FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____to_____
Commission File Number 1-4346
Salomon Inc
(Exact name of registrant as specified in its charter)
Delaware 22-1660266
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Seven World Trade Center, New York, New York 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 783-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of common stock outstanding
at April 30, 1996: 105,188,905
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Salomon Inc
Form 10-Q
<CAPTION>
Part I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements (unaudited):
Consolidated Statement of Income -
Three months ended March 31, 1996 and 1995 3
Condensed Consolidated Statement of Financial Condition -
March 31, 1996 and December 31, 1995 4-5
Summary of Options and Contractual Commitments -
March 31, 1996 and December 31, 1995 6
Consolidated Statement of Cash Flows -
Three months ended March 31, 1996 and 1995 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Dollars in millions, except per share amounts
Three months ended March 31, 1996 1995
Revenues:
<S> <C> <C>
Interest and dividends $ 1,573 $ 1,608
Principal transactions 651 370
Investment banking 181 22
Commissions 90 89
Other (27) (21)
Total revenues 2,468 2,068
Interest expense 1,275 1,325
Revenues, net of interest expense 1,193 743
Noninterest expenses:
Compensation and employee-related 556 431
Technology 55 64
Professional services and business development 44 45
Occupancy 43 41
Clearing and exchange fees 17 16
Other 17 12
Total noninterest expenses 732 609
Income before income taxes 461 134
Income tax expense 185 53
Net income $ 276 $ 81
Earnings available for fully diluted earnings
per common share $ 270 $ 63
Per common share:
Primary earnings $ 2.44 $ 0.59
Fully diluted earnings* 2.21 0.59
Cash dividends 0.16 0.16
Weighted average shares of common stock outstanding (in thousands):
For primary earnings per share 106,600 106,300
For fully diluted earnings per share 121,800 106,700
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Summary of Options and Contractual Commitments are integral
parts of this statement.
* Assumes conversion of redeemable preferred stock unless such assumption
results in higher earnings per share than determined under the primary
method.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
ASSETS March 31, 1996 December 31, 1995
<S> <C> <C> <C> <C>
Cash and interest bearing equivalents $ 2,163 $ 1,454
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 41,643 $ 45,121
Government and government agency securities - non-U.S. 34,931 39,843
Corporate debt securities 10,104 11,150
Options and contractual commitments 5,801 6,713
Equity securities 5,564 3,915
Mortgage loans and collateralized mortgage securities 1,831 1,959
Other 2,656 2,248
102,530 110,949
Commodities-related products and instruments:
Crude oil, refined products and other
physical commodities 1,128 1,223
Options and contractual commitments 463 372
1,591 1,595
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 56,857 48,422
Securities borrowed and other 11,947 16,993
68,804 65,415
Receivables 5,861 4,472
Assets securing collateralized mortgage obligations 2,270 2,431
Property, plant and equipment, net 1,339 1,343
Other assets, including intangibles 783 769
Total assets $ 185,341 $ 188,428
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Summary of Options and Contractual Commitments are integral
parts of this statement.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 1996 December 31, 1995
<S> <C> <C> <C> <C>
Short-term borrowings:
Securities sold under agreements to repurchase $ 75,742 $ 91,813
Bank borrowings 3,427 3,856
Deposit liabilities 1,101 1,347
Securities loaned 1,036 1,040
Commercial paper 706 797
Other 1,017 2,304
$ 83,029 $ 101,157
Financial and commodities-related instruments sold, not yet purchased,
and contractual commitments:
Government and government agency securities - U.S. 38,522 21,132
Government and government agency securities - non-U.S. 20,444 21,994
Financial options and contractual commitments 7,477 8,858
Equity securities 4,668 3,489
Corporate debt securities and other 1,269 1,448
Commodities, including options and
contractual commitments 569 607
72,949 57,528
Payables and accrued liabilities 8,932 9,658
Collateralized mortgage obligations 2,173 2,337
Term debt 13,075 13,045
Total liabilities 180,158 183,725
Commitments and contingencies (Note 2)
Redeemable preferred stock, Series A 560 560
Stockholders' equity:
Preferred stock, Series C, D and E 562 312
Common stock 156 156
Additional paid-in capital 289 296
Retained earnings 5,244 5,001
Cumulative translation adjustments 6 13
Common stock held in treasury, at cost (1,634) (1,635)
Total stockholders' equity 4,623 4,143
Total liabilities and stockholders' equity $ 185,341 $ 188,428
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Summary of Options and Contractual Commitments are integral
parts of this statement.
