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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, 1994 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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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
11.625% Debentures due 2015 New York Stock Exchange
6.75% 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, 1995:
NONE 106,082,100
Aggregate market value at
February 28, 1995:
$3.8 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 / /
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 1994 Annual Report Financial Information (incorporated in 10-K
Parts I, II and IV)
Proxy Statement for the 1995 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, 1994, its full time equivalent number of employees
was 9,077. Information concerning the business of Salomon Inc under the
following captions in Exhibit 13, "Salomon Inc 1994 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 1994 (on pages 14 through 19)
Salomon Brothers - Description of Business (on pages 21 through 22)
Phibro Division - Description of Business (on page 27)
Phibro USA - Description of Business (on pages 28 through 30)
Note 1 Revenues by Business Unit (on pages 67 through 70)
Note 2 Industry Segment and Geographic Data (on pages 71 through 72)
Note 10 Net Capital (on page 78)
Item 2.Properties
Since 1991, the Company's headquarters has been Seven World Trade Center,
located in lower Manhattan, New York. In 1993, a subsidiary of Salomon Brothers
purchased two long-term leasehold interests in property located in London that
was previously leased on a short-term basis. 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.
Further information concerning the Company's properties under the following
captions in Exhibit 13, "Salomon Inc 1994 Annual Report Financial Information,"
is deemed part of this Annual Report on Form 10-K and is hereby incorporated
herein by reference:
Phibro Division - Description of Business (on page 27)
Phibro USA - Description of Business (on pages 28 through 30)
Note 4 Property, Plant and Equipment (on page 73)
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Item 3. Legal Proceedings
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 this 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 Antitrust Division of the U.S. Department of
Justice's charges concerning 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.
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. These actions
can be grouped into three categories: securities litigation (brought on behalf
of purchasers of the Company's securities), Treasury litigation (brought on
behalf of purchasers of U.S. Treasury securities) and derivative litigation.
Forty-two of the actions were class and derivative actions which were
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 were filed in each of the three consolidated
groups of class actions.
The securities litigation and Treasury litigation (with the exception
of the Three Crown action discussed below) are the subject of settlement
agreements. In June 1994, the court approved settlement of the consolidated
securities action and the Company has paid $54.5 million to the plaintiff class
out of the $100 million private civil claims fund described above. The court
also awarded plaintiffs' attorneys' fees and expenses in the amount of $9.6
million, which has been paid by the Company. In July 1994, the court approved
settlement of the consolidated Treasury litigation and the Company and SBI have
paid $66 million to the plaintiff class. Plaintiffs' attorneys' fees and
expenses related to claims against the Company awarded by the court were
included in this amount. The Company and SBI expect that almost two-thirds of
this payment will be reimbursed to the Company out of the $100 million private
civil claims fund. The settlements described above have exhausted all but a
relatively small portion of the fund.
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Plaintiffs in Three Crown Limited Partnership, et al. v. Salomon
Brothers Inc, et al., 92 Civ. 3142, opted out of the Treasury litigation
settlement and have continued actively to pursue claims against SBI and other
defendants. This action, which is pending in the Southern District of New York,
alleges, among other things, that SBI and one of its former 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 action seeks compensatory damages of approximately $25 million
and trebling of that amount pursuant to the antitrust and RICO laws, as well as
costs, interest and other relief.
In re Salomon Inc Shareholders' Derivative Litigation, 91 Civ. 5500
(S.D.N.Y., consolidated August 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. In January 1994, the derivative plaintiffs
amended their complaint, among other things, to 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.
On September 28, 1994, the United States District Court of the Southern
District of New York granted the motion of the individual defendants to stay
trial of the action and compel arbitration, subject to determination by the New
York Stock Exchange as to whether the claims are arbitrable and whether the New
York Stock Exchange would exercise jurisdiction over the claims. The New York
Stock Exchange declined to exercise jurisdiction on December 22, 1994.
Individual defendants have appealed that decision to the New York Stock Exchange
Board. The determination of the motion by the Board is currently pending.
A New York Stock Exchange arbitration panel on May 13, 1994 denied in
their entirety the employment-related compensation claims for John Gutfreund
who sought to recover $55.3 million. On August 12, 1994, Mr. Gutfreund filed a
petition in the Supreme Court of New York for New York County seeking to vacate
the arbitration panel's decision and require a new arbitration. On December 31,
1994, the Court dismissed Mr. Gutfreund's petition and confirmed the arbitration
panel's decision denying Mr. Gutfreund's claims. Mr. Gutfreund has appealed the
decision.
As part of the May 1992 settlement of the U.S. Treasury auction matters
with the U.S. governmental authorities, the Company and SBI consented to an
injunction against violating
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certain record keeping and anti-fraud provisions of the Federal securities laws
based on allegations that transactions in certain securities during 1984 and
1986 were pre-arranged to accelerate the recognition of losses for Federal
income tax purposes. In connection with audits of the Company's Federal income
tax returns, the Internal Revenue Service indicated it was contemplating claims
for civil penalties in connection with such transactions during 1984 and 1986.
The transactions as to which penalties were contemplated were apparently
effected solely by employees who have left the Company and were in violation of
Company policy. The principal impact of such transactions was deferral of taxes.
Promptly after it discovered the transactions, the Company informed the Internal
Revenue Service and paid the taxes due and interest. The Company and the
Internal Revenue Service have entered into a settlement agreement that resolves
the scope of claims for civil penalties, which civil penalties shall be payable
by the Company to the Internal Revenue Service in an amount to be determined in
accordance with the terms of the settlement agreement.
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
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 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 and SBI no longer has any outstanding
claims for indemnity or contribution against them. 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.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT")), Ameritech Corporation, and an officer of
Ameritech filed suit against SBI and Salomon Brothers Realty Corporation
("SBRC") in the United States District Court for the Northern District of
Illinois. The second amended complaint alleges that three purchases by APT from
Salomon of participation interests in net cash flow or resale proceeds of three
portfolios of motels owned by Motels of American, Inc. ("MOA"), as well as a
fourth purchase by APT of a similar participation interest with respect to a
portfolio of motels owned by Best Inns, Inc. ("Best"), violated the Employee
Retirement Income Security Act ("ERISA"), and that the purchase of the
participation interests for the third MOA portfolio and for the Best portfolio
violated RICO and state law. SBI had acquired the participation interests in
transactions in which it purchased as principal mortgage notes issued by MOA and
Best to finance purchases of motel portfolios; 95% of three such interests and
100% of one such interest were sold to APT for purchase prices aggregating
approximately $20.9 million. Plaintiffs' second amended complaint seeks (i) a
judgment on the ERISA claims in the amount
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of the purchase prices of the four participation interests (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. 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) dismissed the RICO
claims as well as plaintiffs' claims for breach of contract and unjust
enrichment; (ii) denied SBI's motion to dismiss one of the ERISA claims (which
alleges 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. Each of the Department of Labor and the Internal
Revenue Service had advised SBI that it was reviewing the transactions in which
APT acquired such participation interests. The Department of Labor, however, has
advised Salomon that its investigation has been concluded. With respect to the
Internal Revenue Service investigation, SBI and Salomon Brothers Realty Corp.
have consented to extensions of time for the assessment of excise taxes which
may be claimed to be due with respect to the transactions for the year 1987.
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. An amended complaint
was filed on November 14, 1994 that added Salomon Brothers Realty Corp. as a
defendant and certain lower-level members of management of HRCA as plaintiffs.
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 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.
Discovery is ongoing in this case.
Between May 1994 and the present, SBI, along with a number of other
broker-dealers, was named as a defendant in approximately 25 federal court
lawsuits and one state court lawsuit, principally alleging that companies that
make markets in securities traded on Nasdaq violated the federal antitrust laws
by conspiring to maintain a minimum spread of $.25 between the price bid and the
price asked for certain securities. The federal lawsuits were consolidated for
pretrial purposes in the Southern District of New York in the fall of 1994 under
the caption In re Nasdaq Market-Makers Antitrust Litigation, United States
District Court, Southern District of New York No. 94-CIV-3996 (RWS); M.D.L. No.
1023. The state court suit, Lawrence A. Abel v. Merrill Lynch & Co., Inc. et
al., Superior Court of San Diego No. 677313, has been stayed.
In the federal suits, the plaintiffs purport to represent the class of
persons who bought what they currently estimate to be approximately 1650
securities on Nasdaq between May 1, 1989 and May 27, 1994. They seek unspecified
monetary damages, which would be trebled under the antitrust laws. The
plaintiffs also seek injunctive relief, as well as attorneys' fees and the costs
of the action. (The state case, brought under California law, seeks similar
relief.) Plaintiffs filed a consolidated amended complaint on December 16, 1994.
Defendants filed a motion to dismiss that complaint on February 2, 1995. A
hearing on the motion is scheduled
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for April 26, 1995. By order of the court, discovery, other than third party
discovery, is stayed pending that hearing.
The Antitrust Division of the Department of Justice is conducting an
industry-wide investigation into the Nasdaq market. It has issued civil
investigative demands to Salomon seeking interrogatory responses and the
production of documents relating to Salomon's role as a market maker in Nasdaq
stocks. The Securities and Exchange Commission is also conducting an
industry-wide investigation of various Nasdaq market practices. SBI has received
various subpoenas for documents relating to the Nasdaq market as part of the
Securities and Exchange Commission investigation.
During 1994, a number of customers of SBI's Private Investment
Department in Hong Kong asserted claims against SBI arising primarily from
alleged inappropriate sales practices with respect to transactions involving
principally collateralized mortgage obligations. Certain of these customers have
filed for arbitrations of these claims with the National Association of
Securities Dealers, Inc. and the American Arbitration Association. Salomon has
resolved almost all of these asserted claims, the cost of which was reflected in
1994 results. Salomon announced the closing of the Private Investment
Department in early 1995.
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.
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 entered into two
Administrative Consent Orders with the EPA pursuant to which certain site
investigations and studies were conducted. In March 1994, EPA selected a remedy
for Lowry, estimated to cost approximately $94 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
approximately 60% has been paid into a trust fund.
In August 1992, the EPA issued a Unilateral Administrative Order ("the
Order") for remedial design/remedial action to be performed by Shattuck under
CERCLA at a site
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(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 that $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 May 1994, Denver issued
a Cease and Desist Order ("CD Order") to Shattuck to stop work under the Order.
In August 1994, EPA filed suit in the Federal District Court in Colorado seeking
to set aside the CD Order. Pending resolution of this suit, Shattuck is
complying with the CD Order. EPA has also demanded payment by Shattuck of past
response costs purportedly relating to the site alleged to be approximately $3
million. The extent of Shattuck's liability for these costs cannot be determined
at this time, because Shattuck is actively contesting the factual and legal
bases for EPA's claim.
In May 1993, the National Zinc site in Bartlesville, Oklahoma was
proposed for listing as a superfund site on EPA's National Priorities List under
CERCLA. Final listing remains subject to EPA's determination. In May 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 formally opposed 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 PRPs 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. In February 1994, EPA issued to the Company and two
other PRPs a Unilateral Administrative Order ("UAO") with respect to the removal
action described above. The Company and one other PRP served notice to EPA of
their intention to comply with the UAO. In April 1994, the Company, one other
PRP and the City of Bartlesville entered into a Consent Agreement and Final
Order ("CAFO") with the Oklahoma Department of Environmental Quality ("ODEQ") to
conduct the RI/FS/RD. The work required under the UAO and the CAFO has been
timely completed to date. The Company estimates that its cost to perform the
removal action pursuant to the UAO and to participate in performing the RI/FS/RD
will be approximately $7.5 million. In December 1994, ODEQ issued a Record of
Decision selecting a remedy for Operable Unit 1, relating to protection of human
health, covering the area at the National Zinc site surrounding the smelter
facility. The selected remedy is estimated to cost approximately $24.3 million.
Under the terms of the CAFO, the Company and the other PRPs have agreed to
negotiate with ODEQ in good faith regarding what role, if any, they will have in
the implementation of the selected remedy. While the Company and the other PRPs
have advised ODEQ that they are preparing to initiate such negotiations, the
Company's future costs, if any, related to implementation of the selected remedy
at the site cannot be determined at this time.
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In February 1994, Horseheads Industries, Inc. D/B/A Zinc Corporation of
America ("ZCA"), 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 ("St. Joe"), Fluor
Corporation ("Fluor") and Cyprus Amax Minerals Company ("Cyprus") 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. In August 1994, a settlement agreement was entered
into between ZCA, Fluor/St. Joe and the Company (but not Cyprus), providing for
an allocation as between the settling parties as to both past and future
response costs. With respect to future remediation (the determination and
implementation of which is expected to take several years) and the costs
thereof, the settlement agreement established a management committee comprised
of representatives of the settling parties to oversee study and clean-up of the
facility and the costs associated therewith. Pursuant to the settlement, the
Company and Fluor have taken over ZCA's role in the litigation including defense
of ZCA against a pending counterclaim of Cyprus, and pursuit of claims against
Cyprus. The Company's future costs related to the remediation of the smelter
facility cannot be determined at this time, because the timing, nature and
extent of any such remediation are still under study.
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 management believes that
Salomon Inc's and the subsidiary's costs will total approximately $1 million.
Remediation activities have been substantially completed 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) 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
management believes that Salomon Inc's, or the subsidiary's share of remediation
costs will be immaterial.
In July 1994, a lawsuit was filed in the Federal Court in Texas against
Phibro Energy USA, Inc., ("Phibro USA") a subsidiary of the Company, by the
Friends of the Earth, Inc. The action is a citizen's suit brought under Section
505 of the Federal Water Pollution Control Act alleging violations by Phibro USA
of the monitoring, record keeping and discharge limitations of its Houston
refinery wastewater discharge permit during the period from September 1989 to
the date of the suit. Subsequent to the filing of this lawsuit, the EPA filed an
Administrative Complaint against Phibro USA, alleging substantially the same
violations under the Clean Water Act and implementing regulations. Phibro USA
has settled the EPA's claim. The extent of Phibro USA's liability with respect
to the claim alleged in the lawsuit cannot be determined at this time.
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In June 1994, the Company's subsidiary, Philipp Brothers, Inc.,
received from the Attorney General of Texas a Notice of Potential Liability,
under the Texas Solid Waste Disposal Act and CERCLA, with respect to the
Industrial Road/Industrial Metals Site (the "Site") in Corpus Christi, Texas.
The State of Texas (the "State") has estimated that complete remediation of the
Site and post-closure care will cost approximately $7.2 million. The State has
claimed that Philipp Brothers, Inc.'s share of such cost is approximately
$487,000. Philipp Brothers, Inc. has advised the State that it has been
incorrectly identified as a PRP at the Site. The extent of Philipp Brothers,
Inc.'s liability with respect to the State's claim cannot be determined at this
time.
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 resolution of pending
legal proceedings will not result in any material adverse impact on the
Company's consolidated financial condition; however, such resolution could have
a material adverse impact on operating results in future periods depending in
part on the results for such periods.
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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 1994.
Executive Officers of the Registrant
Name and Age Office
------------ ------
Jerome H. Bailey (42) Chief Financial Officer since June 1993; previously
employed at Morgan Stanley in various executive
capacities for more than five years
Robert E. Denham (49)* 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
Gedale B. Horowitz (62)* Executive Vice President since 1981
John G. Macfarlane (40) Treasurer since 1989; Treasurer of Salomon Brothers
Inc since 1989; previously employed by Salomon
Brothers Inc in various executive capacities from 1979
Kenneth K. Marshall (52) Acting Controller since March 1, 1995; employed by
Salomon Brothers Inc since October 1993; previously
employed by Coopers & Lybrand in various executive
capacities for more than five years
Deryck C. Maughan (47)* 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 (62) 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.
11
<PAGE>
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 1994 Annual Report
Financial Information," under the caption "Common Stock Data" on page 95, 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 1994 Annual Report
Financial Information," under the caption "Five Year Summary of Selected
Financial Information" on page 96, 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
1994 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 1994 (on pages 14 through 19)
Segment Information (on pages 20 through 31)
Derivative Instruments (on pages 32 through 36)
Capital and Liquidity Management (on pages 37 through 44)
Risk Management (on pages 45 through 53)
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company and subsidiaries, together
with the Summary of Options and Contractual Commitments, the Summary of
Accounting Policies, the Notes to Consolidated Financial Statements and the
Report of Independent Public Accountants, contained in Exhibit 13, "Salomon Inc
1994 Annual Report Financial Information" on pages 56 through 93, and the
information appearing under the caption "Selected Quarterly Financial Data
(Unaudited)" on page 94 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 1995 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' Role, Meetings, Committees and Fees" in the Proxy Statement
for the 1995 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 1995 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" in
the Proxy Statement for the 1995 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 26,
1995, are contained in Exhibit 13, "Salomon Inc 1994 Annual Report Financial
Information," and are hereby incorporated herein by reference.
(2) Schedules
(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 February 26, 1995
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 1994 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
27* Financial Data Schedule
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).
* Filed herewith
16
<PAGE>
Item 14. (continued)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated February 2, 1995,
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 February 27, 1995,
reporting under Item 5 ("Other Events:") and Item 7 ("Financial Statements, Pro
Forma Financial Information and Exhibits") the issuance of a press release.
17
<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, 1995.
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 March 30, 1995
and Director
Jerome H. Bailey Chief Financial Officer March 30, 1995
and Chief Accounting Officer
Dwayne O. Andreas* Director March 30, 1995
Warren E. Buffett* Director March 30, 1995
Claire M. Fagin* Director March 30, 1995
Gedale B. Horowitz* Director March 30, 1995
Deryck C. Maughan* Director March 30, 1995
William F. May* Director March 30, 1995
Charles T. Munger* Director March 30, 1995
Louis A. Simpson* Director March 30, 1995
Robert G. Zeller* Director March 30, 1995
*The undersigned, by signing his or her 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, 1995.
By /s/ Arnold S. Olshin
(Attorney-In-Fact)
18
<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
-------------- -----------
3.b By-Laws
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 1994 Annual Report Financial Information
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
24 Powers of Attorney
27 Financial Data Schedule
19
SALOMON INC
---------------------------------------
BY - LAWS
(As Amended February 26, 1995)
<PAGE>
I N D E X
Page
ARTICLE I. Offices . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. Stockholders. . . . . . . . . . . . . . . . . 1
Section 1. Annual Meetings . . . . . . . . . . . . . 1
Section 2. Special Meetings. . . . . . . . . . . . . 2
Section 3. Notice of Meetings. . . . . . . . . . . . 2
Section 4. List of Stockholders. . . . . . . . . . . 3
Section 5. Quorum. . . . . . . . . . . . . . . . . . 3
Section 6. Organization. . . . . . . . . . . . . . . 4
Section 7. Voting. . . . . . . . . . . . . . . . . . 4
Section 8. Judges. . . . . . . . . . . . . . . . . . 5
Section 9. Action by Written Consent . . . . . . . . 5
Section 10. Notice of Stockholder Nominees. . . . . . 6
ARTICLE III. Directors . . . . . . . . . . . . . . . . . . 7
Section 1. Number, Election and Term
of Office . . . . . . . . . . . . . . . . 7
Section 2. Vacancies and Newly Created
Directorships . . . . . . . . . . . . . . 8
Section 3. Regular Meetings. . . . . . . . . . . . . 8
Section 4. Special Meetings. . . . . . . . . . . . . 8
Section 5. Notice. . . . . . . . . . . . . . . . . . 8
<PAGE>
Page
Section 6. Quorum. . . . . . . . . . . . . . . . . . 9
Section 7. Organization. . . . . . . . . . . . . . . 9
Section 8. Adjournment . . . . . . . . . . . . . . . 9
Section 9. Action without Meeting. . . . . . . . . . 9
Section 10. Compensation. . . . . . . . . . . . . . . 9
Section 11. Directors Emeritus. . . . . . . . . . . .10
ARTICLE IV. Committees. . . . . . . . . . . . . . . . . .10
Section 1. Executive Committee . . . . . . . . . . .10
Section 2. Chairman of the
Executive Committee . . . . . . . . . . .11
Section 3. Compensation and Employee Benefits
Committee . . . . . . . . . . . . . . . .12
Section 4. Other Committees. . . . . . . . . . . . .12
Section 5. Committee Vacancies, etc. . . . . . . . .12
Section 6. Committee Meetings. . . . . . . . . . . .13
ARTICLE V. Officers. . . . . . . . . . . . . . . . . . .13
Section 1. Number, Election and
Term of Office. . . . . . . . . . . . . .13
Section 2. Chairman. . . . . . . . . . . . . . . . .14
Section 3. President . . . . . . . . . . . . . . . .14
Section 4. Vice Chairmen . . . . . . . . . . . . . .14
ii
<PAGE>
Page
Section 5. Executive Vice Presidents,
Senior Vice Presidents,
Vice Presidents and Other
Officers. . . . . . . . . . . . . . . . .14
Section 6. Secretary . . . . . . . . . . . . . . . .15
Section 7. Treasurer . . . . . . . . . . . . . . . .15
Section 8. Chief Financial Officer . . . . . . . . .15
Section 9. Controller. . . . . . . . . . . . . . . .15
Section 10. General Counsel . . . . . . . . . . . . .16
Section 11. Bonds . . . . . . . . . . . . . . . . . .16
Section 12. Vacancies . . . . . . . . . . . . . . . .16
ARTICLE VI. Divisions and Division Officers . . . . . . .16
Section 1. Establishment of Divisions and
Appointment of Officers . . . . . . . . .16
Section 2. Authority . . . . . . . . . . . . . . . .16
ARTICLE VII. Removal of Directors. . . . . . . . . . . . .17
ARTICLE VIII. Contracts, Checks, Drafts, Etc. . . . . . . .17
Section 1. Contracts, etc., How
Executed. . . . . . . . . . . . . . . . .17
Section 2. Loans . . . . . . . . . . . . . . . . . .17
Section 3. Checks, Drafts, etc.. . . . . . . . . . .18
ARTICLE IX. Stock . . . . . . . . . . . . . . . . . . . .18
Section 1. Certificates of Stock . . . . . . . . . .18
Section 2. Transfer of Stock . . . . . . . . . . . .18
iii
<PAGE>
Page
ARTICLE X. Registered Stockholders . . . . . . . . . . .19
ARTICLE XI. Lost, Stolen or Destroyed
Certificates. . . . . . . . . . . . . . . . .19
ARTICLE XII. Fixing of Record Date . . . . . . . . . . . .19
ARTICLE XIII. Dividends . . . . . . . . . . . . . . . . . .20
ARTICLE XIV. Waiver of Notice. . . . . . . . . . . . . . .20
ARTICLE XV. Seal. . . . . . . . . . . . . . . . . . . . .20
ARTICLE XVI. Fiscal Year . . . . . . . . . . . . . . . . .21
ARTICLE XVII. Amendments. . . . . . . . . . . . . . . . . .21
iv
<PAGE>
ARTICLE I
Offices
The registered office of the Corporation in the State of Delaware
shall be at No. 1209 Orange Street, Wilmington, Delaware.
The Corporation shall also have offices at such other places,
both within and without the State of Delaware, as the Board of Directors
may from time to time designate.
ARTICLE II
Stockholders
Section 1. Annual Meetings. (a) The Annual Meeting of the
Stockholders of the Corporation shall be held in such suitable place as
may be from time to time designated by the Board of Directors, on the
first Wednesday of the month of May in each year, if not a legal holiday
under the laws of the state where the Meeting is to be held, and, if a
legal holiday under the laws of such state, then on the next business
day following at 10:00 o'clock in the forenoon. The Board of Directors
may designate any other business day in the month of May for the holding
of an Annual Meeting of the Stockholders; provided, however, that such
designation shall be made at least 30 days prior to the regular date
fixed for such Annual Meeting in this Section 1.
(b) At any Annual Meeting of the Stockholders of the
Corporation, only such business shall be conducted as shall have been
brought before the meeting (i) by or at the direction of the Board of
Directors or (ii) by any Stockholder of the Corporation who complies
with the procedures set forth in this Section 1. For business to be
properly brought before an Annual Meeting by a Stockholder, the
Stockholder must have given timely notice thereof in proper written form
to the Secretary of the Corporation. To be timely, a Stockholder's
notice must be delivered to or mailed and received at the principal
executive offices of the Corporation not less than 30 days nor more than
60 days prior to the meeting; provided, however, that in the event that
less than 40 days' notice or prior public disclosure of the date of the
meeting is given or made to Stockholders, notice by the Stockholder to
be timely must be
<PAGE>
received not later than the close of business on the 10th day following
the day on which such notice of the date of the Annual Meeting was
mailed or such public disclosure was made. To be in proper written
form, a Stockholder's notice to the Secretary shall set forth in writing
as to each matter the Stockholder proposes to bring before the Annual
Meeting (i) a brief description of the business desired to be brought
before the Annual Meeting and the reasons for conducting such business
at the Annual Meeting, (ii) the name and address, as they appear on the
Corporation's books, of the Stockholder proposing such business, (iii)
the class and number of shares of the Corporation which are beneficially
owned by the Stockholder and (iv) any material interest of the
Stockholder in such business. Notwithstanding anything in the By-Laws
to the contrary, no business shall be conducted at an Annual Meeting
except in accordance with the procedures set forth in this Section 1.
The Chairman of an Annual Meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before
the meeting in accordance with the provision of this Section 1, and, if
he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be
transacted.
Section 2. Special Meetings. A Special Meeting of the
Stockholders of the Corporation for any purpose or purposes other than
those regulated by statute may be called by resolution of the Board of
Directors or by the Chairman or by the Secretary at the request in
writing of Stockholders owning at least one-third of the shares of the
stock of the Corporation issued and outstanding and entitled to vote at
said meeting. Any such Special Meeting shall be held in such suitable
place as may be designated by the Board of Directors.
Section 3. Notice of Meetings. Written notice of every
meeting of the Stockholders shall be given which shall state the place,
date and hour of the Meeting and the purpose(s) for which the Meeting
was called. Unless otherwise provided by statute, such written notice
shall be given not less than ten nor more than fifty days before the
date of any Meeting to each Stockholder entitled to vote at such
Meeting. If mailed, notice shall be given when deposited in the United
States mail, postage prepaid, directed to the Stockholder at his address
as it appears in the records of the Corporation. When a Meeting is
adjourned to another time or place, notice need not be given of the
adjourned Meeting if the time and
2
<PAGE>
place thereof are announced at the Meeting at which the adjournment is
taken. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned Meeting, a
notice of the adjourned Meeting shall be given to each Stockholder of
record entitled to vote at the Meeting.
Section 4. List of Stockholders. The officer who has
charge of the stock ledger of the Corporation shall prepare and make, at
least ten days before every Meeting of the Stockholders, a complete list
of the Stockholders entitled to vote at the Meeting, arranged in
alphabetical order, and showing the address of each Stockholder and the
number of shares registered in the name of each Stockholder. Such list
shall be open to the examination of any Stockholder, for any purpose
germane to the Meeting, during ordinary business hours, for a period of
at least ten days prior to the Meeting, either at a place within the
city where the Meeting is to be held, which place shall be specified in
the notice of the Meeting, or, if not so specified, at the place where
the Meeting is to be held. The list shall also be produced and kept at
the time and place of the Meeting during the whole time thereof and may
be inspected by any Stockholder who is present.
Section 5. Quorum. At any Meeting of the Stockholders of the
Corporation, except as otherwise provided by statute, the Certificate of
Incorporation or these By-Laws, there must be present, either in person
or by proxy, in order to constitute a quorum, the holders of a majority
of the outstanding shares of the stock of the Corporation entitled to
vote at said Meeting. If at any such Meeting a quorum shall fail to be
present, the holders of, or proxies for, a majority of the stock which
is represented at such Meeting, may adjourn the Meeting from time to
time without notice other than the announcement at the Meeting (subject
to the provisions of Section 3 of this Article II) until a quorum shall
attend, and thereupon, any business may be transacted at the adjourned
Meeting which might have been transacted at the Meeting as originally
called.
