction and related
matters.
Private Actions
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Over 50 private actions were commenced against the Company, SBI or certain
present and former directors, officers and employees of the Company or SBI with
respect to the U.S. Treasury auction and related matters. All but one of the
actions brought to date can be grouped into three categories: securities
litigation, Treasury litigation and derivative litigation.
Forty-two of the actions were class and derivative actions which have been
consolidated for pre-trial or discovery purposes into three actions in the
United States District Court for the Southern District of New York (the
"Southern District of New York") before The Honorable Robert P. Patterson, Jr.
Amended consolidated complaints have been filed by lead counsel in each of the
three consolidated groups of class actions. In addition, three individual
actions have been coordinated or consolidated with the class actions for pre-
trial purposes.
A. Securities Litigation
---------------------
The securities litigation is comprised of two individual actions (which the
Company believes are not material) and In re Salomon Inc Securities Litigation,
---------------------------------------
91 Civ. 5442 (S.D.N.Y., consolidated Aug. 30, 1991), which consolidated for pre-
trial purposes 16 purported class actions and one individual action (Discount
--------
Bank and Trust Company v. Salomon Inc., et al.) brought by purchasers of various
- ----------------------------------------------
of the Company's publicly traded securities, including Common Stock, Preferred
Stock and debt instruments. These actions claim, among other things, that the
defendants (the Company, SBI and others) violated provisions of the Federal
securities laws by knowingly or recklessly not disclosing improprieties with
respect to U.S. Treasury securities and potential adverse financial and
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business consequences of the improprieties, and by falsely portraying the
Company as a well-run, conservatively managed enterprise whose activities were
in compliance with government rules and regulations. The actions allege that the
market prices of the Company's securities were artificially inflated or
maintained as a consequence of the alleged Federal securities law violations,
and that plaintiffs purchased their securities at such artificial prices. The
actions primarily seek unspecified compensatory and punitive damages for
plaintiffs as a result of such alleged misconduct, as well as costs, interests
and other relief.
Following an agreement in principle reached on June 10, 1993, on September 13,
1993 the Company, while denying any violation of law, entered into a formal
stipulation of settlement to settle the consolidated class action. The
settlement is subject to court approval, and hearings have been held to
determine whether the settlement should be approved. Under the terms of the
settlement, $54.5 million will be paid to the plaintiff class out of the $100
million private claims fund established pursuant to the 1992 settlement
described above. The Company also has agreed to pay plaintiffs' attorneys' fees
and expenses as awarded by the court, in an amount not to exceed $12.5 million.
B. Treasury Litigation
-------------------
The Treasury litigation is comprised of six individual actions and In re
-----
Salomon Brothers Treasury Litigation, 91 Civ. 5471 (S.D.N.Y., consolidated Aug.
- ------------------------------------
28, 1991), which consolidated for discovery purposes 10 purported class actions.
Three of the six individual actions (Three Crown Limited Partnership, et al. v.
------------------------------------------
Salomon Brothers, Inc., et al., 92 Civ. 3142; Kevin Connors & Co., L.P. v.
- ------------------------------ ----------------------------
Salomon Brothers, Inc., 92 Civ. 3714 (currently stayed and the parties ordered
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to proceed in arbitration); and New York Capital Markets Inc. v. Salomon
----------------------------------------
Brothers, Inc., et. al., 92 Civ. 5885), as well as In re Salomon Brothers
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Treasury Litigation, were each originally brought in the Southern District of
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New York and are pending before The Honorable Robert P. Patterson, Jr. Two
individual actions (Commonwealth Financial Futures Fund, et al. v. Salomon
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Brothers Inc., 92 Civ. 7691; SWS Financial Fund A, et al. v. Salomon Brothers
- ------------- ------------------------------------------------
Inc., 92 Civ. 6602, 92 Civ. 6935), were transferred to the Southern District of
- ----
New York by the Judicial Panel on Multidistrict Litigation and assigned to Judge
Patterson for inclusion in the coordinated or consolidated pre-trial proceedings
taking place in connection with In re Salomon Brothers Treasury Litigation. The
------------------------------------------
final individual action (State of Louisiana v. Salomon, Inc., et al., No. 94-
-------------------------------------------
0904I), was filed on March 17, 1994 in the United States District Court for the
Eastern District of Louisiana.
These actions claim, among other things, that the Company, SBI and certain
former officers and employees violated provisions of the Federal securities
laws, the Racketeer Influenced and Corrupt Organization Act ("RICO") and the
antitrust laws, in some instances in collusion with others, by repeatedly
purchasing quantities of U.S. Treasury securities in excess of Federal
regulatory limits and manipulating the market in U.S. Treasury securities. The
actions primarily seek unspecified compensatory and punitive damages, and treble
damages pursuant to the antitrust and RICO counts, for plaintiffs as a result of
such alleged misconduct, as well as costs, interest and other relief.
On March 30, 1994, the Company and SBI advised Judge Patterson that they had
reached an agreement in principle, while denying any violation of law, to settle
the class actions included in the Treasury Litigation. The settlement is subject
to approval by the court. Under the terms of the settlement, which involves
other defendants, the Company and SBI will pay $66 million. This amount includes
plaintiffs' attorneys' fees to be awarded by the court. The Company and SBI
expect that substantially more than half of the $66 million payment will be paid
from the $100 million private claims fund established pursuant to the 1992
settlement
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described above.
C. Derivative Litigation
---------------------
In re Salomon Inc Shareholders' Derivative Litigation, 91 Civ. 5500 (S.D.N.Y.,
-----------------------------------------------------
consolidated Aug. 30, 1991), consolidated for all pre-trial purposes 16 actions
which asserted derivative claims purportedly on behalf of the Company against
members of the Company's Board of Directors and others. The actions claim, among
other things, that SBI employees violated U.S. Treasury and Federal Reserve
Board regulations governing the purchase of U.S. Treasury securities at auctions
by repeatedly purchasing quantities of U.S. Treasury securities in excess of
federal regulatory limits and submitting bids for those securities in the names
of persons who had not authorized such bids. The claims, as originally filed,
further asserted that the director defendants breached their fiduciary
obligations to the Company by engaging in or recklessly disregarding these
allegedly illegal practices, thereby exposing the Company to potential
liabilities and adverse business consequences. The actions seek to require the
individual defendants to recompense the Company for all damages caused by them,
to return compensation received by them and to pay punitive damages, as well as
costs, interest and other relief. The Company moved to dismiss the complaint on
the grounds that plaintiffs had failed to make a demand on the Company's Board
of Directors. Thereafter the parties entered into a stipulation and order which
deferred consideration of the motion to dismiss the amended consolidated
complaint until the earlier of (i) final resolution by judgment or settlement of
all actions pending before Judge Patterson arising out of the U.S. Treasury
auction and related matters or (ii) a request by all parties to the stipulation
and order to undertake further consideration of the motion. In January 1994, the
derivative plaintiffs amended their complaint to, among other things, dismiss
without prejudice their complaint against all defendants other than those who
ceased to be officers or directors of the Company following the announcement of
irregularities in August 1991.
In addition to the foregoing purported derivative actions, a purported
derivative action asserting claims similar to those in In re Salomon Inc
-----------------
Shareholders' Derivative Litigation, Sands, et al. v. Salomon Inc, et al. Civil
- ----------------------------------- ------------------------------------
Action No. 1155-K, was filed in Delaware Chancery Court for Kent County. On
November 4, 1991, a motion was made to dismiss this action, but it has not been
briefed. A briefing schedule on the motion will be set by the court shortly.
Private Claims Fund
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The private claims fund described above will be available to pay judgments and
settlements (including interest thereon) with respect to claims for compensatory
damages against the Company or SBI in these and any future private actions with
respect to the U.S. Treasury auction and related matters. The fund does not
cover attorneys' fees or expenses or certain other liabilities. The residual
amount, if any, in the fund will be paid to the United States. The liability of
the Company and SBI for private compensatory damages with respect to the U.S.
Treasury auction and related matters may exceed the amount in the fund. The
proposed settlements in the Securities Litigation and the Treasury Litigation
described above would, if approved, exhaust all but a relatively small portion
of the fund.
Former Officers
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In late 1992 and early 1993, the Company and SBI settled certain employment-
related compensation claims with three of the four senior officers whose
employment with the Company and SBI ended following the August 1991 announcement
of certain earlier
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improprieties by former employees. The Company has not resolved the compensation
claims of the remaining former officer, John Gutfreund; these claims are now the
subject of arbitration pursuant to New York Stock Exchange rules.
Additional Information
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Additional information concerning proceedings relating to the U.S. Treasury
auction and related matters is contained in Note 14, "Legal Proceedings", of
Exhibit 13, "Salomon Inc 1992 Annual Report to Stockholders", and is hereby
incorporated herein by reference. For further information, copies of documents
relating to the settlement with certain governmental authorities and copies of
the amended consolidated complaints were filed as Exhibits 28(a) and 28(b),
respectively, to the Company's 1992 Annual Report on Form 10-K. Based on
information currently available and established reserves, the Company believes
the ultimate disposition of pending legal proceedings in connection with the
United States Treasury auction and related matters will not have a material
adverse effect on the Company's consolidated financial condition.
II. Other Legal Proceedings
-----------------------
Commencing in 1987, 21 purported derivative lawsuits were filed in Delaware
Chancery Court, New Castle County, New York Supreme Court, New York County and
in the Southern District of New York (In re Salomon Inc Shareholder Litigation)
-----------------------------------------
against, among others, the Company and its directors (including its current
directors other than Messrs. Buffett, Denham, Hall, Maughan, Munger, Simpson and
Young) and in two instances Berkshire Hathaway Inc. ("Berkshire") arising out of
the Company's purchase of 21,282,070 shares of its Common Stock beneficially
owned by Minerals and Resources Corporation Limited at $38.00 per share and the
Company's sale for $700 million of 700,000 shares of its Preferred Stock to
affiliates of Berkshire. In addition, the lawsuits challenge the Company's
distribution of Preferred Share Purchase Rights to its shareholders on February
18, 1988 and the amendment of certain of the Company's employment benefit plans.
The complaints allege, among other things, that the aforesaid corporate actions
were part of a scheme to maintain the positions of the defendant directors with
the Company in derogation of their fiduciary duties and that the Company had the
opportunity to sell the Preferred Stock on superior terms. The complaints seek,
among other things, injunctive relief with respect to the challenged corporate
actions, rescission of such corporate actions and monetary damages. The
litigation in Delaware (consisting of 19 of the purported derivative lawsuits)
had been consolidated under the caption In re Salomon Inc Shareholder
-----------------------------
Litigation, Civil Action No. 9296. The Delaware court, on May 24, 1993, entered
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into a stipulation and order of dismissal without prejudice with respect to this
consolidated action.
SBI has been named as a defendant in a purported class action brought in May
1988 in the Delaware Chancery Court for New Castle County (Shields and Van De
------------------
Walle v. L.F. Rothchild, Unterberg, Towbin Holdings, Inc., et al.). The
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defendants include L.F. Rothchild, Unterberg, Towbin Holdings, Inc.
("Holdings"), certain of its officers and directors, certain selling
shareholders and controlling persons and the lead underwriters for Holdings'
March 1986 public offering of 7,676,325 shares of Common Stock at $20.50 per
share. Plaintiffs purport to represent a class of all persons who purchased
stock pursuant to that offer. Together with Shearson Lehman Brothers
Incorporated and L.F. Rothchild Incorporated ("L.F. Rothchild"), SBI acted as
one of the lead underwriters with a participation of 1,074,441 shares. In
general, the complaint alleges that the prospectus prepared in connection with
the offering contained untrue statements of material fact and omitted to state
material facts in violation of
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the Federal securities laws. The complaint seeks, among other things,
compensation and punitive damages in unspecified amounts as well as the costs of
the action. Both Holdings and L.F. Rothchild have been reorganized in bankruptcy
proceedings which are continuing. In February 1990, the court determined that
the action should be stayed as to all defendants pending resolution of a class
proof of claim filed by the Shields and Van De Walle plaintiffs in the Holdings
------------------------
bankruptcy proceeding that alleges the same claims contained in the Shields and
-----------
Van De Walle complaint. That proof of claim was withdrawn, and with the
- ------------
completion of the reorganization of Holdings, the stay has been lifted and pre-
trial proceedings have resumed.
Numerous purported class actions, which are consolidated in the United States
District Court for the Eastern District of Louisiana (In re Taxable Municipal
------------------------
Bond Securities Litigation), were commenced in 1990 and 1991 in connection with
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various taxable municipal bond offerings in 1986 managed by Drexel Burnham
Lambert Incorporated ("Drexel Burnham"), including bonds issued by authorities
in Colorado, Louisiana, Nebraska, Tennessee and Texas. The defendants include
the issuing authorities, the co-managers of the offerings (other than Drexel
Burnham which has undergone bankruptcy proceedings) and certain of their
officers, Michael R. Milken, Executive Life Insurance Company, First Executive
Corporation, law firms, the bond trustees, and the underwriting syndicates for
the offerings. SBI was a member of the above underwriting syndicates with an
aggregate participation of approximately $50 million, and has been named as a
defendant in certain of the actions described above. The plaintiffs purport to
represent a class of bond purchasers who purchased the various bonds during the
period from the issuance of the bonds in 1986 through approximately April 1990
and were damaged thereby. In general, the complaints allege that the offering
documents prepared in connection with the offerings contained untrue statements
of material fact and omitted to state material facts in violation of various
Federal and state securities laws as well as fraud, negligent misrepresentation
and breach of fiduciary duty. The complaints seek, among other things,
compensatory and punitive damages in unspecified amounts, rescission, interest
and costs and expenses of the actions. Executive Life Insurance Company, the
company that issued and guaranteed investment contracts in which the proceeds of
the bond issues were invested, has been placed in conservatorship by the
California Commissioner of Insurance.
Salomon Forex Inc ("Salomon Forex"), an indirect wholly owned subsidiary of
the Company, filed an amended complaint in a collection action in the United
States District Court for the Eastern District of Virginia (Salomon Forex Inc v.
---------------------
Tauber) in November 1991 against Laszlo N. Tauber ("Tauber") seeking to recover
- ------
approximately $26 million payable under certain foreign exchange transactions
Salomon Forex entered at various dates which matured in July and August 1991.
Tauber filed an answer raising numerous defenses and a counterclaim and third-
party complaint raising numerous claims against Salomon Forex, the Company and
SBI, as well as certain employees of SBI, asserting that the counterclaim and
third-party defendants violated U.S. commodities, New York and Virginia gambling
and New York bucketing laws, as well as committed common law fraud, breach of
fiduciary duty, breach of implied covenants of good faith and fair dealing and
breach of a duty to disclose material information. The counterclaim and third-
party complaint sought unspecified compensatory damages asserted to exceed $20
million, unspecified punitive damages in an amount equal to twice compensatory
damages and a judgment that certain transactions be declared null and void. On
March 27, 1992, summary judgment was entered in favor of Salomon Forex for the
principal amount due of $25,831,453.01, plus prejudgment interest of
$1,435,134.79. Tauber appealed unsuccessfully to the United States Court of
Appeals for the Fourth Circuit and has petitioned the United States Supreme
Court for review of that decision.
SBI privately placed in three separate offerings approximately $157.2 million
of first mortgage notes issued by Motels of America, Inc. ("MOA") to finance the
purchases of three
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portfolios of motel properties: $70.6 million of such notes placed in August
1987 ("Portfolio I"); $23.4 million of such notes placed in March 1988
("Portfolio II"); and $63.2 million of such notes placed in August 1989
("Portfolio III"). In each offering, the notes were nonrecourse to MOA and
secured by mortgages on the respective portfolios of motel properties being
purchased by MOA. SBI received three participation interests in net operating
income from the properties securing the mortgage notes, 95% of which in two
instances and 100% of which in one instance were then sold to Ameritech Pension
Trust ("APT") for purchase prices aggregating approximately $19.3 million.
Following MOA's bankruptcy filing in the United States Bankruptcy Court for the
District of Delaware, in or about December 1991, MOA and Ben Franklin
Properties, Inc. ("Ben Franklin"), an assignee of the participation interests
which had been sold to APT, commenced an adversary proceeding in the MOA
bankruptcy case against SBI and Salomon Brothers Realty Corporation ("SBRC").
Although SBI and SBRC denied the material allegations of the adversary
complaint, on March 27, 1992, SBI and SBRC entered into a settlement agreement
with MOA and Ben Franklin, which settlement was approved by the Bankruptcy Court
on July 23, 1992. On September 9, 1992, the Bankruptcy Court approved the plan
of reorganization for MOA.
In September 1992, Harris Trust and Savings Bank (as trustee for APT),
Ameritech Corporation, and an officer of Ameritech filed a complaint against SBI
and SBRC in the United States District Court for the Northern District of
Illinois (the "Northern District of Illinois"), alleging that all three
purchases by APT of MOA participation interests, as well as a fourth purchase by
APT of a similar participation interest with respect to a portfolio of motels
owned by Best Inns, violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interest for Portfolio III
violated RICO and the Illinois Consumer Fraud and Deceptive Business Practices
Act, and is actionable as common law fraud and negligent misrepresentation. SBI
and SBRC moved to dismiss the APT complaint. On December 24, 1992, the Court
dismissed one of the ERISA claims and all of the RICO claims. On March 5, 1993,
plaintiffs filed a second amended complaint alleging that all four purchases of
the participation interests violated ERISA and that the purchases of the
participation interests for Portfolio III and for the Best Inns portfolio
violated RICO and state law. Plaintiffs' second amended complaint seeks (i) a
judgment on the ERISA claims in the amount of the purchase prices of the four
participation interests (alleged to be approximately $20.9 million), for
rescission and for disgorgement of profits, as well as other relief, and (ii) a
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
damages in excess of $37 million on certain of the state law claims, as well as
other relief. On April 5, 1993 SBI and SBRC answered the second amended
complaint in part, moved to dismiss in part and asserted counterclaims against
plaintiff Ameritech Corp. On August 16, 1993 the court (i) again dismissed the
RICO claims as well as plaintiffs' claims for breach of contract and unjust
enrichment; (ii) denied SBI's motion to dismiss the repleaded claim under ERISA
alleging that SBI participated in a fiduciary's breach; and (iii) denied
Ameritech's motion to dismiss SBI's counterclaims. Discovery with respect to the
remaining claims is ongoing. The Department of Labor has advised SBI that it is
reviewing the transactions in which APT acquired such participation interests.
Golder, Thoma, Cressey Fund III Limited Partnership, et al. v. Salomon
----------------------------------------------------------------------
Brothers Inc, is a lawsuit brought by Golder, Thoma, Cressey Fund III Limited
- ------------
Partnership and three individuals purporting to represent eleven members of
senior management of Health Care and Retirement Corporation of America ("HCRA"),
in the Circuit Court of Cook County, Illinois on July 10, 1992 against SBI in
connection with SBI's performance in providing financial advisory services for
the proposed acquisition by the plaintiffs of HCRA in 1991. The lawsuit asserts
claims for negligence, breach of fiduciary duty, negligent misrepresentation and
breach of contract. Plaintiffs seek to recover damages purported to exceed $190
million due to their alleged
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inability to complete the acquisition at an advantageous price, $6 million of
alleged fees and expenses, punitive damages and attorneys' fees, as well as
costs and other relief.
SBI is a defendant in three actions arising out of the acquisition of The
Pacific Lumber Company ("Pacific Lumber") in 1985 by MAXXAM Group, Inc.
("MAXXAM") in which SBI acted as financial adviser to Pacific Lumber. One of
such actions, originally filed in October 1988, was transferred on May 25, 1989
and is now pending in the United States District Court for the Southern District
of New York as part of a consolidated proceeding captioned In re Ivan F.
-------------
Boesky Securities Litigation, MDL No. 732. The complaint in this action
- ----------------------------
asserts federal securities law claims against SBI by individual plaintiffs
who claim to be former shareholders of Pacific Lumber, and includes
allegations that there were allegedly false and misleading statements or
omissions in connection with SBI's opinion that the final price of $40 per share
offered and ultimately paid by MAXXAM for the approximately 20 million
outstanding shares of Pacific Lumber stock in the acquisition was fair to the
shareholders of Pacific Lumber from a financial point of view. The complaint
also asserts claims against several other defendants in connection with the
acquisition of Pacific Lumber, including MAXXAM and various of its affiliates,
as well as Pacific Lumber and the former directors of Pacific Lumber. Although
the complaint does not specify the amount of damages sought from the defendants,
plaintiffs claim that the Pacific Lumber stock was worth substantially more than
what was paid by MAXXAM. A trial date of April 11, 1994 has been scheduled by
the Court in this action. SBI is also named as a defendant in two state court
class actions arising out of the acquisition of Pacific Lumber, Russ et al. v.
--------------
Milken et al. DR 85429, and Thompson, et al. v. Elam, et al., which were filed
- ------------- --------------------------------
in October 1989 in the Humboldt County Superior Court in California. The state
court actions have been stayed pursuant to stipulations between counsel.
Information concerning environmental proceedings involving the Company
contained in the third through ninth paragraphs of Note 14, "Legal Proceedings"
of Exhibit 13, "Salomon Inc 1993 Annual Report Financial Information", is hereby
incorporated herein by reference.
In addition, other legal proceedings are pending against or involve the
Company and its subsidiaries. Based on information currently available and
established reserves, the Company believes the ultimate disposition of legal
proceedings involving the Company will not have a material adverse effect on the
Company's consolidated financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Office
- ------------ ------
Jerome H. Bailey (41) Chief Financial Officer since June 1993, previously
employed at Morgan Stanley in various executive
capacities for more than five years
Robert E. Denham (48)* Chairman and Chief Executive Officer since June 1992;
previously General Counsel from September 1991;
previously a partner in the law firm of Munger, Tolles
& Olson, Los Angeles, California, for more than four
years. He rejoined Munger, Tolles & Olson as a partner
in August 1992 and resigned from that firm on December
31, 1993.
David C. Fisher (47) Controller since 1989; previously employed by Salomon
Brothers Inc in various executive capacities from 1985
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EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Name and Age Office
- ------------ ------
Andrew J. Hall (43)* Executive Vice President since May 1991; Chairman and
President of the Phibro Division since January 1, 1993;
Chairman and Chief Executive Officer of Phibro Energy,
Inc. from January 1992 to December 1992 and President
of Phibro Energy, Inc. from 1987 to December 1992
Gedale B. Horowitz (61)* Executive Vice President since 1981
John G. Macfarlane (39) Treasurer since 1989; Treasurer of Salomon Brothers Inc
since 1989; previously employed by Salomon Brothers Inc
in various executive capacities from 1979
Deryck C. Maughan (46)* Executive Vice President since May 1993; Chairman and
Chief Executive Officer of Salomon Brothers Inc since
May 1992; previously Chief Operating Officer of Salomon
Brothers Inc from August 1991; Vice Chairman of Salomon
Brothers Inc from January 1991 to August 1991; Chairman
of Salomon Brothers Asia Limited from 1986 to 1991
Robert H. Mundheim (61) Executive Vice President and General Counsel since
December 1993; General Counsel since September 1992;
previously co-chairman of the law firm Fried, Frank,
Harris, Shriver and Jacobson, New York, from March 1990
after having served as Dean of the University of
Pennsylvania Law School for more than seven years
* Also a Director of Salomon Inc
Officers of the Registrant are elected annually at the May meeting of the
Company's Board of Directors that follows the Annual Meeting of Stockholders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information concerning the market for the Registrant's common equity and
related stockholder matters in Exhibit 13, "Salomon Inc 1993 Annual
Report Financial Information," under the caption "Common Stock Data" on
page 85, is deemed part of this Annual Report on Form 10-K and is hereby
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data in Exhibit 13, "Salomon Inc 1993 Annual Report
Financial Information," under the caption "Five Year Summary of Selected
Financial Information" on page 86, is deemed part of this Annual Report
on Form 10-K and is hereby incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations contained under the following captions in Exhibit 13,
"Salomon Inc 1993 Annual Report Financial Information," is deemed part of
this Annual Report on Form 10-K and is hereby incorporated herein by
reference:
Financial Highlights (page 1)
Overview of 1993 (on pages 13 through 19)
Segment Information (on pages 20 through 30)
Capital and Liquidity Management (on pages 31 through 38)
Risk Management (on pages 39 through 45)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and subsidiaries,
together with the Summary of Accounting Policies, the Notes to
Consolidated Financial Statements and the Report of Independent Public
Accountants, contained in Exhibit 13, "Salomon Inc 1993 Annual Report
Financial Information" on pages 48 through 84, and the information
appearing under the caption "Selected Quarterly Financial Data
(Unaudited)" on page 85 of such Exhibit are deemed part of this Annual
Report on Form 10-K and are hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants reportable
herein.
12
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors -
---------
Information concerning directors of the Registrant is contained
under the caption "Election of Directors" in the Proxy Statement for
the 1994 Annual Meeting of Stockholders, which information is hereby
incorporated herein by reference.
(b) Executive Officers -
------------------
Information concerning executive officers of the Registrant is
presented in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is contained under the
captions "Election of Directors - Executive Compensation" and "Election
of Directors - Board of Directors' Meetings, Committees and Fees" in the
Proxy Statement for the 1994 Annual Meeting of Stockholders, which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is contained under the caption "Election of Directors
- Information as to Certain Stockholdings" in the Proxy Statement for the
1994 Annual Meeting of Stockholders, which information is hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is contained under the caption "Election of Directors - Certain
Transactions and Legal Matters" in the Proxy Statement for the 1994
Annual Meeting of Stockholders, which information is hereby incorporated
herein by reference.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
----------------------------------
(1) Financial Statements
The Consolidated Financial Statements of the Company and subsidiaries, together
with the Summary of Accounting Policies, the Notes to Consolidated Financial
Statements and the Report of Independent Public Accountants, dated February 10,
1994, are contained in Exhibit 13, "Salomon Inc 1993 Annual Report Financial
Information," and are hereby incorporated herein by reference.
