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 March 31, 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 April 30, 1995: 106,177,529
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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 months ended March 31, 1995 and 1994 3
Condensed Consolidated Statement of Financial Condition -
March 31, 1995 and December 31, 1994 4-5
Summary of Options and Contractual Commitments -
March 31, 1995 and December 31, 1994 6
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1995 and 1994 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Events 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Dollars in millions, except per share amounts
Three months ended March 31, 1995 1994
Revenues:
<S> <C> <C>
Interest and dividends $ 1,608 $ 1,400
Principal transactions 370 53
Investment banking 22 170
Commissions 89 90
Other (21) 56
Total Revenues 2,068 1,769
Interest Expense 1,325 1,058
Revenues, net of interest expense 743 711
Noninterest expenses:
Compensation and employee-related 431 417
Technology 64 60
Professional services and business development 45 34
Occupancy 41 38
Clearing and exchange fees 16 20
Other 12 30
Total noninterest expenses 609 599
Income before taxes 134 112
Income taxes 53 46
Net income $ 81 $ 66
Per common share:
Primary earnings $ 0.59 $ 0.48
Fully diluted earnings 0.59 0.48
Dividends 0.16 0.16
Weighted average shares of common stock
outstanding (in thousands):
For primary earnings per share 106,300 110,600
For fully diluted earnings per share 106,700 111,100
<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>
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
ASSETS March 31, 1995 December 31, 1994
<S> <C> <C> <C> <C>
Cash and interest bearing equivalents $ 1,580 $ 3,539
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 28,985 $ 32,980
Government and government agency securities - non-U.S. 37,087 34,071
Corporate debt securities 11,734 11,537
Options and contractual commitments 6,997 6,932
Equity securities 4,156 4,169
Mortgage loans and collateralized mortgage securities 1,681 2,190
Other 1,431 1,418
92,071 93,297
Commodities-related products and instruments:
Crude oil, refined products and other
physical commodities 1,345 1,066
Options and contractual commitments 530 424
1,875 1,490
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 37,009 43,792
Securities borrowed and other 18,876 17,034
55,885 60,826
Receivables 8,397 8,524
Assets securing collateralized mortgage obligations 3,070 3,140
Property, plant and equipment, net 1,238 1,181
Other assets, including intangibles 840 735
Total assets $ 164,956 $ 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>
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 1995 December 31, 1994
Short-term borrowings:
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase $ 79,609 $ 70,405
Bank borrowings 3,404 2,333
Securities loaned 1,608 1,500
Deposit liabilities 1,020 1,447
Commercial paper 1,014 865
Other 3,652 2,029
$ 90,307 $ 78,579
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments:
Government and government agency securities - U.S. 16,058 31,021
Government and government agency securities - non-U.S. 11,665 18,948
Financial options and contractual commitments 9,141 6,232
Equity securities 4,355 3,528
Corporate debt securities 1,419 1,677
Commodities, including options and
contractual commitments 759 663
43,397 62,069
Payables and accrued liabilities 8,487 9,364
Collateralized mortgage obligations 2,971 3,026
Term debt 15,239 15,202
Total liabilities 160,401 168,240
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 289 292
Retained earnings 4,725 4,681
Cumulative translation adjustments 18 5
Common stock held in treasury, at cost (1,645) (1,654)
Total stockholders' equity 3,855 3,792
Total liabilities and stockholders' equity $ 164,956 $ 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
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
(UNAUDITED)
March 31, 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* $ 474.2 $ - $ - $ 734.3 $ - $ -
Other exchange-issued products:
Equity contracts 16.7 .2 .2 11.6 .1 .1
Fixed income contracts 18.9 - - 24.2 - .1
Foreign exchange contracts 1.2 - - 4.1 - -
Commodities-related contracts 5.6 - - 11.3 - -
Total exchange-issued products 516.6 .2 .2 785.5 .1 .2
Over-the-counter swap agreements,
swap options, caps and floors:
Swaps 433.4 3.3 5.7 383.3 3.8 3.7
Swap options written 6.6 - .3 9.7 - .1
Swap options purchased 17.3 .6 .2 24.5 .7 -