Notwithstanding the foregoing, at all Meetings of Stockholders
whenever the holders of the Corporation's Preferred Stock shall have the
special right, voting separately as a class, to elect directors or to
vote with respect to other corporate action, the presence in person or
by proxy of the holders of a majority of the Corporation's outstanding
Common Stock shall be required to
3
<PAGE>
constitute a quorum of such class, and the presence in person or by
proxy of the holders of a majority of the outstanding Preferred Stock
shall be required to constitute a quorum of such class; provided,
however, that the absence of a quorum of the holders of stock of either
class shall not prevent the election at any such Meeting or adjournment
thereof of directors or the taking of a vote with respect to such other
corporate action by the other such class if the necessary quorum of the
holders of stock of such other class is present in person or by proxy at
such Meeting or any adjournment thereof; and provided further, however,
that in the absence of a quorum of the holders of stock of either class,
a majority of the holders of the stock of the class who are present in
person or by proxy shall have power to adjourn the election of the
directors to be elected by such class or the taking of a vote with
respect to such other corporate action from time to time without notice
other than announcement at the Meeting (subject to the provisions of
Section 3 of this Article II) until the requisite number of holders of
such class shall be present in person or by proxy.
Section 6. Organization. The Chairman shall act as
Chairman of any Meeting of the Stockholders of the Corporation. If the
Chairman is absent, then such other officer as the Board of Directors
may from time to time designate shall act as Chairman of such Meeting.
The Secretary or, in his absence, any person appointed by the Chairman
of the Meeting, shall act as secretary of the Meeting.
Section 7. Voting. Each stockholder of record of the Corporation
shall, at every Meeting of the Stockholders of the Corporation, be
entitled to one vote for each share of stock standing in his name on the
books of the Corporation on any matter on which he is entitled to vote,
and such votes may be cast either in person or by proxy, but no proxy
shall be voted on after one year from its date.
The vote on all elections of Directors shall be by ballot and, upon
demand of any Stockholder, the vote on any other question before the
Meeting shall be by ballot or otherwise as determined by the Chairman of
the Meeting.
Except as otherwise provided by statute, the Certificate of
Incorporation or these By-Laws, all elections shall be had and all
questions decided by a majority of the votes cast.
4
<PAGE>
Section 8. Judges. At every meeting of the Stockholders of the
Corporation at which a vote by ballot is taken, the polls shall be
opened and closed, the proxies and ballots shall be received and taken
in charge, and all questions touching the qualification of voters, the
validity of proxies and the acceptance or rejection of votes shall be
decided by two Judges with appeal to the Chairman of the Meeting. Said
Judges shall be appointed by the presiding officer of the Meeting.
Section 9. Action by Written Consent. (a) Unless otherwise
provided in the Certificate of Incorporation, any action required to be
taken at any Meeting of Stockholders of the Corporation, or any action
which may be taken at any Meeting of the Stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon
were present and voted and shall be delivered to the Corporation by
delivery to its registered office in Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of
the book in which proceedings of Meetings of Stockholders are recorded.
Delivery made to the Corporation's registered office shall be made by
hand or by certified or registered mail, return receipt requested.
Every written consent shall bear the date of signature of each
Stockholder who signs the consent and no written consent shall be
effective to take the corporate action referred to therein unless,
within 60 days of the date the earliest dated consent with respect
thereto is delivered to the Corporation a written consent or consents
signed by a sufficient number of holders to take such action are
delivered to the Corporation in the manner prescribed in the first
paragraph of this Section.
(b) Determination of Record Date of Action by Written
Consent. In order that the Corporation may determine the Stockholders
entitled to consent to corporate action in writing without a meeting,
the Board of Directors may fix a record date, which record date shall
neither precede, nor be more than 10 days after, the date on which the
resolution fixing the record date is adopted by the Board of Directors.
Any Stockholder of Record seeking to have the Stockholders authorize or
take corporate action
5
<PAGE>
by written consent shall, by written notice to the Secretary, request
the Board of Directors to fix a record date. The Board of Directors
shall promptly (but in all events not more than 10 days after the date
on which such a request is received) adopt a resolution fixing the
record date. If no record date has been fixed by the Board of Directors
within 10 days of the date on which such a request is received, the
record date for determining Stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by
the Board of Directors is required by applicable law, shall be the first
date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or
by certified or registered mail, return receipt requested. If no record
date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by applicable law, the record date for
determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the date
on which the Board of Directors adopts the resolution taking such prior
action.
Section 10. Notice of Stockholder Nominees. Only persons
who are nominated in accordance with the procedures set forth in this
Section 10 shall be eligible for election at a meeting of Stockholders
as directors of the Corporation. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a meeting of
Stockholders (a) by or at the direction of the Board of Directors or (b)
by any Stockholder of the Corporation entitled to vote for the election
of directors at such meeting who complies with the procedures set forth
in this Section 10. All nominations by Stockholders shall be made
pursuant to timely notice in proper written form to the Secretary of the
Corporation. To be timely, a Stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the
Corporation not less than 30 days nor more than 60 days prior to the
meeting; provided, however, that in the event that less than 40 days'
notice or prior public disclosure of the date of the meeting is given
or made to Stockholders, notice by the Stockholder to be timely must be
so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting
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was mailed or such public disclosure was made. To be in proper written
form, such Stockholder's notice shall set forth in writing (a) as to
each person whom the Stockholder proposes to nominate for election or
re-election as a director, all information relating to such person that
is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation
14A promulgated under the 1934 Act, including, without limitation, such
person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected; and (b) as to the
Stockholder giving the notice (i) the name and address, as they appear
on the Corporation's books, of such Stockholder and (ii) the class and
number of shares of the Corporation which are beneficially owned by such
Stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a director shall
furnish to the Secretary of the Corporation that information required to
be set forth in a Stockholder's notice of nomination which pertains to
the nominee. In the event that a Stockholder seeks to nominate one or
more directors, the Secretary shall appoint two inspectors, who shall
not be affiliated with the Corporation, to determine whether a
Stockholder has complied with this Section 10. If the inspectors shall
determine that a Stockholder has not complied with this Section 10, the
inspectors shall direct the Chairman of the meeting to declare to the
meeting that a nomination was not made in accordance with the procedures
prescribed by the By-Laws of the Corporation, and the Chairman shall so
declare to the meeting and the defective nomination shall be
disregarded.
ARTICLE III
Directors
Section 1. Number, Election and Term of Office. The business of
the Corporation shall be managed by a Board of Directors (hereinafter
sometimes referred to as the "Board"). The number of Directors which
shall constitute the Board shall be such as from time to time shall be
fixed by the Board of Directors but in no case shall the number be less
than three (3). Each Director shall hold office until his successor is
elected and qualified or until he shall resign or shall have been
removed.
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In addition to the powers by these By-Laws expressly conferred
upon them, the Board may exercise all powers and do all lawful acts and
things other than those required by law, the Certificate of
Incorporation or these By-Laws to be exercised or done by the
Stockholders.
Section 2. Vacancies and Newly Created Directorships.
Any vacancy or vacancies which may occur among the Directors through
death, resignation, or disqualification or for any other cause, and
newly created directorships resulting from any increase in the
authorized number of Directors, may be filled by a majority of the
Directors then in office, though less than a quorum, subject to the
provisions hereinafter contained in this Section 2.
In case of any vacancy in the office of a Director occurring
among the Directors elected by the holders of the Corporation's
Preferred Stock, voting separately as a class, the remaining Director
elected by the holders of the Preferred Stock may designate a successor
to hold office for the unexpired term of the Director whose place is
vacant. Likewise in case of any vacancy in the office of a Director
occurring among the Directors elected by the holders of the
Corporation's Common Stock, the remaining Director(s) elected by the
holders of the Common Stock, by affirmative vote of a majority thereof,
may elect a successor or successors to hold office for the unexpired
term of the Director or Directors whose place or places shall be vacant.
Section 3. Regular Meetings. Regular Meetings of the
Board of Directors may be held without notice at such time and place as
shall from time to time be determined by resolution of the Board.
Section 4. Special Meetings. Special Meetings of the
Board may be called by the Chairman, the President or any two
Directors, and such Meetings shall be held at the registered office of
the Corporation in the State of Delaware or at such other place or
places, either within or without the State of Delaware, as shall be
specified in the notices thereof.
Section 5. Notice. Notice of any Meeting of the Board requiring
Notice shall be given to each Director by mailing the same at least
forty-eight (48) hours, or by telegraphing or telephoning the same at
least twelve (12) hours before the time fixed
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for the meeting. Any Director may participate in a meeting by means of
conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other and
such participation in a meeting shall constitute presence in person at
such meeting. At any meeting at which every director shall be present
any and all business may be transacted even though no notice shall have
been given.
Section 6. Quorum. At all Meetings of the Board the
presence of one-third of the Directors shall be necessary to constitute
a quorum and be sufficient for the transaction of business and any act
of a majority present at a meeting, at which there is a quorum, shall be
the act of the Board, except as may be otherwise specifically provided
by statute, the Certificate of Incorporation or these By-laws.
Section 7. Organization. The Chairman shall act as
Chairman of any Meeting or the Board or, in the absence of the Chairman,
the President or, in his absence, a Vice Chairman designated by the
Board shall act as Chairman at any Meeting of the Board; and the
Secretary or, in his absence, any Assistant Secretary shall act as
Secretary of any such meeting.
Section 8. Adjournment. Any Regular or Special Meeting of the
Board of Directors may be adjourned from time to time by the members
present whether or not a quorum shall be present, and no notice shall be
required of any adjourned meeting beyond the announcement of such
adjournment of the meeting.
Section 9. Action without Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these By-Laws, any
action required or permitted to be taken at any Meeting of the Board of
Directors or any committee referred to in these By-Laws, may be taken
without a meeting if all members of the Board or of such committee, as
the case may be, consent thereto in writing and the writing or writings
are filed with the minutes of the proceedings of the board or committee.
Section 10. Compensation. Each Director, in consideration of his
serving as such, shall be entitled to receive from the Corporation such
compensation as the Board shall from time to time determine, together
with reimbursement for reasonable expenses incurred by him in attending
meetings of the Board. Each
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Director who shall serve as a member of the Executive Committee or any
other committee of the Board provided for in these By-Laws, in
consideration of his serving as such, shall be entitled to such
additional compensation as the Board shall from time to time determine.
Nothing herein contained shall be construed to preclude any Director
from serving the Corporation in any other capacity and receiving
compensation therefor.
Section 11. Directors Emeritus. The Board of Directors
may, at any time and from time to time, designate one or more persons as
Directors Emeritus. Directors Emeritus shall be entitled to attend, in
an advisory capacity, all meetings of the Board, may serve on such
committees of the Board and perform such other services for the
Corporation as may be determined by the Board from time to time, but
shall have no power to vote at meetings of the Board or otherwise to
manage the business and affairs of the Corporation. Whenever in this
Article III and elsewhere in these By-Laws the term "Board", "Director",
or "Directors" are used, such terms shall not include Directors Emeritus
within their meanings. Each Director Emeritus, in consideration of his
serving as such, shall be entitled to receive from the Corporation such
compensation as the Board shall from time to time determine, together
with reasonable expenses incurred by him in attending meetings of the
Board.
ARTICLE IV
Committees
Section 1. Executive Committee. The Board of Directors, by
resolution passed by a majority of the whole Board, shall designate an
Executive Committee to consist of such number of the Directors as shall
be designated from time to time by the Board and shall designate, from
among the members of the Executive Committee, a Chairman of the
Executive Committee. The Executive Committee shall serve at the
pleasure of the Board of Directors and shall have and exercise all
powers of the Board in the general and active management of the business
and the affairs of the Corporation even if not referred to in these
By-Laws in the description of such power(s), except that the Executive
Committee shall not have and may not exercise the following powers:
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(i) To submit or recommend to the Stockholders any action which any
applicable statute requires to be approved by a vote of the
Stockholders;
(ii) To amend or repeal the By-Laws or to adopt any By-Laws or remove
any officer;
(iii) To amend, alter or repeal any resolution of the Board of
Directors which by its terms provides that it will not be amended,
altered or repealed by the Executive Committee;
(iv) To fix compensation for services as a member of the Executive
Committee;
(v) To call any securities of the Corporation for redemption,
conversion or purchase by the Corporation, except pursuant to, and
within such parameters, if any, as may be established by, a specific
delegation of discretionary authority by the Board of Directors, or to
authorize the issuance or sale of any authorized but non-issued stock,
or any Treasury stock, of the Corporation;
(vi) To declare dividends upon any class of capital stock of the
Corporation.
Any removal or designation of a member of the Executive
Committee shall require the affirmative vote of a majority of the whole
Board of Directors.
Section 2. Chairman of the Executive Committee. The Chairman of
the Executive Committee shall preside at all meetings of the Executive
Committee at which he is present and shall receive such compensation as
may be fixed by the Board of Directors, and nothing herein contained
shall be construed to preclude him from serving the Corporation in any
other capacity and receiving compensation therefor.
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Section 3. Compensation and Employee Benefits Committee.
The Board of Directors, by resolution passed by a majority of the whole
Board, shall designate a Compensation and Employee Benefits Committee to
consist of such number of Directors as shall be determined from time to
time by the Board. A majority of the members of the Compensation and
Employee Benefits Committee shall be persons who are not officers or
employees of the Corporation. The Compensation and Employee Benefits
Committee shall have such powers and duties as the Board may properly
determine. In addition, no payment (other than previously established
remuneration) shall be made by the Corporation or any of its
wholly-owned subsidiaries to any director or officer of the Corporation
or of any of its wholly-owned subsidiaries in connection with or because
of any merger to which the Corporation or any of its wholly-owned
subsidiaries is a party, or in connection with or because of any
divestiture of a wholly-owned subsidiary or a division by the
Corporation or any of its wholly-owned subsidiaries, unless such payment
has been approved by a majority of the members of the Compensation and
Employee Benefits Committee who are eligible to vote thereon pursuant to
the following sentence. Any member of the Compensation and Employee
Benefits Committee who has received or has been proposed to receive
payment (other than previously established remuneration) in connection
with or because of such merger or divestiture or who is an officer of
the Corporation shall not participate in the deliberations or voting of
the Committee on any payment described in the preceding sentence. By a
majority vote of its members who are not officers or employees of the
Corporation, the Compensation and Employee Benefits Committee may
recommend to the Board that said Committee retain, at the Corporation's
expense, its own counsel, accountants and experts.
Section 4. Other Committees. The Board of Directors may appoint
such other Committees, which may include as members directors only or
directors and non-directors, as the Board may from time to time consider
desirable, and such Committees shall have such powers and duties as the
Board may properly determine; provided, however, that the powers and
duties of any such Committee whose members shall include non-directors
shall be limited to making recommendations to the Board of Directors.
Section 5. Committee Vacancies, etc. Any Committee appointed
pursuant to this Article shall serve at the pleasure of the Board, which
shall have power at any time to change the
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membership of such Committee, to fill vacancies in it or to dissolve it;
but, subject to such change or dissolution, members of a Committee shall
hold office until the first meeting of the Board of Directors following
the Annual Meeting of the Stockholders next succeeding their appointment
and until their successors are appointed.
Section 6. Committee Meetings. Meetings of a Committee
shall be held at such place within or without the State of Delaware as
may from time to time be determined by the Board of Directors or the
Committee, and no notice of such regular meetings shall be required.
Special meetings of any Committee may be called by the Chairman of such
Committee or by a majority of the members of such Committee. All
special meetings of committees shall be called by the Secretary on the
written request of the requisite members of such Committee as aforesaid.
Notice of a special meeting of any Committee shall be given to each
member thereof by mailing the same at least 48 hours, or by telegraphing
or telephoning the same at least 12 hours, before the time of Meeting.
The majority of the members of a Committee shall constitute a quorum for
the transaction of Committee business. Any member of a Committee may
participate in a meeting of such Committee by means of conference
telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other and such
participation in the meeting shall constitute presence in person at such
meeting. The act of a majority of the members present at any meeting at
which there is a quorum shall be the act of the Committee; provided,
however, that, with respect to the Executive Committee, a majority shall
not be deemed to exist unless it consists of three or more members of
the Committee. A Committee shall keep regular minutes of its Meetings
which shall be reported to the Board of Directors when required.
ARTICLE V
Officers
Section 1. Number, Election and Term of Office. The
officers of the Corporation shall be a Chairman (who shall be designated
Chief Executive Officer), a President, two Vice Chairmen, one or more
Executive Vice Presidents, Senior Vice Presidents and Vice Presidents, a
Secretary, a Treasurer, a General Counsel, a Chief Financial Officer and
a Controller who shall be elected by the Board
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of Directors at any Regular or Special Meeting of the Board, and such
other officers as may be appointed by the Board. Any officer elected by
the board of Directors shall hold office until his successor shall be
elected and shall have qualified, but such officer may be removed at any
time by the affirmative vote of a majority of the Board. The Board may
from time to time elect or appoint such other officers and agents as the
interests of the Corporation may require and may fix their duties and
terms of office. More than one office may be held by the same person.
Section 2. Chairman. The Chairman shall be a director.
Subject to the direction of the Board of Directors, the Chairman shall
have the general and active management of the business of the
Corporation, shall have all of the powers and duties of Chief Executive
Officer, shall perform all other duties and enjoy all other powers
commonly incident to his office or delegated to him by the Board of
Directors and shall preside at all meetings of the Stockholders and the
Board of Directors at which he shall be present.
Section 3. President. The President shall be a Director,
shall be a principal executive of the Corporation and shall be subject
to the direction of the Board of Directors. In the event of disability
of the Chairman, then the President shall perform the duties of the
Chairman.
Section 4. Vice Chairmen. In the event of
non-availability or disability of the Chairman and the President, then
the Vice Chairman designated by the Board shall perform the duties of
the Chairman. Additionally, the Vice Chairmen shall perform such duties
as may be assigned to them by the Board of Directors or the Chairman.
Section 5. Executive Vice Presidents, Senior Vice
Presidents, Vice Presidents and Other Officers. Except as provided in
Article II, Section 6 and Article III, Section 7 of these By-Laws, in
the event of non-availability or disability of the Chairman, the
President and the Vice Chairman designated by the Board to perform the
duties of the Chairman, then any other Vice Chairman, Executive Vice
Presidents, Senior Vice Presidents and Vice Presidents in the order of
designation by the Board shall perform the duties of the Chairman.
Additionally, the Executive Vice Presidents, Senior Vice Presidents and
Vice Presidents shall perform such duties as may be assigned to them by
the Board of Directors or the Chairman.
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Section 6. Secretary. The Secretary shall record all the
proceedings of the Meetings of the Board of Directors and the Executive
Committee, and of the Stockholders of the Corporation in a book or books
to be kept for that purpose. He shall have custody of the records and
of the seal of the Corporation and may affix the seal to any instrument
requiring the seal when authorized by the Board of Directors or the
Executive Committee. He shall have charge of the stock certificate and
stock transfer books of the Corporation. He shall notify the Directors
and Stockholders of the respective meetings as required by law or the
By-Laws of the Corporation, and shall perform such other duties as may
be required of him. The Assistant Secretaries shall, during the
absence or incapacity of the Secretary, assume and perform all functions
and duties which the Secretary might lawfully do if present and not
under any incapacity.
Section 7. Treasurer. The Treasurer shall have charge of
the funds of the Corporation. He shall keep full and accurate accounts
of all receipts and disbursements of the Corporation in books belonging
to the Corporation, and shall deposit all money and other valuable
effects in the name and to the credit of the Corporation in such
depositaries as may be designated by the Board of Directors or the
Executive Committee. He shall disburse the funds of the Corporation as
may be ordered by the Board, and shall render an account of all his
transactions as Treasurer. The Assistant Treasurers shall during the
absence or incapacity of the Treasurer assume and perform all functions
and duties which the Treasurer might lawfully do if present and not
under any incapacity.
Section 8. Chief Financial Officer. The Chief Financial Officer
shall be the principal officer of the Corporation having responsibility
for financial matters and shall perform such duties as may be assigned
to him by the Board of Directors or the Chairman.
Section 9. Controller. The Controller shall be the Chief
Accounting Officer of the Corporation. He shall maintain the records of
the Corporation pertaining to its fiscal affairs and see that adequate
audits thereof are currently and regularly made. He shall render an
account of the financial condition of the Corporation and shall perform
such other duties incident to his office as shall be delegated to him by
the Board of Directors. If the position of Controller is vacant or a
new Controller has served in the position for
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such a short period that the Chairman determines that the new Controller
cannot yet fully discharge the role of Chief Accounting Officer, the
Chief Financial Officer, on the direction of the Chairman, may assume
the role of Chief Accounting Officer.
Section 10. General Counsel. The General Counsel shall be
the chief officer of the Corporation for legal proceedings and matters
of a legal nature and shall have the responsibility of supervising such
matters and proceedings.
Section 11. Bonds. The Treasurer and Assistant Treasurers, if
required so to do by the Board of Directors, shall give a Bond for the
faithful performance of his duties, in such sum and with such surety or
sureties as the Board of Directors may require.
Section 12. Vacancies. If for any reason any vacancy
occurs in any office or agency of the Corporation, the Board of
Directors or the Executive Committee may choose a successor to hold
office for the unexpired term of the office in question.
ARTICLE VI
Divisions and Division Officers
Section 1. Establishment of Divisions and Appointment of
Officers. The Board of Directors may establish one or more divisions of
the Corporation to carry on a portion of the business of the
Corporation. The Board of Directors shall appoint a Chairman of any
division so established. The Chairman of any division may appoint such
other officers of the division as he shall deem appropriate.
Section 2. Authority. The Chairman of any division shall have
ultimate authority and control with respect to significant policy-making
functions relating to the business, operations and affairs of the
division, including overall risk levels, capital, budget and significant
employment and compensation decisions. The other officers of any
division shall have such powers, authorities, functions and
responsibilities with respect to the business, operations and affairs of
the division as may be prescribed from time to time by the Board of
Directors or the Chairman of the division. All acts, contracts,
engagements and undertakings by such
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division officers within the scope of their powers, authorities,
functions or responsibilities shall be binding upon the Corporation and
the division for which such officers shall have acted.
ARTICLE VII
Removal of Directors
Any Director may be removed at any time by the vote of the
holders of a majority of all the shares of stock of the Corporation
entitled to vote for his election, given at a Meeting called for that
purpose, and the vacancy in the Board caused by such removal may be
filled by such Stockholders at such meeting or, if the Stockholders
shall fail to fill such vacancy, by the Board by a majority vote of the
remaining Directors (except as provided in Section 2, Article III of
these By-Laws) though less than a quorum.
ARTICLE VIII
Contracts, Checks, Drafts, Etc.
Section 1. Contracts, etc., How Executed. The Board,
except as in these By-Laws otherwise provided, may authorize any officer
or officers, agent or agents, or employee, to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Corporation and such authority may be general or confined to specific
instances, and may be granted by the Board pursuant to authorization
given by the Board, and, unless so authorized, no agent or employee
shall have power or authority to bind the Corporation by any contract or
engagement or to pledge its credit or to render it liable pecuniarily
for any purpose or to any amount.
Section 2. Loans. No loan shall be contracted on behalf of the
Corporation and no negotiable paper shall be issued in its name, unless
authorized by, or given pursuant to authorization of, the Board. When
so authorized by the Board of Directors or the Executive Committee, any
officer or agent of the Corporation may effect loans and advances at any
time for the Corporation from any bank, trust company or other
institution, or from any firm, corporation or individual, and for such
loans and advances may
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make, execute and deliver promissory notes, or other evidences of
indebtedness of the Corporation. Such authority may be general or
confined to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts, bills of
exchange and promissory notes and other negotiable instruments of the
Corporation shall be signed by such officers or agents of the
Corporation as may be designated by the Board.
ARTICLE IX
Stock
Section 1. Certificates of Stock. The certificates for
shares of stock of the Corporation shall be in such form, not
inconsistent with the Certificate of Incorporation, as shall be
prepared or approved by the Board of Directors. Every certificate shall
be signed by the Chairman, the President or any Executive Vice
President, Senior Vice President or Vice President, and by the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
and no certificate shall be valid unless so signed, provided, however,
that where such certificate is countersigned by a registrar designated
by the Corporation for such purpose, all other signatures thereon
(including those of a transfer agent or an assistant transfer agent or a
transfer clerk acting on behalf of the Corporation) may be facsimiles.
All certificates shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued. Every
certificate shall certify the name of the person owning the shares
represented thereby, with the number of said shares and the date of
issue.
All certificates surrendered to the Corporation shall be
cancelled and, except in the case of lost, stolen or destroyed
certificates, no new certificates shall be issued until the former
certificate for the same number of shares of the same class of stock has
been surrendered and cancelled.
Section 2. Transfer of Stock. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate
for shares duly endorsed or accompanied by proper
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evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction
upon its books.
ARTICLE X
Registered Stockholders
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and, accordingly,
shall not be bound to recognize any equitable or other claim to, or
interest in, such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of Delaware.
ARTICLE XI
Lost, Stolen or Destroyed Certificates
Any person claiming a certificate of stock to be lost, stolen or
destroyed, shall make an affidavit or affirmation of that fact and, if
required by the Board of Directors, advertise the same in such manner as
the Board may require, and the Board of Directors may, in their
discretion, require the owner of the lost, stolen or destroyed
certificate, or his legal representative, to give the Corporation a bond
in a sum sufficient, in the opinion of the Board of Directors, to
indemnify the Corporation against any claim that may be made against it
on account of the alleged loss, theft or destruction of any such
certificate.
ARTICLE XII
Fixing of Record Date
In order that the Corporation may determine the Stockholders
entitled to notice of or to vote at any Meeting of Stockholders or any
adjournment thereof, or to express consent to corporate action in
writing without a Meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change,
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conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which
shall not be more than sixty nor less than ten days before the date of
such Meeting, nor more than sixty days prior to any other such action.
ARTICLE XIII
Dividends
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared
by the Board of Directors at any Regular or Special Meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the
capital stock, subject to the provisions of the Certificate of
Incorporation.
ARTICLE XIV
Waiver of Notice
Whenever any notice whatever is required to be given by
statute or under the provisions of the Certificate of Incorporation or
by these By-Laws, a waiver thereof in writing signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be equivalent thereto.
ARTICLE XV
Seal
The corporate seal of the Corporation shall be circular and shall bear
the name of the Corporation and the year and state of its incorporation.
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ARTICLE XVI
Fiscal Year
The fiscal year of the Corporation shall begin on the first day of
January of each year and shall end on the thirty-first day of December
following.
ARTICLE XVII
Amendments
These By-Laws may be altered or repealed at any Regular Meeting of the
Stockholders or at any Special meeting of the Stockholders at which a
quorum is present or represented, provided notice of the proposed
alteration or repeal be contained in the notice of such Special Meeting,
by the affirmative vote of a majority of the stock entitled to vote at
such Meeting and present or represented thereat, or by the affirmative
vote of a majority of the Board of Directors at any Regular Meeting of
the Board or at any Special Meeting of the Board if notice of the
proposed alteration or repeal be contained in the notice of such Special
Meeting; provided, however, that the provisions of Section 5 of Article
II, Section 2 of Article III, Article VII and this Article XVII, insofar
as they relate to the rights of the holders of the Corporation's
Preferred Stock, may not be amended without the affirmative vote of the
holders of a majority of such Preferred Stock voting separately as a
class.
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EXHIBIT 12.a
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Fixed Charges
(Unaudited)
Years Ended December 31,
------------------------------------------
Dollars in millions 1994 1993 1992 1991 1990
------- ------- ------- ------- -------
Earnings:
Income (loss) before taxes and
cumulative effect of change
in accounting principles $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see
below) 4,919 4,644 4,373 5,704 6,032
Other adjustments (3) 22 20 (4) (16)
------- ------- ------- ------- -------
Earnings as defined $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
======= ======= ======= ======= =======
Fixed Charges:
Interest expense $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 27 44 49 66 73
------- ------- ------- ------- -------
Fixed charges as defined $ 4,919 $ 4,644 $ 4,373 $ 5,704 $ 6,032
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges 0.83* 1.32 1.25 1.16 1.08
======= ======= ======= ======= =======
NOTE:
The ratio of earnings to fixed charges is calculated by dividing fixed charges
into the sum of income (loss) before taxes and 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.
