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 June 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 July 31, 1995: 106,387,047
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SALOMON INC
Form 10-Q
<CAPTION>
Part I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements (unaudited):
Consolidated Statement of Income -
Three and Six months ended June 30, 1995 and 1994 3
Condensed Consolidated Statement of Financial Condition -
June 30, 1995 and December 31, 1994 4-5
Summary of Options and Contractual Commitments -
June 30, 1995 and December 31, 1994 6
Condensed Consolidated Statement of Cash Flows -
Six months ended June 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 Six months
Period ended June 30, 1995 1994 1995 1994
Revenues:
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Interest and dividends $ 1,944 $ 1,347 $ 3,552 $ 2,747
Principal transactions (252) (245) 118 (192)
Investment banking 154 86 176 256
Commissions 81 85 170 175
Other 27 10 6 66
Total Revenues 1,954 1,283 4,022 3,052
Interest Expense 1,553 1,112 2,878 2,170
Revenues, net of interest expense 401 171 1,144 882
Noninterest expenses:
Compensation and employee-related 324 338 755 755
Technology 64 61 128 121
Occupancy 42 51 83 89
Professional services and business development 35 39 80 73
Clearing and exchange fees 17 15 33 35
Other 18 13 30 43
Total noninterest expenses 500 517 1,109 1,116
Income (loss) before taxes (99) (346) 35 (234)
Income tax expense (benefit) (39) (142) 14 (96)
Net income (loss) $ (60) $ (204) $ 21 $ (138)
Per common share:
Primary earnings (loss) $ (0.73) $ (2.08) $ (0.14) $ (1.54)
Dividends $ 0.16 $ 0.16 $ 0.32 $ 0.32
Weighted average shares of common stock outstanding (in thousands):
For primary earnings per share 106,500 105,800 106,400 107,900
<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
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
ASSETS June 30, 1995 December 31, 1994
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Cash and interest bearing equivalents $ 2,444 $ 3,539
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 34,902 $ 32,980
Government and government agency securities - non-U.S. 37,157 34,071
Corporate debt securities 11,577 11,537
Options and contractual commitments 6,058 6,932
Equity securities 4,305 4,169
Mortgage loans and collateralized mortgage securities 1,691 2,190
Other 1,458 1,418
97,148 93,297
Commodities-related products and instruments:
Crude oil, refined products and other
physical commodities 1,392 1,066
Options and contractual commitments 576 424
1,968 1,490
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 37,577 43,792
Securities borrowed and other 14,211 17,034
51,788 60,826
Receivables 5,376 8,524
Assets securing collateralized mortgage obligations 2,817 3,140
Property, plant and equipment, net 1,279 1,181
Other assets, including intangibles 873 735
Total assets $ 163,693 $ 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
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 1995 December 31, 1994
Short-term borrowings:
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Securities sold under agreements to repurchase $ 81,089 $ 70,405
Bank borrowings 2,737 2,333
Securities loaned 1,644 1,500
Deposit liabilities 1,228 1,447
Commercial paper 972 865
Other 3,941 2,029
$ 91,611 $ 78,579
Financial and commodities-related instruments sold, not yet purchased, and
contractual commitments:
Government and government agency securities - U.S. 17,159 31,021
Government and government agency securities - non-U.S. 9,385 18,948
Financial options and contractual commitments 10,506 6,232
Equity securities 2,800 3,528
Corporate debt securities and other 1,245 1,677
Commodities, including options and
contractual commitments 1,276 663
42,371 62,069
Payables and accrued liabilities 7,782 9,364
Collateralized mortgage obligations 2,660 3,026
Term debt 14,799 15,202
Total liabilities 159,223 168,240
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 4,631 4,681
Cumulative translation adjustments 23 5
Common stock held in treasury, at cost (1,641) (1,654)
Total stockholders' equity 3,770 3,792
Total liabilities and stockholders' equity $ 163,693 $ 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)
June 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:
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Futures contracts* $ 446.5 $ - $ - $ 734.3 $ - $ -
Other exchange-issued products:
Equity contracts 18.8 .3 .2 11.6 .1 .1
Fixed income contracts 25.3 - - 24.2 - .1
Foreign exchange contracts .1 - - 4.1 - -
Commodities-related contracts 5.0 - - 11.3 - -
Total exchange-issued products 495.7 .3 .2 785.5 .1 .2
Over-the-counter swap agreements,
swap options, caps and floors:
Swaps 456.2 2.7 7.2 383.3 3.8 3.7
Swap options written 7.2 - .3 9.7 - .1
Swap options purchased 17.6 .8 - 24.5 .7 -
Cap and floor agreements 84.8 .3 .7 68.1 .3 .7
Total over-the-counter swap agreements,
swap options, caps and floors 565.8 3.8 8.2 485.6 4.8 4.5
Over-the-counter foreign exchange
contracts and options:
Forward currency contracts 53.5 .3 .6 49.8 .3 .2
Options written 15.8 - .4 15.3 - .4
Options purchased 16.3 .2 - 15.0 .4 -
Total over-the-counter foreign exchange
contracts and options 85.6 .5 1.0 80.1 .7 .6
Other options and contractual commitments:
Options and warrants on equities and
equity indices** 34.3 1.1 .6 31.5 1.0 .6
Options and forward contracts
on fixed-income securities** 148.5 .3 .5 103.2 .3 .3
Commodities-related contracts*** 27.6 .6 .7 23.1 .4 .5
Total $ 1,357.5 $6.6 $11.2 $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 $500 million
at June 30, 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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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 June 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>
Risk classes 1 and 2 $ .5 $ .1 $ .3 $ .1 $ - $ 1.0 $ 1.0 $ .5
Risk class 3 .4 .2 .2 - .1 .9 .9 .3
Risk classes 4 and 5 .4 .5 .3 - - 1.2 1.2 .7
Risk classes 6, 7 and 8 - .1 - - - .1 .1 -
$ 1.3 $ .9 $ .8 $ .1 $ .1 $ 3.2 $ 3.2 $ 1.5
Foreign exchange
contracts and options:
Risk classes 1 and 2 $ .2 $ - $ - $ - $ - $ .2 $ .2 $ -
Risk class 3 .1 - - - .1 .2 .2 -
Risk classes 4 and 5 - - - - .1 .1 .2 -
$ .3 $ - $ - $ - $ .2 $ .5 $ .6 $ -
<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
Six months ended June 30, 1995 1994
Cash flows from operating activities:
Net income adjusted for noncash items -
<S> <C> <C>
Net income (loss) $ 21 $ (138)
Depreciation, amortization and other 69 101
Total cash items included in net income (loss) 90 (37)
(Increase) decrease in operating assets -
Financial instruments and contractual commitments (3,851) 17,386
Commodities-related products and instruments (478) (310)
Collateralized short-term financing agreements 9,038 (10,076)
Receivables 3,359 2,252
Other 153 61
Total decrease in operating assets 8,221 9,313
Increase (decrease) in operating liabilities -
Short-term borrowings 13,032 (13,428)
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments (19,698) 3,161
Payables and accrued liabilities (1,569) (655)
Total decrease in operating liabilities (8,235) (10,922)
Cash provided by (used in) operating activities 76 (1,646)
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 1,972 3,898
Employee stock purchase and option plans 10 9
Total cash proceeds from financing activities 1,982 3,907
Payments for -
Term debt maturities and repurchases 2,886 1,647
Collateralized mortgage obligations 417 586
Purchase of common stock for treasury 1 252
Dividends on common stock 35 35
Dividends on preferred stock* 36 28
Total cash payments for financing activities 3,375 2,548
Cash provided by (used in) financing activities (1,393) 1,359
Cash flows from investing activities:
Proceeds from -
Assets securing collateralized mortgage obligations 376 514
Total cash proceeds from investing activities 376 514
Payments for -
Property, plant and equipment 154 62
Total cash payments for investing activities 154 62
Cash provided by investing activities 222 452
Increase (decrease) in cash and interest bearing equivalents (1,095) 165
Cash and interest bearing equivalents at January 1 3,539 5,748
Cash and interest bearing equivalents at June 30 $ 2,444 $ 5,913
<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 six months ended June 30, 1995 and June 30, 1994, dividends on preferred stock were reduced by the
aftertax impact
($9 million and $17 million) 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
June 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 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 ("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 June 30, 1995, SBI's net capital was $1,312
million, $1,273 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 June 30, 1995, SBIL's financial resources were $673
million in excess of regulatory requirements.