Cap and floor agreements 75.4 .3 .6 68.1 .3 .7
Total over-the-counter swap agreements,
swap options, caps and floors 532.7 4.2 6.8 485.6 4.8 4.5
Over-the-counter foreign exchange
contracts and options:
Forward currency contracts 55.9 .8 .6 49.8 .3 .2
Options written 16.8 - .7 15.3 - .4
Options purchased 13.0 .6 - 15.0 .4 -
Total over-the-counter foreign
exchange contracts and options 85.7 1.4 1.3 80.1 .7 .6
Other options and contractual
commitments:
Options and warrants on equities
and equity indices** 26.7 .8 .4 31.5 1.0 .6
Options and forward contracts on
fixed-income securities** 120.7 .4 .4 103.2 .3 .3
Commodities-related contracts*** 22.2 .5 .5 23.1 .4 .5
Total $1,304.6 $7.5 $9.6 $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 $600 million
at March 31, 1995 and $300 million at 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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<CAPTION>
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 March 31, 1995 All Transactions with over
3 years
to
maturity
Other
Major
Derivatives Financial Governments/ Quarter
(Dollars in billions) Dealers Corporates Institutions Supranationals 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 $ .5 $ - $ .3 $.1 $ .1 $1.0 $ .9 $ .5
Risk class 3 .5 .3 .2 - .1 1.1 .9 .5
Risk classes 4 and 5 .3 .7 .3 - - 1.3 1.1 .6
Risk classes 6, 7 and 8 - - - - - - .1 -
$1.3 $1.0 $ .8 $ .1 $ .2 $3.4 $3.0 $1.6
Foreign exchange
contracts and options:
Risk classes 1 and 2 $ .4 $ - $ - $ - $ - $ .4 $ .2 $ -
Risk class 3 .4 .1 - - .1 .6 .1 -
Risk classes 4 and 5 .1 - - - .3 .4 .1 -
$ .9 $ .1 $ - $ - $ .4 $1.4 $ .4 $ -
<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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<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Dollars in millions
Three months ended March 31, 1995 1994
Cash flows from operating activities:
Net income adjusted for noncash items -
<S> <C> <C>
Net income $ 81 $ 66
Depreciation, amortization and other 21 58
Total cash items included in net income 102 124
(Increase) decrease in operating assets -
Financial instruments and contractual commitments 1,226 12,335
Commodities-related products and instruments (385) 68
Collateralized short-term financing agreements 4,941 (1,025)
Receivables 313 (4,120)
Other 174 (36)
Total (increase) decrease in operating assets 6,269 7,222
Increase (decrease) in operating liabilities -
Short-term borrowings 11,728 (11,336)
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments (18,672) (1,908)
Payables and accrued liabilities (876) (37)
Total increase (decrease) in operating liabilities (7,820) (13,281)
Cash used in operating activities (1,449) (5,935)
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 1,313 2,938
Employee stock purchase and option plans 6 7
Total cash proceeds from financing activities 1,319 2,945
Payments for -
Term debt maturities and repurchases 1,740 854
Collateralized mortgage obligations 134 337
Purchase of common stock for treasury -- 237
Dividends on common stock 18 18
Dividends on preferred stock* 18 13
Total cash payments for financing activities 1,910 1,459
Cash provided by (used in) financing activities (591) 1,486
Cash flows from investing activities:
Proceeds from -
Assets securing collateralized mortgage obligations 159 255
Total cash proceeds from investing activities 159 255
Payments for -
Property, plant and equipment 78 39
Total cash payments for investing activities 78 39
Cash provided by investing activities 81 216
Decrease in cash and interest bearing equivalents (1,959) (4,233)
Cash and interest bearing equivalents at January 1 3,539 5,748
Cash and interest bearing equivalents at March 31 $ 1,580 $ 1,515
<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 three months ended March 31, 1995 and March 31, 1994, dividends on
preferred stock were reduced by the aftertax impact ($4 million and $9 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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Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements include the
accounts of Salomon Inc and all majority-owned subsidiaries
(collectively, the "Company"). These financial statements include all
adjustments necessary for a fair presentation of financial condition,
results of operations and cash flows. The Unaudited Condensed
Consolidated Financial Statements should be read in conjunction with
the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 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.
