FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____to_____
Commission File Number 1-4346
Salomon Inc
(Exact name of registrant as specified in its charter)
Delaware 22-1660266
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Seven World Trade Center, New York, New York 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 783-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of common stock outstanding
at October 31,1995: 106,431,226
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Salomon Inc
Form 10-Q
<CAPTION>
Part I FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements (unaudited):
Consolidated Statement of Income -
Three and Nine months ended September 30, 1995 and 1994 3
Condensed Consolidated Statement of Financial Condition -
September 30, 1995 and December 31, 1994 4-5
Summary of Options and Contractual Commitments -
September 30, 1995 and December 31, 1994 6
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1995 and 1994 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Dollars in millions, except per share amounts Three months Nine months
Period ended September 30, 1995 1994 1995 1994
Revenues:
<S> <C> <C> <C> <C>
Interest and dividends $ 1,611 $ 1,520 $ 5,163 $ 4,267
Principal transactions 691 (42) 809 (234)
Investment banking 128 121 304 377
Commissions 82 82 252 257
Other 24 17 30 83
Total revenues 2,536 1,698 6,558 4,750
Interest expense 1,355 1,290 4,233 3,460
Revenues, net of interest expense 1,181 408 2,325 1,290
Noninterest expenses:
Compensation and employee-related 557 399 1,312 1,154
Technology 64 69 192 190
Occupancy 45 44 128 133
Professional services and business development 45 48 125 121
Clearing and exchange fees 15 18 48 53
Other 16 6 46 49
Total noninterest expenses 742 584 1,851 1,700
Income (loss) before taxes 439 (176) 474 (410)
Income tax expense (benefit) 171 (72) 185 (168)
Net income (loss) $ 268 $ (104) $ 289 $ (242)
Earnings available for fully diluted earnings
per common share $ 263 $ (120) $ 274 $ (286)
Per common share:
Primary earnings (loss) $ 2.36 $ (1.13) $ 2.22 $ (2.67)
Fully diluted earnings (loss)* 2.10 (1.13) 2.19 (2.67)
Dividends 0.16 0.16 0.48 0.48
Weighted average shares of common stock
outstanding (in thousands):
For primary earnings per share 106,600 105,700 106,500 107,200
For fully diluted earnings per share 125,400 105,700 125,300 107,200
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements and the Unaudited Summary
of Options and Contractual Commitments are integral parts of this statement.
* Assumes conversion of convertible notes and the 700,000 shares of redeemable
preferred stock outstanding during each period presented, unless such
assumptions result in higher earnings per share than determined under the
primary method.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
ASSETS September 30, 1995 December 31, 1994
<S> <C> <C> <C> <C>
Cash and interest bearing equivalents $ 1,920 $ 3,539
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 35,103 $ 32,980
Government and government agency securities - non-U.S. 31,856 34,071
Corporate debt securities 10,247 11,537
Options and contractual commitments 5,581 6,932
Equity securities 4,385 4,169
Mortgage loans and collateralized mortgage securities 1,616 2,190
Other 2,831 1,418
91,619 93,297
Commodities-related products and instruments:
Crude oil, refined products and other
physical commodities 1,332 1,066
Options and contractual commitments 302 424
1,634 1,490
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 43,497 43,792
Securities borrowed and other 14,698 17,034
58,195 60,826
Receivables 4,531 8,524
Assets securing collateralized mortgage obligations 2,655 3,140
Property, plant and equipment, net 1,318 1,181
Other assets, including intangibles 714 735
Total assets $ 162,586 $ 172,732
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Summary of Options and Contractual Commitments are integral
parts of this statement.
</FN>
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<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, 1995 December 31, 1994
Short-term borrowings:
<S> <C> <C>
Securities sold under agreements to repurchase $ 77,817 $ 70,405
Bank borrowings 2,190 2,333
Deposit liabilities 1,390 1,447
Securities loaned 1,288 1,500
Commercial paper 645 865
Other 907 2,029
$ 84,237 $ 78,579
Financial and commodities-related instruments sold, not yet purchased, and
contractual commitments:
Government and government agency securities - U.S. 22,025 31,021
Government and government agency securities - non-U.S. 12,378 18,948
Financial options and contractual commitments 8,607 6,232
Equity securities 3,187 3,528
Corporate debt securities and other 1,557 1,677
Commodities, including options and
contractual commitments 609 663
48,363 62,069
Payables and accrued liabilities 9,430 9,364
Collateralized mortgage obligations 2,516 3,026
Term debt 13,341 15,202
Total liabilities 157,887 168,240
Commitments and contingencies (Note 2)
Redeemable preferred stock, Series A 700 700
Stockholders' equity:
Preferred stock, Series C and D 312 312
Common stock 156 156
Additional paid-in capital 287 292
Retained earnings 4,866 4,681
Cumulative translation adjustments 13 5
Common stock held in treasury, at cost (1,635) (1,654)
Total stockholders' equity 3,999 3,792
Total liabilities and stockholders' equity $ 162,586 $ 172,732
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Summary of Options and Contractual Commitments are integral
parts of this statement.