(2) Schedules
Report of Independent Public Accountants on Schedules I and II
Schedule I - Marketable Securities
Schedule II - Amounts Receivable From Related Parties and Underwriters,
Promoters and Employees Other Than Related Parties
(Other schedules are omitted because the required information either is not
applicable or is included in the financial statements or the notes thereto.)
(3) Exhibits
3(a) Certificate of Incorporation of the Company, as amended (incorporated by
reference to Exhibits 3 to Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1987 and June 30, 1986, Exhibit 4(a) to
Registration Statement Number 2-84733 on Form S-3 filed June 30, 1983,
Exhibit 4 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1987, Exhibit A to Exhibit 1 to Registration Statement on
Form 8-A filed February 11, 1988, Exhibit 3 to Current Report on Form 8-K
dated June 13, 1991, and Exhibit 4(a) to Current Report on Form 8-K dated
February 22, 1993)
3(b) By-laws of the Company, as amended (incorporated by reference to Exhibit
3 to Quarterly Report on Form 10-Q for the quarter ended September 30,
1992)
4(a) Certificate of Incorporation of the Company. See Exhibit 3(a) above.
4(b) Rights Agreement dated as of February 8, 1988 between Salomon Brothers
Inc and Morgan Shareholders Services Trust Company and related letter
dated February 9, 1988 from Berkshire Hathaway Inc. (incorporated by
reference to Exhibit 28 to Annual Report on Form 10-K for the year ended
December 31, 1987)
14
<PAGE>
ITEM 14. (CONTINUED)
(c) Exhibits (continued)
--------------------
4(c) First Amendment dated December 7, 1988 to Rights Agreement dated as of
February 8, 1988 between Salomon Inc and Morgan Shareholder Services
Trust Company (incorporated by reference to Exhibit 28 to Annual Report
on Form 10-K for the year ended December 31, 1988)
4(d) Contract dated September 27, 1987 between Berkshire Hathaway Inc. and
Salomon Inc and letter dated September 28, 1987 amending said contract
(incorporated by reference to Exhibit 10(c) to Annual Report on Form 10-K
for the year ended December 31, 1987)
4(e) The Company agrees to furnish the Securities and Exchange Commission upon
its request a copy of any instrument which defines the rights of holders
of long-term debt of the Company and its consolidated subsidiaries that
does not exceed 10 percent of the total consolidated assets of the
Company.
10(a) Lease between 7 World Trade Center Company and Salomon Inc dated November
23, 1988 (incorporated by reference to Exhibit 10(a) to the Annual Report
on Form 10-K, as amended, for the year ended December 31, 1991)
10(b) Foundation Agreement for the creation of the Joint Enterprise "White
Nights" between Varyeganneftegaz Production Association, Phibro Energy
Production, Inc. and Anglo-Suisse (U.S.S.R.) L.P. dated November 1, 1990.
(incorporated by reference to Exhibit 10(b) to the Annual Report on Form
10-K, as amended, for the year ended December 31, 1991)
10(c) Charter of the Joint Enterprise "White Nights" (incorporated by reference
to Exhibit 10(c) to the Annual Report on Form 10-K, as amended, for the
year ended December 31, 1991)
10(d) Non-Qualified Stock Option Plan of 1984 (incorporated by reference to
Exhibit A to the Proxy Statement for the 1988 Annual Meeting of the
Stockholders)
12(a)* Calculation of Ratio of Earnings to Fixed Charges
12(b)* Calculation of Ratio of Earnings to Combined Fixed Charges and Preferred
Dividends
13* Salomon Inc 1993 Annual Report Financial Information (furnished for the
information of the Securities and Exchange Commission and not deemed
"filed" as part of this Report except for those portions which are
expressly incorporated by reference)
21* Subsidiaries of the Registrant
23* Consent of Independent Public Accountants
24* Powers of Attorney
* Filed herewith
15
<PAGE>
ITEM 14. (CONTINUED)
(c) Exhibits (continued)
--------------------
99(a) Copies of the settlement documents relating to the resolution of certain
governmental investigations with respect to the U.S. Treasury auction and
related matters. (incorporated by reference to Exhibit 28(a) to the
Annual Report on Form 10-K for the year ended December 31, 1992)
99(b) Copies of the amended consolidated complaints filed in connection with In
re Salomon Inc Securities Litigation, In re Salomon Brothers Treasury
Litigation and In re Salomon Inc Shareholders' Derivative Litigation.
(incorporated by reference to Exhibit 28(b) to the Annual Report on Form
10-K for the year ended December 31, 1992)
99(c) Summaries of the complaints filed against the Company, SBI and certain
present and former directors, officers and employees of the Company and
SBI in the six individual actions named in Item 3 with respect to the
U.S. Treasury auction and related matters. (incorporated by reference to
Exhibit 28(c) to the Annual Report on Form 10-K for the year ended
December 31, 1992)
99(d) Copies of the six complaints summarized in Exhibit 28(c) which were
filed against the Company, SBI or certain present and former directors,
officers and employees of the Company and SBI with respect to the U.S.
Treasury auction and related matters (incorporated by reference to
Exhibit 28(c) to the Company's Annual Report on Form 10-K, as amended,
for the year ended December 31, 1991; Exhibit 28(h) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1991;
Exhibit 28(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992; Exhibit 28(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992; Exhibit 28(f) to
the Company's Current Report on Form 8-K dated September 16, 1991 and
Exhibits 28(b) and (c) to the Company's Current Report on Form 8-K dated
July 28, 1992.
16
<PAGE>
ITEM 14. (CONTINUED)
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K dated November 5, 1993,
reporting under Item 5 ("Other Events:") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits") the completed
offering and sale of 1,150,000 of the Company's AMEX Hong Kong 30 Index
Call Warrants Expiring November 3, 1995 and the related Underwriting
Agreement, Warrant Agreement and Opinions of counsel.
The Company filed a Current Report on Form 8-K dated December 17, 1993,
reporting under Item 7 ("Financial Statements, Pro Forma Financial
Information and Exhibits") a Form T-1 Statement of Eligibility.
The Company filed a Current Report on Form 8-K dated January 12, 1994,
reporting under Item 7 ("Financial Statements, Pro Forma Financial
Information and Exhibits") a Form T-1 Statement of Eligibility.
The Company filed a Current Report on Form 8-K dated January 18, 1994,
reporting under Item 7 ("Financial Statements, Pro Forma Financial
Information and Exhibits") an Indenture and a Form T-1 Statement of
Eligibility.
The Company filed a Current Report on Form 8-K dated January 27, 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 March 7, 1994,
reporting under Item 7 ("Financial Statements, Pro Forma Financial
Information and Exhibits") a Form T-1 Statement of Eligibility.
17
<PAGE>
SALOMON INC
FINANCIAL STATEMENT SCHEDULE INDEX
Schedule
Number Description
- ------ -----------
Report of Independent Public Accountants on
Schedules I and II
I Marketable Securities
II Amounts Receivable From Related Parties and
Underwriters, Promoters and Employees Other Than
Related Parties
18
<PAGE>
Report of Independent Public Accountants on Schedules I and II -
To Salomon Inc:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Salomon Inc and subsidiaries included in
Exhibit 13, "Salomon Inc 1993 Annual Report Financial Information," incorporated
by reference and deemed part of this Annual Report on Form 10-K, and have issued
our report thereon dated February 10, 1994. Our audits were made for the
purpose of forming an opinion on those financial statements taken as a whole.
Schedules I and II are the responsibility of the Company's management. They are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
New York, New York ARTHUR ANDERSEN & CO.
February 10, 1994
19
<PAGE>
SCHEDULE I
SALOMON INC AND SUBSIDIARIES
MARKETABLE SECURITIES
DECEMBER 31, 1993
<TABLE>
<CAPTION>
Amount Carried
in the
Statement of
Financial Condition
(Market Value)
Financial Instruments (Dollars in millions)
--------------------- ---------------------
<S> <C> <C>
U.S. government and agencies, various $ 42,485
issues
Non-U.S. government securities:
Italy, various issues $11,258
United Kingdom, various issues 9,290
Germany, various issues 6,132
Other governments 11,599* 38,279
-------
Options and contractual commitments 8,581*
Corporate debt securities 11,876*
Mortgage loans and collateralized 4,227*
mortgage securities
Equity securities 7,178*
Money market instruments 333
Precious metals 19
Other 5,945*
---------------
$118,923
===============
</TABLE>
* No individual issuer or counterparty exceeds 2% of consolidated total assets.
20
<PAGE>
SCHEDULE II
SALOMON INC AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF AMOUNT END OF
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED PERIOD*
- -------------------------------------------------------------------------------
Year Ended December 31, 1993
- ----------------------------
<S> <C> <C> <C> <C> <C>
Joseph Anastasio $704,000 $ $ $704,000 (a)
Richard Barrett 400,000 (200,000) 200,000 (b)
Richard Boughrum 33,639 (33,639)
Douglas Brengel 250,000 250,000 (c)
Christopher Campbell 40,000 (40,000)
Mark Field 740,000 (740,000)
Chris Franke 78,500 (13,000) 65,500 (d)
Dennis Keegan 2,500,000 (2,500,000)
Robert Mundheim 900,000 900,000 (e)
George Styskal 75,000 (18,750) 56,250 (f)
James Worms 700,000 700,000 (g)
</TABLE>
* All loans outstanding at December 31, 1993 are non-interest bearing except for
Chris Franke who is no longer an employee.
(a) In February 1994 the Company assumed title to the home financed by this
loan, thus eliminating the obligation.
(b) Remaining balance of $200,000 repaid January 15, 1994.
(c) Remaining balance of $250,000 repaid January 31, 1994.
(d) $5,000 repaid January 16, 1994, remainder due upon sale of home.
(e) Balance payable in three $200,000 and one $300,000 annual installments
commencing November 30, 1995.
(f) Remaining balance payable in three $18,750 annual installments commencing
January 31, 1994.
(g) $700,000 due upon sale of home.
21
<PAGE>
SCHEDULE II
(Continued)
SALOMON INC AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF AMOUNT END OF
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED PERIOD
- -------------------------------------------------------------------------------
Year Ended December 31, 1992
- ----------------------------
<S> <C> <C> <C> <C>
Joseph Anastasio $ 704,000 $ $ $ 704,000
Richard Barrett 600,000 (200,000) 400,000
Richard Boughrum 33,639 33,639
Douglas Brengel 750,000 (500,000) 250,000
Christopher Campbell 80,000 (40,000) 40,000
Mark Field 805,000 (65,000) 740,000
Chris Franke 92,000 (13,500) 78,500
George Styskal 100,000 (25,000) 75,000
Daniel Tyree 1,000,000 (1,000,000)
Sumner White 200,000 (200,000)
Year Ended December 31, 1991
- ----------------------------
Joseph Anastasio $ $704,000 $ $ 704,000
Richard Barrett 800,000 (200,000) 600,000
Richard Boughrum 33,639 33,639
Douglas Brengel 1,000,000 (250,000) 750,000
Christopher Campbell 120,000 (40,000) 80,000
Michael Corbat 75,000 (75,000)
Mark Field 935,000 (130,000) 805,000
Chris Franke 92,000 92,000
Robert Powers 40,000 (40,000)
George Styskal 150,000 (50,000) 100,000
Daniel Tyree 1,000,000 1,000,000
Sumner White 200,000 200,000
</TABLE>
22
<PAGE>
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, on the 30th day of March, 1994.
SALOMON INC By /s/ Arnold S. Olshin
- ----------------------- --------------------------
(Registrant) (Secretary)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Robert E. Denham Chief Executive Officer
and Director March 30, 1994
Jerome H. Bailey Chief Financial Officer March 30, 1994
David C. Fisher Chief Accounting Officer March 30, 1994
Dwayne O. Andreas* Director March 30, 1994
Warren E. Buffett* Director March 30, 1994
Andrew J. Hall* Director March 30, 1994
Gedale B. Horowitz* Director March 30, 1994
Deryck C. Maughan* Director March 30, 1994
William F. May* Director March 30, 1994
Charles T. Munger* Director March 30, 1994
Louis A. Simpson* Director March 30, 1994
David I. Young* Director March 30, 1994
Robert G. Zeller* Director March 30, 1994
*The undersigned, by signing his name hereto, does hereby sign this report on
behalf of each of the above-indicated directors of the Registrant pursuant to
powers of attorney, executed on behalf of each such director, on the 30th day of
March, 1994.
By /s/ Arnold S. Olshin
-----------------------------
(Attorney-In-Fact)
23
<PAGE>
SALOMON INC
FORM 10-K EXHIBIT INDEX
Certain exhibits to this Form 10-K have been incorporated by reference in Part
IV Item 14. The following exhibits are being filed herewith:
Exhibit Number Description
- -------------- -----------
12(a) Calculation of Ratio of Earnings to Fixed
Charges
12(b) Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
13 Salomon Inc 1993 Annual Report Financial
Information
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
24 Powers of Attorney
24
<PAGE>
EXHIBIT 12(a)
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Fixed Charges
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
Dollars in millions 1993 1992 1991 1990 1989
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before taxes and
cumulative effect of change
in accounting principles $1,465 $1,056 $ 919 $ 506 $ 740
Add fixed charges (see
below) 4,644 4,373 5,704 6,032 6,147
Other adjustments 22 20 (4) (16) (10)
------ ------ ------ ------ ------
Earnings as defined $6,131 $5,449 $6,619 $6,522 $6,877
====== ====== ====== ====== ======
Fixed Charges:
Interest expense $4,600 $4,324 $5,638 $5,959 $6,093
Other adjustments 44 49 66 73 54
------ ------ ------ ------ ------
Fixed charges as defined $4,644 $4,373 $5,704 $6,032 $6,147
====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 1.32 1.25 1.16 1.08 1.12
====== ====== ====== ====== ======
</TABLE>
NOTE:
The ratio of earnings to fixed charges is calculated by dividing fixed charges
into the sum of income before taxes, fixed charges and other adjustments. Fixed
charges consist of interest expense, including capitalized interest and a
portion of rental expense representative of the interest factor.
<PAGE>
EXHIBIT 12(b)
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
Dollars in millions 1993 1992 1991 1990 1989
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before taxes and
cumulative effect of change
in accounting principles $1,465 $1,056 $ 919 $ 506 $ 740
Add fixed charges (see
below) 4,644 4,373 5,704 6,032 6,147
Other adjustments 22 20 (4) (16) (10)
------ ------ ------ ------ ------
Earnings as defined $6,131 $5,449 $6,619 $6,522 $6,877
====== ====== ====== ====== ======
Fixed Charges and
Preferred Dividends:
Interest expense $4,600 $4,324 $5,638 $5,959 $6,093
Other adjustments 44 49 66 73 54
------ ------ ------ ------ ------
Fixed charges as defined 4,644 4,373 5,704 6,032 6,147
Preferred dividends (tax
equivalent basis) 83 131 121 105 99
------ ------ ------ ------ ------
Combined fixed charges
and preferred dividends $4,727 $4,504 $5,825 $6,137 $6,246
====== ====== ====== ====== ======
Ratio of earnings to
combined fixed charges
and preferred dividends 1.30 1.21 1.14 1.06 1.10
====== ====== ====== ====== ======
</TABLE>
NOTES:
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, cumulative effect of change in
accounting principles, fixed charges and other adjustments.
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.
<PAGE>
EXHIBIT 13
SALOMON INC
--------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS 1993 1992 1991 1990
------- ------- ------- ------
<S> <C> <C> <C> <C>
Income (loss) before taxes and
cumulative effect of change
in accounting principles by
segment:
Salomon Brothers' business unit
contributions:
Client-Driven Businesses $ 1,159 $ 276 $ 227 $ (60)
Proprietary Trading Businesses 416 1,416 1,103 485
Other - (302) (294) (9)
------- ------- ------- ------
Total Salomon Brothers 1,575 1,390 1,036 416
Phibro Division (15) (194) 47 361
Phibro USA (46) (47) (80) 146
Philipp Brothers - - - (323)
Corporate and Other (49) (93) (84) (94)
------- ------- ------- ------
Income before taxes and cumulative
effect of change in accounting
principles $ 1,465 $ 1,056 $ 919 $ 506
======= ======= ======= ======
Net income $ 827 $ 550 $ 507 $ 303
======= ======= ======= ======
Fully diluted return on average
common stockholders' equity* 19.1% 12.8% 12.9% 8.3%
======= ======= ======= ======
Per common share:
Primary earnings $ 7.01 $ 4.18 $ 3.90 $ 2.08
Fully diluted earnings* 6.28 4.05 3.79 2.05
Cash dividends 0.64 0.64 0.64 0.64
Book value at year-end 38.57 32.33 28.56 25.87
======= ======= ======= ======
Capital and liquidity:
Equity capital $ 5,331 $ 4,363 $ 4,045 $3,544
Long-term capital 16,919 11,767 10,002 8,660
Total capital basis double
leverage ratio 0.95 1.15 1.21 1.33
Working capital coverage ratio 132% 95% 91% 70%
======= ======= ======= ======
</TABLE>
Salomon Brothers' "Other" results include pretax charges of $185 million in 1992
and $200 million in 1991 in connection with the U.S. Treasury auction and
related matters. Philipp Brothers' 1990 results include a pretax charge of $155
million in connection with the downsizing of the segment. Net income and
earnings per share data for 1993 include a $37 million aftertax cumulative
charge to reflect a change in accounting principles for certain postretirement
benefits; fully diluted return on average common stockholders' equity is
presented before the effect of the charge.
* 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.
Graph #1 (See Appendix A)
Graph #2 (See Appendix A)
1
<PAGE>
TABLE OF CONTENTS
--------------------------------
13 OVERVIEW OF 1993
20 SEGMENT INFORMATION
31 CAPITAL AND LIQUIDITY MANAGEMENT
39 RISK MANAGEMENT
48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
49 CONSOLIDATED FINANCIAL STATEMENTS
85 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
85 COMMON STOCK DATA
86 FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
Appendix A
2
<PAGE>
SALOMON INC
--------------------------------
OVERVIEW OF 1993
Salomon Inc (referred to herein, together with its subsidiaries,
as "the Company") conducts global investment banking, global securities
and commodities trading, and U.S. oil refining activities.
Investment banking activities are conducted by Salomon Brothers
Holding Company Inc and its subsidiaries ("Salomon Brothers"),
including Salomon Brothers Inc ("SBI"). Salomon Brothers provides
capital raising, advisory, trading and risk management services to its
customers, and executes proprietary trading strategies on its own behalf.
Commodities trading activities are conducted by the Phibro Division of
Salomon Inc and related affiliates ("Phibro Division").
Oil refining activities and other asset-related operations are conducted by
Phibro Energy USA, Inc. ("Phibro USA") which owns and operates
three refineries in the U.S. Gulf Coast region.
The following section provides an overview of 1993, a year marked by significant
progress in a number of areas. The Company's record results were primarily
attributable to the significant strengthening of Salomon Brothers' Client-Driven
Businesses. Notwithstanding quarterly volatility, Salomon Brothers' Proprietary
Trading Businesses continued to demonstrate longer term profitability, although
1993 results were well below the extraordinary results of 1992 and 1991. Losses
incurred by the Phibro Division and Phibro USA were indicative of difficult
energy and commodities markets in 1993. The Company, however, has taken steps to
achieve profitable returns from these businesses. The Phibro Division completed
a restructuring, undertaken in late 1992, which leaves it better positioned to
take advantage of market opportunities when they arise. A significant refinery
upgrade project announced in 1993 by Phibro USA will take a few years to
complete. The benefits of this project are clearly longer term in nature.
14 THE YEAR IN REVIEW
15 SALOMON INC TODAY
17 CONSOLIDATED SALOMON INC RESULTS
13
<PAGE>
SALOMON INC
--------------------------------
THE YEAR IN REVIEW
. The Company earned a record $827 million or $6.28 per share on a fully
diluted basis in 1993. Excluding a cumulative charge for a change in accounting
principles, fully diluted return on average common equity in 1993 was 19%. Book
value per common share increased nearly 20% to $38.57 as of December 31, 1993.
. Salomon Brothers had an exceptional year with pretax earnings of $1.6
billion, reflecting significant strengthening of Client-Driven Businesses. Fully
diluted return on average common equity employed by Salomon Brothers was 23% in
1993.
. Salomon Swapco Inc ("Swapco"), Salomon Brothers' derivatives subsidiary
established in 1993 to offer counterparties triple-A assurance on contractual
obligations, had a successful first year, with over 200 transactions executed
and $22 billion in notional contracts outstanding at December 31, 1993.
. The Phibro Division, which had pretax losses of $15 million in 1993,
completed the restructuring that was undertaken in late 1992.
. Phibro USA had pretax losses of $46 million in 1993, including a $30 million
charge to write down its core refining and marketing inventories to market value
at year-end.
. Phibro USA announced a $200 million refinery upgrade project. The project is
planned to be completed by early 1996 and will substantially reduce Phibro USA's
exposure to the residual fuel oil market.
. Long-term working capital, which includes equity capital, unsecured
obligations maturing beyond one year, portions of unsecured obligations maturing
within one year (weighted by maturity), and long-term deferred taxes, totaled
$16.9 billion at year-end. Total assets were $185 billion.
. The Company's Board of Directors authorized a 10-million-share repurchase
program and the Company repurchased approximately 362,000 common shares at an
aggregate cost of $15.5 million in 1993. At year-end, there were 9.6 million
shares available for repurchase under this program.
14
<PAGE>
SALOMON INC
--------------------------------
SALOMON INC TODAY
OVERVIEW
With the U.S. Treasury auction matter now largely behind it, the Company is
different in some important ways. Changes in the Company's and Salomon Brothers'
senior management were a direct result of the U.S. Treasury auction matter.
Changes in business focus have been, and continue to be, made in an effort to
enhance the Company's competitive position and maximize returns to shareholders.
Other initiatives begun earlier, such as expense reduction efforts and
enhancements to operational support areas, were accelerated. Some of the more
significant changes are summarized below and are discussed in greater detail
elsewhere in this report.
BUSINESS FOCUS
Initiatives to grow and diversify earnings for Salomon Brothers have been quite
successful. Specifically, Salomon Brothers has undertaken a significant effort
to improve returns in its Client-Driven Businesses. The Client-Driven Businesses
are a natural complement to Salomon Brothers' Proprietary Trading Businesses,
which are quite volatile over short-term periods, but have demonstrated
profitability over long-term periods.
At the end of 1992, the Company undertook a restructuring of what had previously
been Phibro Energy, Inc. The Phibro Division now focuses solely on commodities
trading. Phibro USA, the Company's oil refining and marketing business sold
certain non-core businesses and undertook a significant refinery upgrade project
that, over the longer term, is expected to significantly improve its refining
margins.
EXPENSE MANAGEMENT
Over the last two years, each of the Company's segments has undertaken space
reduction and consolidation programs. Most major operating centers have been
affected, including Salomon Brothers' New York, London and Tokyo offices, the
Phibro Division's Westport headquarters and Phibro USA's Houston headquarters.
These efforts resulted in large occupancy-related charges against 1992 and 1993
earnings, but will provide future cost savings.
Salomon Brothers' 1994 compensation year, which began October 1, 1993, is the
third year in which compensation for its individual business units is determined
under a formula-driven process that directly links compensation with business
unit performance. Compensation as a percentage of pretax earnings before
compensation has consistently been lower than the percentages that prevailed
prior to the Treasury auction matter. A similar compensation program has been
implemented by the Phibro Division.
CAPITAL AND LIQUIDITY MANAGEMENT
At year-end 1993, the Company's balance sheet is more liquid than it was two
years ago. Further, taking into account the significant expansion of its long-
term capital, the Company is actually less leveraged than it was after it
significantly reduced the size of its balance sheet in the latter half of 1991.
The Company has intensified its effort to optimize the use of its capital. As
discussed later, major factors that influence capital usage are monitored on an
ongoing basis. A major advance in this area took place with Salomon Brothers'
introduction of internal charges to its business units for risk capital and
regulatory capital. These charges were implemented in conjunction with the
beginning of Salomon Brothers' 1994 compensation year.
15
<PAGE>
SALOMON INC TODAY
SUMMARY
The objective of the changes in business focus, efforts in expense management,
and progress with respect to capital allocation, as discussed above, is to
maximize returns to shareholders, of which employees represent a significant and
growing component. Through various plans designed to increase employees' equity
ownership, employees now own approximately 13.5% of the Company's outstanding
common and common equivalent shares. Despite the progress of the last two years,
significant challenges remain. In 1993, the Company's energy and commodities
businesses continued to be affected by cyclical downturns in their markets. The
positive operating environment in 1993 for Salomon Brothers will not continue
indefinitely. Further, Salomon Brothers faces increasing challenges from well-
capitalized competitors around the world.
16
<PAGE>
SALOMON INC
--------------------------------
CONSOLIDATED SALOMON INC RESULTS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS
YEAR ENDED DECEMBER 31, 1993 1992 1991 1990
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income (loss) before taxes and
cumulative effect of change in
accounting principles by segment:
Salomon Brothers $1,575 $1,390 $1,036 $ 416
Phibro Division (15) (194) 47 361
Phibro USA (46) (47) (80) 146
Philipp Brothers - - - (323)
Corporate and Other (49) (93) (84) (94)
------ ------ ------ ------
Income before taxes and cumulative
effect of change in accounting
principles 1,465 1,056 919 506
Income taxes 601 506 412 203
------ ------ ------ ------
Income before cumulative effect of
change in accounting principles 864 550 507 303
Cumulative effect of change in
accounting principles, net of
related income taxes (37) - - -
------ ------ ------ ------
Net income $ 827 $ 550 $ 507 $ 303
====== ====== ====== ======
Per common share:*
Primary earnings $ 7.01 $ 4.18 $ 3.90 $ 2.08
Fully diluted earnings** 6.28 4.05 3.79 2.05
Cash dividends 0.64 0.64 0.64 0.64
Book value at year-end 38.57 32.33 28.56 25.87
====== ====== ====== ======
Return on average common
stockholders' equity:*
Primary method 21.7% 13.6% 13.8% 8.3%
Fully diluted method** 19.1 12.8 12.9 8.3
====== ====== ====== ======
</TABLE>
* Earnings per share data includes the cumulative effect of a change in
accounting for certain postretirement benefits; return on average common
stockholders' equity is calculated on earnings before the cumulative effect
of the change in accounting principles.