</FN>
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SALOMON INC AND SUBSIDIARIES
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
(UNAUDITED)
March 31, 1996 December 31, 1995
Current Market or Current Market or
Notional Fair Market Value Notional Fair Market Value
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
Exchange-issued products:
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Financial futures contracts* $ 573.1 $ - $ - $ 570.5 $ - $ -
Other exchange-issued products:
Equity contracts 7.8 .1 .2 16.8 .5 .3
Fixed income contracts 51.4 - - 44.5 .2 -
Foreign exchange contracts .1 - - - - -
Commodities-related contracts 6.4 - - 4.3 - -
Total exchange-issued products 638.8 .1 .2 636.1 .7 .3
Over-the-counter ("OTC") swaps, swap options,
caps and floors:
Swaps 646.1 555.5
Swap options written 7.0 5.2
Swap options purchased 21.9 20.4
Caps and floors 98.8 100.8
Total OTC swaps, swap options, caps and floors ** 773.8 3.4 5.2 681.9 4.3 6.5
OTC foreign exchange contracts and options:
Forward currency contracts** 75.4 .4 .3 57.4 .3 .4
Options written 18.5 - .4 21.0 - .6
Options purchased 18.2 .2 - 20.2 .3 -
Total OTC foreign exchange contracts and options 112.1 .6 .7 98.6 .6 1.0
Other options and contractual commitments:
Options and warrants on equities and equity indices*** 40.0 1.4 1.0 24.0 1.0 .6
Options and forward contracts on fixed income
securities*** 274.6 .3 .4 196.6 .1 .5
Commodities-related contracts**** 30.1 .5 .3 21.8 .4 .3
Total $1,869.4 $ 6.3 $ 7.8 $1,659.0 $ 7.1 $ 9.2
<FN>
* Margin on futures contracts is included in receivables/payables to brokers,
dealers and clearing organizations on the Consolidated Statement of Financial
Condition.
** Notional values of swap agreements and forward currency contracts
related to non-trading activities were $12.6 billion and $1.4 billion at March
31, 1996 and $12.8 billion and $1.9 billion at December 31, 1995, respectively.
*** The fair market value of such instruments recorded as assets includes
approximately $.5 billion at March 31, 1996 and $.4 billion at December 31, 1995
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.
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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.
Transactions
with over
Dollars in billions All Transactions 3 years to
maturity
Other Major
Derivatives Financial Governments/ Year-to-Date
March 31, 1996 Dealers Corporates Institutions Supranationals Other Total Average Total
Swaps, swap options,
caps and floors:
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Risk classes 1 and 2 $ .4 $ - $ .6 $ .1 $ - $1.1 $1.3 $ .7
Risk class 3 .4 .3 .1 - - .8 .9 .4
Risk classes 4 and 5 .1 .5 .2 - .1 .9 .9 .4
Risk classes 6, 7 and 8 - .1 - - - .1 .1 .1
$ .9 $ .9 $ .9 $ .1 $ .1 $2.9 $3.2 $1.6
Foreign exchange
contracts and options:
Risk classes 1 and 2 $ .2 $ - $ - $ .1 $ - $ .3 $ .4 $ -
Risk class 3 .2 - - - - .2 .3 -
Risk classes 4 and 5 - .1 - - - .1 .1 -
$ .4 $ .1 $ - $ .1 $ - $ .6 $ .8 $ -
<FN>
*To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are analogous to
external credit ratings whereby risk classes one through three are high quality
investment grades. Risk classes four and five include counterparties ranging
from the lowest investment grade to the highest non-investment grade level. Risk
classes six, seven and eight represent higher risk counterparties.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Dollars in millions
<S> <C> <C>
Three months ended March 31, 1996 1995
Cash flows from operating activities:
Net income adjusted for noncash items -
Net income $ 276 $ 81
Depreciation, amortization and other 44 21
Cash items included in net income 320 102
Net(increase)decrease in operating assets -
Financial instruments and contractual commitments 8,419 1,226
Commodities-related products and instruments 4 (385)
Collateralized short-term financing agreements (3,389) 4,941
Receivables (1,432) 33
Other (70) 174
Net increase in operating assets 3,532 5,989
Increase (decrease) in operating liabilities -
Short-term borrowings (18,128) 11,728
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments 15,421 (18,672)
Payables and accrued liabilities (756) (596)
Net decrease in operating liabilities (3,463) (7,540)
Net cash provided by (used in) operating activities 389 (1,449)
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 1,271 1,313
Issuance of preferred stock, Series E 250 -
Employee stock purchase and option plans - 6
Total cash proceeds from financing activities 1,521 1,319
Payments for -
Term debt maturities and repurchases 1,132 1,740
Collateralized mortgage obligations 134 134
Dividends on common stock 17 18
Dividends on preferred stock* 16 18
Total cash payments for financing activities 1,299 1,910
Net cash provided by (used in) financing activities 222 (591)
Cash flows from investing activities:
Proceeds from -
Assets securing collateralized mortgage obligations 128 159
Total cash proceeds from investing activities 128 159
Payments for -
Property, plant and equipment 30 78
Total cash payments for investing activities 30 78
Net cash provided by investing activities 98 81
Net increase (decrease) in cash and interest bearing equivalents 709 (1,959)
Cash and interest bearing equivalents at January 1, 1,454 3,539
Cash and interest bearing equivalents at March 31, $ 2,163 $ 1,580
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Summary of Options and Contractual Commitments are integral
parts of this statement.
