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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File Number 1-4346
December 31, 1995
SALOMON INC
(Exact name of registrant as specified in its charter)
Delaware 22-1660266
(State of incorporation) (I.R.S. Employer Identification No.)
Seven World Trade Center, (212) 783-7000
New York, New York 10048 (Registrant's telephone number,
(Address of principal executive offices) including area code)
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $1 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Depositary Shares, Each Representing a
One-Twentieth Interest in a Share of
9.50% Cumulative Preferred Stock, Series C New York Stock Exchange
Depositary Shares, Each Representing a
One-Twentieth Interest in a Share of
8.08% Cumulative Preferred Stock, Series D New York Stock Exchange
Depositary Shares, Each Representing a
One-Twentieth Interest in a Share of
8.40% Cumulative Preferred Stock, Series E New York Stock Exchange
11.625% Debentures due 2015 New York Stock Exchange
6.75% DEC Common Equity-Linked Securities due 1996 American Stock Exchange
7.25% ORCL Common Equity-Linked Securities due 1996 American Stock Exchange
5.00% MSFT Common Equity-Linked Securities due 1996 American Stock Exchange
5.25% HWP Common Equity-Linked Securities due 1997 American Stock Exchange
7.625% SNPL Common Equity-Linked Securities due 1997 American Stock Exchange
6.50% AMGN Common Equity-Linked Securities due 1997 American Stock Exchange
6.125% PRI Common Equity-Linked Securities due 1997 American Stock Exchange
Securities registered pursuant to Number of shares of common stock
Section 12(g) of the Act: outstanding at February 29, 1996:
NONE 106,462,726
Aggregate market value at
February 29, 1996:
$4.1 billion
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Documents incorporated by reference:
Salomon Inc 1995 Annual Report Financial Information (incorporated in 10-K
Parts I, II and IV) Proxy Statement for the 1996 Annual Meeting of
Stockholders (incorporated, in part, in 10-K Parts III and IV)
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PART I
Item 1. Business
Salomon Inc ("the Company") was incorporated in 1960 under the laws of
the State of Delaware. At December 31, 1995, the Company had 8,439
full time employees. Information concerning the business of Salomon
Inc under the following captions in Exhibit 13, "Salomon Inc 1995
Annual Report Financial Information," is deemed part of this Annual
Report on Form 10-K and is hereby incorporated herein by reference:
Salomon Inc - Overview of 1995 (on pages 12 through 14)
Salomon Brothers - Description of Business
(on pages 16 through 18)
Phibro - Description of Business (on page 22)
Basis Petroleum - Description of Business
(on pages 23 through 25)
Note 1 Revenues by Business Unit (on pages 65 through 68)
Note 2 Industry Segment and Geographic Data
(on pages 69 through 70)
Note 10 Capital Requirements (on page 76)
Item 2. Properties
Since 1991, the Company's headquarters has been Seven World Trade
Center, located in lower Manhattan, New York. In 1993, a subsidiary of
Salomon Brothers purchased two long-term leasehold interests in
property located in London that was previously leased on a short-term
basis. Salomon Brothers' 132,000-square-foot operational support
facility in Tampa, Florida was completed and became fully operational
in 1992. The Tampa facility provides clearing and operational support
services primarily for Salomon Brothers' New York-based sales, trading
and investment banking activities.
Further information concerning the Company's properties under the
following captions in Exhibit 13, "Salomon Inc 1995 Annual Report
Financial Information," is deemed part of this Annual Report on Form
10-K and is hereby incorporated herein by reference:
Salomon Brothers - Description of Business
(on pages 16 through 18)
Phibro - Description of Business (on page 22)
Basis Petroleum - Description of Business
(on pages 23 through 25)
Note 4 Property, Plant and Equipment (on page 71)
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Item 3. Legal Proceedings
On August 9, 1991, the Company announced that it had uncovered
irregularities by certain employees of its indirect wholly owned subsidiary
Salomon Brothers Inc ("SBI") in connection with certain auctions of U.S.
Treasury securities. The remaining legal proceedings arising out of these
events, each of which had been pending before the United States District Court
for the Southern District of New York, were concluded during the fourth quarter
of 1995. Plaintiffs in Three Crown Limited Partnership, et al. v. Salomon
Brothers Inc. et al., 92 Civ. 3142, who had opted out of the Treasury litigation
settlement and continued actively to pursue claims against SBI and other
defendants, agreed to settle the action in November 1995. Pursuant to the
settlement, the action was dismissed with prejudice by the court on November 22,
1995. In addition, the settlement of the shareholder derivative
action, In re Salomon Inc Shareholders' Derivative Litigation, 91 Civ. 5500
(S.D.N.Y., consolidated August 30, 1991), was approved by the Court on December
19, 1995. Also, pursuant to the settlement of the shareholder derivative action,
John Gutfreund has withdrawn his appeal of the court's dismissal of his
petition to vacate the New York State Stock Exchange arbitration panel's
decision of May 13, 1994 with respect to certain compensation-related claims.
In September 1992, Harris Trust and Savings Bank (as trustee for Ameritech
Pension Trust ("APT")), Ameritech Corporation, and an officer of Ameritech filed
suit against SBI and Salomon Brothers Realty Corporation ("SBRC") in the United
States District Court for the Northern District of Illinois (Harris Trust
Savings Bank, not individually but solely as trustee for the Ameritech Pension
Trust, Ameritech Corporation, and John A. Edwardson v. Salomon Brothers Inc and
Salomon Brothers Realty Corp., (92 Civ. 5883 (MEA)). The second amended
complaint alleges that three purchases by APT from Salomon of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
MOA portfolio and for the Best portfolio violated RICO and state law. SBI had
acquired the participation interests in transactions in which it purchased as
principal mortgage notes issued by MOA and Best to finance purchases of motel
portfolios; 95% of three such interests and 100% of one such interest were sold
to APT for purchase prices aggregating approximately $20.9 million. Plaintiffs'
second amended complaint seeks (i) a judgment on the ERISA claims in the amount
of the purchase prices of the four participation interests (approximately $20.9
million), for rescission and for disgorgement of profits, as well as other
relief, and (ii) a judgment on the claims brought under RICO and state law in
the amount of $12.3 million, with damages trebled to $37 million on the RICO
claims and punitive damages in excess of $37 million on certain of the state law
claims as well as other relief. SBI and SBRC answered the second amended
complaint in part, moved to dismiss in part and asserted counterclaims against
plaintiff Ameritech Corp. On August 16, 1993 the court (i) dismissed the RICO
claims as well as plaintiffs' claims for breach of contract and unjust
enrichment; (ii) denied SBI's motion to dismiss one of the ERISA claims (which
alleges that SBI participated in a fiduciary's breach); and (iii) denied
Ameritech's motion to dismiss SBI's counterclaims. Discovery with respect to the
remaining claims is ongoing. Each of the Department of Labor and the Internal
Revenue Service had advised SBI that it was reviewing the transactions in which
APT acquired such participation interests. In May 1995 plaintiffs and defendants
served cross motions for summary judgement. Briefing on those motions for
summary judgement was completed in November 1995 and are pending for summary
judgement. The Department of Labor, however, has advised Salomon that its
investigation has been concluded. With respect to the Internal Revenue Service
investigation, SBI and Salomon Brothers Realty Corp. have consented to
extensions of time for the assessment of excise taxes which may be claimed to be
due with respect to the transactions for the year 1987.
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Golder, Thoma, Cressey Fund III Limited Partnership, et al. v. Salomon
Brothers Inc is a lawsuit brought by Golder, Thoma, Cressey Fund III Limited
Partnership and three individuals purporting to represent eleven members of
senior management of Health Care and Retirement Corporation of America ("HCRA"),
in the Circuit Court of Cook County, Illinois on July 10, 1992 against SBI in
connection with SBI's performance in providing financial advisory services for
the proposed acquisition by the plaintiffs of HCRA in 1991. An amended complaint
was filed on November 14, 1994 that added Salomon Brothers Realty Corp. as a
defendant and certain lower-level members of management of HRCA as plaintiffs.
The lawsuit asserts claims for negligence, breach of fiduciary duty, negligent
misrepresentation and breach of contract. Plaintiffs seek to recover damages
purported to exceed $190 million due to their alleged inability to complete the
acquisition at an advantageous price, $6 million of alleged fees and expenses,
punitive damages and attorneys' fees, as well as costs and other relief.
Discovery was concluded in August of 1995. The court has set a trial date of
April 8, 1996.
Between May 1994 and the present, SBI, along with a number of other
broker-dealers, was named as a defendant in approximately 25 federal court
lawsuits and two state court lawsuits, principally alleging that companies that
make markets in securities traded on Nasdaq violated the federal antitrust laws
by conspiring to maintain a minimum spread of $.25 between the price bid and the
priced asked for certain securities. The federal lawsuits were consolidated for
pre-trial purposes in the Southern District of New York in the fall of 1994
under the caption In re Nasdaq Market-Makers Antitrust Litigation, United States
District Court, Southern District of New York No. 94-CIV-3996(RWS); M.D.L. No.
1023. One state court suit, Lawrence A. Abel v. Merrill Lynch & Co., Inc., et
al., Superior Court of San Diego, Case No. 677313, has been stayed. The other
state court suit has been removed by the defendants to federal court under the
caption Robert Kevin Tisdale v. A.G. Edwards & Sons, Inc., et al., M.D. Ala.,
Case No. CV 96-D-66-N, where the defendants have requested that the Judicial
Panel on Multidistrict Litigation ("JPML") consolidate it with the federal
suits. Also pending in the Alabama case are the plaintiffs' motion to remand the
case to state court and the defendants' motion to dismiss the complaint.
In the federal suits, the plaintiffs purport to represent the class of
persons who bought what they currently estimate to be approximately 1650
securities on Nasdaq between May 1, 1989 and May 27, 1994. They seek unspecified
monetary damages, which would be trebled under the antitrust laws. The
plaintiffs also seek injunctive relief, as well as attorneys' fees and the costs
of the action. (The state cases, brought under California and Alabama law, seek
similar relief.) Plaintiffs in the federal suits filed an amended consolidated
complaint that defendants answered in December 1995. Discovery has begun and
plaintiffs have recently filed their motion for class certification, which will
be considered by the court in late spring.
The Antitrust Division of the Department of Justice is conducting an
industry-wide investigation into the Nasdaq market. It has issued civil
investigative demands to Salomon seeking interrogatory responses and the
production of documents relating to Salomon's role as a market maker in Nasdaq
stocks. The Securities and Exchange Commission is also conducting an
industry-wide investigation of various Nasdaq market practices. SBI has received
various subpoenas for documents and depositions relating to the Nasdaq market as
part of the Securities and Exchange Commission investigation.
Under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), under certain circumstances a potentially
responsible party ("PRP"), may be held jointly and severally liable, without
regard to fault, for response costs at a CERCLA site. A PRP's ultimate cost at a
site generally depends on its involvement with the site and the nature and
extent of contamination, the remedy selected, the role of other PRPs in creating
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the alleged contamination and the availability of contribution from those PRPs,
as well as any insurance or indemnification agreements which may apply. In most
cases, both the resolution of the complex issues involved and any necessary
remediation expenditures occur over a number of years.
In 1988, a subsidiary of Salomon Inc, The S.W. Shattuck Chemical Company,
Inc. ("Shattuck"), along with over 350 industrial, municipal and other entities,
was named by the federal Environmental Protection Agency ("EPA") as a PRP
subject to liability under CERCLA at a site, Section 6 of the Lowry Landfill in
Arapaho County, Colorado ("Lowry"), owned by the city and county of Denver
("Denver"). Shattuck was named a PRP based on disposal of its wastes at Lowry.
In March 1994, EPA selected a remedy for Lowry, estimated to cost approximately
$94 million. Based on current EPA estimates, and under the terms of settlements
between the Company, Shattuck and certain PRPs, the Company's ultimate share of
remediation costs is not expected to exceed $13 million of which approximately
60% has been paid into a trust fund.
In August 1992, the EPA issued a Unilateral Administrative Order ("the
Order") for remedial design/remedial action to be performed by Shattuck under
CERCLA at a site (Bannock Street), which includes property owned by, and a metal
processing plant previously operated by, Shattuck in Denver, Colorado. The Order
provides that, in the course of performing the remedial design/remedial action,
Shattuck shall demonstrate financial assurance in an amount not less than $26.6
million. Shattuck has performed significant remediation activities at the site
in accordance with the Order since August 1992. In May 1994, Denver issued a
Cease and Desist Order ("CD Order") to Shattuck to stop work under the Order. In
August 1994, EPA filed suit in the Federal District Court in Colorado seeking to
set aside the CD Order. Pending resolution of the suit, Shattuck complied with
the CD Order. On January 23, 1996, the Court ruled in favor of EPA, enjoining
enforcement of the CD Order. Following the Court's ruling, Shattuck has resumed
remediation activities at the site. Denver has moved in the District Court for a
stay of judgement and suspension of injunction pending appeal and has appealed
the District Court's decision to the United States Court of Appeals for the
Tenth Circuit. To date, there has not been a determination on either Denver's
motion or its appeal. In March, 1996 Shattuck paid $2,402,278 to settle EPA's
claim for response costs incurred prior to April 1, 1995.
In May 1993, the National Zinc site in Bartlesville, Oklahoma was proposed
for listing as a superfund site on EPA's National Priorities List under CERCLA.
Final listing remains subject to EPA's determination. In May 1993, both Salomon
Inc and a current subsidiary received notices from EPA of designation as PRPs
with respect to National Zinc. The National Zinc site was defined by EPA to
include a smelter facility which had been owned by a former subsidiary of the
Company and an eight square mile area surrounding such facility. The Company and
its current subsidiary have taken issue with the PRP designations. In October
1993, the Company and two other unrelated parties were designated by EPA as PRPs
with respect to a removal action involving the area at the National Zinc site
surrounding the smelter facility. In February 1994, EPA issued to the Company
and two other PRPs a Unilateral Administrative Order ("UAO") with respect to
this removal action. The Company and one other PRP, Cyprus Amax Minerals Company
("Cyprus") have complied with the UAO and have completed the removal work
required under the UAO.
In November 1993, EPA notified the Company and the same two other PRPs of
its intent to conduct a remedial investigation, feasibility study and remedial
design ("RI/FS/RD") for the area of the site surrounding the smelter facility
and offered the PRPs the opportunity to do this work. EPA also stated its
willingness to consider a State Delegation Pilot Project whereunder PRPs,
including the Company, could conduct the RI/FS/RD pursuant to an Administrative
Order of Consent with the State of Oklahoma, with limited oversight by EPA. In
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April 1994, the Company, Cyprus and the City of Bartlesville entered into a
Consent Agreement and Final Order ("CAFO") with the Oklahoma Department of
Environmental Quality ("ODEQ") to conduct the RI/FS/RD. The RI/FS activities
required by the CAFO have been timely completed to date. The Company estimates
that its cost to complete the remedial design for Operable Unit 2, relating to
protection of ecologically sensitive areas at the National Zinc site surrounding
the smelter facility, will be less than $1 million. In December 1994, ODEQ
issued a Record of Decision selecting a remedy for Operable Unit 1, relating to
protection of human health, covering the area at the National Zinc site
surrounding the smelter facility. The selected remedy is estimated to cost
approximately $24.3 million. In August 1995, Cyprus and the City of Bartlesville
(but not the Company) entered into a CAFO with ODEQ to perform the remediation
of Operable Unit 1.
In February 1994, Horseheads Industries, Inc. D/B/A Zinc Corporation of
America ("ZCA"), the current owner of the smelter facility at the National Zinc
site, filed suit in the United States District Court for the Northern District
of Oklahoma against the Company, St. Joe Minerals Company ("St. Joe"), Fluor
Corporation ("Fluor") and Cyprus alleging that the defendants are liable to it
for response costs incurred in connection with the smelter facility under CERCLA
because of the release of hazardous substances during periods of ownership or
operation by them or their affiliates or predecessors in interest. In August
1994, a settlement agreement was entered into between ZCA, Fluor/St. Joe and the
Company (but not Cyprus), allocating past and future response costs between the
settling parties as to both. With respect to future remediation (the
determination and implementation of which is expected to take several years) and
the costs thereof, the settlement agreement established a management committee
comprised of representatives of the settling parties to oversee study and
clean-up of the facility and the costs associated therewith. Pursuant to the
settlement, the Company and Fluor assumed ZCA's role in the litigation,
including defense of ZCA against a pending counterclaim of Cyprus, and pursuit
of claims against Cyprus. Cyprus subsequently counter-claimed against the
Company for recovery of response costs incurred by Cyprus, commencing in August
1995, under its CAFO with ODEQ. The litigation proceeded to trial in December
1995. The Court has ruled that Cyprus is liable for activities conducted at the
smelter facility, but has not, to date, ruled on the liability of the other
parties nor determined the allocation among the parties of response costs being
incurred at the National Zinc site. The Company's future costs related to the
remediation of the smelter facility and the surrounding area cannot be
determined at this time, because the timing, nature and extent of any such
remediation are still under study, and the Company's allocable portion of such
remediation is still undecided by the Court.
In July 1994, a lawsuit was filed in the Federal court in Texas against
Phibro Energy USA, Inc., ("Phibro USA") a subsidiary of the Company, by the
Friends of the Earth, Inc. The action, a citizen's suit brought under Section
505 of the Federal Water Pollution Control Act, alleges violations by Phibro USA
of the monitoring, record keeping and discharge limitations of its Houston
refinery wastewater discharge permit during the period from September 1989 to
the date of the suit. Subsequent to the filing of the lawsuit, the EPA filed an
Administrative Complaint against Phibro USA, alleging substantially the same
violations under the Clean Water Act and implementing regulations. Phibro USA
settled the EPA's claim. In March 1995, Phibro USA's motion for summary judgment
against the plaintiff was granted and judgment was entered in favor of Phibro
USA. Plaintiff appealed to the United States Court of Appeals for the Fifth
Circuit, which, to date, has not rendered its decision. Accordingly, Phibro
USA's liability, if any, with respect to the claim alleged in the lawsuit cannot
be determined at this time.
Region 6 of EPA ("EPA Region 6") is seeking aggregate proposed penalties of
$237,066 in three actions filed against Phibro USA by EPA Region 6 following a
"multimedia inspection" of Phibro USA's Houston refinery in 1994, i.e. an action
alleging certain violations of the Clean Air Act filed against Phibro USA on
September 29, 1994 by the Director of the Air, Pesticides and Toxics Division of
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EPA Region 6; an action alleging certain violations of the Resource Conservation
and Recovery Act 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 filed
against Phibro USA on March 13, 1995 by the Director for Environmental Services
Division of EPA Region 6.
In addition, other legal proceedings are pending against or involve the
Company and its subsidiaries. Based on information currently available and
established reserves, the Company believes the ultimate resolution of pending
legal proceedings will not result in any material adverse impact on the
Company's consolidated financial condition; however, such resolution could have
a material adverse impact on operating results in future periods depending in
part on the results for such periods.
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Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of 1995.
Executive Officers of the Registrant at December 31, 1995
Name and Age Office
- ------------ ------
Jerome H. Bailey (43) Chief Financial Officer since June 1993;
previously employed at Morgan Stanley in
various executive capacities for more than
five years
Richard J. Carbone (48) Controller since June 1995; previously
employed by Bankers Trust Company in various
executive capacities for more than five years
Robert E. Denham (50)* Chairman and Chief Executive Officer since
June 1992; previously General Counsel from
September 1991; previously a partner in the
law firm of Munger, Tolles & Olson, Los
Angeles, California, for more than four years
Gedale B. Horowitz (63)* Executive Vice President since 1981
John G. Macfarlane (41) Treasurer of the Company and Salomon Brothers
Inc since 1989; resigned as Treasurer
effective March 6, 1996
Deryck C. Maughan (48)* Executive Vice President since May 1993;
Chairman and Chief Executive Officer of
Salomon Brothers Inc since May 1992;
previously Chief Operating Officer of Salomon
Brothers Inc from August 1991; Vice Chairman
of Salomon Brothers Inc from January 1991 to
August 1991; Chairman of Salomon Brothers Asia
Limited from 1986 to 1991
Robert H. Mundheim (63) Executive Vice President and General Counsel
since December 1993; General Counsel since
September 1992; previously co-chairman of the
law firm Fried, Frank, Harris, Shriver and
Jacobson, New York, from March 1990 after
having served as Dean of the University of
Pennsylvania Law School for more than seven
years
* Also a Director of Salomon Inc
Officers of the Registrant are elected annually at the May meeting of the
Company's Board of Directors that follows the Annual Meeting of Stockholders.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Information concerning the market for the Registrant's common equity
and related stockholder matters in Exhibit 13, "Salomon Inc 1995
Annual Report Financial Information," under the caption "Common Stock
Data" on page 93, is deemed part of this Annual Report on Form 10-K
and is hereby incorporated herein by reference.
Item 6. Selected Financial Data
Selected financial data in Exhibit 13, "Salomon Inc 1995 Annual Report
Financial Information," under the caption "Five-Year Summary of
Selected Financial Information" on page 94, is deemed part of this
Annual Report on Form 10-K and is hereby incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained under the following captions in
Exhibit 13, "Salomon Inc 1995 Annual Report Financial Information," is
deemed part of this Annual Report on Form 10-K and is hereby
incorporated herein by reference:
Financial Highlights (page 1)
Overview of 1995 (on pages 12 through 14)
Business Unit Information (on pages 15 through 26)
Derivative Instruments (on pages 27 through 33)
Capital and Liquidity Management (on pages 34 through 43)
Risk Management (on pages 44 through 52)
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company and subsidiaries,
together with the Summary of Options and Contractual Commitments, the
Summary of Accounting Policies, the Notes to Consolidated Financial
Statements and the Report of Independent Public Accountants, contained
in Exhibit 13, "Salomon Inc 1995 Annual Report Financial Information"
on pages 54 through 91, and the information appearing under the
caption "Selected Quarterly Financial Data (Unaudited)" on page 92 of
such Exhibit are deemed part of this Annual Report on Form 10-K and
are hereby incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants reportable
herein.
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PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors -
Information concerning directors of the Registrant is contained
under the caption "Election of Directors" in the Proxy Statement
for the 1996 Annual Meeting of Stockholders, which information is
hereby incorporated herein by reference.
(b) Executive Officers -
Information concerning executive officers of the Registrant is
presented in Part I of this Annual Report on Form 10-K.
Item 11. Executive Compensation
Information concerning executive compensation is contained under the
captions "Election of Directors - Executive Compensation" and
"Election of Directors - Board of Directors' Role, Meetings,
Committees and Fees" in the Proxy Statement for the 1996 Annual
Meeting of Stockholders, which information is hereby incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is contained under the caption "Election of Directors -
Information as to Certain Stockholdings" in the Proxy Statement for
the 1996 Annual Meeting of Stockholders, which information is hereby
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is contained under the caption "Election of Directors - Certain
Transactions" in the Proxy Statement for the 1996 Annual Meeting of
Stockholders, which information is hereby incorporated herein by
reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules
(1) Financial Statements
The Consolidated Financial Statements of the Company and subsidiaries, together
with the Summary of Options and Contractual Commitments, Summary of Accounting
Policies, the Notes to Consolidated Financial Statements and the Report of
Independent Public Accountants, dated February 6, 1996, are contained in
Exhibit 13, "Salomon Inc 1995 Annual Report Financial Information," and are
hereby incorporated herein by reference.
(2) Schedules
(Schedules are omitted because the required information either is not applicable
or is included in the financial statements or the notes thereto.)
(3) Exhibits
3.a Certificate of Incorporation of the Company, as amended (incorporated
by reference to Exhibits 3 to Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1987 and June 30, 1986, Exhibit 4(a) to
Registration Statement Number 2-84733 on Form S-3 filed June 30, 1983,
Exhibit 4 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1987, Exhibit A to Exhibit 1 to Registration Statement
on Form 8-A filed February 11, 1988, Exhibit 3 to Current Report on
Form 8-K dated June 13, 1991, Exhibit 4(a) to Current Report on Form
8-K dated February 22, 1993, and Exhibit 4(a) to Current Report on
Form 8-K dated February 12, 1996)
3.b By-laws of the Company, as amended February 26, 1995 (incorporated by
reference to Exhibit 3.b to Annual Report on Form 10-K for the year
ended December 31, 1994)
4.a Certificate of Incorporation of the Company. See Exhibit 3(a) above.
4.b Rights Agreement dated as of February 8, 1988 between Salomon Brothers
Inc and Morgan Shareholders Services Trust Company and related letter
dated February 9, 1988 from Berkshire Hathaway Inc. (incorporated by
reference to Exhibit 28 to Annual Report on Form 10-K for the year
ended December 31, 1987)
4.c First Amendment dated December 7, 1988 to Rights Agreement dated as of
February 8, 1988 between Salomon Inc and Morgan Shareholder Services
Trust Company (incorporated by reference to Exhibit 28 to Annual
Report on Form 10-K for the year ended December 31, 1988)
4.d Contract dated September 27, 1987 between Berkshire Hathaway Inc. and
Salomon Inc and letter dated September 28, 1987 amending said contract
(incorporated by reference to Exhibit 10(c) to Annual Report on Form
10-K for the year ended December 31, 1987)
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Item 14. (continued)
(c) Exhibits (continued)
4.e The Company agrees to furnish the Securities and Exchange Commission
upon its request a copy of any instrument which defines the rights of
holders of long-term debt of the Company and its consolidated
subsidiaries that does not exceed 10 percent of the total consolidated
assets of the Company.
10.a Lease between 7 World Trade Center Company and Salomon Inc dated
November 23, 1988 (incorporated by reference to Exhibit 10(a) to the
Annual Report on Form 10-K, as amended, for the year ended December
31, 1991)
10.b Foundation Agreement for the creation of the Joint Enterprise "White
Nights" between Varyeganneftegaz Production Association, Phibro Energy
Production, Inc. and Anglo-Suisse (U.S.S.R.) L.P. dated November 1,
1990 (incorporated by reference to Exhibit 10(b) to the Annual Report
on Form 10-K, as amended, for the year ended December 31, 1991)
10.c Charter of the Joint Enterprise "White Nights" (incorporated by
reference to Exhibit 10(c) to the Annual Report on Form 10-K, as
amended, for the year ended December 31, 1991)
10.d Non-Qualified Stock Option Plan of 1984 (incorporated by reference to
Exhibit A to the Proxy Statement for the 1988 Annual Meeting of the
Stockholders)
12.a* Calculation of Ratio of Earnings to Fixed Charges
12.b* Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends
13* Salomon Inc 1995 Annual Report Financial Information (furnished for
the information of the Securities and Exchange Commission and not
deemed "filed" as part of this Report except for those portions which
are expressly incorporated by reference)
21* Subsidiaries of the Registrant
23* Consent of Independent Public Accountants
24* Powers of Attorney
27* Financial Data Schedule
99.a Copies of the settlement documents relating to the resolution of
certain governmental investigations with respect to the U.S. Treasury
auction and related matters (incorporated by reference to Exhibit
28(a) to the Annual Report on Form 10-K for the year ended December
31, 1992)
99.b Copies of the amended consolidated complaints filed in connection with
In re Salomon Inc Securities Litigation, In re Salomon Brothers
Treasury Litigation and In re Salomon Inc Shareholders' Derivative
Litigation (incorporated by reference to Exhibit 28(b) to the Annual
Report on Form 10-K for the year ended December 31, 1992)
11
<PAGE> 13
Item 14. (continued)
(c) Exhibits (continued)
99.c Summaries of the complaints filed against the Company, SBI and certain
present and former directors, officers and employees of the Company
and SBI in the six individual actions named in Item 3 with respect to
the U.S. Treasury auction and related matters (incorporated by
reference to Exhibit 28(c) to the Annual Report on Form 10-K for the
year ended December 31, 1992)
99.d Copies of the six complaints summarized in Exhibit 28(c) which were
filed against the Company, SBI or certain present and former
directors, officers and employees of the Company and SBI with respect
to the U.S. Treasury auction and related matters (incorporated by
reference to Exhibit 28(c) to the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1991; Exhibit 28(h)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1991; Exhibit 28(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1992; Exhibit 28(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1992; Exhibit 28(f) to the Company's Current Report on Form 8-K dated
September 16, 1991 and Exhibits 28(b) and (c) to the Company's Current
Report on Form 8-K dated July 28, 1992).
* Filed herewith
12
<PAGE> 14
Item 14. (continued)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January 23, 1996,
reporting under Item 5 ("Other Events:") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits").
The Company filed a Current Report on Form 8-K dated February 1, 1996,
reporting under Item 5 ("Other Events:") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits").
The Company filed a Current Report on Form 8-K dated February 12,
1996, reporting under Item 7 ("Financial Statements, Pro Forma
Financial Information and Exhibits").
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 29th day of March, 1996.