* For the year ended December 31, 1994, earnings as defined were inadequate to
cover fixed charges. The amount by which fixed charges exceeded earnings
as defined for the year was $834 million.
<PAGE>
EXHIBIT 12.b
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
Years Ended December 31,
------------------------------------------
Dollars in millions 1994 1993 1992 1991 1990
------- ------- ------- ------- -------
Earnings:
Income (loss) before taxes and
cumulative effect of change
in accounting principles $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see
below) 4,919 4,644 4,373 5,704 6,032
Other adjustments (3) 22 20 (4) (16)
------- ------- ------- ------- -------
Earnings as defined $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
======= ======= ======= ======= =======
Fixed Charges and
Preferred Dividends:
Interest expense $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 27 44 49 66 73
------- ------- ------- ------- -------
Fixed charges as defined 4,919 4,644 4,373 5,704 6,032
Preferred dividends (tax
equivalent basis) 129 83 131 121 105
------- ------- ------- ------- -------
Combined fixed charges
and preferred dividends $ 5,048 $ 4,727 $ 4,504 $ 5,825 $ 6,137
======= ======= ======= ======= =======
Ratio of earnings to
combined fixed charges
and preferred dividends 0.81* 1.30 1.21 1.14 1.06
======= ======= ======= ======= =======
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 income (loss) before taxes and 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.
Dividends on preferred stock are adjusted for the aftertax impact of interest
rate swaps that effectively convert the Company's fixed-rate obligations to
variable-rate. In 1992, 1991 and 1990, the impact of the swaps related to the
Series A Preferred was included in reported earnings.
* For the year ended December 31, 1994, earnings as defined were inadequate to
cover fixed charges, including preferred dividends. The amount by which
fixed charges, including preferred dividends, exceeded earnings as defined
for the year ended December 31, 1994 was $963 million.
<PAGE>
SALOMON INC
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before taxes and cumulative effect of change
in accounting principles by segment:
Salomon Brothers' business unit contribution:
Client-Driven Business $ (636) $ 1,159 $ 276 $ 227
Proprietary Trading Businesses (49) 416 1,416 1,103
Other (278) -- (302) (294)
-----------------------------------------------------------------------------------------------------------------------
Total Salomon Brothers (963) 1,575 1,390 1,036
Phibro Division 81 (15) (194) 47
Phibro USA 18 (46) (47) (80)
Corporate and Other 33 (49) (93) (84)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect of change
in accounting principles $ (831) $ 1,465 $ 1,056 $ 919
=======================================================================================================================
Net income (loss) $ (399) $ 827 $ 550 $ 507
=======================================================================================================================
Fully diluted return on average common stockholders' equity* (11.7)% 19.3% 12.9% 12.9%
=======================================================================================================================
Per common share:
Primary earnings (loss) $ (4.31) $ 7.01 $ 4.18 $ 3.90
Fully diluted earnings (loss)* (4.31) 6.28 4.05 3.79
Cash dividends 0.64 0.64 0.64 0.64
Book value at year-end 32.65 37.93 32.06 28.76
=======================================================================================================================
Capital and liquidity:
Stockholders' equity $ 3,792 $ 4,546 $ 3,631 $ 3,367
Convertible preferred stock 700 700 700 700
Long-term capital 16,138 16,834 11,735 10,024
Equity capital basis double leverage ratio 1.18 1.45 1.61 1.65
Total capital basis double leverage ratio 0.87 0.96 1.15 1.21
Working capital coverage ratio 1.07 1.32 0.95 0.91
=======================================================================================================================
</TABLE>
Salomon Brothers' "Other" results include 1994 fourth quarter pretax charges
of $278 million in connection with the resolution of unreconciled balances
related to Salomon Brothers' London-based companies and the completion of a
detailed review of Salomon Brothers' general ledger accounts related to interest
rate swaps; and pretax charges of $185 million in 1992 and $200 million in 1991
in connection with the U.S. Treasury auction and related matters. 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 convertible 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
14 OVERVIEW OF 1994
20 SEGMENT INFORMATION
32 DERIVATIVE INSTRUMENTS
37 CAPITAL AND LIQUIDITY MANAGEMENT
45 RISK MANAGEMENT
56 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
57 CONSOLIDATED FINANCIAL STATEMENTS
94 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
95 COMMON STOCK DATA
96 FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
2
<PAGE>
SALOMON INC
OVERVIEW OF 1994
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 and gathering
activities are conducted by Phibro Energy USA, Inc. ("Phibro USA") which owns
and operates three refineries in the U.S. Gulf Coast region.
15 THE YEAR IN REVIEW
16 SALOMON INC TODAY
18 CONSOLIDATED SALOMON INC RESULTS
14
<PAGE>
SALOMON INC
THE YEAR IN REVIEW
o The Company recorded a net loss of $399 million, or $4.31 per share in
1994. As discussed later in more detail, results for the year included certain
charges by Salomon Brothers in connection with the resolution of unreconciled
balances related to Salomon Brothers' London-based companies and the completion
of a detailed review of Salomon Brothers' general ledger accounts and
transaction databases related to interest rate swaps, and certain tax benefits
which, in the aggregate, reduced net income by $87 million. Book value per
common share was $32.65 at December 31, 1994.
o Salomon Brothers, the Company's international investment banking and
securities business, recorded a pretax loss of $963 million in 1994, which
included fourth quarter pretax charges of $278 million in connection with the
resolution of unreconciled balances related to Salomon Brothers' London-based
companies and the completion of a comprehensive review of global general ledger
accounts and transaction databases related to interest rate swap activities.
o Salomon Brothers' Client-Driven Business recorded a pretax loss of $636
million in 1994. This loss reflects the depressed levels of both underwriting
volume and customer trading activity that prevailed for much of the year as well
as inventory and trading losses incurred by certain units within the
Client-Driven Business.
o Salomon Brothers' Proprietary Trading Businesses recorded a pretax loss of
$49 million in 1994. For the compensation year ended September 30, 1994,
Proprietary Trading Businesses had pretax earnings of $487 million reflecting
exceptionally strong pretax earnings of $508 million for the quarter ended
December 31, 1993. For the twelve months ended September 30, 1993, Proprietary
Trading Businesses had pretax earnings of $390 million.
o Salomon Swapco Inc ("Swapco"), Salomon Brothers' triple-A rated
derivatives subsidiary, completed its first full year of operation. At December
31, 1994, Swapco had contracts with a notional amount of $67 billion
outstanding.
o The Phibro Division recorded pretax earnings of $81 million in 1994. Since
completing the restructuring undertaken in late 1992, the Phibro Division has
expanded its trading base beyond its traditional strength in energy, while
maintaining fixed expenses at a relatively low level.
o Phibro USA recorded pretax earnings of $18 million in 1994. Work continued
on Phibro USA's Residfiner project, which is expected to be mechanically
complete by the end of 1995 and will reduce Phibro USA's exposure to the
low-margin residual fuel oil market. Phibro USA also sold its interests in
several non-core businesses.
o The Company's long-term capital, which includes common and perpetual
preferred equity capital, unsecured obligations and convertible preferred stock
maturing beyond one year, a portion of unsecured obligations and convertible
preferred stock maturing within one year (weighted by maturity), and long-term
deferred taxes, was $16.1 billion at year-end. Total assets were $173 billion.
Certain of the Company's debt ratings were downgraded in 1994.
o The Company's Board of Directors authorized the repurchase of up to 10
million shares of the Company's common stock, which includes 4.6 million shares
remaining under a previous authorization. During 1994, the Company repurchased
5.2 million shares at an aggregate cost of $252 million, or $48.57 per share.
Nearly all of these repurchases took place in the first quarter of the year. At
December 31, 1994, shares authorized for additional repurchase totaled 9.8
million.
15
<PAGE>
SALOMON INC
SALOMON INC TODAY
OVERVIEW
1994 was a disappointing year for the Company and, particularly, for Salomon
Brothers. The loss for the year was the Company's first since the merger of
Salomon Brothers and Phibro Corporation in 1981. Although extremely difficult
market conditions put pressure on results for virtually all participants in the
securities and investment banking business, the Company's principal competitors
in the United States had profits in 1994, albeit much lower than in 1993.
A significant factor contributing to differences between returns generated by
the Company and its competitors is the mix of the Company's businesses. In
addition to having a large proprietary trading business, Salomon Brothers is
more dependent on trading in its client business than many of its competitors.
Salomon Brothers does not have significant retail, asset management or clearing
and custody businesses. The combination of these factors causes Salomon
Brothers' results to be more volatile than those of its competitors.
The Company's Phibro Division commodities trading unit and Phibro USA oil
refining business returned to profitability in 1994 following losses in prior
years. The scope of these businesses, and consequently their impact on
consolidated results, is much less than that of Salomon Brothers.
INITIATIVES
As discussed below, and elsewhere in this report, the Company is taking steps to
strengthen controls and enhance returns.
COMPENSATION
Salomon Brothers manages the businesses that comprise the Client-Driven Business
as a single, integrated global business rather than a group of related but
separate businesses. Effective October 1, 1994, the beginning of the current
compensation year, the way in which compensation is determined for participating
Managing Directors ("partners") within these businesses has been modified to
reflect this change in focus. Previously, compensation for each business unit
within the Client-Driven Business was formula-driven. Aggregate compensation of
partners now depends upon the performance of the Client-Driven Business as a
whole. This approach is intended to more closely align the partners' interests
with the Company's shareholders, promote cooperation among the units and
increase the flexibility, variability and logic of compensation expense. For a
more detailed discussion of the changes in the compensation plans, including
those related to the Proprietary Trading Businesses, see "Salomon Brothers--
Results of Operations."
RISK MANAGEMENT
The Company's poor results in 1994 were attributable in part to weaknesses in
the management of risks inherent in its businesses. For example, weaknesses in
trading risk management in several areas within Salomon Brothers' Client-Driven
Business contributed to significant inventory losses earlier in the year in
certain products, such as mortgages. Charges recorded upon the resolution of
unreconciled balances were the result of financial systems incapable of
efficiently handling an expansion in both the volume and complexity of
business. The Company's efforts to address these areas, as well as the other
risks inherent in its businesses, are discussed in greater detail in the
"Risk Management" section of this report.
16
<PAGE>
SALOMON INC TODAY
BUSINESS PROCESS REVIEW
This effort, undertaken in late 1994, links Salomon Brothers' Strategic Planning
Group with a strengthened budget process. The objectives of the Business Process
Review are (1) to provide a tactical focus on shorter term expense reduction
initiatives and (2) to assist with the longer term fundamental redesign of the
way Salomon Brothers transacts business.
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity management is an integral facet of capital management and is
especially critical for a financial intermediary. The objective of the Company's
liquidity management process is to provide constant access to funding, even
under the most difficult market conditions. The principal source of funding
continues to be short-term secured borrowings, primarily repurchase agreements.
The Company's access to secured funding is facilitated by its highly liquid
balance sheet. Liquidity is principally a function of asset quality and, at
December 31, 1994, more than 80% of the Company's assets consisted of cash and
interest bearing equivalents, G-7 government securities, investment grade
corporate debt, and short-term financing agreements collateralized by such
securities. The Company also maintains committed secured credit facilities
exceeding $3 billion. At December 31, 1994, there were no outstanding borrowings
under these facilities.
The Company's policy is to support its working capital requirements with
long-term capital. Since mid-1993, the Company's targeted working capital
coverage ratio (i.e., long-term capital divided by required working capital) has
been 1.10. The Company's capital management also focuses on the distribution of
capital among the Company's businesses and the relationship between subsidiary
capital levels, driven largely by regulatory requirements, and capital available
to the Company as a whole. This relationship is typically expressed through
double leverage ratios. The Company's double leverage ratios have been reduced
in each of the past four years. Significant progress was achieved in 1994
towards reducing the Company's equity capital basis double leverage ratio.
17
<PAGE>
SALOMON INC
CONSOLIDATED SALOMON INC RESULTS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31, 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before taxes and cumulative effect of change in
accounting principles by segment:
Salomon Brothers $ (963) $ 1,575 $ 1,390 $ 1,036
Phibro Division 81 (15) (194) 47
Phibro USA 18 (46) (47) (80)
Corporate and Other 33 (49) (93) (84)
-----------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect of change
in accounting principles (831) 1,465 1,056 919
Income tax expense (benefit) (432) 601 506 412
-----------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principles (399) 864 550 507
Cumulative effect of change in accounting principles,
net of related income taxes -- (37) -- --
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (399) $ 827 $ 550 $ 507
=================================================================================================================
Per common share:*
Primary earnings (loss) $ (4.31) $ 7.01 $ 4.18 $ 3.90
Fully diluted earnings (loss)** (4.31) 6.28 4.05 3.79
Cash dividends 0.64 0.64 0.64 0.64
Book value at year-end 32.65 37.93 32.06 28.76
=================================================================================================================
Return on average common stockholders' equity:*
Primary method (11.7)% 21.9% 13.6% 13.9%
Fully diluted method** (11.7) 19.3 12.9 12.9
=================================================================================================================
<FN>
* Earnings (loss) 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 convertible preferred stock,
unless such assumptions result in higher returns on equity or earnings
per share than determined under the primary method.
</TABLE>
The Company's 1994 results include charges of $303 million before taxes ($189
million aftertax), that resulted from the substantial completion of a general
ledger review at Salomon Brothers' London-based companies, as well as the
conclusion of a comprehensive review of global general ledger accounts and
transaction databases related to interest rate swap activities. See "Salomon
Brothers'--Results of Operations" for a discussion of these charges and related
charges in 1993 and 1992. The Company's 1994 results also include a $102
million income tax benefit that resulted from the reversal of reserves
established in prior years to cover potential tax liabilities. Favorable
developments pertaining to certain U.S. federal, state and local, and non-U.S.
income tax matters permitted the reversal. In the aggregate, 1994 net income was
reduced by $87 million as a result of the aforementioned charges and benefits.
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.
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
18
<PAGE>
CONSOLIDATED SALOMON INC RESULTS
Philipp Brothers commodities segment and, beginning in the third quarter of
1993, results of The Mortgage Corporation Group Limited and its subsidiaries
("TMC"), which originates and services residential mortgages in the United
Kingdom.
The 1994 results of Corporate and Other were positively impacted by improvement
in the operating results of TMC as well as positive developments which permitted
the reduction in the Company's reserve for environmental matters. The 1993
results of Corporate and Other included a $20 million writedown of PEPI's
investment in the White Nights Joint Enterprise ("White Nights"), a
Russian-American oil production venture located in Western Siberia.
PEPI's primary asset is its 45% direct and indirect investment in White Nights.
White Nights is entitled to incremental production resulting from the
development of three oil fields, two of which are currently in production. This
work involves the application of western technology and improved reservoir
management. The venture's oil exports increased 13% to 3.6 million barrels in
1994 from 3.2 million barrels in 1993, resulting in gross sales proceeds
totaling $52 million in 1994 compared with $46 million in 1993. Since PEPI's
initial debt and equity investment of nearly $120 million in White Nights and
related projects, which was made from late 1990 through the first half of 1992,
the project has been maintained on a self-funding basis.
During 1994, White Nights resolved a number of problems which had beset
operations in prior years. First, White Nights received an exemption, effective
September 1, 1994, from an export tax of approximately $5 per barrel. Since
January 1, 1992, White Nights had paid a total of $33 million in export taxes.
The exemption is for three years or until such earlier time as White Nights
recovers its capital investment. Second, White Nights received a government
approved increase in the amount of production which is deemed incremental and,
therefore, for the account of White Nights. The export tax exemption, coupled
with the increased production revenue, allowed White Nights to cover operating
costs and capital expenditures and to pay PEPI $6 million of current and prior
period loan interest. The interest payments represent the first cash received by
PEPI in connection with its investment in White Nights. These payments were
recorded as reductions in the carrying value of the investment. Although loan
payments are expected to continue in 1995, White Nights' future remains
uncertain and dependent on Russian fiscal, legislative, and regulatory policy.
As a result, future writedowns may be required. At December 31, 1994, the
investment in White Nights was carried at $58 million compared with $64 million
at December 31, 1993.
Based on positive developments in 1994 and 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, excluding remediation expenditures charged against the reserve, were
approximately $15 million in both 1994 and 1993. Environmental expenses,
primarily reserve additions, totaled $38 million in 1992. A further discussion
of environmental matters is included in "Risk Management--Environmental Risk."
19
<PAGE>
SALOMON INC
SEGMENT INFORMATION
Graph #3 (See Appendix A)
Graph #4 (See Appendix A)
Graph #5 (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 that provides a
variety of capital raising, market-making and brokerage services to its clients
worldwide and engages in proprietary trading. With branches, subsidiaries or
representative offices in Australia, Canada, China, France, Germany, Hong Kong,
Italy, Japan, Malaysia, Singapore, South Korea, Spain, Switzerland, Taiwan,
Thailand, the United Kingdom and the United States, and associate relationships
in Brazil and Chile, Salomon Brothers and its affiliates are able to access and
serve markets and clients around the world. Salomon Brothers is organized into
two distinct businesses, its Client-Driven Business and its Proprietary Trading
Businesses. The Client-Driven Business provides various services for its
government, financial institution and corporate clients including fixed income
and equity sales and trading, foreign exchange trading, emerging markets
activities, fixed income and equity market research, investment banking and
funds management. In the first quarter of 1995, Salomon Brothers announced its
intention to discontinue its Private Investment Department, which provided
financial services and strategic advice for high net-worth individuals.
Financial products offered by Salomon Brothers 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. The Proprietary Trading Businesses execute trading
and arbitrage strategies using debt, equity, and derivative instruments for
Salomon Brothers' own account. Principal operating subsidiaries of Salomon
Brothers Holding Company Inc ("SBHC") are Salomon Brothers Inc ("SBI") in New
York, Salomon Brothers International Limited ("SBIL") in London, Salomon
Brothers Asia Limited ("SBAL") in Tokyo, 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. In addition to providing
liquidity to investors across a broad range of markets and financial
instruments, Salomon Brothers' significant capital base and extensive
distribution capabilities enable it to execute numerous capital intensive
trades on behalf of its customers and for its own account. 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 futures, swap
agreements, and other contractual commitments.
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 clients
through Salomon Brothers Asset Management Inc ("SBAM"). SBAM provides portfolio
management services to pension funds, investment companies, endowments,
foundations, banks, insurance companies, corporations and government agencies.
21
<PAGE>
SALOMON BROTHERS
During 1994, SBAM established numerous funds around the world. As of December
31, 1994, assets managed or under advisement by SBAM were $12 billion.
A significant consideration of participants in the long-term derivatives market
is counterparty credit quality. In 1993, SBHC established Swapco, a wholly-owned
subsidiary with credit ratings of Aaa from Moody's, AAAt from Standard & Poor's
and AAA from Fitch. Through the use of back-to-back collateralized transactions,
Swapco transfers its market risk to other related entities (without reducing the
Company's aggregate market risk). Risk arising from Swapco's activities is
reviewed and managed on a consolidated basis together with risk arising from
the Company's other activities. 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. 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.
Since it began operations in 1993, Swapco has executed over 900 transactions
with 118 counterparties. Additionally, Swapco has negotiated nearly 150 master
agreements with counterparties located in North America, Europe, Asia and
Australia. Notional contracts outstanding with third parties totaled $67 billion
at December 31, 1994. 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.
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; 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 its securities and
related businesses. Continued competition comes from commercial banks, insurance
companies and other corporations which have entered the securities and related
businesses, as well as large private investment funds actively engaged in
proprietary trading. As a result of pending legislation and regulatory
initiatives in the United States to remove or relieve certain restrictions on
commercial banks, it is anticipated that competition in some markets currently
dominated by investment banks may increase in the near future. Salomon Brothers'
ability to succeed depends on its ability to respond to customer needs and
anticipate changes in the markets, its access to funding and capital, its
creditworthiness in transactions as agent and counterparty, its efficiency in
executing a substantial volume of transactions and in providing other financial
services, and its ability to retain key personnel.
22
<PAGE>
SALOMON BROTHERS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Client-Driven Business:
Global investment banking:
Advisory $ 219 $ 151 $ 142 $ 164
Equity underwriting 190 296 111 147
Debt underwriting 77 344 197 185
----------------------------------------------------------------------------------------------------------
Total global investment banking revenues 486 791 450 496
Fixed income secondary markets 360 1,612 1,064 845
Equities secondary markets 187 536 232 385
Foreign exchange (63) 204 189 14
Private Investment Department* 31 67 28 26
Asset management 38 29 20 20
----------------------------------------------------------------------------------------------------------
Total revenues from Client-Driven Business 1,039 3,239 1,983 1,786
Proprietary Trading Businesses 317 896 1,945 1,489
Other (278) -- 23 44
----------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,078 $ 4,135 $ 3,951 $ 3,319
==========================================================================================================
Income (loss) before taxes and cumulative effect of change
in accounting principles:
Client-Driven Business $ (636) $ 1,159 $ 276 $ 227
Proprietary Trading Businesses (49) 416 1,416 1,103
Other** (278) -- (302) (294)
----------------------------------------------------------------------------------------------------------
Total income (loss) before taxes and cumulative effect of change
in accounting principles $ (963) $ 1,575 $ 1,390 $ 1,036
==========================================================================================================
<FN>
* To be discontinued in 1995.
** "Other" results include 1994 fourth quarter pretax charges of $278 million
in connection with the resolution of unreconciled balances related to
Salomon Brothers' London-based companies and the completion of a detailed
review of Salomon Brothers' general ledger accounts related to interest rate
swaps; and pretax charges of $185 million in 1992 and $200 million in 1991
in connection with the U.S. Treasury auction and related matters.
</TABLE>
Salomon Brothers had a pretax loss of $963 million in 1994 compared with pretax
earnings of $1.6 billion in 1993 and $1.4 billion in 1992. Client-Driven
Business revenues decreased 68% from 1993's record levels. A decline of 65% in
revenues from Proprietary Trading Businesses also contributed to Salomon
Brothers' negative results. Salomon Brothers' 1994 results included special
charges, discussed further below, that reduced revenues by $303 million,
including $278 million in the fourth quarter.
The Client-Driven Business generated pretax losses of $636 million in 1994,
compared with record earnings of $1.2 billion in 1993 and earnings of $276
million in 1992. Market conditions for the Client-Driven Business were very
difficult in 1994 and contrasted sharply with the favorable environment of 1993.
The decline in revenues was predominantly attributable to the following factors:
(1) a decline in customer activity, (2) reduced trading opportunities, (3)
trading losses in certain businesses in the first half of 1994, and (4)
increased cost of carry on inventories. Capital raising activity, which was
extraordinarily strong in the low interest rate environment of 1993, contracted
sharply in 1994
23
<PAGE>
SALOMON BROTHERS
as interest rates rose. Uncertainty in the fixed income markets contributed to a
substantial decline in secondary market activity as well. These large drops in
both primary and secondary market volume were accompanied by significant
declines in the value of fixed income securities. Risks attendant in maintaining
market-making inventories can often be reduced by hedging, but not all market
risk can be effectively hedged, particularly when market liquidity declines, as
was the case earlier in the year with respect to mortgage-related securities and
later in the year for emerging market securities. Adverse market developments,
together with inadequate trading risk management in a few areas within the
Client-Driven Business, led to large trading losses. In response, Salomon
Brothers has taken steps to strengthen its risk management (see "Risk
Management--Market Risk"). In contrast to these negative developments, merger
and acquisition activity was quite strong in 1994.
Graph #6 (See Appendix A)
Graph #7 (See Appendix A)
Graph #8 (See Appendix A)
The Proprietary Trading Businesses are organized into three distinct units,
based on geographic focus. These units execute many different strategies,
involving a broad spectrum of financial instruments and derivative products, in
various markets around the world. Pretax losses from Proprietary Trading
Businesses were $49 million in 1994, compared with earnings of $416 million in
1993 and $1.4 billion in 1992. Results for 1994 were diverse across units. 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 (estimated
liquidation value) taking into account the position size, 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. However, because proprietary trading strategies are often
designed with time horizons of a year or more, profits or losses reported in
interim periods may not reflect the ultimate success or failure of these
strategies.
24
<PAGE>
SALOMON BROTHERS
Salomon Brothers' 1994 results include a pretax charge of $194 million ($126
million aftertax) attributable to unreconciled balances related to Salomon
Brothers' London-based companies. These balances were identified as Salomon
Brothers changed operational systems and conducted its detailed review of
databases supporting general ledger balances. The review necessitated a number
of adjustments affecting transactions going back at least until 1989 involving
many different instruments, positions and related currency effects. Although
the charge relates to a number of years, the impact on any single year would not
have been material. A detailed review of general ledger balances related to
Salomon Brothers' U.S.-based operations was completed in the 1993 fourth
quarter, resulting in a pretax charge of $87 million ($49 million aftertax),
which was not material to the 1993 fourth quarter. Salomon Brothers' 1994
results also include pretax charges of $109 million ($63 million aftertax)
arising from the completion of a detailed review of Salomon Brothers' general
ledger accounts related to interest rate swaps and the interest rate swap
transactions database. Problems in recording the results of interest rate swap
activities date back to the mid-1980s. From 1992 through 1994, pretax charges of
$161 million were recorded in connection with this effort. With the exception of
the fourth quarter of 1994, the impact on earnings in any single period was not
material.
The pretax charges described above are reflected as reductions in revenues from
principal transactions. See "Risk Management--Operational and Support Risk" for
a discussion of the circumstances that led to these charges. All amounts other
than the $278 million recorded in the 1994 fourth quarter are included in
business unit
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1994 1993 1992 1991
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and employee-related expenses $1,355 $1,810 $1,577 $1,272
=============================================================================================
Compensation ratio* n/m 53% 53% 55%
=============================================================================================
Recurring non-compensation expenses:
Technology $ 240 $ 249 $ 272 $ 299
Occupancy 163 175 196 158
Professional services and business development 143 116 108 128
Clearing and exchange fees 67 62 64 66
Other 73 103 77 52
---------------------------------------------------------------------------------------------
Total recurring non-compensation expenses 686 705 717 703
Non-recurring non-compensation expenses -- 45 267 308
---------------------------------------------------------------------------------------------
Total non-compensation expenses $ 686 $ 750 $ 984 $1,011
=============================================================================================
Non-compensation expense ratio:**
Total non-compensation expenses 64% 18% 25% 30%
Recurring non-compensation expenses 64% 17% 18% 21%
=============================================================================================
<FN>
n/m -- not meaningful
* Compensation as a percentage of earnings before taxes and compensation
** Non-compensation expenses as a percentage of revenues, net of interest
</TABLE>
25
<PAGE>
SALOMON BROTHERS
revenues and earnings in the preceding table. Salomon Brothers' "Other" results
include a $185 million charge in 1992 and a $200 million charge in 1991 in
connection with the U.S. Treasury auction and related matters.
Compensation and employee-related expenses, the largest component of noninterest
expenses, decreased by $455 million in 1994, reflecting weaker operating
results. Prior to October 1, 1994, Salomon Brothers' compensation for each of
its 16 business units (excluding the Private Investment Department) was
formula-driven, with aggregate compensation for each unit based upon the unit's
results for the compensation year ending September 30. Under that approach,
Salomon Brothers' total compensation expense was impacted not only by the level
of earnings, but by the mix of earnings among the business units. Beginning with
the 1995 compensation year, which began October 1, 1994, the Company has changed
the way in which participating Managing Directors ("partners") of Salomon
Brothers' Client-Driven Business are compensated. Partners of the Client-Driven
Business now receive a fixed minimum compensation (approximately 35% of their
1994 compensation) plus 40% of the earnings of the Client-Driven Business in
excess of an aftertax return to shareholders that is fixed initially at 7% of
applicable equity capital and will be increased to 10% over a two-year phase-in.
Partners now have their compensation dependent upon performance of the whole
Client-Driven Business, and their compensation will be more variable. Salomon
Brothers' Proprietary Trading Businesses continue to have formula-driven
compensation arrangements for each of the three separate business units.