3. Net Capital
Certain U.S. and non-U.S. subsidiaries are subject to various
securities and commodities regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of
the countries in which they operate. The Company's principal regulated
subsidiaries are discussed below.
Salomon Brothers Inc is registered as a broker-dealer with the U.S.
Securities and Exchange Commission ("SEC") and is subject to the SEC's
Uniform Net Capital Rule, Rule 15c3-1, which requires net capital, as
defined under the alternative method, of not less than the greater of
2% of aggregate debit items arising from customer transactions, as
defined, or 4% of funds required to be segregated for customers'
regulated commodity accounts, as defined. Although net capital,
aggregate debit items and funds required to be segregated change from
day to day, at March 31, 1995, SBI's net capital was $1,178 million,
$1,139 million in excess of regulatory requirements.
Salomon Brothers International Limited ("SBIL") is authorized to
conduct investment business in the United Kingdom by the Securities and
Futures Authority ("SFA") in accordance with the Financial Services Act
1986 (the "Act"). The SFA requires SBIL to have available at all times
financial resources, as defined, sufficient to demonstrate continuing
compliance with its rules. At March 31, 1995, SBIL's financial
resources were $483 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 March 31, 1995, SBAL's net
capital was $555 million above the minimum required by Japan's Ministry
of Finance. SBAG's net capital was $119 million above the minimum
required by Germany's Banking Supervisory Authority.
4. Revenues by Business Unit and Industry Segment Reporting
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 Russian-American oil joint venture. Industry segment
financial information is prepared in accordance with generally accepted
accounting principles in the United States.
The accompanying Management's Discussion and Analysis section includes
a discussion of the operating results of the Company's industry
segments. 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-level expenses that
cannot be directly associated with the Company's operating segments are
included in "Corporate and Other."
Revenues by Business Unit
The following tables present revenues, net of interest, by business unit for the
three months ended March 31, 1995 and 1994.
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Three Months Ended March 31, 1995
Principal
Transactions
& Net Interest Investment
(Dollars in millions) Banking Commissions Other Total
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Salomon Brothers' Client-Driven Business:
Global investment banking* $ - $ 22 $ - $ - $ 22
Fixed income secondary markets 119 - 16 - 135
Equities secondary markets (15) - 70 - 55
Foreign exchange (2) - - - (2)
Private Investment Department 4 2 - 6
Asset management (2) - - 11 9
Total revenues from Client-Driven Business 104 22 88 11 225
Proprietary Trading Businesses 362 - - - 362
Total Salomon Brothers' revenues, net of
interest expense 466 22 88 11 587
Phibro Division 183 - - 1 184
Phibro USA (6) - - (34) (40)
Corporate and other 10 - 1 1 12
Total Salomon Inc $ 653 $ 22 $ 89 $ (21) $ 743
<FN>
*Includes $68 million of pretax losses on Latin American securities positions
that arose in connection with underwriting activities.