SALOMON INC By /s/ Arnold S. Olshin
- ------------------------------- --------------------------------
(Registrant) (Secretary)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Robert E. Denham Chief Executive Officer March 29, 1996
and Director
Jerome H. Bailey Chief Financial Officer March 29, 1996
Richard J. Carbone Chief Accounting Officer March 29, 1996
Dwayne O. Andreas* Director March 29, 1996
Warren E. Buffett* Director March 29, 1996
Claire M. Fagin* Director March 29, 1996
John L. Haseltine* Director March 29, 1996
Gedale B. Horowitz* Director March 29, 1996
Deryck C. Maughan* Director March 29, 1996
David O. Maxwell* Director March 29, 1996
William F. May* Director March 29, 1996
Charles T. Munger* Director March 29, 1996
Shigeru Myojin* Director March 29, 1996
Louis A. Simpson* Director March 29, 1996
Robert G. Zeller* Director March 29, 1996
*The undersigned, by signing his or her name hereto, does hereby sign this
report on behalf of each of the above-indicated directors of the Registrant
pursuant to powers of attorney, executed on behalf of each such director, on the
29th day of March, 1996.
By /s/ Arnold S. Olshin
-----------------------------------------
(Attorney-In-Fact)
14
<PAGE> 16
SALOMON INC
FORM 10-K EXHIBIT INDEX
Certain exhibits to this Form 10-K have been incorporated by reference in Part
IV Item 14. The following exhibits are being filed herewith:
Exhibit Number Description
12.a Calculation of Ratio of Earnings to Fixed Charges
12.b Calculation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
13 Salomon Inc 1995 Annual Report Financial Information
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
24 Powers of Attorney
27 Financial Data Schedule
15
<PAGE> 1
EXHIBIT 12(a)
SALOMON INC AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
Dollars in millions 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes and
cumulative effect of change in
accounting principles $ 708 $ (831) $1,465 $1,056 $ 919
Add fixed charges (see below) 5,825 4,919 4,644 4,373 5,704
Other adjustments (11) (3) 22 20 (4)
------- ------- ------ ------ -------
Earnings as defined $ 6,522 $ 4,085 $6,131 $5,449 $ 6,619
======= ======= ====== ====== =======
Fixed Charges:
Interest expense $ 5,782 $ 4,892 $4,600 $4,324 $ 5,638
Other adjustments 43 27 44 49 66
------- ------- ------ ------ -------
Fixed charges as defined $ 5,825 $ 4,919 $4,644 $4,373 $ 5,704
======= ======= ====== ====== =======
Ratio of earnings to
fixed charges 1.12 0.83* 1.32 1.25 1.16
======= ======= ====== ====== =======
</TABLE>
NOTE:
The ratio of earnings to fixed charges is calculated by dividing fixed
charges into the sum of income before income 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.
<PAGE> 1
EXHIBIT 12(b)
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
Dollars in millions 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes and
cumulative effect of change in
accounting principles $ 708 $ (831) $1,465 $1,056 $ 919
Add fixed charges (see below) 5,825 4,919 4,644 4,373 5,704
Other adjustments (11) (3) 22 20 (4)
------- ------- ------ ------ -------
Earnings as defined $ 6,522 $ 4,085 $6,131 $5,449 $ 6,619
======= ======= ====== ====== =======
Fixed Charges and
Preferred Dividends:
Interest expense $ 5,782 $ 4,892 $4,600 $4,324 $ 5,638
Other adjustments 43 27 44 49 66
------- ------- ------ ------ -------
Fixed charges as defined 5,825 4,919 4,644 4,373 5,704
Preferred stock dividends (tax
equivalent basis) 106 129 83 131 121
------- ------- ------ ------ -------
Combined fixed charges
and preferred dividends $ 5,931 $ 5,048 $4,727 $4,504 $ 5,825
======= ======= ====== ====== =======
Ratio of earnings to
combined fixed charges
and preferred dividends 1.10 0.81* 1.30 1.21 1.14
======= ======= ====== ====== =======
</TABLE>
NOTES:
The ratio of earnings to combined fixed charges and preferred dividends was
calculated by dividing the sum of fixed charges and tax equivalent preferred
dividends into the sum of earnings before income taxes and fixed charges. Fixed
charges consist of interest expense, including capitalized interest and a
portion of rental expense representative of the interest factor.
The preferred stock dividend amounts represent the pretax earnings necessary to
cover preferred dividends after adjusting for the effects of interest rate
swaps, which effectively convert these fixed rate obligations into variable rate
obligations.
* For the year ended December 31, 1994, earnings as defined were inadequate to
cover fixed charges, including preferred dividends. The amount by which
fixed charges, including preferred dividends, exceeded earnings as defined
for the year ended December 31, 1994 was $963 million.
<PAGE> 1
Exhibit 13
----------
SALOMON INC
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1995 1994 1993 1992 1991
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes and cumulative effect of
change in accounting principles by business unit:
Salomon Brothers $ 704 $ (963) $ 1,575 $ 1,390 $ 1,036
Phibro 85 81 (15) (194) 47
Basis Petroleum (91) 18 (46) (47) (80)
Corporate and Other 10 33 (49) (93) (84)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principles $ 708 $ (831) $ 1,465 $ 1,056 $ 919
================================================================================================================================
Net income (loss) $ 457 $ (399) $ 827 $ 550 $ 507
================================================================================================================================
Earnings (loss) available for fully diluted earnings (loss)
per common share $ 437 $ (461) $ 817 $ 546 $ 505
================================================================================================================================
Return on average common stockholders' equity:
Primary 10.8% (11.7)% 21.9% 13.6% 13.9%
Fully diluted* 10.3 (11.7) 19.3 12.9 12.9
================================================================================================================================
Per common share:
Primary earnings (loss) $ 3.64 $ (4.31) $ 7.01 $ 4.18 $ 3.90
Fully diluted earnings (loss)* 3.50 (4.31) 6.28 4.05 3.79
Cash dividends .64 .64 .64 .64 .64
Book value at year-end 35.84 32.65 37.93 32.06 28.76
================================================================================================================================
Capital and liquidity:
Stockholders' equity $ 4,143 $ 3,792 $ 4,546 $ 3,631 $ 3,367
Redeemable preferred stock 560 700 700 700 700
Long-term capital 15,433 16,138 16,834 11,735 10,024
Equity capital basis double leverage ratio** 1.19 1.18 1.45 1.61 1.65
Total capital basis double leverage ratio .98 .87 .96 1.15 1.21
Working capital coverage ratio 1.10 1.07 1.32 .95 .91
================================================================================================================================
</TABLE>
Salomon Brothers' "Income (loss) before income taxes and cumulative effect of
change in accounting principles" included fourth quarter pretax charges of $278
million in connection with the resolution of unreconciled balances related to
Salomon Brothers' London-based companies and the completion of a detailed review
of Salomon Brothers' general ledger accounts related to interest rate swaps in
1994, and pretax charges of $185 million and $200 million in connection with the
U.S. Treasury auction and related matters in 1992 and 1991, respectively. Net
income and earnings per share data for 1993 include a $37 million aftertax
cumulative charge to reflect a change in accounting principles for certain
postretirement benefits; fully diluted return on average common stockholders'
equity is presented before the effect of the charge.
* Assumes conversion of convertible notes and redeemable preferred stock,
unless such assumptions result in higher returns on equity or earnings
per share than determined under the primary method.
** Includes redeemable preferred stock as equity.
Graph # 1 (See Appendix A) Graph # 2 (See Appendix A)
1
<PAGE> 2
TABLE OF CONTENTS
12
OVERVIEW OF 1995
15
BUSINESS UNIT INFORMATION
27
DERIVATIVE INSTRUMENTS
34
CAPITAL AND LIQUIDITY MANAGEMENT
44
RISK MANAGEMENT
53
MANAGEMENT'S RESPONSIBILITY FOR COMPLIANCE AND FINANCIAL REPORTING
54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
55
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
92
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
93
COMMON STOCK DATA
94
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
SALOMON INC
OVERVIEW OF 1995
Salomon Inc (referred to herein, together with its subsidiaries, as "the
Company") conducts global investment banking, global securities and commodities
trading, and U.S. oil refining and gathering activities. Investment banking
activities are conducted by Salomon Brothers Holding Company Inc and its
subsidiaries ("Salomon Brothers"), including Salomon Brothers Inc ("SBI").
Salomon Brothers provides capital raising, advisory, research and trading
services to its customers, and executes proprietary trading strategies on its
own behalf. The Company's commodities dealer business, formerly conducted by
Salomon Inc's Phibro Division and certain subsidiaries, as of January 1, 1996,
are conducted by the Company's wholly-owned subsidiary, Phibro Inc. and its
subsidiaries ("Phibro").Oil refining and gathering activities are conducted by
Phibro Energy USA, Inc., which, effective April 1, 1996, will be renamed Basis
Petroleum, Inc. ("Basis Petroleum" or "Basis"). Basis Petroleum owns and
operates three refineries in the U.S. Gulf Coast region.
Salomon Inc's 1995 results were indicative of the broad-based improvement in
Salomon Brothers' results, particularly in the second half of the year, as well
as the continued profitability of Phibro. A significant factor contributing to
differences between results generated by the Company and its competitors is the
mix of the Company's businesses. Much of Salomon Brothers' business is focused
on trading with and for clients and on proprietary trading. Salomon Brothers
does not have significant retail, asset management or clearing and custody
businesses. The combination of these factors causes Salomon Brothers' results to
be more volatile than those of its competitors. Salomon Brothers' 1995 results
reflect progress in building its customer flow business as well as favorable
market conditions.
Phibro's profits increased modestly in 1995. Results for Basis Petroleum were
negatively impacted by tightening margins, unseasonably warm weather in the
first quarter, and reduced product output principally due to turnarounds at its
Texas refineries.
12
<PAGE> 4
CONSOLIDATED SALOMON INC RESULTS
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1995 1994 1993 1992 1991
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes and cumulative effect of
change in accounting principles by business unit:
Salomon Brothers $ 704 $ (963) $ 1,575 $ 1,390 $ 1,036
Phibro 85 81 (15) (194) 47
Basis Petroleum (91) 18 (46) (47) (80)
Corporate and Other 10 33 (49) (93) (84)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative effect of change
in accounting principles 708 (831) 1,465 1,056 919
Income tax expense (benefit) 251 (432) 601 506 412
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principles 457 (399) 864 550 507
Cumulative effect of change in accounting principles,
net of tax benefit -- -- (37) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 457 $ (399) $ 827 $ 550 $ 507
=================================================================================================================================
</TABLE>
The Company earned $457 million in 1995, a vast improvement over the $399
million net loss incurred in 1994. The Company achieved record results in 1993
with net income of $827 million. The Company's 1994 net loss included pretax
charges of $303 million ($189 million aftertax) that resulted from the
substantial completion of a general ledger review at Salomon Brothers'
London-based companies, as well as the conclusion of a comprehensive review of
global general ledger accounts and transaction databases related to interest
rate swap activities. See "Salomon Brothers-Results of Operations" for a
discussion of these charges and related charges in 1993 and 1992. In addition,
the Company's 1994 results included a $102 million income tax benefit that
resulted from the reversal of reserves established in prior years to cover
potential tax liabilities.
Business unit results reflect the allocation of certain expenses, the most
significant of which is net interest expense, incurred by Salomon Inc.
CORPORATE AND OTHER
Corporate and Other includes certain Salomon Inc corporate revenues and expenses
which cannot be attributed to any of the Company's business units. Also included
are the results of Phibro Energy Production, Inc. ("PEPI"), changes to
environmental reserves related to the former Philipp Brothers commodities
segment and, beginning in the third quarter of 1993, the results of The Mortgage
Corporation Limited and its affiliates ("TMC"), which originate and service
residential mortgages in the United Kingdom. In 1996, the Company began
exploring alternatives with respect to the disposition of TMC. Management
believes that such disposition will not have a material effect on the Company's
consolidated financial statements.
PEPI's principal asset is its 45% direct and indirect investment in the White
Nights Joint Enterprise ("White Nights"), a Russian-American oil production
joint venture located in Western Siberia. White Nights is entitled to
incremental production resulting from the development of three oil fields, two
of which are currently in production. Oil exports from the venture were 3.8
million, 3.6 million and 3.2 million barrels in 1995, 1994 and 1993,
respectively. Gross sales proceeds from such exports totaled $60 million, $52
million and $46 million in 1995, 1994 and 1993, respectively.
13
<PAGE> 5
Effective September 1, 1994, White Nights received an export tax exemption for
three years, or until such earlier time as White Nights recovers its capital
investment. In 1995, White Nights received a further government approved
increase in the level of production which is deemed incremental and available
for export. The export tax exemption, combined with increased production
revenue, enabled White Nights to pay PEPI $16.8 million of current and prior
period loan interest and $1.1 million of principal during 1994 and 1995. PEPI
has recorded the majority of these payments as reductions in the carrying value
of its investment. However, White Nights' operations remain adversely affected
by high operating expenses due to increasing gross revenue taxation and pipeline
tariffs, high inflation, uncertainty regarding ruble devaluation and high
technical costs from geologically difficult fields. At December 31, 1995, the
investment in White Nights had a carrying value of $47 million, as compared with
$58 million at December 31, 1994. The future of White Nights is dependent not
only on its ability to produce and export crude oil in an economical manner, but
also on Russian fiscal, legislative and regulatory policy. The 1993 results of
Corporate and Other included a $20 million writedown of PEPI's investment in
White Nights.
14
<PAGE> 6
SALOMON INC
BUSINESS UNIT INFORMATION
GRAPH #3 (SEE APPENDIX A)
GRAPH #4 (SEE APPENDIX A)
GRAPH #5 (SEE APPENDIX A)
SALOMON BROTHERS
16
DESCRIPTION OF BUSINESS
18
RESULTS OF OPERATIONS
PHIBRO
22
DESCRIPTION OF BUSINESS
22
RESULTS OF OPERATIONS
BASIS PETROLEUM
23
DESCRIPTION OF BUSINESS
25
RESULTS OF OPERATIONS
15
<PAGE> 7
SALOMON BROTHERS
DESCRIPTION OF BUSINESS
Salomon Brothers is an international investment banking firm that provides a
variety of capital raising, market making, risk management and brokerage
services to its institutional clients worldwide, and engages in proprietary
trading activities for its own account. Salomon Brothers has branches,
subsidiaries or representative offices in Australia, Canada, China, France,
Germany, Hong Kong, India, Italy, Japan, Korea, Malaysia, Mexico, Russia,
Singapore, Spain, Switzerland, Taiwan, Thailand, the United Kingdom and the
United States, and affiliate relationships in Argentina, Brazil, and Korea.
Through this global network, Salomon Brothers and its affiliates are able to
access markets and serve clients around the world. Salomon Brothers provides
various services for its government, financial institution and corporate clients
including fixed income and equity sales and trading, foreign exchange trading,
fixed income and equity market research, investment banking and asset
management. Salomon Brothers also executes trading and arbitrage strategies for
its own account using debt, equity and derivative instruments. The financial
products offered by Salomon Brothers include debt and equity instruments,
contractual commitments, such as forward securities and currency agreements,
swap agreements, caps and floors, options, warrants and other derivative
products. In the first quarter of 1995, Salomon Brothers discontinued its
Private Investment Department, which provided financial services and strategic
advice for high net worth individuals. Principal operating subsidiaries of
Salomon Brothers Holding Company Inc ("SBHC") are SBI in New York, Salomon
Brothers International Limited ("SBIL") in London, Salomon Brothers Asia Limited
("SBAL") in Tokyo, Salomon Brothers AG ("SBAG") in Frankfurt with a branch in
Tokyo, Salomon (International) Finance AG ("SIFAG") in Zug, Switzerland, and
Salomon Swapco Inc ("Swapco") in New York.
Salomon Brothers is a major dealer in government securities in New York, London,
Frankfurt and Tokyo and is a member of major international securities, financial
futures and options exchanges, as well as other organized markets. It is also a
major participant in over-the-counter ("OTC") markets. In addition to providing
liquidity to investors across a broad range of markets and financial
instruments, Salomon Brothers' significant capital base and extensive
distribution capabilities enable it to execute numerous capital-intensive trades
on behalf of its customers and for its own account. Salomon Brothers' ability to
execute arbitrage and other trading strategies is enhanced by its established
presence in international capital markets, its use of information technology and
quantitative risk management tools, its research capabilities, and its knowledge
and experience in various markets for financial futures, swap agreements and
other contractual commitments.
Salomon Brothers' global investment banking services encompass a full range of
capital markets activities, including underwriting and distributing debt, equity
and derivative securities, and executing secondary market transactions. Salomon
Brothers also provides financial advisory services covering a broad range of
transactions, including mergers and acquisitions, divestitures, leveraged
buyouts, financial restructurings and a variety of cross-border transactions.
Through Salomon Brothers Asset Management Inc ("SBAM"), Salomon Brothers
provides portfolio management services to pension funds, investment companies,
endowments, foundations, banks, insurance companies, corporations and
governmental agencies. As of December 31, 1995, assets managed by SBAM totaled
$13 billion.
16
<PAGE> 8
A counterparty's credit quality is a significant consideration of participants
in the long-term derivatives markets. In 1993, SBHC established Swapco, a
wholly-owned subsidiary with credit ratings of Aaa from Moody's, AAAt from
Standard & Poor's and AAA from Fitch. Through the use of back-to-back
collateralized transactions, Swapco transfers its market risk to other related
entities (without reducing the Company's aggregate market risk). Risk arising
from Swapco's activities is reviewed and managed on a consolidated basis
together with risk arising from the Company's other activities. Swapco's capital
and collateral rules enable it to withstand a high level of counterparty
defaults and extreme market price fluctuations while maintaining its own ability
to make payments. Swapco can directly transact or guarantee a wide range of
derivative products, including interest rate swaps and options, currency swaps,
currency forwards and options, and equity derivatives.
At December 31, 1995, Swapco had over 1,800 transactions outstanding and had
over 200 master netting agreements in place. Notional contracts outstanding with
third parties totaled $113 billion at December 31, 1995, up substantially from
the $67 billion at December 31, 1994. Swapco's counterparties are located in
sixteen countries and transactions are executed in seventeen currencies.
Swapco's counterparties represent a broad range of industries and include
multinational corporations, banks, insurance and finance companies, other
derivatives dealers, governments and government agencies.
The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. As a registered broker-dealer, SBI is subject to
regulation by the U.S. Securities and Exchange Commission ("SEC") and various
state and self-regulatory authorities. SBI and certain other subsidiaries are
subject to regulation by the Commodity Futures Trading Commission ("CFTC").
Futures and option activities are also subject to regulation by exchanges and
self-regulatory organizations. As a registered investment advisor, SBAM is
subject to federal and state securities regulations. Certain non-U.S.
subsidiaries are subject to regulation in the jurisdictions in which they
conduct their businesses. Salomon Brothers' principal non-U.S. regulated
subsidiaries are SBIL, which is subject to regulation in the United Kingdom by
the Securities and Futures Authority; SBAL, which is subject to regulation in
Japan by the Ministry of Finance; and SBAG, which is subject to regulation in
Germany by the Banking Supervisory Authority. In addition, in order to maintain
its triple-A rating, Swapco must maintain levels of capital in accordance with
agreements with its rating agencies.
Salomon Brothers continues to face intense competition from other investment
banks, commercial banks, insurance companies and other corporations which have
entered the securities and related businesses, as well as from large private
investment funds that actively engage in proprietary trading. Traditional
investment banking activities may also face increased competition, as
governmental bodies seek to remove restrictions on commercial banks. Salomon
Brothers' ability to succeed depends on its ability to manage risk, respond to
customer needs and anticipate changes in the markets, its access to funding and
capital, its creditworthiness in transactions as agent and counterparty, its
efficiency in executing a substantial volume of transactions and in providing
other financial services, and its ability to retain key personnel.
During 1995, Salomon Brothers established an Operating Committee whose members
include Salomon Brothers' Chief Executive Officer ("CEO"), as well as the heads
of each of its major business units; hired a
17
<PAGE> 9
new CEO in Europe whose time is 100% dedicated to overseeing all European
business activities and appointed a Chief Administrative Officer to oversee,
among other things, Salomon Brothers' operations, technology and human resources
functions globally.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
======================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues, net of interest expense:
Global investment banking:
Advisory $ 247 $ 219 $ 151 $ 142 $ 164
Equity underwriting 147 190 296 111 147
Debt underwriting 78 77 344 197 185
- ------------------------------------------------------------------------------------------------------
Total global investment banking 472 486 791 450 496
- ------------------------------------------------------------------------------------------------------
Fixed income sales and trading 1,603 644 2,381 2,637 2,203
Equity sales and trading 828 157 867 793 530
Asset management 39 38 29 20 20
Unallocated charges and other* 6 (247) 67 51 70
- ------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $ 2,948 $ 1,078 $ 4,135 $ 3,951 $ 3,319
======================================================================================================
Income (loss) before income taxes and cumulative
effect of change in accounting principles** $ 704 $ (963) $ 1,575 $ 1,390 $ 1,036
======================================================================================================
</TABLE>
* "Unallocated charges and other" in 1994 included pretax charges of
$278 million during the fourth quarter of 1994 in connection with the resolution
of unreconciled balances related to Salomon Brothers' London-based companies and
the completion of a detailed review of Salomon Brothers' general ledger accounts
related to interest rate swaps.
** "Income (loss) before income taxes and cumulative effect of change
in accounting principles" in 1992 and 1991 included pretax charges of $185
million and $200 million, respectively, in connection with the U.S. Treasury
auction and related matters.
Salomon Brothers recorded pretax income of $704 million in 1995, a significant
improvement compared with the $963 million pretax loss in 1994. Salomon Brothers
achieved record results in 1993 with pretax income of $1.6 billion. Salomon
Brothers' 1995 results reflect a broad-based recovery, with substantial
improvements over 1994 results in both its fixed income and equity sales and
trading activities. Net revenues in 1995 were nearly triple the 1994 levels,
which included charges incurred in connection with the resolution of past
accounting problems that reduced revenues by $303 million, as discussed below.
Fixed income sales and trading net revenues for the year increased to $1.6
billion, from $644 million in 1994, reflecting a strong performance in customer
sales and trading, favorable market conditions, solid results in trading for
Salomon Brothers' own account and lower cost of carry on inventories,
particularly in the second half of the year. Salomon Brothers' 1994 fixed income
sales and trading results were negatively impacted by a low volume of customer
activity, trading losses in certain businesses, as well as the increased cost of
carry on inventories. Fixed income sales and trading results in 1993 reflect the
extraordinarily strong capital raising activity which resulted from the low
interest rate environment.
Equity sales and trading net revenues improved significantly to $828 million in
1995, as compared with $157 million in 1994, and down only slightly from the
$867 million reported in 1993. The favorable 1995 results reflect Salomon
Brothers' progress towards building its global equity capabilities, combined
with favorable market conditions and a strong performance in trading.
18
<PAGE> 10
Global investment banking revenues were $472 million in 1995, compared with $486
million in 1994 and $791 million in 1993. Debt and equity underwriting revenues
in 1995 were negatively impacted by pretax losses of $55 million and $13
million, respectively, on Latin American securities positions. Salomon Brothers
is focusing on strengthening its investment banking business by strategically
recruiting key banking and research personnel and more closely aligning its
investment banking efforts with Salomon Brothers' research and sales and trading
units.
U.S. Market Share (Lead-Managed Basis)*
<TABLE>
<CAPTION>
1995 1994 1993
RANK RANK RANK
==================================================================
<S> <C> <C> <C>
Mergers and acquisitions 4 2 8
Investment grade debt** 2 6 5
High yield debt 5 3 4
Equity (excluding straight preferred
and 144A transactions) 9 5 5
==================================================================
</TABLE>
* Source: Securities Data Company
** Includes non-convertible debt, asset-backed securities, taxable municipals
and straight preferreds.
Salomon Brothers' 1994 results reflect a pretax charge of $303 million ($189
million aftertax). This charge includes a pretax charge of $194 million ($126
million aftertax) attributable to unreconciled balances related to Salomon
Brothers' London-based companies. These balances were identified as Salomon
Brothers changed operational systems and conducted a detailed review of
databases supporting general ledger balances. The review necessitated a number
of adjustments affecting transactions going back at least until 1989 involving
many different instruments, positions and related currency effects. The 1994
pretax charge of $303 million also includes a pretax charge of $109 million ($63
million aftertax) arising from the completion of a detailed review of Salomon
Brothers' general ledger accounts related to interest rate swaps and the
interest rate swap transactions database.
A detailed review of general ledger balances related to Salomon Brothers'
U.S.-based operations was completed in the 1993 fourth quarter, resulting in a
pretax charge of $87 million ($49 million aftertax). Problems in recording the
results of interest rate swap activities date back to the mid-1980s. In 1993 and
1992, pretax charges of $31 million ($17 million aftertax) and $21 million ($11
million aftertax), respectively, were recorded in connection with this effort.
Although the 1994 charge of $303 million related to a number of years, Salomon
Brothers' accounting systems do not contain sufficient information to permit
allocation of the largest part of the charge to individual years. Based on the
analysis of available information, Management believes that, were it possible to
allocate the charge to prior years, the impact of such an allocation would not
have been material in any single prior year.
In the preceding table, $278 million of the $303 million 1994 charge is
reflected in "Unallocated charges and other," and the remainder is included in
business unit revenues. The 1993 and 1992 charges discussed above were included
entirely in business unit revenues. There are no comparable 1995 charges.
19
<PAGE> 11
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Compensation and employee-related expenses $ 1,599 $ 1,355 $ 1,810 $ 1,577 $ 1,272
=======================================================================================================
Compensation expense ratio* 69% n/m 53% 53% 55%
=======================================================================================================
Recurring non-compensation expenses:
Technology $ 238 $ 240 $ 249 $ 272 $ 299
Occupancy 166 163 175 196 158
Professional services and business development 152 143 116 108 128
Clearing and exchange fees 62 67 62 64 66
Other 50 73 103 77 52
- -------------------------------------------------------------------------------------------------------
Total recurring non-compensation expenses 668 686 705 717 703
Non-recurring non-compensation expenses (23) -- 45 267 308
- -------------------------------------------------------------------------------------------------------
Total non-compensation expenses $ 645 $ 686 $ 750 $ 984 $ 1,011
=======================================================================================================
Non-compensation expense ratios:**
Total non-compensation expenses 22% 64% 18% 25% 30%
Recurring non-compensation expenses 23 64 17 18 21
=======================================================================================================
</TABLE>
n/m - not meaningful.
* Compensation and employee-related expenses as a percentage of earnings
before income taxes and compensation and employee-related expenses.
** Non-compensation expenses as a percentage of revenues, net of interest
expense.
Compensation and employee-related expenses increased by $244 million in 1995,
reflecting a significant improvement in Salomon Brothers' operating results and
industry conditions. Salomon Brothers' current compensation approach is a
discretionary one that includes the following factors when determining
compensation: Salomon Brothers' return on equity, applicable business
performance, market conditions and individual performance.
As planned, Salomon Brothers' full-time headcount at the end of 1995 was
approximately 6,400, down more than 500 as compared with the previous year.
Salomon Brothers' full-year compensation as a percentage of earnings before
income taxes and compensation and employee-related expenses was 69%, which was
in line with industry-wide levels.
GRAPH #6 (SEE APPENDIX A)
20
<PAGE> 12
GRAPH #7 (SEE APPENDIX A)
Salomon Brothers' recurring non-compensation expenses have declined in each of
the last three years. The 1995 decrease in "Other" expenses was partially
attributable to lower legal provisions. Salomon Brothers' ratio of recurring
non-compensation expenses to revenues, net of interest expense was 23% in 1995,
favorable in comparison with its major competitors.
In 1995, recognition of amounts to be received in settlement of the Shareholder
Derivative Action against certain former executives in connection with Salomon
Brothers' 1991 Treasury auction matter caused non-compensation expenses to be
reduced by $23 million. The settlement of the Shareholder Derivative Action
brings to a conclusion all legal actions with respect to the 1991 U.S. Treasury
auction and related matters. Non-recurring non-compensation expenses in 1993
consisted of occupancy charges incurred in connection with reductions of leased
space in New York and Tokyo.
21
<PAGE> 13
PHIBRO
DESCRIPTION OF BUSINESS
Effective January 1, 1996, the commodities dealer businesses conducted by the
Company's Phibro Division and its subsidiaries were transferred to the Company's
wholly-owned subsidiary, Phibro Inc. and its subsidiaries. Phibro conducts a
global commodities dealer business through its principal offices in Westport
(Connecticut), London and Singapore. Commodities traded include crude oil,
refined oil products, natural gas, electricity, metals, petrochemicals, ethanol,
plastics, coal, coke, fertilizers, sugar, cocoa, grains and coffee. Phibro makes
extensive use of futures markets and is a participant in the OTC derivatives
market. Phibro's restructuring, which was announced in late 1992, was
substantially completed by the end of 1993. The restructuring resulted in
Phibro exiting certain businesses and significantly reducing the scope of
others. The principal competitors of Phibro are major integrated oil companies,
other commodity trading companies, certain investment banks and other financial
institutions.