However, beginning with the 1995 compensation year, these agreements are
multiple year compensation arrangements. Under the new approach, a portion of
formula-driven compensation in excess of specified minimums will be accumulated
in deferred compensation accounts that will be reduced in the event of losses in
subsequent years.
Salomon Brothers' recurring non-compensation expenses decreased by $19 million
in 1994 following a $12 million decrease in 1993. These decreases reflect cost
savings attributable, in part, to 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.
Graph #9 (See Appendix A)
Non-recurring non-compensation expenses in 1993 consist of occupancy charges
incurred in connection with the reduction of leased office space in New York and
Tokyo. Non-recurring expenses 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. The Division consists of five
principal trading departments: oil, natural gas, metals, non-exchange traded
commodities and soft commodities. The non-exchange traded category includes
petrochemicals, plastics, coal, coke, and fertilizers. Soft commodities traded
include coffee, cocoa, grains, and sugar. The Division makes extensive use of
futures markets and is a major participant in the derivatives market. The
restructuring of the Division, which was announced in late 1992, was
substantially completed by the end of 1993. The restructuring included exiting
certain businesses and significantly reducing the scope of others. Principal
competitors of the Phibro Division are major integrated oil companies, other
commodity trading companies, investment banks, and other financial institutions.
RESULTS OF OPERATIONS
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1994 1993 1992 1991
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues, net of interest $ 191 $ 46 $ (28) $ 159
--------------------------------------------------------------------------------------------
Compensation and employee-related expenses 83 40 45 49
Other general and administrative expenses 27 21 43 29
Restructuring and relocation -- -- 78 34
--------------------------------------------------------------------------------------------
Total noninterest expenses 110 61 166 112
--------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect of change
in accounting principles $ 81 $ (15) $(194) $ 47
============================================================================================
</TABLE>
Phibro Division's strategy is to focus solely on commodities trading, while
maintaining tight control over fixed costs. As a dealer, Phibro Division engages
in counterparty flow business and proprietary trading. Given its proprietary
trading activities, Phibro Division's operating results are subject to a high
degree of volatility in the short term. Thus, results are better evaluated over
the longer term.
Phibro Division returned to profitability in 1994 after incurring losses in 1993
and 1992. Higher compensation expense in 1994 reflects this improvement. 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 costs 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.
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 271,700 barrels per day and additional
throughputs of purchased feedstock of approximately 39,000 barrels per day. 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's refined product
output encompasses many grades of light transportation fuel, marine fuel, jet
fuel, heating oil, residual fuel oil, asphalt, and specialty petrochemicals. 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. These activities are complemented by Phibro USA's
marketing and distribution capabilities. These include supply activities in
both domestic and foreign crude oil, feedstocks, liquified petroleum gases and
natural gas, as well as product distribution activities through bulk clean
product marketing, wholesale marketing, Northeast retail supply, heavy oil
marketing (including ship bunkering, residual fuel oil marketing and asphalt
sales) and the manufacture and sales of petrochemicals and specialty solvents.
Phibro USA has no retail marketing outlets.
The most important challenge met by Phibro USA during 1994 was the continued
development of the Residfiner/Residual Oil Super Critical Extraction unit
project, which is expected to be mechanically complete by the end of 1995. This
project will result in an optimized, two-refinery Texas system producing higher
valued products from lower cost feedstocks, resulting in both greater and more
stable earnings. The project is intended to convert the Texas City, Texas
refinery into a full upgrading refinery by providing 75,000 barrels per day of
resid hydroprocessing capacity, 600 long tons per day of sulfur plant capacity,
30,000 barrels per day of resid de-asphalting capacity, and an offsite hydrogen
purification plant. The project will substantially reduce Phibro USA's exposure
to the residual fuel oil market, where margins have deteriorated over the past
several years. Capital expenditures related to the Residfiner project amounted
to $63 million in 1994 and are expected to amount to $163 million in 1995.
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
generally tracks the 6-3-2-1 crackspread. (The crackspread is the difference
between the spot prices of the crude oil input into the refining process and the
refined product output.) 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 of WTI
crude oil and output of three parts gasoline, two parts heating oil, and one
part low sulfur residual fuel oil.
Graph #10 (See Appendix A)
Graph #11 (See Appendix A)
Graph #12 (See Appendix A)
During 1994, considerable progress was made toward concentrating on Phibro USA's
core refining business and preparing for the post-Residfiner environment. The
St. Rose refinery, which had become less important as a feedstock preparation
plant for the system, was sold. Questor Drilling Corp., Phibro USA's only
remaining asset in the upstream petroleum industry, was also sold, as were the
assets of the Louisiana marine fuels and lubricants business. In addition,
Phibro USA sold substantially all of the excess equipment, previously purchased
from Dow Chemical Co., and not required to complete the Residfiner project, to
an international refining and marketing
28
<PAGE>
PHIBRO USA
company. In 1993, Phibro USA sold certain other investments in non-refining
businesses, including its interests in the Moss Bluff natural gas storage
venture and the Northland natural gas production venture.
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, excluding costs
associated with the Residfiner project, totaled $141 million over the past two
years and are projected to be $60 million in 1995. The majority of these
expenditures have been designed to improve operating flexibility and enhance
refining margins. For example, the fluidized catalytic cracking units at the
Krotz Springs, Louisiana and Houston, Texas refineries have undergone major
renovations to allow the processing of heavier, less expensive feedstocks
without a degradation in yields of light products. Additionally, a 1995 project
at the Texas City, Texas refinery will increase that refinery's tolerance for
higher sulfur crude oil. Other recent expenditures have increased the
flexibility to produce low sulfur distillate fuels and reformulated gasoline.
Phibro USA has invested in projects in anticipation of future, more stringent,
environmental regulations, and believes that its refineries will require
relatively low expenditures, as compared with the rest of the industry, in order
to comply with upcoming environmental requirements. Phibro USA's total capital
expenditures in 1994 include $13 million related to environmental compliance;
such expenditures are expected to be about $12 million in 1995.
The manufacturing complexity of the refining business has always placed
a premium on strong technical resources. The current competitive environment has
added greater emphasis to achieving a high quality of technical support within
the refinery system. In order to maximize
29
<PAGE>
PHIBRO USA
refinery operations, Phibro USA has contracted with a specialized engineering
firm to conduct a review of the plant operations within the Texas refinery
system. Through these reviews, which will be concluded later in 1995, Phibro USA
anticipates that it will be able to identify and improve a number of current
practices which will allow the refineries to achieve a higher product value
without requiring significant capital investment.
As a seller of gasoline on the spot market, Phibro USA must react quickly to
changing market demands for various types and grades of gasoline in order to
enhance its profitability. The 1990 amendments to the Clean Air Act mandate the
use of cleaner burning or reformulated gasoline ("RFG") in nine major
metropolitan areas beginning January 1, 1995. Past investments in refinery
process units, along with current and planned capital projects, have given
Phibro USA the flexibility to blend up to 50% of the system's gasoline
production into RFG. This flexibility, along with terminal/blending facilities
in the New York harbor area, allow Phibro USA to take advantage of market
opportunities in the RFG program if they materialize. A decision was made to
limit the investment in RFG production capability until the economics of such
additional investment become more certain.
Phibro USA has continued to develop downstream outlets to market light
transportation fuels. In 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. Additionally, 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. These two outlets, combined
with its previously existing distribution system, have significantly increased
Phibro USA's ability to sell refined products in higher valued markets.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
CONDENSED STATEMENT OF INCOME
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 7,258 $ 8,357 $ 7,197 $ 6,736
Cost of sales 7,181 8,308 7,173 6,658
-----------------------------------------------------------------------------------------------------
Operating profit 77 49 24 78
Net interest and other (12) (19) (25) (32)
-----------------------------------------------------------------------------------------------------
Operating profit, net of interest and other 65 30 (1) 46
-----------------------------------------------------------------------------------------------------
Compensation and employee-related expenses 31 29 28 28
Other expenses 16 17 18 27
Writedown of minimum refining and marketing inventories -- 30 -- 71
-----------------------------------------------------------------------------------------------------
Total noninterest expenses 47 76 46 126
-----------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect of change
in accounting principles $ 18 $ (46) $ (47) $ (80)
=====================================================================================================
</TABLE>
30
<PAGE>
PHIBRO USA
Phibro USA had pretax earnings of $18 million in 1994 compared with pretax
losses of $46 million in 1993 and $47 million in 1992. 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. The market value of these
inventories exceeded their carrying value by $39 million at the end of 1994.
Results for 1994 benefited from favorable first quarter refining margins which
resulted from strong weather-related demand for refined products. Phibro USA's
ability to trade for and process foreign crude oil and its flexibility in
marketing clean products enabled it to take advantage of market opportunities
and outperform the 6-3-2-1 crackspread, which narrowed considerably later in the
year. 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 special inventory writedown, were $47
million in 1994, $46 million in 1993 and $46 million in 1992. Results for 1992
included a charge of $5 million in connection with vacant office space and the
relocation of Phibro USA's headquarters.
31
<PAGE>
SALOMON INC
DERIVATIVE INSTRUMENTS
Derivatives are an integral part of the world's financial and commodity markets.
Globalization of economic activity has brought more market participants in
contact with foreign exchange and foreign interest rate risk at a time when
market volatility has increased. Market participants have developed technology
that has facilitated the identification and monitoring of such risks with a much
greater degree of precision. Derivatives provide flexibility which often cannot
be achieved in the cash markets.
33 OVERVIEW
33 SALOMON INC'S USE OF DERIVATIVE INSTRUMENTS
35 ACCOUNTING FOR DERIVATIVES
ADDITIONAL DERIVATIVES-RELATED DISCLOSURES
60 SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
63 SUMMARY OF ACCOUNTING POLICIES
67 NOTE 1--REVENUES BY BUSINESS UNIT
75 NOTE 7--TERM DEBT
86 NOTE 16--FINANCIAL AND COMMODITIES-RELATED
INSTRUMENTS AND RELATED RISKS
90 NOTE 17--FAIR VALUE INFORMATION
32
<PAGE>
DERIVATIVE INSTRUMENTS
OVERVIEW
Derivative instruments, by definition, are bilateral contractual commitments or
payment exchange agreements between counterparties that "derive" their value
based on some underlying asset, index, interest rate or exchange rate. The
markets for these instruments have grown tremendously over the past decade.
Expansion of geographic coverage, transaction volume and liquidity, and the
number of underlying products and instruments has in turn resulted in a vast
increase in the types of derivative users and their motivation in using them.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk, and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, in considering such factors as taxes, regulations,
capital, and liquidity, they provide the most efficient means of taking a
desired market position. These are just a few of the business objectives for
which derivatives are used. The list is huge and growing rapidly.
Because derivatives often involve a high degree of leverage and are accounted
for and settled differently than cash instruments, their use requires special
management oversight. Such oversight should ensure that management understands
the transactions to which they commit their firms and that the transactions are
executed in accordance with sensible corporate risk policies and procedures.
Publications such as the Basle Committee on Banking Supervision's July 1994
report, Risk Management Guidelines for Derivatives; the International
Organization of Securities Commissions' July 1994 report, Operational and
Financial Risk Management Control Implications for Over-The-Counter Derivatives
Activities of Regulated Securities Firms; or the Group of Thirty ("G-30") July
1993 report, Derivatives: Practices and Principles, provide an excellent
framework for developing such policies. The Company has chosen the G-30 report
as its model for management controls and is working toward implementation of
applicable recommendations. In addition, the Company has participated in the
U.S. Securities Dealers' Derivatives Policy Group initiative, encouraged by the
Securities and Exchange Commission, to formulate a set of management controls
for U.S. derivatives dealers.
SALOMON INC'S USE OF DERIVATIVE
INSTRUMENTS
The Company's use of derivative instruments can be broadly classified into
trading and non-trading activities. The vast majority of the Company's
derivatives use is in its trading activities, which include market-making
activities for customers and the execution of proprietary trading strategies. As
a dealer in derivatives, the Company both executes trades of derivative
instruments listed on exchanges and creates customized derivative instruments
for customers. The counterparties with which the Company conducts derivative
transactions consist primarily of other major derivatives dealers; financial
institutions such as commercial banks, investment banks, savings institutions,
insurance companies, pension funds and investment companies; and other
corporations. Governments and other types of counterparties represent a
relatively small portion of the Company's derivatives counterparties.
Derivatives trading activities are conducted by each of the Company's business
segments.
33
<PAGE>
DERIVATIVE INSTRUMENTS
SALOMON BROTHERS CLIENT-DRIVEN BUSINESS A fundamental activity of the
Client-Driven Business is to provide market liquidity to its customers across a
broad range of financial instruments, including derivatives. The most
significant derivatives-related activity conducted by the Client-Driven Business
is fixed income derivatives, which include interest rate swaps, swap options,
and cap and floor agreements. Other derivative transactions, such as currency
swaps, forwards and options, as well as derivatives linked with equities, are
also regularly executed by the Client-Driven Business. Similar to market-making
activities in non-derivative instruments, the Client-Driven Business generally
earns a spread from market-making transactions involving derivatives. The
Client-Driven Business also makes extensive use of derivatives to manage the
market risk inherent in the securities inventories maintained for market-making
purposes as well as its "book" of swap agreements and related transactions with
customers.
SALOMON BROTHERS PROPRIETARY TRADING BUSINESSES These businesses seek to
generate returns by executing trading and arbitrage strategies that are
generally longer term in nature. By their very nature, these activities
represent the assumption of risk. However, trading positions are constructed in
a manner that seeks to define and limit risk taking to those risks that the firm
intends to assume. The Proprietary Trading Businesses make extensive use of
derivative instruments in executing their strategies.
PHIBRO DIVISION The fundamental nature of Phibro Division's activities is
similar to Salomon Brothers' Client-Driven Business and Proprietary Trading
Businesses. The Division conducts commodities trading activities in organized
futures exchanges as well as in off-exchange forward markets. Phibro Division
executes transactions involving commodities options and swaps, much in the same
manner as Salomon Brothers in the financial markets.
PHIBRO USA As noted earlier, Phibro USA's oil refining results are influenced
significantly by "crackspreads," which represent the difference between the spot
prices of the crude oil input into the refining process and the refined product
output. Results for Phibro USA's marketing and distribution activities are
influenced heavily by spot market prices of crude oil and refined products.
Phibro USA regularly utilizes derivatives, including forward purchase and sale
agreements and exchange-traded futures and options to manage crackspreads and
optimize marketing and distribution results.
The Company makes significant use of financial derivatives for non-trading, or
end user, purposes. Such activities are not nearly as extensive as its use of
derivatives for trading purposes. As an end user, these instruments provide the
Company with added flexibility in the management of its balance sheet and its
funding costs. The Company utilizes interest rate swaps to effectively convert
the majority of its fixed-rate term debt and preferred stock to variable-rate
obligations. The Company utilizes cross-currency swaps and forwards to
effectively convert a portion of its non-U.S. dollar denominated term debt to
U.S. dollar denominated obligations and, in order to minimize the variability in
equity and book value per share otherwise attributable to exchange rate
movements, to hedge certain investments in non-U.S. subsidiaries.
Derivatives activities, like the Company's other ongoing business activities,
give rise to market, credit, and operational and support risks. Market risk
represents the risk of loss from adverse market price movements. While market
risk relating to derivatives is clearly an important consideration for a market
intermediary such as Salomon Inc, such risk represents only a component of
overall market risk, which includes non-derivative instruments as well.
34
<PAGE>
DERIVATIVE INSTRUMENTS
Consequently, the scope of the Company's market risk management procedures
covers derivatives. Credit risk is the risk of loss that would result if
counterparties failed to perform pursuant to their contractual obligations.
While credit risk is not a principal consideration with respect to
exchange-traded instruments, it is a major factor with respect to
non-exchange-traded over-the-counter ("OTC") instruments. Swap and foreign
exchange agreements are documented utilizing counterparty master agreements
supplemented by individual trade confirmations. Whenever possible, industry
master and netting agreements are used to reduce aggregate credit exposure.
Over the past two years, the Company has enhanced its management of credit
exposure, particularly that arising from its derivative instrument activities.
See "Risk Management" for discussions of the Company's management of market,
credit, and operational and support risks.
Notional amounts of derivatives are the underlying principal amounts (i.e., par
value) used to calculate contractual cash flows to be exchanged between
derivatives counterparties. The notional amounts presented in this report are an
indicator only of the volume of derivative instrument activity and are not
indicative of the level of market or credit risk.
Graph #13 (See Appendix A)
ACCOUNTING FOR DERIVATIVES
The way in which the Company accounts for and presents derivative instruments in
its financial statements depends on both the type and purpose of the derivative
instruments held or issued. Derivative instruments issued or held for trading
purposes (both client-driven and proprietary), including those used to hedge
trading positions, are marked to market or fair value. Under mark-to-market
accounting, gains or losses are recognized currently in "Principal transactions"
on the Consolidated Statement of Income and resulting assets or liabilities are
recorded in "Options and contractual commitments" on the Consolidated Statement
of Financial Condition. Such assets and liabilities are reflected on a gross
basis on the Consolidated Statement of Financial Condition. Netting of
derivative receivables and payables is applied only when a legal right of offset
exists under a master netting agreement. The determination of market or fair
value involves various factors, including the potential impact on market prices
of liquidating positions over a reasonable time period, and counterparty credit
quality. When marking derivative positions to market, higher risk counterparties
warrant a higher risk premium, or yield to the Company, which equates to a lower
fair value. Credit-related adjustments are applied in determining the carrying
amount of the Company's derivatives portfolio. These adjustments consider, among
other things, concentrations of exposure, netting agreements, and expected
defaults. In specific situations in which individual counterparties experience
financial difficulties that compromise their ability to meet their contractual
obligations to the Company, reserves are established to cover such exposure. The
Company also maintains reserves to cover the future operational costs of
maintaining long-term contractual commitments.
35
<PAGE>
DERIVATIVE INSTRUMENTS
Interest rate swaps used to convert the Company's fixed-rate preferred stock and
term debt obligations to variable rates are not marked to market. Instead, the
net inflows or outflows are recorded as adjustments to interest expense or
dividends, as appropriate. Adjustments to dividends are recorded on an aftertax
basis. Non-U.S. dollar denominated term debt issued by Salomon Inc (the parent
company) is translated to U.S. dollars at exchange rates prevailing at the end
of each reporting period. Except for term debt specifically identified as a
hedge of an investment in a subsidiary with a functional currency other than the
U.S. dollar, the translation impact is included in earnings. The Company
mitigates this exposure by entering into forward currency purchase agreements.
The impact of marking such agreements to prevailing exchange rates is also
included in earnings. The Company also enters into forward currency sales
contracts to hedge investments in subsidiaries with functional currencies other
than the U.S. dollar. The impact of marking such contracts to prevailing
exchange rates is included in "Cumulative translation adjustments" in
Stockholders' equity, as is the impact of translating the investments being
hedged.
36
<PAGE>
SALOMON INC
CAPITAL AND LIQUIDITY MANAGEMENT
Capital is an expensive resource. To maximize the return to shareholders, it is
essential that the Company deploy its capital in an efficient manner. Liquidity
management is integral to capital management, and it is especially critical for
a financial intermediary. Access to funding must be assured under all 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.
38 CAPITAL MANAGEMENT-OVERVIEW
38 REGULATORY CAPITAL AND
DOUBLE LEVERAGE
39 WORKING CAPITAL
40 RISK CAPITAL
40 BALANCE SHEET LEVERAGE
41 CAPITAL AND FUNDING SOURCES
44 OTHER
37
<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. The Company's capital strategy is
driven by its need to respond quickly to market developments and the following
factors: regulatory capital requirements and double leverage, working capital
requirements, risk capital requirements, and balance sheet leverage. 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 time
may not be one at a later time.
The principal determinants of the Company's total long-term capital requirements
are its usage of regulatory capital and working capital. Long-term capital
requirements are satisfied by common equity, convertible preferred stock,
perpetual preferred stock, unsecured obligations (primarily term debt) and
long-term deferred taxes. Long-term capital includes only a portion of such
amounts maturing between six months and one year (weighted by maturity),
includes all amounts maturing beyond one year and excludes all amounts scheduled
to mature within six months. The Company's policy is to maintain long-term
capital at a level greater than the equity and subordinated debt of its
subsidiaries (see "Regulatory Capital and Double Leverage") or its working
capital requirements, as determined on a consolidated basis (see "Working
Capital" for a discussion of the Company's working capital requirements).
Graph #14 (See Appendix A)
<TABLE>
<CAPTION>
DOLLARS IN BILLIONS
YEAR ENDED DECEMBER 31, 1994 1993 1992 1991
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term capital:
Common equity capital $ 3.5 $ 4.2 $ 3.5 $ 3.2
Convertible preferred stock .7 .7 .7 .7
Perpetual preferred stock .3 .3 .1 .1
Term debt and other 11.6 11.6 7.4 6.0
----------------------------------------------------------------------------------
Total long-term capital $16.1 $16.8 $11.7 $10.0
=================================================================================-
</TABLE>
REGULATORY CAPITAL AND DOUBLE LEVERAGE
The Company operates globally through a network of subsidiaries, each with its
own capital requirements. 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. In addition,
limits exist regarding the maximum amount of regulatory capital which can be in
the form of subordinated debt. Actual requirements vary by jurisdiction.
Dividends and certain other payments by regulated subsidiaries may be made only
in accordance with regulatory requirements. Subsidiaries' capital requirements,
the substantial majority of which are attributable to regulated subsidiaries,
are largely met by the parent company's injection of equity and/or subordinated
debt. If the parent company could not refinance its own debt or withdraw equity
capital from its subsidiaries, it could experience a liquidity problem.
38
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
Double leverage is a measure of a parent company's investment in its
subsidiaries in relation to its own capital. The Company views double leverage
from two perspectives: first, a "total capital" view, under which the sum of
intercompany subordinated debt and the equity of the Company's subsidiaries
("subsidiaries' total capital") is divided by the total long-term capital of
Salomon Inc. Total capital basis double leverage in excess of 1.0 represents a
portion of subsidiaries' total capital which is funded with short-term debt of
the parent. Under the "equity capital" basis, the equity of the Company's
operating units is divided by the sum of Salomon Inc's common equity and
perpetual and convertible preferred stock. Equity basis double leverage in
excess of 1.0 arises from the funding of equity investments with debt of the
parent. The Company's objectives are to maintain the total capital basis double
leverage ratio at no more than 1.0 and, over time, to reduce the equity capital
basis double leverage ratio to a level that approximates 1.0. As shown in the
following table, the Company's double leverage ratios have declined
significantly since 1991.
DECEMBER 31, 1994 1993 1992 1991
--------------------------------------------------------------------------------
Total capital basis double leverage 0.87 0.96 1.15 1.21
Equity capital basis double leverage 1.18 1.45 1.61 1.65
--------------------------------------------------------------------------------
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 requirements, market conventions, and
lender requirements. 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 collateral requirements of exchanges and
clearing organizations and the Company's fixed assets. The Company monitors its
ability to raise secured funding against actual capacity as well as adjusted
capacity taking into consideration potential changes in market conditions and
the Company's status.
The Company's policy is to fund working capital requirements with long-term
capital. As of December 31, 1994, the Company's working capital coverage ratio,
which represents total long-term capital divided by required working capital,
was 1.07, which was below the Company's internal guideline of 1.10. The 10%
cushion is designed to provide a layer of protection against volatility in
capital usage. Consistent with internal policies, remedial action was taken and
the ratio was restored to 1.10 by January 20, 1995 and has since remained above
the guideline. The average for the year exceeded the internal guideline.
39
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
Graph #15 (See Appendix A)
DOLLARS IN MILLIONS DEC. 31, 1994 AVERAGE 1994
------------------------------------------------------------------------------
Working capital required $15,045 $15,134
Working capital coverage ratio 1.07 1.17
------------------------------------------------------------------------------
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 was implemented in 1991
following the U.S. Treasury auction matter and is continually reviewed to keep
the funding options current and in line with market conditions. 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.
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, 1994, the Company had sufficient
unencumbered assets to support, under normal market conditions, all maturing
short-term unsecured liabilities. 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.
SBI has 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 at
December 31, 1994 was $2.12 billion. In addition, SBIL has a similar facility in
the amount of $1 billion. At December 31, 1994 there were no outstanding
borrowings under these facilities.
RISK CAPITAL
Risk capital represents equity capital required to support earnings volatility.
The longer term risk objectives of the Company are expressed by comparing
earnings volatility with available equity capital. The targeted equity to
volatility ratio is set by management and reviewed with the Company's Board of
Directors. See "Risk Management--Market Risk" for further discussion of this
process.
BALANCE SHEET LEVERAGE
Balance sheet leverage is often defined as the ratio of total assets to total
equity. As some creditors and contractual counterparties utilize this ratio as a
measure of risk, it can pose a constraint on activity. While balance sheet
leverage may be a useful measure, it does not recognize the quality or liquidity
of assets; it does not accurately indicate the degree of market risk embedded in
assets and liabilities; and it 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. For those that do focus on balance
sheet leverage, the Company recommends that such leverage ratio be calculated on
the basis of net assets to equity. Net assets are total assets less
collateralized short-term financing agreements, cash and interest bearing
equivalents and assets securing collateralized mortgage obligations.
40
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
<TABLE>
<CAPTION>
AVERAGE WEEKLY BALANCE SHEET INFORMATION
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
----------------------------------------------------------- ------------- -------------
DOLLARS IN MILLIONS MAR. 31, 1994 JUNE 30, 1994 SEPT. 30, 1994 DEC. 31, 1994 DEC. 31, 1994 DEC. 31, 1993
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government and government agency
securities--U.S. $ 39,779 $ 31,398 $ 28,758 $ 34,621 $ 33,639 $ 42,585
Government and government agency
securities--non-U.S. 36,434 32,518 31,384 28,275 32,153 35,159
Financial options and
contractual commitments 7,904 9,580 9,119 8,336 8,735 8,281
Other financial instruments owned 26,848 22,141 21,443 21,355 22,945 17,358
----------------------------------------------------------------------------------------------------------------------------------
Total financial instrument inventories 110,965 95,637 90,704 92,587 97,472 103,383
----------------------------------------------------------------------------------------------------------------------------------
Collateralized short-term
financing agreements 53,876 56,653 64,572 64,058 59,790 57,171
Other assets 19,270 23,444 19,237 18,032 19,997 16,132
----------------------------------------------------------------------------------------------------------------------------------
Average total assets $184,111 $175,734 $174,513 $174,677 $177,259 $176,686
==================================================================================================================================
Period-end total assets $173,316 $175,549 $158,486 $172,732 $172,732 $184,835
==================================================================================================================================
Period-end net assets* $118,229 $107,181 $ 96,594 $105,227 $105,227 $126,311
==================================================================================================================================
Average net assets* $123,311 $112,107 $102,154 $103,411 $110,245 $112,294
==================================================================================================================================
<FN>
* Total assets less collateralized short-term financing agreements, cash and interest bearing equivalents and assets securing
collateralized mortgage obligations.
</TABLE>
Graph #16 (See Appendix A)
Average net assets for the fourth quarter of 1994 were down from the average
level for the full year and from the 1993 level, reflecting a 19% reduction in
inventories for Salomon Brothers' Client-Driven Business since December 31,
1993. Due to the nature of the Company's trading and funding activities,
including its matched-book activities, it is not uncommon for the Company's
asset levels, including client-driven and proprietary trading inventories, to
fluctuate from period to period.
At December 31, 1994, the Company adopted Financial Accounting Standards Board
Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements ("FIN 41"). FIN 41 allows, under certain
circumstances, the netting of securities sold under agreements to repurchase and
securities purchased under agreements to resell. Prior to the adoption of FIN
41, the Company recorded these instruments on a gross basis. At December 31,
1994, the Company's consolidated assets and liabilities were reduced by $6
billion as a result of the application of FIN 41. Average balances and
period-end balances (prior to December 31, 1994) presented in the above table
were not affected by this change.
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
41
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
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 government 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.