* For the three months ended March 31, 1996 and 1995, dividends on preferred
stock were reduced by the aftertax impact ($6 million and
$4 million respectively) of interest rate swaps that effectively
convert the Company's fixed-rate obligations to variable-rate obligations.
</FN>
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Salomon Inc and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1996
1. Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements are prepared
in accordance with generally accepted accounting principles in the U.S.
and prevailing industry practice, both of which require the use of
management's best judgment and estimates. They include all normal
recurring adjustments necessary for a fair presentation of financial
condition, results of operations and cash flows. Estimates, including
the fair market value of financial instruments, may vary from actual
results. The Unaudited Condensed Consolidated Financial Statements
include the accounts of Salomon Inc and all majority-owned subsidiaries
(collectively, the "Company"). The Unaudited Condensed Consolidated
Financial Statements should be read in conjunction with the Audited
Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
2. Legal Proceedings
Outstanding legal matters are discussed in Note 15 to the Consolidated
Financial Statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995. Management of the Company,
after consultation with outside legal counsel, believes that the
ultimate resolution of legal proceedings and environmental matters
(taking into consideration applicable reserves) will not have a
material adverse effect on the Company's financial condition; however,
there could be a material impact on operating results in future periods
depending in part on the results for such periods. Additional
information on legal proceedings is included in "Item 1 Legal
Proceedings."
3. Net Capital
Certain U.S. and non-U.S. subsidiaries are subject to securities and
commodities regulations and capital adequacy requirements promulgated
by the regulatory and exchange authorities of the countries in which
they operate. The Company's principal regulated subsidiaries are
discussed below.
Salomon Brothers Inc ("SBI") is registered as a broker-dealer with the
U.S. Securities and Exchange Commission ("SEC") and is subject to the
SEC's Uniform Net Capital Rule, Rule 15c3-1, which requires net
capital, as defined under the alternative method, of not less than the
greater of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds required to be segregated for
customers' regulated commodity accounts, as defined. Although net
capital, aggregate debit items and funds required to be segregated
change from day to day, at March 31, 1996, SBI's net capital was $1,281
million, $1,219 million in excess of regulatory requirements.
Salomon Brothers International Limited ("SBIL") is authorized to
conduct investment business in the United Kingdom by the Securities and
Futures Authority ("SFA") in accordance with the Financial Services Act
1986. The SFA requires SBIL to have available at all times financial
resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At March 31, 1996, SBIL's financial resources were $637
million in excess of regulatory requirements.
Salomon Brothers Asia Limited ("SBAL") and Salomon Brothers AG ("SBAG")
are also subject to requirements to maintain specified levels of net
capital or its equivalent. At March 31, 1996, SBAL's net capital was
$257 million above the minimum required by Japan's Ministry of Finance.
SBAG's net capital was $148 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 March 31, 1996, Swapco was
in compliance with all such agreements. Swapco's capital requirements
are dynamic, varying with the size and concentration of its
counterparty receivables.
4. Business Unit Revenues
Global investment banking and securities activities are conducted by
Salomon Brothers Holding Company Inc and its subsidiaries ("Salomon
Brothers"). Commodities trading activities are conducted by Phibro Inc.
and its subsidiaries ("Phibro"). Oil refining and marketing activities
are conducted by Basis Petroleum, Inc. ("Basis Petroleum" or "Basis").
The results of The Mortgage Corporation Limited and its affiliates
("TMC"), are included in "Corporate and Other," as are the results of
Phibro Energy Production, Inc. ("PEPI"), an investor in the White
Nights Limited Liability Company ("White Nights") a Russian-American
oil production venture located in Western Siberia.
The accompanying Management's Discussion and Analysis section includes
a discussion of the operating results of the Company's respective
business units. Business unit results reflect the allocation of Salomon
Inc corporate-level expenses incurred for the benefit of the business
unit. Corporate-level expenses that cannot be directly associated with
the Company's business units are included in "Corporate and Other."