** 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.
The Company earned a record $827 million in 1993, up over 50% from 1992 and over
60% from 1991. The 1993 results included a pretax charge of $65 million ($37
million after taxes) representing a one-time cumulative adjustment for a change
in accounting for postretirement health and life insurance benefits. For further
discussion of this adjustment see Note 10 to the Consolidated Financial
Statements. In 1993, the Company also adopted new standards for accounting for
income taxes and certain other employee benefits, the impact of which was
negligible. Salomon Brothers' 1992 and 1991 results included pretax charges of
$185 million and $200 million, respectively, associated with the U.S. Treasury
auction and related matters.
Results presented in this report for the Company's industry segments reflect the
allocation of certain expenses, the most significant of which is net interest
expense, incurred by Salomon Inc.
As depicted in the following chart, the Company's results are highly volatile
when measured on a quarterly basis; when measured over more meaningful time
periods such as four or more quarters, results are less volatile and have been
consistently profitable. The primary source of volatility is Salomon Brothers'
Proprietary Trading Businesses. See "Salomon Brothers-Results of Operations" for
a discussion of earnings volatility.
17
<PAGE>
CONSOLIDATED SALOMON INC RESULTS
Graph #3 (See Appendix A)
CORPORATE AND OTHER
Corporate and Other includes certain Salomon Inc corporate expenses that cannot
be attributed to any of the Company's operating segments. Corporate and Other
also includes results of Phibro Energy Production, Inc. ("PEPI"), environmental
expenses related to the former Philipp Brothers commodities segment and,
beginning in the third quarter of 1993, results of The Mortgage Corporation
Group Limited and its subsidiaries which issue sterling-denominated mortgage-
backed securities and originate and service residential mortgages in the United
Kingdom.
PEPI's principal asset is its 45% direct and indirect investment in the White
Nights Joint Enterprise ("White Nights"), a Russian-American oil production
venture located in Western Siberia. White Nights is entitled to incremental
production resulting from the development of three oil fields, two of which are
currently in operation. This work involves the application of western technology
including horizontal drilling, hydraulic fracturing, hydraulic jet pumping and
improved reservoir management. The venture exported 3.2 million barrels of oil
in 1993, compared with 1.9 million barrels in 1992, an increase of 68%. Proceeds
after gross revenue taxes, transportation and marketing expenses were
approximately equal to production costs. Since PEPI's initial debt and equity
investment of nearly $120 million in White Nights and related projects from late
1990 through the first half of 1992, the project has been maintained on a self-
funding basis, although no interest or principal payments have been made to PEPI
for its loan to the venture. The main impediment to economic success has been
the Russian government's imposition, after the inception of the project, of
export and other gross revenue taxes not related to profitability. The
particular problems thus created for White Nights and other similar foreign
joint ventures have apparently been recognized by the Russian government, which
has issued enabling decrees allowing for exemption from the export tax, but
these exemptions have not so far been implemented. Accordingly, White Nights has
been required to pay an export tax at a rate of approximately $5 per barrel on
all oil exported, aggregating to $20 million since the tax was imposed at the
beginning of 1992. 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 and to what extent these policies will be changed.
The 1993 results for Corporate and Other include a $20 million charge to write
down the carrying amount of PEPI's investment (including a loan) in White Nights
and related projects. At December 31, 1993, the investment was carried at $64
million. Future write-downs may be required. In 1992, PEPI changed its method of
accounting for White Nights from the cost basis to the equity method. This
resulted in a pretax charge of $20 million in 1992, largely reflecting losses
the venture incurred during its developmental phase.
18
<PAGE>
CONSOLIDATED SALOMON INC RESULTS
Based on settlements reached in 1993, management reduced the Company's reserve
for environmental matters, which is mostly attributable to discontinued Philipp
Brothers activities. As a result, net environmental reserve reductions in 1993,
excluding remediation expenditures charged against the reserve, were
approximately $15 million. The positive impact on earnings was offset by
additions to other reserves. Environmental expenses, primarily reserve
additions, totaled $38 million in 1992 and $35 million in 1991, respectively. A
further discussion of environmental matters is included in "Risk Management-
Environmental Risk" and Note 14 to the Consolidated Financial Statements.
19
<PAGE>
SALOMON INC
--------------------------------
SEGMENT INFORMATION
Graph #4 (See Appendix A)
Graph #5 (See Appendix A)
Graph #6 (See Appendix A)
SALOMON BROTHERS
21 DESCRIPTION OF BUSINESS
23 RESULTS OF OPERATIONS
PHIBRO DIVISION
27 DESCRIPTION OF BUSINESS
27 RESULTS OF OPERATIONS
PHIBRO USA
28 DESCRIPTION OF BUSINESS
30 RESULTS OF OPERATIONS
20
<PAGE>
SALOMON BROTHERS
--------------------------------
DESCRIPTION OF BUSINESS
Salomon Brothers is an international investment banking firm which provides a
broad range of services to its clients and engages in proprietary trading. Its
businesses are organized into two groups: Client-Driven Businesses and
Proprietary Trading Businesses. Services provided by Client-Driven Businesses
include: strategic advice and a broad range of capital-raising, market-making
and brokerage services for governments, financial institutions and corporations;
fixed income and equity sales and trading; foreign exchange trading; emerging
markets activities; fixed income and equity market research; funds management;
and financial services for high net-worth individuals. Proprietary Trading
Businesses execute trading and arbitrage strategies using debt, equity and
derivative instruments. Salomon Brothers and its affiliates conduct business
globally, with offices in Argentina, Australia, Brazil, Canada, Chile, France,
Germany, Hong Kong, Italy, Japan, Singapore, South Korea, Spain, Switzerland,
Taiwan, Thailand, the United Kingdom and the United States. Principal operating
subsidiaries of Salomon Brothers Holding Company Inc ("SBHC") are Salomon
Brothers Inc ("SBI") in New York, Salomon Brothers Asia Limited ("SBAL") in
Tokyo, Salomon Brothers International Limited ("SBIL") in London, Salomon
Brothers AG ("SBAG") in Frankfurt with a branch in Tokyo, Salomon
(International) Finance AG ("SIFAG") in Zug, Switzerland, and Salomon Swapco Inc
("Swapco") in New York.
Salomon Brothers is a major dealer in government securities in New York, London,
Frankfurt and Tokyo and is a member of major international securities, financial
futures and options exchanges, as well as other organized markets. It is also a
major participant in over-the-counter markets. Financial products that Salomon
Brothers offers to its global client base include debt and equity instruments,
contractual commitments, such as forward securities and currency agreements,
interest rate swaps, cap and floor agreements, options, warrants and other
derivative products. Extensive distribution capabilities and a large capital
base enable Salomon Brothers both to execute a large volume of trades requiring
significant commitments of capital on behalf of customers and for its own
account, and to provide liquidity to investors across a broad range of markets
and financial instruments. Salomon Brothers' ability to execute arbitrage and
other trading strategies is enhanced by its established presence in
international capital markets, its use of information technology and
quantitative risk management tools, its research capabilities, and its knowledge
and experience in various markets for financial derivative instruments.
Salomon Brothers' investment banking services encompass a full range of capital
markets activities, including underwriting and distributing debt, equity and
derivative securities, and executing secondary market transactions. Salomon
Brothers provides financial advisory services covering a broad range of
transactions, including mergers and acquisitions, divestitures, leveraged
buyouts, financial restructurings and a variety of cross-border transactions.
Salomon Brothers provides money management services to institutional and private
clients through Salomon Brothers Asset Management Inc ("SBAM"). SBAM provides
portfolio management services to pension funds, mutual funds, endowments,
foundations, banks, insurance companies, corporations, governmental agencies and
selected private investors. As of December 31, 1993, assets managed or under
advisement by SBAM were $13 billion.
21
<PAGE>
SALOMON BROTHERS
Salomon Brothers' Private Investment Department provides high net-worth
individuals with the same types of services that Salomon Brothers offers its
institutional clients. Private Investment Department offices are located in New
York, Chicago, Los Angeles, Dallas and Hong Kong.
A significant consideration of participants in the long-term derivatives market
is counterparty credit quality. In 1993, SBHC established Swapco, a separately
incorporated wholly-owned subsidiary with credit ratings of Aaa from Moody's,
AAAt from Standard & Poor's and AAA from Fitch. Swapco employs a structure,
specially designed by Salomon Brothers, whereby market risk is eliminated
through the use of back-to-back collateralized transactions with SBHC. Swapco's
capital and collateral rules enable it to withstand severe counterparty defaults
and extreme market price fluctuations while maintaining its own ability to make
payments, thereby warranting a triple-A rating. Swapco can directly transact or
guarantee a complete range of derivative products, including interest rate swaps
and options, currency swaps, currency forwards and options, and equity
derivatives.
During 1993, Swapco executed over 200 transactions with 56 counterparties and
entered into master agreements with more than 70 counterparties located in North
America, Europe, Asia and Australia. Notional contracts outstanding with third
parties totaled $22.4 billion at December 31, 1993. Swapco's counterparties
represent a broad range of industries and include multinational corporations,
banks, insurance and finance companies, other derivatives dealers, governments
and government agencies.
In 1991, the Company relocated its headquarters to Seven World Trade Center in
lower Manhattan, New York. In 1993, Salomon Brothers consolidated its remaining
New York-based personnel from five locations into Seven World Trade Center and
another site. Also in 1993, a subsidiary of Salomon Brothers purchased a
previously leased property in London. Salomon Brothers' 132,000-square-foot
operational support facility in Tampa, Florida was completed and became fully
operational in 1992. The Tampa facility provides clearing and operational
support services primarily for Salomon Brothers' New York-based sales, trading
and investment banking activities.
The securities industry in the United States is subject to extensive regulation
under both federal and state laws. As a registered broker-dealer, SBI is subject
to regulation by the United States Securities and Exchange Commission and
various state and self-regulatory authorities. SBI and certain other
subsidiaries are subject to regulation by the Commodity Futures Trading
Commission. Futures and option activities are also subject to regulation by
exchanges and self-regulatory organizations. As a registered investment advisor,
SBAM is subject to federal and state securities regulations. Certain non-U.S.
subsidiaries are subject to regulation in the jurisdictions in which they
conduct their businesses. The Company's principal non-U.S. regulated
subsidiaries are SBIL, which is subject to regulation in the United Kingdom by
The Securities and Futures Authority and the Bank of England; SBAL, which is
subject to regulation in Japan by the Ministry of Finance; and SBAG, which is
subject to regulation in Germany by the Banking Supervisory Authority.
Salomon Brothers faces intense competition in all aspects of the securities and
related businesses in which it engages. Many securities firms, both U.S. and
non-U.S. based, have significantly increased their capital through mergers,
acquisitions, public offerings and private placements of their securities.
Further, some competing firms
22
<PAGE>
SALOMON BROTHERS
have substantial asset management operations which provide a more stable source
of revenues. Increasing competition has come from other sources, including
commercial banks, insurance companies and other corporations which have entered
securities and related businesses, as well as large private investment funds
actively engaged in proprietary trading.
Salomon Brothers' ongoing success depends on its access to funding and capital,
its creditworthiness in transactions as agent and counterparty, its ability to
respond to customer needs and anticipate and benefit from changes in the
markets, and its efficiency in executing a substantial volume of transactions
and in providing other financial services.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1993 1992 1991 1990
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Client-Driven Businesses:
Global investment banking $ 791 $ 450 $ 496 $ 416
U.S. secondary markets 1,091 853 849 497
International secondary markets 1,057 443 381 256
Foreign exchange 204 189 14 107
Private Investment Department and
asset management 96 48 46 26
------ ------ ------ ------
Total revenues from Client-Driven
Businesses 3,239 1,983 1,786 1,302
Proprietary Trading Businesses 896 1,945 1,489 882
Other - 23 44 135
------ ------ ------ ------
Total revenues, net of interest
expense $4,135 $3,951 $3,319 $2,319
====== ====== ====== ======
Income before taxes and cumulative
effect of change in accounting
principles:
Client-Driven Businesses $1,159 $ 276 $ 227 $ (60)
Proprietary Trading Businesses 416 1,416 1,103 485
Other* - (302) (294) (9)
------ ------ ------ ------
Total income before taxes and
cumulative effect of change in
accounting principles $1,575 $1,390 $1,036 $ 416
====== ====== ====== ======
</TABLE>
* Includes charges relating to the U.S. Treasury auction matter of $185 million
in 1992 and $200 million in 1991.
Short-term earnings volatility, particularly in Proprietary Trading, is inherent
in Salomon Brothers' businesses. The accompanying chart illustrates the
quarterly volatility of Salomon Brothers' revenues. Management believes that
operating performance is better understood by evaluating results over more
meaningful longer periods. Because Proprietary Trading strategies are often
designed with time horizons of a year or more but are marked to market
continually, profits or losses reported in interim periods may not reflect the
ultimate success or failure of these strategies. Given the nature of Salomon
Brothers' Proprietary Trading Businesses, large quarter-to-quarter swings in
Salomon Brothers' results are not unusual and, in fact, are to be expected.
23
<PAGE>
SALOMON BROTHERS
Graph #7 (See Appendix A)
Proprietary Trading Businesses involve many different strategies, including a
broad spectrum of financial instruments and derivative products, and are
executed in various markets around the world. The ability to generate
substantial profits is dependent on arbitrage and trading opportunities, which
generally are more prevalent in periods of high market volatility. Proprietary
Trading positions are marked to market, taking into consideration not only
market prices but also market liquidity and counterparty credit quality.
Inclusion in earnings of unrealized gains and losses from marking open positions
to market, together with realized gains and losses from positions that have been
closed, means that the period-to-period volatility inherent in the Company's
businesses is clearly reflected in its reported earnings. Mark-to-market pricing
of open positions results in assets and liabilities reported in the Consolidated
Statement of Financial Condition that reflect market reality at the balance
sheet date.
Revenues from Client-Driven Businesses are also volatile, but to a lesser degree
than Proprietary Trading Businesses. Client-Driven Businesses include market-
making or other customer-related trading, advisory services, asset management
and capital raising. Changes in revenues arise primarily from changes in
inventories as valued on a mark-to-market basis, changes in the number,
character, and size of transactions and changes in bid/ask spreads.
Salomon Brothers earned $1.6 billion before taxes in 1993, surpassing 1992
results by 13% and 1991 results by over 50%. The increase in 1993 was
attributable to exceptionally strong results from Client-Driven Businesses.
Proprietary Trading Businesses were also profitable in 1993, but significantly
below the exceptional profits of 1992 and 1991.
Client-Driven Businesses generated record pretax earnings of $1.2 billion in
1993, compared with $276 million in 1992 and $227 million in 1991. The 1993
results reflect favorable market conditions and the recapture of underwriting
market share lost as a result of the U.S. Treasury auction matters. Results
improved in nearly all products across all major geographic regions. Pretax
earnings from Proprietary Trading Businesses were $416 million in 1993, compared
with $1.4 billion in 1992 and $1.1 billion in 1991. Results from "Other" Salomon
Brothers' activities consist primarily of non-recurring expenses, including the
charges related to the U.S. Treasury auction matter.
24
<PAGE>
SALOMON BROTHERS
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1993 1992 1991 1990
------ ------ ------ ------
<S> <C> <C> <C> <C>
Compensation and employee-related
expenses $1,810 $1,577 $1,272 $1,150
====== ====== ====== ======
Compensation ratio 53% 53% 55% 73%
====== ====== ====== ======
Recurring non-compensation
expenses:
Technology $ 252 $ 275 $ 303 $ 303
Occupancy 175 196 158 123
Professional services and
business development 116 108 128 132
Other 162 138 114 127
------ ------ ------ ------
Total recurring non-compensation
expenses 705 717 703 685
Non-recurring non-compensation
expenses 45 267 308 68
------ ------ ------ ------
Total non-compensation expenses $ 750 $ 984 $1,011 $ 753
====== ====== ====== ======
Non-compensation expense ratio:
Total non-compensation expenses 18% 25% 30% 32%
Recurring non-compensation
expenses 17 18 21 30
====== ====== ====== ======
</TABLE>
Compensation and employee-related expenses, the largest component of noninterest
expenses, grew $233 million in 1993 and $305 million in 1992, reflecting
stronger operating results. Salomon Brothers' compensation for its business
units is formula-driven, with aggregate compensation for each business unit
based upon the results for that unit for the compensation year ending September
30. The most recent compensation year, ended September 30, 1993, was the second
year that the formula-driven process was in place. Under this approach,
Salomon Brothers' total compensation expense is impacted not only by the level
of earnings, but by the mix of earnings among the business units.
Graph #8 (See Appendix A)
Salomon Brothers' recurring non-compensation expenses have been essentially even
over the last four years but have declined as a percentage of revenues, net of
interest. Technology expenses have declined by more than 15% over the last two
years. Occupancy expense decreased by 11% in 1993. These decreases reflect cost
savings from expense reduction initiatives taken over the past several years
including the consolidation of office space in New York, London and Tokyo as
well as the 1992 relocation of Salomon Brothers' operational support facilities
from New York to Tampa. These decreases were partly offset in 1993 by higher
expenses for legal matters.
25
<PAGE>
SALOMON BROTHERS
Graph #9 (See Appendix A)
Non-recurring expenses in 1993 consist of occupancy charges incurred in
connection with the reduction of leased office space in New York and Tokyo. Non-
recurring charges in 1992 included $185 million related to the U.S. Treasury
auction matter and $82 million related to the consolidation of office space in
New York and London. In 1991, non-recurring expenses included $200 million
related to the U.S. Treasury auction matter, $45 million for other legal matters
and $63 million related to the relocation of the Company's New York headquarters
to Seven World Trade Center.
26
<PAGE>
PHIBRO DIVISION
--------------------------------
DESCRIPTION OF BUSINESS
The Company's Phibro Division trades commodities through its principal offices
in Westport (Connecticut), London and Singapore. A restructuring of the
Division, announced in late 1992, included decisions to exit certain businesses,
such as crude oil shipping, and to significantly reduce the scope of others,
including refined products trading. By the end of 1993, the restructuring was
substantially complete. The Division now consists of four principal components:
oil, natural gas, metals and non-oil commodities. The non-oil category includes
petrochemicals, plastics, coal, coke, fertilizer and soft commodities, such as
coffee, cocoa, grains and sugar. The Division makes extensive use of futures
markets, is a major participant in the energy derivatives market and actively
trades in swaps, options, caps, floors and collars covering various grades of
crude oil, natural gas, and other petroleum and energy-related products.
Principal competitors of the Phibro Division are major integrated oil companies,
other trading companies, investment banks and other financial institutions.
RESULTS OF OPERATIONS
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1993 1992 1991 1990
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues, net of interest $ 46 $ (28) $159 $526
---- ----- ---- ----
Overhead (including minimum production
compensation) 61 88 78 82
Restructuring and relocation - 78 34 -
Variable compensation - - - 83
---- ----- ---- ----
Total noninterest expenses 61 166 112 165
---- ----- ---- ----
Income (loss) before taxes and cumulative
effect of change in accounting principles $(15) $(194) $ 47 $361
==== ===== ==== ====
</TABLE>
The Phibro Division recorded a pretax loss of $15 million in 1993. Revenues (net
of interest) of $23 million for metals trading and $13 million for natural gas
were strong, considering that overhead attributable to these activities is a
small proportion of the Division's total. In contrast, revenues of $7 million
for oil and $12 million for non-oil commodities were weak. Revenues, net of
interest, were reduced by nearly $9 million largely as a result of businesses
which are no longer part of the Division's ongoing operations, primarily crude
oil shipping. The restructuring of the Division resulted in a significant
reduction in operating expenses in 1993.
The Division's pretax loss of $194 million in 1992 included pretax charges of
$78 million resulting primarily from the restructuring. In addition, 1992 fourth
quarter losses of $75 million were recorded in businesses identified for exit.
These losses included recognition of the cost expected to be incurred in
terminating long-term charters on four crude oil carriers and in writing down to
scrap value a Division-owned crude oil carrier. Oil trading revenues were $66
million in 1992, down significantly from 1991. The Division's pretax earnings of
$47 million in 1991 were primarily attributable to strong crude oil and
derivatives trading revenues of $152 million. These results were partly offset
by charges of $34 million in connection with staff reductions and office
relocations.
27
<PAGE>
PHIBRO USA
--------------------------------
DESCRIPTION OF BUSINESS
Phibro USA, with headquarters in Houston, Texas, owns and operates three oil
refineries in the U.S. Gulf Coast area, with a combined design crude oil
throughput capacity of approximately 261,000 barrels per day and additional
throughputs of purchased feedstock of approximately 39,000 barrels per day. In
January 1994, Phibro USA completed the sale of its St. Rose refinery, located in
Louisiana. This was the smallest and least sophisticated refinery in Phibro
USA's system. The sale will result in a modest gain in the 1994 first quarter.
Two of Phibro USA's refineries, representing over 75% of its combined design
crude oil throughput capacity, are able to receive direct imports of foreign
crude oil discharged at deep water ports. This gives the refineries access to a
wide range of competitively priced crude oil and feedstocks. Phibro USA
purchases practically all crude oil and feedstocks in the spot market or under
contracts in which prices are linked to the spot market. Phibro USA's refineries
are directly linked to major refined product pipelines that reach a substantial
part of the United States market. Phibro USA's refined product output
encompasses many grades of light transportation fuel, marine fuel, jet fuel,
heating oil, residual fuel oil, asphalt, and specialty petrochemicals. Phibro
USA markets substantially all its refinery production in the spot market or
through its wholesale marketing operation under contracts in which prices are
linked to the prevailing spot market levels. Phibro USA has no retail marketing
outlets.
In 1993, as a continuation of the restructuring of the Company's energy
businesses, Phibro USA sold certain investments in non-refining businesses,
including its interests in the Moss Bluff natural gas storage venture and the
Northland natural gas production venture. The impact of these transactions on
1993 earnings was negligible. Phibro USA also announced plans to invest in a
residual fuel oil upgrading project for its Texas City,
Graph #10 (See Appendix A)
Graph #11 (See Appendix A)
Graph #12 (See Appendix A)
28
<PAGE>
PHIBRO USA
Texas refinery. With the completion of this project, Phibro USA's Texas
refineries will be positioned in the top tier of U.S. Gulf Coast refineries,
with the ability to produce over a 90% yield of high value, low sulfur
transportation fuels while processing high sulfur heavy feedstocks. The project
includes the purchase and relocation of a 63,000 barrel per day heavy oil
Residfiner from The Dow Chemical Company ("Dow"), and the construction of a new
Residual Oil Supercritical Extraction unit. Phibro USA has also entered into a
long-term agreement with Dow to purchase unrefined hydrogen, which will be
delivered from Dow's Freeport, Texas facility. The project, which is estimated
to cost $200 million, is planned to be completed by the end of the first quarter
of 1996 and will substantially reduce Phibro USA's exposure to the residual fuel
oil market, where prices have deteriorated over the past several years. Upon
completion of the Residfiner project, Phibro USA's operating profit will more
closely track the 2-1-1 crackspread rather than its current profile which tracks
the 6-3-2-1 crackspread. The 2-1-1 crackspread assumes input of two parts of
West Texas Intermediate ("WTI") crude oil and output of one part gasoline and
one part heating oil. The 6-3-2-1 crackspread assumes input of six parts WTI
crude oil and output of three parts gasoline, two parts heating oil and one part
low sulfur residual fuel oil.
Phibro USA continues to make significant capital investments to enhance its
competitive position and meet present and anticipated future environmental and
safety requirements. Refinery-related capital expenditures totaled $237 million
over the past two years and are projected to be $56 million in 1994, excluding
costs associated with the Residfiner project. The majority of these expenditures
have been designed to improve operating flexibility and enhance refining
margins. For example, Phibro USA has already improved its input flexibility by
investing in plant and equipment that will enhance its ability to process sour
crude oil. Phibro USA has invested in programs that will desulfurize 50% of its
distillate output to meet new on-road specifications as well as produce cleaner
burning oxygenated gasoline. Phibro USA has invested in projects in anticipation
of future, more stringent, environmental requirements, and believes that its
refineries will require relatively lower expenditures to comply with
environmental requirements than other refineries. Capital expenditures related
to environmental compliance were $24 million in 1993 and are expected to be
about $17 million in 1994.
Phibro USA's principal competitors are major integrated oil companies and
independent refining and marketing companies. In recent years, the competitive
environment in the industry has intensified; refining margins narrowed
significantly as the weak U.S. economy dampened demand for refined products and
created a surplus of gasoline production capacity in the United States. Domestic
demand for refined products should improve as the U.S. economy strengthens. The
industry also is responding to more rigorous environmental standards mainly
resulting from amendments to the Clean Air Act. Compliance with these
regulations is expected to require the industry to make billions of dollars of
capital investments over the next few years, and, as a result, domestic refining
capacity may decline.
Phibro USA is continuing to develop downstream outlets to market light
transportation fuels. For instance, to take advantage of the increasing demand
for storing and distributing refined products in the Northeast, Phibro USA
entered into a three-year agreement in 1993 to utilize a terminal facility in
the New York harbor area that has the capacity to store two million barrels of
refined products.
29
<PAGE>
PHIBRO USA
Also, in January 1994, Phibro USA entered into a three-year agreement to store
and sell its refined products in 22 terminals located in the Northeast and
Southeast. These two outlets combined with Phibro USA's previously existing
distribution system will significantly increase Phibro USA's ability to sell
refined products to higher valued markets.
In addition to its core refining assets, Phibro USA owns and operates a crude
oil gathering business which gathers approximately 90,000 barrels per day in the
Southwestern United States, and a land-based drilling business with nine rigs
operating in Texas.