Salomon Brothers Asia Limited ("SBAL") and Salomon Brothers AG ("SBAG")
are also subject to regulation in the countries in which they do
business. Such regulations include requirements to maintain specified
levels of net capital or its equivalent. At June 30, 1995, SBAL's net
capital was $504 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 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, by business unit for the three and six months ended June 30, 1995 and 1994.
Three Months Ended June 30, 1995
Principal
Transactions
& Net Investment
(Dollars in millions) Interest Banking Commissions Other Total
Salomon Brothers' Client-Related Business:
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Global investment banking $ - $ 154 $ - $ - $ 154
Fixed income secondary markets 216 - 8 - 224
Equities secondary markets 128 - 73 - 201
Foreign exchange 6 - - - 6
Asset management 2 - - 8 10
Total revenues from Client-Related Business 352 154 81 8 595
Proprietary Trading Businesses (43) - - - (43)
Total Salomon Brothers' revenues, net of
interest expense 309 154 81 8 552
Phibro Division (178) - - 1 (177)
Phibro USA (7) - - 18 11
Corporate and other 15 - - - 15
Total Salomon Inc $ 139 $ 154 $ 81 $ 27 $ 401
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Three Months Ended June 30, 1994
Principal
Transactions
& Net Investment
(Dollars in millions) Interest Banking Commissions Other Total
Salomon Brothers' Client-Related Business:
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Global investment banking $ - $ 86 $ - $ - $ 86
Fixed income secondary markets (136) - 11 - (125)
Equities secondary markets (9) - 71 - 62
Foreign exchange 55 - - - 55
Private Investment Department 3 - 3 - 6
Asset management 6 - - 5 11
Total revenues from Client-Related Business (81) 86 85 5 95
Proprietary Trading Businesses (60) - - - (60)
Total Salomon Brothers' revenues, net of
interest expense (141) 86 85 5 35
Phibro Division 130 - - - 130
Phibro USA (2) - - 5 3
Corporate and other 3 - - - 3
Total Salomon Inc $ (10) $ 86 $ 85 $ 10 $ 171
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Six Months Ended June 30, 1995
Principal
Transactions
& Net Investment
(Dollars in millions) Interest Banking Commissions Other Total
Salomon Brothers' Client-Related Business:
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Global investment banking $ - $ 176 $ - $ - $ 176
Fixed income secondary markets 335 - 24 - 359
Equities secondary markets 113 - 143 - 256
Foreign exchange 4 - - - 4
Private Investment Department 4 - 2 - 6
Asset management - - - 19 19
Total revenues from Client-Related Business 456 176 169 19 820
Proprietary Trading Businesses 319 - - - 319
Total Salomon Brothers' revenues, net of
interest expense 775 176 169 19 1,139
Phibro Division 5 - - 2 7
Phibro USA (13) - - (16) (29)
Corporate and other 25 - 1 1 27
Total Salomon Inc $ 792 $ 176 $ 170 $ 6 $ 1,144
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<CAPTION>
Six Months Ended June 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 $ - $ 256 $ - $ - $ 256
Fixed income secondary markets 49 - 24 - 73
Equities secondary markets (97) - 143 - 46
Foreign exchange (56) - - - (56)
Private Investment Department 4 - 7 - 11
Asset management 8 - - 12 20
Total revenues from Client-Related Business (92) 256 174 12 350
Proprietary Trading Businesses 281 - - - 281
Total Salomon Brothers' revenues, net of
interest expense 189 256 174 12 631
Phibro Division 203 - - - 203
Phibro USA (8) - - 53 45
Corporate and other 1 - 1 1 3
Total Salomon Inc $ 385 $ 256 $ 175 $ 66 $ 882
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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 Six months
Period ended June 30, 1995 1994 1995 1994
Income (loss) before taxes:
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Salomon Brothers $ 56 $ (410) $ 116 $ (371)
Phibro Division (162) 82 (39) 132
Phibro USA 1 (10) (50) 17
Corporate and other 6 (8) 8 (12)
Income (loss) before taxes (99) (346) 35 (234)
Income tax expense (benefit) (39) (142) 14 (96)
Net Income (loss) $ (60) $ (204) $ 21 $ (138)
Per Common Share:
Primary earnings (loss) $ (0.73) $ (2.08) $ (0.14) $ (1.54)
Cash dividends $ 0.16 $ 0.16 $ 0.32 $ 0.32
Book value at period-end $ 32.38 $ 35.71 $ 32.38 $ 35.71
Annualized return on average common stockholders' equity (8.8) % (22.0) % (0.8) % (8.0) %
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The Company's three 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 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 second quarter and six
month results of Corporate and other were positively impacted by the strong
results of TMC. PEPI's investment in White Nights, including related loans, had
a carrying value of $52 million at June 30, 1995, a decrease of $6 million since
December 31, 1994. The decrease reflects interest payments from White Nights to
PEPI with respect to PEPI's loan to the venture, which are excluded from income
and instead recorded as reductions in the carrying value of the investment.