RESULTS OF OPERATIONS
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
=============================================================================================
<S> <C> <C> <C> <C> <C>
Revenues, net of interest expense $ 207 $ 191 $ 46 $ (28) $ 159
- ---------------------------------------------------------------------------------------------
Compensation and employee-related expenses 92 83 40 45 49
Other general and administrative expenses 30 27 21 43 29
Restructuring and relocation -- -- -- 78 34
- ---------------------------------------------------------------------------------------------
Total noninterest expenses 122 110 61 166 112
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principles $ 85 $ 81 $ (15) $(194) $ 47
=============================================================================================
Compensation expense ratio* 52% 51% 160% n/m 51%
Non-compensation expense ratio** 14 14 46 n/m 18
=============================================================================================
</TABLE>
n/m-not meaningful.
* Compensation and employee-related expenses as a percentage of earnings
before income taxes and compensation and employee-related expenses.
** Other general and administrative expenses as a percentage of revenues, net
of interest expense.
As a dealer, Phibro's strategy is to focus on taking positions in commodities on
a longer-term horizon while also engaging in counterparty flow business on a
short-term basis. Phibro's operating results are subject to a high degree of
quarterly volatility due to the predominance of directional positions in
commodities that have a longer-term horizon until realization. Thus, results are
better evaluated over the longer term.
Phibro was profitable for the second consecutive year in 1995, after incurring a
modest loss in 1993. The higher levels of compensation expense recorded in 1995
and 1994 reflect the improvement in Phibro's earnings.
22
<PAGE> 14
BASIS PETROLEUM
DESCRIPTION OF BUSINESS
Basis Petroleum, with headquarters in Houston, Texas, owns and operates three
oil refineries in the U.S. Gulf Coast area, with a combined design crude oil
throughput capacity of approximately 272,000 barrels per day and additional
throughputs of purchased feedstocks of approximately 39,000 barrels per day. Two
of Basis' refineries, representing over 75% of its combined design capacity, are
able to receive direct imports of foreign crude oil and feedstocks discharged at
their deepwater ports. This gives the refineries access to a wide range of crude
oil and feedstocks. Basis' refined product output encompasses many grades of
light transportation fuel, marine fuel, jet fuel, heating oil, residual fuel
oil, asphalt and specialty petrochemicals. In addition to its core refining
assets, Basis owns and operates a crude oil gathering business which gathers
approximately 85,000 barrels per day in the Southwestern U.S. These activities
are complemented by Basis' marketing and distribution capabilities. These
include supply activities in both domestic and foreign crude oil, feedstocks and
liquified petroleum gases, as well as product distribution activities through
bulk clean products marketing, wholesale marketing, heavy oil marketing
(including ship bunkering, residual fuel oil marketing and asphalt sales) and
the manufacture and sales of petrochemicals and specialty solvents. Basis has no
retail marketing outlets.
During 1995, Basis made significant progress in the construction of the
Residfiner/Residual Oil Super Critical Extraction ("ROSE") project. The ROSE
unit commenced operation in February 1996 while the Residfiner will be
operational in the second quarter of 1996. This project will convert the Texas
City, Texas refinery into a full upgrading refinery by providing 75,000 barrels
per day of resid hydroprocessing capacity, 600 long tons per day of sulfur plant
capacity, 30,000 barrels per day of resid de-asphalting capacity, and an offsite
hydrogen purification plant. This project will provide Basis with the ability to
improve the margins available in a given market environment by upgrading the
product mix for the refinery system, processing lower cost crude and feedstocks,
and increasing total throughput capacity by approximately four million barrels
annually. The upgrade in product mix will result in Basis' operating profit more
closely tracking the 2-1-1 crackspread (assumes input of two parts of West Texas
Intermediate ("WTI") crude oil and output of one part gasoline and one part
heating oil) rather than its historic profile which generally tracked the
6-3-2-1 crackspread (assumes input of six parts of WTI crude oil and output of
three parts gasoline, two parts heating oil, and one part low sulfur residual
fuel oil). The crackspread represents the theoretical refining margin resulting
from the difference between the spot prices of the crude oil input into the
refining process and the refined product output for the period. Capital
expenditures related to the Residfiner project amounted to $178 million in 1995,
including $11 million in capitalized interest expense, and are projected to
approximate $20 million in 1996.
In addition to the refining crackspread, Basis' results are also impacted by the
pricing spread between light and heavy crude oil. Over the past five years,
there has been a significant decline in this spread, due to the decreased supply
of heavy crude oil resulting from the withdrawal of Iraqi oil from the
marketplace and increased demand caused by several large investments in heavy
crude oil upgrading projects. In addition, although overall Organization of
Petroleum Exporting Countries ("OPEC") supply has remained relatively flat
during this period, there has been a shift in output mix to lighter crude oils.
Growth in non-OPEC supply, principally North Sea and Colombia, has also been
mainly in lighter crude oils. Given the ability of Basis to process heavy crude
oil (post-Residfiner/ROSE unit completion), its refinery
23
<PAGE> 15
GRAPH #8 (SEE APPENDIX A)
GRAPH #9 (SEE APPENDIX A)
GRAPH #10 (SEE APPENDIX A)
GRAPH #11 (SEE APPENDIX A)
system is well positioned to capture any widening of the light/heavy spread that
may arise from a change in the mix of worldwide crude oil production and/or a
reduction in the number of refinery upgrading projects due to the current narrow
spreads.
Given the extremely depressed level of current crackspreads and the spread
between light and heavy crude oil (as seen from the historical trends), bringing
the Residfiner/ROSE units on-line without an improvement in these spreads is not
enough for Basis to show meaningful profitability. Basis anticipates these
spreads will widen over time, providing Basis with improved returns on
investment.
Basis continues to make capital investments to enhance its competitive position
and meet present and anticipated future environmental and safety requirements.
Refinery-related capital expenditures, excluding costs associated with the
Residfiner/ROSE unit project, totaled $123 million over the past two years and
are budgeted to be $50 million in 1996. The majority of these expenditures are
of a "stay in business" nature. Basis' total capital expenditures in 1995
included $9 million related to environmental compliance; such expenditures are
budgeted to be about $8 million in 1996.
Basis' long-term assets employed were primarily comprised of refinery assets
with a net book value of $793 million. At December 31, 1995 long-term assets
were funded by $299 million of equity and the balance by long-term intercompany
debt. In addition, the Company has advanced Basis $252 million of working
capital advances to finance short-term assets.
The competitiveness of the refining industry makes it essential that each
refinery unit be operated at its maximum potential. In 1994, Basis contracted a
specialized
24
<PAGE> 16
engineering firm to conduct a review of plant operations within its refinery
system. This ongoing review continued in 1995, identifying several opportunities
to enhance operational efficiency at all three of Basis' refineries, which
either have been or will be implemented. The engineering firm has also conducted
reviews related to optimizing the operation of the Residfiner/ROSE unit and
identifying inter-plant synergies. Additionally, ongoing process engineering
support on several capital projects, as well as the potential for processing
additional heavy crude oils, is being provided.
As a seller of gasoline on the spot market, Basis must react quickly to changing
market demands for various types and grades of gasoline in order to enhance
profitability. The 1990 amendments to the Clean Air Act mandated the use of
cleaner burning or reformulated gasoline ("RFG") in nine major metropolitan
areas in the U.S. Past investments in refinery process units have given Basis
the flexibility to blend up to 50% of its gasoline production into RFG. This
flexibility, along with leased terminal/blending facilities in the New York
harbor area, allows Basis to take advantage of market opportunities in the RFG
program as they materialize.
RESULTS OF OPERATIONS
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
========================================================================================================
<S> <C> <C> <C> <C> <C>
Sales $ 9,149 $ 7,258 $ 8,357 $ 7,197 $ 6,736
Cost of sales 9,170 7,181 8,308 7,173 6,658
- --------------------------------------------------------------------------------------------------------
Operating profit (loss) (21) 77 49 24 78
Net interest and other (27) (12) (19) (25) (32)
- --------------------------------------------------------------------------------------------------------
Operating profit (loss), net of interest and other (48) 65 30 (1) 46
- --------------------------------------------------------------------------------------------------------
Compensation and employee-related expenses 27 31 29 28 28
Other expenses 16 16 17 18 27
Write down of minimum refining and marketing
inventories -- -- 30 -- 71
- --------------------------------------------------------------------------------------------------------
Total noninterest expenses 43 47 76 46 126
- --------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principles $ (91) $ 18 $ (46) $ (47) $ (80)
========================================================================================================
</TABLE>
Basis recorded a pretax loss of $91 million in 1995, compared with pretax
earnings of $18 million in 1994. In 1993, Basis recorded a pretax loss of $46
million. The 1993 results include a $30 million charge to write down to market
value the carrying value of minimum refining and marketing inventories. These
inventories are neither hedged nor continuously marked to market but are carried
at the lower of aggregate cost or market. The market value of these inventories
exceeded their carrying values, by $61 million and $39 million at December 31,
1995 and 1994, respectively.
25
<PAGE> 17
After improved performance in 1994, the 1995 results for Basis were extremely
disappointing. Significant factors contributing to these results were a
continued decline in crackspreads, which were at an eight-year low, and a
decline in throughputs principally due to complete shutdowns for scheduled
turnarounds and the tie-in of the Residfiner/ROSE complex. (Turnarounds are
maintenance routines performed on major units.) Additional negative factors
included refinery operating costs increasing approximately 5% and lower
aggregate performances from wholesale marketing and petrochemicals, partially
offset by an excellent performance from the crude oil gathering business.
To reduce the adverse earnings impact of a possible continuation of depressed
refining crackspreads, Basis entered into a swap agreement, in February 1996, to
lock in a Gulf Coast 2-1-1 crackspread at a volume equivalent to approximately
20% of its crude oil throughput capacity. This two-year agreement, which
commences April 1, 1996, is priced at a level approximately 36% higher than the
average 2-1-1 crackspread for 1995.
Net interest and other increased $15 million over 1994 due to increased interest
expense in 1995, reflecting higher debt levels required to fund capital
projects, working capital and 1995 operating losses. Additionally, 1994 results
included gains related to the sale of non-core assets. Noninterest expenses,
excluding the special inventory write down, were relatively unchanged over the
past few years.
26
<PAGE> 18
DERIVATIVE INSTRUMENTS
Derivatives are an integral part of the world's financial and commodity markets.
Globalization of economic activity has brought more market participants in
contact with foreign exchange and foreign interest rate risk at a time when
market volatility has increased. The Company has developed many techniques using
derivatives which have enhanced the precision with which its capital and trading
risks are managed. The Company is committed to the further development of these
techniques and to providing these risk management capabilities to its clients.
28
OVERVIEW
29
NATURE AND TERMS OF DERIVATIVE INSTRUMENTS
31
SALOMON INC'S USE OF DERIVATIVE INSTRUMENTS
32
ACCOUNTING FOR DERIVATIVES
ADDITIONAL DERIVATIVES-RELATED DISCLOSURES
58
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
61
SUMMARY OF ACCOUNTING POLICIES
65
NOTE 1-REVENUES BY BUSINESS UNIT
73
NOTE 7-TERM DEBT
84
NOTE 16-FINANCIAL AND COMMODITIES-RELATED INSTRUMENTS AND RELATED RISKS
88
NOTE 17-FAIR MARKET VALUE INFORMATION
27
<PAGE> 19
OVERVIEW
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value based on some
underlying asset, index, interest rate or exchange rate. The markets for these
instruments have grown tremendously over the past decade. A vast increase in the
types of derivative users and their motivation in using them has resulted in an
expansion of geographic coverage, transaction volume and liquidity, and the
number of underlying products and instruments.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk, and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, because of such factors as taxes, regulations,
capital and liquidity, they provide the most efficient means of taking a desired
market position. These are just a few of the business objectives for which
derivatives are used. The list of objectives is large and continues to grow
rapidly.
Derivatives are settled differently from cash instruments and their use requires
special management oversight. Such oversight should ensure that management
understand the transactions to which they commit their firms and that the
transactions are executed in accordance with sensible corporate risk policies
and procedures. Publications such as the Basle Committee on Banking
Supervision's July 1994 report, Risk Management Guidelines for Derivatives; the
International Organization of Securities Commissions' July 1994 report,
Operational and Financial Risk Management Control Implications for
Over-the-Counter Derivatives Activities of Regulated Securities Firms; or the
Group of Thirty ("G-30") July 1993 report, Derivatives: Practices and
Principles, each provide an excellent framework for developing strong management
policies and procedures.
In 1994, the Company adopted the G-30 report as its model for control of its OTC
derivatives activities. Subsequently, the Company began working with five other
U.S. securities firms, forming the Derivatives Policy Group ("DPG"), to develop
the "Framework for Voluntary Oversight" of OTC derivatives activities of
unregulated affiliates of SEC-registered broker-dealers. In March of 1995, the
DPG agreed with the SEC to implement the framework during the remainder of the
year. The framework encompasses management controls, enhanced reporting,
evaluation of risk in relation to capital and counterparty relations.
The Company's adoption of the DPG framework resulted in modifications and/or
enhancements of the Company's existing control procedures, including the
establishment by the Board of Directors of an OTC Derivatives Activity and
Transaction Oversight Committee ("Authorizing Body"), a Board-approved firmwide
market risk limit, a quarterly SEC and CFTC reporting package, and annual
reviews of internal risk management control objectives and reviews of inventory
pricing and modeling procedures performed by the Company's external auditors and
provided to the SEC.
The Authorizing Body, which consists of senior risk managers and senior control
managers from the Company's businesses, has established guidelines which include
the Company's framework for independent market risk measurement and monitoring
the scope of
28
<PAGE> 20
permitted activity for the Company's OTC derivatives activities both as dealer
and end user, and the establishment of requirements for the periodic review of
credit, funding, legal and operations.
The reports provided to the SEC and CFTC by the Company and other DPG
participants provide insight into the OTC derivatives activities conducted by
unregulated affiliates of U.S. broker-dealers. Information provided on such
reports consists of:
- - firmwide net current credit exposure and market sensitivities of its top
20 current net exposure counterparties,
- - firmwide current net exposures by counterparty rating,
- - potential net exposures by counterparty rating,
- - net revenues derived from OTC derivatives activities in unregulated
entities, and
- - the OTC derivatives business revenue sensitivity to certain market
movements.
Derivatives activities, like the Company's other ongoing business activities,
give rise to market, credit, and operational and support risks. Market risk
represents the risk of loss from adverse market price movements. While market
risk relating to derivatives is clearly an important consideration for a market
intermediary such as the Company and its subsidiaries, such risk represents only
a component of overall market risk, which includes non-derivative instruments as
well. Consequently, the scope of the Company's market risk management procedures
includes all financial and commodities-related instruments, including
derivatives. Credit risk is the potential loss that the Company could incur if
counterparties failed to perform pursuant to their contractual obligations.
While credit risk is not a principal consideration with respect to
exchange-traded instruments, it is a major factor with respect to
non-exchange-traded OTC instruments. Whenever possible, industry master netting
agreements are used to reduce aggregate credit exposure. Swap and foreign
exchange agreements are documented utilizing counterparty master netting
agreements supplemented by trade confirmations. Over the past two years, the
Company has enhanced the funding and risk management of its derivatives
activities through the increased use of bilateral security agreements. Salomon
Brothers in particular has been an industry leader in promoting the use of this
risk reduction technique. As a result, at December 31, 1995, 72% of the
Company's entire swap portfolio was subject to the bilateral exchange of
collateral. This initiative, combined with the success of Swapco, has
strengthened and stabilized the Company's market liquidity for derivative
trading activities. See "Risk Management" for discussions of the Company's
management of market, credit, and operational and support risks.
NATURE AND TERMS OF DERIVATIVE INSTRUMENTS
The Company and its subsidiaries enter into various bilateral financial
instruments involving future settlement, which are based upon a predetermined
principal or par value (referred to as a "notional"). Such instruments include
swaps, caps and floors, futures contracts, forward purchase and sale agreements,
option contracts and warrants. The transactions are either conducted through
organized exchanges or are conducted OTC.
Interest rate swaps are OTC instruments by which two counterparties agree to
exchange periodic interest payment streams calculated on a predetermined
notional amount. Interest rate swaps generally involve one party paying a fixed
interest rate and the other party paying a variable rate. Other types of
interest rate swaps include basis swaps, cross-currency swaps, equity swaps and
commodity swaps. Basis swaps consist of both parties
29
<PAGE> 21
paying variable interest streams based on different reference rates.
Cross-currency interest rate swaps involve the exchange of coupon payments in
one currency for coupon payments in another currency. An equity swap is an
agreement to exchange cash flows on a notional principal amount based on changes
in the values of a referenced index, such as the Standard & Poor's ("S&P") 500.
Commodity swaps involve the exchange of a fixed price of a commodity for a
floating price, which is usually the prevailing spot price throughout the swap
term. The most common commodity swaps are petroleum-based; other types are based
on metals or soft commodities.
Caps are contractual commitments which require the "provider" or writer to pay
the purchaser an excess amount, if the reference rate exceeds a contractual rate
at specified times during the contract. Likewise, a floor is a contractual
commitment that requires the writer to pay an excess amount, if any, of a
contractual rate over a reference rate at specified times over the life of the
contract.
Futures contracts are exchange-traded contractual commitments to either receive
(purchase) or deliver (sell) a standard amount or value of a commodity or
financial instrument at a specified future date and price (or, with respect to
futures contracts on indices, the net cash amount). Maintaining a futures
contract will typically require the Company to deposit with the futures exchange
(or other financial intermediary), as security for its obligations, an amount of
cash or other specified asset ("initial margin") that typically ranges from 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. Futures contracts may be settled by physical delivery of
the underlying asset or cash settlement (for index futures) on the settlement
date, or by entering into an offsetting futures contract with the futures
exchange prior to the settlement date. Forward contracts are OTC contractual
commitments to purchase or sell a specified amount of financial instruments,
foreign currency or commodities at a future date at a predetermined price.
Option contracts are contractual agreements which give the purchaser the right,
but not the obligation, to purchase or sell a financial instrument, commodity or
currency at a predetermined exercise price. In return for this right, the
purchaser pays a premium to the seller (or writer) of the option. Option
contracts also exist for various indices and are similar to options on a
security or other instruments except that, rather than settling by physical
delivery of the underlying instrument, they are settled in cash. Options on
futures contracts give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract. If an option on a futures contract
is exercised, the Company will be obligated to post initial margin (and
potentially, variation margin) for the resulting futures position just as it
would for any futures contract. Option contracts may be either exchange traded
or OTC. Exchange-traded options issued by certain regulated intermediaries, such
as the Options Clearing Corporation ("OCC"), are the obligations of the issuing
intermediary. In contrast to such options, which generally have standardized
terms and performance mechanics, all of the terms of an OTC option, including
the method of settlement, term, exercise price, premium, guarantees and
security, are determined by negotiation of the parties, and there is no
intermediary between the parties to assume the risks of performance. The Company
also issues warrants that entitle holders to settlements on exercise based upon
30
<PAGE> 22
movements in market prices of specific financial instruments, foreign exchange
rates, equity indices and certain commodities. Warrants have characteristics
similar to those of options whereby the buyer has the right, but not the
obligation, to purchase a certain instrument at a specific future date and
price.
SALOMON INC'S USE OF DERIVATIVE INSTRUMENTS
The Company's use of derivatives can be broadly classified into trading and
non-trading activities. A vast majority of the Company's derivatives use is in
its trading activities, which include market-making activities for customers and
the execution of proprietary trading strategies. The counterparties with which
the Company conducts derivatives transactions consist primarily of other major
derivatives dealers, financial institutions, insurance companies, pension funds
and investment companies, and other corporations. Governments and other types of
counterparties represent a relatively small portion of the Company's derivatives
counterparties. The scope of permitted derivatives activities both for trading
and non-trading purposes for each of the Company's businesses is defined by the
Authorizing Body.
TRADING ACTIVITIES
SALOMON BROTHERS A fundamental activity of Salomon Brothers is to provide market
liquidity to its customers across a broad range of financial instruments,
including derivatives. Salomon Brothers also seeks to generate returns by
executing trading and arbitrage strategies which are generally longer term in
nature. By their very nature, these trading activities represent the assumption
of risk. However, trading positions are constructed in a manner that seeks to
define and limit risk taking to those risks that Salomon Brothers intends to
assume. The most significant derivatives-related activity conducted by Salomon
Brothers is in fixed income derivatives, which include interest rate swaps,
financial futures, swap options, and caps and floors. Other derivative
transactions, such as currency swaps, forwards and options, as well as
derivatives linked to equities, are also regularly executed by Salomon Brothers.
Salomon Brothers generally earns a spread from market-making transactions
involving derivatives, as it generally does from its market-making activities
for non-derivative transactions. Salomon Brothers also utilizes derivatives to
manage the market risk inherent in its securities inventories and derivatives
portfolios maintained for market-making purposes as well as its "book" of swap
agreements and related transactions with customers.
PHIBRO The fundamental nature of Phibro's activities is similar to Salomon
Brothers. Phibro conducts its commodities dealer activities in organized futures
exchanges as well as in off-exchange forward markets. Phibro executes
transactions involving commodities options and swaps, much in the same manner as
Salomon Brothers in the financial markets.
NON-TRADING ACTIVITIES
The Company also makes significant use of financial derivatives for non-trading,
or end user, purposes. Such activities are not nearly as extensive as its use of
derivatives for trading purposes. As an end user, these instruments provide the
Company with added flexibility in the management of its capital and funding
costs. The Company utilizes interest rate swaps to effectively convert the
majority of its fixed rate term debt and preferred stock to variable rate
obligations. The Company utilizes cross-currency swaps and forwards to
effectively convert a portion of its non-U.S. dollar denominated term debt to
U.S. dollar denominated obligations and, in order to minimize the variability in
equity and book value per share otherwise attributable to exchange rate
movements, to hedge certain investments in non-U.S. subsidiaries.
31
<PAGE> 23
BASIS PETROLEUM As noted earlier, Basis Petroleum's oil refining results are
influenced significantly by crackspreads, which represent the theoretical
refining margin resulting from the difference between the spot prices of the
crude oil input into the refining process and the refined product output for the
period. Results for Basis Petroleum's marketing and distribution activities are
influenced heavily by spot prices of crude oil and refined products. Basis
regularly utilizes derivative financial instruments, including forward purchase
and sale agreements, swaps, options and exchange-traded futures and options to
hedge current or anticipated price risks, to manage crackspreads and to optimize
marketing and distribution results.
Notional amounts of derivatives are the underlying principal amounts used to
calculate contractual cash flows to be exchanged between derivatives
counterparties. The notional amounts presented in this report are only a rough
indicator of the volume of derivative instrument activity and are not indicative
of the level of market or credit risk.
GRAPH #12 (SEE APPENDIX A)
ACCOUNTING FOR DERIVATIVES
The way in which the Company accounts for and presents derivative instruments in
its financial statements depends on both the type and purpose of the derivative
instruments held or issued. Derivative instruments issued or held for trading
purposes, including those used to hedge trading positions, are marked to market
or fair market value. Under mark-to-market accounting, gains or losses are
recognized currently in "Principal transactions," and resulting assets or
liabilities are recorded in "Options and contractual commitments." Derivative
receivables and payables are netted by counterparty when a legal right of offset
exists under a legally enforceable master netting agreement. Derivative
receivables and payables are netted across product lines and against cash
collateral if such provisions are included in the master netting and cash
collateral agreements. The determination of market or fair market value involves
various factors, including the potential impact on market prices of liquidating
positions over a reasonable time period, and counterparty credit quality. When
marking derivative positions to market, higher risk counterparties warrant a
higher risk premium, or yield to the Company, which equates to a lower price.
Credit-related adjustments are applied in determining the carrying amount of the
Company's derivatives portfolio. These adjustments consider, among other things,
concentrations of exposure, netting agreements and expected defaults. In
specific situations in which individual counterparties experience financial
difficulties that compromise their ability to meet their contractual obligations
to the Company, reserves are established to cover such exposure. As part of its
mark-to-market policy the Company provides for the future operational costs of
maintaining long-term contractual commitments.
32
<PAGE> 24
Interest rate swaps, including cross-currency swaps, which are used to convert
the Company's fixed rate preferred stock and term debt obligations to variable
rate obligations are not marked to market. Instead, the net inflows or outflows
are recorded as adjustments to interest expense or dividends, as appropriate.
Adjustments to dividends are recorded on an aftertax basis. Non-U.S. dollar
denominated debt issued by Salomon Inc (Parent Company) is translated to U.S.
dollars at exchange rates prevailing at the end of each reporting period. Except
for debt specifically identified as a hedge of an investment in a subsidiary
with a functional currency other than the U.S. dollar, the translation impact is
included in income. The Company mitigates this exposure by entering into forward
currency purchase agreements. The impact of marking such agreements to
prevailing exchange rates is also included in income. The Company also enters
into forward currency sales contracts to hedge investments in subsidiaries with
functional currencies other than the U.S. dollar. The impact of marking such
contracts to prevailing exchange rates is included in "Cumulative translation
adjustments," as is the impact of translating the investments being hedged.
33
<PAGE> 25
CAPITAL AND LIQUIDITY MANAGEMENT
Capital is an expensive resource. To maximize the return to shareholders, it is
essential that the Company deploy its capital in an efficient manner. Liquidity
management is integral to capital management, and it is especially critical for
a financial intermediary. Access to funding must be assured under all market
conditions. The confidence of creditors and counterparties in the Company's
ability to perform pursuant to its contractual obligations is critical to the
Company's survival and continued success.
35
CAPITAL MANAGEMENT - OVERVIEW
35
WORKING CAPITAL
36
REGULATORY CAPITAL AND DOUBLE LEVERAGE
38
ECONOMIC RISK CAPITAL
38
ASSET LEVERAGE
39
CAPITAL AND FUNDING SOURCES
43
OTHER
34
<PAGE> 26
CAPITAL MANAGEMENT - OVERVIEW
As a major financial intermediary that competes in global markets, the Company
has large and diverse capital requirements. The Company's capital strategy is
driven by its need to respond quickly to market developments and the following
factors: working capital requirements, regulatory capital requirements and
double leverage, and economic risk capital requirements.
The principal determinants of the Company's total long-term capital requirements
are working capital and total capital basis double leverage. The principal
determinants of the Company's equity capital requirements are equity capital
basis double leverage and economic risk capital.
Long-term capital requirements are funded by common equity, perpetual preferred
stock, redeemable preferred stock, unsecured obligations (primarily term debt)
and long-term deferred taxes. Long-term capital includes all amounts maturing
beyond one year and a portion of amounts maturing between six months and one
year (weighted by maturity), and excludes all amounts scheduled to mature within
six months.
From January 1, 1996 through February 29, 1996, the Company issued over $1
billion in long-term debt as well as $250 million of 8.40% Cumulative Preferred
Stock, Series E. Such issuances were intended to partially replace the roll-off
of long-term capital which occurred during the fourth quarter of 1995 and is
expected to occur during the first half of 1996.
<TABLE>
<CAPTION>
Dollars in billions
Year Ended December 31, 1995 1994 1993 1992 1991
==========================================================================================
<S> <C> <C> <C> <C> <C>
Long-term capital:
Common equity capital $ 3.8 $ 3.5 $ 4.2 $ 3.5 $ 3.2
Perpetual preferred stock .3 .3 .3 .1 .1
Redeemable preferred stock .5 .7 .7 .7 .7
Term debt and other 10.8 11.6 11.6 7.4 6.0
- ------------------------------------------------------------------------------------------
Total long-term capital $ 15.4 $ 16.1 $ 16.8 $ 11.7 $ 10.0
==========================================================================================
</TABLE>
GRAPH #13 (SEE APPENDIX A)
WORKING CAPITAL
Determination of its working capital requirements is essential to the Company's
capital and liquidity management. The Company defines its working capital
requirement as the amount needed to fund the difference between the Company's
total cash requirement and the cash which could be reasonably raised through
secured financing under normal market conditions. The amount of cash which can
be raised through secured financings is dependent upon many factors, including
the credit quality and market liquidity of the Company's assets, legal
requirements, market conventions and lender requirements. For example, the
Company can obtain
35
<PAGE> 27
secured financing by pledging as collateral an investment grade corporate bond
that it owns. Based upon the quality of this bond, the Company may reasonably
expect to obtain secured financing equal to 90% of the bond's value. Thus, the
Company would apply a 10% working capital margin or "haircut" to its holding of
this particular security. Securities such as U.S. government obligations require
a smaller haircut, while other less liquid assets require a greater haircut,
perhaps as much as 100%. The aggregate of these haircuts represents a large
percentage of the Company's working capital requirements. The remaining
requirements are principally related to collateral requirements of swap
counterparties, exchanges and clearing organizations and the Company's fixed
assets. The Company monitors its ability to raise secured funding against actual
capacity as well as adjusted capacity taking into consideration potential
changes in market conditions and the Company's status.