Graph #17 (See Appendix A)
UNSECURED SHORT-TERM BORROWINGS
Unsecured short-term borrowings are utilized by the Company 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) and corporate loans. See Note 5 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. The average maturity of the Company's term debt was
3.3 years and 3.5 years at December 31, 1994 and 1993, respectively. See Note 7
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 interest rate swaps. See Note 7 to the Consolidated Financial
Statements for an analysis of the impact of such swaps as of December 31, 1994.
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 effectively convert that debt into
U.S. dollar obligations.
42
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
During 1994, Standard and Poor's ("S&P") downgraded the Company's credit ratings
on its senior debt, subordinated debt and preferred stock, and affirmed the
Company's commercial paper rating. Also in 1994, Duff & Phelps downgraded the
credit rating on the Company's long-term borrowings and affirmed the Company's
commercial paper rating. Subsequent to December 31, 1994, IBCA downgraded the
Company's ratings on long-term borrowings, while affirming the Company's
short-term rating and Moody's put the Company's long-term borrowings on negative
watch. The downgrades have had a negative impact on the Company's funding costs
and may negatively impact the derivatives business. In addition, the
downgrades could result in a reduced access to borrowings. Other rating agencies
have either affirmed or are currently reviewing the Company's debt ratings. The
following table summarizes the Company's credit ratings as of March 8, 1995:
DUFF &
PHELPS FITCH IBCA MOODY'S S&P TBW
---------------------------------------------------------------
Long-term debt A- A- A A3 BBB+ --
Commercial paper D1 F1 A1 P2 A2 TBW1
---------------------------------------------------------------
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, 1994. 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. Preferred shares not previously converted are scheduled for
redemption in annual installments of 140,000 shares 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. These swap agreements effectively reduced
dividends on preferred stock in 1994 by $28 million, net of taxes.
COMMON EQUITY
In May 1994, the Company's Board of Directors authorized the repurchase of up to
10 million shares of the Company's common stock, including 4.6 million shares
remaining under a previous authorization. The Company repurchased approximately
5.2 million of its common shares for treasury in 1994, primarily in the first
quarter, at an aggregate cost of $252 million. Shares authorized for additional
repurchase by the Company's Board of Directors totaled 9.8 million at December
31, 1994.
The Company has two programs intended to encourage employee equity ownership in
Salomon Inc. During 1990, the Company commenced an Equity Partnership Plan (the
"Plan"). Under the Plan, qualifying employees 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 percentage of each qualifying
employee's compensation paid in Plan shares rises in proportion to compensation
to a maximum of 50%. Employees receive
43
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
the Plan shares at a 15% discount from the average price paid by the Company
during the calendar year. Since the Plan's inception, 27.0 million shares have
been awarded to employees. 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 distribution of shares held by
the Plan in connection with the 1990 award (including shares purchased with
reinvested dividends) will occur in late 1995 or early 1996. At the end of 1992,
in light of possible changes in the U.S. income tax laws, a portion of shares
held by the Plan was distributed to employees. Some of these shares were subject
to restrictions on transferability. Such restrictions that pertain to the 1990
award will also expire in late 1995 or early 1996. Thus, in the aggregate,
restrictions on the transferability of 3.3 million of the Company's common
shares will expire in late 1995 or early 1996.
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 purchased on the open market. Prior to the second quarter of
1994, these shares were issued from the Company's common stock held in treasury.
Thus far, nearly 1.5 million shares have been purchased by employees under this
plan, including approximately 185,000 shares in 1994.
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, unrated securities with market yields comparable to entities rated
below "triple B-", 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. For example, high-yield securities exclude the
collateralized portion of the Salomon Brothers' holdings of "Brady Bonds," but
include such securities to the extent they are not collateralized. The Company's
trading portfolio of high-yield securities owned is carried at market value and
totaled $2.3 billion at December 31, 1994; the largest single high-yield
exposure was $114 million.
44
<PAGE>
SALOMON INC
RISK MANAGEMENT
Effective management of the risks inherent in the Company's businesses is
critical. Although substantial progress was achieved in 1994 towards
strengthening controls and risk management, the poor results for the year were
partly attributable to control and risk management weaknesses. The Company has
taken a number of steps to address the weaknesses that contributed to the 1994
losses. The following section discusses the risks inherent in the Company's
businesses, procedures in place to manage such risks, and initiatives underway
to enhance the Company's management of risk.
46 MARKET RISK
49 CREDIT RISK
51 OPERATIONAL AND SUPPORT RISK
52 ENVIRONMENTAL RISK
45
<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, the age or holding period 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 for all products, including those on- and
off-balance-sheet. This, together with the Company's mark-to-market accounting
policy, means that separate discussion of market risk for individual products,
including derivatives, is not meaningful. The distinguishing risk relative to
derivatives is credit risk, which can be increased or decreased by market
movements. See "Risk Management--Credit Risk--Credit Exposure from Derivatives
Activities."
Within Salomon Brothers' Proprietary Trading Businesses, sound management of
market risk has always been a critical consideration. However, as noted earlier
in this report, weaknesses in the management of market risk within certain units
of Salomon Brothers' Client-Driven Business contributed to the poor results of
1994. The sections that follow discuss organizational elements of market risk
management, as well as specific risk management tools and techniques. The
Company has sought to institutionalize these elements across all its businesses
and believes that progress towards this goal leaves it much better positioned to
manage market risks than was the case at the beginning of 1994. Efforts to
further strengthen the Company's management of market risk are ongoing and the
enhancement of risk management systems and reporting, including the development
and utilization of quantitative tools, is of major importance. Nevertheless, the
basis for strong risk management is the expertise and judgment of the Company's
trading professionals and senior management, and open lines of communication.
SALOMON BROTHERS' RISK MANAGEMENT
STRUCTURE AND OVERSIGHT
THE RISK MANAGEMENT GROUP
Salomon Brothers' Risk Management Group (the "Group") is composed of the heads
of the major risk-taking business units and trading desks throughout the world,
as well as key officers of the Company, including the Chairman and Chief
Executive Officer of Salomon Brothers, the Chief Financial Officer, the
Treasurer, and the Global Risk Manager. The Group is chaired by a Managing
Director who is both the head of the U.S. Proprietary Trading Business and
co-head of U.S. Client-Driven fixed income trading. The Group's primary
functions are to monitor overall risk levels so that they are in accordance with
firmwide guidelines; 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 perform risk audits to enhance the
analysis and management of major risks by the heads of the trading desks; to set
and review risk limits and approve limit excessions; and, when appropriate, to
adjust the levels of risk assumed.
46
<PAGE>
RISK MANAGEMENT
THE GLOBAL RISK MANAGER
The Global Risk Manager is responsible for the continued development of Salomon
Brothers' risk management system and process and for monitoring and reporting
aggregate risk-taking activity. This responsibility includes the analysis and
monitoring of market risks, as well as oversight of the process for position
marking and inventory management. The Global Risk Manager reports to the
Company's Chief Financial Officer and is independent of Salomon Brothers'
business units.
RISK AUDITS
Members of the Group perform periodic risk audits of the risk-taking business
units. The risk audit process is overseen by the Group Chairman and the Global
Risk Manager and includes participation by members of Salomon Brothers' two Risk
Audit Working Committees. Each Committee, one for fixed income businesses and
the other for equity businesses, consists of senior traders and risk managers
from the various business units with expertise in the respective market arenas.
The risk audits include a detailed critique of the positions, strategies, and
risk management methods taken by the business units. By including senior traders
from other areas of Salomon Brothers, risk audits provide a forum for the
communication of risk management approaches and ideas across Salomon Brothers.
The risk audit process is the primary tool for critical review and refinement of
the risk management measurement and reporting Salomon Brothers has in place.
THE SALOMON INC BOARD OF DIRECTORS
The Company maintains an overall guideline as to firmwide risk, expressed as a
ratio of the expected annual earnings volatility of the Company's trading
businesses to equity capital available to support that volatility. This
guideline, which is subject to periodic reexamination, is reviewed with the
Company's Board of Directors. With such a guideline in place, a decline in
common equity capital will lead to a proportionately lower limit on risk-taking.
TOOLS FOR RISK MANAGEMENT AND REPORTING
Salomon Brothers' global risk measurement begins with the identification of
relevant market risk factors. These factors vary from market to market, and
region to region. For example, in fixed income markets, risk factors include
interest rates, yield curve slopes, credit spreads, and interest rate
volatility. In equity markets, risk factors include equity index exposure,
equity volatility and equity index spreads. In the foreign exchange market, risk
factors are exchange rates and exchange rate volatility. Salomon Brothers
identifies other factors specific to proprietary trading strategies as well as
risk factors significant to Salomon Brothers as a whole, such as aggregate
credit spread exposure, that may not be significant for individual desks.
Overall, more than sixty risk factors are employed. Risk factors are used in
three types of analyses: stress analysis, value-at-risk analysis and scenario
analysis.
STRESS ANALYSIS
Salomon Brothers performs stress analysis by repricing selected inventory
positions for specified upward and downward moves in risk factors, and computing
the revenue implications of these repricings. Stress analysis is a useful tool
for identifying exposures that appear to be relatively small in the current
environment but grow more than proportionately with changes in risk factors.
Such risk is typical of a number of derivative instruments, including options
sold, many mortgage-backed securities, and a number of structured products.
Stress analysis provides for the measurement of the potential impact of
extremely large moves in risk factors, which, though infrequent, can be expected
to occur from time to time.
47
<PAGE>
RISK MANAGEMENT
VALUE-AT-RISK ANALYSIS
Under value-at-risk analysis, revenue implications are computed for individual
simulations, each based on a random outcome for the individual risk factors.
Value-at-risk is a summary statistic constructed by performing thousands of
simulations from which a probability distribution of revenues is derived. It is
of limited value for internal risk management in that it does not give any
indication of which individual exposures are problematic or which of the many
risk factor simulations are particularly worrisome. However, it does provide a
concise and simple measure of risk. A potential benefit of value-at-risk is that
a consistent computation by all market participants could provide a common
measure of risk appetite.
SCENARIO ANALYSIS
Scenario analysis is a tool that generates forward looking "what-if" simulations
for specified changes in market factors. For example, a scenario analysis could
simulate the impact of a dramatic tightening by the Federal Reserve. The revenue
implications of the specified scenario are quantified not only for Salomon
Brothers as a whole, but on a business unit basis and on a global region basis.
The risk management system keeps track of many scenarios developed by members of
the Group and Salomon Brothers' economists and strategists. This tool is also
used regularly on a retrospective basis to evaluate the accuracy of assumptions
regarding risk factors and to ascertain significant risk factors. This is done
by reflecting the actual changes in risk factors in the system and comparing the
system predicted results with actual results.
RISK MANAGEMENT CONTROLS
RISK LIMITS
Salomon Brothers maintains risk limits in both its Proprietary Trading
Businesses and its Client-Driven Business. Business units may not exceed such
limits without the approval of a quorum of the Risk Management Group. In its
Client-Driven Business, Salomon Brothers has also implemented desk level limits
on exposure to risk factors. These limits, which are intended to enforce the
discipline of communicating and gaining approval for higher risk positions, are
periodically reviewed by the Risk Management Group. Individual desks may not
exceed risk limits without the approval of the business unit head.
INVENTORY CONTROL AND VALUATION
Inventory is necessary for an active market maker, but can be a major source of
risk from liquidity events and hedge mistracking. Monitoring of inventory levels
and composition and oversight for inventory pricing is the responsibility of the
Global Risk Manager and is carried out by the Pricing Policy and Control Group.
As a control on inventory buildup, Salomon Brothers imposes markdowns, which
increase with age, for aged inventory in the Client-Driven Business.
PHIBRO DIVISION
The commodities trading activities of Phibro Division are not as extensive in
scope and volume as the financial instruments trading of Salomon Brothers.
Although several individual market risk factors relevant to Phibro Division
are also relevant to Salomon Brothers, in general, they are quite different.
For example, much of the activity of Phibro Division involves consumable
commodities where the logistics of physically moving and storing material at
locations all over the world present risks not encountered with financial
instruments. Nevertheless, the fundamental nature of the market risks inherent
in the two businesses are similar. Phibro Division applies many of the same
risk management concepts as does Salomon Brothers. The senior operating
management of Phibro Division regularly monitors the risk profiles of Phibro
Division's individual trading
48
<PAGE>
RISK MANAGEMENT
departments and regularly reports Phibro Division's market risk exposures to
Salomon Inc's management. Phibro Division's control structure places
responsibility for the reporting of risk, trading positions and trading
profitability with risk managers who report directly to senior management and
not to business unit trading managers.
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,
sovereign risk, and the general tendency for those who experience losses to
behave badly.
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 borrowing of securities, and derivative
transactions, particularly interest rate and currency swaps. 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 Global 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 has risk to
issuers of fixed income securities for the timely payment 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 Global Credit
Review Department whose credit professionals assess, approve, monitor, and
coordinate the 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
49
<PAGE>
RISK MANAGEMENT
also has established various credit policies and control procedures used
singularly or in combination, depending upon the circumstances, including:
o initial credit approval whereby the approval of a designated member of
the Global Credit Review Department is required before execution of a
transaction that does not meet defined parameters;
o credit limits, against which monitoring of transactions is performed on
a daily basis;
o 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;
o establishment of collateral standards for financing activities and
secured contractual commitments; and
o 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.
CREDIT EXPOSURE FROM DERIVATIVES ACTIVITIES
The accompanying charts display Salomon Brothers' credit exposure, net of
collateral, at December 31, 1994, for swap agreements, swap options, caps and
floors (together referred to as "swaps" in the charts) and foreign exchange
contracts and options. They do not present potential credit exposure that may
result from factors that influence market risk or from the passage of time.
Severe changes in market factors can cause credit exposure to increase suddenly
and dramatically. Swap agreements, swap options, caps and floors include
transactions with both short- and long-term periods of commitment. Foreign
exchange contracts have maturities that are generally less than one year.
Amounts include the effect of netting agreements, where applicable.
50
<PAGE>
RISK MANAGEMENT
Graph #18 (See Appendix A)
Graph #19 (See Appendix A)
Collateral securing these transactions reduced gross credit exposure to a net
unsecured credit exposure of approximately $3.0 billion from swap agreements,
swap options, caps and floors and $.5 billion from foreign exchange contracts.
With respect to sovereign risk, credit exposure at December 31, 1994 was
primarily to counterparties in the United States ($1.5 billion), Japan ($.7
billion), the United Kingdom ($.3 billion) and France ($.2 billion).
OPERATIONAL AND SUPPORT RISK
As a major intermediary in financial and commodities markets, the direct risks
which arise in the normal course of the Company's business activities are market
risk and credit risk. Slightly less direct, but of critical importance, are
risks pertaining to operational and back-office support for the Company's
production areas. This is particularly the case in an environment characterized
by rapid change that includes increasing transaction volumes and an expansion in
the number and complexity of products in the marketplace. Such risks include:
o OPERATIONAL/SETTLEMENT RISK the risk of financial and opportunity loss
and legal liability attributable to operational problems such as inaccurate
pricing of transactions, untimely trade execution, clearance and/or settlement,
or the inability to process large volumes of transactions.
o TECHNOLOGICAL RISK the risk of loss attributable to technological
limitations that constrain the Company's ability to gather, process, and
communicate information, efficiently and without interruption, between the
Company and its customers, among units within the Company, and between the
Company and the markets in which it participates.
o LEGAL/DOCUMENTATION RISK the risk of loss attributable to deficiencies
in the documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
o FINANCIAL CONTROL RISK the risk of loss attributable to limitations in
financial systems and controls; strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including shareholders,
creditors, and regulators is free of material errors.
As the above risks are largely interrelated, so are the Company's actions to
mitigate them. An essential element in mitigating the risks noted above is the
optimization of information technology. To effectively compete in an
information-driven business of a global nature, this requires the development
of global systems and databases that ensure increased and more timely access to
reliable data. As business volume expanded significantly in the mid-1980s,
Salomon Brothers' systems were not capable of efficiently processing such
activity, and manually intensive reconciliation procedures to ensure accuracy
were not always effective. In 1987, Salomon Brothers initiated a long-term and
as yet unfinished process of
51
<PAGE>
RISK MANAGEMENT
upgrading its financial and operating systems. This effort focused on the
replacement of manually intensive processes and aged, relatively undocumented
and fragile systems and included the implementation of a new general ledger
system and a redesign of the information flows from supporting systems to the
general ledger.
A major development in Salomon Brothers' financial systems effort is the
expected completion and implementation, during 1995, of a new global interest
rate swap system linking trading, clearance, credit, legal and accounting
applications to a common database. This system will improve controls by
centralizing processing for certain contractual products, improve trade support
work flow by providing daily profit and loss information, and will be readily
reconcilable to supporting trade systems and risk management information. In
addition to the aforementioned systems implementations, Salomon Brothers'
systems development efforts have enhanced reporting of regulatory capital usage,
improved support for analysis of funding requirements and tax planning, and
provided more flexible data access and reporting tools for internal and external
reporting. These efforts are ongoing.
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.
In conjunction with its systems development efforts, Salomon Brothers has been
engaged in a continuing effort to strengthen its internal control structure. In
mid-1993, Salomon Brothers' management commissioned a detailed review by the
Company's Financial Division staff and its independent auditors, Arthur Andersen
LLP, of material general ledger accounts of SBI. The objective of the review was
to ensure that general ledger accounts were properly supported and that
appropriate reconciliation procedures were in place. This review was completed
in late 1993 for Salomon Brothers' U.S.-based operations. By the end of 1994, a
similar review was substantially completed for material accounts of Salomon
Brothers' London-based operations. The implementation of the new interest rate
swap system involved the detailed examination of swap general ledger accounts
and of each data element of individual swap transactions prior to their input
into the new system.
The detailed account review uncovered significant unsupported balances which
required charges against the Company's and Salomon Brothers' earnings, including
pretax charges of $303 million in 1994. To prevent a similar accumulation of
unreconciled balances in the future, the Company is augmenting its systems
development efforts with improvements in reconciliation and control procedures.
ENVIRONMENTAL RISK
The Company is subject to environmental risk from two primary sources:
discontinued commodities processing operations, and existing energy-related
refining,
52
<PAGE>
RISK MANAGEMENT
transportation and field development. 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, it is possible that
the Company will be named as a PRP at additional sites. Management believes,
based upon currently known facts and established reserves, that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.
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 which 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, oil product and petrochemical trading activities
in which cargoes are transported and placed in storage. These businesses seek to
mitigate exposure through insurance coverage and consideration of ports of
delivery.
53
<PAGE>
SALOMON INC
CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
56 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
57 CONSOLIDATED STATEMENT OF INCOME
58 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
60 SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
61 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
62 CONSOLIDATED STATEMENT OF CASH FLOWS
63 SUMMARY OF ACCOUNTING POLICIES
67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
94 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
95 COMMON STOCK DATA
96 FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
54
<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, 1994
and 1993, 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, 1994. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Salomon Inc and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Note 11 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."
ARTHUR ANDERSEN LLP
NEW YORK, NEW YORK
FEBRUARY 26, 1995
56
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest and dividends $5,902 $6,171 $4,861
Principal transactions (560) 1,482 2,627
Investment banking 486 791 450
Commissions 336 285 202
Other 114 70 43
-----------------------------------------------------------------------------------------------------------------------------------
Total revenues 6,278 8,799 8,183
Interest expense 4,892 4,600 4,324
-----------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 1,386 4,199 3,859
-----------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 1,486 1,900 1,638
Technology 255 262 305
Professional services and business development 167 142 145
Occupancy 165 231 324
Clearing and exchange fees 70 62 66
Charge relating to U.S. Treasury auction and related matters -- -- 185
Other 74 137 140
-----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,217 2,734 2,803
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect of change in
accounting principles (831) 1,465 1,056
Income tax expense (benefit) (432) 601 506
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in accounting principles (399) 864 550
Cumulative effect of change in accounting principles, net of tax benefit of $28 -- (37) --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (399) $ 827 $ 550
===================================================================================================================================
Per common share:
Primary earnings (loss) before cumulative effect of change in
accounting principles $(4.31) $ 7.34 $ 4.18
Cumulative effect of change in accounting principles -- (0.33) --
-----------------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) $(4.31) $ 7.01 $ 4.18
===================================================================================================================================
Fully diluted earnings (loss) before cumulative effect of change in
accounting principles $(4.31) $ 6.57 $ 4.05
Cumulative effect of change in accounting principles -- (0.29) --
-----------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) $(4.31) $ 6.28 $ 4.05
===================================================================================================================================
<FN>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial Statements, and Summary of Options and Contractual
Commitments are integral parts of this statement.
</TABLE>
57
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
DECEMBER 31, 1994 1993
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest bearing equivalents $ 3,539 $ 5,748
Financial instruments and contractual commitments:
Government and government agency securities--U.S. $32,980 $42,485
Government and government agency securities--non-U.S. 34,071 39,190
Corporate debt securities 11,537 11,876
Options and contractual commitments 6,932 8,485
Equity securities 4,169 7,178
Mortgage loans and collateralized mortgage securities 2,190 3,316
Municipal securities and other 1,418 1,438
------ ------
93,297 113,968
Commodities-related products and instruments:
Crude oil, refined products and other physical commodities 1,066 488
Options and contractual commitments 424 366
------ ------
1,490 854
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 43,792 36,924
Securities borrowed and other 17,034 11,965
------ ------
60,826 48,889
Receivables:
Brokers, dealers and clearing organizations 4,135 5,524
Customers 3,539 3,479
Other 850 656
------ ------
8,524 9,659
Assets securing collateralized mortgage obligations:
Sterling denominated 2,377 2,748
U.S. dollar denominated 763 1,139
------ ------
3,140 3,887
Property, plant and equipment, net of accumulated depreciation
and amortization of $701 in 1994 and $617 in 1993 1,181 1,122
Other assets, including intangibles 735 708
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $172,732 $184,835
===================================================================================================================================
<FN>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial Statements, and Summary of Options and Contractual
Commitments are integral parts of this statement.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholders' Equity:
Short-term borrowings:
Securities sold under agreements to repurchase $70,405 $86,066
Bank borrowings 2,333 3,644
Securities loaned 1,500 2,172
Deposit liabilities 1,447 1,293
Commercial paper 865 1,344
Other 2,029 3,371
------ -----
$ 78,579 $ 97,890
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments:
Government and government agency securities--U.S. 31,021 30,714
Government and government agency securities--non-U.S. 18,948 9,604
Financial options and contractual commitments 6,232 10,619
Equity securities 3,528 3,434
Corporate debt securities 1,677 1,635
Commodities, including options and contractual commitments 663 464
------ ------
62,069 56,470
Payables and accrued liabilities:
Customers and suppliers 3,622 3,060
Brokers, dealers and clearing organizations 3,193 2,937
Income taxes 651 1,466
Other 1,898 2,266
------ ------
9,364 9,729
Collateralized mortgage obligations:
Sterling denominated 2,278 2,691
U.S. dollar denominated 748 1,117
------ ------
3,026 3,808
Term debt 15,202 11,692
------- -------
Total liabilities 168,240 179,589
Commitments and contingencies (Notes 14, 15 and 16)
Redeemable preferred stock, Series A 700 700
Stockholders' equity:
Preferred stock, Series C and D 312 312
Common stock, par value $1 per share
(250,000,000 shares authorized; shares issued:
155,617,271 in 1994 and 155,513,950 in 1993) 156 156
Additional paid-in capital 292 295
Retained earnings 4,681 5,208
Cumulative translation adjustments 5 (11)
Common stock held in treasury, at cost
(shares: 49,769,452 in 1994 and 44,952,468 in 1993) (1,654) (1,414)
------ ------
Total stockholders' equity 3,792 4,546
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $172,732 $184,835
===================================================================================================================================
</TABLE>
59
<PAGE>
SALOMON INC AND SUBSIDIARIES
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
<TABLE>
<CAPTION>
CURRENT MARKET OR FAIR VALUE
AT DECEMBER 31, 1994 NOTIONAL ----------------------------
DOLLARS IN BILLIONS AMOUNTS ASSETS LIABILITIES
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exchange-issued products:
Futures contracts* $ 734.3 $ -- $ --
Other exchange-issued products:
Equity contracts 11.6 .1 .1
Fixed income contracts 24.2 -- .1
Foreign exchange contracts 4.1 -- --
Commodities-related contracts 11.3 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 785.5 .1 .2
-----------------------------------------------------------------------------------------------------------------------------------
Over-the-counter swap agreements, swap options, caps and floors:
Swaps** 383.3 3.8 3.7
Swap options written 9.7 -- .1
Swap options purchased 24.5 .7 --
Cap and floor agreements 68.1 .3 .7
-----------------------------------------------------------------------------------------------------------------------------------
Total over-the-counter swap agreements, swap options, caps and floors 485.6 4.8 4.5
-----------------------------------------------------------------------------------------------------------------------------------
Over-the-counter foreign exchange contracts and options:
Forward currency contracts** 49.8 .3 .2
Options written 15.3 -- .4
Options purchased 15.0 .4 --
-----------------------------------------------------------------------------------------------------------------------------------
Total over-the-counter foreign exchange contracts and options 80.1 .7 .6
-----------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices*** 31.5 1.0 .6
Options and forward contracts on fixed income securities*** 103.2 .3 .3
Commodities-related contracts**** 23.1 .4 .5
-----------------------------------------------------------------------------------------------------------------------------------
Total $1,509.0 $7.3 $6.7
===================================================================================================================================
<FN>
* Margin on futures contracts is included in receivables/payables to brokers, dealers and clearing organizations on the
Consolidated Statement of Financial Condition.
** Notional amounts of swap agreements and forward currency contracts related to non-trading activities were $12.3 billion and
$1.5 billion, respectively.
*** The market or fair value of such instruments recorded as assets includes approximately $300 million of over-the-counter
instruments primarily with investment grade counterparties. The remainder consists primarily of highly liquid instruments
actively traded on organized exchanges.
**** Notional amounts related to non-trading activities were $.9 billion. The substantial majority of these over-the-counter
contracts are with investment grade counterparties.
</TABLE>
CREDIT EXPOSURE, NET OF COLLATERAL, ON OTC SWAP AGREEMENTS,
SWAP OPTIONS, CAPS AND FLOORS AND OTC FOREIGN EXCHANGE CONTRACTS
AND OPTIONS, BY RISK CLASS*
<TABLE>
<CAPTION>
NOTE: AMOUNTS REPRESENT CURRENT EXPOSURE AND DO NOT INCLUDE POTENTIAL CREDIT EXPOSURE TRANSACTIONS
THAT MAY RESULT FROM FACTORS THAT INFLUENCE MARKET RISK. WITH OVER
3 YEARS TO
AT DECEMBER 31, 1994 ALL TRANSACTIONS MATURITY
--------------------------------------------------------------------------------------- ------------
OTHER MAJOR GOVERNMENTS/
DERIVATIVES FINANCIAL SUPRA- 1994
DOLLARS IN BILLIONS DEALERS CORPORATES INSTITUTIONS NATIONALS OTHER TOTAL AVERAGE TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swap agreements,
swap options,
caps and floors:
Risk classes 1 and 2 $.4 $ -- $.4 $.1 $-- $ .9 $1.1 $ .5
Risk class 3 .3 .3 .2 -- .1 .9 1.1 .4
Risk classes 4 and 5 .2 .6 .2 -- .1 1.1 1.1 .5
Risk classes 6, 7 and 8 -- .1 -- -- -- .1 .1 --
-----------------------------------------------------------------------------------------------------------------------------------
$.9 $1.0 $.8 $.1 $.2 $3.0 $3.4 $1.4
===================================================================================================================================
Foreign exchange
contracts and options:
Risk classes 1 and 2 $.2 $ -- $-- $-- $-- $ .2 $ .3 $ .1
Risk class 3 .1 -- -- -- -- .1 .2 --
Risk classes 4 and 5 -- .1 -- -- .1 .2 .3 --
-----------------------------------------------------------------------------------------------------------------------------------
$.3 $ .1 $-- $-- $.1 $ .5 $ .8 $ .1
===================================================================================================================================
<FN>
* 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.