Although loan repayments are expected to continue, White Nights' future remains
dependent on Russian fiscal, legislative and regulatory policy.
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Salomon Brothers
Results of Operations
Dollars in millions
Three months Percent Six months Percent
Period ended June 30, 1995 1994 Change 1995 1994 Change
Revenues:
Client-Related Business:
Global investment banking
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Advisory $ 52 $ 44 18 % $ 104 $ 93 12 %
Equity underwriting 67 30 123 67 122 (45)
Debt underwriting 35 12 192 5 41 (88)
Total global investment banking 154 86 79 176 256 (31)
Fixed income secondary markets 224 (125) n/m 359 73 392
Equities secondary markets 201 62 224 256 46 457
Foreign exchange 6 55 (89) 4 (56) n/m
Private Investment Department* - 6 n/m 6 11 (45)
Asset management 10 11 (9) 19 20 (5)
Total revenues from Client-Related Business 595 95 526 820 350 134
Proprietary Trading Businesses (43) (60) n/m 319 281 14
Total revenues, net of interest expense $ 552 $ 35 1,477 % $ 1,139 $ 631 81 %
Income (loss) before taxes:
Client-Related Business $ 149 $ (291) n/m % $ (30) $ (464) n/m %
Proprietary Trading Businesses (93) (119) n/m 146 93 57
Total income (loss) before taxes $ 56 $ (410) n/m % $ 116 $ (371) n/m %
<FN>
*Discontinued in the first quarter of 1995.
</FN>
</TABLE>
Salomon Brothers, the Company's global investment banking and securities
business, recorded pretax income of $56 million in the second quarter of 1995,
compared to a pretax loss of $410 million in the 1994 second quarter. For the
first six months of 1995, Salomon Brothers recorded pretax income of $116
million, compared to a pretax loss of $371 million in the first six month period
of 1994.
Salomon Brothers Client-Related Business recorded pretax income of $149 million
in the second quarter of 1995, which represented its best quarter since 1993,
and the fifth most profitable quarter since 1990. For the second quarter of
1994, Salomon Brothers' Client-Related Business reported a pretax loss of $291
million. For the first six months of 1995, the Client-Related Business reported
revenues of $820 million, more than double the $350 million reported for the
first six months of 1994. The equity underwriting business had a strong
performance during the second quarter of 1995, resulting in an improvement in
U.S. equity underwriting rankings to third for the quarter, on a lead basis.
Salomon Brothers advisory business continued its strong performance in the
quarter and debt underwriting revenues, which benefited from increased volumes
in global bond markets, also improved significantly. The lower 1995 six month
revenues versus 1994 for equity and debt underwriting reflect first quarter 1995
pretax losses of $13 million and $55 million, respectively, on Latin American
securities positions. Equity and fixed income secondary markets also showed
marked improvement compared to the same 1994 periods; particularly strong were
the U.S. and European equity secondary markets and corporate fixed income
secondary markets. The 1994 second quarter and six month revenues for fixed
income secondary markets reflect losses incurred due to the decline in market
value of certain inventory positions.
Salomon Brothers Proprietary Trading Business recorded pretax profits of $146
million in the first six months of 1995, compared with $93 million in the first
half of 1994. For the second quarter of 1995, Salomon Brothers' Proprietary
Trading Business reported a pretax loss of $93 million, compared to a $119
million pretax loss in the second quarter 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 over the first two quarters of 1995 ($239 million pretax profit in the
first quarter; $93 million pretax loss in the second quarter) reflects the
Company's mark-to-market accounting practices and is consistent with
management's expectations relative to current position risk levels.