</FN>
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<CAPTION>
Three Months Ended March 31, 1994
Principal
Transactions
& Net Interest Investment
(Dollars in millions) Banking Commissions Other Total
<S> <C> <C> <C> <C> <C>
Salomon Brothers' Client-Driven Business:
Global investment banking $ - $ 170 $ - $ - $ 170
Fixed income secondary markets 185 - 13 - 198
Equities secondary markets (88) - 72 - (16)
Foreign exchange (111) - - - (111)
Private Investment Department 1 - 4 - 5
Asset management 2 - - 7 9
Total revenues from Client-Driven Business (11) 170 89 7 255
Proprietary Trading Businesses 341 - - - 341
Total Salomon Brothers' revenues, net of
interest expense 330 170 89 7 596
Phibro Division 73 - - - 73
Phibro USA (6) - - 48 42
Corporate and other (2) - 1 1 -
Total Salomon Inc $ 395 $170 $ 90 $ 56 $ 711
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
<CAPTION>
SUMMARY OF CONSOLIDATED OPERATING RESULTS
Dollars in millions, except per share amounts
Three months ended March 31, 1995 1994
<S> <C> <C>
Income before taxes by segment:
Salomon Brothers $ 60 $ 39
Phibro Division 123 50
Phibro USA (51) 27
Corporate and other 2 (4)
Income before taxes 134 112
Income taxes 53 46
Net income $ 81 $ 66
Per Common Share:
Primary earnings $0.59 $0.48
Fully diluted earnings* $0.59 $0.48
Cash dividends $0.16 $0.16
Book value at period-end $33.22 $37.87
Annualized return on average common stockholders' equity:
Primary method 7.1 % 5.0 %
Fully diluted method* 7.1 % 5.0 %
<FN>
* Assumes conversion of convertible notes and redeemable preferred stock, unless
such assumptions result in higher returns on equity or earnings per share than
determined under the primary method.
</FN>
</TABLE>
The Company's three operating segments 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 gathering 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 operating segments; the results of
TMC, which originates and 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 1995 first quarter
results of Corporate and other were positively impacted by an improvement in the
results of TMC. PEPI's investment in White Nights, including related loans, had
a carrying value of $54 million at March 31, a decrease of $4 million from
December 31, 1994. The decrease reflects principal and interest payments from
White Nights to PEPI with respect to PEPI's loan to the venture. 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.
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Salomon Brothers
In April 1995, Salomon Brothers announced changes in the management of its core
businesses and support functions. An Operating Committee was formed for the
Client-Driven Business that will have the objectives of setting client business
strategy, implementing strategic business plans and reviewing key hiring,
promotion and compensation decisions. Members of the Operating Committee include
the Chairman of Salomon Brothers and the heads of the Fixed Income, Equities and
Investment Banking areas. In addition, the management of Salomon Brothers'
support functions is being restructured to reflect the global nature of the
firm's businesses. The heads of Salomon Brothers' global Operations, Technology,
Financial, and Organization and Staff Development divisions, as well as the
regional Chief Administrative Officers, will be organized under a Chief
Administrative Officer, who, when appointed, will be a member of the
Client-Driven Business' Operating Committee.
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<CAPTION>
Results of Operations
Dollars in millions
Percent
Three months ended March 31, 1995 1994 Change
<S> <C> <C> <C>
Revenues:
Client-Driven Business:
Global investment banking:
Advisory $ 52 $ 49 6 %
Equity underwriting* -- 92 (100)
Debt underwriting* (30) 29 N/M
Total global investment banking 22 170 (87)
Fixed income secondary markets 135 198 (32)
Equities secondary markets 55 (16) N/M
Foreign exchange (2) (111) N/M
Private Investment Department** 6 5 20
Asset management 9 9 --
Total revenues from Client-Driven Business 225 255 (12)
Proprietary Trading Businesses 362 341 6
Total revenues, net of interest expense $ 587 $ 596 (2) %
Income before taxes:
Client-Driven Business $(179) $(173) (3) %
Proprietary Trading Businesses 239 212 13
Total income before taxes $ 60 $ 39 54 %
<FN>
* Amounts for 1995 include pretax losses on Latin American securities positions
of approximately $55 million in debt underwriting and $13 million in equity
underwriting.