The Company's policy is to fund working capital requirements with long-term
capital. As of December 31, 1995, the Company's working capital coverage ratio,
which represents total long-term capital divided by required working capital,
was 1.10, consistent with the Company's internal guideline of 1.10. The 10%
cushion is designed to provide a layer of protection against volatility in
capital usage.
The reduction in the Company's total long-term capital during 1995 was
consistent with the reduction in working capital requirements.
GRAPH #14 (SEE APPENDIX A)
REGULATORY CAPITAL AND DOUBLE LEVERAGE
The Company operates globally through a network of subsidiaries, each with its
own capital requirements. A number of the Company's subsidiaries are subject to
regulatory capital requirements. Regulated entities such as SBI, SBIL, SBAL and
SBAG are required to maintain minimum amounts of regulatory capital, which
generally consists of both equity capital and subordinated debt. In addition,
limits exist pertaining to the maximum amount of capital which may be held in
the form of subordinated debt. Actual requirements vary by jurisdiction.
Regulatory requirements also govern dividends and certain other payments made by
regulated subsidiaries. In addition, Swapco, in order to maintain its triple-A
rating, must maintain levels of equity capital in accordance with agreements
with its rating agencies. Swapco's capital requirements are dynamic, varying
with the size and concentration of its counterparty receivables. Subsidiaries'
capital requirements, the substantial majority of which are attributable to
regulated subsidiaries, are largely met by the parent company's infusion of
equity and/or subordinated debt. If the parent company could not refinance its
own debt and simultaneously could not withdraw regulatory capital from its
subsidiaries, it could experience liquidity difficulty.
36
<PAGE> 28
Double leverage is a measure of a parent company's investment in its
subsidiaries in relation to its own capital. The Company views double leverage
from two perspectives. Under the "total capital" view, the sum of intercompany
debt and the equity of the Company's subsidiaries ("subsidiaries' total
capital") is divided by the total long-term capital of Salomon Inc. Total
capital basis double leverage in excess of 1.0 represents a portion of
subsidiaries' total capital which is funded with short-term debt of the parent.
Under the "equity capital" basis, the equity of the Company's operating units is
divided by the sum of Salomon Inc's common equity and perpetual and redeemable
preferred stock. Equity basis double leverage in excess of 1.0 arises from the
funding of equity investments with debt of the parent. The Company's objectives
are to maintain the total capital basis double leverage ratio at no more than
1.0 and, over time, to reduce the equity capital basis double leverage ratio to
a level that approximates 1.0. As shown in the following table, the Company's
double leverage ratios have decreased significantly since 1991.
<TABLE>
<CAPTION>
December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total capital basis .98 .87 .96 1.15 1.21
Equity capital basis 1.19 1.18 1.45 1.61 1.65
======================================================
</TABLE>
As a general rule, it is Company policy to dividend subsidiary earnings to the
parent on a regular basis. Such dividends are subject to regulatory constraints
as well as tax management considerations.
The Company's double leverage increased as a result of capital requirements at
Swapco. A requirement of Swapco's triple-A rating is that the structured
derivative intermediary maintain capital equal to concentrations of counterparty
credit exposure, including exposure to its largest triple-A rated counterparty.
This rating agency requirement applies to triple-A rated counterparties even
where Swapco has the right to call for collateral if the counterparty is
downgraded. During 1995, market conditions led to increased exposure to one such
triple-A rated counterparty. This increased exposure led the Company to increase
its equity investment in Swapco from $280 million to $666 million over the year.
The double leverage produced by the Company's equity investment in Swapco is its
safest investment among all of its subsidiaries. Swapco's activities are limited
to intermediating derivative transactions between other subsidiaries of the
Company and customers. Swapco itself bears no market or liquidity risk. Of
Swapco's $1.3 billion of derivative receivables, 84% are from triple-A,
double-A, or fully collateralized counterparties, and 96% are from triple-A,
double-A, single-A, or fully collateralized counterparties. Its other assets are
securities purchased under agreements to resell collateralized by U.S.
Treasuries and triple-A debt securities hedged against market risk. The
Company's double leverage due to its investment in Swapco is therefore more
benign than double leverage from other sources. The Company's equity in Swapco
is akin to the risk of investing in very high quality corporate or sovereign
debt securities. At December 31, 1995, excluding its investment in Swapco, the
Company's total capital and equity basis double leverage ratios were 0.93 and
1.05, respectively. In spite of its low risk, the Company is mindful of the cost
of maintaining high levels of Swapco capital and, accordingly, is taking
measures to reduce Swapco's capital requirement without constraining its
business.
37
<PAGE> 29
ECONOMIC RISK CAPITAL
Economic risk capital represents equity capital required to absorb potential
losses that can result from the various risks to which the Company is exposed.
The key risks are market risk, credit risk, and operational and support risk
(see "Risk Management" for a further discussion of these risks). One means of
measuring these risks is earnings volatility, including a comparison of expected
volatility ("ex-ante" risk) to historical volatility ("ex-post" risk) to help
ensure that risks have been appropriately captured and quantified. The Company
manages to a ratio of earnings volatility to equity capital, which is adjusted
over time to reflect the expected level of core earnings capacity and credit
ratings considerations.
ASSET LEVERAGE
It should be recognized that a simple total asset to equity measure is not a
valid indicator of market risk leverage, given the ability to hedge
"on-balance-sheet" market risk with derivative instruments. Such traditional
measure does not recognize the substantial differences in the liquidity of
various assets. In viewing such measures as a gauge of liquidity risk leverage,
it is therefore critical to focus on asset mix. For example, based purely on a
ratio of gross or net assets to equity, the Company would appear more leveraged
than the industry; however, if government securities are also excluded, this is
not the case. The reason for excluding government securities is the vast
majority of such securities are easy to fund, carry little credit risk and can
be easily hedged. In other words, the liquidity of such securities is
significantly higher than other asset types.
GRAPH #15 (SEE APPENDIX A)
In addition, when comparing the Company's asset to equity ratios with its
competitors, it should be noted that the Company discloses average assets, and
there is little difference between the Company's average and period-end assets.
Since such a difference is most likely to occur in finance assets and
governments, due to their high level of liquidity, this makes the ratio of
average net assets excluding governments to equity even more meaningful as a
measure of relative leverage.
38
<PAGE> 30
AVERAGE WEEKLY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Year Ended Year Ended
--------------------------------------------------------
Dollars in millions Mar. 31, 1995 June 30, 1995 Sept. 30, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government and government agency
securities-U.S. $ 31,743 $ 32,904 $ 33,871 $ 41,446 $ 34,991 $ 33,639
Government and government agency
securities-non-U.S. 32,896 38,749 33,202 34,466 34,828 32,153
Financial options and
contractual commitments 7,857 6,919 5,988 5,731 6,624 8,735
Other financial instruments owned 19,212 19,014 18,500 20,421 19,288 22,945
- ------------------------------------------------------------------------------------------------------------------------
Total financial instrument inventories 91,708 97,586 91,561 102,064 95,731 97,472
- ------------------------------------------------------------------------------------------------------------------------
Collateralized short-term
financing agreements 63,779 61,163 56,817 68,567 62,583 59,790
Other assets 16,737 17,260 14,122 13,002 15,281 19,997
- ------------------------------------------------------------------------------------------------------------------------
Average total assets $ 172,224 $176,009 $162,500 $183,633 $173,595 $177,259
========================================================================================================================
Period-end total assets $ 164,956 $163,693 $162,586 $188,428 $188,428 $172,452
========================================================================================================================
Period-end net assets* $ 104,421 $106,644 $ 99,816 $119,128 $119,128 $104,947
========================================================================================================================
Average net assets* $ 102,459 $109,494 $101,042 $110,748 $105,938 $110,245
========================================================================================================================
Average net assets, excluding
government securities* $ 37,820 $ 37,841 $ 33,969 $ 34,836 $ 36,119 $ 44,453
========================================================================================================================
Ratios:
Average net assets to equity* 22 24 22 24 23 25
Average net assets, excluding
government securities to equity* 8 8 7 7 8 10
========================================================================================================================
</TABLE>
*Net assets are total assets less collateralized short-term financing
agreements, cash and interest bearing equivalents and assets securing
collateralized mortgage obligations.
The Company's total assets were $188 billion at December 31, 1995, up from $172
billion at year-end 1994. This increase was primarily the result of higher U.S.
and non-U.S. government and government agency securities and an increase in
matched book activity, partially offset by a reduction in receivables. Due to
the nature of the Company's trading activities, including its matched book
activities, it is not uncommon for the Company's asset levels to fluctuate from
period to period.
CAPITAL AND FUNDING SOURCES
The Company's liquidity management process includes a contingency funding plan
designed to ensure adequate liquidity even if access to unsecured funding
sources is severely restricted or unavailable. This plan is reviewed
periodically to keep the funding options current and in line with market
conditions. The management of this plan includes an analysis which is utilized
to determine the Company's ability to withstand varying levels of stress, which
could impact its liquidation horizons and required margins.
The liquidity management process considers the ability of the Company to repay
unsecured debt obligations and other unsecured liabilities when they mature
through the proceeds of secured financing, using unpledged collateral or asset
sales, if necessary. As of December 31, 1995, the Company had sufficient
unencumbered assets to support, under normal market conditions, all maturing
short-term unsecured liabilities.
39
<PAGE> 31
The rationale for maintaining unencumbered assets is that they represent a
source of short-term liquidity and could be used as collateral to raise the
funds needed in the event that the Company's access to unsecured financing was
impaired.
SBI has a committed secured standby bank credit facility for financing
securities positions. It enables SBI to borrow on a secured basis using a
variety of financial instruments as collateral. The capacity of the facility at
December 31, 1995 was $2.1 billion. In addition, SBIL has a similar facility in
the amount of $1 billion. At December 31, 1995, there were no outstanding
borrowings under these facilities.
SECURED SHORT-TERM BORROWINGS Secured short-term financing, including
repurchase agreements and secured loans, is the Company's principal funding
source. A repurchase agreement is a sale of securities to a counterparty and a
simultaneous agreement to repurchase similar securities in the future from the
same counterparty for the same price plus interest at an agreed upon rate; in
economic substance, a repurchase agreement is a collateralized borrowing. The
market for repurchase agreements collateralized by U.S. government and
government agency securities is very active and has remained available even in
the most disruptive market conditions. Markets for repurchase agreements
collateralized by securities issued by non-U.S. governments, corporate debt and
equity securities continue to develop and represent another source of liquidity,
particularly for the Company's non-U.S. operations.
In addition to utilizing repurchase agreements to finance trading activities,
the Company uses these instruments to take offsetting positions in reverse
repurchase agreements to benefit from favorable interest rate spreads. These
matched book activities provide the Company with a low-risk source of revenues
while utilizing the available secured financing capacity. Securities loaned in
return for cash collateral, another form of collateralized short-term financing,
and secured bank borrowings represent a small portion of the Company's secured
financing.
UNSECURED SHORT-TERM BORROWINGS Unsecured short-term borrowings provide the
Company with a source of short-term liquidity and are also utilized as an
alternative to secured financing when they represent a cheaper funding source.
Sources of short-term unsecured borrowings include commercial paper (mainly
issued in the U.S.), unsecured bank borrowings and letters of credit
(principally in Europe), deposit liabilities (virtually all at the Tokyo branch
of the Company's German banking subsidiary) and corporate loans. See Note 5 to
the Consolidated Financial Statements for additional information regarding
short-term borrowings and committed credit facilities.
TERM DEBT The Company's long-term capital is comprised largely of unsecured
term debt. The Company includes all term debt with a remaining maturity in
excess of one year and portions of term debt with remaining maturities between
six months and one year on a weighted basis, in its calculation of long-term
capital. The average remaining maturity of the Company's term debt was 3.3 years
at December 31, 1995 and 1994. See Note 7 to the Consolidated Financial
Statements for additional information regarding term debt.
The Company utilizes interest rate swaps to convert fixed rate term debt, which
is used to fund inventory-related working capital requirements, into variable
rate obligations. See Note 7 to the Consolidated Financial Statements for an
analysis of the impact of such swaps. Fixed rate term debt used to fund fixed
assets may
40
<PAGE> 32
not be converted to variable rate obligations. The Company's term
debt issuances denominated in currencies other than the U.S. dollar which are
not used to finance assets in the same currency, are effectively converted to
U.S. dollar obligations through the use of foreign exchange agreements.
During 1995, S&P lowered its ratings on the Company's long-term debt and
reaffirmed its commercial paper rating; Fitch lowered the credit rating of the
Company's long-term debt and commercial paper; Moody's lowered its rating on the
Company's long-term debt and reaffirmed its commercial paper rating; IBCA
downgraded the Company's ratings on long-term debt and reaffirmed its commercial
paper rating, and Duff & Phelps reaffirmed the Company's long-term debt and
commercial paper ratings. The downgrades have had a negative impact on the
Company's funding costs. However, the credit ratings of Swapco have not been
affected by these actions. The following table summarizes the Company's credit
ratings as of February 29, 1996:
<TABLE>
<CAPTION>
Duff &
Phelps Fitch IBCA Moody's S&P
============================================================
<S> <C> <C> <C> <C> <C>
Long-term debt A- BBB+ A- Baa1 BBB
Commercial paper D1 F-2 A1 P-2 A2
============================================================
</TABLE>
PREFERRED STOCK The Company is authorized to issue a total of 5,000,000 shares
of preferred stock. Three separate series (Series A, C and D) were issued and
outstanding at December 31, 1995. The Company issued 700,000 shares of Series A
Preferred in 1987. At December 31, 1995, 560,000 of such shares were
outstanding, each with a redemption value of $1,000. All of the outstanding
shares are held by affiliates of Berkshire Hathaway Inc. Dividends are payable
at an annual rate of 9% and the shares are convertible into Salomon Inc common
stock at the rate of $38 per common share. The first of five tranches of 140,000
shares of Series A Preferred was redeemed by the Company on October 31, 1995. If
not previously converted, one-fourth of the remaining 560,000 shares are to be
redeemed annually on October 31 at $1,000 per share plus any accrued but unpaid
dividends.
The Company issued 225,000 shares of Series C Preferred in 1991 for an aggregate
of $112.5 million. Dividends are payable at an annual rate of 9.5%. An aggregate
of $200 million of Series D Preferred (400,000 shares) was issued in 1993, with
dividends payable at an annual rate of 8.08%. Both of these series are
redeemable, at par, only at the Company's option. Series C is redeemable at any
time on or after June 30, 1996; Series D is redeemable at any time on or after
March 31, 1998. In February 1996, the Company issued 500,000 shares of 8.40%
Cumulative Preferred Stock, Series E, for an aggregate of $250 million. Series E
is redeemable at the Company's option at any time on or after March 31, 2001.
The Company has entered into interest rate swap agreements that effectively
convert its fixed rate dividend obligations on all of its preferred stock issues
to variable rate obligations. Such agreements effectively reduced dividends on
preferred stock in 1995 by $19 million, net of taxes.
COMMON EQUITY In May 1994, the Company's Board of Directors authorized the
repurchase of up to 10 million shares of the Company's common stock, including
4.6 million shares remaining under previous authorizations. The Company's common
shares repurchased for treasury were insignificant in 1995. Shares authorized
for additional repurchase by the Company's Board of Directors totaled 9.8
million at December 31, 1995.
41
<PAGE> 33
The Company has several programs intended to encourage employee equity ownership
in Salomon Inc. The Company's Equity Partnership Plan (the "Plan") began in 1990
and was formally approved by stockholders in 1991. Under the Plan, qualifying
employees ("participants") receive a portion of their compensation in the form
of Salomon Inc common stock, the payment of which is deferred for five years.
The stock is purchased by the Plan's trustee in the open market as well as from
participants upon distribution in order to satisfy their income tax withholding
liabilities. The portion of each participant's compensation paid in stock is
fixed in relation to total compensation, and for 1995 and prior years reached a
maximum of 50% of total compensation. Participants received the shares for 1995
and prior years with an incentive of 17.65% whereby the Company makes an
additional contribution to participants' accounts of 17.65% of their
compensation deferred into the Plan.
In 1995, 2.7 million shares were awarded under the Plan. In addition, in
December 1995, the Plan's trustee distributed, under the Plan terms, the 1990
award amounting to 1.6 million shares (net of withholding tax requirements).
The Plan was amended for 1996 and future awards. The amendments, subject to
approval by the Company's shareholders, include an increase in the award
incentive to 25%, a reduction in the deferral period to three years from five
years, and the introduction of additional forfeiture provisions on both the
award and the incentive. The award is forfeited if the participant's employment
is terminated for cause (no change from the prior Plan). The award is subject to
forfeiture provisions if the participant leaves the Company to join a competitor
within three years after the award date. If a participant leaves the Company
other than by virtue of death, disability, retirement or as the result of a
downsizing during the three years following the award, the entire 25% award
incentive will be forfeited.
The Plan, as amended, also includes revisions to the participation schedule
which generally reduces the portion of participants' compensation subject to the
Plan (participation reaches 30% of compensation) and substantially increases the
minimum level of compensation required for participation.
The Company's 401(k) plan was amended effective January 1, 1996. The amendment
includes an increase in the Company's match from 50% to 75% of an eligible
employee's contribution to the 401(k) plan. As amended, the plan will match 75%
of the lesser of the eligible employee's contribution to the plan or 6% of the
eligible employee's total compensation. The increase in the Company's match will
be in the form of Salomon Inc common stock and is limited to eligible employees
with a compensation level less than $360,000.
The Employee Stock Purchase Plan was approved by the Company's stockholders in
1989. This plan allows eligible employees to make purchases, through payroll
deductions, of the Company's common stock at a price of 85% of market value,
limited by tax regulations to an annual maximum per employee of the lesser of
$21,250 or 10% of the individual's annual compensation. Shares purchased under
this plan are purchased on the open market. Prior to the second quarter of 1994,
these shares were issued from the Company's common stock held in treasury. Thus
far, over 1.7 million shares have been purchased by employees under this plan,
including approximately 232,000 shares in 1995.
42
<PAGE> 34
OTHER
BASIS PETROLEUM The previous discussions of capital and liquidity management are
applicable primarily to the trading and financing activities of Salomon Inc,
Salomon Brothers and Phibro. The liquidity and capital needs of Basis, the
Company's oil refining and gathering subsidiary, are closely monitored and
managed by Basis Petroleum's management in close coordination with Salomon Inc.
Asset liquidity and financial leverage ratios of Basis Petroleum are much lower
than subsidiaries engaged in trading activities. Capital investments are
necessary to maintain operational flexibility and achieve competitive advantage.
This is true as the refining industry responds to the more restrictive health,
safety and environmental requirements of the Occupational Safety and Health
Administration, the Department of Transportation, the Environmental Protection
Agency and other U.S. regulatory agencies.
At December 31, 1995, the Company's total investment in Basis Petroleum was
approximately $1.1 billion, comprised of $252 million in working capital
advances, $525 million in intercompany subordinated debt and $299 million in
equity. In January 1996, $140 million of debt was exchanged for equity, so as to
create a capital mix more consistent with the industry.
HIGH YIELD PORTFOLIO Salomon Brothers' activities include trading securities
that are less than investment grade, characterized as "high yield." High yield
securities include corporate debt, convertible debt, preferred and redeemable
preferred equity securities rated lower than "triple B-" by internationally
recognized rating agencies, unrated securities with market yields comparable
with entities rated below "triple B-," as well as sovereign debt issued by
certain countries in currencies other than their local currencies and which are
not collateralized by U.S. government securities. For example, high yield
securities exclude the collateralized portion of Salomon Brothers' holdings of
"Brady Bonds," but include such securities to the extent they are not
collateralized. The Company's trading portfolio of high yield securities owned
is carried at fair market value and totaled $2.3 billion at December 31, 1995;
the largest single high yield exposure was $84 million.
43
<PAGE> 35
RISK MANAGEMENT
Effective management of the risks inherent in the Company's businesses is
critical. Substantial progress was achieved in 1995 towards strengthening
controls and risk management, including a restructuring of the Company's Risk
Management Group, which now oversees the market risk management of both Salomon
Brothers and Phibro. The following section discusses the risks inherent in the
Company's businesses, procedures in place to manage such risks, and initiatives
under way to continue to enhance the Company's management of risk.
45
MARKET RISK
47
CREDIT RISK
49
OPERATIONAL AND SUPPORT RISK
51
ENVIRONMENTAL RISK
44
<PAGE> 36
MARKET RISK
Market risk represents the potential loss the Company may incur as a result of
absolute and relative price movements in financial and commodities-related
instruments, price volatility, changes in yield curves, currency fluctuations
and changes in market liquidity. The Company utilizes a mark-to-market
accounting policy for the substantial majority of items recorded on the balance
sheet as well as off-balance-sheet contractual commitments. When market prices
are not readily available, instruments are priced on a comparable basis, for
example, by using matrix or model pricing ("fair market value"). Prices are
adjusted, where appropriate, to address factors such as the market liquidity of
the instrument, the age or holding period of the instrument, and credit quality
of the counterparty. The market liquidity component considers the size of
positions relative to the market and would generally result in a markdown of a
position as its relative size is increased. The Company considers this to be a
useful trading discipline. It represents an integral component of mark-to-market
accounting as practiced by the Company and, as such, may have an impact on the
reported volatility of the Company's trading businesses. The Company manages
market risk across on- and off-balance-sheet products. This, together with the
Company's mark-to-market accounting policy, means that separate discussion of
market risk for individual products, including derivatives, is not meaningful.
The distinguishing risks relative to derivatives are credit and funding risk,
which can be increased or decreased by market movements. See "Risk Management -
Credit Risk - Credit Exposure from Derivatives Activities."
Within the Company's trading businesses, sound management of market risk has
always been a critical consideration. The sections that follow discuss
organizational elements of market risk management, as well as specific risk
management tools and techniques. The Company has sought to institutionalize
these elements across all its businesses. Efforts to further strengthen the
Company's management of market risk are ongoing and the enhancement of risk
management systems and reporting, including the development and utilization of
quantitative tools, is of major importance. Nevertheless, the basis for strong
risk management is the expertise and judgment of the Company's trading
professionals and senior management, and open lines of communication.
THE COMPANY'S RISK MANAGEMENT STRUCTURE AND OVERSIGHT
THE RISK MANAGEMENT GROUP
The Company's Risk Management Group (the "Group") is comprised of the Global
Risk Manager, the Chairman and CEO of the Company, the Chairman and CEO of
Salomon Brothers and the heads of the major risk-taking business units and
trading desks throughout the world, including the President of Phibro. The
Group's primary functions are to monitor overall risk levels so that they are in
accordance with firmwide guidelines; to identify and report to the Company's
Board of Directors, on a timely basis, major risks undertaken by the trading
businesses; to perform risk audits to enhance the analysis and management of
major risks by the heads of the trading desks; to set and review risk limits and
approve limit excessions; and, when appropriate, to adjust the levels of risk
assumed.
THE GLOBAL RISK MANAGER
The Global Risk Manager is responsible for the continued development of the
Company's risk management system and process and for monitoring and reporting
aggregate risk-taking activity. This responsibility includes the analysis and
monitoring of market risks, as well as oversight of the process for position
marking and inventory management. The responsibility of the Global
45
<PAGE> 37
Risk Manager extends to Phibro, and the risks of Phibro are integrated for risk
monitoring and risk management purposes with the other trading units of the
Company. The Global Risk Manager reports to the Company's Chief Financial
Officer and is independent of the Company's business units.
RISK AUDITS
Members of the Group perform periodic risk audits of the Company's risk-taking
business units. The risk audit process is overseen by the Global Risk Manager.
The Global Risk Manager is assisted in this role by members of the Group, and by
senior traders and risk managers from the various business units with expertise
in their respective market arenas. By including senior traders from other
businesses, risk audits provide a forum for the communication of risk management
approaches and ideas across the Company.
The risk audits include a review of models and controls related to market risk
management and measurement, and a detailed critique of the positions, strategies
and risk management methods utilized by the business units. The risk audit
process is the primary tool for critical review and refinement of the risk
management measurement and reporting that the Company has in place.
THE SALOMON INC BOARD OF DIRECTORS
The Company maintains an overall guideline as to firmwide risk, expressed as a
ratio of the expected annual earnings volatility of the Company's trading
businesses to equity capital available to support that volatility. This
guideline, which is subject to periodic reexamination, is reviewed with the
Company's Board of Directors. With such a guideline in place, a decline in
common equity capital will lead to a proportionately lower limit on risk taking.
TOOLS FOR RISK MANAGEMENT AND REPORTING
The Company's global risk measurement begins with the identification of relevant
market risk factors. These core risk factors vary from market to market, and
region to region. For example, in fixed income markets, risk factors include
interest rates, yield curve slopes, credit spreads and interest rate volatility.
In equity markets, risk factors include equity index exposure, equity volatility
and equity index spreads. In the foreign exchange market, risk factors are
exchange rates and exchange rate volatility. In the commodities markets, risk
factors include price levels, spreads and the volatility of prices. The Company
identifies other factors specific to trading strategies as well as risk factors
significant to the Company as a whole, such as aggregate credit spread exposure,
that may not be significant for individual desks. Overall, more than one hundred
risk factors are employed. Risk factors are used in three types of analyses:
stress analysis, value-at-risk analysis and scenario analysis.
STRESS ANALYSIS
The Company performs stress analysis by repricing inventory positions for
specified upward and downward moves in risk factors, and computing the revenue
implications of these repricings. Stress analysis is a useful tool for
identifying exposures that appear to be relatively small in the current
environment but grow more than proportionately with changes in risk factors.
Such risk is typical of a number of derivative instruments, including options
sold, many mortgage derivatives and a number of structured products. Stress
analysis provides for the measurement of the potential impact of extremely large
moves in risk factors, which, though infrequent, can be expected to occur from
time to time.
VALUE-AT-RISK ANALYSIS
Under value-at-risk analysis, revenue implications are computed for individual
simulations, each based on a
46
<PAGE> 38
random outcome for the individual risk factors. Value-at-risk is a summary
statistic constructed by performing thousands of simulations from which a
probability distribution of revenues is derived. It is of limited value for
internal risk management in that it does not give any indication of which
individual exposures are problematic or which of the many risk factor
simulations are particularly worrisome. However, it does provide a concise and
simple measure of risk. A potential benefit of value-at-risk is that a
consistent computation by all market participants could provide a common measure
of risk levels.
SCENARIO ANALYSIS
Scenario analysis is a tool that generates forward-looking "what-if" simulations
for specified changes in market factors. For example, a scenario analysis could
simulate the impact of a dramatic tightening by the Federal Reserve. The revenue
implications of the specified scenario are quantified not only for the Company
as a whole, but on a business unit basis and on a global basis. The risk
management system keeps track of many scenarios developed by both members of the
Group and the Company's economists and strategists. This tool can also be used
on a retrospective basis to evaluate the accuracy of assumptions regarding risk
factors and to ascertain significant risk factors. This is done by reflecting
the actual changes in risk factors in the system and comparing the system
predicted results with actual trading results.
RISK MANAGEMENT CONTROLS
RISK LIMITS
The Company's trading businesses have implemented desk and business unit limits
on exposure to risk factors. These limits, which are intended to enforce the
discipline of communicating and gaining approval for higher risk positions, are
periodically reviewed by the Risk Management Group. Individual desks may not
exceed risk limits without the approval of the business unit head. Business
units may not exceed risk limits without the approval of the appropriate members
of the Risk Management Group.
INVENTORY CONTROL AND VALUATION
Inventory is necessary for an active market maker, but can be a major source of
liquidity risk and can result in hedge mistracking. Monitoring the Company's
inventory levels and composition and oversight for inventory pricing is the
responsibility of the Global Risk Manager. The Company provides for liquidity
risk on inventory positions by imposing markdowns as the age of the inventory
increases.
CREDIT RISK
Credit risk is the potential loss the Company could incur if an issuer or
counterparty is unable to perform on its commitments, including the timely
payment of principal and interest or settlement of swap and foreign exchange
transactions, repurchase agreements, securities purchases and sales, and other
contractual obligations. The Company's credit risk management process considers
the many factors that influence the probability of a potential loss, including,
but not limited to, the issuer's or counterparty's financial profile, its
business prospects and reputation, the specific terms and duration of the
transactions, the exposure of the transactions to market risk, macroeconomic
developments and sovereign risk.
ORIGIN OF CREDIT RISK
In the normal course of its operations, the Company and its subsidiaries enter
into various transactions which give rise to credit risk. Credit risk is
generally attributable to one or more of the following risks: market, delivery
and principal. Market and delivery risks generally create credit risk with
respect to transactions with
47
<PAGE> 39
counterparties. Principal risk is the risk of nonpayment of the principal and
interest of a security.