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Noninterest Expenses
Dollars in millions
Three months Percent Six months Percent
Period ended June 30, 1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Compensation and employee-related expenses $ 336 $ 281 20 % $ 702 $ 669 5 %
Non-compensation expenses:
Technology $ 61 $ 56 9 % $ 121 $ 113 7 %
Occupancy 41 50 (18) 80 89 (10)
Professional services and business development 30 34 (12) 68 62 10
Clearing and exchange fees 17 14 21 32 34 (6)
Other 11 10 10 20 35 (43)
Total non-compensation expense $ 160 $ 164 (2)% $ 321 $ 333 (4) %
</TABLE>
During the second quarter, Salomon Brothers announced that it will be adding
compensation to the amount that would be payable under its previously announced
compensation system for participating managing directors in its Client-Related
Business. Salomon Brothers also announced that it will be revising its
compensation plans, effective October 1, 1995, the beginning of the new
compensation year. Under the revised plans, the compensation of Salomon
Brothers' Operating Committee will be tied to Salomon Brothers' return on equity
as well as to individual business unit performance. All other compensation will
be determined based on business unit, individual and firm performance, as well
as market considerations.
Compensation and employee-related expenses, the largest component of noninterest
expense, were $336 million in the 1995 second quarter, up 20% from the
comparable 1994 period. For the six month period ended June 30, 1995,
compensation and employee-related expenses rose a modest 5% from the comparable
1994 period. The increases are primarily the result of Salomon Brothers'
improved profitability.
Non-compensation expenses, in the aggregate, were $4 million or 2% lower in the
1995 second quarter than in the comparable 1994 quarter. Although technology
expenses were higher in the 1995 second quarter, primarily reflecting
workstation and office automation additions, the increase was offset by
reductions in occupancy and professional and business development expenses. The
decrease in occupancy expense is the result of a $20 million reserve related to
the Tokyo office relocation recorded in the second quarter of 1994, partially
offset by scheduled rent increases at several locations subsequent to the second
quarter of 1994. Professional services and business development expenses
decreased primarily because of expense reduction initiatives related to travel
expenses. For the six month period ending June 30, 1995, total non-compensation
expenses were $12 million or 4% lower than in the comparable 1994 period. Other
expenses decreased by $15 million or 43% during the 1995 six month period
primarily due to higher legal expenses in the 1994 six month period.
<PAGE>
<TABLE>
<CAPTION>
Phibro Division
Condensed Statement of Income
Dollars in millions
Three months Percent Six months Percent
Period ended June 30, 1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Revenues, net of interest $ (177) $ 132 n/m % $ 7 $ 205 (97) %
Compensation and employee-related expenses (21) 43 n/m 31 60 (48)
Other general and administrative expenses 6 7 (14) 15 13 15
Total noninterest expenses (15) 50 n/m 46 73 (37)
Income (loss) before taxes $ (162) $ 82 n/m % $ (39) $ 132 n/m %
</TABLE>
Phibro Division engages in counterparty flow business and trades for its own
account. Because of its proprietary trading activities, significant
quarter-to-quarter volatility in Phibro Division's results can be expected. For
the first six months of 1995, the Phibro Division recorded a pretax loss of $39
million compared with pretax earnings of $132 million in the first half of 1994.
The Phibro Division recorded a $162 million pretax loss in the second quarter of
1995, compared with $82 million of pretax income in the second quarter of 1994.
A year-to-date adjustment was made to compensation and employee-related expense
to reflect the net loss recorded in the second quarter of 1995; this adjustment
resulted in negative compensation and employee-related expense being reported
for the 1995 second quarter.
<TABLE>
<CAPTION>
Phibro USA
Condensed Statement of Income
Dollars in millions
Three months Percent Six months Percent
Period ended June 30, 1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Sales $ 2,629 $ 1,587 66 % $ 4,804 $ 3,198 50 %
Cost of Sales 2,612 1,583 65 4,820 3,147 53
Operating Profit 17 4 325 (16) 51 n/m
Net interest and other (6) (3) (100) (13) (8) (63)
Operating profit, net of interest and other 11 1 1,000 (29) 43 n/m
Compensation and employee-related expenses 6 7 (14) 13 17 (24)
Other expenses 4 4 0 8 9 (11)
Total noninterest expenses 10 11 (9) 21 26 (19)
Income (loss) before taxes $ 1 $ (10) n/m % $ (50) $ 17 n/m %
</TABLE>
Phibro USA, the Company's oil refining and marketing business, recorded pretax
earnings of $1 million in the second quarter of 1995, compared to a pretax loss
of $10 million in the second quarter of 1994. The improvement in Phibro USA's
1995 second quarter results was primarily due to stronger gasoline margins, but
was partially offset by a three-week unscheduled outage at one of its Texas
refineries. For the first six months of 1995, Phibro USA recorded a pretax loss
of $50 million, compared with pretax earnings of $17 million in the first half
of 1994. Results for the 1995 six 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. Additionally, Phibro USA's Houston refinery underwent a five week
scheduled shutdown for turnaround maintenance during the 1995 first quarter.