</FN>
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SALOMON INC AND SUBSIDIARIES
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
(UNAUDITED)
September 30, 1995 December 31, 1994
Notional Current Market or Fair Value Notional Current Market or Fair Value
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
Exchange-issued products:
<S> <C> <C> <C> <C> <C> <C>
Futures contracts* $476.9 $ - $ - $ 734.3 $ - $ -
Other exchange-issued products:
Equity contracts 18.7 .4 .3 11.6 .1 .1
Fixed income contracts 50.2 .1 - 24.2 - .1
Foreign exchange contracts - - - 4.1 - -
Commodities-related contracts 4.8 - - 11.3 - -
Total exchange-issued products 550.6 .5 .3 785.5 .1 .2
Over-the-counter swap agreements, swap options,
caps and floors:
Swaps 491.4 1.5 5.0 383.3 3.8 3.7
Swap options written 5.5 - .3 9.7 - .1
Swap options purchased 18.3 1.0 - 24.5 .7 -
Cap and floor agreements 89.4 .3 .6 68.1 .3 .7
Total over-the-counter swap agreements,
swap options, caps and floors 604.6 2.8 5.9 485.6 4.8 4.5
Over-the-counter foreign exchange contracts and options:
Forward currency contracts 46.8 .6 .5 49.8 .3 .2
Options written 23.7 - .6 15.3 - .4
Options purchased 21.7 .4 - 15.0 .4 -
Total over-the-counter foreign exchange contracts
and options 92.2 1.0 1.1 80.1 .7 .6
Other options and contractual commitments:
Options and warrants on equities and
equity indices** 26.5 1.0 .8 31.5 1.0 .6
Options and forward contracts
on fixed-income securities** 147.0 .3 .5 103.2 .3 .3
Commodities-related contracts*** 23.7 .3 .3 23.1 .4 .5
Total $1,444.6 $5.9 $8.9 $1,509.0 $7.3 $6.7
<FN>
*Margin on futures contracts is included in receivables/payables on the
Condensed Consolidated Statement of Financial Condition. **The market or fair
value of such instruments recorded as assets includes approximately $300 million
at September 30, 1995 and December 31, 1994, of over-the-counter
instruments primarily with investment grade counterparties. The remainder
consists primarily of highly liquid instruments actively traded on organized
exchanges. ***The substantial majority of these over-the-counter contracts are
with investment grade counterparties.
</FN>
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CREDIT EXPOSURE, NET OF COLLATERAL, ON OTC SWAP AGREEMENTS,
SWAP OPTIONS, CAPS AND FLOORS AND OTC FOREIGN EXCHANGE CONTRACTS
AND OPTIONS, BY RISK CLASS*
Note: Amounts represent current exposure and do not include potential credit exposure
that may result from factors that influence market risk.
Transactions
At September 30, 1995 All Transactions with over
3 years
to
maturity
Other
Major Year-to
Derivatives Financial Governments/ -Date
Dollars in billions Dealers Corporates Institutions Supranationals Other Total Average Total
Swap agreements, swap options,
caps and floors:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk classes 1 and 2 $ .4 $ .1 $ .5 $ - $ - $ 1.0 $ 1.0 $ .6
Risk class 3 .4 .3 .2 - .1 1.0 .9 .5
Risk classes 4 and 5 .2 .4 .3 - .1 1.0 1.2 .6
Risk classes 6, 7 and 8 - .1 - - - .1 .1 -
$ 1.0 $ .9 $ 1.0 $ - $ .2 $ 3.1 $ 3.2 $ 1.7
Foreign exchange
contracts and options:
Risk classes 1 and 2 $ .3 $ - $ - $ - $ - $ .3 $ .2 $ .1
Risk class 3 .3 - - - .1 .4 .3 -
Risk classes 4 and 5 .1 - - - .2 .3 .2 -
$ .7 $ - $ - $ - $ .3 $ 1.0 $ .7 $ .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.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Dollars in millions
Nine months ended September 30, 1995 1994
Cash flows from operating activities:
Net income adjusted for noncash items -
<S> <C> <C>
Net income (loss) $ 289 $ (242)
Depreciation, amortization and other 110 139
Total cash items included in net income (loss) 399 (103)
(Increase) decrease in operating assets -
Financial instruments and contractual commitments 1,678 27,231
Commodities-related products and instruments (144) (603)
Collateralized short-term financing agreements 2,631 (5,685)
Receivables 4,006 3,168
Other 63 235
Total decrease in operating assets 8,234 24,346
Increase (decrease) in operating liabilities -
Short-term borrowings 5,658 (20,615)
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments (13,706) (7,147)
Payables and accrued liabilities 97 (1,316)
Total decrease in operating liabilities (7,951) (29,078)
Cash provided by (used in) operating activities 682 (4,835)
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 2,371 5,994
Employee stock purchase and option plans 14 10
Total cash proceeds from financing activities 2,385 6,004
Payments for -
Term debt maturities and repurchases 4,318 2,431
Collateralized mortgage obligations 552 759
Purchase of common stock for treasury 2 252
Dividends on common stock 51 51
Dividends on preferred stock* 53 44
Total cash payments for financing activities 4,976 3,537
Cash provided by (used in) financing activities (2,591) 2,467
Cash flows from investing activities:
Proceeds from -
Assets securing collateralized mortgage obligations 526 752
Total cash proceeds from investing activities 526 752
Payments for -
Property, plant and equipment 236 124
Total cash payments for investing activities 236 124
Cash provided by investing activities 290 628
Decrease in cash and interest bearing equivalents (1,619) (1,740)
Cash and interest bearing equivalents at January 1 3,539 5,748
Cash and interest bearing equivalents at September 30 $ 1,920 $ 4,008
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements and the Unaudited Summary of
Options and Contractual Commitments are integral parts of this statement.