** Discontinued in the first quarter of 1995.
</FN>
</TABLE>
Salomon Brothers, the Company's global investment banking and securities
business, recorded pretax earnings of $60 million in the 1995 first quarter,
compared with pretax earnings of $39 million in the 1994 first quarter.
First quarter 1995 results for Salomon Brothers' Client-Driven Business reflect
depressed volume levels for customer activity, in both capital raising and
secondary market trading. In addition, first quarter 1995 investment banking
revenues were adversely impacted by $68 million of pretax losses on Latin
American securities positions that arose in connection with underwriting
activities. Although Salomon Brothers' U.S. underwriting rankings generally
improved when co-managed transactions were considered, the rankings weakened on
a lead-managed basis, particularly with respect to equities. Based upon the
backlog of uncompleted transactions in registration, the Company anticipates an
improvement in its equity underwriting performance. First quarter Client-Driven
Business results also included a $12 million loss (including severance costs)
from the Private Investment Department, which was closed in the first quarter.
<TABLE>
<CAPTION>
Noninterest Expenses
Dollars in millions
Percent
Three months ended March 31, 1995 1994 Change
<S> <C> <C> <C>
Compensation and employee-related expenses $366 $388 (6) %
Compensation ratio* 86 % 91 %
Non-compensation expenses:
Technology $ 60 $ 57 5 %
Occupancy 39 39 --
Professional services and business development 38 28 36
Clearing and exchange fees 15 20 (25)
Other 9 25 (64)
Total non-compensation expense $161 $169 (5) %
Non-compensation expense ratio** 27 % 28 %
<FN>
* Compensation as a percentage of earnings before taxes and compensation.
** Non-compensation expenses as a percentage of revenues, net of interest.
</FN>
</TABLE>
For the 1995 compensation year, which began October 1, 1994, Salomon Brothers
established a compensation plan for participating Managing Directors
("partners") of Salomon Brothers' Client-Driven Business, pursuant to which the
partners will receive a fixed minimum compensation plus 40% of the earnings of
the Client-Driven Business in excess of an aftertax return to shareholders that
is fixed for the 1995 compensation year at 7% of applicable equity capital. To
enhance flexibility, the compensation plan was amended in the first quarter of
1995 to include a fund that will be used to recognize outstanding individual
performance, even if the Client-Driven Business as a whole does not meet its
targeted returns. The 1995 first quarter compensation and employee-related
expenses of $366 million included severance expenses of $6 million related to
the closing of the Private Investment Department.
Non-compensation expenses, in the aggregate, were $8 million or 5% lower in the
1995 first quarter than in the comparable 1994 quarter. Although professional
services and business development expenses were higher in the 1995 quarter,
primarily reflecting higher legal expenses, this increase was more than offset
by reductions in clearing and exchange fees and reduced provisions for legal
matters (which are included in "other" expenses in the preceding table).
<TABLE>
<CAPTION>
Phibro Division
Condensed Statement of Income
Dollars in millions
Percent
Three months ended March 31, 1995 1994 Change
<S> <C> <C> <C>
Revenues, net of interest $ 184 $ 73 152 %
Compensation and employee-related expenses 52 17 206
Other general and administrative expenses 9 6 50
Total noninterest expenses 61 23 165
Income before taxes $ 123 $ 50 146 %
</TABLE>
Phibro Division reported pretax earnings for the quarter of $123 million,
compared with $50 million in the 1994 first quarter. Phibro Division engages in
counterparty flow business and proprietary trading. Because of its proprietary
trading activities, significant quarter-to-quarter volatility in Phibro
Division's results can be expected. The higher compensation expenses in the 1995
first quarter are the result of the significantly stronger operating results.