<TABLE>
<CAPTION>
SALOMON INC
Capital and Liquidity Management
Dollars in millions
June 30, March 31, December 31, September 30, June 30,
Quarter ended 1995 1995 1994 1994 1994
Average Weekly Balance Sheet Information:
<S> <C> <C> <C> <C> <C>
Government and agency securities - U.S. $ 32,904 $ 31,743 $ 34,621 $ 28,758 $ 31,398
Government and agency securities - non-U.S. 38,749 32,896 28,275 31,384 32,518
Financial options and contractual commitments 6,919 7,857 8,336 9,119 9,580
Other financial instruments owned 19,014 19,212 21,355 21,443 22,141
Total financial instrument inventories 97,586 91,708 92,587 90,704 95,637
Collateralized short-term financing agreements 61,163 63,779 64,058 64,572 56,653
Other assets 17,260 16,737 18,032 19,237 23,444
Average total assets $ 176,009 $ 172,224 $ 174,677 $ 174,513 $ 175,734
Period-end total assets $ 163,693 $ 164,956 $ 172,732 $ 158,486 $ 175,549
Period-end net assets* $ 106,644 $ 104,421 $ 105,227 $ 96,594 $ 107,181
Average net assets* $ 109,494 $ 102,459 $ 103,411 $ 102,154 $ 112,107
Long-term capital at period-end $ 16,715 $ 17,237 $ 16,138 $ 17,862 $ 17,923
Ratios at period end:
Working capital coverage 1.22 1.17 1.07 1.16 1.11
Total capital basis double leverage 0.91 0.85 0.87 0.85 0.88
Equity capital basis double leverage 1.24 1.19 1.18 1.23 1.31
Average net assets to total equity 24 22 23 22 23
Common shares outstanding (in millions) 106.2 106.1 105.8 105.8 105.7
<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 second quarter were $176 billion, unchanged from
last year's second quarter. 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-related 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 $2.5 billion at June 30, 1995, up 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 $119 million at June 30, 1995.
Book value per share decreased to $32.38 at June 30, 1995, from $32.65 at
December 31, 1994. During the first half of 1995, the Company's treasury share
repurchases were negligible. At June 30, 1995, shares authorized for additional
repurchase totaled 9.8 million shares.
Subsequent to June 30, 1995, Moody's reaffirmed its rating of the Company's
senior debt of Baa1 and commercial paper of P-2; Fitch lowered its rating of the
Company's senior debt from A- to BBB+ and commercial paper from F-1 to F-2;
Thomson BankWatch, Inc. lowered its rating of the Company's commercial paper
from TBW-1 to TBW-2; and Standard & Poor's placed the Company's long-term debt
on Creditwatch. The credit ratings of Salomon Swapco Inc, the Company's triple-A
rated derivatives subsidiary, have not been affected by these actions. 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
June 30, March 31, December 31, September 30, June 30,
Dollars in millions, except per share amounts 1995 1995 1994 1994 1994
For the quarter:
Revenues:
<S> <C> <C> <C> <C> <C>
Principal transactions, including net interest
and dividends $ 139 $ 653 $ (123) $ 188 $ (10)
Investment banking 154 22 109 121 86
Commissions and other 108 68 110 99 95
Revenues, net of interest expense 401 743 96 408 171
Noninterest expenses:
Compensation and employee-related 324 431 332 399 338
Other noninterest expenses 176 178 185 185 179
Total noninterest expenses 500 609 517 584 517
Income (loss) before taxes (99) 134 (421) (176) (346)
Income tax expense (benefit) (39) 53 (264) (72) (142)
Net income (loss) $ (60) $ 81 $ (157) $ (104) $ (204)
Annualized return on average common
stockholders' equity:
Primary (8.8) % 7.1 % (19.2) % (12.8) % (22.0)%
Fully diluted* (8.8) % 7.1 % (19.2) % (12.8) % (22.0)%
Income (loss) before taxes:
Salomon Brothers:
Client-Related Business $ 149 $ (179) $ (110) $ (62) $ (291)
Proprietary Trading Businesses (93) 239 (28) (114) (119)
Unallocated Charges - - (278) - -
Total Salomon Brothers 56 60 (416) (176) (410)
Phibro Division (162) 123 (24) (27) 82
Phibro USA 1 (51) 5 (4) (10)
Corporate and other 6 2 14 31 (8)
Total income (loss) before taxes $ (99) $ 134 $ (421) $ (176) $ (346)
Per common share:
Primary earnings (loss) $ (0.73) $ 0.59 $ (1.65) $ (1.13) $ (2.08)
Fully diluted earnings (loss)* (0.73) 0.59 (1.65) (1.13) (2.08)
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 43 1/4 40 1/8 42 48 1/4 52 5/8
Low market price 33 1/4 32 1/4 35 38 1/2 47 1/4
Ending market price 40 1/8 33 7/8 37 1/2 39 1/2 47 3/4
Book value at period-end 32.38 33.22 32.65 34.50 35.71
<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>
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.