RESULTS OF OPERATIONS
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1993 1992 1991 1990
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $8,357 $7,197 $6,736 $6,658
Cost of sales 8,308 7,173 6,658 6,437
------ ------ ------ ------
Operating profit 49 24 78 221
Net interest and other (19) (25) (32) (11)
------ ------ ------ ------
Operating profit, net of interest
and other 30 (1) 46 210
------ ------ ------ ------
Compensation and employee-related
expenses 29 28 28 49
Other expenses 17 18 27 15
Write-down of minimum refining and
marketing inventories 30 - 71 -
------ ------ ------ ------
Total noninterest expenses 76 46 126 64
------ ------ ------ ------
Income (loss) before taxes and
cumulative effect of change in
accounting principles $ (46) $ (47) $ (80) $ 146
====== ====== ====== ======
</TABLE>
Phibro USA had pretax losses of $46 million in 1993, $47 million in 1992 and $80
million in 1991. The 1993 and 1991 results included charges of $30 million and
$71 million, respectively, to write down to market value, the carrying value of
minimum refining and marketing inventories. These inventories are neither hedged
nor continuously marked to market but are carried at the lower of aggregate cost
or market.
Results for the past several years are indicative of the difficult conditions
that have prevailed in the U.S. oil refining industry. Phibro USA has been
particularly affected by increased purchases of natural gas by traditional
industrial and utility fuel users, a development which has severely weakened
demand for residual fuel oil.
The deterioration in the spread between crude oil and residual fuel oil
adversely affects Phibro USA as residual fuel oil is a significant portion of
its refining system output. As previously discussed, Phibro USA's residual fuel
oil upgrading project will significantly reduce its exposure to the residual
fuel oil market.
Noninterest expenses, excluding the inventory write-downs discussed above, were
$46 million in 1993, $46 million in 1992 and $55 million in 1991. Results for
1992 and 1991 included charges of $5 million and $6 million, respectively, in
connection with vacant office space and the relocation of Phibro USA's
headquarters.
30
<PAGE>
SALOMON INC
--------------------------------
CAPITAL AND LIQUIDITY MANAGEMENT
Capital is an expensive resource. To maximize the return to shareholders,
it is essential that the Company deploys its capital in an efficient manner.
The Company has taken several steps this past year to strengthen
its capital management, including the implementation of a system
of limits and discrete charges levied on its business units.
Liquidity management is an integral facet of capital management,
and it is especially critical for a financial intermediary. Access to funding
must be assured under varying market conditions. Confidence of creditors
and counterparties in the Company's ability to perform pursuant to its
contractual obligations is critical to the Company's survival and its success.
32 CAPITAL MANAGEMENT - OVERVIEW
32 RISK CAPITAL
33 DOUBLE LEVERAGE
33 REGULATORY CAPITAL
34 BALANCE SHEET LEVERAGE
35 WORKING CAPITAL
36 CAPITAL AND FUNDING SOURCES
38 OTHER
31
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
CAPITAL MANAGEMENT - OVERVIEW
As a major financial intermediary that competes in global markets, the Company
has large and diverse capital requirements. Determination of an optimal level of
capital and the allocation of that capital is a complex process.
The Company's capital strategy is principally driven by the following factors:
risk capital, double leverage, regulatory capital, capital to support balance
sheet leverage, and working capital. The strategy considers synergies that may
exist between these factors, both firmwide and between business units. A factor
which is a firmwide constraint at one point in time may not be one at a later
point in time. Finally, capital strategy must allow the Company to respond
quickly to market developments.
The Company's capital strategy provides incentives that promote efficient use of
capital within Salomon Brothers and the Phibro Division by charging business
units for using the Company's capital. These charges, which reflect, but are
less than the cost of capital which the Company incurs in the marketplace, are
integrated into the process of determining the profitability of each business
unit and, therefore, compensation paid to each business unit.
Management believes that this approach facilitates optimal capital deployment
and concentrates decision making and bottom line responsibility at the business
unit level.
Long-term capital 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.
Graph #13 (See Appendix A)
<TABLE>
<CAPTION>
DOLLARS IN BILLIONS
YEAR ENDED DECEMBER 31, 1993 1992 1991 1990
----- ----- ----- -----
<S> <C> <C> <C> <C>
Long-term capital:
Common equity capital (including
convertible preferred stock) $ 5.0 $ 4.3 $ 3.9 $ 3.5
Perpetual preferred stock .3 .1 .1 -
Term debt and other 11.6 7.4 6.0 5.2
----- ----- ----- -----
Total long-term capital $16.9 $11.8 $10.0 $ 8.7
===== ===== ===== =====
</TABLE>
RISK CAPITAL
Risk capital represents equity capital required to support earnings volatility.
For example, if the anticipated earnings over time of two distinct businesses
are identical but one business has relatively consistent earnings, while the
other has volatile earnings, the latter would require more risk capital.
The Company utilizes a model to allocate risk capital to Salomon Brothers'
business units and to the Phibro Division. The allocation is based on the
relative contribution of each business unit to the volatility of the Company's
overall earnings. Beginning with its 1994
32
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
compensation year, which commenced October 1, 1993, Salomon Brothers' business
units and the Phibro Division are charged for risk capital.
The ultimate objective of the risk capital charge is to maximize shareholder
value by providing the business units with financial incentives to seek business
strategies with optimal risk/return profiles. Application of the risk capital
charge does not necessarily lower the overall level of risk borne by the Company
or reduce the total level of compensation.
The process of allocating risk capital quantifies risk capital usage by Salomon
Brothers' respective businesses and by the Phibro Division. It also enables
Salomon Inc to estimate its overall risk capital requirements and to establish
and monitor appropriate risk limits (see "Risk Management"). Risk capital
requirements are supported by the Company's common equity capital and redeemable
preferred stock, which is convertible into common equity at $38 per share,
compared with a book value of $38.57 and a market price of $47.625 per share at
December 31, 1993.
DOUBLE LEVERAGE
The Company operates globally through a network of regulated and unregulated
legal entities, each with its own capital requirements. Subsidiaries' capital
requirements are largely met by the parent company's injection of equity and/or
subordinated debt. If the parent company cannot refinance its own debt or
withdraw equity capital from its subsidiaries, the parent company could
experience a liquidity problem.
The Company views double leverage from two perspectives: first, a "total
capital" view, under which intercompany subordinated debt and the equity of the
Company's operating units is divided by the total long-term capital of Salomon
Inc; and second, an "equity capital" basis, under which the equity of the
Company's operating units is divided by the equity capital of Salomon Inc. The
Company's objectives are to maintain the total capital basis double leverage
ratio at no more than 1.00 and, over time to reduce the equity capital basis
double leverage ratio. As shown in the following table, the Company's double
leverage ratios have declined significantly.
<TABLE>
<CAPTION>
DECEMBER 31, 1993 1992 1991 1990
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total capital basis 0.95 1.15 1.21 1.33
Equity capital basis 1.42 1.59 1.66 1.80
---- ---- ---- ----
</TABLE>
REGULATORY CAPITAL
A number of the Company's subsidiaries are subject to regulatory capital
requirements. Regulated entities such as SBI, SBIL, SBAL and SBAG are required
to maintain minimum amounts of regulatory capital, which generally consists of
both equity capital and subordinated debt. Further, limits exist regarding the
ratio of subordinated debt to equity capital. Actual requirements vary by
jurisdiction. Dividends and certain other payments by regulated subsidiaries to
SBHC may be made only in accordance with regulatory requirements.
The Company supports its regulatory capital requirements with long-term capital.
The Company's aggregate need for long-term capital is thus the greater of its
regulatory capital requirements or its working capital requirements, as
determined on a legal entity by legal entity basis (see "Working Capital" for a
discussion of the Company's working capital requirements).
33
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
Beginning with its 1994 compensation year, Salomon Brothers instituted a charge
to its business units for regulatory capital usage with the objective of
optimizing the use of such capital.
BALANCE SHEET LEVERAGE
Balance sheet leverage is often defined as the ratio of total assets to total
equity. As some creditors and contractual counterparties focus on this measure,
it can be viewed as a constraint. The Company's management, however, firmly
believes that the quality and liquidity of the Company's assets are more
important when analyzing leverage. The gross balance sheet leverage ratio
provides no guidance as to quality or liquidity of assets, does not accurately
indicate the degree of market risk embedded in assets and liabilities, and does
not reflect the impact of risks associated with off-balance-sheet instruments.
Therefore, in managing market, credit or liquidity risk, management does not
believe that the gross balance sheet leverage ratio is particularly meaningful.
Management believes that the trend in its working capital uses to equity ratio
is a far more meaningful indicator of trends in leverage.
Management does not believe that the size of the Company's balance sheet is
necessarily comparable with other market intermediaries. Furthermore, management
believes that, when viewed against some of its competitors, there may be less
variation between its weekly average balance sheet and the amounts reported
publicly at the end of each quarter.
Graph #14 (See Appendix A)
Graph #15 (See Appendix A)
Graph #16 (See Appendix A)
34
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
AVERAGE WEEKLY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
-----------------------------------------------------------
DOLLARS IN MILLIONS MAR. 31, 1993 JUNE 30, 1993 SEPT. 30, 1993 DEC. 31, 1993 DEC. 31, 1993
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
U.S. government securities $ 39,875 $ 40,486 $ 44,753 $ 45,227 $ 42,585
Non-U.S. government securities 31,704 33,124 37,475 36,293 34,649
Contractual commitments 7,944 8,155 8,167 8,857 8,281
Other financial instruments owned 16,375 18,499 21,242 23,908 20,006
Collateralized short-term financing agreements 60,685 58,690 57,912 51,396 57,171
Other assets 13,868 14,122 12,984 15,004 13,994
-------- -------- -------- -------- --------
Average total assets $170,451 $173,076 $182,533 $180,685 $176,686
======== ======== ======== ======== ========
Period-end total assets $176,617 $169,265 $172,863 $184,835 $184,835
======== ======== ======== ======== ========
</TABLE>
WORKING CAPITAL
Central to the Company's capital and liquidity management processes is the
determination of working capital requirements. The Company defines working
capital requirements as the amount needed to fund the difference between the
Company's total cash requirements and the cash which reasonably could be raised
through secured financing under normal market conditions. The amount which can
be raised through secured financing reflects the credit quality and market
liquidity of the Company's assets, legal and regulatory guidelines, market
conventions and lenders' guidelines. For example, the Company can obtain secured
financing by pledging as collateral an investment grade corporate bond that it
owns. Based upon the quality of this bond, the Company may reasonably expect to
obtain secured financing equal to 90% of the bond's value. Thus, the Company
would apply a 10% working capital margin or "haircut" to its holding of this
particular security. Securities such as U.S. government obligations require a
smaller haircut, while other less liquid assets require a greater haircut,
perhaps as much as 100%. The aggregate of these haircuts represents a large
percentage of the Company's working capital requirements. The remaining
requirements are principally related to the Company's fixed assets. The Company
monitors usage of secured financing against actual capacity as well as adjusted
capacity taking into consideration potential changes in market conditions.
The Company's policy is to fund working capital requirements with long-term
capital. As of December 31, 1993, the Company's working capital coverage ratio,
which represents total long-term capital divided by required working capital,
was at its highest point ever, significantly above the level that prevailed at
December 31, 1991. Thus, the Company is much less leveraged than it was two
years ago when it had a much smaller balance sheet. Under its current internal
policy, the Company seeks to maintain a working capital coverage ratio at least
equal to 110%.
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS DEC. 31, 1993 AVERAGE 1993
------------- ------------
<S> <C> <C>
Working capital required $12,852 $12,950
Working capital coverage ratio 132% 107%
------- -------
</TABLE>
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, although periodically
revised, has been in existence for several years and was implemented in 1991
following the Treasury auction matter. Management of this plan includes an
analysis of the Company's ability to withstand varying levels of stress, which
would impact liquidation horizons and required margins.
35
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
Graph #17 (See Appendix A)
The liquidity management process considers the ability of the Company to repay
unsecured debt obligations and other unsecured liabilities when they mature,
through the proceeds of secured financing using unpledged collateral or asset
sales, if necessary. As of December 31, 1993, the Company had sufficient
unencumbered assets to support all unsecured liabilities coming due in the next
year, under normal market conditions. The rationale for maintaining unencumbered
assets is that they could be used as collateral to raise the funds needed in the
event that the Company's access to unsecured financing was impaired.
In 1992, SBI entered into a committed secured standby bank credit facility for
financing securities positions. It enables SBI to borrow on a secured basis
using a variety of financial instruments as collateral. The capacity of the
facility is currently $2.65 billion. To date, there have been no borrowings
under the facility. In addition, the Company expects to have a similar facility
for SBIL in the amount of $1 billion available in early 1994. Once the SBIL
agreement is executed, the Company expects to reduce the SBI facility by
approximately $500 million.
CAPITAL AND FUNDING SOURCES
SECURED SHORT-TERM BORROWINGS Secured short-term financing, including
repurchase agreements and secured loans, is the Company's principal funding
source. A repurchase agreement is a sale of securities to a counterparty and a
simultaneous agreement to repurchase the same securities in the future from the
same counterparty at the same price plus interest at an agreed upon rate; in
economic substance, a repurchase agreement is a collateralized borrowing. The
market for repurchase agreements collateralized by U.S. government and agency
securities is very active and has remained available even in the most disruptive
market conditions. Markets for repurchase agreements collateralized by
securities issued by non-U.S. governments continue to develop and represent
another source of liquidity, particularly for the Company's non-U.S. operations.
In addition to utilizing repurchase agreements to finance trading activities,
the Company uses these instruments to take offsetting positions in reverse
repurchase agreements to benefit from favorable interest rate spreads. These
matched-book activities provide the Company with a low-risk source of revenues
and utilize available secured financing capacity. Securities loaned in return
for cash collateral, another form of collateralized short-term financing, and
secured bank borrowings represent a small portion of the Company's secured
financing.
UNSECURED SHORT-TERM BORROWINGS Unsecured short-term borrowings are utilized
only to the extent that they provide a cheaper alternative to secured financing.
Sources of short-term unsecured borrowings include commercial paper (mainly
issued in the U.S.), unsecured bank borrowings and letters of credit
(principally in Europe), deposit liabilities (virtually all at the Tokyo branch
of the Company's German banking subsidiary)
36
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
and corporate loans. See Note 4 to the Consolidated Financial Statements for
additional information regarding short-term borrowings and committed credit
facilities.
TERM DEBT The Company's largest source of long-term capital is term debt, which
includes obligations issued with an original term in excess of one year. For
purposes of determining capital available to support working capital
requirements, the Company includes all term debt with a remaining maturity in
excess of one year and portions of term debt with remaining maturities between
six months and one year on a weighted basis. See Note 6 to the Consolidated
Financial Statements for additional information regarding term debt.
The Company's policy is to convert fixed-rate term debt used to fund inventory-
related working capital requirements to variable-rate obligations through the
use of financial instruments, including interest rate swaps. Fixed-rate term
debt used to fund investments in fixed assets is not converted to a variable
rate. For issues denominated in currencies other than the U.S. dollar that are
not used to finance assets in the same currency, the Company enters into foreign
exchange agreements that convert that debt into U.S. dollar obligations.
Graph #18 (See Appendix A)
PREFERRED STOCK The Company is authorized to issue a total of 5,000,000 shares
of preferred stock. Three separate series (Series A, C and D) were issued and
outstanding at December 31, 1993. Series A was issued in 1987. The entire issue,
700,000 shares, each with a redemption value of $1,000, is held by affiliates of
Berkshire Hathaway Inc. Dividends are payable at an annual rate of 9% and the
shares are convertible into Salomon Inc common stock at the rate of $38 per
common share. If conversion does not take place, these preferred shares are
scheduled for redemption in five equal annual installments commencing October
31, 1995.
Series C was issued in 1991. An aggregate of $112.5 million was issued and is
entitled to receive dividends at an annual rate of 9.5%. An aggregate of $200
million of Series D was issued in 1993 and is entitled to receive dividends at
an annual rate of 8.08%. Both of these series are redeemable, at par, only at
the Company's option. Series C is redeemable any time on or after June 30, 1996;
Series D is redeemable on or after March 31, 1998.
The Company has entered into interest rate swap agreements that effectively
convert its fixed-rate dividend obligations on all three preferred stock issues
to variable-rate obligations.
COMMON EQUITY In September 1993, the Company's Board of Directors authorized
the repurchase of up to 10 million shares of the Company's common stock,
including 1.6 million shares remaining under a previous authorization. The
Company repurchased approximately 362,000 of its common shares for treasury in
1993, at an aggregate cost of $15.5 million. Shares authorized for additional
repurchase by the Company's Board of Directors totaled 9.6 million at year-end
1993.
37
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
The Company has two programs intended to encourage employee equity ownership in
Salomon Inc. During 1990, the Company commenced an Equity Partnership Plan
("EPP" or the "Plan"). Under the Plan, qualifying employees of Salomon Brothers,
the Phibro Division and PEPI, receive a portion of their compensation in the
form of Salomon Inc common stock purchased in the open market by the Plan's
trustee. (Such purchases are separate from the Company's open market purchases
referred to above.) The shares are held by the Plan in trust for the employees
and, in most instances, are not distributed to the employees for five years from
the date of the original grant. The percentage of each qualifying employee's
compensation paid in EPP shares rises in proportion to compensation to a maximum
of 50%. Employees receive the EPP shares at a 15% discount from the average
price paid by the Company during the calendar year. Since the EPP's inception,
21.4 million shares have been awarded to employees.
The Employee Stock Purchase Plan was approved by the Company's stockholders in
1989. This plan allows eligible employees to make purchases, through payroll
deductions, of the Company's common stock at a price of 85% of fair market
value, limited by tax regulations to an annual maximum per employee of the
lesser of $21,250 or 10% of individual annual compensation. Shares purchased
under this plan are issued from the Company's common stock held in treasury.
Thus far, nearly 1.3 million shares have been purchased by employees under this
plan, including 184,000 shares in 1993.
OTHER
PHIBRO USA The previous discussions of capital and liquidity management are
applicable primarily to the trading and financing activities of Salomon Inc,
Salomon Brothers and the Phibro Division. The liquidity and capital needs of
Phibro USA, the Company's oil refining subsidiary, are closely monitored and
managed by Phibro USA's management in close coordination with Salomon Inc.
Asset liquidity and financial leverage ratios of Phibro USA are much lower than
subsidiaries engaged in trading activities. Capital investments are necessary to
maintain operational flexibility and achieve competitive advantage. This is
particularly true as the refining industry responds to the more restrictive
health, safety and environmental requirements of the Occupational Safety and
Health Administration, the Department of Transportation, the Environmental
Protection Agency and other agencies. As discussed earlier, Phibro USA has
undertaken a significant capital investment program that will reduce its
exposure to the residual fuel market.
HIGH-YIELD PORTFOLIO Salomon Brothers' activities include trading securities
that are less than investment grade, characterized as "high yield." 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 certain
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 Company's trading portfolio of high-yield securities owned
is carried at market or fair value and totaled $2.6 billion at December 31, 1993
and $2.0 billion at December 31, 1992. The largest single high-yield exposure
was $115 million at December 31, 1993 and $302 million at December 31, 1992.
38
<PAGE>
SALOMON INC
--------------------------------
RISK MANAGEMENT
As a major participant in financial and commodities markets,
the Company derives substantial revenue from trading activities,
which subject the Company to market, credit and operational risks.
Management of these risks is critical. A significant degree
of decision-making authority rests with experienced trading professionals
at the operational level. Through interaction with managers at the operational
level and assessment of risk from a company-wide perspective,
senior management plays an active role in the risk management process.
40 MARKET RISK
41 CREDIT RISK
43 OPERATIONAL RISK
44 ENVIRONMENTAL RISK
39
<PAGE>
RISK MANAGEMENT
MARKET RISK
Market risk represents the potential loss the Company may incur as a result of
absolute and relative price movements in financial and commodities-related
instruments, price volatility, changes in yield curves, currency fluctuations
and changes in market liquidity. The Company applies a mark-to-market accounting
policy to the substantial majority of items recorded on the balance sheet as
well as to off-balance-sheet contractual commitments. When market prices are not
readily available, instruments are marked to fair value. Market or fair values
are adjusted, where appropriate, to address factors such as the market liquidity
of the instrument and credit quality of the counterparty. The market liquidity
component considers the size of positions relative to the market and would
generally result in a markdown of a position as its relative size is increased.
The Company considers this to be a useful trading discipline. It represents an
integral component of mark-to-market accounting as practiced by the Company and,
as such, has a direct impact on the reported volatility of the Company's
Proprietary Trading Businesses. The Company manages market risk across on- and
off-balance-sheet products. This, together with the Company's mark-to-market
accounting policy, means that separate disclosure of market risk on derivatives
is not meaningful. A key risk relative to derivatives is credit risk, which can
be increased or decreased by market movements. See "OTC Derivative and Foreign
Exchange Credit Exposure."
ORIGIN OF MARKET RISK Any activity in which the Company's business units take
positions in financial instruments, contractual commitments or physical
commodities exposes the Company to market risk. Trading activities represent the
principal source of such risk and can generally be grouped into two separate
activities: (1) those in which the Company plays the role of market intermediary
on behalf of its customers and (2) those in which the Company implements
proprietary trading strategies.
In its role as a market intermediary, the Company often acts as a principal in
financial or commodities transactions. This exposes the Company to market risk,
which is generally hedged by entering into positions that have market risk
profiles inversely related to the positions the Company has acquired through
transactions with its customers. Hedging reduces market risk, leaving credit
risk as the principal remaining consideration. Not all the market risks
associated with intermediation, however, can be effectively hedged. For example,
hedging may be difficult or impossible with respect to many emerging market
securities.
Proprietary trading represents the largest source of market risk to the Company.
By their nature, proprietary trading strategies represent the assumption and
management of risk in order to generate returns expected to be justified by the
level of risk assumed. Hedging strategies are used in the execution of
proprietary trading strategies to reduce market risks that the Company chooses
not to assume, which in particular circumstances may include absolute movements
in interest rates, commodity prices, foreign exchange rates and stock market
prices. The purpose of such hedging is not to eliminate risk, but to focus on
particular risks that the strategy is designed to assume. Very often, the
anticipated duration of proprietary trading strategies is several years. Other
strategies are designed to take advantage of market price discrepancies between
related instruments or securities, or identical instruments or securities
trading in different markets, that are expected to converge over relatively
short periods of time.
40
<PAGE>
RISK MANAGEMENT
MARKET RISK MANAGEMENT AT SALOMON BROTHERS Salomon Brothers' Risk Management
Group (the "Group") is composed of heads of major trading desks around the world
and is chaired by the Chairman and Chief Executive Officer of Salomon Brothers.
The Company's Chief Financial Officer and Treasurer are also members of the
Group. The Group's primary functions are to identify and report to the Company's
Chairman and Chief Executive Officer and its Board of Directors, on a timely
basis, major risks undertaken by the trading businesses; to enhance, through
peer review, the analysis and management of major risks by the heads of the
trading desks; and, when appropriate, to adjust the levels of risk assumed.
The Group establishes risk guidelines for each business unit, which are reviewed
monthly and revised as business conditions change. In addition to monitoring
market risks assumed by the business units, the Group monitors the aggregate
level of Salomon Brothers' risk and seeks to ensure that, over time, the level
of such risk does not exceed the limits set by senior management and discussed
periodically with the Company's Board of Directors.
As discussed earlier (see Capital and Liquidity Management-"Risk Capital"),
Salomon Brothers has developed and implemented a model under which its business
units are charged for risk capital usage. The imposition of this charge
encourages business units to consider the risk capital implications of trading
and business strategies, which further strengthens risk management at the
operational level.
The foreign exchange exposure resulting from capital investments of non-U.S.
dollar entities is managed centrally in the United States. Currency risk
resulting from operations is managed locally in each of the Company's
major operational centers. The Company's policy is to hedge currency exposures
to the functional currency of the operating entity which generates the exposure.
CREDIT RISK
Credit risk is the potential loss the Company could incur if an issuer or
counterparty is unable to perform on its commitments, including the timely
payment of principal and interest or settlement of swap and foreign exchange
transactions, repurchase agreements, securities purchases and sales, and other
contractual obligations. The credit risk management process considers the many
factors that influence the probability of potential loss, including, but not
limited to, the issuer's or counterparty's financial profile, prospects, and
business reputation, the specific terms and duration of the transactions, the
exposure of the transactions to market risk, macroeconomic developments and
sovereign risk.
ORIGIN OF CREDIT RISK In the normal course of its operations, the Company and
its subsidiaries enter into various transactions that give rise to credit risk.
Credit risk is generally attributable to one or more of the following risks:
market, delivery and principal. Market and delivery risks generally create
credit risk with respect to transactions with counterparties. Principal risk is
the risk of nonpayment of the principal and interest of a security.
With components such as absolute and relative price movements, price volatility,
changes in yield curves, currency fluctuations, and changes in market liquidity,
market risk creates credit risk when a counterparty's obligation to the Company
exceeds the obligation of the Company to the counterparty. Examples are regular
and forward trading of securities and currencies, financing agreements such as
repurchase agreements, lending or
41
<PAGE>
RISK MANAGEMENT
borrowing of securities, and derivative transactions. Financial instruments and
contractual commitments are marked to market or fair value. Delivery risk arises
from the requirement in many circumstances to release cash or securities before
receiving payment. For both risks, the Credit Review Department sets credit
limits or requires specific approvals which anticipate the potential exposure of
transactions.
As a dealer of securities in the global capital markets, the Company is at risk
to issuers of fixed income securities for the timely receipt of principal and
interest. This principal risk is reviewed by Salomon Brothers' Risk Management
Group, which identifies and reports major risks undertaken by the trading
businesses.
CREDIT RISK MANAGEMENT AT SALOMON BROTHERS The Chief Credit Officer of Salomon
Brothers is a Managing Director and reports directly to Salomon Brothers' Chief
Executive Officer. Independent of any revenue-generating function, the Chief
Credit Officer manages the Credit Review Department whose credit professionals
assess, approve, monitor, and coordinate extension of credit on a global basis.