See Note 16 to the Consolidated Financial Statements for a discussion of the market risk and credit risk associated with options
and contractual commitments.
</TABLE>
60
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------
COMMON TOTAL COMMON
ADDITIONAL CUMULATIVE STOCK STOCK- STOCK
PREFERRED COMMON PAID-IN RETAINED TRANSLATION HELD IN HOLDERS' COMMON HELD IN
AMOUNTS IN MILLIONS STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS TREASURY EQUITY STOCK TREASURY
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $112 $155 $266 $4,087 $ 24 $(1,277) $3,367 154.9 (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) -- --
Other -- -- 35 -- -- -- 35 -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 $112 $155 $296 $4,498 $ 2 $(1,432) $3,631 155.5 (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) -- --
Other -- -- (2) -- -- -- (2) -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $312 $156 $295 $5,208 $(11) $(1,414) $4,546 155.5 (44.9)
Net loss -- -- -- (399) -- -- (399) -- --
Dividends on -
Common stock -- -- -- (66) -- -- (66) -- --
Preferred stock, Series A,
C and D -- -- -- (62) -- -- (62) -- --
Exercise of stock options -- -- -- -- -- 9 9 -- 0.2
Employee stock purchase plan -- -- 1 -- -- 3 4 -- 0.1
Purchase of common stock for
treasury -- -- -- -- -- (252) (252) -- (5.2)
Conversion of notes into
common stock -- -- 2 -- -- -- 2 0.1 --
Net change in cumulative
translation adjustments -- -- -- -- 16 -- 16 -- --
Other -- -- (6) -- -- -- (6) -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $312 $156 $292 $4,681 $ 5 $(1,654) $3,792 155.6 (49.8)
====================================================================================================================================
<FN>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial Statements, and Summary of Options and Contractual
Commitments are integral parts of this statement.
</TABLE>
61
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) adjusted for noncash items -
Net income (loss) $ (399) $ 827 $ 550
Cumulative effect of change in accounting principles -- 37 --
Deferred income tax expense (benefit) (885) 324 107
Depreciation, amortization and other 142 217 198
-----------------------------------------------------------------------------------------------------------------------------------
Total cash items included in net income (loss) (1,142) 1,405 855
-----------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in operating assets -
Financial instruments and contractual commitments 20,671 (29,735) (29,823)
Commodities-related products and instruments (636) (141) (74)
Collateralized short-term financing agreements (11,937) 11,681 (33,325)
Receivables 1,210 (3,434) (737)
Other 162 33 (135)
-----------------------------------------------------------------------------------------------------------------------------------
Total (increase) decrease in operating assets 9,470 (21,596) (64,094)
-----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Short-term borrowings (19,311) 9,473 48,024
Financial and commodities-related instruments sold, not yet purchased,
and contractual commitments 5,599 10,140 14,421
Payables and accrued liabilities 550 2,447 (196)
-----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in operating liabilities (13,162) 22,060 62,249
-----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (4,834) 1,869 (990)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 6,500 7,089 4,438
Issuance of collateralized mortgage obligations -- -- 284
Issuance of preferred stock -- 200 --
Employee stock purchase and option plans 13 35 73
-----------------------------------------------------------------------------------------------------------------------------------
Total cash proceeds from financing activities 6,513 7,324 4,795
-----------------------------------------------------------------------------------------------------------------------------------
Payments for -
Term debt maturities and repurchases 3,281 4,073 2,923
Collateralized mortgage obligations 945 1,070 1,347
Purchase of common stock for treasury 252 16 241
Dividends 128 117 139
-----------------------------------------------------------------------------------------------------------------------------------
Total cash payments for financing activities 4,606 5,276 4,650
-----------------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 1,907 2,048 145
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from -
Assets securing collateralized mortgage obligations 930 1,290 1,497
-----------------------------------------------------------------------------------------------------------------------------------
Total cash proceeds from investing activities 930 1,290 1,497
-----------------------------------------------------------------------------------------------------------------------------------
Payments for -
Assets to secure new collateralized mortgage obligations -- -- 367
Property, plant and equipment 212 321 203
-----------------------------------------------------------------------------------------------------------------------------------
Total cash payments for investing activities 212 321 570
-----------------------------------------------------------------------------------------------------------------------------------
Cash provided by investing activities 718 969 927
-----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and interest bearing equivalents (2,209) 4,886 82
Cash and interest bearing equivalents at beginning of year 5,748 862 780
-----------------------------------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at end of year $ 3,539 $ 5,748 $ 862
===================================================================================================================================
<FN>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial Statements, and Summary of Options and Contractual
Commitments are integral parts of this statement.
</TABLE>
62
<PAGE>
SALOMON INC
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Salomon
Inc and its majority-owned subsidiaries (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. 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 and are included in "Other assets, including
intangibles" on the Consolidated Statement of Financial Condition. The
Company's equity in the earnings of its non-consolidated subsidiaries
and affiliates is reported in "Other" revenues on the Consolidated
Statement of Income.
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 with functional currencies
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 on the Consolidated Statement
of Financial Condition. Hedges of such exposure include designated
issues of non-U.S. dollar term debt and, to a lesser extent, forward
currency contracts.
The 1994 Consolidated Financial Statements include several
reclassifications, none of which had an impact on previously reported
pretax or net income. Prior period financial information has been
restated to conform with the 1994 presentation. The Company has modified
its presentation of cash to include interest bearing equivalents, which
are comprised of highly liquid investments with original maturities of
three months or less, other than those held for sale in the ordinary
course of business. The Company has reclassified "Equity Partnership
Plan, net" on the Consolidated Statement of Financial Condition. The
liability or asset related to the Plan was previously classified as a
component of Stockholders' equity, but is now included in "Payables and
accrued liabilities--other" when a net liability balance exists or
"Receivables--other" when a net asset balance exists. The Company has
reclassified Phibro Energy USA, Inc.'s ("Phibro USA's") operating profit
on the Consolidated Statement of Income from "Principal transactions"
to "Other" revenues. The Company has also corrected misclassifications
in 1994 and 1993 of certain revenues pertaining to accretion on zero
coupon non-U.S. dollar denominated securities, principally Mexican
Tesobonos and Cetes. The reclassifications had the effect of increasing
interest income and decreasing "Principal transactions" by the same
amount, and had no impact on total revenues or income.
FINANCIAL INSTRUMENTS AND CONTRACTUAL COMMITMENTS
Financial instruments and contractual commitments, including derivatives
used for trading purposes, are recorded on the Consolidated Statement of
Financial Condition at either market value or, when market prices are
not readily available, fair value which includes related accrued
interest or dividends. 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.
63
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
The majority of the Company's financial instruments are recorded on 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. Gains and losses and commission
revenues and expenses are also recognized on a trade date basis.
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVES HELD OR ISSUED FOR TRADING PURPOSES
Derivative instruments held or issued for trading purposes are carried
at either market value or, when market prices are not readily available,
fair value. The market or fair values of swap agreements, caps and
floors, and forward contracts in a gain position, as well as options
owned, are reported as assets in "Options and contractual commitments"
on the Consolidated Statement of Financial Condition. Similarly,
contractual commitments in a loss position, as well as options and
warrants written, are reported as liabilities in "Financial options and
contractual commitments" on the Consolidated Statement of Financial
Condition. Contractual commitments are netted only when a legal right of
setoff exists. Revenues generated from derivatives held or issued for
trading purposes are reported as "Principal transactions" on the
Consolidated Statement of Income and include realized gains and losses,
as well as unrealized gains and losses resulting from changes in the
market or fair value of such instruments.
DERIVATIVES HELD OR ISSUED FOR NON-TRADING PURPOSES
The Company utilizes interest rate swaps to effectively convert
fixed-rate preferred stock and a significant portion of its fixed-rate
term debt to variable-rate obligations. These swaps are not marked to
market. Instead, the accrued inflows and outflows are recorded as
adjustments to interest expense or dividends, as appropriate.
Adjustments to dividends are recorded on an aftertax basis.
As previously noted, the Company utilizes forward currency purchase
contracts to hedge a portion of the currency exposure relating to
non-U.S. dollar term debt issued by Salomon Inc (parent company). The
impact of marking such contracts and the related debt to prevailing
exchange rates is included in earnings. The Company utilizes forward
currency sales contracts to hedge investments in subsidiaries with
functional currencies other than the U.S. dollar. The impact of marking
such contracts to prevailing exchange rates, net of the related tax
effects, is included in "Cumulative translation adjustments" in
Stockholders' equity, as is the impact of translating the investments
being hedged.
See Note 7 for a further discussion of the use of interest rate swaps
and forward currency contracts.
COMMODITIES-RELATED PRODUCTS AND INSTRUMENTS
Commodities-related products and instruments include physical quantities
of commodities, as well as swaps, options and contractual commitments
involving future delivery or settlement. Except as noted below, these
products and instruments are carried at market or fair value. The Phibro
Division of Salomon Inc and related affiliates' ("Phibro Division")
gains or losses are recognized currently in "Principal transactions" on
the Consolidated Statement of Income. Gains and losses included in the
gross profits of Phibro USA are included in "Other" revenues on the
Consolidated Statement of Income.
64
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
The refining and marketing operations of 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 had a carrying value of $184 million at
December 31, 1994 compared with a market value of $223 million. In 1993
they were written down by $30 million to reflect a decline in market
value. These inventories are not adjusted for subsequent recoveries in
market value.
Phibro USA utilizes futures and forward contracts to hedge anticipated
refinery production and crude oil gathering purchases. Gains or losses
on these contracts are deferred until recognition of the underlying risk
element takes place. As of December 31, 1994, net gains of $2.7 million
were deferred in connection with such activity.
COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS
Collateralized short-term financing agreements are carried at their
contractual amounts including accrued interest. In the determination of
income, certain financing transactions are marked to fair value, which
has no material effect on results of operations. The Company takes
possession of the underlying collateral, monitors its market value
relative to the amounts due under the agreements and, when necessary,
requires prompt transfer of additional collateral or reduction in the
loan balance in order to maintain contractual margin protection. At
December 31, 1994, the Company adopted Financial Accounting Standards
Board Interpretation No. 41, Offsetting of Amounts Related to Certain
Repurchase and Reverse Repurchase Agreements ("FIN 41"). FIN 41 allows,
under certain circumstances, the netting of securities sold under
agreements to repurchase and securities purchased under agreements to
resell. Prior to the adoption of FIN 41, the Company recorded repurchase
and reverse repurchase agreements on a gross basis on the Consolidated
Statement of Financial Condition. At December 31, 1994, the Company's
consolidated assets and liabilities were reduced by $6 billion as a
result of the adoption of FIN 41.
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, investments in affiliates accounted for
under the equity method and prepaid expenses. At December 31, 1994,
goodwill totaled $137 million and is being amortized at an annual rate
of approximately $5 million.
65
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSETS
SECURING COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations issued by the Company are carried at
their principal amounts, net of unamortized discounts, plus accrued
interest payable. Assets securing collateralized mortgage obligations
are carried at their principal amounts, net of unamortized discounts and
premiums, plus deferred issuance expenses and accrued interest
receivable. 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
See Note 1 for detail regarding the Company's revenues.
EXPENSES
INTEREST EXPENSE 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 1994, 1993 and 1992 did not differ materially from
the amount of interest paid.
COMPENSATION AND EMPLOYEE-RELATED EXPENSES include 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.
Compensation expense also includes the cost of shares allocated to
individual employee accounts pursuant to the Company's Equity
Partnership Plan.
TECHNOLOGY EXPENSE includes costs for computer hardware; office
automation and workstations; data center equipment; market data
services; and voice, data, audio-visual and network communications.
Technology expense also includes systems development consulting
expenses.
PROFESSIONAL SERVICES AND BUSINESS DEVELOPMENT EXPENSE includes legal,
audit, tax, non-systems consulting, travel and entertainment and
advertising expenses.
OCCUPANCY EXPENSE 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 relocation or downsizing of certain of the Company's
businesses.
CLEARING AND EXCHANGE FEES include clearance, transaction and commission
fees and exchange dues and assessments.
OTHER EXPENSE includes goodwill amortization, expenses recorded for
environmental matters, provisions for legal matters (other than the
special charge recorded in 1992 for the U.S. Treasury auction matter),
insurance expense and other expenses not included in the captions listed
above. Other expenses in 1993 included $30 million to write down Phibro
USA's minimum refining and marketing inventories.
66
<PAGE>
SALOMON INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REVENUES BY BUSINESS UNIT
The following tables present revenues, net of interest expense, by business unit
for the years ended December 31, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
PRINCIPAL
DOLLARS IN MILLIONS TRANSACTIONS & INVESTMENT
YEAR ENDED DECEMBER 31, 1994 NET INTEREST BANKING COMMISSIONS OTHER TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salomon Brothers
Client-Driven Business:
Global investment banking $ -- $486 $ -- $ -- $ 486
Fixed income secondary markets 321 -- 39 -- 360
Equities secondary markets (94) -- 281 -- 187
Foreign exchange (63) -- -- -- (63)
Private Investment Department
and asset management 33 -- 13 23 69
---------------------------------------------------------------------------------------------------
Total revenues from
Client-Driven Business 197 486 333 23 1,039
Proprietary Trading Businesses 317 -- -- -- 317
Unallocated charges (278) -- -- -- (278)
---------------------------------------------------------------------------------------------------
Total Salomon Brothers' revenues,
net of interest expense 236 486 333 23 1,078
Phibro Division 190 -- 1 -- 191
Phibro USA (19) -- -- 84 65
Corporate and Other 43 -- 2 7 52
---------------------------------------------------------------------------------------------------
Total revenues, net of interest
expense $450 $486 $336 $ 114 $1,386
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
DOLLARS IN MILLIONS TRANSACTIONS & INVESTMENT
YEAR ENDED DECEMBER 31, 1993 NET INTEREST BANKING COMMISSIONS OTHER TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salomon Brothers
Client-Driven Business:
Global investment banking $ -- $791 $ -- $ -- $ 791
Fixed income secondary markets 1,568 -- 44 -- 1,612
Equities secondary markets 308 -- 228 -- 536
Foreign exchange 204 -- -- -- 204
Private Investment Department
and asset management 53 -- 12 31 96
---------------------------------------------------------------------------------------------------
Total revenues from
Client-Driven Business 2,133 791 284 31 3,239
Proprietary Trading Businesses 896 -- -- -- 896
---------------------------------------------------------------------------------------------------
Total Salomon Brothers' revenues,
net of interest expense 3,029 791 284 31 4,135
Phibro Division 45 -- -- 1 46
Phibro USA (19) -- -- 49 30
Corporate and Other (2) -- 1 (11) (12)
---------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $3,053 $791 $285 $ 70 $4,199
===================================================================================================
</TABLE>
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PRINCIPAL
DOLLARS IN MILLIONS TRANSACTIONS & INVESTMENT
YEAR ENDED DECEMBER 31, 1992 NET INTEREST BANKING COMMISSIONS OTHER TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salomon Brothers
Client-Driven Business:
Global investment banking $ -- $450 $ -- $ -- $ 450
Fixed income secondary markets 1,028 -- 36 -- 1,064
Equities secondary markets 75 -- 157 -- 232
Foreign exchange 189 -- -- -- 189
Private Investment Department
and asset management 3 -- 9 36 48
---------------------------------------------------------------------------------------------------
Total revenues from
Client-Driven Business 1,295 450 202 36 1,983
Proprietary Trading Businesses 1,945 -- -- -- 1,945
Other 23 -- -- -- 23
---------------------------------------------------------------------------------------------------
Total Salomon Brothers' revenues,
net of interest expense 3,263 450 202 36 3,951
Phibro Division (31) -- -- 3 (28)
Phibro USA (25) -- -- 24 (1)
Corporate and Other (43) -- -- (20) (63)
----------------------------------------------------------------------------------------------------
Total revenues, net of interest
expense $3,164 $450 $202 $ 43 $3,859
===================================================================================================
</TABLE>
SALOMON BROTHERS
CLIENT-DRIVEN BUSINESS
The Client-Driven Business includes revenues from global investment banking,
fixed income and equities secondary markets, foreign exchange and the Private
Investment Department and asset management.
GLOBAL INVESTMENT BANKING
Global investment banking revenues include gains, losses and fees, net of
syndicate expenses, arising from securities offerings in which Salomon Brothers
acts as an underwriter or agent. Investment banking revenues also include fees
earned from providing merger and acquisition and financial restructuring
advisory services.
FIXED INCOME SECONDARY MARKETS
Fixed income secondary markets revenues include realized and unrealized gains
and losses and fees arising from the trading, as principal and agent, of
government and government agency securities, investment and non-investment grade
corporate debt, mortgage securities (primarily U.S. government agencies,
including interest only and principal only strips), preferred equity securities
and emerging market fixed income securities. Emerging market securities include
certain non-U.S. government securities, corporate debt and preferred equity
securities. Fixed income secondary markets revenues also include realized and
unrealized gains and losses from changes in the market or fair value of options
on fixed income securities, interest rate swaps, options on swaps, caps and
floors, financial futures, over-the-counter options and forward contracts on
fixed income securities. Fixed income secondary markets revenues are increased
by interest income earned on trading inventories and reduced by the interest
expense incurred to finance such inventories, as well as interest on securities
sold, not yet purchased.
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EQUITIES SECONDARY MARKETS
Equities secondary markets revenues consist of realized and unrealized gains and
losses and fees arising from the trading of U.S. and non-U.S. equity securities,
including common and preferred stock, convertible preferred stock, convertible
corporate debt, equity-linked notes and exchange-traded and over-the-counter
equity options and warrants. Equities secondary markets revenues are increased
by interest and dividends earned on trading inventories and reduced by interest
expense incurred to finance such inventories, as well as interest and dividends
on securities sold, not yet purchased. Fee income is generated primarily from
equity-related block trading and program trading transactions executed for
customers.
FOREIGN EXCHANGE
Foreign exchange revenues consist of realized and unrealized gains and losses
arising from the trading of currencies and exchange-traded and over-the-counter
currency options.
PRIVATE INVESTMENT DEPARTMENT AND ASSET MANAGEMENT
Private Investment Department revenues include commissions generated by
providing brokerage services to high net-worth individuals. In February 1995,
the Company announced its intention to discontinue its Private Investment
Department. Revenues for the department were $31 million in 1994, $67 million in
1993, and $28 million in 1992. Asset management revenues consist of investment
advisory fees generated from providing specialized investment and portfolio
management services to institutional clients. Asset management revenues are
included in "Other" revenues on the Consolidated Statement of Income. Private
Investment Department and asset management revenues also include certain shared
secondary trading revenues.
PROPRIETARY TRADING
Proprietary trading revenues consist of realized and unrealized gains and losses
and net interest from arbitrage strategies that use a variety of fixed income
and equity securities and derivative instruments. Salomon Brothers' proprietary
trading strategies involve the same types of instruments utilized in the fixed
income and equities secondary markets businesses.
UNALLOCATED CHARGES
The resolution of unreconciled balances related to Salomon Brothers'
London-based companies resulted in an aftertax charge of $126 million ($194
million pretax) to Salomon Brothers' fourth quarter 1994 results. These balances
were identified as Salomon Brothers changed operational systems and conducted a
detailed review of databases supporting general ledger balances. The review
necessitated a number of adjustments affecting transactions going back at least
until 1989 involving many different instruments, positions and the related
currency effects. Although the charge relates to a number of years, the impact
on any single year would not have been material. A detailed review of general
ledger balances related to Salomon Brothers' U.S.-based operations was completed
in the 1993 fourth quarter and an aftertax charge of $49 million ($87 million
pretax), which was not material to the 1993 fourth quarter, was reflected in
such period. The 1993 charge is allocated to business units in the preceding
table.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Salomon Brothers' 1994 fourth quarter results also include a $49 million
aftertax charge ($84 million pretax) arising from the completion of the detailed
review of Salomon Brothers' general ledger accounts related to interest rate
swaps and the interest rate swap transactions database. Problems in recording
the results of interest rate swap activities date back to the mid-1980s. From
1992 through 1994, aftertax charges of approximately $91 million ($161 million
pretax) were recorded in connection with this effort, including an aggregate of
$25 million before taxes in the first three quarters of 1994 and the $84 million
pretax charge in the 1994 fourth quarter; the impact on earnings in any single
period was not material.
The pretax charges referred to above are reflected as reductions in "Principal
transactions" on the Consolidated Statement of Income. Amounts other than the
$278 million are allocated to business units in the preceding tables.
PHIBRO DIVISION
Phibro Division, the Company's commodities trading business, trades oil, natural
gas, metals, petrochemicals, plastics, coal, coke, fertilizers and soft
commodities (coffee, grains, cocoa and sugar). Phibro Division revenues consist
of realized and unrealized gains and losses from trading these commodities and
related derivative instruments.
PHIBRO USA
Phibro USA is the Company's oil refining and gathering business. Phibro USA
revenues include the gross margin related to its oil refining and gathering
activities and net interest expense attributable to the financing of such
activities. Phibro USA's gross sales totaled $7,258 million in 1994, $8,357
million in 1993 and $7,197 million in 1992. The related cost of sales was $7,181
million in 1994, $8,308 million in 1993 and $7,173 million in 1992. Phibro USA
regularly enters into commodities-related futures, forwards, options and swap
agreements to manage the cost of inputs into the refining process as well as
revenues from the marketing and distribution of refined products. Phibro USA's
oil refining and gathering activities are reported on a gross profit basis
within "Other" revenues on the Consolidated Statement of Income.
CORPORATE AND OTHER
Corporate and Other includes the Company's equity in the earnings of
Phibro Energy Production, Inc. ("PEPI"), a partner in the White Nights Joint
Enterprise ("White Nights"), a Russian-American oil production venture located
in Western Siberia, and, beginning in the third quarter of 1993, results of The
Mortgage Corporation Group Limited and its subsidiaries ("TMC"), which originate
and service residential mortgages in the United Kingdom. "Other" revenues in
1993 included a $20 million pretax charge to write down PEPI's investment in
White Nights.
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 INDUSTRY SEGMENT AND GEOGRAPHIC DATA
The Company's operating results by segment for each of the last three years
were:
INCOME (LOSS) BEFORE
TAXES AND CUMULATIVE
EFFECT OF CHANGE IN
DOLLARS IN MILLIONS REVENUES ACCOUNTING PRINCIPLES(1) TOTAL ASSETS
-------------------------------------------------------------------------------
Year Ended December 31, 1994
Salomon Brothers $5,751 $ (963) $165,435
Phibro Division 208 81 2,375
Phibro USA 87 18 1,602
Corporate and Other 232 33 3,320
-------------------------------------------------------------------------------
Consolidated $6,278 $(831) $172,732
===============================================================================
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
===============================================================================
(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.
Segment results for all periods presented include a partial allocation of
Salomon Inc corporate-level expenses. Corporate-level expenses incurred for the
benefit of a particular operating segment are allocated directly to that
segment. "Corporate and Other" assets consist primarily of certain fixed assets,
PEPI's investment in White Nights and, in 1994 and 1993, the assets of TMC,
which consist primarily of assets securing collateralized mortgage obligations.
In 1992, TMC's assets of $4,117 million were included in the Salomon Brothers
segment.
71
<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 integration of the
Company's worldwide business activities, the Company believes that amounts
determined in this manner have limited use in understanding its business.
INCOME (LOSS) BEFORE
TAXES AND CUMULATIVE
EFFECT OF CHANGE IN
DOLLARS IN MILLIONS REVENUES ACCOUNTING PRINCIPLES(1) TOTAL ASSETS
-------------------------------------------------------------------------------
Year Ended December 31, 1994
North America $4,449 $ (119) $100,878
Europe 1,332 (841) 64,021
Asia and Other 497 129 7,833
-------------------------------------------------------------------------------
Consolidated $6,278 $ (831) $172,732
===============================================================================
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
===============================================================================
(1) North America includes charges of $109 million in 1994 related to the
detailed review of Salomon Brothers' general ledger accounts in connection
with interest rate swaps, as well as $185 million in 1992 in connection with
the U.S. Treasury auction and related matters. Europe includes a charge of
$194 million in 1994 in connection with the resolution of unreconciled
balances related to Salomon Brothers' London-based companies.
NOTE 3 COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS
Securities purchased under agreements to resell are collateralized principally
by government and government agency securities. Securities borrowed agreements
are collateralized principally by government and government agency securities,
corporate debt and equity securities. Securities purchased under agreements to
resell and securities borrowed agreements generally have terms ranging from
overnight to up to six months. As noted in the Summary of Accounting Policies,
the Company has adopted FIN 41. Excluding the impact of FIN 41, collateralized
short-term financing agreements totaled $66.8 billion at December 31, 1994. At
December 31, 1994, the market value of securities collateralizing resale
agreements and securities borrowed and other short-term financing agreements was
$51.0 billion and $16.7 billion, respectively. The interest rate on these
instruments depends on, among other things, the underlying collateral, the term
of the agreement and the credit quality of the counterparty. At December 31,
1994, these instruments had a weighted average interest rate of 5.2%.
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (dollars in millions):
DECEMBER 31, 1994 1993
-------------------------------------------------------------------------------
Land $ 4 $ 4
Buildings, improvements and equipment 1,142 1,075
Refining and other energy-related assets 736 660
-------------------------------------------------------------------------------
Total 1,882 1,739
Accumulated depreciation and amortization (701) (617)
-------------------------------------------------------------------------------
Property, plant and equipment, net $1,181 $1,122
===============================================================================
NOTE 5 SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase are collateralized principally by
government and government agency securities. Securities loaned agreements are
collateralized principally by corporate debt and equity securities.
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>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994 1993 1992
--------------------------------------------------------------------------------
Bank borrowings:
Balance at year-end $2,333 $3,644 $2,080
Weighted average interest rate 6.0% 4.2% 5.7%
Annual averages:
Amount outstanding $3,045 $2,341 $2,206
Weighted average interest rate 4.9% 4.5% 6.2%
Maximum amount outstanding at any month-end $4,173 $3,999 $3,544
-------------------------------------------------------------------------------
Commercial paper:
Balance at year-end $ 865 $1,344 $1,143
Weighted average interest rate 5.7% 3.5% 3.6%
Annual averages:
Amount outstanding $1,094 $ 933 $ 731
Weighted average interest rate 4.4% 3.4% 4.0%
Maximum amount outstanding at any month-end $1,309 $1,344 $1,143
================================================================================
</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, 1994 and 1993, all of the Company's commercial paper
outstanding was U.S. dollar denominated.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1992, Salomon Brothers Inc ("SBI") entered into a committed secured standby
bank credit facility for financing securities positions. The facility, which has
a capacity of $2.12 billion, contains certain restrictive covenants that
require, among other things, that SBI maintain minimum levels of excess net
capital and net worth, as defined. SBI's excess net capital exceeded the minimum
required under the facility by $488 million and SBI's net worth exceeded the
minimum amount required by $130 million at December 31, 1994. Salomon Brothers
International Limited ("SBIL"), an indirect wholly-owned subsidiary of the
Company, entered into a committed secured standby bank credit facility in 1994,
which has a capacity of $1.00 billion. At December 31, 1994, there were no
outstanding borrowings under these facilities. TMC has secured sterling
denominated committed credit facilities aggregating the U.S. dollar equivalent
of $190 million at December 31, 1994. Approximately $130 million of these
facilities mature in mid-1995; the remainder mature in 2031. The unused
portions of these lines were approximately $27 million at December 31, 1994.
Annual commitment fees on the unused portions of committed credit facilities
range from 10 to 30 basis points.
NOTE 6 COLLATERALIZED MORTGAGE OBLIGATIONS
Certain special purpose wholly-owned subsidiaries have been organized to issue
collateralized mortgage obligations ("CMOs"). The CMOs are collateralized by
mortgages, mortgage-backed securities and short-term investments (collectively,
the "Collateral"). Principal and interest payments received from the Collateral
are utilized to meet periodic principal and interest payments on the CMOs.
Although the CMOs have contractual maturities, their actual maturities may be
shorter as a result of prepayments of the Collateral.