<TABLE>
<CAPTION>
Phibro USA
Condensed Statement of Income
Dollars in millions
Percent
Three months ended March 31, 1995 1994 Change
<S> <C> <C> <C>
Sales $ 2,175 $ 1,611 35 %
Cost of sales 2,208 1,564 41
Operating profit (33) 47 N/M
Net interest and other (7) (5) (40)
Operating profit (loss), net of interest and other (40) 42 N/M
Compensation and employee-related expenses 7 10 (30)
Other expenses 4 5 (20)
Total noninterest expenses 11 15 (27)
Income (loss) before taxes $ (51) $ 27 N/M %
</TABLE>
Phibro USA, the Company's oil refining and marketing business, recorded the
worst quarterly operating result in its ten-year history with a pretax loss of
$51 million compared with pretax earnings of $27 million in the first quarter of
1994. Results were adversely affected by weak refining margins which were
impacted by unseasonably warm weather in the northeastern United States and
implementation of the reformulated gasoline program. In addition, Phibro USA's
Houston refinery underwent a five week shutdown for turnaround maintenance
during the first quarter.
During the first quarter of 1994, refining margins benefited from strong
weather-related demand in the Northeast. In addition, Phibro USA sold its St.
Rose refinery in the first quarter of 1994; the sale resulted in a modest gain.
<TABLE>
<CAPTION>
SALOMON INC
Capital and Liquidity Management
Dollars in millions
March 31, December 31, September 30, June 30, March 31,
Quarter ended 1995 1994 1994 1994 1994
<S> <C> <C> <C> <C> <C>
Average Weekly Balance Sheet Information:
Government and agency securities - U.S. $ 31,743 $ 34,621 $ 28,758 $ 31,398 $ 39,779
Government and agency securities - non-U.S. 32,896 28,275 31,384 32,518 36,434
Financial options and contractual commitments 7,857 8,336 9,119 9,580 7,904
Other financial instruments owned 19,212 21,355 21,443 22,141 26,848
Total financial instrument inventories 91,708 92,587 90,704 95,637 110,965
Collateralized short-term financing agreements 63,779 64,058 64,572 56,653 53,876
Other assets 16,737 18,032 19,237 23,444 19,270
Average total assets $ 172,224 $ 174,677 $ 174,513 $ 175,734 $ 184,111
Period-end total assets $ 164,956 $ 172,732 $ 158,486 $ 175,549 $ 173,316
Period-end net assets* $ 104,421 $ 105,227 $ 96,594 $ 107,181 $ 118,229
Average net assets* $ 102,459 $ 103,411 $ 102,154 $ 112,107 $ 123,311
Long-term capital at period-end $ 17,237 $ 16,138 $ 17,862 $ 17,923 $ 17,741
Ratios at period end:
Working capital coverage 1.17 1.07 1.16 1.11 1.13
Total capital basis double leverage 0.85 0.87 0.85 0.88 0.94
Equity capital basis double leverage 1.19 1.18 1.23 1.31 1.34
Average net assets to total equity 22 23 22 23 24
Common shares outstanding (in millions) 106.1 105.8 105.8 105.7 105.9
<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 first quarter were $172 billion, compared with $184
billion in last year's first quarter. March 31, 1995 and December 31, 1994
period-end total assets were reduced by $6 billion as a result of the Company's
adoption of Financial Accounting Standards Board Interpretation No. 41,
Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements. 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.
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.
Salomon Brothers' trading portfolio of high-yield securities, carried at market
value, totaled $2.2 billion at March 31, 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 $82 million at March 31, 1995.
Book value per share increased to $33.22 at March 31, 1995, from $32.65 at
December 31, 1994. During the 1995 first quarter, the Company's treasury share
repurchases were negligible. At March 31, 1995, shares authorized for additional
repurchase totaled 9.8 million shares.
Subsequent to March 31, 1995, Moody's lowered its rating of the Company's senior
debt from A3 to Baa1 and confirmed the Company's commercial paper rating of P2
and Thomson BankWatch, Inc. lowered its rating of the Company's senior debt from
B/C to C and confirmed the Company's commercial paper rating of TBW-1.