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Revenues by Business Unit
The following tables present revenues, net of interest expense,
by business unit for the three months ended March 31, 1996 and 1995.
Three Months Ended March 31, 1996
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
Salomon Brothers:
<S> <C> <C> <C> <C> <C>
Fixed income sales and trading $ 727 $ - $ 5 $ - $ 732
Equity sales and trading (21) - 85 - 64
Global investment banking - 181 - - 181
Asset management 1 - - 11 12
Salomon Brothers' revenues, net of
interest expense 707 181 90 11 989
Phibro 235 - - - 235
Basis Petroleum (7) - - (38) (45)
Corporate and Other 14 - - - 14
Salomon Inc revenues, net of interest expense $ 949 $ 181 $ 90 $(27) $ 1,193
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Three Months Ended March 31, 1995
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
Salomon Brothers:
<S> <C> <C> <C> <C> <C>
Fixed income sales and trading $ 382 $ - $ 16 $ - $ 398
Equity sales and trading 82 - 70 - 152
Global investment banking - 22 - - 22
Asset management (2) - - 11 9
Other 4 - 2 - 6
Salomon Brothers' revenues, net of
interst expense 466 22 88 11 587
Phibro 183 - - 1 184
Basis Petroleum (6) - - (34) (40)
Corporate and Other 10 - 1 1 12
Salomon Inc revenues, net of interest expense $ 653 $ 22 $ 89 $(21) $ 743
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
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SUMMARY OF CONSOLIDATED OPERATING RESULTS
Dollars in millions, except per share amounts Three months
Period ended March 31, 1996 1995
Income (loss) before taxes:
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Salomon Brothers $ 368 $ 60
Phibro 145 123
Basis Petroleum (55) (51)
Corporate and Other 3 2
Income before income taxes 461 134
Income tax expense 185 53
Net income $ 276 $ 81
Per common share:
Primary earnings $ 2.44 $ 0.59
Fully diluted earnings* 2.21 0.59
Cash dividends 0.16 0.16
Book value at period-end 37.98 33.22
Annualized return on average common stockholders' equity:
Primary 26.4% 7.1%
Fully diluted* 24.0 7.1
<FN>
* Assumes conversion of redeemable preferred stock unless such assumption
results in higher earnings per share or return on equity than determined under
the primary method.
</FN>
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Salomon Inc recorded net income of $276 million, or $2.21 per common share on a
fully diluted basis, for the first quarter of 1996, representing the third most
profitable quarter in its history. In the first quarter of 1995, Salomon Inc
recorded net income of $81 million, or $.59 per common share.
The Company's businesses are diverse. Salomon Brothers' results are not closely
correlated with the results of Phibro's commodities trading business or Basis'
oil refining and marketing business. Consequently, it is not unusual for certain
of the Company's businesses to generate positive results during difficult
periods for other businesses.
Corporate and Other includes certain Salomon Inc corporate-level expenses that
cannot be attributed to any of the Company's businesses; the results of TMC,
which services residential mortgages in the United Kingdom; and the results of
PEPI, whose primary asset is its investment in White Nights. As previously
reported, the Company is exploring alternatives regarding the disposition of
TMC; such disposition is not expected to have a material effect on the Company's
financial condition.
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Salomon Brothers
Results of Operations
Dollars in millions
Three months Percent
Period ended March 31, 1996 1995 Change
Revenues:
Global investment banking:
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Advisory $ 60 $ 52 15 %
Equity underwriting 53 - n/m
Debt underwriting 68 (30) n/m
Total global investment banking 181 22 723
Fixed income sales and trading 732 398 84
Equity sales and trading 64 152 (58)
Asset management 12 9 33
Other - 6 n/m
Total revenues, net of interest expense $989 $587 68 %
Income before income taxes $368 $ 60 513 %
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Salomon Brothers, the Company's global investment banking and securities
business, recorded pretax income of $368 million in the first quarter of 1996,
compared with $60 million in the first quarter of 1995. Fixed income sales and
trading net revenues (total revenues less interest expense) in the first quarter
increased to $732 million from $398 million in the first quarter of 1995,
reflecting excellent results from trading for Salomon Brothers' own account and
a strong performance in customer sales and trading. Equity sales and trading net
revenues were $64 million for the quarter, down from $152 million in the first
quarter of 1995. The decline was attributable to losses on long-term equity
arbitrage positions which offset a solid performance in customer sales and
trading. Global investment banking revenues were $181 million for the quarter,
compared with $22 million in the first quarter of 1995. First quarter revenues
were 53% above the 1995 quarterly average of $118 million. This improvement
reflects significant increases in both debt and equity underwriting. For the
second consecutive quarter, Salomon Brothers ranked second in U.S. public new
issues. First quarter 1995 debt and equity underwriting revenues were adversely
impacted by pretax losses of $55 million and $13 million, respectively, on Latin
American securities positions.