The components of market risk, such as absolute and relative price movements,
price volatility, changes in yield curves, currency fluctuations and changes in
market liquidity, result in credit risk when a counterparty's obligation to the
Company exceeds the obligation of the Company to the counterparty. Delivery risk
arises from the requirement, in many circumstances, to release cash or
securities before receiving payment. For both market and delivery risk, the
Global Credit Review Department sets credit limits or requires specific
approvals which anticipate the potential exposure of transactions.
The Company, as a dealer of securities in the global capital markets, has risk
to issuers of fixed income securities for the timely payment of principal and
interest. Principal risk is reviewed by the Group, which identifies and reports
major risks undertaken by the trading businesses.
CREDIT RISK MANAGEMENT AT SALOMON BROTHERS
The Chief Credit Officer of Salomon Brothers is a Managing Director and reports
directly to the General Counsel of Salomon Inc. Independent of any
revenue-generating function, the Chief Credit Officer of Salomon Brothers
manages the Global Credit Review Department (the "Department"), whose
professionals assess, approve, monitor and coordinate the extension of credit on
a global basis. In considering such risk, the Department evaluates the
risk/return trade-offs as well as current and potential credit exposures to a
counterparty or to groups of counterparties that are related because of
industry, geographic or economic characteristics. The Department also has
established various credit policies and control procedures used singularly or in
combination, depending upon the circumstances, including:
- - establishment of internal guidelines monitored by the Chief Credit Officer
for maximum potential credit exposure to each counterparty or each issuer and
to each country;
- - initial credit approval, whereby the approval of a designated member of the
Department is required before execution of a transaction that does not meet
defined parameters;
- - credit limits, against which monitoring of transactions is performed on a
daily basis;
- - specific clauses in legal agreements for collateral requirements,
cross-default, right of set-off, guarantees, event risk covenants and two-way
mark to market, among others;
- - establishment of collateral standards for financing activities and secured
contractual commitments;
- - quarterly analysis of potential exposure for DPG reporting to the SEC and
CFTC, see "Derivative Instruments - Overview;"
- - periodic scenario analysis of subsets of the derivatives credit portfolio to
evaluate sensitivity to market variables;
- - periodic assessment of sovereign risk through analysis of economic and
political developments; and
- - periodic review of aged and large inventory positions with the Global Risk
Manager.
CREDIT RISK MANAGEMENT OF COMMODITIES-RELATED TRANSACTIONS
The credit departments of Phibro and Basis Petroleum determine the credit limits
for counterparties in their respective commodities-related activities. Exposure
reports, which contain detailed information about cash flows with customers,
goods in transit and forward mark-to-market positions, are reviewed daily.
48
<PAGE> 40
CREDIT EXPOSURE FROM DERIVATIVES ACTIVITIES
The accompanying charts display Salomon Brothers' credit exposure, net of
collateral, at December 31, 1995, for swap agreements, swap options, caps and
floors (together referred to as "swaps" in the charts) and foreign exchange
contracts and options. They do not present potential credit exposure that may
result from factors that influence market risk or from the passage of time.
Severe changes in market factors may cause credit exposure to increase or
decrease suddenly and dramatically. Swap agreements, swap options, caps and
floors include transactions with both short- and long-term periods of
commitment. Foreign exchange contracts have maturities that are generally less
than one year. Amounts shown include the effect of legally enforceable master
netting agreements, where applicable.
Collateral securing such transactions reduced gross credit exposure to a net
unsecured credit exposure of approximately $3.7 billion from swaps, swap
options, caps and floors and $.6 billion from foreign exchange contracts. With
respect to sovereign risk, credit exposure at December 31, 1995 was primarily to
counterparties in the U.S. ($2.1 billion), Japan ($.9 billion), Germany ($.4
billion) and Switzerland ($.3 billion).
Graph # 16 (See Appendix A)
Graph # 17 (See Appendix A)
OPERATIONAL AND SUPPORT RISK
As a major intermediary in financial and commodities markets, the Company is
directly exposed to market risk and credit risk which arise in the normal course
of its business activities. Slightly less direct, but of critical importance,
are risks pertaining to operational and back office support. This is
particularly the case in an environment characterized by rapid change that
includes increasing transaction volumes and an expansion in the number and
complexity of products in the marketplace.
49
<PAGE> 41
Such risks include:
- - OPERATIONAL/SETTLEMENT RISK The risk of financial and opportunity loss and
legal liability attributable to operational problems such as inaccurate
pricing of transactions, untimely trade execution, clearance and/or
settlement, or the inability to process large volumes of transactions.
- - TECHNOLOGICAL RISK The risk of loss attributable to technological limitations
that constrain the Company's ability to gather, process and communicate
information efficiently and without interruption, between the Company and its
customers, among units within the Company, and between the Company and the
markets in which it participates.
- - LEGAL/DOCUMENTATION RISK The risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
- - FINANCIAL CONTROL RISK The risk of loss attributable to limitations in
financial systems and controls; strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance
with management's authorization, and that financial information utilized by
management and communicated to external parties, including stockholders,
creditors and regulators, is free of material errors.
As the above risks are largely interrelated, so are the Company's actions to
mitigate and manage them. In 1995, Salomon Brothers appointed a Chief
Administrative Officer whose responsibilities include, among other things,
oversight of global operations and technology. An essential element in
mitigating the risks noted above is the optimization of information technology.
To be an effective competitor in an information-driven business of a global
nature requires the development of global systems and databases that ensure
increased and more timely access to reliable data. Salomon Brothers has
initiated a long-term and still ongoing process of upgrading its financial and
operating systems. This effort is focused on the replacement of manually
intensive processes with an intended improvement in control.
In 1995, Salomon Brothers implemented a new global interest rate swap system
which links trading, clearance, credit, legal and accounting applications to a
common database. This system improves controls by centralizing processing for
certain contractual products, improving the trade support work flow by providing
daily profit and loss information, and serving as the Company's "books and
records" for these contractual products. In addition to the aforementioned
systems implementations, Salomon Brothers' systems development efforts have
enhanced reporting of regulatory capital usage, improved support for analysis of
funding requirements and tax planning, and provided more flexible data access
and reporting tools for internal and external reporting. Additionally, systems
were deployed or enhanced to support trading flow and the management of risk.
The ability to provide superior client service at an acceptable cost is vital to
remain competitive in markets and products characterized by narrow margins. This
requires continued upgrading and increased flexibility in trading and operating
systems. The transition from a centralized application environment to a more
flexible distributed environment will allow Salomon Brothers to efficiently
support business changes. A critical challenge is to accomplish the transition
to new technology while supporting the current platform. Salomon Brothers has
made substantial investments in contingency systems to safeguard its information
assets. Such systems are designed to minimize the impact of any system outages.
50
<PAGE> 42
In conjunction with its systems development efforts, Salomon Brothers has been
engaged in a continuing multi-year effort to strengthen its internal control
structure. In 1994, a general ledger account review of Salomon Brothers'
London-based operations uncovered unreconciled balances which resulted in pretax
charges of $194 million, and an additional $109 million in pretax charges
resulted from the completion of a detailed review of Salomon Brothers' general
ledger accounts related to interest rate swaps. A similar review for Salomon
Brothers' U.S. operations was completed in 1993. To prevent a similar
accumulation of unreconciled balances in the future, the Company improved its
reconciliation and control procedures. As part of this process, responsibility
for general ledger accounts has been specifically assigned to the appropriate
managers who are required to confirm account accuracy on a quarterly basis. Key
reconciliation procedures are documented and are periodically reviewed by
internal audit.
ENVIRONMENTAL RISK
The Company is subject to environmental risk from two primary sources:
discontinued commodities processing operations and existing energy-related
refining, transportation and field development. In 1992, the Company formally
adopted an environmental policy statement which was communicated to its
stockholders and employees.
The Company is subject to uncertain remedial liability as a result of
commodities-related industrial operations, which were discontinued in or prior
to 1984. Such liability arises under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
which provides that potentially responsible parties ("PRPs"), including waste
generators and past and present site owners and operators, may be held jointly
and severally liable for the entire cost of site clean-up. The Company may also
be subject to liability under state or other U.S. environmental laws.
The process of remediating hazardous waste sites under CERCLA is normally
lengthy and involves a series of events including initial site identification,
environmental site studies and evaluations, issuance of the "Preliminary
Identification of Remedial Alternatives," completion of the "Remedial
Investigation and Feasibility Study," selection of an appropriate site remedy
and its related cost estimate known as the "Record of Decision," performance of
site remediation and post-remediation site monitoring. Factors that influence
the cost and time of completion include the remediation method selected; the
number of financially solvent PRPs responsible for payment; whether PRPs were
owners, operators or generators; determination of cost allocation among PRPs;
and the ongoing development of more efficient and effective remediation
technologies. The process may take ten years or more from site identification to
completion and may be further complicated by protracted legal proceedings
involving numerous PRPs.
The ultimate share of remediation costs that will be borne by the Company and
its subsidiaries cannot be predicted with accuracy. Although certain exposures
may be covered by insurance contracts or indemnification agreements from other
parties, the Company has incurred and will continue to incur costs related to
remediation at certain sites already identified. Further, it is possible that
the Company will be named as a PRP at additional sites. Management believes,
based upon currently known facts and established reserves, that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.
51
<PAGE> 43
Basis Petroleum is subject to various federal, state and local laws and
regulations concerning environmental standards. As new regulations are
developed, Basis seeks to identify those actions necessary to comply with the
requirements. Basis also seeks to make modifications which may be required under
future regulatory programs or which are desirable even though not dictated by
current regulations. Basis Petroleum's Vice President of Health, Safety and
Environmental, reporting directly to the Chairman, CEO and President of Basis
Petroleum, is responsible for establishing and coordinating internal safety and
environmental policies, periodic regulatory reporting and day-to-day oversight
of environmental matters. Basis has an ongoing internal auditing program to
monitor environmental compliance and has developed risk reduction policies and
procedures.
Phibro and Basis Petroleum have potential environmental exposure in connection
with physical oil and petrochemical activities in which cargoes of products are
transported and stored. These businesses seek to mitigate exposure through
insurance coverage, consideration of ports of delivery and storage terminals.
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<PAGE> 44
MANAGEMENT'S RESPONSIBILITY FOR COMPLIANCE AND FINANCIAL REPORTING
================================================================================
TO THE SHAREHOLDERS:
Management has developed and maintains controls to provide reasonable assurance
that assets are safeguarded and transactions are executed in accordance with
management's authorization. These controls are augmented by established policies
and procedures and include a substantial internal auditing function.
The Board of Directors, acting through its Audit and Compliance Committee,
provides general oversight of the Company's accounting policies and internal
controls, and reviews Company-wide compliance with legal and regulatory
requirements. The Audit and Compliance Committee is comprised entirely of
directors who are not officers or employees of the Company. The Director of
Internal Audit oversees the performance of a worldwide audit program and reports
directly to the Audit and Compliance Committee on matters of internal control.
Senior legal and compliance personnel have been directed to report compliance
concerns directly to the Chairman of the Committee and the Chairman of the
Company. Ongoing oversight of compliance activities is the responsibility of
the Company's General Counsel.
The financial statements of Salomon Inc, and all other information presented in
this Annual Report, are the responsibility of Management. The financial
statements have been prepared, under the direction of the Chief Financial
Officer, in accordance with generally accepted accounting principles. Management
is responsible for the integrity and objectivity of the financial statements,
including estimates and judgments reflected in them.
Arthur Andersen LLP, a firm of independent public accountants, audits the
Company's financial statements and meets regularly with the Audit and Compliance
Committee, including sessions in which no member of management is present, to
discuss the nature, scope and results of their audits. Arthur Andersen LLP's
report is presented on the following page.
/s/ Robert E. Denham /s/ Robert H. Mundheim /s/ Jerome H. Bailey
Robert E. Denham Robert H. Mundheim Jerome H. Bailey
Chairman and Executive Vice President and Chief Financial Officer
Chief Executive Officer General Counsel
53
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SALOMON INC:
We have audited the accompanying consolidated statement of financial condition
of Salomon Inc (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Salomon Inc and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
February 6, 1996
54
<PAGE> 46
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31, 1995 1994 1993
================================================================================================================================
<S> <C> <C> <C>
Revenues:
Interest and dividends $ 7,022 $ 5,902 $ 6,171
Principal transactions 1,077 (560) 1,482
Investment banking 472 486 791
Commissions 332 336 285
Other 30 114 70
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 8,933 6,278 8,799
Interest expense 5,782 4,892 4,600
- --------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,151 1,386 4,199
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 1,737 1,486 1,900
Technology 252 255 262
Professional services and business development 178 167 142
Occupancy 173 165 231
Clearing and exchange fees 63 70 62
Other 40 74 137
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,443 2,217 2,734
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative effect of change in
accounting principles 708 (831) 1,465
Income tax expense (benefit) 251 (432) 601
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in accounting principles 457 (399) 864
Cumulative effect of change in accounting principles,
net of tax benefit of $28 - - (37)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 457 $ (399) $ 827
================================================================================================================================
Earnings (loss) available for fully diluted earnings (loss)
per common share $ 437 $ (461) $ 817
================================================================================================================================
Per common share:
Primary earnings (loss) before cumulative effect of change in accounting principles $ 3.64 $ (4.31) $ 7.34
Cumulative effect of change in accounting principles - - (.33)
- --------------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) $ 3.64 $ (4.31) $ 7.01
================================================================================================================================
Fully diluted earnings (loss) before cumulative effect of change in
accounting principles $ 3.50 $ (4.31) $ 6.57
Cumulative effect of change in accounting principles - - (.29)
- --------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) $ 3.50 $ (4.31) $ 6.28
================================================================================================================================
</TABLE>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial
Statements, and Summary of Options and Contractual Commitments are integral
parts of this statement.
55
<PAGE> 47
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Dollars in millions
December 31, 1995 1994
============================================================================================================
<S> <C> <C> <C> <C>
Assets:
Cash and interest bearing equivalents $ 1,454 $ 3,539
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $45,121 $ 32,980
Government and government agency securities - non-U.S. 39,843 34,071
Corporate debt securities 11,150 11,537
Options and contractual commitments 6,713 6,932
Equity securities 3,915 4,169
Mortgage loans and collateralized mortgage securities 1,959 2,190
Other 2,248 1,418
------- -------
110,949 93,297
Commodities-related products and instruments:
Crude oil, refined products and other physical commodities 1,223 1,066
Options and contractual commitments 372 424
------- -------
1,595 1,490
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 48,422 43,792
Securities borrowed and other 16,993 17,034
------- -------
65,415 60,826
Receivables:
Customers 2,668 3,539
Brokers, dealers and clearing organizations 1,205 4,135
Other 599 570
------- -------
4,472 8,244
Assets securing collateralized mortgage obligations:
Sterling denominated 1,786 2,377
U.S. dollar denominated 645 763
------- -------
2,431 3,140
Property, plant and equipment, net of accumulated depreciation
and amortization of $669 in 1995 and $701 in 1994 1,343 1,181
Other assets, including intangibles 769 735
- ------------------------------------------------------------------------------------------------------------
Total assets $188,428 $172,452
============================================================================================================
</TABLE>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial
Statements, and Summary of Options and Contractual Commitments are integral
parts of this statement.
56
<PAGE> 48
<TABLE>
<CAPTION>
1995 1994
==================================================================================================================
<S> <C> <C> <C> <C>
Liabilities and Stockholders' Equity:
Short-term borrowings:
Securities sold under agreements to repurchase $ 91,813 $ 70,405
Bank borrowings 3,856 2,333
Deposit liabilities 1,347 1,447
Securities loaned 1,040 1,500
Commercial paper 797 865
Other 2,304 2,029
-------- ---------
$ 101,157 $ 78,579
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments:
Government and government agency securities - U.S. 21,132 31,021
Government and government agency securities - non-U.S. 21,994 18,948
Financial options and contractual commitments 8,858 6,232
Equity securities 3,489 3,528
Corporate debt securities and other 1,448 1,677
Commodities, including options and contractual commitments 607 663
-------- --------
57,528 62,069
Payables and accrued liabilities:
Brokers, dealers and clearing organizations 4,440 3,193
Customers and suppliers 3,372 3,622
Income taxes 303 371
Other 1,543 1,898
-------- --------
9,658 9,084
Collateralized mortgage obligations:
Sterling denominated 1,732 2,278
U.S. dollar denominated 605 748
-------- --------
2,337 3,026
Term debt 13,045 15,202
-------- --------
Total liabilities 183,725 167,960
Commitments and contingencies (Notes 14, 15 and 16)
Redeemable preferred stock, Series A 560 700
Stockholders' equity:
Preferred stock, Series C and D 312 312
Common stock, par value $1 per share
(250,000,000 shares authorized; shares issued:
155,642,470 in 1995 and 155,617,271 in 1994) 156 156
Additional paid-in capital 296 292
Retained earnings 5,001 4,681
Cumulative translation adjustments 13 5
Common stock held in treasury, at cost
(shares: 49,194,744 in 1995 and 49,769,452 in 1994) (1,635) (1,654)
--------- ---------
Total stockholders' equity 4,143 3,792
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 188,428 $ 172,452
==================================================================================================================
</TABLE>
57
<PAGE> 49
SALOMON INC AND SUBSIDIARIES
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
<TABLE>
<CAPTION>
1995 1994
-------------------------------------- --------------------------------
Current Market Or Current Market Or
Fair Market Value Fair Market Value
December 31, Notional --------------------- Notional -------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts* $ 570.5 $ - $ - $ 734.3 $ - $ -
Other exchange-issued products:
Equity contracts 16.8 .5 .3 11.6 .1 .1
Fixed income contracts 44.5 .2 - 24.2 - .1
Foreign exchange contracts - - - 4.1 - -
Commodities-related contracts 4.3 - - 11.3 - -
- ------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 636.1 .7 .3 785.5 .1 .2
- ------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap
options, caps and floors:
Swaps** 555.5 383.3
Swap options written 5.2 9.7
Swap options purchased 20.4 24.5
Caps and floors 100.8 68.1
- ------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 681.9 4.3 6.5 485.6 4.8 4.5
- ------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts** 57.4 .3 .4 49.8 .3 .2
Options written 21.0 - .6 15.3 - .4
Options purchased 20.2 .3 - 15.0 .4 -
- ------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 98.6 .6 1.0 80.1 .7 .6
- ------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity
indices*** 24.0 1.0 .6 31.5 1.0 .6
Options and forward contracts on fixed
income securities*** 196.6 .1 .5 103.2 .3 .3
Commodities-related contracts**** 21.8 .4 .3 23.1 .4 .5
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 1,659.0 $ 7.1 $ 9.2 $ 1,509.0 $ 7.3 $ 6.7
==============================================================================================================================
</TABLE>
* Margin on futures contracts is included in receivables/payables to brokers,
dealers and clearing organizations on the Consolidated Statement of
Financial Condition.
** Includes notional values of swap agreements and forward currency contracts
related to non-trading activities of $12.8 billion and $1.9 billion at
December 31, 1995 and $12.3 billion and $1.5 billion at December 31, 1994,
respectively.
*** The fair market value of such instruments recorded as assets includes
approximately $.4 billion at December 31, 1995 and $.3 billion at December
31, 1994, respectively, 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.
CREDIT EXPOSURE, NET OF COLLATERAL ON OTC SWAPS, 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.
<TABLE>
<CAPTION>
Transactions
With Over
3 Years to
All Transactions Maturity
---------------------------------------------------------------------------- ------------
Other Major Governments/
December 31, 1995 Derivatives Financial Supra- 1995
Dollars in billions Dealers Corporates Institutions nationals Other Total Average Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps, swap options,
caps and floors:
Risk classes 1 and 2 $ .4 $ - $1.1 $ .1 $ - $1.6 $1.1 $1.2
Risk class 3 .5 .3 .2 - .1 1.1 1.0 .5
Risk classes 4 and 5 .2 .5 .2 - .1 1.0 1.1 .5
Risk classes 6, 7 and 8 - - - - - - .1 -
- ------------------------------------------------------------------------------------------------------------------------------------
$1.1 $.8 $1.5 $ .1 $ .2 $3.7 $3.3 $2.2
====================================================================================================================================
Foreign exchange contracts and options:
Risk classes 1 and 2 $ .3 $ - $ - $ - $ - $ .3 $ .3 $ -
Risk class 3 .2 - - - - .2 .3 -
Risk classes 4 and 5 - - - - .1 .1 2 -
- ------------------------------------------------------------------------------------------------------------------------------------
$ .5 $ - $ - $ - $ .1 $ .6 $ .8 $ -
====================================================================================================================================
</TABLE>
* To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are
analogous to external credit ratings whereby risk classes one through three
are high quality investment grades. Risk classes four and five include
counterparties ranging from the lowest investment grade to the highest
non-investment grade level. Risk classes six, seven and eight represent
higher risk counterparties.
See Note 16 to the Consolidated Financial Statements for a discussion of
the market risk and credit risk associated with options and contractual
commitments.
58
<PAGE> 50
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Total
Additional Cumulative Stock Stock-
Preferred Common Paid-in Retained Translation Held in holders'
Amounts in millions Stock Stock Capital Earnings Adjustments Treasury Equity
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 112 $ 155 $296 $4,498 $ 2 $(1,432) $ 3,631
Net income - - - 827 - - 827
Issuance of preferred stock, Series D 200 - - - - - 200
Dividends on-
Common stock - - - (68) - - (68)
Preferred stock, Series A, C and D - - - (49) - - (49)
Exercise of stock options - - - - - 28 28
Purchase of common stock for treasury - - - - - (16) (16)
Net change in cumulative translation
adjustments - - - - (13) - (13)
Other - 1 (1) - - 6 6
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $ 312 $ 156 $295 $5,208 $ (11) $(1,414) $ 4,546
Net loss - - - (399) - - (399)
Dividends on-
Common stock - - - (66) - - (66)
Preferred stock, Series A, C and D - - - (62) - - (62)
Purchase of common stock for treasury - - - - - (252) (252)
Net change in cumulative translation
adjustments - - - - 16 - 16
Other - - (3) - - 12 9
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 312 $ 156 $292 $4,681 $ 5 $(1,654) $ 3,792
Net income - - - 457 - - 457
Dividends on-
Common stock - - - (68) - - (68)
Preferred stock, Series A, C and D - - - (69) - - (69)
Exercise of stock options - - (4) - - 21 17
Net change in cumulative translation
adjustments - - - - 8 - 8
Other - - 8 - - (2) 6
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 312 $ 156 $296 $5,001 $ 13 $(1,635) $ 4,143
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Number of Shares
----------------
Common
Stock
Common Held in
Amounts in millions Stock Treasury
=========================================================
<S> <C> <C>
Balance at December 31, 1992 155.5 (45.7)
Net income - -
Issuance of preferred stock, Series D - -
Dividends on-
Common stock - -
Preferred stock, Series A, C and D - -
Exercise of stock options - .9
Purchase of common stock for treasury - (.4)
Net change in cumulative translation
adjustments - -
Other - .3
- ---------------------------------------------------------
Balance at December 31, 1993 155.5 (44.9)
Net loss - -
Dividends on-
Common stock - -
Preferred stock, Series A, C and D - -
Purchase of common stock for treasury - (5.2)
Net change in cumulative translation
adjustments - -
Other .1 .3
- ---------------------------------------------------------
Balance at December 31, 1994 155.6 (49.8)
Net income - -
Dividends on-
Common stock - -
Preferred stock, Series A, C and D - -
Exercise of stock options - (.6)
Net change in cumulative translation
adjustments - -
Other - -
- ---------------------------------------------------------
Balance at December 31, 1995 155.6 (49.2)
=========================================================
</TABLE>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial
Statements, and Summary of Options and Contractual Commitments are integral
parts of this statement.
59
<PAGE> 51
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1995 1994 1993
=========================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) adjusted for noncash items-
Net income (loss) $ 457 $ (399) $ 827
Cumulative effect of change in accounting principles - - 37
Deferred income tax expense (benefit) (299) (885) 324
Depreciation, amortization and other 140 142 217
- -------------------------------------------------------------------------------------------------------------------------
Cash items included in net income (loss) 298 (1,142) 1,405
- -------------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets-
Financial instruments and contractual commitments (17,652) 20,671 (29,735)
Commodities-related products and instruments (105) (636) (141)
Collateralized short-term financing agreements (4,589) (11,937) 11,681
Receivables 3,755 1,490 (3,434)
Other 20 162 33
- -------------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets (18,571) 9,750 (21,596)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities-
Short-term borrowings 22,578 (19,311) 9,473
Financial and commodities-related instruments sold, not yet purchased,
and contractual commitments (4,541) 5,599 10,140
Payables and accrued liabilities 875 270 2,447
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities 18,912 (13,442) 22,060
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 639 (4,834) 1,869
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from-
Issuance of term debt 2,797 6,500 7,089
Issuance of preferred stock, Series D - - 200
Employee stock purchase and option plans 15 13 35
- -------------------------------------------------------------------------------------------------------------------------
Total cash proceeds from financing activities 2,812 6,513 7,324
- -------------------------------------------------------------------------------------------------------------------------
Payments for-
Redemption of redeemable preferred stock, Series A 140 - -
Term debt maturities and repurchases 4,972 3,281 4,073
Collateralized mortgage obligations 704 945 1,070
Purchase of common stock for treasury 2 252 16
Dividends 137 128 117
- -------------------------------------------------------------------------------------------------------------------------
Total cash payments for financing activities 5,955 4,606 5,276
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (3,143) 1,907 2,048
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from-
Assets securing collateralized mortgage obligations 721 930 1,290
- -------------------------------------------------------------------------------------------------------------------------
Total cash proceeds from investing activities 721 930 1,290
- -------------------------------------------------------------------------------------------------------------------------
Payments for-
Property, plant and equipment 302 212 321
- -------------------------------------------------------------------------------------------------------------------------
Total cash payments for investing activities 302 212 321
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 419 718 969
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and interest bearing equivalents (2,085) (2,209) 4,886
Cash and interest bearing equivalents at beginning of year 3,539 5,748 862
- -------------------------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at end of year $ 1,454 $ 3,539 $ 5,748
=========================================================================================================================
</TABLE>
Interest expense recorded for financial statement purposes in 1995, 1994 and
1993 did not differ materially from the amount of interest paid.
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial
Statements, and Summary of Options and Contractual Commitments are integral
parts of this statement.
60
<PAGE> 52
SALOMON INC AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements are prepared in accordance with generally
accepted accounting principles in the United States and prevailing industry
practice, both of which require the use of management's best judgment of
estimates. Estimates, including the fair market value of financial instruments,
may vary from actual results. The Consolidated Financial Statements include the
accounts of Salomon Inc and its majority-owned subsidiaries (collectively, the
"Company"). Material intercompany transactions have been eliminated in
consolidation. Long- term investments in operating joint ventures and affiliated
(20%- to 50%-owned) companies in which the Company has significant influence are
carried under the equity method of accounting and are included in "Other assets,
including intangibles." The Company's equity in the earnings of its
non-consolidated subsidiaries and affiliates is reported in "Other" revenues.
Assets and liabilities denominated in non-U.S. dollar currencies are translated
into U.S. dollar equivalents using year-end spot foreign exchange rates. The
income statements are translated monthly at amounts which approximate weighted
average exchange rates. Gains and losses resulting from non-U.S. dollar currency
transactions are included in income. The effects of translating financial
statements of non-U.S. subsidiaries with functional currencies other than the
U.S. dollar are recorded, net of related hedge gains and losses and income
taxes, as "Cumulative translation adjustments," a separate component of
Stockholders' equity. Hedges of such exposure include designated issues of
non-U.S. dollar term debt and, to a lesser extent, forward currency contracts.
Certain prior period amounts have been reclassified to conform with the current
presentation.
FINANCIAL INSTRUMENTS AND CONTRACTUAL COMMITMENTS
Financial instruments and contractual commitments, including derivatives used
for trading purposes, are recorded at either market value or, when market prices
are not readily available, instruments are priced on a comparable basis, for
example, by using matrix or model pricing ("fair market value"). Fair market
value includes related dividends or accrued interest. The determination of
market or fair market value considers various factors, including closing
exchange or over-the-counter market price quotations; time value and volatility
factors underlying options, warrants and contractual commitments; price activity
for equivalent or synthetic instruments in markets located in different time
zones; counterparty credit quality; and the potential impact on market prices of
liquidating the Company's positions in an orderly manner over a reasonable
period of time under present market conditions. As part of its mark-to-market
policy, the Company provides for the future operational costs of maintaining
long-term contractual commitments.
The majority of the Company's financial instruments are recorded on a trade date
basis. Recording the remaining instruments on a trade date basis would not
result in a material difference. Gains and losses and commission revenues and
expenses are also recognized on a trade date basis.