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 July 11, 1995,
reporting under Item 5 ("Other Events") the issuance of a press
release.
The Company filed a Current Report on Form 8-K dated July 20, 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 August 11, 1995 /s/ Richard Carbone
Controller and
Chief Accounting
Officer
Date August 11, 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)
Six
Months
Ended
June 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 $ 35 $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see below) 2,899 4,919 4,644 4,373 5,704 6,032
Other adjustments (5) (3) 22 20 (4) (16)
Earnings as defined $ 2,929 $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
Fixed Charges:
Interest expense $ 2,878 $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 21 27 44 49 66 73
Fixed charges as defined $ 2,899 $ 4,919 $ 4,644 $ 4,373 $ 5,704 $ 6,032
Ratio of earnings to
fixed charges 1.01 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)
Six
Months
Ended
June 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 $ 35 $ (831) $ 1,465 $ 1,056 $ 919 $ 506
Add fixed charges (see below) 2,899 4,919 4,644 4,373 5,704 6,032
Other adjustments (5) (3) 22 20 (4) (16)
Earnings as defined $ 2,929 $ 4,085 $ 6,131 $ 5,449 $ 6,619 $ 6,522
Fixed Charges and
Preferred Dividends:
Interest expense $ 2,878 $ 4,892 $ 4,600 $ 4,324 $ 5,638 $ 5,959
Other adjustments 21 27 44 49 66 73
Fixed charges as defined 2,899 4,919 4,644 4,373 5,704 6,032
Preferred dividends (tax
equivalent basis) 60 129 83 131 121 105
Combined fixed charges
and preferred dividends $ 2,959 $ 5,048 $ 4,727 $ 4,504 $ 5,825 $ 6,137
Ratio of earnings to
combined fixed charges
and preferred dividends 0.99 * 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 six months ended June 30, 1995, earnings as defined were inadequate to cover fixed
charges, including preferred dividends. The amount by which fixed charges, including preferred
dividends, exceeded earnings as defined for the six months ended June 30, 1995 was $30 million.
** 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 SIX MONTHS ENDED JUNE 30,
1995 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 2,444
<RECEIVABLES> 5,376
<SECURITIES-RESALE> 37,577
<SECURITIES-BORROWED> 14,211
<INSTRUMENTS-OWNED> 99,116
<PP&E> 1,279
<TOTAL-ASSETS> 163,693
<SHORT-TERM> 8,878
<PAYABLES> 7,782
<REPOS-SOLD> 81,089
<SECURITIES-LOANED> 1,644
<INSTRUMENTS-SOLD> 42,371
<LONG-TERM> 14,799
<COMMON> 156
700
312
<OTHER-SE> 3,302
<TOTAL-LIABILITY-AND-EQUITY> 163,693
<TRADING-REVENUE> 118
<INTEREST-DIVIDENDS> 3,552
<COMMISSIONS> 170
<INVESTMENT-BANKING-REVENUES> 176
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2,878
<COMPENSATION> 755
<INCOME-PRETAX> 35
<INCOME-PRE-EXTRAORDINARY> 35
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