In considering such risk, the Department evaluates the risk/return trade-offs as
well as current and potential credit exposures to a counterparty or to groups of
counterparties that are related because of similar industry, geographic, or
economic characteristics. The Department also has established various control
procedures used singularly or in combination, depending upon the circumstances,
including:
. Initial credit approval whereby the approval of a designated member of the
Credit Review Department is required before execution of a transaction that does
not meet defined parameters
. Credit limits, against which monitoring of transactions is performed on a
daily basis
. Specific clauses in legal agreements for collateral requirements, cross-
default, right of set-off, guarantees, event risk covenants and two-way mark to
market, among others
. Establishment of collateral standards for financing activities and secured
contractual commitments
. Periodic assessment of sovereign risk through analysis of economic and
political developments
CREDIT RISK MANAGEMENT OF COMMODITIES-RELATED TRANSACTIONS Credit limits for
counterparties in commodities-related activities are determined by the credit
departments of the Phibro Division and Phibro USA. Exposure reports, which
contain detailed information about cash flows with customers, goods-in-transit
and forward mark-to-market positions, are reviewed on a daily basis.
OTC DERIVATIVE AND FOREIGN EXCHANGE CREDIT EXPOSURE The accompanying charts
display Salomon Brothers' credit exposure, net of collateral, at December 31,
1993, for over-the-counter ("OTC") derivatives and foreign exchange. They do not
present potential credit exposure that may result from factors that influence
market risk or from the passage of time. OTC derivatives include transactions
such as swaps, swap options, caps and floors, and other derivatives, with both
short-and long-term periods of commitment. Foreign exchange contracts are
generally less than one year. Amounts include the effect of netting agreements,
where applicable.
42
<PAGE>
RISK MANAGEMENT
Collateral securing these transactions reduced gross credit exposure to a net
unsecured credit exposure of $4 billion at year-end 1993. Of this amount,
approximately $3 billion is from OTC derivatives and $1 billion is from foreign
exchange. Division of the risk between banks and non-banks shows that slightly
more than half is to a diverse group of banks in G-1-0 countries. With respect
to sovereign risk, credit exposure at December 31, 1993 was primarily to
counterparties in the United States ($1.5 billion), Japan ($1.1 billion), the
United Kingdom ($400 million) and France ($300 million).
Graph #19 (See Appendix A)
OPERATIONAL RISK
Operational support for the Company's participation in worldwide financial and
commodities markets is critical to its success. In a rapidly changing
environment characterized by increasing globalization of markets and rapidly
expanding trading volume, most notably in international markets, the Company's
ability to gather, process and communicate information is an important
determinant of its competitive position. The ability to communicate relevant
information between the Company and its customers, among units within the
Company and between the Company and the markets in which it participates is
essential.
The Company is a major participant in markets for derivative instruments. These
markets have been characterized by rapidly increasing complexity and volume
across all geographic regions. In 1993, Salomon Brothers continued its program
to strengthen its derivative support infrastructure and to take on a global
character. A major facet of this program will be the 1994 completion of a new
swap system linking trading, clearance, credit, legal and accounting
applications to a common database.
43
<PAGE>
RISK MANAGEMENT
The ability to provide superior client service at an acceptable cost is vital to
remain competitive in markets and products characterized by narrow margins. This
requires continued upgrading and increased flexibility in trading support and
other operating systems. Salomon Brothers has made substantial investments in
systems to safeguard its information assets and trading floors. Such systems are
designed to minimize the impact of any system outages. In addition, a
significant transition is underway from an increasingly stressed central
processing environment to a more efficient and flexible distributed technology
environment, characterized by network-linked processors. A critical challenge
for Salomon Brothers is to accomplish the transition to new technology while
supporting the current platform and an expanding volume of business.
ENVIRONMENTAL RISK
The Company is subject to environmental risk from two primary sources:
discontinued commodities processing operations, and existing energy-related
refining, transportation, field development, drilling and storage operations. In
1992, the Company formally adopted an environmental policy statement which was
communicated to its stockholders and employees.
The Company is subject to uncertain remedial liability as a result of
commodities-related industrial operations, which were discontinued in or prior
to 1984. Such liability arises under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
which provides that potentially responsible parties ("PRPs"), including waste
generators and past and present site owners and operators, may be held jointly
and severally liable for the entire cost of site clean-up. The Company may also
be subject to liability under state or other U.S. environmental laws.
The process of remediating hazardous waste sites under CERCLA is normally
lengthy and involves a series of events including initial site identification,
environmental site studies and evaluations, issuance of the "Preliminary
Identification of Remedial Alternatives," completion of the "Remedial
Investigation and Feasibility Study," selection of an appropriate site remedy
and its related cost estimate known as the "Record of Decision," performance of
site remediation and post-remediation site monitoring. Factors that influence
the cost and time of completion include the remediation method selected; the
number of financially solvent PRPs responsible for payment; whether PRPs were
owners, operators or generators; determination of cost allocation among PRPs and
the ongoing development of more efficient and effective remediation
technologies. The process may take ten years or more from site identification to
completion and may be further complicated by protracted legal proceedings
involving numerous PRPs.
The ultimate share of remediation costs that will be borne by the Company and
its subsidiaries cannot be predicted with accuracy. Although certain exposures
may be covered by insurance contracts or indemnification agreements from other
parties, the Company has incurred and will continue to incur costs related to
remediation at certain sites already identified. Further, based upon the nature
of the Company's discontinued commodities processing activities and the number
and nature of entities that have been identified as PRPs in CERCLA proceedings
to date, the Company may be named as a PRP at additional sites. Moreover, the
impact of legislation to reauthorize Superfund, upon the Company's liability
under CERCLA, cannot be determined at this time. Management believes, based upon
currently known facts and established reserves, that the ultimate disposition
44
<PAGE>
RISK MANAGEMENT
of these matters will not have a material adverse effect on the Company's
financial condition. A further discussion of environmental matters is included
in Note 14 to the Consolidated Financial Statements.
Phibro USA is subject to various federal, state and local laws and regulations
concerning environmental standards. As new regulations are developed, Phibro USA
seeks to identify those actions necessary to comply with the requirements.
Phibro USA also seeks to make modifications which may be required under future
regulatory programs or are desirable even though not dictated by current
regulations. Phibro USA's Vice President of Health, Safety and Environmental,
reporting directly to the Chairman, Chief Executive Officer and President of
Phibro USA, is responsible for establishing and coordinating internal safety and
environmental policies, periodic regulatory reporting and day-to-day oversight
of environmental matters. Phibro USA has an ongoing internal auditing program to
monitor environmental compliance and has developed risk reduction procedures and
policies.
The Phibro Division and Phibro USA have potential environmental exposure in
connection with physical oil trading activities in which cargos of crude oil and
products are transported. These businesses seek to mitigate exposure through
insurance coverage and consideration of ports of delivery.
45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SALOMON INC:
We have audited the accompanying consolidated statement of financial condition
of Salomon Inc (a Delaware corporation) and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Salomon Inc and subsidiaries as
of December 31, 1993 and 1992, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles in the United States
and International Accounting Standards.
As explained in Note 10 to the consolidated financial statements, effective
January 1, 1993, the Company adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions."
/s/ Arthur Andersen & Co.
New York, New York
February 10, 1994
48
<PAGE>
SALOMON INC AND SUBSIDIARIES
--------------------------------
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31, 1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Revenues:
Interest and dividends $5,989 $4,861 $5,747
Principal transactions 1,716 2,651 2,674
Investment banking 791 450 496
Commissions 285 202 213
Other 18 19 35
------ ------ ------
Total revenues 8,799 8,183 9,165
Interest expense 4,600 4,324 5,638
------ ------ ------
Revenues, net of interest expense 4,199 3,859 3,527
------ ------ ------
Noninterest expenses:
Compensation and employee-related 1,900 1,638 1,375
Technology 265 310 324
Occupancy 231 324 242
Professional services and business
development 142 145 161
Clearing and exchange fees 59 61 64
Charges relating to U.S. Treasury
auction matters - 185 200
Other 137 140 242
------ ------ ------
Total noninterest expenses 2,734 2,803 2,608
------ ------ ------
Income before taxes and cumulative effect
of change in accounting principles 1,465 1,056 919
Income taxes 601 506 412
------ ------ ------
Income before cumulative effect of change
in accounting principles 864 550 507
Cumulative effect of change in accounting
principles, net of tax benefit of $28 (37) - -
------ ------ ------
Net income $ 827 $ 550 $ 507
====== ====== ======
Earnings available for fully diluted earnings
per share $ 817 $ 546 $ 505
====== ====== ======
Earnings per share:
Primary earnings before cumulative effect
of change in accounting principles $ 7.34 $ 4.18 $ 3.90
Cumulative effect of change in accounting
principles (0.33) - -
------ ------ ------
Primary earnings $ 7.01 $ 4.18 $ 3.90
====== ====== ======
Fully diluted earnings before cumulative
effect of change in accounting principles $ 6.57 $ 4.05 $ 3.79
Cumulative effect of change in accounting
principles (0.29) - -
------ ------ ------
Fully diluted earnings $ 6.28 $ 4.05 $ 3.79
====== ====== ======
</TABLE>
The accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements are integral parts of this statement.
49
<PAGE>
SALOMON INC AND SUBSIDIARIES
--------------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
DECEMBER 31, 1993 1992
------------------ ------------------
<S> <C> <C> <C> <C>
Assets:
Cash $ 908 $ 620
Financial instruments:
U.S. government and agency
securities $42,485 $33,941
Non-U.S. government securities 38,279 28,715
Corporate debt securities 11,876 6,909
Options and contractual
commitments 8,581 7,699
Equity securities 7,178 3,319
Mortgage loans and
collateralized mortgage
securities 4,227 3,527
Money markets, municipal
securities, precious metals
and other 6,297 403
------- -------
118,923 84,513
Commodities-related products and
instruments:
Crude oil and refined products 469 418
Options and contractual
commitments 270 287
------- -------
739 705
Collateralized short-term financing
agreements:
Securities purchased under
agreements to resell 36,924 37,057
Securities borrowed and other 11,965 23,513
------- -------
48,889 60,570
Receivables:
Brokers, dealers and clearing
organizations 5,524 2,862
Customers 3,479 2,440
Other 656 884
------- -------
9,659 6,186
Assets securing collateralized
mortgage obligations:
Sterling denominated 2,748 3,636
U.S. dollar denominated 1,139 1,575
------- -------
3,887 5,211
Property, plant and equipment, net
of accumulated depreciation and
amortization of $617 in 1993 and
$476 in 1992 1,122 970
Other assets, including intangibles 708 684
-------- --------
Total assets $184,835 $159,459
======== ========
</TABLE>
The accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements are integral parts of this statement.
50
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Financial Condition (continued)
1993 1992
----------------- -------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholders'
Equity:
Short-term borrowings:
Securities sold under agreements to
repurchase $86,066 $81,032
Bank borrowings 3,644 2,080
Securities loaned 2,172 1,402
Commercial paper 1,344 1,143
Deposit liabilities 1,293 1,599
Other 3,371 1,161
------- -------
$ 97,890 $ 88,417
Financial and
commodities-related
instruments sold,
not yet purchased, and other
contractual commitments:
U.S. government and agency
securities 30,714 31,204
Non-U.S. government securities 9,604 3,877
Financial instrument options and
contractual commitments 10,619 6,070
Equity securities 3,434 3,075
Corporate debt securities 1,635 1,317
Precious metals 253 160
Commodities-related options and
contractual commitments 211 627
------- -------
56,470 46,330
Payables and accrued
liabilities:
Customers and suppliers 3,060 2,361
Brokers, dealers and clearing
organizations 2,937 1,612
Income taxes 1,466 1,171
Interest and dividends 478 291
Other 1,703 1,474
------- -------
9,644 6,909
Collateralized mortgage
obligations:
Sterling denominated 2,691 3,386
U.S. dollar denominated 1,117 1,521
------- -------
3,808 4,907
Term debt 11,692 8,533
-------- --------
Total liabilities 179,504 155,096
Commitments and contingencies
(Notes 13 and 14)
Redeemable preferred stock,
Series A 700 700
Stockholders' equity:
Preferred stock, Series C and D 312 112
Common stock, par value $1
per share (250,000,000 shares
authorized; shares issued:
155,513,950 in 1993 and 155,474,650
in 1992) 156 155
Additional paid-in capital 295 296
Retained earnings 5,208 4,498
Cumulative translation adjustments (11) 2
Equity Partnership Plan, net 85 32
Common stock held in
treasury, at cost
(shares: 44,952,468 in 1993 and
45,673,835 in 1992) (1,414) (1,432)
------- -------
Total stockholders' equity 4,631 3,663
-------- --------
Total liabilities and stockholders' equity $184,835 $159,459
======== ========
</TABLE>
51
<PAGE>
SALOMON INC AND SUBSIDIARIES
--------------------------------
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
MARKET OR FAIR VALUE RECORDED AS ASSETS ON THE STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DEC. 31 1993* 1993* 1993* DEC. 31
DOLLARS IN BILLIONS 1993 HIGH LOW AVERAGE 1992
------- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Swap agreements, swap
options, caps and floors $6.0 $6.9 $4.5 $5.2 $4.5
Index and equity options
and warrants 1.1 2.0 1.1 1.6 1.8
Foreign exchange contracts
and options 1.1 1.3 .8 1.0 1.2
Other .4 .8 .1 .5 .2
---- ---- ---- ---- ----
Total market or fair value
of financial options and
contractual commitments $8.6 $8.3 $7.7
==== ==== ====
Commodities-related
instruments $ .3 $ .3 $ .1 $ .2 $ .3
==== ==== ==== ==== ====
</TABLE>
* Based on month-end balances
CREDIT EXPOSURE, NET OF COLLATERAL, BY RISK CLASS*
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------------
TRANSACTIONS WITH MORE
ALL TRANSACTIONS THAN 3 YEARS TO MATURITY
DOLLARS IN BILLIONS BANKS NON BANKS BANKS NON BANKS
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Financial over-the-counter
derivatives, excluding
foreign exchange:
Risk classes 1 and 2 $ .6 $ .3 $.2 $.1
Risk class 3 .3 .7 .1 .5
Risk classes 4 and 5 .6 .5 .4 .2
---- ---- --- ---
1.5 1.5 .7 .8
---- ---- --- ---
Foreign exchange:
Risk classes 1 and 2 .3 .1 - -
Risk class 3 .2 .1 - -
Risk classes 4 and 5 .1 .2 - -
---- ---- --- ---
.6 .4 - -
---- ---- --- ---
Total credit exposure, net
of collateral $2.1 $1.9 $.7 $.8
==== ==== === ===
Commodities-related
instruments** - $ .3 - -
==== ==== === ===
</TABLE>
* 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
and, at December 31, 1993, were less than $100 million.
** The substantial majority of credit exposure arising from commodities-related
instruments is with counterparties of investment grade quality. A small
portion of such exposure relates to transactions with more than three years
to maturity.
NOTIONAL AMOUNTS
<TABLE>
<CAPTION>
DOLLARS IN BILLIONS
DECEMBER 31, 1993 1992
---- ----
<S> <C> <C>
Financial futures contracts $473 $321
Swap agreements 233 144
Options and warrants sold or written 102 95
Forward securities contracts 98 83
Forward currency contracts 51 49
Interest rate cap and floor agreements
written 32 27
Commodities-related instruments 9 9
Precious metals contracts 1 1
==== ====
</TABLE>
See Note 15 to the Consolidated Financial Statements for a discussion of market
risk and credit risk associated with options and contractual commitments.
52
<PAGE>
SALOMON INC AND SUBSIDIARIES
--------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------
COMMON TOTAL COMMON
ADDITIONAL STOCK STOCK- STOCK
PREFERRED COMMON PAID-IN RETAINED HELD IN HOLDERS' COMMON HELD IN
AMOUNTS IN MILLIONS STOCK STOCK CAPITAL EARNINGS OTHER TREASURY EQUITY STOCK TREASURY
--------- ------ ---------- -------- ------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990 $ - $154 $263 $3,717 $ 46 $(1,336) $2,844 153.6 (43.7)
Net income - - - 507 - - 507 - -
Issuance of preferred stock,
Series C 112 - - - - - 112 - -
Dividends on -
Common stock - - - (70) - - (70) - -
Preferred stock, Series A
and C - - - (67) - - (67) - -
Exercise of stock options - - (13) - - 51 38 - 1.7
Employee stock purchase plan - - (2) - - 8 6 - 0.3
Conversion of notes into
common stock - 1 17 - - - 18 1.3 -
Net change in cumulative
translation adjustments - - - - (7) - (7) - -
Equity Partnership Plan, net - - 2 - (37) - (35) - -
Other - - (1) - - - (1) - -
---- ---- ---- ------ ---- ------- ------ ----- -----
Balance at December 31, 1991 $112 $155 $266 $4,087 $ 2 $(1,277) $3,345 154.9 (41.7)
Net income - - - 550 - - 550 - -
Dividends on -
Common stock - - - (71) - - (71) - -
Preferred stock, Series A
and C - - - (68) - - (68) - -
Exercise of stock options - - (12) - - 80 68 - 2.6
Employee stock purchase plan - - (1) - - 6 5 - 0.1
Purchase of common stock for
treasury - - - - - (241) (241) - (6.7)
Conversion of notes into
common stock - - 8 - - - 8 0.6 -
Net change in cumulative
translation adjustments - - - - (22) - (22) - -
Equity Partnership Plan, net - - 35 - 54 - 89 - -
---- ---- ---- ------ ---- ------- ------ ----- -----
Balance at December 31, 1992 $112 $155 $296 $4,498 $ 34 $(1,432) $3,663 155.5 (45.7)
Net income - - - 827 - - 827 - -
Issuance of preferred stock,
Series D 200 - - - - - 200 - -
Dividends on -
Common stock - - - (68) - - (68) - -
Preferred stock, Series A, C
and D - - - (49) - - (49) - -
Exercise of stock options - - - - - 28 28 - 0.9
Employee stock purchase plan - - 1 - - 6 7 - 0.2
Purchase of common stock for
treasury - - - - - (16) (16) - (0.4)
Conversion of notes into
common stock - 1 - - - - 1 - 0.1
Net change in cumulative
translation adjustments - - - - (13) - (13) - -
Equity Partnership Plan, net - - 4 - 53 - 57 - -
Other - - (6) - - - (6) - -
---- ---- ---- ------ ---- ------- ------ ----- -----
Balance at December 31, 1993 $312 $156 $295 $5,208 $ 74 $(1,414) $4,631 155.5 (44.9)
==== ==== ==== ====== ==== ======= ====== ===== =====
</TABLE>
The accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements are integral parts of this statement.
53
<PAGE>
SALOMON INC AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash items -
Net income $ 827 $ 550 $ 507
Cumulative effect of change in accounting
principles, net of tax 37 - -
Deferred income tax expense 322 107 171
Depreciation, amortization and other 217 198 123
-------- -------- --------
Total cash items included in net income 1,403 855 801
-------- -------- --------
(Increase) decrease in operating assets -
Financial instruments (34,410) (29,966) (1,333)
Commodities-related products and instruments (64) (36) 587
Collateralized short-term financing agreements 11,681 (33,325) 12,607
Receivables (3,434) (759) 869
Other assets 33 (135) 160
-------- -------- --------
Total (increase) decrease in operating assets (26,194) (64,221) 12,890
-------- -------- --------
Increase (decrease) in operating liabilities -
Short-term borrowings 9,473 48,024 (2,495)
Financial and commodities-related instruments
sold, not yet purchased 10,140 14,421 (11,553)
Payables and accrued liabilities 2,396 (228) (1,193)
-------- -------- --------
Total increase (decrease) in operating
liabilities 22,009 62,217 (15,241)
-------- -------- --------
Cash used in operating activities (2,782) (1,149) (1,550)
-------- -------- --------
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 7,089 4,438 3,438
Issuance of collateralized mortgage obligations - 284 1,189
Issuance of preferred stock 200 - 112
Employee stock purchase and option plans 35 73 44
-------- -------- --------
Total cash proceeds from financing activities 7,324 4,795 4,783
-------- -------- --------
Payments for -
Term debt maturities and repurchases 4,073 2,923 1,456
Collateralized mortgage obligations 1,070 1,347 1,071
Purchase of common stock for treasury 16 241 -
Dividends on common stock 68 71 70
Dividends on preferred stock 49 68 67
Equity Partnership Plan, net (53) (54) 37
-------- -------- --------
Total cash payments for financing activities 5,223 4,596 2,701
-------- -------- --------
Cash provided by financing activities 2,101 199 2,082
-------- -------- --------
Cash flows from investing activities:
Proceeds from -
Assets securing collateralized mortgage
obligations 1,290 1,497 703
-------- -------- --------
Total cash proceeds from investing activities 1,290 1,497 703
-------- -------- --------
Payments for -
Assets to secure new collateralized mortgage
obligations - 367 1,202
Property, plant and equipment 321 203 328
-------- -------- --------
Total cash payments for investing activities 321 570 1,530
-------- -------- --------
Cash provided by (used in) investing activities 969 927 (827)
-------- -------- --------
Increase (decrease) in cash 288 (23) (295)
Cash at beginning of year 620 643 938
-------- -------- --------
Cash at end of year $ 908 $ 620 $ 643
======== ======== ========
</TABLE>
The accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements are integral parts of this statement.
54
<PAGE>
SALOMON INC
--------------------------------
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The 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" or "Salomon"). Intercompany transactions
have been eliminated in consolidation. Accounting principles underlying the
financial statements are generally accepted in the United States and comply, in
all material respects, with the guidelines of the International Accounting
Standards Committee. In 1993, the Company changed its method of accounting for
interest revenue on certain mortgage-backed instruments carried at market or
fair value from the coupon rate to an approximation of the effective interest
rate method. Previously, accretion of discounts and amortization of premiums
were included in "Principal transactions." Amounts presented for 1992 and 1991
have been restated to conform with the 1993 presentation.
Generally, subsidiaries for which control is deemed to be temporary are not
consolidated. The Company's equity interests in such subsidiaries are considered
to be financial instruments held for sale and are recorded at fair value within
"Equity securities" in the Consolidated Statement of Financial Condition.
Long-term investments in operating joint ventures and affiliated (20%- to 50%-
owned) companies in which the Company has significant influence are carried
under the equity method of accounting. The Company's equity in the earnings of
affiliates is included in "Other revenues." The investment by Phibro Energy
Production, Inc. ("PEPI") in the White Nights Joint Enterprise, a Russian-
American oil production venture in Western Siberia, was carried under the cost
basis of accounting while the venture was in the development stage. In 1992,
PEPI adopted the equity method of accounting for this investment.
Assets and liabilities denominated in non-U.S. dollar currencies are translated
into U.S. dollar equivalents using year-end spot foreign exchange rates. The
income statements are translated monthly at weighted average exchange rates.
Gains and losses resulting from non-U.S. dollar currency transactions are
included in income. The effects of translating financial statements of non-U.S.
subsidiaries whose functional currency is other than the U.S. dollar are
recorded, net of related hedge gains and losses and income taxes, as "Cumulative
translation adjustments," a separate component of Stockholders' equity in the
Consolidated Statement of Financial Condition.
In 1993, the Company changed its method of presenting the Equity Partnership
Plan in the Consolidated Statement of Financial Condition. The liability related
to the plan, which is payable in the Company's common stock, has been
reclassified from "Payables and accrued liabilities" to Stockholders' equity.
"Equity Partnership Plan, net" includes an increase in equity relating to this
liability as well as the reduction in equity equal to the cost of unawarded
shares held by the plan. Both of these amounts are reduced upon the award of
shares to eligible employees. Amounts presented for 1992 and 1991 have been
restated to conform with the 1993 presentation.
Certain other prior period amounts have been reclassified to conform with the
current presentation.
55
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
FINANCIAL INSTRUMENTS
The majority of the Company's financial instruments are recorded in the
Consolidated Statement of Financial Condition on a trade date basis. Recording
the remaining instruments on a trade date basis would not result in a material
difference. Contractual commitments are recorded on a gross basis; assets and
liabilities for individual product classes are netted by customer only when a
legal right of setoff exists.
Financial instruments are recorded at either market value or, when market prices
are not readily available, at fair value. The determination of market or fair
value considers various factors, including: closing exchange or over-the-counter
market price quotations; time value and volatility factors underlying options,
warrants and contractual commitments; price activity for equivalent or synthetic
instruments in markets located in different time zones; counterparty credit
quality; and the potential impact on market prices of liquidating the Company's
positions in an orderly manner over a reasonable period of time under present
market conditions. Fair value also considers future operational costs of
maintaining long-term contractual commitments.
Although precious metals trading may involve physical delivery or receipt, the
nature of these activities is very similar to trading activities involving debt,
equity and derivative financial instruments. Therefore, precious metals are
included as a component of financial instruments.
COMMODITIES-RELATED PRODUCTS AND INSTRUMENTS
Commodities-related products and instruments include physical quantities of
crude oil, refined products and other commodities, as well as caps, floors and
contractual commitments involving future delivery or settlement. Physical
inventory held for sale, caps, floors and contractual commitments are carried at
market or fair value, with resulting gains or losses recognized currently in the
Consolidated Statement of Income.
The refining and marketing operations of Phibro Energy USA, Inc. ("Phibro USA")
maintain minimum physical inventories of crude oil and other energy products.
These inventories are neither hedged nor marked-to-market as trading-related
inventories but are carried at the lower of aggregate cost or market. Phibro
USA's minimum inventories were written down by $30 million in 1993 to $180
million, their aggregate market value at December 31, 1993. A $71 million
writedown was recorded in 1991. These inventories are not adjusted for
subsequent recoveries in market value.
COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS
Collateralized short-term financing agreements are carried at their contractual
amounts, including accrued interest. The Company takes possession of the
underlying collateral, monitors its market value relative to the amounts due
under the agreements, including accrued interest, and when necessary, requires
prompt transfer of additional collateral or reduction in the loan balance in
order to maintain contractual margin protection.