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Noninterest Expenses
Dollars in millions
Three months Percent
Period ended March 31, 1996 1995 Change
<S> <C> <C> <C>
Compensation and employee-related expenses $ 463 $ 366 27 %
Compensation expense ratio* 56 % 86 %
Non-compensation expenses:
Technology $ 51 $ 60 (15) %
Occupancy 42 39 8
Professional services and business development 36 38 (5)
Clearing and exchange fees 17 15 13
Other 12 9 33
Total non-compensation expenses $ 158 $ 161 (2) %
Non-compensation expense ratio** 16 % 27 %
<FN>
*Compensation and employee-related expenses as a percentage of earnings before
income taxes, compensation and employee-related expenses.
**Non-compensation expenses as a percentage of revenues, net of interest expense.
</FN>
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Compensation and employee-related expenses, the largest component of noninterest
expense, were $463 million in the first quarter of 1996, up from $366 million in
the first quarter of 1995, reflecting the improvement in Salomon Brothers'
earnings. Non-compensation expenses, in the aggregate, were $158 million in the
first quarter of 1996, 2% lower than the first quarter of 1995.
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<CAPTION>
Phibro
Condensed Statement of Income
Dollars in millions
Three months Percent
Period ended March 31, 1996 1995 Change
<S> <C> <C> <C>
Revenues, net of interest expense $ 235 $ 184 28 %
Compensation and employee-related expenses 82 52 58
Other general and administrative expenses 8 9 (11)
Total noninterest expenses 90 61 48
Income before income taxes $ 145 $ 123 18 %
Compensation expense ratio * 36 % 30 %
Non-compensation expense ratio** 3 5
<FN>
* Compensation and employee-related expenses as a percentage of earnings before
income taxes, compensation and employee-related expenses.
**Other general and administrative expenses as a percentage of revenues,
net of interest expense.
</FN>
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Phibro takes positions in commodities on a longer term basis 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
positions and strategies that have expected time horizons extending across
quarters. Thus, results are better evaluated over the longer term. Phibro
recorded pretax income of $145 million in the first quarter of 1996, up from
$123 million in the first quarter of 1995. The increase in compensation and
employee-related expenses in the first quarter of 1996 reflects Phibro's
improved operating results.
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Basis Petroleum
Condensed Statement of Income
Dollars in millions
Three months Percent
Period ended March 31, 1996 1995 Change
<S> <C> <C> <C>
Sales $2,109 $2,175 (3) %
Cost of sales 2,147 2,208 (3)
Operating loss (38) (33) (15)
Net interest and other (7) (7) 0
Operating loss, net of interest and other (45) (40) (13)
Compensation and employee-related expenses 6 7 (14)
Other expenses 4 4 0
Total noninterest expenses 10 11 (9)
Loss before income taxes $ (55) $ (51) (8) %
</TABLE>
Basis, the Company's oil refining and marketing business, recorded a pretax loss
of $55 million in the first quarter of 1996, compared with a pretax loss of $51
million in the first quarter of 1995. Results for the first quarter of 1996 were
adversely affected by continued weak refining margins. Higher refinery operating
costs related to the commissioning of the Residfiner/ROSE complex, a collapse in
propylene prices and the high cost of hedging in a steeply backwardated crude
oil market also contributed to the poor first quarter.
At March 31, 1996, the Company's total investment in Basis was $1.1 billion,
comprised of $131 million of working capital advances, $525 million of
intercompany subordinated debt and $403 million in equity.