* For the nine months ended September 30, 1995 and 1994, dividends on preferred stock were reduced by the aftertax
impact ($14 million and $23 million, respectively) of interest rate swaps that effectively convert the Company's
fixed-rate dividend obligations to variable-rate obligations.
</FN>
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Salomon Inc and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1995
1. Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements include the
accounts of Salomon Inc and all majority-owned subsidiaries
(collectively, the "Company"). These financial statements include all
adjustments necessary for a fair presentation of financial condition,
results of operations and cash flows. The Unaudited Condensed
Consolidated Financial Statements should be read in conjunction with
the Audited Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
2. Legal Proceedings
Outstanding legal matters are discussed in Note 15 to the Consolidated
Financial Statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1994. 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. Additional
information on legal proceedings is included in "Item 1 Legal
Proceedings."
3. Net Capital
Certain U.S. and non-U.S. subsidiaries are subject to various
securities and commodities regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of
the countries in which they operate. The Company's principal regulated
subsidiaries are discussed below.
Salomon Brothers Inc ("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 September 30, 1995, SBI's net capital was
$1,366 million, $1,324 million in excess of regulatory requirements.
Salomon Brothers International Limited ("SBIL") is authorized to
conduct investment business in the United Kingdom by the Securities and
Futures Authority ("SFA") in accordance with the Financial Services Act
1986. The SFA requires SBIL to have available at all times financial
resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At September 30, 1995, SBIL's financial resources were
$574 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 September 30, 1995, SBAL's
net capital was $310 million above the minimum required by Japan's
Ministry of Finance. SBAG's net capital was $276 million above the
minimum required by Germany's Banking Supervisory Authority.
4. Business Unit Revenues
The Company's investment banking and securities activities are
conducted by Salomon Brothers Holding Company Inc and its subsidiaries
("Salomon Brothers"). Commodities trading activities are conducted by
the Phibro Division of Salomon Inc ("Phibro Division"). Crude oil
refining and gathering and refined product marketing activities are
conducted by Phibro Energy USA, Inc. ("Phibro USA"). Results of The
Mortgage Corporation Group Limited ("TMC"), an indirect wholly-owned
subsidiary of the Company, are included in "Corporate and other," as
are the results of Phibro Energy Production, Inc. ("PEPI"), a partner
in the White Nights Joint Enterprise ("White Nights") a
Russian-American oil joint venture.
The accompanying Management's Discussion and Analysis section includes
a discussion of the operating results of the Company's businesses.
Business unit 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 business
are allocated directly to that business. Corporate-level expenses that
cannot be directly associated with the Company's operating units are
included in "Corporate and other."
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Revenues by Business Unit
The following tables present revenues, net of interest expense, by business unit
for the three and nine months ended September 30, 1995 and 1994.
Three Months Ended September 30, 1995
Principal
Transactions
& Net Investment
(Dollars in millions) Interest Banking Commissions Other Total
Salomon Brothers' Client-Related Business:
<S> <C> <C> <C> <C> <C>
Global investment banking $ - $ 128 $ - $ - $ 128
Fixed income secondary markets 256 - 8 2 266
Equities secondary markets 53 - 73 1 127
Foreign exchange 38 - - - 38
Asset management - - - 9 9
Total revenues from Client-Related Business 347 128 81 12 568
Proprietary Trading Businesses 498 - - - 498
Total Salomon Brothers' revenues, net of
interest expense 845 128 81 12 1,066
Phibro Division 103 - - 2 105
Phibro USA (7) - - 9 2
Corporate and other 6 - 1 1 8
Total Salomon Inc $ 947 $ 128 $ 82 $ 24 $ 1,181
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<CAPTION>
Three Months Ended September 30, 1994
Principal
Transactions
& Net Investment
(Dollars in millions) Interest Banking Commissions Other Total
Salomon Brothers' Client-Related Business:
<S> <C> <C> <C> <C> <C>
Global investment banking $ - $ 121 $ - $ - $ 121
Fixed income secondary markets 128 - 6 - 134
Equities secondary markets 65 - 72 - 137
Foreign exchange (12) - - - (12)
Asset management 5 - - 4 9
Private Investment Department 6 - 3 - 9
Total revenues from Client-Related Business 192 121 81 4 398
Proprietary Trading Businesses (7) - - - (7)
Total Salomon Brothers' revenues, net of
interest expense 185 121 81 4 391