The CMOs consisted of the following (dollars in millions):
CURRENCY
----------------
DECEMBER 31, STERLING U.S.$ TOTAL 1994 TOTAL 1993
----------------------------------------------------------------------------
Contractual Maturity
2001 to 2005 $ -- $ -- $ -- $ 62
2006 to 2010 -- 97 97 206
2011 to 2031 2,264 713 2,977 3,595
Accrued interest payable 14 15 29 38
Unamortized discounts -- (77) (77) (93)
----------------------------------------------------------------------------
Collateralized mortgage obligations $ 2,278 $ 748 $ 3,026 $ 3,808
============================================================================
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 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, consisted of
the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
FIXED-RATE FIXED-RATE
TERM DEBT TERM DEBT TOTAL VARIABLE-
SWAPPED TO NOT FIXED-RATE RATE TOTAL TOTAL
DOLLARS IN MILLIONS VARIABLE SWAPPED TERM DEBT TERM DEBT 1994 1993
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated:
Due in 1994 $ -- $ -- $ -- $ -- $ -- $ 1,901
Due in 1995 1,935 230 2,165 1,407 3,572 2,271
Due in 1996 1,168 7 1,175 1,051 2,226 1,882
Due in 1997 803 13 816 317 1,133 522
Due in 1998 1,026 5 1,031 199 1,230 1,018
Due in 1999 821 7 828 519 1,347 515
Thereafter 1,561 11 1,572 163 1,735 1,439
-------------------------------------------------------------------------------------------------------------------------
U.S. dollar denominated 7,314 273 7,587 3,656 11,243 9,548
-------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated:
Due in 1994 -- -- -- -- -- 525
Due in 1995 118 60 178 170 348 300
Due in 1996 130 21 151 333 484 255
Due in 1997 430 -- 430 115 545 188
Due in 1998 117 8 125 748 873 193
Due in 1999 162 -- 162 405 567 37
Thereafter 927 117 1,044 98 1,142 646
-------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated 1,884 206 2,090 1,869 3,959 2,144
-------------------------------------------------------------------------------------------------------------------------
Term debt $ 9,198 $ 479 $ 9,677 $ 5,525 $15,202 $11,692
=========================================================================================================================
</TABLE>
The Company and its subsidiaries issue U.S. dollar and non-U.S. dollar
denominated fixed-rate and variable-rate term debt. Fixed-rate debt matures at
various dates through 2023. The contractual interest rates on fixed-rate debt,
excluding zero-coupon debt, ranged from 1.50% (Japanese yen denominated) to
12.87% (Italian lira denominated) at December 31, 1994 and 3.67% (U.S. dollar
denominated) to 12.87% (Italian lira denominated) at December 31, 1993. The
weighted average interest rate on total fixed-rate term debt (both U.S. dollar
denominated and non-U.S. dollar denominated term debt) was 6.51% at December 31,
1994 and 6.71% at December 31, 1993. The Company utilizes interest rate swap
agreements to convert most of its fixed interest rate term debt to variable
interest rate obligations. The maturity structure of the swap contracts is
structured to correspond with the maturity structure of the debt being hedged.
The Company's non-U.S. dollar fixed-rate term debt was issued across a broad
range of currencies (including German marks, Japanese yen, U.K. sterling,
Italian lire, Swedish krone, and European Currency Units) and, consequently,
a wide range of interest rates.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the effects of interest rate swaps on the portion
of the Company's fixed-rate term debt converted to variable-rate obligations at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
--------------------------------------- ----------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
FIXED RATE ON WEIGHTED AVERAGE FIXED RATE ON WEIGHTED AVERAGE
SWAPPED FIXED-RATE VARIABLE RATE ON SWAPPED FIXED-RATE VARIABLE RATE ON
TERM DEBT SWAPPED TERM DEBT TERM DEBT SWAPPED TERM DEBT
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. dollar denominated 6.5% 7.0% 7.2% 4.2%
Japanese yen denominated 4.4% 2.8% 5.3% 2.5%
German mark denominated 8.0% 5.5% 8.3% 6.2%
Other non-U.S. dollar denominated 5.2% 5.9% 7.0% 4.8%
---------------------------------------------------------------------------------------------------------------------
Total swapped fixed-rate term debt 6.4% 6.4% 7.1% 4.2%
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Variable-rate debt matures at various dates through 2004. 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 2.00% (U.S. dollar denominated) to 10.89% (German
mark denominated) at December 31, 1994, and 1.63% (Japanese yen denominated) to
9.27% (European Currency Unit denominated) at December 31, 1993. The weighted
average contractual rate on total variable-rate term debt (both U.S. dollar
denominated and non-U.S. dollar denominated) was 5.58% at December 31, 1994 and
3.95% at December 31, 1993.
At December 31, 1994, the Company had outstanding $4.0 billion non-U.S. dollar
denominated term debt, of which $2.3 billion was Japanese yen denominated and
$1.1 billion was German mark denominated (converted at the December 31, 1994
spot rates). This amount includes term debt of $2.3 billion used to finance
operations, including $1.2 billion issued by subsidiaries of the Company in
their respective local currencies. Approximately $1.4 billion of Salomon Inc
(parent company) non-U.S. dollar denominated debt, primarily Japanese yen
denominated, has been designated as a hedge of investments in subsidiaries with
functional currencies other than the U.S. dollar. Salomon Inc (parent company)
has entered into forward currency purchase and swap contracts that effectively
convert $307 million of non-U.S. dollar denominated term debt to U.S. dollar
denominated obligations.
Term debt includes subordinated notes, which totaled $29 million at December 31,
1994 and $28 million at December 31, 1993. At December 31, 1994, subordinated
debt included approximately $6 million of convertible restricted notes, which
are convertible at the rate of $13.89 per share into 444,595 shares of the
Company's common stock. At December 31, 1993, subordinated debt included
approximately $8 million of convertible restricted notes, which were convertible
into 547,953 shares of the Company's common stock. The Company has outstanding
certain issues of term debt for which the principal repayment is linked to
certain equity securities of unaffiliated issuers.
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 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, 1994, 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, 1994),
voting together as one class with the Company's common stock. At December 31,
1994, the redeemable preferred stock represented 14.8% 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 (if not previously converted) 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 is redeemable only 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).
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 is redeemable only 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 fixed-rate dividend obligations into variable-rate obligations. For
financial reporting purposes, dividends on preferred stock are adjusted by the
after-tax income or loss generated by these swaps.
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 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 11.
NOTE 10 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.
SBI 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, 1994, SBI's net capital was $944 million, $888 million in
excess of regulatory requirements.
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 SFA requires SBIL to have available at all times
financial resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At December 31, 1994, SBIL's financial resources were $633
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, 1994, SBAL's net capital was $489 million above
the minimum required by Japan's Ministry of Finance. SBAG's net capital was $10
million above the minimum required by Germany's Banking Supervisory Authority.
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 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 $44 million, $46 million and $40 million in 1994, 1993 and 1992,
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 such benefit programs. At December 31, 1994,
there were 8,900 active and 600 retired employees eligible for such benefits.
Expenses recorded for health care and life insurance benefits were $48 million,
$125 million and $43 million in 1994, 1993 and 1992, respectively. Such
expenses in 1993 included the $65 million pretax charge, discussed below,
related to the adoption of Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions
("SFAS 106"). In 1992, the Company expensed the costs associated with these
plans as they were paid.
Effective January 1, 1993, the Company adopted 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. The Company also adopted Statement of Financial Accounting Standards
No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112") in 1993,
the impact of which was immaterial. At December 31, 1994, the present value of
the liability related to benefits as defined by SFAS 106 and SFAS 112 was $76
million.
STOCK OPTION AND INCENTIVE PLANS
The Non-Qualified Stock Option Plan of 1984 (the "1984 Plan"), as amended in
1988, which terminated on June 30, 1994, provided for the granting of options to
purchase common stock to certain key employees. Stock appreciation rights
accompanied some of the options granted. Exercise of such rights extinguishes
the related options. Options expire ten years from the date of grant. Options to
purchase 1,438,390 and 1,732,890 shares were exercisable at December 31, 1994
and 1993, respectively.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in options and outstanding shares under option are summarized as
follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------------------------------------------------------------
Shares under option at:
December 31, 1994 1,438,390 $18.13 to $ 46.00
December 31, 1993 1,732,890 $18.13 to $ 46.00
December 31, 1992 2,650,952 $18.13 to $ 46.00
Options exercised:
1994 283,300 $18.13 to $ 46.00
1993 899,585 $18.13 to $ 40.38
1992 2,620,142 $17.88 to $ 32.84
Options canceled or expired:
1994 11,200 $18.13 to $ 46.00
1993 18,477 $18.13 to $ 46.00
1992 154,920 $18.13 to $ 46.00
---------------------------------------------------------------
Available for future grant:
December 31, 1994 0
December 31, 1993 9,823,767
December 31, 1992 9,806,090
===============================================================
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.
During 1994, the stockholders approved the Salomon Inc Stock Incentive Plan
("SIP"). The SIP provides for an aggregate grant of up to five million shares in
the form of (i) non-qualified stock options, (ii) incentive stock options, (iii)
limited stock appreciation rights, (iv) tandem stock appreciation rights, (v)
stand-alone stock appreciation rights, (vi) shares of restricted stock, (vii)
shares of phantom stock, (viii) stock bonuses and (ix) cash bonuses to key
employees, including officers, whether or not they are directors of the Company
and its affiliates. No awards have been made under the SIP.
During 1989, the stockholders approved an Employee Stock Purchase Plan ("ESPP").
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 are issued from the Company's common stock
held in treasury. Shares for the ESPP are purchased in the open market. Prior to
the second quarter of 1994, ESPP shares were 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 $266 million (5.8
million shares) in 1994 and
80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$293 million (6.9 million shares) in 1993. Stock awarded under the Plan totaled
$264 million (5.6 million shares) and $264 million (6.3 million shares) in 1994
and 1993, 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. The net asset or liability
related to the Plan, which represents the difference between the Company's
liability under the Plan, payable in common stock, and the cost of the unawarded
shares held by the Plan, is included in either "Other assets, including
intangibles" or "Payables and accrued liabilities--Other" on the Consolidated
Statement of Financial Condition. Shares held by the trustee of the Plan are
considered outstanding for the purpose of computing earnings (loss) per share.
NOTE 12 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 provision for income taxes was determined using the deferred
method of interperiod tax allocation in accordance with Accounting Principles
Board Opinion No. 11.
The components of income taxes reflected on the Consolidated Statement of Income
are (dollars in millions):
YEAR ENDED DECEMBER 31, 1994 1993 1992
----------------------------------------------------------
Current:
U.S. federal $ 42 $ 150 $ 176
State and local 25 59 33
Non-U.S. 386 68 190
----------------------------------------------------------
Total current 453 277 399
----------------------------------------------------------
Deferred:
U.S. federal (199) (44) (47)
State and local (58) (37) 44
Non-U.S. (628) 405 110
----------------------------------------------------------
Total deferred (885) 324 107
----------------------------------------------------------
Income tax expense (benefit) charged
to earnings $ (432) $ 601 $ 506
==========================================================
Deferred tax provisions (benefits) arising from temporary differences are as
follows (dollars in millions):
YEAR ENDED DECEMBER 31, 1994 1993 1992
-------------------------------------------------------------------
Mark-to-market adjustments $(893) $ 348 $ 92
U.S. tax provided on foreign earnings (40) 17 --
Employee benefits and deferred compensation 18 (111) --
U.S. Treasury auction and related matters 6 11 37
Environmental reserves 11 13 (12)
Occupancy reserves 18 16 (21)
Other, net (5) 30 11
-------------------------------------------------------------------
Deferred income tax expense (benefit) $(885) $ 324 $ 107
===================================================================
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1994, the Company's Consolidated Statement of Financial
Condition included a net deferred tax liability of $310 million, comprised of
deferred tax assets and liabilities of $567 million and $877 million,
respectively. The largest component of deferred tax assets is $410 million
attributable to employee benefits and deferred compensation. Remaining deferred
tax assets are attributable largely to reserves. The largest component of
deferred tax liabilities is $728 million attributable to mark-to-market
adjustments. Remaining deferred tax liabilities are attributable largely to
cumulative translation adjustments (which do not affect the provision for
income taxes) and undistributed earnings of non-U.S. subsidiaries. At December
31, 1993, the Company had a net deferred income tax liability of $1,185 million.
The Company had no deferred tax valuation allowance at December 31, 1994 or
December 31, 1993.
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 reduces the Company's deferred tax liability but does not
impact the Company's provision for income tax expense.
Income taxes paid, net of refunds, totaled $409 million in 1994, $278 million in
1993 and $349 million in 1992. 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,
1994, the accumulated undistributed earnings of the Company's non-U.S.
subsidiaries amounted to $1.7 billion. U.S. federal taxes have been provided on
$500 million of these earnings and, therefore, that amount could be remitted to
the 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 rates, additional taxes of $368 million would have to be provided if
the remaining earnings were remitted to the United States.
A reconciliation of the Company's "expected" income tax expense (benefit) to
the amounts recorded by the Company follows (dollars in millions):
Year Ended December 31, 1994 1993* 1992
------------------------------------------------------------------
Income (loss) before taxes $ (831) $ 1,465 $ 1,056
Statutory U.S. federal income tax
rate for corporations 35% 35% 34%
------------------------------------------------------------------
Expected income tax expense (benefit) (291) 513 359
Impact of:
Taxes applicable to non-U.S. earnings 4 2 26
State and local taxes, net of U.S.
federal tax effect (18) 14 51
Provisions for tax contingencies and
non-deductible reserves 5 87 68
Reversal of tax contingency reserves (102) -- --
Tax advantaged income (35) (19) (7)
Other, net 5 4 9
------------------------------------------------------------------
Income tax expense (benefit) $ (432) $ 601 $ 506
==================================================================
* Excludes cumulative effect of change in accounting principles.
82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is computed by dividing net income (loss),
less 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 (loss) 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 8
and 7, respectively.
<TABLE>
<CAPTION>
AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31, 1994 1993 1992
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares used in computing earning (loss) per share:
Average common shares outstanding 106.8 110.4 114.6
Effects of assumed exercise of stock options, if dilutive -- .6 .8
------------------------------------------------------------------------------------------------------
Shares used in computing primary earnings (loss) per share 106.8 111.0 115.4
Effects (when dilutive) of:
Assumed conversion of convertible notes -- .6 .9
Assumed conversion of convertible preferred stock -- 18.4 18.4
------------------------------------------------------------------------------------------------------
Shares used in computing fully diluted earnings (loss) per share 106.8 130.0 134.7
======================================================================================================
Net income (loss) for earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principles $(399) $ 864 $ 550
Less dividends on preferred stock, Series A, C and D* 62 49 68
------------------------------------------------------------------------------------------------------
Income (loss) for primary earnings (loss) per share before cumulative
effect of change in accounting principles (461) 815 482
Add dividends on preferred stock, Series A, when dilutive* -- 39 63
Add interest expense, net of tax, on convertible notes, when dilutive -- -- 1
------------------------------------------------------------------------------------------------------
Income (loss) for fully diluted earnings (loss) per share before
cumulative effect of change in accounting principles (461) 854 546
Cumulative effect of change in accounting principles,
net of tax benefit of $28 -- (37) --
------------------------------------------------------------------------------------------------------
Net income (loss) for fully diluted earnings (loss) per share $(461) $ 817 $ 546
======================================================================================================
Earnings (loss) per share of common stock:
Primary earnings (loss) before cumulative effect of change in
accounting principles $(4.31) $ 7.34 $4.18
Cumulative effect of change in accounting principles -- (0.33) --
------------------------------------------------------------------------------------------------------
Primary earnings (loss) $(4.31) $ 7.01 $4.18
======================================================================================================
Fully diluted earnings (loss) before cumulative effect of change
in accounting principles $(4.31) $ 6.57 $4.05
Cumulative effect of change in accounting principles -- (0.29) --
------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) $(4.31) $ 6.28 $4.05
======================================================================================================
</TABLE>
* Dividends on preferred stock are adjusted for the aftertax impact of interest
rate swaps that effectively convert the Company's fixed-rate obligations to
variable-rate. In 1992, the impact of the swaps related to the Series A
Preferred was included in reported earnings.
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SECURITIES PLEDGED AND LEASE COMMITMENTS
REPURCHASE AGREEMENTS, SECURITIES PLEDGED AND LETTERS OF CREDIT
At December 31, 1994, the approximate market values of securities sold under
agreements to repurchase or pledged by the Company were:
DOLLARS IN MILLIONS
--------------------------------------------------------------------------------
For sales under agreements to repurchase $ 75,644
As collateral for securities borrowed of
approximately equivalent value 23,837
For securities loaned 1,586
To clearing organizations or segregated
under securities laws and regulations 3,455
As collateral for letters of credit 955
As collateral on bank loans 752
--------------------------------------------------------------------------------
Repurchase agreements and securities pledged $106,229
================================================================================
At December 31, 1994, the Company had $3.5 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, 1994. 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 and gathering activities, are expected to be recorded as a reduction of
"Other" revenues on the Consolidated Statement of Income.
DOLLARS IN MILLIONS
----------------------------------------------------------
1995 $ 136
1996 113
1997 89
1998 70
1999 67
Thereafter 677
----------------------------------------------------------
Minimum future rentals $1,152
==========================================================
Minimum future rentals include $85 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 $70 million, $133 million
and $161 million for the years ended December 31, 1994, 1993 and 1992,
respectively. These amounts exclude reductions in "Other" revenues of $65
million in 1994, $46 million in 1993 and $85 million in 1992.
84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 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.
Over 50 private actions were commenced against the Company or SBI 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. On June 15, 1994, the United States
District Court for the Southern District of New York (the "District Court")
approved the settlement of certain class action lawsuits brought by purchasers
of various of the Company's securities, pursuant to which $54.5 million was paid
to the plaintiff class out of the $100 million private claims fund established
pursuant to the 1992 settlement described above. The District Court awarded
plaintiffs' attorneys fees and expenses of $9.6 million, which was paid by the
Company. On July 26, 1994, the District Court approved the settlement of certain
class action lawsuits brought by participants in the U.S. Treasury securities
market, pursuant to which $66 million (almost two-thirds of which is expected
to be reimbursed out of the $100 million private claims fund established
pursuant to the 1992 settlement described above) was paid by the Company to the
plaintiff class and its attorneys. Derivative claims asserted on behalf of the
Company and SBI against four former officers and employees of the Company in
connection with the U.S. Treasury auction and related matters are pending in the
District Court.
OTHER MATTERS
The Company is also a defendant in other lawsuits incidental to its securities,
commodities and oil refining businesses. Further, in connection with its
discontinued commodities processing operations, the Company and certain of its
subsidiaries are subject to claims asserted by the U.S. Environmental Protection
Agency, certain state agencies and private parties in connection with
environmental matters. Management of the Company, after consultation with
outside legal counsel and consideration of applicable reserves, believes that
the ultimate resolution of legal proceedings and environmental matters will not
have a material adverse effect on the Company's financial condition; however,
such resolution could have a material adverse impact on operating results in
future periods depending in part on the results for such periods.
85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 FINANCIAL AND COMMODITIES-RELATED INSTRUMENTS AND RELATED RISKS
NATURE AND TERMS OF FINANCIAL AND COMMODITIES-RELATED INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
In the normal course of its operations, the Company and its subsidiaries enter
into various contractual commitments involving future settlement. These include
swaps, cap and floor agreements, futures contracts, forward purchase and sale
agreements, option contracts, warrants, and securities sold, not yet purchased
(short sales). These transactions are executed either over-the-counter ("OTC")
or are exchange traded.
Interest rate swaps are OTC instruments that involve two separate parties
agreeing to exchange periodic interest payment streams calculated on a
predetermined notional principal amount. Interest rate swaps generally involve
one party paying a fixed interest rate and the other party paying a variable
rate. Other types of interest rate swaps include basis swaps and cross-currency
swaps. Basis swaps consist of both parties paying variable interest streams
based on different reference rates (for example, one based on the three-month
U.S. Treasury bill and the other on LIBOR). Cross-currency interest rate swaps
involve the exchange of coupon payments in one currency for coupon payments in
another currency. An equity swap is an agreement to exchange cash flows on a
notional principal amount based on changes in the values of a referenced index,
such as the S&P 500. Phibro Division and Phibro USA enter into commodity swaps,
which are contractual commitments that involve the exchange of a fixed price of
a commodity for a floating price, which is usually the prevailing spot price
throughout the swap term. The most common commodity swaps are petroleum-based;
other types are based on metals or soft commodities, such as agricultural
products.
Caps are contractual commitments which require the writer to pay the purchaser
an excess amount, if any, of a reference rate over a contractual rate at
specified times during the contract. Likewise, a floor is a contractual
commitment that requires the writer to pay an excess amount, if any, of a
contractual rate over a reference rate at specified times over the life of the
contract. Swap agreements, caps and floors have widely varying terms and may
range over several years.
Futures contracts are exchange-traded contractual commitments to either receive
(purchase) or deliver (sell) a standard amount or value of a commodity or
financial instrument at a specified future date and price (or, with respect to
futures contracts on indices, the net cash amount). Maintaining a futures
contract will typically require the Company to deposit with the futures exchange
(or other financial intermediary), as security for its obligations, an amount of
cash or other specified asset ("initial margin") that typically ranges from 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The Company enters into interest rate futures, currency
futures, index futures, and commodities futures, among others. Futures contracts
may be settled by physical delivery of the underlying asset or cash settlement
(for index futures) on the settlement date, or by entering into an offsetting
futures contract with the futures exchange prior to the settlement date. Forward
contracts are OTC contractual commitments to purchase or sell a specified amount
of financial instruments, foreign currencies, or commodities at a future date at
a predetermined price.
86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option contracts are contractual agreements that give the purchaser the right,
but not the obligation, to purchase or sell a financial instrument, commodity,
or currency at a predetermined exercise price. In return for this right, the
purchaser pays a premium to the seller (or writer) of the option. Option
contracts also exist for various indices and are similar to options on a
security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, they are settled in cash. Options on
futures contracts give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract. The purchase of an option on a
futures contract involves the payment of a premium for the option without
further obligation on the part of the Company. If the Company exercises an
option on a futures contract, it will be obligated to post initial margin (and
potentially variation margin) for the resulting futures position just as it
would for any futures contract. Option contracts may be either exchange traded
or OTC. Exchange-traded options issued by certain regulated intermediaries, such
as the Options Clearing Corporation ("OCC"), are the obligations of the issuing
intermediary. In contrast to such options, which generally have standardized
terms and performance mechanics, all of the terms of an OTC option, including
the method of settlement, term, exercise price, premium, guarantees and
security, are determined by negotiation of the parties, and there is no
intermediary between the parties to assume the risks of performance. The Company
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. Warrants have characteristics
similar to those of OTC options whereby the buyer has the right to purchase a
certain debt instrument at a specific future date and price.
The Company sells various financial instruments and commodities which have not
yet been purchased ("short sales"). The Company borrows these securities in
order to sell them short and, at a later date, must deliver (i.e., replace) like
or materially-like financial instruments or commodities to the parties from
which they were originally borrowed. The Company is exposed to market risk for
short sales. If the market value of an instrument sold short increases, the
Company's obligation, reflected as a liability on the Consolidated Statement of
Financial Condition, would increase and revenues from principal transactions
would be reduced.
As discussed in the Summary of Accounting Policies, the Company records all
contractual commitments used for trading purposes at market or fair value.
Consequently, changes in the amounts recorded on the Company's Consolidated
Statement of Financial Condition resulting from movement in market prices are
included currently in the Consolidated Statement of Income. Certain contractual
commitments used for purposes other than trading, such as interest rate swaps,
are not marked to market. Instead, the accrued inflows and outflows are
recorded as adjustments to interest expense or dividends, as appropriate. Other
non-trading contractual commitments, such as forward currency contracts, are
marked to market. The use of contractual commitments and financial instruments
with off-balance-sheet risk may expose the Company to both market risk and
credit risk in excess of amounts recorded on the Consolidated Statement of
Financial Condition. These risks are discussed in more detail below.
MARKET RISK
Market risk is the potential loss the Company may incur as a result of changes
in the market value of a particular instrument. All financial and
commodities-related instruments, including derivatives and short sales, are
subject to market risk. The Company's exposure to market risk is determined by a
number of factors, including the size,
87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
composition and diversification of positions held, the absolute and relative
levels of interest rates and foreign currency exchange rates, as well as market
volatility and illiquidity. For instruments such as options and warrants, the
time period during which the options or warrants 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 mitigate such risk.
Statement of Financial Accounting Standards ("SFAS") No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, and SFAS No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments, require the disclosure of the notional amounts of derivative
financial instruments, distinguishing between those held or issued for trading
purposes and those held or issued for purposes other than trading. Notional
amounts and additional detail of the market or fair values of financial options
and contractual commitments recorded on the Consolidated Statement of Financial
Condition at December 31, 1994 are set forth in the Summary of Options and
Contractual Commitments that immediately follows the Consolidated Statement of
Financial Condition. At December 31, 1993, the Company had outstanding contracts
with the following notional amounts: financial futures $473 billion; swap
agreements $233 billion; options and warrants sold or written $102 billion;
forward securities contracts $98 billion; forward currency contracts $51
billion; interest rate cap and floor agreements written $32 billion; and
commodities-related instruments $10 billion. The determination of notional
amounts does not consider any of the market risk factors discussed above.
Notional amounts as presented in this report are indicative only of the volume
of activity and are not a measure of market risk. Market risk is influenced by
the nature of the items that comprise a particular category of financial
instrument. 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 of the reasons noted above, the
interpretation of notional amounts as a measure of market risk could be
materially misleading. Management attempts to control market risk by setting
risk limits and monitoring the effectiveness of hedging policies and strategies.
The annual average balances of the Company's options and contractual commitments
based on month-end balances are as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DOLLARS IN BILLIONS ASSETS LIABILITIES ASSETS LIABILITIES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swaps agreements, swap options,
caps and floors $5.9 $6.1 $5.2 $6.1
Index and equity contracts and options 1.3 1.1 1.6 .7
Foreign exchange contracts and options 1.1 1.0 1.0 .8
Other .4 .5 .5 .6
------------------------------------------------------------------------------------
Total financial options
and contractual commitments $8.7 $8.7 $8.3 $8.2
====================================================================================
Commodities-related instruments $ .4 $ .4 $ .2 $ .3
====================================================================================
</TABLE>
88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CREDIT RISK
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. 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. Credit risk is measured by the loss the Company would record if
its counterparties failed to perform pursuant to terms of their contractual
obligations and the value of collateral held, if any, was not adequate to cover
such losses. The Company has established controls to monitor the
creditworthiness of counterparties, as well as the quality of pledged
collateral, and uses master netting agreements whenever possible to mitigate
the Company's exposure to counterparty credit risk. The Company may require
counterparties to submit additional collateral when deemed necessary. 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 securities issued by the U.S.
government or its agencies.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk from financial instruments, including contractual
commitments, exist when groups of issuers or counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected,
in a similar manner, by changes in the economy or other market conditions. The
Company monitors credit risk on both an individual and group counterparty basis.
The Company's largest single concentration of credit risk is with securities
issued by the U.S. government and its agencies which totaled $33.0 billion at
December 31, 1994 and $42.5 billion at December 31, 1993. With the addition of
U.S. government and U.S. government agency securities pledged as collateral by
counterparties in connection with collateralized financing activity, the
Company's total holdings of U.S. government securities were $75.2 billion or 44%
of the Company's total assets at December 31, 1994 and $71.2 billion or 39% of
total assets at December 31, 1993. Similarly, concentrations with non-U.S.
governments totaled $52.0 billion at December 31, 1994 and $53.2 billion at
December 31, 1993. 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, 1994 or 1993. North America and Europe represent the largest
geographic concentrations. Among industries, other major derivatives dealers
represent the largest group of counterparties.