61
<PAGE> 53
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVES HELD OR ISSUED FOR TRADING PURPOSES
Contractual commitments (also referred to as "derivative instruments") held or
issued for trading purposes are carried at either market value or, when market
prices are not readily available, fair market value. The market or fair market
values of swap agreements, caps and floors, and forward contracts in a gain
position, as well as options owned and warrants held, are reported as assets in
"Options and contractual commitments." Similarly, contractual commitments in a
loss position, as well as options written and warrants issued, are reported as
liabilities in "Financial options and contractual commitments." The market
values (unrealized gains and losses) associated with contractual commitments are
reported net by counterparty, provided a legally enforceable master netting
agreement exists, and are netted across product lines and against cash
collateral when such provisions are stated in the master netting agreement. Net
cash collateral paid in connection with interest rate swaps totaled $890 million
at December 31, 1995. Net cash collateral received at December 31, 1994 totaled
$633 million. Revenues generated from derivative instruments held or issued for
trading purposes are reported as "Principal transactions" and include realized
gains and losses, as well as unrealized gains and losses resulting from changes
in the market or fair market value of such instruments.
DERIVATIVES HELD OR ISSUED FOR NON-TRADING PURPOSES
The Company utilizes interest rate swaps transacted with affiliates to
effectively convert fixed rate preferred stock and a significant portion of its
fixed rate term debt to variable rate obligations. These swaps are recorded
"off-balance-sheet," with accrued inflows and outflows reflected as adjustments
to interest and/or dividends, as appropriate. Adjustments to preferred stock
dividends are recorded on an aftertax basis.
As previously noted, the Company utilizes forward currency purchase contracts
transacted with affiliates to hedge a portion of the currency exposure relating
to non-U.S. dollar term debt issued by Salomon Inc (Parent Company). The impact
of marking such contracts and the related debt to prevailing exchange rates is
included in income. The Company utilizes forward currency sales contracts
transacted with affiliates to hedge investments in subsidiaries with functional
currencies other than the U.S. dollar. The impact of marking such contracts to
prevailing exchange rates, net of the related tax effects, is included in
"Cumulative translation adjustments" in Stockholders' equity, as is the impact
of translating the investments being hedged.
See Note 7 for a further discussion of the use of interest rate swaps and
forward currency contracts.
COMMODITIES-RELATED PRODUCTS AND INSTRUMENTS
Commodities-related products and instruments include physical quantities of
commodities, as well as swaps, options and contractual commitments involving
future delivery or settlement. Except as noted below, these products and
instruments are carried at market or fair market value (as previously defined).
Gains or losses of Phibro Inc. and its subsidiaries ("Phibro"), previously the
Phibro Division and its related subsidiaries, are reported as "Principal
transactions."
Phibro Energy USA, Inc. will be renamed Basis Petroleum, Inc. ("Basis Petroleum"
or "Basis") effective April 1, 1996. Basis' gross margin is included in "Other"
revenues. The refining and marketing operations of Basis Petroleum
62
<PAGE> 54
maintain minimum physical inventories of crude oil and other energy
products. These inventories are neither hedged nor marked to market as trading
and marketing inventories, but are carried at the lower of aggregate cost or
market. Basis Petroleum's minimum inventories had carrying values of $172
million and $184 million at December 31, 1995 and 1994, respectively, compared
with market values of $233 million and $223 million, respectively. Trading and
marketing inventories, including related hedging instruments, are marked to
market.
Basis Petroleum utilizes futures, forward contracts, options and swaps to hedge
anticipated refinery production and future contracted purchases of unpriced
domestic crude oil. Gains or losses on these contracts, which were not material
at December 31, 1995, are deferred until the recognition of the gain or loss
from the underlying risk element. All other trading and marketing related
futures and derivative instruments are marked to market.
COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Collateralized short-term financing agreements and securities sold under
agreements to repurchase are carried at their contractual amounts, including
accrued interest. In the determination of income, certain financing transactions
are marked to fair market value, which has no material effect on the results of
operations. The Company generally takes possession of the underlying collateral,
monitors its market value relative to the amounts due under the agreements, and,
when necessary, requires prompt transfer of additional collateral or reduction
in the loan balance in order to maintain contractual margin protection. In the
event of counterparty default, the financing agreements provide the Company with
the right to liquidate the collateral held. Securities sold under agreements to
repurchase and securities purchased under agreements to resell are reported net
by counterparty when permitted under Financial Accounting Standards Board
Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements ("FIN 41").
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSETS SECURING COLLATERALIZED MORTGAGE
OBLIGATIONS
Collateralized mortgage obligations issued by the Company are carried at their
principal amounts, net of unamortized discounts, plus accrued interest payable.
Assets securing collateralized mortgage obligations are carried at their
principal amounts, net of unamortized discounts and premiums, plus deferred
issuance costs and accrued interest receivable. Discounts, premiums and deferred
issuance costs are amortized on an effective yield basis over the expected lives
of the obligations and assets, on a retrospective basis, taking into
consideration the prepayment experience of the underlying mortgage collateral.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including leasehold improvements and capitalized
interest, are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are recorded substantially on a straight-line
basis over the lesser of the estimated useful lives of the related assets or
noncancelable lease terms, as appropriate. Maintenance and repairs are charged
to occupancy expense as incurred. However, the Company accrues currently for
63
<PAGE> 55
future expenditures in connection with turnarounds, which are scheduled
maintenance and refurbishing routines performed on major units within Basis
Petroleum's oil refineries that require complete shutdown of the units involved.
The cost of purchased software is capitalized and amortized over a three-year
period. Costs incurred in connection with the internal development of software,
solely for the Company's use, as well as the customization of purchased
software, are expensed in the period incurred.
OTHER ASSETS, INCLUDING INTANGIBLES
Other assets, including intangibles, includes goodwill, investments in
affiliates accounted for under the equity method and prepaid expenses. At
December 31, 1995, goodwill totaled $132 million and is being amortized at an
annual rate of approximately $5 million.
NEW ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. The result on the Company's
financial statements was not material.
In October 1995, SFAS 123, Accounting for Stock-Based Compensation, was issued.
SFAS 123 is effective for the Company's 1996 calendar year. As permitted under
the provisions of SFAS 123, the Company currently plans to continue to account
for such compensation under existing rules and will provide the required pro
forma disclosures in the 1996 Annual Report. At December 31, 1995, if the
Company had adopted the alternative method of accounting for stock-based
compensation as defined by SFAS 123, the result on the financial statements
would have been insignificant.
64
<PAGE> 56
SALOMON INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REVENUES BY BUSINESS UNIT
The following tables present revenues, net of interest expense, by business
unit, for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS &
DOLLARS IN MILLIONS NET INTEREST INVESTMENT
YEAR ENDED DECEMBER 31, 1995 AND DIVIDENDS BANKING COMMISSIONS OTHER TOTAL
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Salomon Brothers:
Fixed income sales and trading $1,560 $ - $ 40 $ 3 $1,603
Equity sales and trading 538 - 288 2 828
Global investment banking - 472 - - 472
Asset management - - - 39 39
Other 4 - 2 - 6
- ---------------------------------------------------------------------------------------------------------
Salomon Brothers' revenues, net of
interest expense 2,102 472 330 44 2,948
Phibro 202 - - 5 207
Basis Petroleum (27) - - (21) (48)
Corporate and Other 40 - 2 2 44
- ---------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $2,317 $472 $332 $30 $ 3,151
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS &
DOLLARS IN MILLIONS NET INTEREST INVESTMENT
YEAR ENDED DECEMBER 31, 1994 AND DIVIDENDS BANKING COMMISSIONS OTHER TOTAL
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Salomon Brothers:
Fixed income sales and trading $605 $ - $ 39 $ - $ 644
Equity sales and trading (124) - 281 - 157
Global investment banking - 486 - - 486
Asset management 15 - - 23 38
Other 18 - 13 - 31
Unallocated charges (278) - - - (278)
- ---------------------------------------------------------------------------------------------------------
Salomon Brothers' revenues, net of
interest expense 236 486 333 23 1,078
Phibro 190 - 1 - 191
Basis Petroleum (19) - - 84 65
Corporate and Other 43 - 2 7 52
- ---------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $450 $486 $336 $114 $1,386
=========================================================================================================
</TABLE>
65
<PAGE> 57
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS &
DOLLARS IN MILLIONS NET INTEREST INVESTMENT
YEAR ENDED DECEMBER 31, 1993 AND DIVIDENDS BANKING COMMISSIONS OTHER TOTAL
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Salomon Brothers:
Fixed income sales and trading $2,337 $ - $ 44 $ - $2,381
Equity sales and trading 639 - 228 - 867
Global investment banking - 791 - - 791
Asset management - - - 29 29
Other 53 - 12 2 67
- ---------------------------------------------------------------------------------------------------------
Salomon Brothers' revenues, net of
interest expense 3,029 791 284 31 4,135
Phibro 45 - - 1 46
Basis Petroleum (19) - - 49 30
Corporate and Other (2) - 1 (11) (12)
- ---------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $3,053 $791 $285 $70 $4,199
=========================================================================================================
</TABLE>
SALOMON BROTHERS
FIXED INCOME SALES AND TRADING
Fixed income sales and trading revenues include realized and unrealized gains
and losses and fees arising from the trading, as principal and agent, of
government and government agency securities, investment and non-investment grade
corporate debt, mortgage securities (primarily U.S. government agencies,
including interest only and principal only strips), and emerging market fixed
income securities. Revenues also include realized and unrealized gains and
losses generated from a variety of fixed income securities utilized in arbitrage
strategies for the Company's own account, and realized and unrealized gains and
losses arising from the trading of currencies and exchange-traded and
over-the-counter ("OTC") currency options. Realized and unrealized gains and
losses resulting from changes in the market or fair market value of options on
fixed income securities, interest rate swaps, swap options, caps and floors,
financial futures, OTC options and forward contracts on fixed income securities
are reflected as fixed income sales and trading revenue. Revenues are increased
by interest income generated from inventories, and reduced by the interest
expense incurred to finance inventories as well as interest on securities sold,
not yet purchased.
EQUITY SALES AND TRADING
Equity sales and trading revenues consist of realized and unrealized gains and
losses and fees arising from the trading of U.S. and non-U.S. equity securities,
including common and preferred stock, convertible preferred stock, convertible
corporate debt, equity-linked notes and exchange-traded and OTC equity options
and warrants. Revenues also include realized and unrealized gains and losses on
equity securities and related derivatives utilized in arbitrage strategies for
the Company's own account. Revenues are increased by interest and dividends
generated from inventories, and are reduced by interest expense incurred to
finance inventories as well as interest and dividends on securities sold, not
yet purchased. Commission income is generated primarily from equity-related
block trading and program trading transactions executed for customers.
66
<PAGE> 58
GLOBAL INVESTMENT BANKING
Global investment banking revenues include gains, losses and fees, net of
syndicate expenses, arising from securities offerings in which Salomon Brothers
acts as an underwriter or agent and fees earned from providing merger and
acquisition and financial restructuring advisory services. Debt and equity
underwriting revenues in 1995 reflect pretax losses of $55 million and $13
million, respectively, on Latin American securities positions.
ASSET MANAGEMENT
Asset management revenues consist of investment advisory fees generated from
providing specialized investment and portfolio management services to
institutional and private investors.
OTHER
Other revenue includes commissions generated from the Private Investment
Department, which provided brokerage services to high net worth individuals. In
the first quarter of 1995, the Company discontinued the Private Investment
Department.
UNALLOCATED CHARGES
Salomon Brothers' 1994 results reflect a pretax charge of $303 million ($189
million aftertax). This charge includes a pretax charge of $194 million ($126
million aftertax) attributable to unreconciled balances related to Salomon
Brothers' London-based companies. These balances were identified as Salomon
Brothers changed operational systems and conducted a detailed review of
databases supporting general ledger balances. The review necessitated a number
of adjustments affecting transactions going back at least until 1989 involving
many different instruments, positions and related currency effects. The 1994
pretax charge of $303 million also includes a pretax charge of $109 million ($63
million aftertax) arising from the completion of a detailed review of Salomon
Brothers' general ledger accounts related to interest rate swaps and the
interest rate swap transactions database.
A detailed review of general ledger balances related to Salomon Brothers'
U.S.-based operations was completed in the 1993 fourth quarter, resulting in a
pretax charge of $87 million ($49 million aftertax). Problems in recording the
results of interest rate swap activities date back to the mid-1980s. In 1993 and
1992, pretax charges of $31 million ($17 million aftertax) and $21 million ($11
million aftertax), respectively, were recorded in connection with this effort.
Although the 1994 charge of $303 million related to a number of years, Salomon
Brothers' accounting systems do not contain sufficient information to permit
allocation of the largest part of the charge to individual years. Based on the
analysis of available information, Management believes that, were it possible to
allocate the charge to prior years, the impact of such an allocation would not
have been material in any single prior year.
In the preceding table, $278 million of the $303 million 1994 charge is
reflected in "Unallocated charges," and the remainder is included in business
unit revenues. The 1993 and 1992 charges discussed above were included entirely
in business unit revenues. There are no comparable 1995 charges.
67
<PAGE> 59
PHIBRO
Phibro, the Company's commodities dealer business, trades crude oil, refined oil
products, natural gas, electricity, metals, petrochemicals, ethanol, plastics,
coal, coke, fertilizers, coffee, grains, cocoa and sugar. Phibro's revenues
consist of realized and unrealized gains and losses from trading these
commodities and related derivative instruments.
BASIS PETROLEUM
Basis Petroleum is the Company's oil refining and gathering business. Basis
Petroleum's revenues include the gross margin related to its oil refining and
gathering activities and net interest expense attributable to the financing of
such activities. Basis Petroleum's gross sales totaled $9,149 million in 1995,
$7,258 million in 1994 and $8,357 million in 1993. The related cost of sales was
$9,170 million in 1995, $7,181 million in 1994 and $8,308 million in 1993. Basis
Petroleum regularly enters into commodities-related futures, forwards, options
and swap agreements to manage the cost of inputs into the refining process as
well as revenues from the marketing and distribution of refined products.
Revenues related to Basis' trading and non-trading derivatives activities as
well as its gross margin from its oil refining and gathering activities is
reported in "Other" revenues.
CORPORATE AND OTHER
Corporate and Other includes the Company's equity in the earnings of Phibro
Energy Production, Inc. ("PEPI"), a partner in the White Nights Joint Enterprise
("White Nights"), a Russian-American oil production venture located in Western
Siberia. Beginning in the third quarter of 1993, Corporate and Other also
includes the results of The Mortgage Corporation Limited and its affiliates
("TMC"), which originate and service residential mortgages in the United
Kingdom. Other revenues in 1993 included a $20 million pretax charge to write
down PEPI's investment in White Nights.
68
<PAGE> 60
NOTE 2 INDUSTRY SEGMENT AND GEOGRAPHIC DATA
The Company's operating results by segment for each of the last three years
were:
<TABLE>
<CAPTION>
INCOME (LOSS)
BEFORE INCOME TAXES
AND CUMULATIVE
EFFECT OF CHANGE IN
DOLLARS IN MILLIONS REVENUES ACCOUNTING PRINCIPLES* TOTAL ASSETS
====================================================================================================
<S> <C> <C> <C>
Year Ended December 31, 1995
Salomon Brothers $8,467 $ 704 $181,342
Phibro 261 85 2,709
Basis Petroleum (20) (91) 1,747
Corporate and Other 225 10 2,630
- ----------------------------------------------------------------------------------------------------
Consolidated $8,933 $ 708 $188,428
====================================================================================================
Year Ended December 31, 1994
Salomon Brothers $5,751 $ (963) $165,155
Phibro 208 81 2,375
Basis Petroleum 87 18 1,602
Corporate and Other 232 33 3,320
- ----------------------------------------------------------------------------------------------------
Consolidated $6,278 $ (831) $172,452
====================================================================================================
Year Ended December 31, 1993
Salomon Brothers $8,613 $1,575 $178,617
Phibro 40 (15) 1,226
Basis Petroleum 56 (46) 1,356
Corporate and Other 90 (49) 3,636
- ----------------------------------------------------------------------------------------------------
Consolidated $8,799 $1,465 $184,835
====================================================================================================
</TABLE>
*1993 does not include the $65 million pretax cumulative effect of a change in
accounting principles. This charge is allocated as follows: Salomon Brothers
$35 million; Phibro $1 million; Basis Petroleum $6 million, and Corporate and
Other $23 million.
Segment results for all periods presented include a partial allocation of
Salomon Inc corporate-level expenses. Corporate-level expenses incurred for the
benefit of a particular operating segment are allocated directly to that
segment. Corporate and Other assets consist primarily of certain fixed assets,
PEPI's investment in White Nights and the assets of TMC, which consist primarily
of assets securing sterling-denominated collateralized mortgage obligations.
69
<PAGE> 61
The accompanying table summarizes the Company's operations by geographic area.
Amounts are determined principally by the respective legal jurisdictions of the
Company's subsidiaries. Because of the global nature of the financial and
commodities markets in which the Company competes and the integration of the
Company's worldwide business activities, the Company believes that amounts
determined in this manner are not particularly useful in understanding its
business.
<TABLE>
<CAPTION>
INCOME (LOSS)
BEFORE INCOME TAXES
AND CUMULATIVE
EFFECT OF CHANGE IN
DOLLARS IN MILLIONS REVENUES ACCOUNTING PRINCIPLES* TOTAL ASSETS
====================================================================================================
<S> <C> <C> <C>
Year Ended December 31, 1995
North America $4,699 $ 133 $107,868
Europe 4,039 611 69,261
Asia and Other 195 (36) 11,299
- ----------------------------------------------------------------------------------------------------
Consolidated $8,933 $ 708 $188,428
====================================================================================================
Year Ended December 31, 1994
North America $4,449 $ (119) $100,878
Europe 1,332 (841) 63,741
Asia and Other 497 129 7,833
- ----------------------------------------------------------------------------------------------------
Consolidated $6,278 $ (831) $172,452
====================================================================================================
Year Ended December 31, 1993
North America $4,438 $ 139 $106,735
Europe 3,979 1,206 70,524
Asia and Other 382 120 7,576
- ----------------------------------------------------------------------------------------------------
Consolidated $8,799 $1,465 $184,835
====================================================================================================
</TABLE>
*For the year ended December 31, 1994, North America includes a charge of $109
million related to the detailed review of Salomon Brothers' general ledger
accounts in connection with interest rate swaps and Europe includes a charge of
$194 million in connection with the resolution of unreconciled balances related
to Salomon Brothers' London-based companies.
NOTE 3 COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS
Securities purchased under agreements to resell are collateralized principally
by government and government agency securities. Securities borrowed agreements
are collateralized principally by government and government agency securities,
corporate debt and equity securities. Securities purchased under agreements to
resell and securities borrowed agreements generally have terms ranging from
overnight to up to six months. Excluding the impact of FIN 41, securities
purchased under agreements to resell totaled $53.2 billion and $49.8 billion at
December 31, 1995 and 1994, respectively. At December 31, 1995, the market value
of securities collateralizing resale agreements and securities borrowed and
other short-term financing agreements was $55.3 billion and $16.7 billion,
respectively. The interest rate on these instruments depends on, among other
things, the underlying collateral, the term of the agreement and the credit
quality of the counterparty. At December 31, 1995, these instruments had a
weighted average rate of 5.7%.
70
<PAGE> 62
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
DECEMBER 31, 1995 1994
================================================================================
<S> <C> <C>
Land $ 4 $ 4
Buildings, improvements and equipment 1,030 1,142
Refining and other energy-related assets 978 736
- --------------------------------------------------------------------------------
Total 2,012 1,882
Accumulated depreciation and amortization (669) (701)
- --------------------------------------------------------------------------------
Property, plant and equipment, net $1,343 $1,181
================================================================================
</TABLE>
NOTE 5 SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase are collateralized principally by
government and government agency securities. Securities loaned agreements are
collateralized principally by corporate debt and equity securities. Securities
sold under agreements to repurchase generally have terms ranging from overnight
to up to six months. Information regarding the Company's bank borrowings and
commercial paper is presented below. Average balances were computed based on
month-end outstanding balances.
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1995 1994 1993
============================================================================
<S> <C> <C> <C>
Bank borrowings:
Balance at year-end $3,856 $2,333 $3,644
Weighted average interest rate 4.8% 6.0% 4.2%
Annual averages-
Amount outstanding $2,743 $3,045 $2,341
Weighted average interest rate 5.7% 4.9% 4.5%
Maximum amount outstanding at any month-end $4,856 $4,173 $3,999
- ----------------------------------------------------------------------------
Commercial paper:
Balance at year-end $ 797 $ 865 $1,344
Weighted average interest rate 6.0% 5.7% 3.5%
Annual averages-
Amount outstanding $ 907 $1,094 $ 933
Weighted average interest rate 6.2% 4.4% 3.4%
Maximum amount outstanding at any month-end $1,106 $1,309 $1,344
============================================================================
</TABLE>
Outstanding bank borrowings include both U.S. dollar and non-U.S. dollar
denominated loans. The non-U.S. dollar loans are denominated in multiple
currencies including Japanese yen, German marks and U.K. sterling.
71
<PAGE> 63
Salomon Inc (Parent Company) issues U.S. dollar denominated commercial paper in
the United States and Europe, and sterling and other non-U.S. dollar denominated
commercial paper in Europe. All of the Company's commercial paper outstanding at
December 31, 1995, 1994 and 1993 was U.S. dollar denominated.
In 1992, Salomon Brothers Inc ("SBI") entered into a committed secured standby
bank credit facility for financing securities positions. The facility, which has
a capacity of $2.1 billion, contains certain restrictive covenants that require,
among other things, that SBI maintain minimum levels of excess net capital and
net worth, as defined. SBI's excess net capital exceeded the minimum required
under the facility by $576 million and SBI's net worth exceeded the minimum
amount required by $520 million at December 31, 1995. Salomon Brothers
International Limited ("SBIL") an indirect wholly-owned subsidiary of the
Company, entered into a committed secured standby bank credit facility in 1994.
The facility, which has a capacity of $1.0 billion, is subject to restrictive
covenants, which require SBIL to maintain excess financial resources, as
defined. At December 31, 1995, SBIL's consolidated tangible net worth exceeded
the amount required by the facility by $254 million. At December 31, 1995, there
were no outstanding borrowings under these facilities.
TMC has sterling denominated committed credit facilities secured by mortgages
aggregating to the U.S. dollar equivalent of $25 million at December 31, 1995.
These facilities mature in 2031. These lines were all in use at December 31,
1995.
NOTE 6 COLLATERALIZED MORTGAGE OBLIGATIONS
Certain special purpose wholly-owned subsidiaries have been organized to issue
collateralized mortgage obligations ("CMOs"). The CMOs are collateralized by
mortgages, mortgage-backed securities and short-term investments (collectively,
the "Collateral"). Principal and interest payments received from the Collateral
are utilized to meet periodic principal and interest payments on the CMOs.
Although the CMOs have contractual maturities, their actual maturities may be
shorter as a result of prepayments of the Collateral.
The CMOs consisted of the following:
<TABLE>
<CAPTION>
Dollars in millions Currency
----------------------
December 31, Sterling U.S. $ Total 1995 Total 1994
================================================================================================
<S> <C> <C> <C> <C>
Contractual Maturity
2006 to 2010 $ - $ 60 $ 60 $ 97
2011 to 2031 1,721 587 2,308 2,977
Accrued interest payable 11 12 23 29
Unamortized discounts - (54) (54) (77)
- ------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $1,732 $605 $2,337 $3,026
================================================================================================
</TABLE>
72
<PAGE> 64
NOTE 7 TERM DEBT
Term debt, net of unamortized discount, if applicable, consists of issues with
original maturities in excess of one year. Certain issues are redeemable, in
whole or in part, at par or at premiums prior to maturity, and certain issues
carry sinking fund requirements. The maturity structure of the Company's term
debt, based on contractual maturities, sinking fund requirements or the earliest
date on which the debt is repayable at the option of the holder, consisted of
the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Fixed Rate Fixed Rate
Obligations Obligations Total Variable Total at Total at
Swapped to Not Fixed Rate Rate December 31, December 31,
DOLLARS IN MILLIONS Variable Swapped Obligations Obligations 1995 1994
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated:
Due in 1995 $ - $ - $ - $ - $ - $ 3,572
Due in 1996 1,438 11 1,449 1,106 2,555 2,226
Due in 1997 1,088 13 1,101 537 1,638 1,133
Due in 1998 1,374 1 1,375 280 1,655 1,230
Due in 1999 714 2 716 499 1,215 1,347
Due in 2000 513 1 514 42 556 305
Thereafter 1,483 1 1,484 168 1,652 1,430
- -------------------------------------------------------------------------------------------------------------------
U.S. dollar denominated 6,610 29 6,639 2,632 9,271 11,243
- -------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated:
Due in 1995 - - - - - 348
Due in 1996 123 36 159 329 488 484
Due in 1997 312 35 347 152 499 545
Due in 1998 162 8 170 716 886 873
Due in 1999 229 - 229 353 582 567
Due in 2000 256 - 256 68 324 275
Thereafter 829 116 945 50 995 867
- -------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated 1,911 195 2,106 1,668 3,774 3,959
- -------------------------------------------------------------------------------------------------------------------
Term debt $8,521 $224 $8,745 $4,300 $13,045 $15,202
===================================================================================================================
</TABLE>
The Company issues U.S. dollar and non-U.S. dollar denominated fixed and
variable rate term debt. Fixed rate debt matures at various dates through 2023.
The contractual interest rates on fixed rate debt ranged from 1.25% (Japanese
yen denominated) to 12.87% (Italian lira denominated) at December 31, 1995 and
1.5% (Japanese yen denominated) to 12.87% (Italian lira denominated) at December
31, 1994. The weighted average contractual rate on total fixed rate term debt
(both U.S. dollar denominated and non-U.S. dollar denominated term debt) was
6.78% at December 31, 1995 and 6.51% at December 31, 1994. The Company utilizes
interest rate swap agreements to convert most of its fixed rate term debt to
variable rate obligations. The maturity structure of the swaps corresponds with
the maturity structure of the debt being hedged. The Company's non-U.S. dollar
fixed rate term debt was issued across a broad range of currencies (including
Japanese yen, German mark, U.K. sterling, Italian lira, Swiss franc and European
Currency Unit) and, consequently, the term debt bears a wide range of interest
rates.
73
<PAGE> 65
At December 31, 1995, the Company had outstanding $3.8 billion of non-U.S.
dollar denominated term debt, of which $1.9 billion was Japanese yen
denominated, $1.2 billion was German mark denominated and $.4 billion was U.K.
sterling denominated (converted at the December 31, 1995 spot rates). Of the
$3.8 billion, approximately $1.1 billion of Salomon Inc (Parent Company)
non-U.S. dollar denominated debt has been designated as a hedge of investments
in subsidiaries with functional currencies other than the U.S. dollar. Another
$.5 billion of Salomon Inc (Parent Company) debt has been effectively converted
to U.S. dollar denominated obligations using cross-currency swaps. The remaining
$2.2 billion is used for general corporate purposes.
The following table summarizes the Company's fixed rate term debt that is
swapped to variable rate obligations using interest rate swaps at December 31,
1995 and 1994. The variable rates presented are indicative of the Company's
actual costs related to such obligations.
<TABLE>
<CAPTION>
1995 1994
-------------------------------------- ---------------------------------------
Contractual Contractual
Weighted Average Weighted Average
Fixed Rate on Weighted Average Fixed Rate on Weighted Average
Swapped Fixed Rate Variable Rate on Swapped Fixed Rate Variable Rate on
Term Debt Swapped Term Debt Term Debt Swapped Term Debt
======================================================================================================================
<S> <C> <C> <C> <C>
U.S. dollar denominated 6.9% 6.9% 6.5% 7.0%
Japanese yen denominated 4.4 .9 4.4 2.8
German mark denominated 7.9 4.2 8.0 5.5
U.K. sterling denominated 11.4 7.0 11.4 6.5
Italian lira denominated 12.9 11.0 12.9 9.1
Japanese yen swapped to
U.S. dollar denominated 4.1 6.8 3.9 5.6
Swiss franc swapped to
U.S. dollar denominated 5.1 6.1 5.1 6.6
European Currency Units swapped to
U.S. dollar denominated 8.5 5.8 8.5 5.3
- ----------------------------------------------------------------------------------------------------------------------
Total swapped fixed rate term debt 6.8% 6.2% 6.4% 6.4%
======================================================================================================================
</TABLE>
Variable rate term debt matures at various dates through 2004. The interest
rates are determined periodically by reference to money market rates, or in
certain instances, are calculated based on stock market indices as specified in
the agreements governing the respective issues. The coupon interest rates on
variable rate term debt ranged from .71% (Japanese yen denominated) to 10.97%
(Italian lira denominated) at December 31, 1995, and 2.00% (U.S. dollar
denominated) to 10.89% (German mark denominated) at December 31, 1994. The
weighted average contractual rate on total variable rate term debt (both U.S.
dollar denominated and non-U.S. dollar denominated) was 4.87% at December 31,
1995 and 5.58% at December 31, 1994.