Phibro Division (15) - 1 - (14)
Phibro USA (3) - - 11 8
Corporate and other 21 - - 2 23
Total Salomon Inc $ 188 $ 121 $ 82 $ 17 $ 408
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<CAPTION>
Nine Months Ended September 30, 1995
Principal
Transactions
& Net Investment
(Dollars in millions) Interest Banking Commissions Other Total
Salomon Brothers' Client-Related Business:
<S> <C> <C> <C> <C> <C>
Global investment banking $ - $ 304 $ - $ - $ 304
Fixed income secondary markets 591 - 32 2 625
Equities secondary markets 166 - 216 1 383
Foreign exchange 42 - - - 42
Asset management - - - 28 28
Private Investment Department 4 - 2 - 6
Total revenues from Client-Related Business 803 304 250 31 1,388
Proprietary Trading Businesses 817 - - - 817
Total Salomon Brothers' revenues, net of
interest expense 1,620 304 250 31 2,205
Phibro Division 108 - - 4 112
Phibro USA (20) - - (7) (27)
Corporate and other 31 - 2 2 35
Total Salomon Inc $ 1,739 $ 304 $ 252 $ 30 $ 2,325
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<CAPTION>
Nine Months Ended September 30, 1994
Principal
Transactions
& Net Investment
(Dollars in millions) Interest Banking Commissions Other Total
Salomon Brothers' Client-Related Business:
<S> <C> <C> <C> <C> <C>
Global investment banking $ - $ 377 $ - $ - $ 377
Fixed income secondary markets 176 - 31 - 207
Equities secondary markets (30) - 213 - 183
Foreign exchange (68) - - - (68)
Asset management 13 - - 16 29
Private Investment Department 9 - 11 - 20
Total revenues from Client-Related Business 100 377 255 16 748
Proprietary Trading Businesses 274 - - - 274
Total Salomon Brothers' revenues, net of
interest expense 374 377 255 16 1,022
Phibro Division 190 - 1 - 191
Phibro USA (14) - - 65 51
Corporate and other 23 - 1 2 26
Total Salomon Inc $ 573 $ 377 $ 257 $ 83 $ 1,290
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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<CAPTION>
SUMMARY OF CONSOLIDATED OPERATING RESULTS
Dollars in millions, except per share amounts Three months Nine months
Period ended September 30, 1995 1994 1995 1994
Income (loss) before taxes:
<S> <C> <C> <C> <C>
Salomon Brothers $ 381 $ (176) $ 497 $ (547)
Phibro Division 68 (27) 29 105
Phibro USA (9) (4) (59) 13
Corporate and other (1) 31 7 19
Income (loss) before taxes 439 (176) 474 (410)
Income tax expense (benefit) 171 (72) 185 (168)
Net income (loss) $ 268 $ (104) $ 289 $ (242)
Per common share:
Primary earnings (loss) $ 2.36 $ (1.13) $ 2.22 $ (2.67)
Fully diluted earning (loss)* 2.10 (1.13) 2.19 (2.67)
Cash dividends 0.16 0.16 0.48 0.48
Book value at period-end 34.49 34.50 34.49 34.50
Annualized return on average common stockholders' equity:
Primary 28.0 % (12.8) % 8.9 % (9.5) %
Fully diluted* 24.6 (12.8) 8.6 (9.5)
<FN>
* Assumes conversion of convertible notes and the 700,000 shares of redeemable preferred stock outstanding during each
period presented, unless such assumptions result in higher earnings per share or return on equity than determined under the
primary methods.
</FN>
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Salomon Inc reported net income of $268 million, or $2.10 per common share on a
fully diluted basis, for the third quarter of 1995, representing its most
profitable quarter since 1993. In the comparable 1994 quarter, Salomon Inc
recorded a net loss of $104 million, or $1.13 per common share. The Company's
net income for the nine months ended September 30, 1995 was $289 million, or
$2.19 per common share on a fully diluted basis, compared to a net loss of $242
million, or $2.67 per common share for the nine month period ended September 30,
1994.
The Company's businesses are diverse. Results of Salomon Brothers are not
closely correlated with the results of Phibro Division's commodities trading
business or Phibro USA's oil refining and marketing business. Consequently, it
is not unusual for certain of the Company's businesses to generate positive
results during difficult periods for other businesses.
Corporate and other includes certain Salomon Inc corporate-level expenses that
cannot be attributed to any of the Company's businesses; the results of TMC,
which services residential mortgages in the United Kingdom; and the results of
PEPI, whose primary asset is its investment in the White Nights Russian-American
oil production joint venture. The decrease in Corporate and other's pretax
results in the third quarter of 1995 compared to the third quarter of 1994, was
due, in part, to a decline in TMC's contribution to pretax earnings. PEPI's
investment in White Nights, including the related loan, had a carrying value of
$49 million at September 30, 1995, a decrease of $9 million since December 31,
1994. The decrease reflects current and past due interest payments from White
Nights to PEPI with respect to PEPI's loan to the venture, which are recorded as
reductions in the carrying value of the loan. Although loan repayments are
expected to continue, White Nights' future is dependent on Russian fiscal,
legislative and regulatory policy.