89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 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, 1994 can be characterized as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
DOLLARS IN BILLIONS VALUE VALUE VALUE VALUE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
On-balance-sheet items:
Recorded at market or fair value:
Cash and interest bearing equivalents $ 3.5 $ 3.5 $ -- $ --
Financial options and contractual
commitments held or sold
for trading purposes 6.9 6.9 6.2 6.2
Other financial instruments held or
sold for trading purposes 86.4 86.4 55.2 55.2
Commodities-related derivative instruments
held or sold for trading purposes .4 .4 .5 .5
Other commodities-related products held or
sold for trading purposes .9 .9 .1 .1
Recorded at contractual amounts that
approximate market or fair value:
Collateralized short-term financing agreements 60.8 60.8 -- --
Receivables 8.5 8.5 -- --
Assets securing Sterling denominated
CMOs (variable rate) 2.4 2.4 -- --
Short-term borrowings -- -- 78.6 78.6
Payables -- -- 9.4 9.4
Sterling denominated CMOs (variable rate) -- -- 2.3 2.3
Variable-rate term debt -- -- 5.5 5.5
Items recorded at contractual amounts or
historical amounts that do not necessarily
approximate market or fair value:
Assets securing U.S. dollar denominated
CMOs (fixed rate) .8 .8 -- --
U.S. dollar denominated CMOs (fixed rate) -- -- .7 .8
Fixed-rate term debt -- -- 9.7 9.3
Other (non-financial assets) 2.1 N/A N/A N/A
--------------------------------------------------------------------------------------------
Total on-balance-sheet items $172.7 $168.2
============================================================================================
Off-balance-sheet contractual commitments -- $ .5 -- $ .7
============================================================================================
</TABLE>
At December 31, 1994, approximately 98% of the Company's assets and 94% of the
Company's liabilities were carried at market or fair value or at amounts that
approximate market or fair value. All trading positions, including financial and
derivative instruments and securities sold, not yet purchased (short sales), are
carried at market or fair value, with changes in market value reflected on the
Consolidated Statement of Income. The market value of items recorded at
contractual amounts that approximate market or fair value are not materially
sensitive to shifts in market interest rates because of the limited term to
maturity of many of these instruments or their variable interest rates.
90
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1993, assets and liabilities recorded at market or fair value
totaled $120.4 billion and $56.5 billion, respectively. Assets recorded at
contractual amounts that approximated market or fair value totaled $61.2 billion
at December 31, 1993. Liabilities recorded at contractual amounts that
approximated market or fair value totaled $119.7 billion at December 31, 1993.
Assets recorded at contractual amounts or historical amounts that did not
necessarily approximate market or fair value totaled $3.2 billion at December
31, 1993. Liabilities recorded at contractual amounts or historical amounts that
did not necessarily approximate market or fair value totaled $3.4 billion at
December 31, 1993.
NOTE 18 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>
PARENT COMPANY ONLY CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $ 418 $ 383 $ 601
Net interest and principal transactions 9 (25) (77)
General, administrative and other expenses (88) (78) (66)
----------------------------------------------------------------------------------------------------------
Income before taxes and equity in net income of
subsidiaries and affiliates, net of dividends received 339 280 458
Income tax benefit 33 44 89
Equity in net income (loss) of subsidiaries and affiliates,
net of dividends received (771) 518 3
----------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in accounting principles (399) 842 550
Cumulative effect of change in accounting principles, net of tax benefit of $11 -- (15) --
----------------------------------------------------------------------------------------------------------
Net income (loss) $(399) $ 827 $ 550
==========================================================================================================
</TABLE>
91
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest bearing equivalents $ 7 $ 6
Financial instruments 31 30
Commodities-related products
and instruments 573 273
Receivables 462 299
Receivables from subsidiaries:
Salomon Brothers Holding Company Inc $13,963 $11,652
Phibro Energy USA, Inc. 455 465
Other subsidiaries 640 158
------- -------
15,058 12,275
Investments in subsidiaries:
Salomon Brothers Holding Company Inc 4,433 5,112
Phibro Energy USA, Inc. 356 345
Other subsidiaries 24 363
------- -------
4,813 5,820
Property, plant and equipment, net 315 335
Other assets 87 55
-------------------------------------------------------------------------------------
Total assets $21,346 $19,093
=====================================================================================
Liabilities and stockholders' equity:
Short-term borrowings $ 2,064 $ 2,445
Financial and commodities-related instruments 470 664
Other liabilities 424 237
Term debt 13,896 10,501
------- -------
Total liabilities 16,854 13,847
Redeemable preferred stock 700 700
Stockholders' equity 3,792 4,546
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $21,346 $19,093
=====================================================================================
</TABLE>
PARENT COMPANY ONLY CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1993 1992
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of term debt $ 6,115 $ 6,783 $ 3,625
Repurchases and maturities of term debt (2,891) (3,560) (2,642)
Net increase (decrease) in short-term borrowings (381) 586 725
Issuance of preferred stock -- 200 --
Purchase of common stock for treasury (252) (16) (241)
Dividends (128) (117) (139)
Employee stock purchase and option plans 13 35 73
----------------------------------------------------------------------------------------------------
Cash provided by financing activities 2,476 3,911 1,401
----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in receivables from subsidiaries (2,783) (4,341) (1,198)
Dividends received from subsidiaries 418 383 601
Capital infusions and other capital transactions
with subsidiaries -- -- (326)
Purchases of property, plant and equipment (11) (8) (37)
----------------------------------------------------------------------------------------------------
Cash used in investing activities (2,376) (3,966) (960)
----------------------------------------------------------------------------------------------------
Cash provided by (used in) operating and other activities (99) 26 (409)
----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and interest bearing equivalents 1 (29) 32
Cash and interest bearing equivalents at beginning of year 6 35 3
----------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at end of year $ 7 $ 6 $ 35
====================================================================================================
</TABLE>
92
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on contractual maturities, sinking fund requirements or the earliest
date on which the debt is repayable at the option of the holder, consisted of
the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
FIXED-RATE FIXED-RATE
TERM DEBT TERM DEBT TOTAL VARIABLE-
SWAPPED TO NOT FIXED-RATE RATE TOTAL TOTAL
DOLLARS IN MILLIONS VARIABLE SWAPPED TERM DEBT TERM DEBT 1994 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated:
Due in 1994 $ -- $ -- $ -- $ -- $ -- $ 1,815
Due in 1995 1,935 230 2,165 1,407 3,572 2,271
Due in 1996 1,168 7 1,175 1,051 2,226 1,882
Due in 1997 800 13 813 297 1,110 503
Due in 1998 1,026 5 1,031 161 1,192 979
Due in 1999 821 7 828 519 1,347 515
Thereafter 1,561 11 1,572 163 1,735 1,439
--------------------------------------------------------------------------------------------------------------
U.S. dollar denominated 7,311 273 7,584 3,598 11,182 9,404
--------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated:
Due in 1994 -- -- -- -- -- 385
Due in 1995 100 48 148 170 318 284
Due in 1996 71 -- 71 331 402 194
Due in 1997 413 -- 413 115 528 169
Due in 1998 50 8 58 702 760 65
Due in 1999 145 -- 145 399 544 --
Thereafter 45 117 162 -- 162 --
--------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated 824 173 997 1,717 2,714 1,097
--------------------------------------------------------------------------------------------------------------
Term debt $ 8,135 $ 446 $ 8,581 $ 5,315 $13,896 $10,501
==============================================================================================================
</Table >
See Note 7 for information regarding the Parent's use of non-trading derivatives
to hedge term debt.
93
<PAGE>
SALOMON INC
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
</TABLE>
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS DECEMBER SEPTEMBER JUNE MARCH
THREE MONTHS ENDED 31 30 30 31
----------------------------------------------------------------------------------------------------
1994
Revenues:
<S> <C> <C> <C> <C>
Interest and dividends $ 1,635 $ 1,520 $ 1,347 $ 1,400
Principal transactions (326) (42) (245) 53
Investment banking 109 121 86 170
Commissions 79 82 85 90
Other 31 17 10 56
----------------------------------------------------------------------------------------------------
Total revenues $ 1,528 $ 1,698 $ 1,283 $ 1,769
Revenues, net of interest expense $ 96 $ 408 $ 171 $ 711
----------------------------------------------------------------------------------------------------
Income (loss) before taxes by segment:
Salomon Brothers' business unit contribution:
Client-Driven Business $ (110) $ (62) $ (291) $ (173)
Proprietary Trading Businesses (28) (114) (119) 212
Unallocated charges (278) -- -- --
----------------------------------------------------------------------------------------------------
Total Salomon Brothers (416) (176) (410) 39
Phibro Division (24) (27) 82 50
Phibro USA 5 (4) (10) 27
Corporate and Other 14 31 (8) (4)
----------------------------------------------------------------------------------------------------
Income (loss) before taxes $ (421) $ (176) $ (346) $ 112
----------------------------------------------------------------------------------------------------
Net income (loss) $ (157) $ (104) $ (204) $ 66
====================================================================================================
Earnings (loss) per share
Primary $ (1.65) $ (1.13) $ (2.08) $ 0.48
Fully diluted (1.65) (1.13) (2.08) 0.48
====================================================================================================
1993
Revenues:
Interest and dividends $ 1,444 $ 1,776 $ 1,520 $ 1,431
Principal transactions 965 (225) 805 (63)
Investment banking 250 214 178 149
Commissions 79 61 79 66
Other 26 33 3 8
----------------------------------------------------------------------------------------------------
Total revenues $ 2,764 $ 1,859 $ 2,585 $ 1,591
Revenues, net of interest expense $ 1,684 $ 587 $ 1,505 $ 423
----------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect of
change in accounting principles by segment:
Salomon Brothers' business unit contribution:
Client-Driven Business $ 354 $ 192 $ 383 $ 230
Proprietary Trading Businesses 508 (173) 400 (319)
----------------------------------------------------------------------------------------------------
Total Salomon Brothers 862 19 783 (89)
Phibro Division (21) (3) 3 6
Phibro USA (31) 0 (2) (13)
Corporate and Other (3) 2 (31) (17)
----------------------------------------------------------------------------------------------------
Income (loss) before 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)
====================================================================================================
</TABLE>
Earnings (loss) per share for quarterly periods are based on average common
shares outstanding in individual quarters; thus, the sum of earnings (loss) per
share of the quarters may not equal the amounts reported for the full year.
94
<PAGE>
SALOMON INC
COMMON STOCK DATA
The Company's stock is listed on the New York Stock Exchange, Inc. (trading
symbol SB). As of February 28, 1995, there were 12,978 holders of record.
The ranges of market prices and cash dividends paid on common stock for each
quarterly period during 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------------------- ------------------------------------------------
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 $ 52 3/4 $ 44 3/4 $ 48 1/2 $ 0.16 $ 41 7/8 $ 35 3/4 $ 38 3/4 $ 0.16
June 30 52 5/8 47 1/4 47 3/4 0.16 39 3/8 34 3/8 38 1/4 0.16
September 30 48 1/4 38 1/2 39 1/2 0.16 51 7/8 37 5/8 47 3/4 0.16
December 31 42 35 37 1/2 0.16 50 1/2 41 1/2 47 5/8 0.16
--------------------------------------------------------------------------------------------------------------------------
$ 0.64 $ 0.64
====== ======
</TABLE>
95
<PAGE>
SALOMON INC
FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year:
Revenues:
Principal transactions, including
net interest and dividends $ 450 $ 3,053 $ 3,164 $ 2,705 $ 2,129
Investment banking 486 791 450 496 416
Commissions and other 450 355 245 326 442
----------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 1,386 4,199 3,859 3,527 2,987
----------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 1,486 1,900 1,638 1,375 1,393
Other noninterest expenses 731 834 980 1,033 933
Philipp Brothers downsizing charge -- -- -- -- 155
Charges relating to U.S. Treasury auction matters -- -- 185 200 --
----------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,217 2,734 2,803 2,608 2,481
----------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative
effect of change in accounting principles (831) 1,465 1,056 919 506
Income tax expense (benefit) (432) 601 506 412 203
----------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting principles (399) 864 550 507 303
Cumulative effect of change in accounting principles,
net of tax benefit of $28 -- (37) -- -- --
----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (399) $ 827 $ 550 $ 507 $ 303
================================================================================================================
Income (loss) before taxes and cumulative effect
of change in accounting principles by segment:
Salomon Brothers $ (963) $ 1,575 $ 1,390 $ 1,036 $ 416
Phibro Division 81 (15) (194) 47 361
Phibro USA 18 (46) (47) (80) 146
Philipp Brothers -- -- -- -- (323)
Corporate and Other 33 (49) (93) (84) (94)
-----------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect
of change in accounting principles $ (831) $ 1,465 $ 1,056 $ 919 $ 506
=================================================================================================================
At year-end:
Total assets $ 172,732 $ 184,835 $ 159,459 $ 97,424 $ 109,877
Short-term borrowings 78,579 97,890 88,417 40,393 42,888
Term debt 15,202 11,692 8,533 7,082 4,976
Redeemable preferred stock 700 700 700 700 700
Perpetual preferred stock 312 312 112 112 --
Common equity 3,480 4,234 3,519 3,255 2,829
==================================================================================================================
Per common share:
Primary earnings (loss)* $ (4.31) $ 7.01 $ 4.18 $ 3.90 $ 2.08
Fully diluted earnings (loss)* (4.31) 6.28 4.05 3.79 2.05
Cash dividends 0.64 0.64 0.64 0.64 0.64
High market price 52 3/4 51 7/8 39 37 27
Low market price 35 34 3/8 26 5/8 20 3/4 20
Ending market price 37 1/2 47 5/8 38 1/8 30 5/8 24 3/8
Book value 32.65 37.93 32.06 28.76 25.73
===================================================================================================================
Selected ratios:
Return on average common stockholders' equity:**
Primary (11.7)% 21.9% 13.6% 13.9% 8.3%
Fully diluted (11.7)% 19.3% 12.9% 12.9% 8.3%
Pretax margin n/m 35% 27% 26% 17%
Market/book ratio 1.15 1.26 1.19 1.06 0.95
Price/earnings ratio n/m 7 9 8 12
===================================================================================================================
Other data:
Common shares outstanding (in millions) 105.8 110.6 109.8 113.2 109.9
Salomon Brothers' full time equivalent
number of employees 7,057 6,436 6,566 6,751 6,693
Salomon Inc's full time equivalent
number of employees 9,077 8,640 8,631 8,917 8,883
===================================================================================================================
</TABLE>
Salomon Brothers' 1994 results include pretax charges of $303 million in
connection with the resolution of unreconciled balances related to Salomon
Brothers' London-based companies and the completion of a detailed review of
Salomon Brothers' general ledger accounts related to interest rate swaps.
Results for 1994 include an income tax benefit of $102 million resulting from
the reversal of certain reserves previously established for tax contingencies.
Salomon Brothers' 1992 and 1991 results include pretax charges of $185 million
and $200 million, respectively, 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 $.29, respectively, related to a cumulative change in accounting
principles for postretirement benefits.
** Before cumulative effect of change in accounting principles.
n/m-not meaningful
96
<PAGE>
Salomon Inc 1994
Annual Report Financial Information
Appendix A
Graph #1
Management's Discussion & Analysis
Financial Highlights
Salomon Inc
Net Income - Bar Chart
($ in millions)
1991 507
1992 550
1993 827
1994 (399)
Graph #2
Management's Discussion & Analysis
Financial Highlights
Salomon Inc
Book Value per Common Share and Shares - Bar Chart
Shares Outstanding at Year-End - Line Chart
Book Value per Common Share in $
1991 28.76
1992 32.06
1993 37.93
1994 32.65
Shares Outstanding at Year-end (in millions)
1991 113.2
1992 109.8
1993 110.6
1994 105.8
Graph #3
Management's Discussion & Analysis
Segment Information
Salomon Brothers
Pretax Earnings - Bar Chart
($ in billions)
1991 1.036
1992 1.390
1993 1.575
1994 (0.963)
Graph #4
Management's Discussion & Analysis
Segment Information
Phibro Division
Pretax Earnings - Bar Chart
($ in millions)
1991 47
1992 (194)
1993 (15)
1994 81
Graph #5
Management's Discussion & Analysis
Segment Information
Phibro USA
Pretax Earnings - Bar Chart
($ in millions)
1991 (80)
1992 (47)
1993 (46)
1994 18
Graph #6
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Salomon Brothers Underwriting Statistics
Bar Charts - Total Industry Volume
Share and Rank - Salomon Brothers
U.S. Equities
($ in billions)
Total Salomon Salomon
Industry Brothers' Brothers'
Volume Share Rank
1992 72.3 2.8% 8
1993 101.0 6.1% 5
1994 66.5 5.5% 5
Graph #7
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Salomon Brothers Underwriting Statistics
Bar Charts - Total Industry Volume
Share and Rank - Salomon Brothers
U.S. High Yield Debt
($ in billions)
Total Salomon Salomon
Industry Brothers' Brothers'
Volume Share Rank
1992 38.2 7.2% 7
1993 54.2 8.7% 4
1994 31.6 13.3% 3
Graph #8
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Salomon Brothers Underwriting Statistics
Bar Charts - Total Industry Volume
Share and Rank - Salomon Brothers
U.S. Investment Grade Debt
($ in billions)
Total Salomon Salomon
Industry Brothers' Brothers'
Volume Share Rank
1992 275.8 8.5% 6
1993 377.3 10.6% 4
1994 272.6 9.5% 5
Graph #9
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Non-Compensation Expenses
Non-Recurring Component and Recurring Component (Stacked Bar Chart)
($ in millions)
See Noninterest expense table on page 25 for data
Graph #10
Management's Discussion & Analysis
Phibro USA - Description of Business
Cash Flow Schedule - Line Chart
(in millions of $)
Operating Cash Flows Net Cash Flows*
1991 33 (158)
1992 (1) (116)
1993 40 (36)
1994 70 12
* Operating cash flows 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 - Stacked Bar Chart
(in millions of barrels)
Gasoline Distillates Residual Fuel Oil Other
1991 44 34 22 28
1992 43 33 17 12
1993 43 38 18 14
1994 41 35 13 21
Graph #12
Management's Discussion & Analysis
Phibro USA - Description of Business
Crackspreads - Line Chart
(in $ per barrel)
2-1-1 Crackspread 6-3-2-1 Crackspread
1991
1Q 4.71 2.67
2Q 4.33 2.82
3Q 3.82 1.99
4Q 3.02 1.11
1992
1Q 2.84 1.12
2Q 3.75 2.12
3Q 2.97 1.47
4Q 2.83 1.38
1993
1Q 2.50 1.05
2Q 3.50 2.30
3Q 3.08 1.84
4Q 2.40 1.06
1994
1Q 3.85 2.76
2Q 2.40 1.45
3Q 2.15 1.21
4Q 1.78 0.88
Graph #13
Management's Discussion & Analysis
Derivative Instruments
Notional Amounts - Stacked Bar Chart
(in billions of $)
Over-The-Counter Over-The-Counter
Swaps agreements, Foreign Exchange
Exchange-Issued swap options, Contracts and
Products caps and floors Options Other
1991 440 173 102 114
1992 342 204 64 166
1993 500 322 72 157
1994 785 486 80 158
Graph #14
Management's Discussion & Analysis
Capital & Liquidity Management
Capital Management - Overview
Salomon Inc
Long-Term Capital - Stacked Bar Chart
($ in billions)
See table on page 38 for data
Graph #15
Management's Discussion & Analysis
Capital & Liquidity Management
Working Capital Requirements - Bar Chart
Salomon Inc
($ in billions)
Working Capital Requirements
1991 11,000
1992 12,400
1993 12,767
1994 15,045
Working Capital Coverage Ratio
1991 0.91
1992 0.95
1993 1.32
1994 1.07
Graph #16
Management's Discussion & Analysis
Capital & Liquidity Management
Assets - Stacked Bar Charts
Salomon Inc
($ in billions)
<TABLE>
<CAPTION>
Net Assets* Finance Assets** Average net assets* Average finance assets**
<S> <C> <C> <C> <C>
1992 93.0 66.0 82.0 47.0
1993 126.3 58.5 112.3 64.4
1994 105.2 67.5 110.2 67.1
</TABLE>
* Net assets are total assets less finance assets.
** Finance assets are collateralized short-term financing agreements,
cash and interest bearing equivalents and assets securing collateralized
mortgage obligations.
Graph #17
Management's Discussion & Analysis
Capital & Liquidity Management
Maturity Profile of Unsecured Borrowings - Stacked Bar Chart
Salomon Inc
($ in billions)
<TABLE>
<CAPTION>
<1 Year Remaining 1-5 Years Remaining >5 Years Remaining
<S> <C> <C> <C>
Dec 31,1993 9.50 6.60 2.6
Dec 31,1994 9.10 8.40 2.9
</TABLE>
Graph #18
Management's Discussion & Analysis
Risk Management - Credit Risk
Swap and Foreign Exchange Contracts,
Current Credit Exposure, Net of Collateral - Stacked Bar Charts
Salomon Inc
($ in billions)
All Transactions
Risk Classes Banks Corporates
1 & 2* Swaps 0.6113 0.3294
FX 0.1850 0.0397
3* Swaps 0.3886 0.4986
FX 0.0677 0.0757
4* Swaps 0.4435 0.4080
FX 0.0226 0.1351
5* Swaps 0.0035 0.2175
FX 0 0.0216
6,7&8* Swaps 0.0076 0.0491
FX 0 0
* To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are analogous
to external credit rankings whereby risk classes one through three are high
quality investment grades. Risk classes four and five include counterparties
ranging the lowest investment grade to the highest non-investment grade level.
Risk classes six, seven and eight represent higher risk counterparties.
Graph #19
Management's Discussion & Analysis
Risk Management - Credit Risk
Swap and Foreign Exchange Contracts,
Current Credit Exposure, Net of Collateral - Stacked Bar Charts
Salomon Inc
($ in billions)
Transactions With More Than 3 Years To Maturity
Risk Classes Banks Corporates
1 & 2* Swaps 0.3062 0.1911
FX 0.0480 0
3* Swaps 0.2003 0.2233
FX 0 0
4* Swaps 0.2427 0.1214
FX 0 0
5* Swaps 0 0.1138
FX 0 0
6,7&8* Swaps 0.0068 0.0425
FX 0 0
* To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are analogous
to external credit rankings whereby risk classes one through three are high
quality investment grades. Risk classes four and five include counterparties
ranging the lowest investment grade to the highest non-investment grade level.
Risk classes six, seven and eight represent higher risk counterparties.
<PAGE>
EXHIBIT 21
SALOMON INC
Subsidiaries of the Registrant
Name under which business is conducted Jurisdiction
--------------------------------------------------------------------------------
Phibro Commodities United Kingdom
Phibro Energy Clearing Inc. Delaware
Phibro Energy Production, Inc. Delaware
White Nights Joint Enterprise (45% owned) Russia
Phibro Energy Trading Pte. Ltd. Singapore
Phibro Energy USA Inc. Texas
Phibro GmbH Switzerland
Phibro Resources Corp. Delaware
The S.W. Shattuck Chemical Co., Inc. Colorado
Philipp Brothers, Inc. New York
Philipp Brothers Trading Corporation Delaware
Salomon Brothers Holding Company Inc Delaware
Loan Participation Holding Corporation Delaware
Home Mortgage Access Corporation District of Columbia
Home Mac Mortgage Securities Corporation District of Columbia
PB-SB Investments Inc Delaware
Plaza Clearing Corporation New York
Salomon Brothers Inc Delaware
Salomon Plaza Holdings Inc Delaware
Plaza Holdings, Inc. Delaware
Salomon Brothers Finance Corporation & Co.
beschrankt haftende KG Germany
Salomon Brothers AG Germany
Salomon Forex Inc Delaware
Salomon Brothers Realty Corporation New York
Salomon Swapco Inc Delaware
Salomon Brothers Mortgage Securities II, Inc. Delaware
Salomon Brothers Mortgage Securities Inc. Delaware
Salomon Brothers Mortgage Securities V, Inc. Delaware
Salomon Capital Access for Savings Institutions, Inc. Delaware
Salomon Capital Access Corporation Delaware
Salomon Brothers International Operations (Japan) Inc Delaware
Salomon Brothers International Operations Inc Delaware
Salomon Brothers Asset Management Inc Delaware
Salomon Brothers Housing Investment Inc Delaware
<PAGE>
EXHIBIT 21
(Continued)
Name under which business is conducted Jurisdiction
--------------------------------------------------------------------------------
Salomon Brothers Pacific Holding Company Inc Delaware
Salomon (International) Finance AG Switzerland
Salomon Brothers Overseas Inc and Branch Cayman Islands
Salomon Brothers Asia Limited Hong Kong
Salomon Brothers Hong Kong Limited Hong Kong
Salomon Brothers Australia Limited Australia
Salomon Brothers Canada Holding Co. Canada
Salomon Brothers Finance AG Switzerland
Salomon Brothers S.A. France
Salomon Brothers SIM, SpA Italy
Salomon International Limited Delaware
Phibro Holdings Limited United Kingdom
Phibro Bullion Limited United Kingdom
Phibro Futures Limited United Kingdom
Salomon Brothers Europe Limited United Kingdom
Salomon Brothers International Limited United Kingdom
Salomon Brothers UK Equity limited United Kingdom
Salomon Brothers UK Limited United Kingdom
The Mortgage Corporation Group Limited United Kingdom
The Mortgage Corporation Limited United Kingdom
Scanports Shipping Inc. Delaware
Kirkwood Holding Ltd. United Kingdom
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Salomon Inc:
As independent public accountants, we hereby consent to the incorporation of our
report dated February 26, 1995 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,
Form S-3 filed on December 14, 1993 (Registration No. 33-51269), as amended, and
Form S-3 filed on October 11, 1994 (Registration No. 33-54929), as amended.
It should be noted that we have not audited any financial statements of the
Company subsequent to December 31, 1994 or performed any audit procedures
subsequent to the date of our report.
New York, New York ARTHUR ANDERSEN LLP
March 30, 1995
<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 3l,
1994:
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 1st day of February, 1995.
/s/ Dwayne O. Andreas
______________________________
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 3l,
1994:
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 1st day of February, 1995.
/s/ Warren E. Buffett
______________________________
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 3l,
1994:
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 1st day of February, 1995.
/s/ Claire M. Fagin
______________________________
Claire M. Fagin
<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 3l,
1994:
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 1st day of February, 1995.
/s/ Gedale B. Horowitz
______________________________
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 3l,
1994:
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 1st day of February, 1995.
/s/ Deryck C. Maughan
______________________________
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 3l,
1994:
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 1st day of February, 1995.
/s/ William F. May
______________________________
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 3l,
1994:
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 1st day of February, 1995.
/s/ Charles T. Munger
______________________________
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 3l,
1994:
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 1st day of February, 1995.
/s/ Louis A. Simpson
______________________________
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 3l,
1994:
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 1st day of February, 1995.
/s/ Robert G. Zeller
______________________________
Robert G. Zeller
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
EXHIBIT 27
This schedule contains summary financial information extracted from the
Company's 1994 Annual Report Financial Information (Exhibit 13) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 3,539
<RECEIVABLES> 8,524
<SECURITIES-RESALE> 43,792
<SECURITIES-BORROWED> 17,034
<INSTRUMENTS-OWNED> 93,297
<PP&E> 1,181
<TOTAL-ASSETS> 172,732
<SHORT-TERM> 6,674
<PAYABLES> 9,364
<REPOS-SOLD> 70,405
<SECURITIES-LOANED> 1,500
<INSTRUMENTS-SOLD> 62,069
<LONG-TERM> 15,202
<COMMON> 156
700
312
<OTHER-SE> 3,324
<TOTAL-LIABILITY-AND-EQUITY> 172,732
<TRADING-REVENUE> (560)
<INTEREST-DIVIDENDS> 5,902
<COMMISSIONS> 336
<INVESTMENT-BANKING-REVENUES> 486
<FEE-REVENUE> 114
<INTEREST-EXPENSE> 4,892
<COMPENSATION> 1,486
<INCOME-PRETAX> (831)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (399)
<EPS-PRIMARY> (4.31)
<EPS-DILUTED> (4.31)
</TABLE>