Term debt includes subordinated notes, which totaled $34 million at December 31,
1995 and $29 million at December 31, 1994. At December 31, 1995 and 1994,
subordinated debt included approximately $6 million of convertible restricted
notes, which were convertible at the rate of $13.89 per share into 419,435
shares and 444,595 shares of the Company's common stock at December 31, 1995 and
1994, respectively. The Company has outstanding certain issues of term debt for
which the principal repayment is linked to certain equity securities of
unaffiliated issuers.
74
<PAGE> 66
NOTE 8 PREFERRED STOCK
The Company is authorized to issue a total of 5,000,000 shares of preferred
stock.
REDEEMABLE PREFERRED STOCK, SERIES A
At December 31, 1995, 560,000 shares of Series A cumulative preferred stock
("Series A Preferred") were outstanding. All of the Series A Preferred is held
by affiliates of Berkshire Hathaway Inc. Each share has a redemption value of
$1,000, and is entitled to receive quarterly cash dividends at the annual rate
of $90 and can be converted into shares of common stock at $38 per share. The
number of shares of common stock into which each Series A Preferred share is
convertible is subject to adjustment in the event of stock splits, stock
dividends and certain other events, none of which has occurred to date. The
redeemable preferred stock, which is convertible into common stock (14,736,842
shares at December 31, 1995), is entitled to one vote per share voting together
as one class with the Company's common stock. At December 31, 1995, the
redeemable preferred stock represented 12.2% of the votes entitled to be cast by
the Company's outstanding voting securities.
On October 31, 1995, the first of five tranches of 140,000 shares of Series A
Preferred held by Berkshire Hathaway Inc. was redeemed by the Company for $140
million. If not previously converted, one fourth of the remaining 560,000 shares
are to be redeemed annually on October 31 at $1,000 per share plus any accrued
but unpaid dividends. No cash dividends may be paid on the Company's common
stock, nor may the Company repurchase any of its common stock, if dividends or
required redemptions of Series A Preferred are in arrears.
PREFERRED STOCK, SERIES C
In June 1991, the Company issued $112.5 million (225,000 shares) of Series C
9.50% cumulative preferred stock ("Series C Preferred") represented by 4,500,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. Series C Preferred is redeemable only at the Company's option
at any time on or after June 30, 1996, at a price of $500 for each preferred
share ($25 for each depositary share).
PREFERRED STOCK, SERIES D
In February 1993, the Company issued $200 million (400,000 shares) of Series D
8.08% cumulative preferred stock ("Series D Preferred") represented by 8,000,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. Series D Preferred is redeemable only at the Company's option
at any time on or after March 31, 1998, at a price of $500 for each preferred
share ($25 for each depositary share).
-------------------------------------------
The Company has entered into interest rate swap agreements that effectively
convert fixed rate dividend obligations into variable rate obligations. For
financial reporting purposes, dividends on preferred stock are adjusted by the
aftertax income or loss generated by these swaps.
75
<PAGE> 67
NOTE 9 COMMON STOCK
On February 8, 1988, the Company's Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of the Company's
common stock. The Board also authorized the issuance of preferred share purchase
rights for each share of Series A Preferred based on the number of shares of
common stock into which the Series A Preferred will be convertible. The rights
contain provisions to protect stockholders against certain takeover tactics and
are exercisable for shares of the Company's Series B junior participating
preferred stock only if certain specified events occur relating to changes in
ownership of the Company's stock or an attempted takeover. Also see "Stock
Option and Incentive Plans" in Note 11.
NOTE 10 CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to various securities and
commodities regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the countries in which they operate. The
Company's principal regulated subsidiaries are discussed below.
SBI is registered as a broker-dealer with the U.S. Securities and Exchange
Commission ("SEC") and is subject to the SEC's Uniform Net Capital Rule, Rule
15c3-1, which requires net capital, as defined under the alternative method, of
not less than the greater of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds required to be segregated for
customers' regulated commodity accounts, as defined. Although net capital,
aggregate debit items and funds required to be segregated change from day to
day, at December 31, 1995, SBI's net capital was $1.0 billion, $976 million in
excess of regulatory requirements.
SBIL is authorized to conduct investment business in the United Kingdom by the
Securities and Futures Authority ("SFA") in accordance with the Financial
Services Act 1986. The SFA requires SBIL to have available at all times
financial resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At December 31, 1995, SBIL's financial resources were $439
million in excess of regulatory requirements.
Salomon Brothers Asia Limited ("SBAL") and Salomon Brothers AG ("SBAG") are also
subject to regulation in the countries in which they do business. Such
regulations include requirements to maintain specified levels of net capital or
its equivalent. At December 31, 1995, SBAL's net capital was $179 million above
the minimum required by Japan's Ministry of Finance. SBAG's net capital was $64
million above the minimum required by Germany's Banking Supervisory Authority.
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco") must maintain minimum levels of capital in accordance with agreements
with its rating agencies. At December 31, 1995, Swapco's capital exceeded the
minimum levels required under the agreements. Swapco's capital requirements are
dynamic, varying with the size and concentration of its counterparty
receivables.
76
<PAGE> 68
NOTE 11 EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
Substantially all full-time U.S. employees of the Company participate in defined
contribution plans. Non-U.S. employees generally participate in defined benefit
plans that are insured or otherwise funded. The costs relating to such plans,
which are included in compensation and employee-related expenses, were $55
million, $44 million and $46 million in 1995, 1994 and 1993, respectively.
HEALTH CARE AND LIFE INSURANCE
The Company provides certain health care and life insurance benefits for its
active employees, qualifying retired U.S. employees and certain non-U.S.
employees who reach the retirement criteria specified by the various plans. The
Company self-insures such benefit programs. At December 31, 1995, there were
approximately 8,400 active and 600 retired employees eligible for such benefits.
Expenses recorded for health care and life insurance benefits were $44 million,
$48 million and $125 million in 1995, 1994 and 1993, respectively. Such expenses
in 1993 included a $65 million pretax charge ($37 million aftertax) discussed
below, related to the adoption of SFAS 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions.
Effective January 1, 1993, the Company adopted SFAS 106 and SFAS 112, Employers'
Accounting for Postemployment Benefits. SFAS 106 requires companies to provide
for the cost of postretirement benefits other than pensions over the service
periods of eligible employees. The aggregate liability associated with the
adoption of SFAS 106 resulted in a charge against earnings in the amount of $65
million; the aftertax charge was $37 million. The adoption of SFAS 112 did not
have a material impact on the Company's 1993 financial statements. At December
31,1995, the present value of the liability related to benefits as defined by
SFAS106 and SFAS 112 was $92 million.
STOCK OPTION AND INCENTIVE PLANS
The Non-Qualified Stock Option Plan of 1984 (the "1984 Plan"), as amended in
1988, which terminated on June 30, 1994, provided for the granting of options to
purchase common stock to certain key employees. Stock appreciation rights
accompanied some of the options granted. Exercise of such rights extinguishes
the related options. Options expire ten years from the date of grant. Options to
purchase 713,470 and 1,438,390 shares were exercisable at December 31, 1995 and
1994, respectively.
77
<PAGE> 69
Changes in options and outstanding shares under the 1984 Plan are summarized as
follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares per Share
===============================================================================
<S> <C> <C>
Shares under option at:
December 31, 1995 713,470 $18.13 to $40.38
December 31, 1994 1,438,390 $18.13 to $46.00
December 31, 1993 1,732,890 $18.13 to $46.00
Options exercised:
1995 615,220 $18.13 to $40.38
1994 283,300 $18.13 to $46.00
1993 899,585 $18.13 to $40.38
Options canceled or expired:
1995 109,700 $46.00
1994 11,200 $18.13 to $46.00
1993 18,477 $18.13 to $46.00
- -------------------------------------------------------------------------------
Available for future grant:
December 31, 1995 0
December 31, 1994 0
December 31, 1993 9,823,767
===============================================================================
</TABLE>
In the event of certain changes of control not approved by the Company's Board
of Directors, the holders of options under the 1984 Plan will be entitled to
receive an immediate cash payment equal to the excess of the fair market value
of the common stock over the exercise price of shares covered by options or
stock appreciation rights. Furthermore, all amounts credited to employees'
accounts under certain bonus plans will vest and employees will be entitled to
payment of an amount no less than the pro rata portion of their prior annualized
year-end bonus.
In 1994, the stockholders approved the Salomon Inc Stock Incentive Plan ("SIP").
The SIP provides for a grant of up to 3.5 million shares in the form of options,
shares of restricted stock and stock bonuses, as well as an additional grant of
up to 1.5 million shares in the form of stand alone stock appreciation rights,
shares of phantom stock and cash bonuses to key employees, including officers,
whether or not they are directors of the Company and its affiliates. No awards
have been made under the SIP.
The Employee Stock Purchase Plan ("ESPP") was approved by the Company's
stockholders in 1989. This plan allows eligible employees to make purchases,
through payroll deductions, of the Company's common stock at a price of 85% of
market value, limited by tax regulations to an annual maximum per employee of
the lesser of $21,250 or 10% of the individual's annual compensation. Shares
purchased under this plan are purchased on the open market. Thus far, over 1.7
million shares have been purchased by employees under this plan, including
approximately 232,000 shares in 1995.
Shares purchased under the 1984 Plan are issued from the Company's
common stock held in treasury. Shares for the ESPP are purchased on the open
market. Prior to the second quarter of 1994, ESPP shares were issued from the
Company's common stock held in treasury.
78
<PAGE> 70
The Company's Equity Partnership Plan (the "Plan") began in 1990 and was
formally approved by stockholders in 1991. Under the Plan, qualifying employees
("participants") receive a portion of their compensation in the form of the
Company's common stock, the payment of which is deferred for five years. The
stock is purchased by the Plan's trustee in the open market as well as from
participants upon distribution in order to satisfy their income tax withholding
liabilities. The portion of each participant's compensation paid in stock is
fixed in relation to total compensation, and for 1995 and prior years reached a
maximum of 50% of total compensation. Participants received the shares for 1995
and prior years with an incentive of 17.65%, whereby the Company makes an
additional contribution to participants' accounts of 17.65% of their
compensation deferred into the Plan.
Total purchases of shares by the Plan totaled $76 million (2.1 million shares)
in 1995 and $266 million (5.8 million shares) in 1994. Stock awarded under the
Plan totaled $98 million (2.7 million shares) and $264 million (5.6 million
shares) in 1995 and 1994, respectively. These amounts are included as a
component of compensation expense. Dividends paid on shares held by the Plan are
used to purchase Salomon Inc stock at 85% of its market value at the time of
purchase. The net asset related to the Plan, which represents the cost of the
unawarded shares held by the Plan less the Company's liability related to the
Plan, payable in common stock, is included in "Other assets, including
intangibles." Shares held by the trustee of the Plan are considered outstanding
for the purpose of computing earnings per share. In December 1995, the Plan's
trustee distributed, under the Plan terms, the 1990 award amounting to 1.6
million shares (net of withholding tax requirements). Employees of certain
subsidiaries of the Company do not participate in the Plan, while employees of
other subsidiaries are unable to participate in the Plan but instead receive
stock appreciation rights under the same terms as shares awarded under the Plan.
The Plan was amended for 1996 and future awards. The amendments, subject to
approval by the Company's stockholders, include an increase in the award
incentive to 25%, a reduction in the deferral period to three years from five
years, and the introduction of forfeiture provisions on both the award and the
incentive. The award is forfeited if the participant's employment is terminated
for cause (no change from the prior Plan). The award is subject to forfeiture
provisions if the participant leaves the Company to join a competitor within
three years after the award date. If a participant leaves the Company other than
by virtue of death, disability, retirement or as the result of a downsizing
during the three years following the award, the entire 25% award incentive will
be forfeited.
The Plan, as amended also includes revisions to the participation schedule which
generally reduces the portion of participants' compensation subject to the Plan
(participation reaches 30% of compensation) and substantially increases the
minimum level of compensation required for participation.
The Company's 401(k) plan was amended, effective January 1, 1996. The amendment
includes an increase in the Company's match from 50% to 75% of an eligible
employee's contribution to the plan. As amended, the plan will match 75% of the
lesser of the eligible employee's contribution to the 401(k) plan or 6% of the
eligible employee's total compensation. The increase in the Company's match will
be in the form of Salomon Inc common stock and is limited to eligible employees
with a compensation level less than $360,000.
79
<PAGE> 71
NOTE 12 INCOME TAXES
The components of income taxes reflected on the Consolidated Statement of Income
are:
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1995 1994 1993
===============================================================================
<S> <C> <C> <C>
Current:
U.S. federal $ 140 $ 42 $ 150
State and local 73 25 59
Non-U.S. 337 386 68
- -------------------------------------------------------------------------------
Total current 550 453 277
- -------------------------------------------------------------------------------
Deferred:
U.S. federal (112) (199) (44)
State and local (56) (58) (37)
Non-U.S. (131) (628) 405
- -------------------------------------------------------------------------------
Total deferred (299) (885) 324
- -------------------------------------------------------------------------------
Income tax expense (benefit) charged to earnings $ 251 $(432) $ 601
===============================================================================
</TABLE>
Under SFAS 109, Accounting for Income Taxes ("SFAS 109"), temporary differences
between recorded amounts and the tax bases of assets and liabilities are
accounted for at current income tax rates. Under certain circumstances,
estimates are used in the determination of temporary differences.
At December 31, 1995 and December 31, 1994, the Company's Consolidated Statement
of Financial Condition included a net deferred tax liability of $2 million and
$310 million, respectively, comprised of the following:
<TABLE>
<CAPTION>
Dollars in millions
December 31, 1995 1994
===============================================================================================================
<S> <C> <C>
Mark-to-market adjustments $ 422 $ 728
Employee benefits and deferred compensation (450) (410)
Reserves (184) (203)
Cumulative translation adjustments (which do not affect the provision for income tax expense) 115 86
U.S. taxes provided on the undistributed earnings of non-U.S. subsidiaries 113 63
Other (14) 46
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 2 $ 310
===============================================================================================================
</TABLE>
The Company had no deferred tax valuation allowance at December 31, 1995 or
December 31, 1994.
Effective January 1, 1993, federal legislation required that U.S. securities
dealers value their inventories at market value for tax purposes. The
legislation's transition provisions prescribe that the excess of book basis over
tax basis, at January 1, 1993, be amortized to taxable income over a five-year
period. The charge reduces the Company's deferred tax liabilities but does not
impact the Company's provision for income tax expense.
80
<PAGE> 72
Income taxes paid, net of refunds, totaled $360 million in 1995, $409 million in
1994 and $278 million in 1993. These amounts include estimated tax payments
during the current tax year as well as cash settlements relating to prior tax
years.
The Company provides deferred income taxes on the undistributed earnings of
foreign subsidiaries and affiliates except to the extent that such earnings are
intended to be indefinitely invested outside the United States. At December 31,
1995, the accumulated undistributed earnings of the Company's non-U.S.
subsidiaries amounted to $1.9 billion. U.S. federal taxes have been provided on
$720 million of these earnings and, therefore, that amount could be remitted to
the U.S. without incurring additional tax expense. The undistributed earnings of
the Company's non-U.S. subsidiaries that are indefinitely invested outside the
U.S. amounted to $1.2 billion. At the existing U.S. federal income tax rates,
additional taxes of $368 million would have to be provided if the remaining
earnings were remitted to the U.S.
The following table reconciles the U.S. federal statutory income tax rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993*
===================================================================================
<S> <C> <C> <C>
Statutory U.S. federal income tax rate for corporations 35% 35% 35%
Impact of:
State and local taxes, net of U.S. federal tax effect 2 2 1
Tax advantaged income (4) 4 (1)
Provisions for tax contingencies and non-deductible reserves 3 - 5
Reversal of tax contingency reserves - 12 -
Other, net (1) (1) 1
- -----------------------------------------------------------------------------------
Effective tax rate 35% 52% 41%
===================================================================================
</TABLE>
*Excludes cumulative effect of change in accounting principles.
81
<PAGE> 73
NOTE 13 EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is computed by dividing net income (loss),
less dividends on preferred stock, by the weighted average number of common and
common equivalent shares outstanding, including shares held by the Equity
Partnership Plan. Common equivalent shares include the dilutive effect of
outstanding stock options. Fully diluted earnings (loss) per share is computed
under the assumption that all contingent increases in common stock have occurred
to the extent that they have a dilutive effect on earnings per share. Contingent
increases of common stock include the potential impact of the conversion of
Series A Preferred and convertible debt, which are discussed in Notes 8 and 7,
respectively.
<TABLE>
<CAPTION>
Amounts in millions, except per share amounts
Year Ended December 31, 1995 1994 1993
==================================================================================================================================
<S> <C> <C> <C>
Shares used in computing earnings (loss) per share:
Average common shares outstanding 106.3 106.8 110.4
Effects of assumed exercise of stock options, if dilutive .2 -- .6
- ----------------------------------------------------------------------------------------------------------------------------------
Shares used in computing primary earnings (loss) per share 106.5 106.8 111.0
Effects (when dilutive) of:
Assumed conversion of convertible notes .4 -- .6
Assumed conversion of convertible preferred stock 17.8 -- 18.4
- ----------------------------------------------------------------------------------------------------------------------------------
Shares used in computing fully diluted earnings (loss) per share 124.7 106.8 130.0
==================================================================================================================================
Net income (loss) for earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principles $ 457 $ (399) $ 864
Less dividends on preferred stock, Series A, C and D* 69 62 49
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) for primary earnings (loss) per share before cumulative
effect of change in accounting principles 388 (461) 815
Add dividends on preferred stock, Series A, when dilutive* 49 -- 39
Add interest expense, net of tax, on convertible notes, when dilutive -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) for fully diluted earnings (loss) per share before
cumulative effect of change in accounting principles 437 (461) 854
Cumulative effect of change in accounting principles,
net of tax benefit of $28 -- -- (37)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) for fully diluted earnings (loss) per share $ 437 $ (461) $ 817
==================================================================================================================================
Earnings (loss) per share of common stock:
Primary earnings (loss) before cumulative effect of change in accounting principles $ 3.64 $ (4.31) $ 7.34
Cumulative effect of change in accounting principles -- -- (.33)
- ----------------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) $ 3.64 $ (4.31) $ 7.01
==================================================================================================================================
Fully diluted earnings (loss) before cumulative effect of change in accounting
principles $ 3.50 $ (4.31) $ 6.57
Cumulative effect of change in accounting principles -- -- (.29)
- ----------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) $ 3.50 $ (4.31) $ 6.28
==================================================================================================================================
</TABLE>
* Dividends on preferred stock are adjusted for the aftertax impact of interest
rate swaps that effectively convert the Company's fixed rate obligations to
variable rate.
82
<PAGE> 74
NOTE 14 SECURITIES PLEDGED AND LEASE COMMITMENTS
Repurchase Agreements, Securities Pledged and Letters of Credit
At December 31, 1995, the approximate market values of securities sold under
agreements to repurchase or pledged by the Company were:
<TABLE>
<CAPTION>
Dollars in millions
========================================================================================
<S> <C>
For securities sold under agreements to repurchase $ 98,714
As collateral for securities borrowed of approximately equivalent value 30,647
For securities loaned 1,070
To clearing organizations or segregated under securities laws and regulations 1,961
As collateral for letters of credit 510
As collateral on bank loans 2,302
Other 1,906
- ----------------------------------------------------------------------------------------
Repurchase agreements and securities pledged $137,110
========================================================================================
</TABLE>
At December 31, 1995, the Company had $2.7 billion of outstanding letters of
credit from banks to satisfy various collateral and margin requirements.
Lease Commitments
The Company has noncancelable leases covering office space and equipment
expiring on various dates through 2012. Presented below is a schedule of minimum
future rentals on noncancelable operating leases, net of subleases, as of
December 31, 1995. Various leases contain provisions for lease renewals and
escalation of rent based on increases in certain costs incurred by the lessors.
Amounts presented below also include lease expenses which, as a part of oil
refining and gathering and commodities trading activities, are expected to be
recorded as a reduction of "Other" revenues and "Principal transactions."
<TABLE>
<CAPTION>
7 World All Other
Dollars in millions Trade Center Leases
==========================================================================
<S> <C> <C>
1996 $ 46 $ 62
1997 46 44
1998 46 36
1999 46 31
2000 46 22
Thereafter 515 122
- --------------------------------------------------------------------------
Minimum future rentals $ 745 $ 317
==========================================================================
</TABLE>
Minimum future rentals include $34 million related to space the Company has
vacated or intends to vacate. The Company has provided reserves based on these
amounts. Rent expense under operating leases totaled $88 million, $75 million
and $133 million for the years ended December 31, 1995, 1994 and 1993,
respectively. These amounts exclude reductions in "Other" revenues and
"Principal transactions" of $53 million in 1995, $65 million in 1994 and $46
million in 1993.
83
<PAGE> 75
NOTE 15 LEGAL PROCEEDINGS
The Company is a defendant in lawsuits incidental to its securities, commodities
and oil refining and gathering businesses, and as a result of such activities is
subject to ongoing legal risk. In connection with its discontinued commodities
processing operations, the Company and certain of its subsidiaries are subject
to claims asserted by the U.S. Environmental Protection Agency, certain state
agencies and private parties in connection with environmental matters. For
further discussion on environmental matters, see Management's Discussion and
Analysis, "Risk Management-Environmental Risk." Management of the Company,
after consultation with outside legal counsel, believes that the ultimate
resolution of legal proceedings and environmental matters (net of applicable
reserves) 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.
NOTE 16 FINANCIAL AND COMMODITIES-RELATED INSTRUMENTS AND RELATED RISKS
The Company and its subsidiaries enter into a variety of contractual
commitments, such as swaps, cap and floor agreements, futures contracts, forward
purchase and sale agreements, option contracts, warrants, and securities sold,
not yet purchased ("short sales"). These transactions generally require future
settlement, and are either executed on an exchange or traded as OTC instruments.
Contractual commitments have widely varying terms, and durations that range from
several days to several years depending on the instrument. For a more detailed
discussion of these instruments, see Management's Discussion and Analysis,
"Derivative Instruments."
The Company sells various financial instruments and commodities which have not
been purchased. The Company borrows these securities in order to sell them short
and, at a later date, must deliver (i.e., replace) like or materially-like
financial instruments or commodities to the parties from which they were
originally borrowed. The Company is exposed to market risk for short sales. If
the market value of an instrument sold short increases, the Company's
obligation, reflected as a liability, would increase and revenues from principal
transactions would be reduced.
The way in which the Company accounts for and presents contractual commitments
in its financial statements depends on both the type and purpose of the
contractual commitment held or issued. As discussed in the Summary of Accounting
Policies, the Company records all contractual commitments used for trading
purposes, including those used to hedge trading positions, at market or fair
market value. Consequently, changes in the amounts recorded in the
84
<PAGE> 76
Company's Consolidated Statement of Financial Condition resulting from movement
in market prices are included in "Principal transactions" in the period in which
they occur. Inflows and outflows on contractual commitments with future
settlement used for purposes other than trading are recorded as adjustments to
interest expense or dividends, as appropriate. The use of contractual
commitments and financial instruments with off-balance-sheet risk may expose the
Company to both market risk and credit risk in excess of the amount recorded on
the Consolidated Statement of Financial Condition. These risks are discussed in
more detail below.
Basis' gains and losses associated with futures, forward contracts and swaps
used to hedge anticipated refinery production and future contracted purchases of
unpriced domestic crude oil are deferred until recognition of the gain or loss
from the underlying risk element. When recognition occurs, such gains and losses
are recognized as adjustments to oil costs and product revenues and are reported
as "Other" revenue.
Market Risk
Market risk is the potential loss the Company may incur as a result of changes
in the market value of a particular instrument. All financial and
commodities-related instruments, including derivatives and short sales, are
subject to market risk. The Company's exposure to market risk is determined by a
number of factors, including the size, duration, composition and diversification
of positions held, the absolute and relative levels of interest rates and
foreign currency exchange rates, as well as market volatility and illiquidity.
For instruments such as options and warrants, the time period during which the
options or warrants may be exercised and the relationship between the current
market price of the underlying instrument and the option's or warrant's
contractual strike or exercise price also affect the level of market risk. The
most significant factor influencing the overall level of market risk to which
the Company is exposed is its use of hedging techniques to mitigate such risk.
The Company manages market risk by setting risk limits and monitoring the
effectiveness of its hedging policies and strategies.
The commodities dealer activities of Phibro and the crude oil refining and
gathering activities of Basis Petroleum subject the Company to risk due to
fluctuations in the prices of crude oil, metals, natural gas, gasoline, heating
oil and other commodities and refined products. Significant volatility in these
markets could have a material effect on the Company's operating results in
future periods, depending in part on the results for such periods.
SFAS 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and SFAS 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, require the disclosure of the notional amounts
of derivative financial instruments, distinguishing between those held or issued
for trading purposes and those held or issued for purposes other than trading.
Notional amounts and additional detail of the market or fair market values of
financial options and contractual commitments recorded on the Consolidated
Statement of Financial Condition at December 31, 1995 and 1994 are set forth in
the Summary of Options and Contractual Commitments that immediately follows the
Consolidated Statement of Financial Condition. The determination of notional
amounts does not consider any of the market risk
85
<PAGE> 77
factors discussed above. Notional amounts presented in this report are
indicative only of the volume of activity and are not a measure of market risk.
Market risk is influenced by the nature of the items that comprise a particular
category of financial instrument. Market risk is also influenced by the
relationship among the various off-balance-sheet categories as well as the
relationship between off-balance-sheet items and items recorded in the Company's
Consolidated Statement of Financial Condition. For all of the reasons noted
above, the interpretation of notional amounts as a measure of market risk could
be materially misleading.
The annual average balances of the Company's options
and contractual commitments based on month-end balances are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- --------------------
Average Average Average Average
Dollars in billions Assets Liabilities Assets Liabilities
==========================================================================================
<S> <C> <C> <C> <C>
Swaps, swap options, caps and floors $ 4.0 $ 6.5 $ 5.9 $ 6.1
Index and equity contracts and options 1.2 .8 1.3 1.1
Foreign exchange contracts and options .9 1.0 1.1 1.0
Other .5 .6 .4 .5
- ------------------------------------------------------------------------------------------
Total financial options
and contractual commitments $ 6.6 $ 8.9 $ 8.7 $ 8.7
==========================================================================================
Commodities-related instruments $ .5 $ .5 $ .4 $ .4
==========================================================================================
</TABLE>
Credit Risk
Salomon Brothers regularly transacts business with, and owns securities issued
by, a broad range of corporations, governments, international organizations,
central banks and other financial institutions. Phibro and Basis Petroleum
regularly transact business with independent and government-owned oil producers,
a wide variety of end users, trading companies and financial institutions.
Credit risk is measured by the loss the Company would record if its
counterparties failed to perform pursuant to terms of their contractual
obligations and the value of collateral held, if any, was not adequate to cover
such losses. The Company has established controls to monitor the
creditworthiness of counterparties, as well as the quality of pledged
collateral, and uses master netting agreements whenever possible to mitigate the
Company's exposure to counterparty credit risk. Master netting agreements enable
the Company to net certain assets and liabilities by counterparty. The Company
also nets across product lines and against cash collateral, provided such
provisions are established in the master netting and cash collateral agreements.
The Company may require counterparties to submit additional collateral when
deemed necessary.
Salomon Brothers enters into collateralized financing agreements in which it
extends short-term credit, primarily to major financial institutions. Salomon
Brothers generally controls access to the collateral pledged by the
counterparties, which consists largely of securities issued by the U.S.
government or its agencies, and may be liquidated in the event of counterparty
default.
86
<PAGE> 78
Concentrations of Credit Risk
Concentrations of credit risk from financial instruments, including contractual
commitments, exist when groups of issuers or counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. The
Company monitors credit risk on both an individual and group counterparty basis.
The Company's largest single concentration of credit risk is with securities
issued by the U.S. government and its agencies which totaled $45.1 billion and
$33.0 billion at December 31, 1995 and 1994, respectively. With the addition of
U.S. government and U.S. government agency securities pledged as collateral by
counterparties in connection with collateralized financing activity, the
Company's total holdings of U.S. government securities were $84.6 billion or 45%
of the Company's total assets at December 31, 1995 and $75.2 billion or 44% of
total assets at December 31, 1994. Similarly, concentrations with non-U.S.
governments totaled $67.5 billion at December 31, 1995 and $52.0 billion at
December 31, 1994. These consist predominantly of securities issued by the
governments of major industrial nations.
Remaining concentrations arise principally from contractual commitments with
counterparties in financial or commodities-related transactions involving future
settlement and fixed income securities owned. Excluding governments, no
concentration with a single counterparty exceeded 1% of total assets at December
31, 1995 or 1994. North America and Europe represent the largest geographic
concentrations. Among industries, other major derivatives dealers and financial
institutions represent the largest groups of counterparties.