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SALOMON INC
Capital and Liquidity Management
Dollars in millions
March 31, December 31, September 30, June 30, March 31,
Quarter ended 1996 1995 1995 1995 1995
Average Weekly Balance Sheet Information:
<S> <C> <C> <C> <C> <C>
Government and agency securities - U.S. $ 44,470 $ 41,446 $ 33,871 $ 32,904 $ 31,743
Government and agency securities - non-U.S. 35,001 34,466 33,202 38,749 32,896
Financial options and contractual commitments 6,230 5,731 5,988 6,919 7,857
Other financial instruments owned 19,206 20,421 18,500 19,014 19,212
Total financial instrument inventories 104,907 102,064 91,561 97,586 91,708
Collateralized short-term financing agreements 73,692 68,567 56,817 61,163 63,779
Other assets 12,472 13,002 14,122 17,260 16,737
Average total assets $ 191,071 $ 183,633 $ 162,500 $ 176,009 $ 172,224
Period-end total assets $ 185,341 $ 188,428 $ 162,586 $ 163,693 $ 164,956
Period-end net assets* $ 112,104 $ 119,128 $ 99,816 $ 106,644 $ 104,421
Average net assets* $ 113,195 $ 110,748 $ 101,042 $ 109,494 $ 102,459
Average net assets, excluding
government securities* $ 33,724 $ 34,836 $ 33,969 $ 37,841 $ 37,820
Long-term capital at period-end $ 15,685 $ 15,433 $ 16,112 $ 16,715 $ 17,237
Ratios at period-end:**
Working capital coverage 1.10 1.10 1.24 1.22 1.17
Total capital basis double leverage 0.88 0.98 0.88 0.91 0.85
Equity capital basis double leverage 0.98 1.19 1.18 1.24 1.19
Average net assets to total equity* 22 24 22 24 22
Average net assets, excluding
government securities, to total equity* 7 7 7 8 8
Common shares outstanding (in millions) 106.5 106.4 106.4 106.2 106.1
<FN>
*Net assets are total assets less collateralized short-term financing
agreements, cash and interest-bearing equivalents and assets securing
collateralized mortgage obligations.
**For equity-based ratios, total equity includes the Company's common equity,
perpetual preferred stock and redeemable
preferred stock.
</FN>
</TABLE>
Average assets for the first quarter of 1996 were $191 billion, compared with
$184 billion in the fourth quarter of 1995. This increase was primarily the
result of an increase in matched book activity and a higher level of U.S.
government and agency securities. Due to the nature of the Company's trading and
funding activities, including its matched-book activities, it is not uncommon
for the Company's asset levels to fluctuate from period to period.
The Company's long-term capital includes common equity, redeemable preferred
stock, perpetual preferred stock, unsecured obligations 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.
Long-term capital increased from $15.4 billion at December 31, 1995 to $15.7
billion at March 31, 1996. The equity component of long-term capital benefited
from the high level of earnings during the quarter and was further augmented by
the issuance on February 13, 1996 of $250 million of 8.40% Cumulative Preferred
Stock, Series E, redeemable at the Company's option any time after March 31,
2001. The fixed dividend requirement on the Series E preferred has been
converted to a variable rate obligation through an interest rate swap agreement.
The Company also issued $1.3 billion of term debt during the quarter. The
perpetual preferred and term debt issuances were approximately equivalent to the
roll off of long-term capital during the quarter. With respect to capital
management, among the Company's stated objectives has been to reduce,
over time, its equity capital basis double leverage ratio to a level that
approximates 1.0. This ratio is computed by dividing the equity of the
Company's operating units by the sum of the Company's common equity and
perpetual and redeemable preferred stock. During the first quarter, the
Company reduced its equity capital basis double leverage ratio to 0.98,
from 1.19 at year end 1995.
<TABLE>
<CAPTION>
As of April 30, 1996 the Company's credit ratings were as follows:
<S> <C> <C> <C> <C> <C>
Duff &
Phelps Fitch IBCA Moody's S&P
Long-term debt A- BBB+ A- Baa1 BBB
Commercial paper D-1 F-2 A1 P-2 A2
</TABLE>
Salomon Brothers' trading portfolio of high-yield securities, carried at market
value, totaled $2.5 billion at March 31, 1996, compared with $2.3 billion at
December 31, 1995. High-yield securities include corporate debt, convertible
debt, preferred and convertible preferred equity securities rated lower than
"triple B-" by internationally recognized rating agencies as well as sovereign
debt issued by less developed countries in currencies other than their local
currencies and which are not collateralized by U.S. government securities. For
example, high-yield securities exclude the collateralized portion of "Brady
Bonds," but include such securities to the extent they are not collateralized.
Unrated securities with market yields comparable to entities rated below "triple
B-" are also included in high-yield securities. The largest single high-yield
exposure was $74 million at March 31, 1996.
Book value per share increased to $37.98 at March 31, 1996, from $35.84 at
December 31, 1995. There were no repurchases of the Company's shares for
treasury during the first quarter of 1996. At March 31, 1996, remaining shares
authorized for repurchase totaled approximately 9.8 million shares.
In April, a partial restructuring of the Company's Equity Partnership Plan
resulted in an early distribution of 3.3 million shares held by the plan trustee
to certain employees in the United Kingdom. Approximately 1.3 million of those
shares were repurchased by the Company as treasury stock, for slightly less than
$50 million, to enable the employees to satisfy their resulting tax obligations.