<TABLE>
<CAPTION>
Salomon Brothers
Results of Operations
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1995 1994 Change 1995 1994 Change
Revenues:
Client-Related Business:
Global investment banking
<S> <C> <C> <C> <C> <C> <C>
Advisory $ 66 $ 50 32 % $ 170 $ 143 19 %
Equity underwriting 32 43 (26) 99 165 (40)
Debt underwriting 30 28 7 35 69 (49)
Total global investment banking 128 121 6 304 377 (19)
Fixed income secondary markets 266 134 99 625 207 202
Equities secondary markets 127 137 (7) 383 183 109
Foreign exchange 38 (12) n/m 42 (68) n/m
Asset management 9 9 0 28 29 (3)
Private Investment Department* - 9 (100) 6 20 (70)
Total revenues from Client-Related Business 568 398 43 1,388 748 86
Proprietary Trading Businesses 498 (7) n/m 817 274 198
Total revenues, net of interest expense $ 1,066 $ 391 173 % $ 2,205 $ 1,022 116 %
Income (loss) before taxes:
Client-Related Business $ 32 $ (62) n/m $ 2 $ (526) n/m %
Proprietary Trading Businesses 349 (114) n/m 495 (21) n/m
Total income (loss) before taxes $ 381 $ (176) n/m % $ 497 $ (547) n/m %
<FN>
* Discontinued in the first quarter of 1995.
</FN>
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Salomon Brothers, the Company's global investment banking and securities
business, recorded pretax income of $381 million in the third quarter of 1995,
compared to a pretax loss of $176 million in the third quarter of 1994. The
third quarter 1995 results represent Salomon Brothers' best quarterly
performance since 1993. For the 1995 nine month period, Salomon Brothers
recorded pretax income of $497 million, compared to a pretax loss of $547
million in the comparable 1994 period.
Salomon Brothers Client-Related Business recorded pretax income of $32 million
in the third quarter of 1995, compared to a pretax loss of $62 million recorded
in the third quarter of 1994. For the nine months ended September 30, 1995,
Salomon Brothers' Client-Related Business reported pretax income of $2 million,
compared to a pretax loss of $526 million reported in the comparable 1994
period. The third quarter 1995 results do not fully depict the strong revenue
performance of the Client-Related Business, because of an increase in expenses,
which was largely attributable to third quarter compensation accruals. The
compensation accruals were intended to adjust compensation levels to reflect
improved Company performance and industry conditions. Third quarter 1995
investment banking revenues reflect the continued strength of the Company's
advisory businesses and higher levels of debt underwriting. For the nine months
ended September 30, 1995, the Client-Related Business generated revenues of $1.4
billion; almost double the $748 million reported for the comparable 1994 period.
The increase in revenues for the nine month period reflects a marked improvement
in the fixed income and equity secondary markets, particularly in the U.S. and
Europe. Additionally, 1994 nine month revenues for fixed income secondary
markets reflect losses incurred due to the decline in the market value of
certain inventory positions. The decrease for the nine month period ended
September 30, 1995 in debt and equity underwriting revenues versus the
comparable period in 1994 is partially attributable to pretax losses of $55
million and $13 million, respectively, on Latin American securities positions.
Salomon Brothers Proprietary Trading Businesses recorded pretax profits of $349
million for the third quarter of 1995, compared to a $114 million pretax loss
recorded in the third quarter of 1994. For the nine months ended September 30,
1995, Salomon Brothers' Proprietary Trading Businesses reported pretax profits
of $495 million, compared to a $21 million pretax loss reported in the same
period of 1994. Proprietary trading strategies are often designed with time
horizons of a year or more; as such, results should be viewed over longer-term
periods. The interim volatility of results reflects the Company's mark-to-market
accounting practices.
Because of greater connection in management and compensation structure, the
results of Salomon Brothers' Client-Related and Proprietary Trading Businesses
will not be separately reported in future quarters.
<TABLE>
<CAPTION>
Noninterest Expenses
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Compensation and employee-related expenses $ 515 $ 382 35 % $ 1,217 $ 1,051 16 %
Non-compensation expenses:
Technology $ 60 $ 66 (9) % $ 181 $ 179 1 %
Occupancy 44 43 2 124 132 (6)
Professional services and business development 39 42 (7) 107 104 3
Clearing and exchange fees 15 16 (6) 47 50 (6)
Other 12 18 (33) 32 53 (40)
Total non-compensation expenses $ 170 $ 185 (8) % $ 491 $ 518 (5) %
</TABLE>
Compensation and employee-related expenses, the largest component of noninterest
expense, were $515 million in the third quarter of 1995, up 35% from the third
quarter of 1994. For the nine month period ended September 30, 1995,
compensation and employee-related expenses rose 16%, from the comparable 1994
period. These increases were largely attributable to higher Client-Related
Business incentive compensation accruals in the third quarter of 1995 and
increased Proprietary Trading compensation resulting from the substantial
improvement in results.