56
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including leasehold improvements and capitalized
interest, are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are recorded substantially on a straight-line
basis over the lesser of the estimated useful lives of the related assets or
noncancelable lease terms, as appropriate. Maintenance and repairs are charged
to expense as incurred. However, the Company accrues currently for future
expenditures in connection with turnarounds, which are maintenance routines
performed on major units within Phibro USA's oil refineries that require
complete shutdown of the unit.
The cost of purchased software above specified thresholds is capitalized and
amortized over a three-year period. Costs incurred in connection with the
internal development of software, solely for the Company's use, as well as the
customization of purchased software, are expensed currently.
OTHER ASSETS, INCLUDING INTANGIBLES
Other assets include goodwill, which is the excess of the purchase price over
the fair value of net assets of acquired companies. At December 31, 1993,
goodwill totaled $142 million and is being amortized at an annual rate of $5
million.
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSETS SECURING
COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations include accrued interest payable. Assets
securing collateralized mortgage obligations include deferred issuance expenses
and accrued interest receivable. The obligations and the assets are carried at
their principal amounts, net of unamortized discounts and premiums. Discounts,
premiums and deferred issuance expenses are amortized on an effective yield
basis over the expected lives of the obligations and assets, on a retrospective
basis, taking into consideration the prepayment experience of the underlying
mortgage collateral.
REVENUES
INTEREST AND DIVIDENDS are earned from financial instruments, collateralized
short-term financing agreements, interest-bearing receivables and assets
securing collateralized mortgage obligations. Interest income includes accretion
of discounts and is reduced by amortization of premiums.
PRINCIPAL TRANSACTIONS include realized and unrealized gains and losses from
proprietary and customer trading activities, contractual commitment activities,
foreign exchange and the gross operating margin of Phibro USA's oil refining and
asset-based operations.
INVESTMENT BANKING includes gains, losses and fees, net of syndicate expenses,
arising from securities offerings in which the Company acts as an underwriter or
agent. Investment banking revenues also include fees earned from providing
merger and acquisition and financial restructuring advisory services. Such
revenues do not include revenues from secondary trading activities such as CMO
originations, which are included in "Principal transactions."
57
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
COMMISSIONS represent fees charged to clients, primarily institutions, for the
execution of trades made on their behalf.
OTHER includes asset management fees ($24 million in 1993, $20 million in 1992
and $21 million in 1991), equity in earnings or losses of operating joint
ventures and affiliated companies (20%- to 50% - owned) accounted for under the
equity method and other revenues not otherwise included in the categories
discussed above.
EXPENSES
INTEREST is incurred on short-term borrowings, interest-bearing payables,
collateralized mortgage obligations and term debt, and includes accretion of
discounts and amortization of premiums and deferred issuance costs. Interest
expense recorded for financial reporting purposes in 1993, 1992 and 1991 did not
differ materially from the amount of interest paid.
COMPENSATION AND EMPLOYEE-RELATED includes employee base salaries, bonuses and
fringe benefits, including medical insurance and life insurance, retirement
plans, payroll taxes, expatriate expenses, recruiting agency fees and expenses
related to temporary employees. (See Note 10 for a discussion of the adoption,
in 1993, of new accounting principles relating to certain postretirement and
postemployment benefits.) Compensation expense also includes the cost of shares
allocated to individual employee accounts pursuant to the Company's Equity
Partnership Plan.
TECHNOLOGY includes costs for computer hardware; office automation and
workstations; data center equipment; market data services and voice, data,
telex, audio-visual and network communications. Technology expense also includes
systems development consulting expenses.
OCCUPANCY includes rent, depreciation, amortization of leasehold improvements,
maintenance, utilities, occupancy taxes, property insurance and moving and other
occupancy-related expenses incurred in connection with the restructuring or
relocation of certain of the Company's businesses.
PROFESSIONAL SERVICES AND BUSINESS DEVELOPMENT includes legal, audit, tax, non-
systems consulting, travel and entertainment and advertising expenses.
Clearing and exchange fees include clearance, transaction and commission fees
and exchange dues and assessments.
OTHER includes goodwill amortization, expenses recorded for environmental
matters, provisions for legal matters (other than the special charges recorded
in 1992 and 1991 for the U.S. Treasury auction matters), insurance expense and
other expenses not included in the captions listed above. Other expenses in 1993
and 1991 include $30 million and $71 million, respectively, to write down Phibro
USA's minimum refining and marketing inventories.
58
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income, reduced by
dividends on preferred stock, by the weighted average number of common and
common equivalent shares outstanding, including shares held by the Equity
Partnership Plan. Common equivalent shares include the dilutive effect of
outstanding stock options. Fully diluted earnings per share is computed under
the assumption that all contingent increases in common stock have occurred to
the extent that they have a dilutive effect on earnings per share. Contingent
increases of common stock include the potential impact of the conversion of
redeemable preferred stock and convertible debt, which are discussed in Notes 7
and 6, respectively. See Note 12 for the calculation of earnings per share.
59
<PAGE>
SALOMON INC
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INDUSTRY SEGMENT AND GEOGRAPHIC DATA
The Company's major operating segments are engaged principally in investment
banking and securities activities, commodities trading activities and oil
refining activities. 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"). Oil refining activities and certain
other asset-based businesses are conducted by Phibro Energy USA, Inc. ("Phibro
USA").
In 1992, the Company realigned its energy-related businesses formerly conducted
by Phibro Energy, Inc. ("Phibro"). Phibro merged into Salomon Inc; Phibro's
former direct subsidiaries, including Phibro USA and PEPI, became wholly-owned
direct subsidiaries of Salomon Inc. The Company modified its industry segment
reporting to reflect the realignment and restated 1991 amounts to conform with
the new presentation.
Segment results for all periods presented include a partial allocation of
Salomon Inc corporate-level expenses, the most significant of which is
corporate-level net interest expense, which is allocated to the respective
operating segments based upon their proportional use of the Company's equity
capital. Corporate-level expenses incurred for the benefit of a particular
operating segment are allocated directly to that segment. "Corporate and Other"
includes: results of PEPI, which is a partner in the White Nights joint venture;
corporate-level expenses that cannot be directly associated with the Company's
operating segments; and, beginning in the third quarter of 1993, the results of
The Mortgage Corporation Group Limited and its subsidiaries ("TMC"). TMC issues
sterling denominated mortgage-backed securities and originates and services
mortgages in the United Kingdom. "Corporate and Other" assets consist primarily
of certain fixed assets, PEPI's investment in White Nights and, in 1993, the
assets of TMC, which consist primarily of assets securing collateralized
mortgage obligations. In 1992 and 1991, TMC's assets of $4,117 million and
$6,108 million, respectively, were included in the Salomon Brothers' segment.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's operating results by segment for each of the last three years
were:
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE
TAXES AND CUMULATIVE
EFFECT OF CHANGE IN
DOLLARS IN MILLIONS REVENUES ACCOUNTING PRINCIPLES (1) TOTAL ASSETS
-------- ------------------------- ------------
<S> <C> <C> <C>
Year Ended December 31, 1993
Salomon Brothers $8,613 $1,575 $178,617
Phibro Division 40 (15) 1,226
Phibro USA 56 (46) 1,356
Corporate and Other 90 (49) 3,636
------ ------ --------
Consolidated $8,799 $1,465 $184,835
====== ====== ========
Year Ended December 31, 1992
Salomon Brothers $8,211 $1,390 $155,861
Phibro Division (42) (194) 1,686
Phibro USA 35 (47) 1,394
Corporate and Other (21) (93) 518
------ ------ --------
Consolidated $8,183 $1,056 $159,459
====== ====== ========
Year Ended December 31, 1991
Salomon Brothers $8,904 $1,036 $ 93,297
Phibro Division 175 47 2,365
Phibro USA 81 (80) 1,285
Corporate and Other 5 (84) 455
------ ------ --------
Consolidated $9,165 $ 919 $ 97,402
====== ====== ========
</TABLE>
(1) 1993 does not include the $65 million pretax cumulative effect of a change
in accounting principles. This charge is allocated as follows: Salomon Brothers
$35 million; Phibro Division $1 million; Phibro USA $6 million and Corporate and
Other $23 million.
Phibro USA's oil refining and other asset-related activities are reported on a
gross profit basis within "Principal transactions" in the accompanying
Consolidated Statement of Income. Phibro USA's gross sales totaled $8,357
million in 1993, $7,197 million in 1992 and $6,736 million in 1991. The related
cost of sales was $8,308 million in 1993, $7,173 million in 1992 and $6,658
million in 1991.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying table summarizes the Company's operations by geographic area.
Amounts are determined principally by the respective legal jurisdictions of the
Company's subsidiaries. Because of the global nature of the financial and
commodities markets in which the Company competes and the resulting integration
of the Company's worldwide business activities, the Company believes that
amounts determined in this manner are not meaningful to an understanding of its
business.
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE
TAXES AND CUMULATIVE
EFFECT OF CHANGE IN
DOLLARS IN MILLIONS REVENUES ACCOUNTING PRINCIPLES (1) TOTAL ASSETS
-------- ------------------------ ------------
<S> <C> <C> <C>
Year Ended December 31, 1993
North America $4,438 $ 139 $106,735
Europe 3,979 1,206 70,524
Asia and Other 382 120 7,576
------ ------ --------
Consolidated $8,799 $1,465 $184,835
====== ====== ========
Year Ended December 31, 1992
North America $4,372 $ 55 $112,829
Europe 3,471 923 43,017
Asia and Other 340 78 3,613
------ ------ --------
Consolidated $8,183 $1,056 $159,459
====== ====== ========
Year Ended December 31, 1991
North America $5,658 $ 337 $ 63,296
Europe 3,008 436 29,766
Asia and Other 499 146 4,340
------ ------ --------
Consolidated $9,165 $ 919 $ 97,402
====== ====== ========
</TABLE>
(1) North America excludes the $65 million pretax charge related to the
cumulative effect of a change in accounting principles in 1993 and includes
pretax charges of $30 million in 1993 and $71 million in 1991 to write down to
market value the carrying value of the minimum inventories of Phibro USA's
refining and marketing activities, $27 million in 1993, $67 million in 1992 and
$63 million in 1991, related to the relocation and consolidation of office space
in New York, $185 million in 1992 and $200 million in 1991 in connection with
the U.S. Treasury auction and related matters, $59 million in 1992 in connection
with the restructuring of the Company's energy businesses, and $45 million in
1991 for certain other legal matters. Europe includes pretax charges of $15
million in 1992 in connection with the consolidation of office space in London
and $13 million in 1992 in connection with the restructuring of the Company's
energy businesses. Asia and Other includes a pretax charge of $18 million in
1993 related to the consolidation of office space in Tokyo.
NOTE 2 - COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS
Securities purchased under agreements to resell are collateralized principally
by U.S. and non-U.S. government and agency securities. Securities borrowed
agreements are collateralized principally by U.S. and non-U.S. government and
agency securities, corporate debt and equity securities. At December 31, 1993,
the market value of securities collateralizing resale agreements and securities
borrowed and other short-term financing agreements was $38.1 billion and $11.8
billion, respectively.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1993 1992
------ ------
<S> <C> <C>
Land $ 4 $ 4
Buildings, improvements and equipment 1,075 914
Refining assets 634 496
Shipping, crude gathering and drilling assets 26 32
------ ------
Total 1,739 1,446
Accumulated depreciation and amortization (617) (476)
------ ------
Property, plant and equipment, net $1,122 $ 970
====== ======
</TABLE>
NOTE 4 - SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase are collateralized principally by
U.S. and non-U.S. government and agency securities. Securities loaned agreements
are collateralized principally by corporate debt and equity securities. These
agreements are carried at their contractual amounts, including accrued interest.
Information regarding the Company's bank borrowings and commercial paper is
presented below (dollars in millions). Average balances were computed based on
month-end outstanding balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Bank borrowings:
Balance at year-end $3,644 $2,080 $1,649
Weighted average interest rate 4.2% 5.7% 7.2%
Annual averages -
Amount outstanding $2,341 $2,206 $4,616
Weighted average interest rate 4.5% 6.2% 8.0%
Maximum amount outstanding at any month-end $3,999 $3,544 $7,559
------ ------ ------
Commercial paper:
Balance at year-end $1,344 $1,143 $ 546
Weighted average interest rate 3.5% 3.6% 6.5%
Annual averages -
Amount outstanding $ 933 $ 731 $5,327
Weighted average interest rate 3.4% 4.0% 6.9%
Maximum amount outstanding at any month-end $1,344 $1,143 $8,377
====== ====== ======
</TABLE>
Salomon Inc issues U.S. dollar denominated commercial paper in the United States
and Europe, and sterling and other non-U.S. dollar denominated commercial paper
in Europe. At December 31, 1993, all of the Company's commercial paper
outstanding was U.S. dollar denominated. At December 31, 1992, U.S. dollar
denominated commercial paper
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding totaled $1,136 million and the U.S. dollar equivalent of sterling
denominated commercial paper outstanding totaled $7 million.
In April 1992, Salomon Brothers Inc ("SBI") entered into a committed secured
standby bank credit facility for financing securities positions. The facility
contains certain restrictive covenants that require, among other things, that
SBI maintain minimum levels of excess net capital and net worth, as defined. At
December 31, 1993, SBI's excess net capital exceeded the minimum required under
the facility by $483 million and SBI's net worth exceeded the minimum amount
required by $886 million. There have been no borrowings under this facility, the
capacity of which was $2.65 billion at December 31, 1993. TMC has secured
sterling denominated committed credit facilities aggregating the U.S. dollar
equivalent of $338 million at December 31, 1993. Approximately $153 million of
these facilities mature in mid-1995; the remainder mature in 2031. The unused
portions of these lines were approximately $142 million at December 31, 1993.
Annual commitment fees on the unused portions of committed credit facilities
range from 10 to 30 basis points.
- --------------------------------------------------------------------------------
NOTE 5 - COLLATERALIZED MORTGAGE OBLIGATIONS
Certain special purpose wholly-owned subsidiaries have been organized to issue
collateralized mortgage obligations ("CMOs"). The CMOs are collateralized by
mortgages, mortgage-backed securities and short-term investments (collectively,
the "Collateral"). Principal and interest payments received from the Collateral
are utilized to meet periodic principal and interest payments on the CMOs.
Although the CMOs have contractual maturities, their actual maturities may be
shorter as a result of prepayments of the Collateral.
The CMOs consisted of the following (dollars in millions):
<TABLE>
<CAPTION>
CURRENCY
-------------------
DECEMBER 31, STERLING U.S. $ TOTAL 1993 TOTAL 1992
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Contractual Maturity
2001 to 2005 $ - $ 62 $ 62 $ 250
2006 to 2010 - 206 206 275
2011 to 2033 2,675 920 3,595 4,459
Accrued interest payable 16 22 38 59
Unamortized discounts - (93) (93) (136)
------ ------ ------ ------
Collateralized mortgage
obligations $2,691 $1,117 $3,808 $4,907
====== ====== ====== ======
</TABLE>
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - TERM DEBT
Term debt, net of unamortized discount, if applicable, consists of issues with
original maturities in excess of one year. Certain issues are redeemable, in
whole or in part, at par or at premiums prior to maturity, and certain issues
carry sinking fund requirements. The maturity structure of the Company's term
debt, based on contractual maturities, sinking fund requirements or the earliest
date on which the debt is repayable at the option of the holder was (dollars in
millions):
<TABLE>
<CAPTION>
FIXED-RATE VARIABLE-RATE
DECEMBER 31, OBLIGATIONS OBLIGATIONS TOTAL 1993 TOTAL 1992
----------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. dollar denominated:
Due in 1993 $ - $ - $ - $2,253
Due in 1994 1,196 705 1,901 1,101
Due in 1995 1,426 845 2,271 1,487
Due in 1996 982 900 1,882 422
Due in 1997 447 75 522 122
Due in 1998 850 168 1,018 205
Thereafter 1,886 68 1,954 697
------ ------ ------- ------
U.S. dollar denominated 6,787 2,761 9,548 6,287
------ ------ ------- ------
Non-U.S. dollar denominated:
Due in 1993 - - - 551
Due in 1994 230 295 525 250
Due in 1995 148 152 300 100
Due in 1996 99 156 255 240
Due in 1997 184 4 188 97
Due in 1998 135 58 193 259
Thereafter 639 44 683 749
------ ------ ------- ------
Non-U.S. dollar denominated 1,435 709 2,144 2,246
------ ------ ------- ------
Term debt $8,222 $3,470 $11,692 $8,533
====== ====== ======= ======
</TABLE>
For issues denominated in currencies other than the U.S. dollar that are not
used to finance assets in the same currency, the Company has entered into
foreign exchange agreements that have effectively converted that debt
(consisting mostly of Japanese yen and German marks) into U.S. dollar
obligations. It is Company policy to utilize financial instruments, including
interest rate swap agreements, to convert most fixed interest rate debt into
variable interest rate obligations.
Fixed-rate debt matures at various dates through 2023. The contractual interest
rates on fixed-rate debt ranged from 3.67% (U.S. dollar denominated) to 12.87%
(Italian lira denominated) at December 31, 1993 and 3.60% (U.S. dollar
denominated) to 13.38% (U.S. dollar denominated) at December 31, 1992. The
weighted average coupon interest rates were 6.71% and 7.55% at December 31, 1993
and 1992, respectively.
Variable-rate debt matures at various dates through 2003. The interest rates are
determined periodically by reference to money market rates, or in certain
instances, are calculated based on stock market indices as specified in the
agreements governing the respective issues. The coupon interest rates on
variable-rate debt ranged from 1.63% (yen denominated)
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to 9.27% (European Currency Unit denominated) at December 31, 1993, and 1.63%
(yen denominated) to 12.84% (European Currency Unit denominated) at December 31,
1992.
Term debt includes subordinated notes, which totaled $28 million and $14 million
at December 31, 1993 and 1992, respectively. At December 31, 1993 and 1992,
subordinated debt included approximately $8 million of convertible restricted
notes, convertible at the rate of $13.89 per share into 547,953 shares of the
Company's common stock at December 31, 1993 and 587,255 shares at December 31,
1992. In 1993, the Company issued certain term debt for which the principal
repayment is linked to certain equity securities of unaffiliated issuers.
- --------------------------------------------------------------------------------
NOTE 7 - PREFERRED STOCK
The Company is authorized to issue a total of 5,000,000 shares of preferred
stock.
REDEEMABLE PREFERRED STOCK, SERIES A
At December 31, 1993, 700,000 shares of Series A cumulative preferred stock
("Series A Preferred") were issued and outstanding. The entire issue of Series A
Preferred is held by affiliates of Berkshire Hathaway Inc. Each share has a
redemption value of $1,000, is entitled to receive quarterly cash dividends at
the annual rate of $90 and can be converted into shares of common stock at $38
per share. The number of shares of common stock into which each Series A
Preferred share is convertible is subject to adjustment in the event of stock
splits, stock dividends and certain other events, none of which have occurred to
date. The redeemable preferred stock is entitled to one vote per share of common
stock into which it is convertible (18,421,053 shares at December 31, 1993),
voting together as one class with the Company's common stock. At December 31,
1993, the redeemable preferred stock represented 14.3% of the votes entitled to
be cast by the Company's outstanding voting securities.
Commencing October 31, 1995, 140,000 Series A Preferred shares must be redeemed
annually at $1,000 per share plus any accrued but unpaid dividends. No cash
dividends may be paid on the Company's common stock, nor may the Company
repurchase any of its common stock, if dividends or required redemptions of
Series A Preferred are in arrears.
PREFERRED STOCK, SERIES C
In June 1991, the Company issued $112.5 million (225,000 shares) of Series C
9.50% cumulative preferred stock ("Series C Preferred") represented by 4,500,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. Series C Preferred, which is not redeemable at the holder's
option, is redeemable at the Company's option at any time on or after June 30,
1996, at a price of $500 for each preferred share ($25 for each depositary
share).
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK, SERIES D
In February 1993, the Company issued $200 million (400,000 shares) of Series D
8.08% cumulative preferred stock ("Series D Preferred") represented by 8,000,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. Series D Preferred, which is not redeemable at the holder's
option, is redeemable at the Company's option at any time on or after March 31,
1998, at a price of $500 for each preferred share ($25 for each depositary
share).
................................
The Company has entered into interest rate swap agreements that effectively
convert its fixed-rate dividend obligations into variable-rate obligations. For
financial reporting purposes, dividends on preferred stock are adjusted by the
aftertax income or loss generated by these swaps.
- --------------------------------------------------------------------------------
NOTE 8 - COMMON STOCK
On February 8, 1988, the Company's Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of the Company's
common stock. The Board also authorized the issuance of preferred share purchase
rights for each share of Series A Preferred based on the number of shares of
common stock into which the Series A Preferred will be convertible. The rights
contain provisions to protect stockholders against certain takeover tactics and
are exercisable for shares of the Company's Series B junior participating
preferred stock only if certain specified events occur relating to changes in
ownership of the Company's stock or an attempted takeover.
Also see "Stock Option and Incentive Plans" in Note 10.
- --------------------------------------------------------------------------------
NOTE 9 - 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 December 31, 1993, SBI's net capital was $947 million, $883 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")
and is also a Bank of England listed institution pursuant to Section 43 of the
Act. The SFA requires SBIL to have available at all
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
times financial resources, as defined, sufficient to demonstrate continuing
compliance with its rules. At December 31, 1993, SBIL's financial resources were
$321 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 December 31, 1993, SBAL's net capital was $670 million above
the minimum required by Japan's Ministry of Finance. SBAG's net capital was $78
million above the minimum required by Germany's Banking Supervisory Authority.
- --------------------------------------------------------------------------------
NOTE 10 - EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
Substantially all full-time U.S. employees of the Company participate in defined
contribution plans. Non-U.S. employees generally participate in defined benefit
plans that are insured or otherwise fully funded. The costs relating to such
plans were $46 million, $40 million and $35 million in 1993, 1992 and 1991,
respectively.
HEALTH CARE AND LIFE INSURANCE
The Company provides certain health care and life insurance benefits for its
active employees, substantially all of its retired U.S. employees and certain
non-U.S. employees who reach the retirement criteria specified by the various
plans. The Company self-insures most of such benefit programs. At December 31,
1993, there were 8,400 active and 600 retired employees eligible for such
benefits.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106"). This standard requires companies to provide for the cost
of postretirement benefits other than pensions over the service periods of
eligible employees. The Company recorded a liability to reflect the present
value, as of January 1, 1993, of benefits expected to be paid to retired
employees. In addition, the Company recorded a liability for benefits expected
to be paid to active employees for services rendered prior to January 1, 1993.
The aggregate liability for these benefits resulted in a charge against earnings
in the amount of $65 million; the aftertax charge was $37 million. At December
31, 1993, the present value of the liability related to such benefits was $71
million.
Expenses recorded for health care and life insurance benefits were $125 million,
$43 million and $41 million in 1993, 1992 and 1991, respectively. Such expenses
in 1993 included the $65 million pretax charge, discussed above, related to the
adoption of SFAS 106 as well as $6 million of incremental expenses resulting
from this change in accounting principles. Prior to 1993, the Company expensed
the costs associated with these plans as they were paid.
The Company also adopted Statement of Financial Accounting Standards No. 112,
Employers' Accounting for Postemployment Benefits in 1993, the impact of which
was immaterial.
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION AND INCENTIVE PLANS
The Non-Qualified Stock Option Plan of 1984 (the "1984 Plan"), as amended in
1988, provides for the granting of options to purchase common stock to certain
key employees. Stock appreciation rights can accompany some or all of the
options granted. Exercise of such rights extinguishes the related options.
Options expire ten years from the date of grant. Options to purchase 1,732,890
and 2,650,952 shares were exercisable at December 31, 1993 and 1992,
respectively.
Changes in options and outstanding shares under option are summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Shares under option at:
December 31, 1993 1,732,890 $18.13 to $46.00
December 31, 1992 2,650,952 $18.13 to $46.00
December 31, 1991 5,426,014 $17.88 to $46.00
Options exercised:
1993 899,585 $18.13 to $40.38
1992 2,620,142 $17.88 to $32.84
1991 1,656,206 $14.06 to $30.38
Options canceled:
1993 18,477 $18.13 to $46.00
1992 154,920 $18.13 to $46.00
1991 2,032,450 $18.13 to $46.00
--------- ----------------
Available for future grant:
December 31, 1993 9,824,567
December 31, 1992 9,806,090
December 31, 1991 9,651,170
=========
</TABLE>
In late 1992 and early 1993, the Company settled certain employment-related
compensation claims of three of the four senior officers who left the Company
and SBI following the August 1991 announcement of certain earlier irregularities
by former employees in certain auctions of U.S. Treasury securities. The
compensation claims of the other officer have not been resolved. As a part of
the settlements, options to purchase a total of 451,700 common shares were
either surrendered or were canceled. Options to purchase a total of 145,000
common shares were exercised and are included as 1992 activity in the
accompanying table. The surrendered or canceled options are treated as canceled
as of 1991 in the table. Options to purchase a total of 744,900 common shares,
that were held by the other officer, are also treated as canceled as of 1991 in
the table, although the officer claims the right to exercise these options.
In the event of certain changes of control not approved by the Company's Board
of Directors, the holders of options under the 1984 Plan will be entitled to
receive an immediate cash payment equal to the excess of the fair market value
of the common stock over the exercise price of shares covered by options or
stock appreciation rights. Furthermore, all amounts credited to employees'
accounts under certain bonus plans will vest and employees will be entitled to
payment of an amount no less than the pro rata portion of their prior annualized
year-end bonus.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1989, the stockholders approved an Employee Stock Purchase Plan. Eligible
employees may purchase shares of the Company's common stock at 85% of its fair
market value on the purchase date, up to an annual maximum of $21,250, not to
exceed 10% of their total annual compensation.
Shares purchased under the 1984 Plan and the Employee Stock Purchase Plan are
issued from the Company's common stock held in treasury.
During 1991, the stockholders approved the Equity Partnership Plan (the "Plan").