The remaining 2 million shares are subject to the same restrictions on
transferability that existed prior to the distribution.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
Dollars in millions, except per share amounts 1996 1995 1995 1995 1995
For the quarter:
Revenues:
<S> <C> <C> <C> <C> <C>
Principal transactions, including net interest
and dividends $ 949 $ 578 $ 947 $ 139 $ 653
Investment banking 181 168 128 154 22
Commissions and other 63 80 106 108 68
Revenues, net of interest expense 1,193 826 1,181 401 743
Noninterest expenses:
Compensation and employee-related 556 425 557 324 431
Other noninterest expenses 176 167 185 176 178
Total noninterest expenses 732 592 742 500 609
Income (loss) before income taxes 461 234 439 (99) 134
Income tax expense (benefit) 185 66 171 (39) 53
Net income (loss) $ 276 $ 168 $ 268 $ (60) $ 81
Annualized return on average common stockholders' equity:
Primary 26.4% 16.4% 28.0% (8.8)% 7.1%
Fully diluted* 24.0% 15.1% 24.6% (8.8)% 7.1%
Income (loss) before taxes:
Salomon Brothers $ 368 $ 207 $ 381 $ 56 $ 60
Phibro 145 56 68 (162) 123
Basis Petroleum (55) (32) (9) 1 (51)
Corporate and Other 3 3 (1) 6 2
Total income (loss) before taxes $ 461 $ 234 $ 439 $ (99) $ 134
Per common share:
Primary earnings (loss) $ 2.44 $ 1.42 $ 2.36 $ (0.73) $ 0.59
Fully diluted earnings (loss)* 2.21 1.32 2.10 (0.73) 0.59
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 39 1/4 40 5/8 41 1/8 43 1/4 40 1/8
Low market price 34 7/8 33 7/8 34 3/4 33 1/4 32 1/4
Ending market price 37 1/2 35 3/8 38 1/2 40 1/8 33 7/8
Book value at period-end 37.98 35.84 34.49 32.38 33.22
<FN>
* Assumes conversion of redeemable preferred stock outstanding unless such
assumption results in higher returns on equity or earnings per share than
determined under the primary method.
</FN>
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 16, 1996, Salomon Brothers Inc and Golder, Thoma, Cressey Fund
III Limited Partnership settled all claims and counterclaims arising
out of a lawsuit brought by Golder, Thoma in the Circuit Court of Cook
County Illinois against Salomon Brothers Inc. The lawsuit involved
SBI's performance in providing financial services for the proposed
acquisition by Golder, Thoma of Health Care and Retirement Corporation
of America in 1991. The settlement of this case had no material impact
on the Company's consolidated financial position.
On May 3, 1996, the United States District Court in Colorado denied the
motion of the City and County of Denver, in Denver's lawsuit with the
United States Environmental Protection Agency, for a Stay of Judgment
and Suspension of Injunction Pending Appeal, thus permitting the
Company's subsidiary, The S.W. Shattuck Chemical Co., Inc., to continue
remediation activities at the Bannock Street Superfund site.
On April 2, 1996, the United States District Court for the Northern
District of Oklahoma rendered its decision, subject to the issuance of
a final order, in the suit between the Company, Fluor Corporation, St.
Joe Minerals Company and Zinc Corporation of America as plaintiffs and
Cyprus Amax Minerals Company ("Cyprus") as defendant. The Court
allocated past and future response costs at the National Zinc site in
Bartlesville, Oklahoma 70% to plaintiffs and 30% to Cyprus, except for
response costs relating to certain residue piles stored on the smelter
facility at the National Zinc site which the Court allocated 100% to
plaintiffs. On April 24, 1996, the Oklahoma Department of Environmental
Quality ("ODEQ") issued its proposed plan for remedial action at
Operable Unit 2, relating to ecologically sensitive areas at the
National Zinc site surrounding the smelter facility. The proposed plan,
which is subject to a public comment period and the issuance of a
Record of Decision, sets forth ODEQ's preferred remedial alternative
which is estimated to cost approximately $2.8 million. The Company's
future costs related to remediation of the National Zinc site cannot
yet be determined, because the timing, nature and extent of the
remediation of the smelter facility are still under study, and ODEQ has
not yet made its final decision as to the remedy for Operable Unit 2.