Management does not expect that these actions will have a significant impact on
the Company's cost of funds, since the Company's debt had already been trading
at levels consistent with the rating.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
Dollars in millions, except per share amounts 1995 1994 1994 1994 1994
For the quarter:
Revenues:
<S> <C> <C> <C> <C> <C>
Principal transactions, including net interest
and dividends $ 653 $(123) $ 188 $ (10) $ 395
Investment banking 22 109 121 86 170
Commissions and other 68 110 99 95 146
Revenues, net of interest expense 743 96 408 171 711
Noninterest expenses:
Compensation and employee-related 431 332 399 338 417
Other noninterest expenses 178 185 185 179 182
Total noninterest expenses 609 517 584 517 599
Income (loss) before taxes 134 (421) (176) (346) 112
Income taxes 53 (264) (72) (142) 46
Net income (loss) $ 81 $(157) $(104) $(204) $ 66
Annualized return on average common
stockholders' equity:
Primary 7.1 % (19.2) % (12.8) % (22.0) % 5.0 %
Fully diluted* 7.1 % (19.2) % (12.8) % (22.0) % 5.0 %
Income (loss) before taxes by segment:
Salomon Brothers:
Client-Driven Business $(179) $(110) $ (62) $(291) $(173)
Proprietary Trading Businesses 239 (28) (114) (119) 212
Unallocated Charges -- (278) -- -- --
Total Salomon Brothers 60 (416) (176) (410) 39
Phibro Division 123 (24) (27) 82 50
Phibro USA (51) 5 (4) (10) 27
Corporate and other 2 14 31 (8) (4)
Total income (loss) before taxes $ 134 $(421) $(176) $(346) $ 112
Per common share:
Primary earnings (loss) $0.59 $(1.65) $(1.13) $(2.08) $0.48
Fully diluted earnings (loss)* 0.59 (1.65) (1.13) (2.08) 0.48
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 40 1/8 42 48 1/4 52 5/8 52 3/4
Low market price 32 1/4 35 38 1/2 47 1/4 44 3/4
Ending market price 33 7/8 37 1/2 39 1/2 47 3/4 48 1/2
Book value at period-end 33.22 32.65 34.50 35.71 37.87
<FN>
* Assumes conversion of convertible notes and redeemable preferred stock, unless
such assumptions result in higher returns or earnings per share than determined
under the primary method.
</FN>
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 28, 1995, in the lawsuit filed in Federal Court in Texas
against Phibro Energy USA, Inc. ("Phibro USA"), a subsidiary of the
Company, by the Friends of the Earth, Inc., Phibro USA's motion for
summary judgment against the plaintiff was granted and judgment was
entered in favor of Phibro USA. Plaintiff has filed a Notice of Appeal
to the United States Court of Appeals for the Fifth Circuit.
In April 1995, Region 6 of the federal Environmental Protection Agency
("EPA Region 6") moved to consolidate into one proceeding, seeking
aggregate proposed penalties of $237,066, three actions filed against
Phibro USA by EPA Region 6 following a "multimedia inspection" of
Phibro USA's Houston refinery in 1994. EPA Region 6's motion seeks to
consolidate an action alleging certain violations of the Clean Air Act
which was filed against Phibro USA on September 29, 1994 by the
Director of the Air, Pesticides and Toxics Division of EPA Region 6, an
action alleging certain violations of the Resource Conservation and
Recovery Act which was filed against Phibro USA on December 15, 1994 by
the Director of the Hazardous Waste Division of EPA Region 6 and an
action alleging certain violations of the Emergency Planning and
Community Right to Know Act which was filed against Phibro USA on March
13, 1995 by the Director for Environmental Services Division of EPA
Region 6.