Non-compensation expenses, in the aggregate, were $170 million in the third
quarter of 1995, 8% lower than in the comparable period of 1994. This decline
was primarily attributable to a decrease in technology expenses associated with
network communications and workstations, as well as a decrease in professional
services and business development expenses reflecting reductions in legal and
travel and entertainment expenses, partially offset by an increase in consulting
costs. For the nine month period ended September 30, 1995, total
non-compensation expenses were $491 million or 5% lower than in the comparable
1994 period. This reduction included an $8 million decrease in occupancy expense
which was primarily attributable to a $12 million net reserve addition for
office relocations recorded in 1994, partially offset by scheduled rent
increases at several locations. Other expenses decreased by $21 million, or 40%,
for the nine month period ended September 30, 1995, primarily due to a decrease
in donations and business and franchise taxes versus the same period of 1994.
<PAGE>
<TABLE>
<CAPTION>
Phibro Division
Condensed Statement of Income
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Revenues, net of interest $ 105 $ (14) n/m % $ 112 $ 191 (41) %
Compensation and employee-related expenses 30 6 400 61 66 (8)
Other general and administrative expenses 7 7 0 22 20 10
Total noninterest expenses 37 13 185 83 86 (3)
Income (loss) before taxes $ 68 $ (27) n/m % $ 29 $ 105 (72) %
</TABLE>
Phibro Division engages in counterparty flow business and trades for its own
account. Due to the proprietary nature of Phibro Division's trading activities,
quarter-to-quarter volatility in earnings can be expected. Phibro Division
recorded pretax income of $68 million during the third quarter of 1995, compared
to a pretax loss of $27 million recorded in the same period of 1994. The
increase in compensation and employee-related expenses in the third quarter of
1995 reflects stronger operating results. For the nine months ended September
30, 1995, Phibro Division recorded pretax income of $29 million, compared to
pretax income of $105 million in the same period of 1994.
<TABLE>
<CAPTION>
Phibro USA
Condensed Statement of Income
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Sales $ 2,206 $ 2,136 3 % $ 7,010 $ 5,334 31 %
Cost of sales 2,196 2,126 3 7,016 5,273 33
Operating profit 10 10 0 (6) 61 n/m
Net interest and other (8) (2) (300) (21) (10) (110)
Operating profit (loss), net of interest and other 2 8 (75) (27) 51 n/m
Compensation and employee-related expenses 8 7 14 21 24 (13)
Other expenses 3 5 (40) 11 14 (21)
Total noninterest expenses 11 12 (8) 32 38 (16)
Income (loss) before taxes $ (9) $ (4) (125) % $ (59) $ 13 n/m %
</TABLE>
Phibro USA, the Company's oil refining and marketing business, recorded a pretax
loss of $9 million in the third quarter of 1995, compared to a pretax loss of $4
million in the third quarter of 1994. For the nine months ended September 30,
1995, Phibro USA recorded a pretax loss of $59 million, compared with pretax
earnings of $13 million in the comparable nine month period of 1994. Results for
the 1995 nine month period were adversely affected by weak refining margins
which were impacted by unseasonably warm winter weather in the northeastern
United States and implementation of the reformulated gasoline program. In
addition, 1995 results were adversely affected by a three week unscheduled
outage at its Texas City refinery during the second quarter of 1995, as well as
a five week scheduled shutdown for turnaround maintenance at its Houston
refinery during the first quarter of 1995.
At September 30, 1995, the Company's total investment in Phibro USA, including
working capital advances, subordinated debt and equity was $955 million,
compared to $885 million at December 31, 1994. The increase is largely
attributable to the funding of the Residfiner/ROSE unit project. The project is
expected to be mechanically complete by year-end and operational in the first
quarter of 1996. Additional funding necessary to complete the Residfiner/ROSE
unit project is not expected to exceed $50 million.
<TABLE>
<CAPTION>
SALOMON INC
Capital and Liquidity Management
Dollars in millions
September 30, June 30, March 31, December 31, September 30,
Quarter ended 1995 1995 1995 1994 1994
Average Weekly Balance Sheet Information:
<S> <C> <C> <C> <C> <C>
Government and agency securities - U.S. $ 33,871 $ 32,904 $ 31,743 $ 34,621 $ 28,758
Government and agency securities - non-U.S. 33,202 38,749 32,896 28,275 31,384
Financial options and contractual commitments 5,988 6,919 7,857 8,336 9,119
Other financial instruments owned 18,500 19,014 19,212 21,355 21,443
Total financial instrument inventories 91,561 97,586 91,708 92,587 90,704
Collateralized short-term financing agreements 56,817 61,163 63,779 64,058 64,572
Other assets 14,122 17,260 16,737 18,032 19,237
Average total assets $ 162,500 $ 176,009 $ 172,224 $ 174,677 $ 174,513
Period-end total assets $ 162,586 $ 163,693 $ 164,956 $ 172,732 $ 158,486
Period-end net assets* $ 99,816 $ 106,644 $ 104,421 $ 105,227 $ 96,594
Average net assets* $ 101,042 $ 109,494 $ 102,459 $ 103,411 $ 102,154
Long-term capital at period-end $ 16,112 $ 16,715 $ 17,237 $ 16,138 $ 17,862
Ratios at period end:
Working capital coverage 1.24 1.22 1.17 1.07 1.16
Total capital basis double leverage 0.88 0.91 0.85 0.87 0.85
Equity capital basis double leverage 1.18 1.24 1.19 1.18 1.23
Average net assets to total equity 23 24 22 23 22
Common shares outstanding (in millions) 106.4 106.2 106.1 105.8 105.8
<FN>
*Total assets less collateralized short-term financing agreements, cash and interest-bearing equivalents and assets
securing collateralized mortgage obligations.