On April 18, 1996, the United States Court of Appeals for the Fifth
Circuit reversed the judgment of the United States District Court for
the Southern District of Texas in which the lower court had dismissed
the lawsuit brought by Friends of the Earth, Inc., under Section 505 of
the Federal Water Pollution Control Act, against Phibro Energy USA,
Inc. (now known as Basis Petroleum, Inc. ("Basis")). The Court of
Appeals remanded the suit to the District Court for further discovery.
Basis' liability, if any, with respect to the claim alleged in the
lawsuit cannot be determined at this time.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.a Calculation of ratio of earnings to fixed charges*
12.b Calculation of ratio of earnings to combined fixed charges
and preferred dividends*
27 Financial Data Schedule*
*filed herewith
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated April 23, 1996,
reporting under Item 5 ("Other Events") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits") the issuance
of a press release.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salomon Inc
(Registrant)
Date May 15, 1996 /s/ Richard Carbone
Controller and Chief
Accounting Officer
Date May 15, 1996 /s/ Arnold S. Olshin
Secretary
<PAGE>
Form 10-Q Exhibit Index
The following exhibits are filed herewith:
Exhibit Number
12.a Calculation of ratio of earnings to fixed charges
12.b Calculation of ratio of earnings to combined fixed
charges and preferred dividends
27 Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 12(a)
SALOMON INC AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
Three
Months
Ended
March 31, Years Ended December 31,
Dollars in millions 1996 1995 1994 1993 1992 1991
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes and cumulative
effect of change in accounting principles $ 461 $ 708 $ (831) $ 1,465 $ 1,056 $ 919
Add fixed charges (see below) 1,291 5,825 4,919 4,644 4,373 5,704
Other adjustments (2) (11) (3) 22 20 (4)
Earnings as defined $ 1,750 $ 6,522 $ 4,085 $ 6,131 $ 5,449 $ 6,619
Fixed Charges:
Interest expense $ 1,275 $ 5,782 $ 4,892 $ 4,600 $ 4,324 $ 5,638
Other adjustments 16 43 27 44 49 66
Fixed charges as defined $ 1,291 $ 5,825 $ 4,919 $ 4,644 $ 4,373 $ 5,704
Ratio of earnings to fixed charges 1.36 1.12 0.83* 1.32 1.25 1.16
<FN>
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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12(b)
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
Three
Months
Ended
March 31, Years Ended December 31,
Dollars in millions 1996 1995 1994 1993 1992 1991
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes and cumulative
effect of change in accounting principles $ 461 $ 708 $ (831) $ 1,465 $ 1,056 $ 919
Add fixed charges (see below) 1,291 5,825 4,919 4,644 4,373 5,704
Other adjustments (2) (11) (3) 22 20 (4)
Earnings as defined $ 1,750 $ 6,522 $ 4,085 $ 6,131 $ 5,449 $ 6,619
Fixed Charges and
Preferred Dividends:
Interest expense $ 1,275 $ 5,782 $ 4,892 $ 4,600 $ 4,324 $ 5,638
Other adjustments 16 43 27 44 49 66
Fixed charges as defined 1,291 5,825 4,919 4,644 4,373 5,704
Preferred stock dividends (tax equivalent basis) 27 106 129 83 131 121
Combined fixed charges and preferred dividends $ 1,318 $ 5,931 $ 5,048 $ 4,727 $ 4,504 $ 5,825
Ratio of earnings to combined fixed charges
and preferred dividends 1.33 1.10 0.81* 1.30 1.21 1.14
<FN>
NOTES:
The ratio of earnings to combined fixed charges and preferred dividends was
calculated by dividing the sum of fixed charges and tax equivalent preferred
dividends into the sum of earnings before 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.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31,
1996 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,163
<RECEIVABLES> 5,861
<SECURITIES-RESALE> 56,857
<SECURITIES-BORROWED> 11,947
<INSTRUMENTS-OWNED> 102,530
<PP&E> 1,339
<TOTAL-ASSETS> 185,341
<SHORT-TERM> 6,251
<PAYABLES> 8,932
<REPOS-SOLD> 75,742
<SECURITIES-LOANED> 1,036
<INSTRUMENTS-SOLD> 72,949
<LONG-TERM> 13,075
<COMMON> 156
560
562
<OTHER-SE> 3,905
<TOTAL-LIABILITY-AND-EQUITY> 185,341
<TRADING-REVENUE> 651
<INTEREST-DIVIDENDS> 1,573
<COMMISSIONS> 90
<INVESTMENT-BANKING-REVENUES> 181
<FEE-REVENUE> (27)
<INTEREST-EXPENSE> 1,275
<COMPENSATION> 556
<INCOME-PRETAX> 461
<INCOME-PRE-EXTRAORDINARY> 276
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.21
</TABLE>