87
<PAGE> 79
NOTE 17 FAIR MARKET VALUE INFORMATION
The following information is presented to help users gain an understanding of
the relationship between the amounts reported in the Company's financial
statements and the related market or fair market values. Specific accounting
policies are discussed in the Summary of Accounting Policies.
At December 31, 1995, $185 billion or 98% of the Company's total assets and $174
billion or 95% of the Company's total liabilities were carried at either market
or fair market values or at amounts which approximate such values. At December
31, 1994, $170 billion or 98% of the Company's total assets and $158 billion or
94% of the Company's total liabilities were carried at market value or fair
market value or at amounts that approximate such values. Financial instruments
recorded at fair market value include cash and interest bearing equivalents,
financial instruments held or sold for trading purposes including financial
options and contractual commitments and, commodities-related instruments held or
sold for trading purposes including options and contractual commitments.
Financial instruments recorded at contractual amounts that approximate market or
fair market value include collateralized short-term financing agreements,
receivables, assets securing sterling denominated variable rate CMOs, short-term
borrowings, payables, sterling denominated variable rate CMOs and variable rate
term debt. The market value of such items are not materially sensitive to shifts
in market interest rates because of the limited term to maturity of many of
these instruments and their variable interest rates.
The table below reflects financial instruments which are recorded at contractual
or historical amounts that do not necessarily approximate market or fair market
value. Such instruments include U.S. dollar denominated CMOs and the assets
securing U.S. dollar denominated CMOs, the Company's fixed rate term debt, as
well as the fair market value of derivative instruments which are used for
non-trading, or end user, purposes.
<TABLE>
<CAPTION>
1995 1994
Assets Liabilities Assets Liabilities
---------------------------------- ----------------------------------
Fair Fair Fair Fair
Carrying Market Carrying Market Carrying Market Carrying Market
Dollars in billions Value Value Value Value Value Value Value Value
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial instruments recorded at contractual
amounts or historical amounts that do not
necessarily approximate market or fair market value:
Assets securing U.S. dollar denominated CMOs
(fixed rate) $.6 $.8 $.8 $.8
U.S. dollar denominated CMOs (fixed rate) $ .6 $ .7 $ .7 $ .8
Fixed rate term debt 8.7 9.1 9.7 9.3
Derivatives held or issued for non-trading purposes* $ - $.7 $ - $ .2 $ - $.5 $ - $ .7
=================================================================================================================================
</TABLE>
*The fair market value of non-trading derivatives, which are all transacted with
affiliates, includes amounts related to interest rate swaps used to effectively
convert the Company's fixed rate preferred stock dividend obligations to
variable rate obligations
88
<PAGE> 80
The fair market value of fixed rate term debt has been estimated by using a
discounted cash flow analysis. The Company's U.S. dollar denominated fixed rate
CMOs and assets securing U.S. dollar denominated fixed rate CMOs are carried at
their contractual amounts. At December 31, 1995 and 1994, prevailing interest
rates and prepayments resulted in the fair market value of the liabilities
associated with such CMOs exceeding their carrying amount. The carrying value of
assets securing the dollar denominated CMOs also exceeded their fair market
value at December 31, 1995. CMOs and the assets which secure them should not be
viewed independently. Taken together, the fair market value of the Company's
dollar denominated CMOs and the assets securing them is the present value of the
difference between future cash inflows from the CMO collateral and cash outflows
to service the CMOs. This difference was nominal at December 31, 1995 and 1994.
NOTE 18 PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following are condensed financial statements of Salomon Inc (Parent Company
Only):
Parent Company Only Condensed Statement of Income
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1995 1994 1993
======================================================================================================================
<S> <C> <C> <C>
Dividends from subsidiaries $ 206 $ 418 $ 383
Net interest and principal transactions 152 9 (25)
General, administrative and other expenses (113) (88) (78)
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in net income (loss) of
subsidiaries and affiliates, net of dividends received 245 339 280
Income tax (expense) benefit (13) 33 44
Equity in net income (loss) of subsidiaries and affiliates,
net of dividends received 225 (771) 518
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in accounting principles 457 (399) 842
Cumulative effect of change in accounting principles, net of tax benefit of $11 - - (15)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 457 $ (399) $ 827
======================================================================================================================
</TABLE>
89
<PAGE> 81
PARENT COMPANY ONLY CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Dollars in millions
December 31, 1995 1994
============================================================================================================
<S> <C> <C> <C> <C>
Assets:
Cash and interest bearing equivalents $ 14 $ 7
Financial instruments 29 31
Commodities-related products and instruments 746 573
Receivables 429 462
Receivables from subsidiaries:
Salomon Brothers Holding Company Inc $11,479 $13,963
Basis Petroleum, Inc.* 530 455
Other subsidiaries 168 640
------- -------
12,177 15,058
Investments in subsidiaries:
Salomon Brothers Holding Company Inc 4,731 4,433
Basis Petroleum, Inc.* 299 356
Other subsidiaries 75 24
------- -------
5,105 4,813
Property, plant and equipment, net 285 315
Other assets 55 87
- ------------------------------------------------------------------------------------------------------------
Total assets $18,840 $21,346
============================================================================================================
Liabilities and stockholders' equity:
Short-term borrowings $ 1,751 $ 2,064
Financial and commodities-related instruments sold,
not yet purchased 296 470
Other liabilities 475 424
Term debt 11,615 13,896
------- -------
Total liabilities 14,137 16,854
Redeemable preferred stock, Series A 560 700
Stockholders' equity 4,143 3,792
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $18,840 $21,346
===========================================================================================================
* Effective April 1, 1996, Phibro Energy USA, Inc. will be renamed Basis
Petroleum, Inc. In January 1996, $140 million of Basis' intercompany
debt with Salomon Brothers Holding Company Inc was exchanged for equity.
</TABLE>
90
<PAGE> 82
PARENT COMPANY ONLY CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS
YEAR ENDED DECEMBER 31, 1995 1994 1993
========================================================================================================
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Issuance of term debt $ 2,679 $ 6,115 $ 6,783
Redemption of redeemable preferred stock, Series A (140) - -
Term debt maturities and repurchases (4,898) (2,891) (3,560)
Net increase (decrease) in short-term borrowings (313) (381) 586
Issuance of preferred stock, Series D - - 200
Purchase of common stock for treasury (2) (252) (16)
Dividends (137) (128) (117)
Employee stock purchase and option plans 15 13 35
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,796) 2,476 3,911
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in receivables from subsidiaries 2,881 (2,783) (4,341)
Dividends received from subsidiaries 206 418 383
Capital infusions and other capital transactions with
subsidiaries (69) - -
Purchases of property, plant and equipment (4) (11) (8)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,014 (2,376) (3,966)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating and other activities (211) (99) 26
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and interest bearing equivalents 7 1 (29)
Cash and interest bearing equivalents at beginning of year 7 6 35
- --------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at end of year $ 14 $ 7 $ 6
========================================================================================================
</TABLE>
BASIS OF PRESENTATION
The accompanying Condensed Financial Statements include the accounts of Salomon
Inc (Parent Company Only). Investments in subsidiaries are accounted for under
the equity method. For information regarding the Company's term debt, see Note
7.
91
<PAGE> 83
SALOMON INC AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS DECEMBER SEPTEMBER JUNE MARCH
THREE MONTHS ENDED 31 30 30 31
========================================================================================================
<S> <C> <C> <C> <C>
1995
Revenues:
Interest and dividends $1,859 $1,611 $1,944 $1,608
Principal transactions 268 691 (252) 370
Investment banking 168 128 154 22
Commissions 80 82 81 89
Other - 24 27 (21)
- --------------------------------------------------------------------------------------------------------
Total revenues $2,375 $2,536 $1,954 $2,068
Revenues, net of interest expense $ 826 $1,181 $ 401 $ 743
- --------------------------------------------------------------------------------------------------------
Income (loss) before income taxes by business unit:
Salomon Brothers $ 207 $ 381 $ 56 $ 60
Phibro 56 68 (162) 123
Basis Petroleum (32) (9) 1 (51)
Corporate and Other 3 (1) 6 2
- --------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 234 $ 439 $ (99) $ 134
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 168 $ 268 $ (60) $ 81
========================================================================================================
Earnings (loss) per share -
Primary $ 1.42 $ 2.36 $(0.73) $ 0.59
Fully diluted 1.32 2.10 (0.73) 0.59
=========================================================================================================
1994
Revenues:
Interest and dividends $1,635 $1,520 $1,347 $1,400
Principal transactions (326) (42) (245) 53
Investment banking 109 121 86 170
Commissions 79 82 85 90
Other 31 17 10 56
- --------------------------------------------------------------------------------------------------------
Total revenues $1,528 $1,698 $1,283 $1,769
Revenues, net of interest expense $ 96 $ 408 $ 171 $ 711
- --------------------------------------------------------------------------------------------------------
Income (loss) before income taxes by business unit:
Salomon Brothers* $ (416) $ (176) $ (410) $ 39
Phibro (24) (27) 82 50
Basis Petroleum 5 (4) (10) 27
Corporate and Other 14 31 (8) (4)
- --------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ (421) $ (176) $ (346) $ 112
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ (157) $ (104) $ (204) $ 66
========================================================================================================
Earnings (loss) per share -
Primary $(1.65) $(1.13) $(2.08) $ 0.48
Fully diluted (1.65) (1.13) (2.08) 0.48
========================================================================================================
</TABLE>
Earnings (loss) per share for quarterly periods are based on
average common shares outstanding in individual quarters; thus,
the sum of earnings (loss) per share of the quarters may not
equal the amounts reported for the full year.
* Salomon Brothers' fourth quarter 1994 pretax loss includes $278
million of unallocated charges.
92
<PAGE> 84
SALOMON INC
COMMON STOCK DATA
The Company's stock is listed on the New York Stock Exchange, Inc. (trading
symbol SB). As of February 29, 1996, there were 12,245 holders of record.
The ranges of market prices and cash dividends paid on common stock for each
quarterly period during 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------- --------------------------------------------
MARKET PRICE MARKET PRICE
----------------------------- ------------------------------
DIVIDENDS DIVIDENDS
THREE MONTHS ENDED HIGH LOW END PER SHARE HIGH LOW END PER SHARE
=================================================================== ============================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $40 1/8 $32 1/4 $33 7/8 $.16 $52 3/4 $44 3/4 $48 1/2 $.16
June 30 43 1/4 33 1/4 40 1/8 .16 52 5/8 47 1/4 47 3/4 .16
September 30 41 1/8 34 3/4 38 1/2 .16 48 1/4 38 1/2 39 1/2 .16
December 31 40 5/8 33 7/8 35 3/8 .16 42 35 37 1/2 .16
- ------------------------------------------------------------------- -------------------------------------------
$.64 $.64
======= =======
</TABLE>
93
<PAGE> 85
SALOMON INC AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1995 1994 1993 1992 1991
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
For the year ended December 31:
Revenues:
Principal transactions, including
net interest and dividends $ 2,317 $ 450 $ 3,053 $ 3,164 $ 2,705
Investment banking 472 486 791 450 496
Commissions and other 362 450 355 245 326
- ---------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,151 1,386 4,199 3,859 3,527
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 1,737 1,486 1,900 1,638 1,375
Other noninterest expenses 706 731 834 980 1,033
Charges relating to U.S. Treasury auction matters -- -- -- 185 200
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,443 2,217 2,734 2,803 2,608
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principles 708 (831) 1,465 1,056 919
Income tax expense (benefit) 251 (432) 601 506 412
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting principles 457 (399) 864 550 507
Cumulative effect of change in accounting principles,
net of tax benefit of $28 -- -- (37) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 457 $ (399) $ 827 $ 550 $ 507
===========================================================================================================================
Income (loss) before income taxes and cumulative effect
of change in accounting principles by business unit:
Salomon Brothers $ 704 $ (963) $ 1,575 $ 1,390 $ 1,036
Phibro 85 81 (15) (194) 47
Basis Petroleum (91) 18 (46) (47) (80)
Corporate and Other 10 33 (49) (93) (84)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principles $ 708 $ (831) $ 1,465 $ 1,056 $ 919
===========================================================================================================================
At year-end:
Total assets $188,428 $172,452 $184,835 $159,459 $ 97,424
Short-term borrowings 101,157 78,579 97,890 88,417 40,393
Term debt 13,045 15,202 11,692 8,533 7,082
Redeemable preferred stock 560 700 700 700 700
Perpetual preferred stock 312 312 312 112 112
Common equity 3,831 3,480 4,234 3,519 3,255
===========================================================================================================================
Per common share:
Primary earnings (loss)* $ 3.64 $ (4.31) $ 7.01 $ 4.18 $ 3.90
Fully diluted earnings (loss)* 3.50 (4.31) 6.28 4.05 3.79
Cash dividends .64 .64 .64 .64 .64
High market price 43 1/4 52 3/4 51 7/8 39 37
Low market price 32 1/4 35 34 3/8 26 5/8 20 3/4
Ending market price 35 3/8 37 1/2 47 5/8 38 1/8 30 5/8
Book value 35.84 32.65 37.93 32.06 28.76
===========================================================================================================================
Selected ratios:
Return on average common stockholders' equity:**
Primary 10.8% (11.7)% 21.9% 13.6% 13.9%
Fully diluted 10.3% (11.7)% 19.3% 12.9% 12.9%
Pretax margin 22% n/m 35% 27% 26%
Market/book ratio .99 1.15 1.26 1.19 1.06
Price/earnings ratio 10 n/m 7 9 8
===========================================================================================================================
Other data:
Common shares outstanding (in millions) 106.4 105.8 110.6 109.8 113.2
Salomon Brothers' full-time employees 6,409 6,950 6,339 6,481 6,650
Salomon Inc's full-time employees 8,439 8,970 8,543 8,546 8,816
===========================================================================================================================
</TABLE>
Salomon Brothers' 1994 results include fourth quarter pretax charges of $278
million in connection with the resolution of unreconciled balances related to
Salomon Brothers' London-based companies and the completion of a detailed review
of Salomon Brothers' general ledger accounts related to interest rate swaps.
Results for 1994 include an income tax benefit of $102 million resulting from
the reversal of certain reserves previously established for tax contingencies.
Salomon Brothers' 1992 and 1991 results include pretax charges of $185 million
and $200 million, respectively, related to the U.S. Treasury auction and related
matters.
* 1993 primary and fully diluted earnings per share amounts include reductions
of $.33 and $.29, respectively, related to a cumulative change in accounting
principles for postretirement benefits.
** Before cumulative effect of change in accounting principles.
n/m-not meaningful.
94
<PAGE> 86
Salomon Inc 1995
Annual Report
Financial Information for Graphs
Appendix A
Graph #1
Management's Discussion & Analysis
Financial Highlights
Salomon Inc
Net Income
(in millions of dollars)
91 507
92 550
93 827
94 (399)
95 457
Graph #2
Management's Discussion & Analysis
Financial Highlights
Salomon Inc
Book Value per Common Share and Shares Outstanding at Year-End
Book Value per Common Share
(in dollars)
91 28.76
92 32.06
93 37.93
94 32.65
95 35.84
Shares Outstanding at Year-End
(in millions)
91 113.2
92 109.8
93 110.6
94 105.8
95 106.4
<PAGE> 87
Graph #3
Management's Discussion & Analysis
Business Unit Information
Salomon Brothers
Pretax Results
(in billions of dollars)
91 1.036
92 1.390
93 1.575
94 (0.963)
95 0.704
Graph #4
Management's Discussion & Analysis
Business Unit Information
Phibro
Pretax Results
(in millions of dollars)
91 47
92 (194)
93 (15)
94 81
95 85
Graph #5
Management's Discussion & Analysis
Business Unit Information
Basis Petroleum
Pretax Results
(in millions of dollars)
91 (80)
92 (47)
93 (46)
94 18
95 (91)
<PAGE> 88
Graph #6
Management's Discussion & Analysis
Salomon Brothers Results of Operations
Compensation Expense Ratio(1)
Latest Four Quarters
1995
---------------------------------
Bankers Trust(2) 82%
Lehman Brothers 81%
Merrill Lynch 74%
Salomon Brothers 69%
Bear Stearns 68%
Morgan Stanley(3) 67%
J.P. Morgan 57%
(1) Compensation expenses as a percent of earnings before income taxes and
compensation expenses.
(2) Excludes $50 million provision for severance-related costs.
(3)Ten month fiscal period ended November 30, 1995.
Graph #7
Management's Discussion & Analysis
Salomon Brothers and Competitors
Non-Compensation Expense Ratio(1)
Latest Four Quarters
1995
------------------------------------
Bankers Trust 45
Lehman Brothers(2) 36
Merrill Lynch 31
Morgan Stanley(3) 26
J.P. Morgan 25
Bear Stearns 25
Salomon Brothers(4) 23
(1) Non-compensation expenses as a percent of revenues, net of interest
expense.
(2) Excludes $97 million restructuring charge.
(3) Ten month fiscal period ended November 30, 1995.
(4) Excludes $(23) million in non-recurring expenses.
<PAGE> 89
Graph #8
Management's Discussion & Analysis
Basis Petroleum-Description of Business
Cash Flow Schedule
(in millions of dollars)
Operating Cash Flow Net Cash Flow*
--------------------------------------------------------
91 33 -158
92 -1 -116
93 40 -36
94 70 12
95 -74 -143
* Operating cash flow adjusted for refinery capital improvements (excluding
the Residfiner project) and the impact of acquisitions and divestitures.
Graph #9
Management's Discussion & Analysis
Basis Petroleum-Description of Business
Refining Output by Product Type
(in millions of barrels)
Gasoline Distillates Residual Fuel Oil Other
----------------------------------------------------------------------
91 44 34 22 28
92 43 33 17 12
93 43 38 18 14
94 41 35 13 21
95 41 32 12 19
<PAGE> 90
Graph #10
Management's Discussion & Analysis
Basis Petroleum-Description of Business
Quarterly Average Crackspreads
(in dollars per barrel)
2-1-1 Crackspread 6-3-2-1 Crackspread
-------------------------------------------------------------------
1991 4.713 2.671867
4.330633 2.824167
3.822233 1.9916
3.016867 1.105633
1992 2.842567 1.1155
3.752733 2.122033
2.971967 1.472667
2.825033 1.383067
1993 2.5016 1.046167
3.5028 2.301233
3.075867 1.838433
2.4001 1.059733
1994 3.8478 2.757033
2.4034 1.4539
2.15333 1.205867
1.783767 0.877833
1995 1.275267 0.549633
3.097833 2.420967
2.3795 1.326133
2.025367 0.969833
Graph #11
Management's Discussion & Analysis
Basis Petroleum-Description of Business
Discounts For Heavy Crudes vs. WTI
(in dollars per barrel)
Maya Arab Heavy
----------------------------------------------------------------
1991 9.29 6.56
1992 7.46 4.74
1993 7.01 4.44
1994 4.64 3.51
1995 4.02 2.41
Maya is F.O.B. Mexico. Arab Heavy price is Delivered U.S. Gulf. Both are
compared with WTI price at Cushing, Oklahoma.
<PAGE> 91
Graph #12
Management's Discussion & Analysis
Derivative Instruments
Notional Amounts
(in billions of dollars)
<TABLE>
<CAPTION>
OTC Swap Agreements, OTC Foreign Exchange
Exchange-Issued Products Swap Options, Caps and Floors Contracts and Options Other
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1991 440 173 102 114
1992 342 204 64 166
1993 500 322 72 157
1994 786 486 80 158
1995 636 682 99 242
</TABLE>
Graph #13
Management's Discussion & Analysis
Capital and Liquidity Management
Capital Management Overview
Long-Term Capital
(in billions of dollars)
<TABLE>
<CAPTION>
Common Equity Capital Perpetual Preferred Stock Redeemable Preferred Stock Term Debt and Other
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
91 3.255 0.112 0.7 5.957
92 3.519 0.112 0.7 7.404
93 4.234 0.312 0.7 11.588
94 3.48 0.312 0.7 11.646
95 3.831 0.312 0.497 10.793
</TABLE>
Graph #14
Management's Discussion & Analysis
Capital and Liquidity Management
Working Capital
Working Capital Requirements
(in billions of dollars)
Working Capital Working Capital Coverage Ratio
------------------------------------------------------------------
91 11 0.91
92 12.4 0.95
93 12.767 1.32
94 15.045 1.07
95 14.026 1.1
<PAGE> 92
Graph #15
Management's Discussion & Analysis
Capital and Liquidity Management
Asset Leverage
Asset to Equity Ratios(1)
<TABLE>
<CAPTION>
Gross Assets Net Assets(2) Net Assets less All Govts(3)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch 9/30/95 30.52 19.15 16.19
Lehman Brothers 11/30/95 31.18 16.98 10.8
Bear Stearns 12/31/95 34.86 14.92 10.91
Morgan Stanley 11/30/95 27.78 13.68 8.61
Salomon Inc 12/31/95 39.05 24.52 8.29
</TABLE>
(1) Fourth quarter average assets used for Salomon Inc; period-end assets used
for competitor group.
(2) Net assets represent gross assets less securities purchased under
agreements to resell and securities borrowed.
(3) For Salomon Inc, government inventories include $.4 billion of
non-collateralized emerging market debt, which was neccessary in order to
maintain comparability with Salomon's competitors.
<PAGE> 93
Graph #16
Management's Discussion & Analysis
Risk Management
Credit Risk
Swap and Foreign Exchange Contracts
Current Credit Exposure
Net of Collateral
(in billions of dollars)
<TABLE>
<CAPTION>
All Transactions
Risk Classes(1)
1&2 3 4 5 6, 7 & 8
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Major Derivatives Dealers
- ------------------------------
Swaps 0.4100 0.5038 0.1460 .0026 0
FX 0.2769 0.1810 0.0103 .0084 0
Other
- ------------------------------
Swaps 1.169 0.5565 0.5898 .2792 0.0145
FX 0.045 0.0449 0.0689 .0104 0.00012
Credit Exposure
Weighted by
Historical Default Ratios(2)
($ in millions): $3.1 $6.6 $14.1 $31.6 $4.4
</TABLE>
(1) 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.
(2) This calculation uses conservative assumptions about average duration of
exposures for each risk class and historical default statistics collected
by Moody's for securities of similar duration and risk class. The Company
considers potential credit losses on contractual commitments in the
determination of fair market value.
<PAGE> 94
Graph # 17
Management's Discussion & Analysis
Risk Management
Credit Risk
Transactions with more than 3 Years to Maturity
(in billions of dollars)
<TABLE>
<CAPTION>
Risk Classes(1)
1&2 3 4 5 6, 7 & 8
------------------------------------------------------------------------------------------------------
Major Derivatives Dealers
- -----------------------------
<S> <C> <C> <C> <C> <C>
Swaps 0.1352 0.2571 0.0492 0 0
FX 0.0242 0 0 0 0
Other
- -----------------------------
Swaps 1.0392 0.2271 0.2714 0.1416 0.0138
FX 0.0250 0 0 0 0
</TABLE>
(1) 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.
<PAGE> 1
EXHIBIT 21
SALOMON INC
Subsidiaries of the Registrant
Name under which business is conducted Jurisdiction
- --------------------------------------------------------------------------------
Phibro Commodities United Kingdom
Phibro Energy Clearing Inc. Delaware
Phibro Energy Production, Inc. Delaware
White Nights Joint Enterprise (45% owned) Russia
Phibro Trading Pte. Ltd. Singapore
Phibro Energy USA, Inc. (Effective April 1, 1996,
renamed Basis Petroleum, Inc.) Texas
Phibro GmbH Switzerland
Phibro Resources Corp. Delaware
The S.W. Shattuck Chemical Co., Inc. Colorado
Philipp Brothers, Inc. New York
Philipp Brothers Trading Corporation Delaware
Salomon Brothers Holding Company Inc Delaware
Loan Participation Holding Corporation Delaware
Home Mortgage Access Corporation District of Columbia
Home Mac Mortgage Securities Corporation District of Columbia
PB-SB Investments Inc Delaware
Plaza Clearing Corporation New York
Salomon Brothers Inc Delaware
Salomon Plaza Holdings Inc Delaware
Plaza Holdings, Inc. Delaware
Salomon Brothers Finance Corporation & Co.
beschrankt haftende KG Germany
Salomon Brothers AG Germany
Salomon Forex Inc Delaware
Salomon Brothers Realty Corporation New York
Salomon Swapco Inc Delaware
Salomon Brothers Mortgage Securities II, Inc. Delaware
Salomon Brothers Mortgage Securities Inc. Delaware
Salomon Brothers Mortgage Securities V, Inc. Delaware
Salomon Capital Access for Savings Institutions, Inc. Delaware
Salomon Capital Access Corporation Delaware
Salomon Brothers International Operations (Japan) Inc Delaware
Salomon Brothers International Operations Inc Delaware
Salomon Brothers Asset Management Inc Delaware
Salomon Brothers Housing Investment Inc Delaware
<PAGE> 2
Name under which business is conducted Jurisdiction
- --------------------------------------------------------------------------------
Salomon Brothers Pacific Holding Company Inc Delaware
Salomon (International) Finance AG Switzerland
Salomon Brothers Overseas Inc and Branch Cayman Islands
Salomon Brothers Asia Limited Hong Kong
Salomon Brothers Hong Kong Limited Hong Kong
Salomon Brothers Australia Limited Australia
Salomon Brothers Canada Holding Co. Canada
Salomon Brothers Canada Inc Canada
Salomon Brothers Finance AG Switzerland
Salomon Brothers S.A. France
Salomon Brothers SIM, SpA Italy
Salomon International Limited Delaware
Phibro Holdings Limited United Kingdom
Phibro Bullion Limited United Kingdom
Phibro Futures Limited United Kingdom
Salomon Brothers Europe Limited United Kingdom
Salomon Brothers International Limited United Kingdom
Salomon Brothers UK Equity limited United Kingdom
Salomon Brothers UK Limited United Kingdom
The Mortgage Corporation Limited United Kingdom
Scanports Shipping Inc. Delaware
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Salomon Inc:
As independent public accountants, we hereby consent to the incorporation of our
report dated February 6, 1996 included in this Form 10-K, into the following
Registration Statements previously filed by the Company:
Form S-3 Registration Statement No. 33-41932,
Form S-3 Registration Statement No. 33-48199,
Form S-3 Registration Statement No. 33-49136,
Form S-3 Registration Statement No. 33-57922,
Form S-3 Registration Statement No. 33-51269,
Form S-3 Registration Statement No. 33-54929,
Form S-3 Registration Statement No. 33-56481, and
Form S-3 Registration Statement No. 333-01807.
It should be noted that we have not audited any financial statements of the
Company subsequent to December 31, 1995 or performed any audit procedures
subsequent to the date of our report.
New York, New York ARTHUR ANDERSEN LLP
March 29, 1996
<PAGE> 1
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Dwayne O. Andreas
<PAGE> 2
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Warren E. Buffett
<PAGE> 3
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Claire M. Fagin
<PAGE> 4
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ John L. Haseltine
<PAGE> 5
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Gedale B. Horowitz
<PAGE> 6
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Deryck C. Maughan
<PAGE> 7
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 13th day of
February, 1996.
/s/ David O. Maxwell
<PAGE> 8
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ William F. May
<PAGE> 9
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Charles T. Munger
<PAGE> 10
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Shigeru Myojin
<PAGE> 11
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Louis A. Simpson
<PAGE> 12
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1995:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission, all as fully to all
intents and purposes as I might or could do in person, and I hereby ratify and
approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 7th day of
February, 1996.
/s/ Robert G. Zeller
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 1995 ANNUAL REPORT FINANCIAL INFORMATION (EXHIBIT 13) AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,454
<RECEIVABLES> 4,472
<SECURITIES-RESALE> 48,422
<SECURITIES-BORROWED> 16,993
<INSTRUMENTS-OWNED> 110,949
<PP&E> 1,343
<TOTAL-ASSETS> 188,428
<SHORT-TERM> 8,304
<PAYABLES> 9,658
<REPOS-SOLD> 91,813
<SECURITIES-LOANED> 1,040
<INSTRUMENTS-SOLD> 57,528
<LONG-TERM> 13,045
560
312
<COMMON> 156
<OTHER-SE> 3,675
<TOTAL-LIABILITY-AND-EQUITY> 188,428
<TRADING-REVENUE> 1,077
<INTEREST-DIVIDENDS> 7,022
<COMMISSIONS> 332
<INVESTMENT-BANKING-REVENUES> 472
<FEE-REVENUE> 30
<INTEREST-EXPENSE> 5,782
<COMPENSATION> 1,737
<INCOME-PRETAX> 708
<INCOME-PRE-EXTRAORDINARY> 457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 457
<EPS-PRIMARY> 3.64
<EPS-DILUTED> 3.50
</TABLE>