In April 1995, the Company's subsidiary, Philipp Brothers, Inc., was
served with notice of third-party actions commenced against it by
Houston Lighting & Power Company and Central Power & Light Company in
State of Texas v. Leslie Simon, Jr. et al., Civil Action No. CA-88-4,
in the United States District Court for the Southern District of Texas,
Corpus Christi Division. The third-party actions reiterate the claim,
advanced by the Attorney General of Texas, that Philipp Brothers, Inc.
is liable, under the Texas Solid Waste Disposal Act and CERCLA, with
respect to a share of the $7.2 million costs of remediation and
post-closure care at the Industrial Road/Industrial Metals Site in
Corpus Christi, Texas. The extent of Philipp Brothers, Inc.'s
liability, if any, with respect to the claims alleged in the
third-party actions cannot be determined at this time, but the Company
believes that the ultimate resolution of such actions will not result
in any material adverse impact on the Company's consolidated financial
condition.
A full discussion of legal proceedings is included under Item 3 of the
Company's 1994 Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
At the 1995 Annual meeting of shareholders, which was held on May 3,
1995, the shareholders elected the directors.
Item 5. Other Events
The Company announced that effective May 15, 1995, Richard J. Carbone
will be the Controller and Chief Accounting Officer of Salomon Inc.
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 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.
The Company filed a Current Report on Form 8-K dated April 25, 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 May 12, 1995 /s/ Jerome H. Bailey
Chief Financial Officer
Date May 12, 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 combined fixed charges
12.b Calculation of ratio of earnings to combined fixed charges
and preferred dividends
27 Financial Data Schedule
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12(a)
SALOMON INC AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
Three
Months
Ended
March 31, Years Ended December 31,
Dollars in millions 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before taxes and cumulative
effect of change in accounting principles $ 134 $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see
below) 1,334 4,919 4,644 4,373 5,704 6,032
Other adjustments (2) (3) 22 20 (4) (16)
Earnings as defined $ 1,466 $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
Fixed Charges:
Interest expense $ 1,325 $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 9 27 44 49 66 73
Fixed charges as defined $ 1,334 $ 4,919 $ 4,644 $ 4,373 $ 5,704 $ 6,032
Ratio of earnings to
fixed charges 1.10 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)
Three
Months
Ended
March 31, Years Ended December 31,
Dollars in millions 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before taxes and cumulative
effect of change in accounting principles $ 134 $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see
below) 1,334 4,919 4,644 4,373 5,704 6,032
Other adjustments (2) (3) 22 20 (4) (16)
Earnings as defined $ 1,466 $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
Fixed Charges and
Preferred Dividends:
Interest expense $ 1,325 $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 9 27 44 49 66 73
Fixed charges as defined 1,334 4,919 4,644 4,373 5,704 6,032
Preferred dividends (tax
equivalent basis) 30 129 83 131 121 105
Combined fixed charges
and preferred dividends $ 1,364 $ 5,048 $ 4,727 $ 4,504 $ 5,825 $ 6,137
Ratio of earnings to
combined fixed charges
and preferred dividends 1.07 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 CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF FINANCIAL CONDITION AS OF MARCH 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,580
<RECEIVABLES> 8,397
<SECURITIES-RESALE> 37,009
<SECURITIES-BORROWED> 18,876
<INSTRUMENTS-OWNED> 93,946
<PP&E> 1,238
<TOTAL-ASSETS> 164,956
<SHORT-TERM> 9,090
<PAYABLES> 8,487
<REPOS-SOLD> 79,609
<SECURITIES-LOANED> 1,608
<INSTRUMENTS-SOLD> 43,397
<LONG-TERM> 15,239
<COMMON> 156
700
312
<OTHER-SE> 3,387
<TOTAL-LIABILITY-AND-EQUITY> 164,956
<TRADING-REVENUE> 370
<INTEREST-DIVIDENDS> 1,608
<COMMISSIONS> 89
<INVESTMENT-BANKING-REVENUES> 22
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 1,325
<COMPENSATION> 431
<INCOME-PRETAX> 134
<INCOME-PRE-EXTRAORDINARY> 134
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