Under the Plan, administered by an independent trustee, a portion of qualifying
employees' compensation includes awards in the form of the Company's common
stock. Open market purchases of shares by the Plan totaled $293 million (6.9
million shares) in 1993 and $155 million (4.5 million shares) in 1992. Stock
awarded under the Plan totaled $264 million (6.3 million shares) and $186
million (5.5 million shares) in 1993 and 1992, respectively, and is included as
a component of compensation expense. Dividends paid to shares held by the Plan
are used to purchase Salomon Inc stock at 85% of its market value at the time of
purchase. "Equity Partnership Plan, net," which is a component of Stockholders'
equity in the Consolidated Statement of Financial Condition, includes an
increase in equity representing the Company's liability related to the Plan
which is payable in the Company's common stock as well as a reduction in equity
equal to the cost of the unawarded shares held by the Plan. Shares held by the
trustee of the Plan are considered outstanding for the purpose of computing
earnings per share.
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, ("SFAS 109"), the impact of
which was negligible. Under SFAS 109, temporary differences between recorded
amounts and the tax bases of assets and liabilities are accounted for at current
income tax rates. The 1992 and 1991 provision for income taxes was determined
using the deferred method of intraperiod tax allocation in accordance with
Accounting Principles Board Opinion No. 11.
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of income taxes reflected in the Consolidated Statement of Income
are (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. federal $167 $176 $ 91
State and local 59 33 6
Non-U.S. 53 190 144
---- ---- ----
Total current 279 399 241
---- ---- ----
Deferred:
U.S. federal (61) (47) (23)
State and local (37) 44 58
Non-U.S. 420 110 136
---- ---- ----
Total deferred 322 107 171
---- ---- ----
Income taxes $601 $506 $412
==== ==== ====
</TABLE>
Deferred tax provisions (benefits) arising from significant temporary
differences are as follows (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 1992 1991
----- ---- -----
<S> <C> <C> <C>
Mark-to-market adjustments $ 348 $ 92 $ 479
Non-U.S. earnings - - (153)
Employee benefits and deferred compensation (111) - (70)
U. S. Treasury auction and related matters 11 37 (55)
Environmental reserves 13 (12) (13)
Occupancy reserves 16 (21) (2)
Other, net 45 11 (15)
----- ---- -----
Deferred income taxes $ 322 $107 $ 171
===== ==== =====
</TABLE>
Deferred income tax credits included in the Consolidated Statement of Financial
Condition were $1.2 billion and $0.9 billion at December 31, 1993 and 1992,
respectively. Before 1993, securities inventories for the Company's U.S.-based
securities activities were valued at the lower of cost or market for tax
purposes and at market value in the Company's financial statements. Effective
January 1, 1993, the Omnibus Budget Reconciliation Act ("OBRA") requires U.S.
dealers in securities to value their inventories at market value for tax
purposes. The transition provisions of OBRA prescribe that the excess of book
basis over tax basis at January 1, 1993 be amortized to taxable income over a
five year period. This change will reduce the Company's deferred tax liability
but will not impact the Company's provision for income tax expense.
Income taxes paid, net of refunds, totaled $278 million in 1993, $349 million in
1992 and $231 million in 1991. These amounts include estimated tax payments
during the current tax year as well as cash settlements relating to prior tax
years.
The Company provides deferred income taxes on the undistributed earnings of
foreign subsidiaries and affiliates except to the extent that such earnings are
intended to be indefinitely invested outside the United States. At December 31,
1993, the accumulated undistributed earnings of the Company's non-U.S.
subsidiaries amounted to $3.0 billion. U.S. federal taxes have been provided on
$1.8 billion of these earnings and, therefore, that amount could be remitted to
the
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United States without incurring additional tax expense. The undistributed
earnings of the Company's non-U.S. subsidiaries that are indefinitely invested
outside the United States amounted to $1.2 billion. At the existing U.S. federal
income tax rate, additional taxes of $368 million would have to be provided if
the remaining earnings were remitted to the United States.
A reconciliation of expected income tax expense, computed by applying the
statutory U.S. federal income tax rate to income before taxes, to the actual
expense recorded by the Company follows (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Expected income tax expense at statutory
U.S. federal income tax rate $513 $359 $312
Impact of:
Taxes applicable to non-U.S. earnings 2 26 32
State and local taxes, net of U.S.
federal tax effect 14 51 42
Provisions for tax contingencies and
non-deductible reserves 50 68 17
Other, net 22 2 9
---- ---- ----
Income taxes $601 $506 $412
==== ==== ====
</TABLE>
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EARNINGS PER SHARE
The calculation of earnings per share of common stock was based upon the
following (in millions, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Average common shares outstanding 110.4 114.6 111.7
Effects of assumed exercise of stock
options, if dilutive .6 .8 1.1
------ ------ ------
Shares used in computing primary
earnings per share 111.0 115.4 112.8
Effects (when dilutive) of:
Assumed conversion of convertible notes .6 .9 2.0
Assumed conversion of convertible
preferred stock 18.4 18.4 18.4
------ ------ ------
Shares used in computing fully diluted
earnings per share 130.0 134.7 133.2
====== ====== ======
Income before cumulative effect of
change in accounting principles $ 864 $ 550 $ 507
Less dividends on preferred stock, Series
A, C and D* 49 68 67
------ ------ ------
Income for primary earnings per share
before cumulative effect of change in
accounting principles 815 482 440
Add dividends on preferred stock,
Series A, when dilutive* 39 63 63
Add interest expense, net of tax, on
convertible notes, when dilutive - 1 2
------ ------ ------
Income for fully diluted earnings per
share before cumulative effect of
change in accounting principles 854 546 505
Cumulative effect of change in accounting
principles, net of tax benefit of $28 (37) - -
------ ------ ------
Net income for fully diluted earnings
per share $ 817 $ 546 $ 505
====== ====== ======
Earnings per share of common stock:
Primary earnings before cumulative effect
of change in accounting principles $ 7.34 $ 4.18 $ 3.90
Cumulative effect of change in accounting
principles (0.33) - -
------ ------ ------
Primary earnings $ 7.01 $ 4.18 $ 3.90
====== ====== ======
Fully diluted earnings before cumulative
effect of change in accounting
principles $ 6.57 $ 4.05 $ 3.79
Cumulative effect of change in accounting
principles (0.29) - -
------ ------ ------
Fully diluted earnings $ 6.28 $ 4.05 $ 3.79
====== ====== ======
</TABLE>
* Dividends on preferred stock are adjusted for the aftertax impact of interest
rate swaps that effectively convert the Company's fixed-rate dividend
obligations to variable-rate obligations. In 1992 and 1991, the impact of the
swaps related to the Series A Preferred was included in reported earnings.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENCIES
REPURCHASE AGREEMENTS, SECURITIES PLEDGED AND LETTERS OF CREDIT
At December 31, 1993, the approximate market values of securities sold under
agreements to repurchase or pledged by the Company were:
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
<S> <C>
For sales under agreements to repurchase $ 87,012
As collateral for securities borrowed
of approximately equivalent value 27,662
To clearing organizations or segregated
under securities laws and regulations 3,045
As collateral on bank loans 3,690
For securities loaned 2,250
As collateral for letters of credit 826
--------
Repurchase agreements and securities pledged $124,485
========
</TABLE>
At December 31, 1993, the Company had $2.8 billion of outstanding letters of
credit from banks to satisfy various collateral and margin requirements.
LEASE COMMITMENTS
The Company has noncancelable leases covering office space and equipment
expiring on various dates through 2012. Presented below is a schedule of minimum
future rentals on noncancelable operating leases, net of subleases, as of
December 31, 1993. Various leases contain provisions for lease renewals and
escalation of rent based on increases in certain costs incurred by the lessors.
Amounts presented below also include lease expenses which, as a part of oil
refining or other asset-based activities, are expected to be recorded as a
reduction of "Principal transactions" in the Consolidated Statement of Income.
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
<S> <C>
1994 $ 131
1995 109
1996 97
1997 82
1998 71
Thereafter 681
------
Minimum future rentals $1,171
======
</TABLE>
Minimum future rentals includes $86 million related to space the Company has
vacated or intends to vacate. The Company has provided reserves based on these
amounts. Rent expense under operating leases totaled $133 million, $161 million
and $177 million for the years ended December 31, 1993, 1992 and 1991,
respectively. These amounts exclude reductions in "Principal transactions" of
$46 million in 1993, $85 million in 1992 and $78 million in 1991.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - LEGAL PROCEEDINGS
U.S. TREASURY AUCTION AND RELATED MATTERS
On August 9, 1991, the Company announced that it had uncovered irregularities by
certain employees of its indirect wholly-owned subsidiary, Salomon Brothers Inc
("SBI"), in connection with certain auctions of U.S. Treasury securities. During
the 1991 third quarter, the Company recorded a pretax charge of $200 million to
establish a reserve for estimated monetary damages, settlement costs, fines,
penalties, legal expenses and other related costs expected to be incurred in
connection with the private actions and investigations by certain U.S.
governmental authorities, state agencies and self-regulatory authorities arising
out of this matter. As a result of the settlement announced on May 20, 1992 with
U.S. governmental authorities, the Company recorded an additional pretax charge
of $185 million in the 1992 second quarter. In January and February of 1993, the
Company and SBI settled claims with 42 states and the District of Columbia
arising out of this matter.
The Company or SBI are subject to over 50 private actions with respect to the
U.S. Treasury auction and related matters, including actions brought by
purchasers of the Company's securities, actions brought by participants in the
U.S. Treasury securities market and actions which assert derivative claims
purportedly on behalf of the Company. In September 1993, the Company, while
denying any violation of the law, entered into a formal stipulation of
settlement to settle certain class action lawsuits that have been brought by
purchasers of various of the Company's securities. The stipulation of settlement
provides for payment of $54.5 million to the plaintiff class, to be paid out of
the $100 million private claims fund established pursuant to the 1992 settlement
described above. The Company also agreed to pay plaintiffs' attorneys fees and
expenses awarded by the court, in an amount not to exceed $12.5 million. The
settlement is subject to court approval, and hearings have been held to
determine whether the settlement should be approved. The settlement will not
compromise or settle any claims asserted by participants in the U.S. Treasury
securities market or any derivative claims brought in connection with the U.S.
Treasury auction and related matters. Although the resolution of these remaining
U.S. Treasury auction matters may differ from the amount the Company currently
has reserved, the Company does not expect such difference to be material to its
financial condition.
ENVIRONMENTAL AND OTHER MATTERS
Under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), under certain circumstances, a potentially
responsible party ("PRP"), may be held jointly and severally liable, without
regard to fault, for response costs at a CERCLA site. A PRP's ultimate cost at a
site generally depends on its involvement with the site and the nature and
extent of contamination, the remedy selected, the role of other PRPs in creating
the alleged contamination and the availability of contribution from those PRPs,
as well as any insurance or indemnification agreements which may apply. In most
cases, both the resolution of the complex issues involved and any necessary
remediation expenditures occur over a number of years.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1988, a subsidiary of Salomon Inc, The S.W. Shattuck Chemical Company, Inc.
("Shattuck") along with over 350 industrial, municipal and other entities, was
named by the federal Environmental Protection Agency ("EPA") as a PRP subject to
liability under CERCLA at a site, Section 6 of the Lowry Landfill in Arapaho
County, Colorado ("Lowry"), owned by the city and county of Denver ("Denver").
Shattuck was named a PRP based on disposal of its wastes at Lowry. Along with
several other waste generator PRPs, Shattuck has entered into two Administrative
Consent Orders with the EPA to conduct certain site investigations and studies.
It currently appears, from EPA estimates, that the remediation cost will be
approximately $120 million. In December 1991, Denver filed suit under CERCLA and
state common law in the United States District Court for the District of
Colorado against Salomon Inc, Shattuck and 38 other PRPs seeking a declaration
of their liability for, and recovery of, response costs expended and to be
incurred at Lowry. In February 1992, Waste Management of Colorado, Inc. and
Chemical Waste Management Inc., both PRPs at Lowry, commenced a similar action
in the same court against Salomon Inc and Shattuck. In May 1993, the Company and
Shattuck settled both actions with the plaintiffs. Under the settlement and
based on current EPA estimates, the Company's ultimate share of remediation
costs is not expected to exceed $13 million, of which half has been paid into a
trust fund.
In August 1992, the EPA issued a Unilateral Administrative Order for remedial
design/remedial action to be performed by Shattuck under CERCLA at a site
(Bannock Street), which includes property owned by, and a metal processing plant
previously operated by, Shattuck in Denver, Colorado. The Order provides that,
in the course of performing the remedial design/remedial action, Shattuck shall
demonstrate financial assurance in an amount not less than $26.6 million.
Effective August 31, 1992, Shattuck served notice to EPA of its intent to comply
with the Order. Shattuck has performed significant remediation activities at the
site in accordance with the Order.
In February 1993, Salomon Inc, and at least three other unrelated companies,
received from EPA a request for information under CERCLA concerning an alleged
release of hazardous substances at the National Zinc site in Bartlesville,
Oklahoma. In May 1993, National Zinc was proposed for listing as a superfund
site on EPA's National Priorities List under CERCLA. Final listing remains
subject to EPA's determination. On May 28, 1993, both Salomon Inc and a current
subsidiary received notices from EPA of designation as PRPs with respect to
National Zinc. The National Zinc site was defined by EPA to include a smelter
facility which had been owned by a former subsidiary of the Company and an eight
square mile area surrounding such facility. The Company and its current
subsidiary have taken issue with the PRP designations. In October 1993, the
Company received notice from EPA of a planned removal response by EPA at the
National Zinc site estimated by EPA to cost approximately $15.2 million. The
Company and two other parties were designated by EPA as PRPs with respect to
this removal action. In November 1993, EPA notified the Company and the same two
other parties of its intent to conduct a remedial investigation, feasibility
study and remedial design ("RI/FS/RD") for the site on a schedule which would
result in selecting a remedy by December 1994, and offered the PRPs the
opportunity to do this work. EPA also stated its willingness to consider a State
Delegation Pilot Project whereunder PRPs, including the Company, could conduct
the RI/FS/RD pursuant to an Administrative Order of Consent with the State of
Oklahoma, with limited oversight by EPA. EPA has requested a proposal regarding
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the RI/FS/RD from the state and cooperating parties, which has been provided. In
February 1994, EPA issued to the Company and two other parties a Unilateral
Administrative Order with respect to the removal action described above. The
Company and one other party served notice to EPA of their intention to comply
with the Unilateral Administrative Order. The Company estimates that its cost to
perform the removal action pursuant to the Unilateral Administrative Order and
to participate in performing the RI/FS/RD will be approximately $7.5 million.
The Company's additional costs, if any, related to remediation at the site
cannot be determined at this time.
On February 8, 1994, Horseheads Industries, Inc. D/B/A Zinc Corporation of
America, the current owner of the smelter facility at the National Zinc site,
filed suit in the United States District Court for the Northern District of
Oklahoma against the Company, St. Joe Minerals Company, Fluor Corporation and
Cyprus Amax Minerals Company alleging that the defendants are liable to it for
response costs incurred in connection with the smelter facility under CERCLA
because of the release of hazardous substances during periods of ownership or
operation by them or their affiliates or predecessors in interest. The extent of
the Company's liability with respect to the allegations of the complaint cannot
be determined at this time.
In March 1990, Salomon Inc and a subsidiary were notified by the Tennessee
Department of Health and Environment ("TDHE") that they were responsible for
remedial costs under the Tennessee Hazardous Waste Management Act, as prior
owners and operators, at Roane Alloys, a ferro-alloy plant in Rockwood,
Tennessee. In 1992, Salomon Inc's subsidiary, together with another prior owner
and the current owner of the site, received a determination from the TDHE
selecting a site remediation plan under which Salomon Inc's and the subsidiary's
costs are expected to total approximately $1 million. Remediation activities
have commenced at the site.
In addition to the matters discussed above, liability under CERCLA is currently
asserted against Salomon Inc and/or its subsidiaries by EPA relating to the
following sites: Erda, Utah (Micronutrients International); Golden, Colorado
(Colorado School of Mines Research Institute) and Granite City, Illinois
(NL/Taracorp). Additionally, a subsidiary has been named as a third-party
defendant in a suit filed by the EPA in the United States District Court for the
Western District of Pennsylvania to recover response costs allegedly expended at
a CERCLA site in Pulaski, Pennsylvania (Metcoa). In each case, Salomon Inc, or
the subsidiary, has been identified as a PRP based upon the alleged shipment of
relatively small volumes of material to the site, and Salomon Inc's, or the
subsidiary's, share of remediation costs is expected to be immaterial.
The Company is also a defendant in other lawsuits incidental to its securities
and commodities business. Management of the Company, after consultation with
outside legal counsel and consideration of applicable reserves, believes that
the resolution of environmental and other proceedings will not result in any
material adverse effect on the Company's financial condition.
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
MARKET RISK
In the normal course of its operations, the Company and its subsidiaries enter
into various contractual commitments involving future settlement. Within Salomon
Brothers, these include futures contracts; commitments to buy and sell
securities and foreign currencies; interest rate swap, cap and floor agreements
and option contracts. Salomon Inc also issues warrants that entitle holders to
settlements on exercise based upon movements in market prices of specific
financial instruments, foreign exchange rates, equity indices and certain
commodities. The Phibro Division participates in the commodities-related
futures, forward and derivative markets, particularly with respect to crude oil
and precious metals.
As discussed in the Summary of Accounting Policies, the Company records all
contractual commitments involving future settlement at market or fair value.
Consequently, changes in the amounts recorded in the Company's Consolidated
Statement of Financial Condition resulting from movement in market prices are
included currently in the Consolidated Statement of Income.
Commitments involving future settlement give rise to market risk, which
represents the potential loss that can be caused by a change in the market value
of a particular instrument. The Company's exposure to market risk is determined
by a number of factors, including the size, composition and diversification of
positions held, the absolute and relative levels of interest rates and foreign
currency exchange rates and market volatility. For instruments such as options
and warrants, the time period during which the option or warrant may be
exercised and the relationship between the current market price of the
underlying instrument and the option's or warrant's contractual strike or
exercise price also affects the level of market risk. The most significant
factor influencing the overall level of market risk to which the Company is
exposed is its use of hedging techniques to manage such risk.
SFAS 105, Disclosure of Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk,
requires disclosure of the notional amounts of financial instruments that give
rise to off-balance-sheet risk. The determination of notional amounts does not
consider any of the factors discussed above. Notional amounts are indicative
only of the volume of activity; they are not a measure of market risk. Market
risk is influenced by the nature of the items that comprise a particular
category of financial instruments. For example, notional amounts of forward
contracts include both purchase and sale commitments. Futures contracts include
contracts purchased as well as contracts sold. Swap agreements include several
combinations, such as those in which the Company pays a fixed rate of interest
and receives a variable rate, as well as those in which the Company pays a
variable rate of interest and receives a fixed rate. Options and warrants sold
or written include both calls and puts. Market risk is also influenced by the
relationship among the various off-balance-sheet categories as well as the
relationship between off-balance-sheet items and items recorded in the Company's
Consolidated Statement of Financial Condition. For all
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the reasons noted above, the interpretation of notional amounts as a measure
of market risk could be materially misleading. As noted in the Summary of
Accounting Policies, the Consolidated Statement of Financial Condition includes
the market or fair value of financial options and contractual commitments
involving future settlement.
Notional amounts, as well as the market or fair value of options and contractual
commitments recorded as assets, are set forth in the summary that immediately
follows the Statement of Financial Condition.
CONCENTRATIONS OF CREDIT RISK
Credit risk is measured by the loss the Company would record if its
counterparties failed to perform pursuant to terms of their obligations to the
Company. As an intermediary in financial instruments, Salomon Brothers regularly
transacts business with, and owns securities issued by, a broad range of
corporations, governments, international organizations, central banks and other
financial institutions. Salomon Brothers also enters into collateralized
financing agreements in which it extends short-term credit, primarily to major
financial institutions. Salomon Brothers generally controls access to the
collateral pledged by the counterparties, which consists largely of U.S. and
non-U.S. government and agency securities. The Phibro Division and Phibro USA
regularly transact business with independent and government-owned oil producers,
a wide variety of end-users, trading companies and financial institutions.
The Company acts as a dealer of securities in the global capital markets and,
consequently, has credit risk for the timely repayment of principal and interest
regarding its holdings of securities. U.S. government and agency securities
owned totaled $42.5 billion at December 31, 1993 and $33.9 billion at December
31, 1992. With the addition of U.S. government and agency securities pledged as
collateral by counterparties in connection with collateralized financing
activity, the Company's total holdings of U.S. government securities were $71.2
billion or 39% of the Company's total assets at December 31, 1993 and $84.8
billion or 53% of assets at December 31, 1992. Similarly, concentrations with
non-U.S. governments totaled $52.3 billion at December 31, 1993 and $32.2
billion at December 31, 1992. These consist predominantly of securities issued
by the governments of major industrial nations.
Remaining concentrations arise principally from contractual commitments with
counterparties in financial, or commodities-related transactions involving
future settlement and fixed-income securities owned. Excluding governments, no
concentration with a single counterparty exceeded 1% of total assets at December
31, 1993 or 1992. North America and Asia represent the largest geographic
concentrations. Among industries, banks (both U.S. and non-U.S.) represent the
largest group of counterparties. A Summary of the Company's credit exposure for
over-the-counter derivatives and foreign exchange, net of collateral, by risk
class is included in the Summary of Options and Contractual Commitments
immediately following the Statement of Financial Condition.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - FAIR VALUE INFORMATION
The following information is provided to help users gain an understanding of the
relationship between amounts reported in the Company's financial statements and
the related market or fair values. Specific accounting policies are discussed in
the Summary of Accounting Policies. The Company's assets and liabilities as of
December 31, 1993 and 1992 can be characterized as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
-------------- --------------
DOLLARS IN BILLIONS 1993 1992 1993 1992
------ ------ ------ ------
<S> <C> <C> <C> <C>
Items recorded at market or fair value $120.4 $ 85.5 $ 56.5 $ 46.3
Items recorded at contractual amounts
that approximate market or fair value 61.2 70.5 119.6 105.2
Items recorded at contractual or historical
values that do not necessarily approximate
market or fair value 3.2 3.5 3.4 3.6
------ ------ ------ ------
Total assets and liabilities $184.8 $159.5 $179.5 $155.1
====== ====== ====== ======
</TABLE>
Items recorded at contractual amounts that approximate market or fair value
consist largely of short-term lending or borrowing agreements, non-U.S. dollar
denominated collateralized mortgage obligations ("CMOs") and the assets securing
these CMOs ("CMO collateral"), and a substantial portion of the Company's term
debt. Because of the limited term to maturity of many of these instruments or
their variable interest rates, their market values are not materially sensitive
to shifts in market interest rates. Reverse repurchase agreements and other
collateralized short-term financing agreements totaled $48.9 billion,
representing 80% of such assets at December 31, 1993, down from $60.6 billion,
or 86% of such assets a year ago. Non-U.S. dollar denominated CMO collateral,
which consists primarily of variable-rate mortgage instruments, totaled $2.7
billion, representing 4% of such assets at December 31, 1993, compared with $3.6
billion and 5% a year ago. Remaining assets that fall into this category consist
primarily of short-term receivables. Short-term borrowings totaled $97.9
billion, representing 82% of such liabilities at December 31, 1993, compared
with $88.4 billion and 84% at December 31, 1992. Non-U.S. dollar denominated
CMOs, which are primarily variable-rate obligations, totaled $2.7 billion,
representing 2% of such liabilities at December 31, 1993, down from $3.4 billion
and 3% a year ago. Remaining liabilities included in this category are short-
term payables to customers and suppliers, and a substantial portion of
outstanding term debt.
80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1993, 30% of the Company's term debt was variable-rate; 32% was
variable-rate at December 31, 1992. Because the interest rates on variable-rate
debt are periodically determined by reference to specified market rates, the
market value of such debt is much less sensitive to changes in market interest
rates than the value of otherwise comparable fixed-rate debt. Approximately 70%
of the Company's term debt was fixed-rate at December 31, 1993, compared with
68% a year ago. To minimize exposure to changes in interest rates, the Company
utilizes financial instruments and contractual commitments, including interest
rate swap agreements, that effectively convert most of its fixed interest rate
debt into variable interest rate obligations. Consequently, the recorded values
of variable-rate debt, and fixed-rate debt effectively converted into variable-
rate obligations, do not differ materially from their market values.
The largest items recorded at contractual or historical values that do not
approximate market or fair value are U.S. dollar denominated CMOs, CMO
collateral and deferred income taxes. The CMO collateral is composed primarily
of fixed-rate mortgage backed securities guaranteed by U.S. government agencies.
The CMOs are primarily fixed-rate obligations having cash flow characteristics
almost identical to the CMO collateral. At December 31, 1993 and 1992, market
interest rates were significantly lower than rates prevailing when most of the
CMOs were issued. Consequently, the fair value of the CMOs and CMO collateral
exceeds their carrying amounts. However, the CMOs and CMO collateral cannot be
viewed independently. The unrealized gain on the CMO collateral cannot be
realized without a similar realized loss on the extinguishment of the CMOs.
Taken together, the fair value to the Company of the CMOs and CMO collateral is
the present value of the difference between future cash inflows from the CMO
collateral and the cash outflows to service the CMOs. Management believes this
value is nominal.
Excluding U.S. dollar denominated CMO collateral, assets recorded at contractual
or historical values that do not necessarily approximate market or fair value
represented approximately 1% of total assets or $2.1 billion and $1.9 billion at
year-end 1993 and 1992, respectively. The largest asset class in this category
is property, plant and equipment, which is recorded at historical cost less
accumulated depreciation and amortization and totaled $1.1 billion and $1.0
billion at December 31, 1993 and 1992, respectively. Phibro USA's fixed assets,
primarily refining facilities, were carried at $545 million at the end of 1993.
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 its
market value of $180 million at December 31, 1993.