</FN>
</TABLE>
Presented in the accompanying table is average weekly balance sheet information.
Average assets for the 1995 third quarter were $163 billion, compared with $175
billion in the third quarter of 1994. 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 trading inventories, to
fluctuate from period to period.
The Company's long-term capital includes common equity, convertible preferred
stock, perpetual preferred stock, unsecured obligations 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.
On October 19, 1995, Berkshire Hathaway Inc. ("Berkshire") announced that it
would not convert the first of five tranches of Series A Preferred Stock owned
by its subsidiaries. As a result, the Company redeemed 140,000 shares of
Berkshire's Series A Preferred Stock on October 31, 1995, for $140 million. All
September 30, 1995 ratios in the preceding table reflect this redemption as if
it had occurred as of September 30, 1995.
Salomon Brothers' trading portfolio of high-yield securities, carried at market
value, totaled $2.2 billion at September 30, 1995, down from $2.3 billion at
December 31, 1994. High-yield securities include corporate debt, convertible
debt, preferred and convertible preferred equity securities rated lower than
"triple B-" by internationally recognized rating agencies as well as sovereign
debt issued by less developed countries in currencies other than their local
currencies and which are not collateralized by U.S. government securities. 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. Unrated securities with market yields comparable to
entities rated below "triple B-" are also included in high-yield securities. The
largest single high-yield exposure was $69 million at September 30, 1995.
Book value per share increased to $34.49 at September 30, 1995, from $32.65 at
December 31, 1994. For the nine months ended September 30, 1995, the Company's
treasury share repurchases were negligible. At September 30, 1995, shares
authorized for additional repurchase totaled 9.8 million shares.
<TABLE>
<CAPTION>
The Company's current credit ratings are as follows:
<S> <C> <C> <C> <C> <C> <C>
Duff &
Phelps Fitch IBCA Moody's S&P TBW
Long-term debt A- BBB+ A- Baa1 BBB ---
Commercial paper D1 F-2 A1 P-2 A2 TBW-2
</TABLE>
Depending on maturity, Salomon Inc's spreads over U.S. Treasuries on its term
debt have widened by between five and thirty basis points since June 30, 1994.
The increased interest expense attributable to these widening spreads will be
reflected in the Company's results, over time, as the Company refinances its
debt.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
Three Months Ended
September 30, June 30, March 31, December 31, September 30,
Dollars in millions, except per share amounts 1995 1995 1995 1994 1994
For the quarter:
Revenues:
<S> <C> <C> <C> <C> <C>
Principal transactions, including net interest
and dividends $ 947 $ 139 $ 653 $ (123) $ 188
Investment banking 128 154 22 109 121
Commissions and other 106 108 68 110 99
Revenues, net of interest expense 1,181 401 743 96 408
Noninterest expenses:
Compensation and employee-related 557 324 431 332 399
Other noninterest expenses 185 176 178 185 185
Total noninterest expenses 742 500 609 517 584
Income (loss) before taxes 439 (99) 134 (421) (176)
Income tax expense (benefit) 171 (39) 53 (264) (72)
Net income (loss) $ 268 $ (60) $ 81 $ (157) $ (104)
Annualized return on average common
stockholders' equity:
Primary 28.0 % (8.8) % 7.1 % (19.2) % (12.8) %
Fully diluted* 24.6 % (8.8) % 7.1 % (19.2) % (12.8) %
Income (loss) before taxes:
Salomon Brothers:
Client-Related Business $ 32 $ 149 $ (179) $ (110) $ (62)
Proprietary Trading Businesses 349 (93) 239 (28) (114)
Unallocated Charges - - - (278) -
Total Salomon Brothers 381 56 60 (416) (176)
Phibro Division 68 (162) 123 (24) (27)
Phibro USA (9) 1 (51) 5 (4)
Corporate and other (1) 6 2 14 31
Total income (loss) before taxes $ 439 $ (99) $ 134 $ (421) $ (176)
Per common share:
Primary earnings (loss) $ 2.36 $ (0.73) $ 0.59 $ (1.65) $ (1.13)
Fully diluted earnings (loss)* 2.10 (0.73) 0.59 (1.65) (1.13)
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 41 1/8 43 1/4 40 1/8 42 48 1/4
Low market price 34 3/4 33 1/4 32 1/4 35 38 1/2
Ending market price 38 1/2 40 1/8 33 7/8 37 1/2 39 1/2
Book value at period-end 34.49 32.38 33.22 32.65 34.50
<FN>
* Assumes conversion of convertible notes and the 700,000 shares of redeemable preferred stock outstanding during each period
presented, unless such assumptions result in higher returns or earnings per share than determined under the
primary method.