Excluding U.S. dollar denominated CMOs and deferred income taxes, liabilities
recorded at contractual or historical values that do not necessarily approximate
market or fair value represented less than 1% of total liabilities or $1.1
billion and $1.2 billion at December 31, 1993 and 1992, respectively.
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following are condensed financial statements of Salomon Inc (Parent Company
Only) for the periods indicated (dollars in millions):
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993 1992 1991
---- ---- ------
<S> <C> <C> <C>
Dividends from subsidiaries $383 $601 $1,179
Net interest and principal transactions (25) (77) (223)
General, administrative and other
expenses (78) (66) (76)
---- ---- ------
Income before taxes and equity in net
income of subsidiaries and affiliates,
net of dividends received 280 458 880
Income tax benefit 44 89 109
Equity in net income of subsidiaries and
affiliates, net of dividends received 518 3 (482)
---- ---- ------
Income before cumulative effect of change
in accounting principles 842 550 507
Cumulative effect of change in accounting
principles, net of tax benefit of $11 (15) - -
---- ---- ------
Net income $827 $550 $ 507
==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1993 1992
--------------- ---------------
<S> <C> <C> <C> <C>
ASSETS:
Cash $ 6 $ 35
Financial instruments 46 251
Commodities-related products
and instruments 257 152
Receivables 299 362
Receivables from subsidiaries:
Salomon Brothers Holding
Company Inc $11,652 $7,100
Phibro Energy USA, Inc. 465 557
Other subsidiaries 158 308
------- ------
12,275 7,965
Investments in subsidiaries:
Salomon Brothers Holding
Company Inc 5,112 4,404
Phibro Energy USA, Inc. 345 377
Other subsidiaries 363 503
------- ------
5,820 5,284
Property, plant and equipment, net 335 369
Other assets 55 31
------- -------
Total assets $19,093 $14,449
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Short-term borrowings $ 2,445 $ 1,859
Financial and commodities-related
instruments 664 858
Other liabilities 152 204
Term debt 10,501 7,165
------- -------
Total liabilities 13,762 10,086
Redeemable preferred stock 700 700
Stockholders' equity 4,631 3,663
------- -------
Total liabilities and stockholders'
equity $19,093 $14,449
======= =======
</TABLE>
82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of term debt $ 6,783 $ 3,625 $ 3,228
Repurchases and maturities of term debt (3,560) (2,642) (1,413)
Net increase (decrease) in short-term
borrowings 586 725 (5,770)
Issuance of preferred stock 200 - 112
Purchase of common stock for treasury (16) (241) -
Dividends on common stock (68) (71) (70)
Dividends on preferred stock (49) (68) (67)
Employee stock purchase and option plans 35 73 44
Equity Partnership Plan, net 53 54 (37)
------- ------- -------
Cash provided by (used in) financing activities 3,964 1,455 (3,973)
------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in receivables from
subsidiaries (4,341) (1,198) 3,230
Dividends received from subsidiaries 383 601 1,179
Capital infusions and other capital
transactions with subsidiaries - (326) 68
Purchases of property, plant and equipment (8) (37) (79)
------- ------- -------
Cash provided by (used in) investing activities (3,966) (960) 4,398
------- ------- -------
Cash used in operating and other activities (27) (463) (423)
------- ------- -------
Increase (decrease) in cash (29) 32 2
Cash at beginning of year 35 3 1
------- ------- -------
Cash at end of year $ 6 $ 35 $ 3
======= ======= =======
</TABLE>
NOTES TO PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION The accompanying Condensed Financial Statements include
the accounts of Salomon Inc (Parent Company Only), referred to hereafter as the
"Parent." Investments in subsidiaries are accounted for under the equity method.
TERM DEBT Term debt, net of unamortized discount, if applicable, consists of
issues with original maturities in excess of one year. Certain issues are
redeemable, in whole or in part, at par or at premiums prior to maturity, and
certain issues carry sinking fund requirements. The maturity structure of the
Parent's term debt, based upon contractual maturities, sinking fund requirements
or the earliest date on which the debt is repayable at the option of the holder
was (dollars in millions):
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FIXED-RATE VARIABLE-RATE
DECEMBER 31, OBLIGATIONS OBLIGATIONS TOTAL 1993 TOTAL 1992
----------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. dollar denominated:
Due in 1993 $ - $ - $ - $2,253
Due in 1994 1,196 619 1,815 1,001
Due in 1995 1,426 845 2,271 1,426
Due in 1996 982 900 1,882 404
Due in 1997 447 56 503 103
Due in 1998 850 129 979 205
Thereafter 1,886 68 1,954 658
------ ------ ------- ------
U.S. dollar denominated 6,787 2,617 9,404 6,050
------ ------ ------- ------
Non-U.S. dollar denominated:
Due in 1993 - - - 322
Due in 1994 112 273 385 188
Due in 1995 132 152 284 19
Due in 1996 46 148 194 175
Due in 1997 165 4 169 79
Due in 1998 7 58 65 -
Thereafter - - - 332
------ ------ ------- ------
Non-U.S. dollar denominated 462 635 1,097 1,115
------ ------ ------- ------
Term debt $7,249 $3,252 $10,501 $7,165
====== ====== ======= ======
</TABLE>
For issues denominated in currencies other than the U.S. dollar that are not
used to finance assets in the same currency, the Parent has entered into foreign
exchange agreements that have effectively converted that debt (consisting mostly
of Japanese yen) into U.S. dollar obligations. The Company utilizes financial
instruments, including interest rate swap agreements, to convert most of its
fixed interest rate debt into variable interest rate obligations.
Fixed-rate debt matures at various dates through 2023. The contractual interest
rates on fixed-rate debt ranged from 3.67% (U.S. dollar denominated) to 11.63%
(U.S. dollar denominated) at December 31, 1993 and from 3.60% (U.S. dollar
denominated) to 11.63% (U.S. dollar denominated) at December 31, 1992. The
weighted average coupon interest rates were 6.59% and 7.58% at December 31, 1993
and 1992, respectively.
Variable-rate debt matures at various dates through 2003. The interest rates are
determined periodically by reference to money market rates, or in certain
instances, are calculated based on stock market indices as specified in the
agreements governing the respective issues. The coupon interest rates on
variable-rate debt ranged from 1.63% (yen denominated) to 9.27% (European
Currency Unit denominated) at December 31, 1993 and 1.63% (yen denominated) to
12.84% (European Currency Unit denominated) at December 31, 1992.
Term debt includes convertible restricted subordinated notes, which totaled $8
million at December 31, 1993 and 1992. The notes are convertible at the rate of
$13.89 per share into 547,953 shares of the Parent's common stock at December
31, 1993 and 587,255 shares at December 31, 1992. In 1993, the Company issued
certain term debt for which the principal repayment is linked to certain equity
securities of unaffiliated issuers.
84
<PAGE>
SALOMON INC
--------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS DECEMBER SEPTEMBER JUNE MARCH
THREE MONTHS ENDED 31 30 30 31
-------- --------- ------ ------
<S> <C> <C> <C> <C>
1993:
Total revenues $2,764 $1,859 $2,585 $1,591
Revenues, net of interest expense 1,684 587 1,505 423
Income (loss) before income taxes and cumulative
effect of change in accounting principles 807 18 753 (113)
Net income (loss) 476 20 433 (102)
====== ====== ====== ======
Earnings (loss) per share -
Primary earnings (loss) before cumulative
effect of change in accounting principles $ 4.33 $ 0.01 $ 3.75 $(0.76)
Cumulative effect of change in accounting principles - - - (0.34)
------ ------ ------ ------
Primary earnings (loss) per share $ 4.33 $ 0.01 $ 3.75 $(1.10)
====== ====== ====== ======
Fully diluted earnings (loss) before cumulative
effect of change in accounting principles $ 3.64 $ 0.01 $ 3.32 $(0.76)
Cumulative effect of change in accounting principles - - - (0.34)
------ ------ ------ ------
Fully diluted earnings (loss) per share $ 3.64 $ 0.01 $ 3.32 $(1.10)
====== ====== ====== ======
1992:
Total revenues $2,142 $1,742 $2,362 $1,937
Revenues, net of interest expense 1,009 631 1,308 911
Income before taxes 248 11 466 331
Net income 143 6 211 190
------ ------ ------ ------
Earnings (loss) per share -
Primary $ 1.10 $(0.09) $ 1.68 $ 1.51
Fully diluted 1.06 (0.09) 1.56 1.41
====== ====== ====== ======
</TABLE>
The 1992 second quarter results include a $185 million pretax charge related to
the U.S. Treasury auction and related matters.
Earnings (loss) per share for quarterly periods are based on average common
shares outstanding in individual quarters; thus, the sum of earnings per share
of the quarters may not equal the amounts reported for the full year.
COMMON STOCK DATA
The Company's stock is listed on the New York Stock Exchange, Inc. (trading
symbol SB). As of February 28, 1994, there were 13,511 holders of record.
The ranges of market prices and cash dividends paid on common stock for each
quarterly period during 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1993 1992
------------------------------------ ------------------------------------
MARKET PRICE MARKET PRICE
------------------------- ------------------------
DIVIDENDS DIVIDENDS
THREE MONTHS ENDED HIGH LOW END PER SHARE HIGH LOW END PER SHARE
------- ------- ------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $41 7/8 $35 3/4 $38 3/4 $0.16 $32 1/2 $27 3/8 $27 3/4 $0.16
June 30 39 3/8 34 3/8 38 1/4 0.16 34 1/8 26 5/8 33 3/4 0.16
September 30 51 7/8 37 5/8 47 3/4 0.16 37 3/4 33 3/4 37 5/8 0.16
December 31 50 1/2 41 1/2 47 5/8 0.16 39 32 3/8 38 1/8 0.16
------- ------- ------- ----- ------- ------- ------- -----
$0.64 $0.64
===== =====
</TABLE>
85
<PAGE>
SALOMON INC
--------------------------------
FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS 1993 1992 1991 1990 1989
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
For the year:
Revenues:
Principal transactions,
including net interest
and dividends $ 3,105 $ 3,188 $ 2,783 $ 2,350 $ 2,178
Investment banking 791 450 496 416 470
Commissions and other 303 221 248 221 258
-------- -------- ------- -------- --------
Revenues, net of interest expense 4,199 3,859 3,527 2,987 2,906
-------- -------- ------- -------- --------
Noninterest expenses:
Compensation and employee-related 1,900 1,638 1,375 1,393 1,369
Other noninterest expenses 834 980 1,033 933 797
Philipp Brothers downsizing charge - - - 155 -
Charges relating to U.S. Treasury
auction matters - 185 200 - -
-------- -------- ------- -------- --------
Total noninterest expenses 2,734 2,803 2,608 2,481 2,166
-------- -------- ------- -------- --------
Income before taxes and
cumulative effect of change in
accounting principles 1,465 1,056 919 506 740
Income taxes 601 506 412 203 270
-------- -------- ------- -------- --------
Income before cumulative effect
of change in accounting principles 864 550 507 303 470
Cumulative effect of change
in accounting principles,
net of tax benefit of $28 (37) - - - -
-------- -------- ------- -------- --------
Net income $ 827 $ 550 $ 507 $ 303 $ 470
======== ======== ======= ======== ========
Income (loss) before taxes
and cumulative effect
of change in accounting
principles by segment:
Salomon Brothers $ 1,575 $ 1,390 $ 1,036 $ 416 $ 534
Phibro Division (15) (194) 47 361 202
Phibro USA (46) (47) (80) 146 173
Philipp Brothers - - - (323) (116)
Corporate and Other (49) (93) (84) (94) (53)
-------- -------- ------- -------- --------
Income before taxes and
cumulative effect
of change in accounting
principles $ 1,465 $ 1,056 $ 919 $ 506 $ 740
======== ======== ======= ======== ========
At year-end:
Total assets $184,835 $159,459 $97,402 $109,877 $118,250
Short-term borrowings 97,890 88,417 40,393 42,888 62,716
Term debt 11,692 8,533 7,082 4,976 2,911
Redeemable preferred stock 700 700 700 700 700
Perpetual preferred stock 312 112 112 - -
Common equity 4,319 3,551 3,233 2,844 2,865
======== ======== ======= ======== ========
Per common share:
Primary earnings* $ 7.01 $ 4.18 $ 3.90 $ 2.08 $ 3.26
Fully diluted earnings* 6.28 4.05 3.79 2.05 3.20
Cash dividends 0.64 0.64 0.64 0.64 0.64
High market price 51 7/8 39 37 27 29 3/8
Low market price 34 3/8 26 5/8 20 3/4 20 20 1/2
Ending market price 47 5/8 38 1/8 30 5/8 24 3/8 23 3/8
Book value 38.57 32.33 28.56 25.87 24.08
======== ======== ======= ======== ========
Selected Ratios:
Return on average common stockholders'
equity:**
Primary 21.7% 13.6% 13.8% 8.3% 14.6%
Fully diluted 19.1% 12.8% 12.9% 8.3% 13.4%
Pretax margin 35% 27% 26% 17% 25%
Market/book ratio 1.23 1.18 1.07 0.94 0.97
Price/earnings ratio 7 9 8 12 7
======== ======== ======= ======== ========
Other Data:
Common shares
outstanding (in millions) 110.6 109.8 113.2 109.9 119.0
Full time equivalent number of
employees 8,640 8,631 8,917 8,883 8,924
======== ======== ======= ======== ========
</TABLE>
Salomon Brothers' 1992 results include a $185 million pretax charge related to
the U.S. Treasury auction and related matters. Salomon Brothers' 1991 results
include a $200 million pretax charge related to the U.S. Treasury auction and
related matters. Philipp Brothers' 1990 results include a pretax charge of $155
million in connection with the downsizing of the segment.
* 1993 primary and fully diluted earnings per share amounts include reductions
of $.33 and $.29, respectively, related to a cumulative change in accounting
principles for postretirement benefits.
** Before cumulative effect of change in accounting principles.
86
<PAGE>
Salomon Inc
Annual Report Financial Informationc
Appendix A
Graph #1
Management's Discussion & Analysis
Financial Highlights
Salomon Inc
Net Income
($ in millions)
1989 470
1990 303
1991 507
1992 550
1993 827
Graph #2
Management's Discussion & Analysis
Financial Highlights
Salomon Inc
Book Value per Common Share and Shares
Outstanding at Year-end
Book Value per Common Share in $
1989 24.08
1990 25.87
1991 28.56
1992 32.33
1993 38.57
Shares Outstanding at Year-end
1989 119.0
1990 109.9
1991 113.2
1992 109.8
1993 110.6
Graph #3
Management's Discussion & Analysis
Consolidated Salomon Inc Results
Salomon Inc
Aftertax Earnings Comparison
Quarterly vs. Rolling 4 Quarter Average
($ in Millions)
Quarter Rolling 4 Quarter Average
1990 Q1 119 154
Q2 120 121
Q3 79 97
Q4 -15 76
1991 Q1 273 114
Q2 178 129
Q3 85 130
Q4 -29 127
1992 Q1 190 106
Q2 211 114
Q3 6 95
Q4 143 138
1993 Q1 -65 74
Q2 433 129
Q3 20 133
Q4 476 216
<PAGE>
Graph #4
Management's Discussion & Analysis
Segment Information
Salomon Brothers
Pretax Earnings
($ in millions)
1990 416
1991 1036
1992 1390
1993 1575
Graph #5
Management's Discussion & Analysis
Segment Information
Phibro Division
Pretax Earnings
($ in millions)
1990 361
1991 47
1992 -194
1993 -15
Graph #6
Mangagement's Discussion & Analysis
Segment Information
Phibro USA
Pretax Earnings
($ in Millions)
1990 146
1991 -80
1992 -47
1993 -46
<PAGE>
Graph #7
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Composition of Quarterly Revenues
(In millions of $)
Client-Driven Proprietary Trading
1990
1Q 328 298
2Q 327 277
3Q 395 242
4Q 252 65
1991
1Q 499 656
2Q 511 399
3Q 373 413
4Q 403 21
1992
1Q 482 416
2Q 462 780
3Q 465 104
4Q 574 645
1993
1Q 659 (303)
2Q 913 523
3Q 684 (156)
4Q 983 832
Graph #8
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Compensation Ratio
Compensation As a % of Earnings Before Taxes and
Compensation
See Noninterest expense table on page 25 for data
Graph #9
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Non-Compensation Expense Ratio
Non-recurring and recurring non-compensation expenses as a
percentage of revenues, net of interest
See Noninterest Expense Table on page 25 for data
<PAGE>
Graph #10
Management's Discussion & Analysis
Phibro USA - Description of Business
Pretax Cash Flows
($ in millions)
Operating Cash Flow Net Cash Flow*
1989 203 128
1990 158 50
1991 33 -158
1992 -1 -116
1993 40 -36
* Operating Cash Flow adjusted for refinery capital improvements (excluding the
Residfiner project) and the impact of acquisitions and divestitures.
Graph #11
Management's Discussion & Analysis
Phibro USA - Description of Business
Refining Output by Product Type
(in millions of barrels)
Gasoline Distillates Heavy Fuel Oil Other
12/89 49 33 19 25
12/90 51 33 22 30
12/91 44 34 22 28
12/92 43 33 17 12
12/93 43 38 18 14
Graph #12
Management's Discussion & Analysis
Phibro USA - Description of Business
Crackspreads
(Dollars per barrel)
2-1-1 Crackspread 6-3-2-1 Crackspread
1989 2.95 2.01
1990 4.12 2.60
1991 3.96 2.14
1992 3.09 1.52
1993 2.87 1.56
<PAGE>
Graph #13
Management's Discussion & Analysis
Capital & Liquidity Management
Capital Management - Overview
Salomon Inc
Long-Term Capital
($ in billions)
See table on page 32 for data
Graph #14
Management's Discussion & Analysis
Capital & Liquidity Management - Balance Sheet Leverage
Salomon Inc
Working Capital Uses to Equity Ratio
12/90 3.5
12/91 2.7
12/92 2.8
12/93 2.4
Graph #15
Management's Discussion & Analysis
Capital & Liquidity Management - Balance Sheet Leverage
Salomon Inc
Assets to Equity Ratio
12/90 31.0
12/91 24.1
12/92 36.5
12/93 34.7
Graph #16
Management's Discussion & Analysis
Capital & Liquidity Management - Balance Sheet Leverage
Salomon Inc
Total Assets
($ in billions)
Governments, Reverse Repos and Securities Borrowed
12/90 69
12/91 59
12/92 123
12/93 130
All Other Average Assets
12/90 41
12/91 38
12/92 36
12/93 55 177
<PAGE>
Graph #17
Management's Discussion & Analysis
Capital and Liquidity Management - Working Capital
Salomon Inc
($ in billions)
Working Capital Requirements
12/31/90 12.4
12/31/91 11.0
12/31/92 12.4
12/31/93 12.9
Working Capital Coverage Ratio
12/31/90 70%
12/31/91 91%
12/31/92 95%
12/31/93 132%
Graph #18
Management's Discussion & Analysis
Capital and Liquidity Management - Capital and Funding Sources
Maturity Profile of Unsecured Borrowings
($ in billions)
Dec 31, 1992 Dec 31, 1993
greater than 5 years remaining 1.9 2.6
1-5 years remaining 3.8 6.6
less than 1 year remaining 7.4 9.5
Graph #19
Management's Discussion & Analysis
Risk Management - Credit Risk
OTC Derivative and Foreign Exchange Credit Exposure for all transactions and
transactions with more than 3 years to maturity. For Data see "Summary of
Options and Contractual Commitments" Schedule - "Credit Exposure, Net of
Collateral, by Risk Class" immediately following the Consolidated Statement of
Financial Condition (Page 52).
<PAGE>
EXHIBIT 21
SALOMON INC
SUBSIDIARIES OF THE REGISTRANT
Name under which business is conducted Jurisdiction
- --------------------------------------------------------------
Phibro Energy AG Switzerland
Phibro Energy Futures Limited United Kingdom
Phibro Energy (Asia) Pte. Limited Singapore
Scanports Shipping Limited Switzerland
Phibro Energy Clearing, Inc. Delaware
Phibro Energy International Sales Corp. Virgin Islands
Phibro Energy Oil, Inc. Delaware
Phibro Energy Production, Inc. Delaware
White Nights Joint Enterprise (45%
owned) Russia
Phibro Energy Trading Pte. Limited Singapore
Phibro Energy USA, Inc. Texas
Phibro Gas Properties, Inc. Delaware
Phibro Gas Resources, Inc. Delaware
Questor Drilling Corp. Delaware
Philipp Brothers, Inc. New York
Philipp Brothers Limited United Kingdom
Salomon Brothers Holding Company Inc Delaware
Loan Participation Holding Corporation Delaware
Home Mortgage Access Corporation Delaware
Home Mac Mortgage Securities
Corporation District of Columbia
PB-SB Investments Inc. Delaware
Plaza Clearing Corporation New York
Salomon International Finance AG Switzerland
Salomon Brothers Asia Limited Hong Kong
Salomon Brothers Overseas
Limited Cayman Islands
Salomon International Limited Delaware
Salomon Brothers Europe Limited United Kingdom
Salomon Brothers International
Limited United Kingdom
Salomon Brothers U.K. Limited United Kingdom
Salomon Brothers U.K. Equity
Limited United Kingdom
The Mortgage Corporation
Group Limited United Kingdom
The Mortgage Corporation
Limited United Kingdom
Phibro Energy Commodities
Limited United Kingdom
<PAGE>
EXHIBIT 21
(CONTINUED)
Name under which business is conducted Jurisdiction
- --------------------------------------------------------
Salomon Brothers Holding Company Inc
(continued) Delaware
Phibro Energy Marketing Limited United Kingdom
Salomon Brothers Asset Management Inc Delaware
Salomon Brothers Australia Limited Australia
Salomon Brothers Canada Holding Co. Canada
Salomon Brothers Finanz AG Switzerland
Salomon Brothers Hong Kong Futures
Limited Hong Kong
Salomon Brothers Hong Kong Limited Hong Kong
Salomon Brothers Housing Investment Delaware
Salomon Brothers Inc Delaware
Salomon Brothers Mortgage Securities
Inc Delaware
Salomon Brothers Mortgage Securities
II Inc Delaware
Salomon Brothers Mortgage Securities V
Inc Delaware
Salomon Brothers Pacific Holding
Company Inc Delaware
Salomon Brothers Properties Inc Delaware
Salomon Brothers Realty Corporation New York
Salomon Brothers Services Inc Delaware
Salomon Brothers S.A. France
Salomon Brothers Tosca Inc Delaware
Salomon Capital Access for Savings
Institutions, Inc. Delaware
Salomon Capital Access Corporation Delaware
Salomon Forex Inc Delaware
Salomon Brothers International
Operations Inc Delaware
Salomon Brothers International
Operations Inc (Japan) Delaware
Salomon Brothers Singapore Limited Hong Kong
Salomon Plaza Holdings Inc Delaware
Plaza Holdings, Inc. Delaware
Salomon Brothers Finance Corporation &
Co. beschrankt haftende KG Germany
Salomon Brothers AG Germany
Salomon Swapco Inc Delaware
Salomon Technology Services Inc New York
SBSIM, spa Italy
Scanports Shipping, Inc. Delaware
The S. W. Shattuck Chemical Co., Inc. Colorado
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Salomon Inc:
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 10, 1994 included in or incorporated by reference in this
Form 10-K into the following Registration Statements previously filed by the
Company with the Securities and Exchange Commission:
Form S-8 filed on April 20, 1976 (Registration No. 2-56105),
Form S-8 filed on April 30, 1979 (Registration No. 2-64337),
Form S-8 filed on April 24, 1980 (Registration No. 2-67487),
Form S-3 filed on August 13, 1982 (Registration No. 2-78847),
Form S-8 filed on October 21, 1982 (Registration No. 2-79925),
Form S-8 filed on October 31, 1984 (Registration No. 2-94087),
Form S-3 filed on July 25, 1985 (Registration No. 2-99203),
Form S-3 filed on July 1, 1986 (Registration No. 33-6921),
Form S-8 filed on July 23, 1986 (Registration No. 33-7464),
Form S-3 filed on May 13, 1988 (Registration No. 33-21833),
Form S-3 filed on October 14, 1988 (Registration No. 33-25002),
Form S-8 filed on January 19, 1989 (Registration No. 33-26524),
Form S-8 filed on January 19, 1989 (Registration No. 33-26521),
Form S-3 filed on December 28, 1989 (Registration No. 33-32748),
Form S-3 filed on February 16, 1990 (Registration No. 33-33528),
Form S-3 filed on March 12, 1990 (Registration No. 33-33823),
Form S-3 filed on April 24, 1990 (Registration No. 33-34412),
Form S-3 filed on July 13, 1990 (Registration No. 33-35887),
Form S-3 filed on March 26, 1991 (Registration No. 33-39502),
Form S-3 filed on May 15, 1991 (Registration No. 33-40600),
Form S-3 filed on June 13, 1991 (Registration No. 33-41209),
Form S-3 filed on July 29, 1991 (Registration No. 33-41932),
Form S-3 filed on May 29, 1992 (Registration No. 33-48199),
Form S-3 filed on July 10, 1992 (Registration No. 33-49136), as amended,
Form S-8 filed on December 3,1992 (Registration No. 33-55250),
Form S-3 filed on February 12, 1993 (Registration No. 33-57922), as amended, and
Form S-3 filed on December 14, 1993 (Registration No. 33-51269), as amended.
It should be noted that we have not audited any financial statements of the
Company subsequent to December 31, 1993 or performed any audit procedures
subsequent to the date of our report.
New York, New York ARTHUR ANDERSEN & CO.
March 30, 1994
<PAGE>
EXHIBIT 24
----------
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ Dwayne O. Andreas
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ Warren E. Buffett
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 3rd day of
February, 1994.
/s/ Andrew J. Hall
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ Gedale B. Horowitz
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ Deryck C. Maughan
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ William F. May
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ Charles T. Munger
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ Louis A. Simpson
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ David I. Young
<PAGE>
Power of Attorney
-----------------
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1993:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint David C. Fisher and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 2nd day of
February, 1994.
/s/ Robert G. Zeller