</FN>
</TABLE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A full discussion of legal proceedings is included under Item 3 of the
Company's 1994 Form 10-K. The shareholder derivative action Derivative
Litigation, 91 Civ. 5500 (S.D.N.Y., consolidated August 30, 1991) filed
on behalf of the Company against certain of its former executives
relating to the Salomon Brothers' 1991 U.S. Treasury auction and
related matters has been settled, subject to approval by the Court.
While this action was not filed or prosecuted by the Company, but by
plaintiffs' lawyers suing derivatively on the Company's behalf, the
Company will receive most of the benefit of the settlement, estimated
(after expected fees of plaintiffs' counsel) at $22.5 million of cash
consideration plus additional non-cash consideration, including the
surrender of indemnification claims. The cash consideration will be
reflected in earnings upon Court approval, currently expected to occur
in the fourth quarter of this year.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.a Calculation of ratio of earnings to fixed charges*
12.b Calculation of ratio of earnings to combined fixed charges
and preferred dividends*
27 Financial Data Schedule*
*filed herewith
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated October 19, 1995,
reporting under Item 5 ("Other Events") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits") the issuance
of a press release.
<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.
Salomon Inc
(Registrant)
Date November 13, 1995 /s/ Richard Carbone
Controller and Chief
Accounting Officer
Date November 13, 1995 /s/ Arnold S. Olshin
Secretary
<PAGE>
Form 10-Q Exhibit Index
The following exhibits are filed herewith:
Exhibit Number
12.a Calculation of ratio of earnings to fixed charges
12.b Calculation of ratio of earnings to combined fixed
charges and preferred dividends
27 Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 12(a)
SALOMON INC AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
Nine
Months
Ended
September 30, Years Ended December 31,
Dollars in millions 1995 1994 1993 1992 1991 1990
Earings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes and cumulative
effect of change in accounting principles $ 474 $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see below) 4,257 4,919 4,644 4,373 5,704 6,032
Other adjustments 0 (3) 22 20 (4) (16)
Earnings as defined $ 4,731 $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
Fixed Charges:
Interest expense $ 4,233 $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 24 27 44 49 66 73
Fixed charges as defined $ 4,257 $ 4,919 $ 4,644 $ 4,373 $ 5,704 $ 6,032
Ratio of earnings to
fixed charges 1.11 0.83 * 1.32 1.25 1.16 1.08
<FN>
NOTE:
The ratio of earnings to fixed charges is calculated by dividing fixed charges into the sum of income before taxes
and fixed charges. Fixed charges consist of interest expense, including capitalized interest and a portion of
rental expense representative of the interest factor.
* For the 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12(b)
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
Nine
Months
Ended
September 30, Years Ended December 31,
Dollars in millions 1995 1994 1993 1992 1991 1990
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes and cumulative
effect of change in accounting principles $ 474 $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see below) 4,257 4,919 4,644 4,373 5,704 6,032
Other adjustments - (3) 22 20 (4) (16)
Earnings as defined $ 4,731 $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
Fixed Charges and
Preferred Dividends:
Interest expense $ 4,233 $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 24 27 44 49 66 73
Fixed charges as defined 4,257 4,919 4,644 4,373 5,704 6,032
Preferred dividends (tax
equivalent basis) 87 129 83 131 121 105
Combined fixed charges
and preferred dividends $ 4,344 $ 5,048 $ 4,727 $ 4,504 $ 5,825 $ 6,137
Ratio of earnings to
combined fixed charges
and preferred dividends 1.09 0.81 * 1.30 1.21 1.14 1.06
<FN>
NOTES:
The ratio of earnings to combined fixed charges and preferred dividends was calculated by dividing the sum of
fixed charges and tax equivalent preferred dividends into the sum of earnings before taxes and fixed charges.
Fixed charges consist of interest expense, including capitalized interest and a portion of rental expense
representative of the interest factor.
Tax equivalent preferred dividends represent the pretax earnings necessary to cover preferred stock dividend
requirements, assuming such earnings are taxed at the Company's consolidated effective income tax rate.
* For the 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.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE>BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS
OF SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,920
<RECEIVABLES> 4,531
<SECURITIES-RESALE> 43,497
<SECURITIES-BORROWED> 14,698
<INSTRUMENTS-OWNED> 93,253
<PP&E> 1,318
<TOTAL-ASSETS> 162,586
<SHORT-TERM> 5,132
<PAYABLES> 9,430
<REPOS-SOLD> 77,817
<SECURITIES-LOANED> 1,288
<INSTRUMENTS-SOLD> 48,363
<LONG-TERM> 13,341
<COMMON> 156
700
312
<OTHER-SE> 3,531
<TOTAL-LIABILITY-AND-EQUITY> 162,586
<TRADING-REVENUE> 809
<INTEREST-DIVIDENDS> 5,163
<COMMISSIONS> 252
<INVESTMENT-BANKING-REVENUES> 304
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 4,233
<COMPENSATION> 1,312
<INCOME-PRETAX> 474
<INCOME-PRE-EXTRAORDINARY> 474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 2.19
</TABLE>
