FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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 October 31, 1996: 109,030,178
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Salomon Inc
Form 10-Q
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PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (unaudited):
Consolidated Statement of Income -
Three and Nine months ended September 30, 1996 and 1995 3
Condensed Consolidated Statement of Financial Condition -
September 30, 1996 and December 31, 1995 4-5
Summary of Options and Contractual Commitments -
September 30, 1996 and December 31, 1995 6
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1996 and 1995 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Dollars in millions, except per share amounts Three months Nine months
- ---------------------------------------------------------------------------------------------------------------------------
Period ended September 30, 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Interest and dividends $ 1,367 $ 1,611 $ 4,376 $ 5,163
Principal transactions 307 691 1,542 809
Investment banking 187 128 619 304
Commissions 69 82 234 252
Other 30 24 19 30
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 1,960 2,536 6,790 6,558
Interest expense 1,144 1,355 3,562 4,233
- ---------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 816 1,181 3,228 2,325
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 447 557 1,554 1,312
Technology 71 64 185 192
Professional services and business development 45 45 140 125
Occupancy 42 45 129 128
Clearing and exchange fees 20 15 55 48
Other 5 16 34 46
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 630 742 2,097 1,851
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 186 439 1,131 474
Income tax expense 74 171 452 185
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 112 $ 268 $ 679 $ 289
===========================================================================================================================
Earnings available for fully diluted earnings
per common share $ 102 $ 263 $ 654 $ 274
===========================================================================================================================
Per common share:
Primary earnings $ 0.88 $ 2.36 $ 5.90 $ 2.22
Fully diluted earnings* 0.85 2.10 5.41 2.19
Cash dividends 0.16 0.16 0.48 0.48
===========================================================================================================================
Weighted average shares of common stock outstanding (in thousands):
For primary earnings per share 105,500 106,600 105,800 106,500
For fully diluted earnings per share 120,600 125,400 121,000 125,300
===========================================================================================================================
<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 September 30, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and interest bearing equivalents $ 1,620 $ 1,454
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 43,258 $ 45,121
Government and government agency securities - non-U.S. 31,451 39,843
Corporate debt securities 13,416 11,150
Options and contractual commitments 5,759 6,713
Equity securities 4,721 3,915
Mortgage loans and collateralized mortgage securities 2,663 1,959
Other 2,791 2,248
--------- ---------
104,059 110,949
Commodities-related products and instruments:
Crude oil, refined products and other
physical commodities 1,228 1,223
Options and contractual commitments 411 372
--------- ---------
1,639 1,595
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 61,652 48,422
Securities borrowed and other 14,647 16,993
--------- ---------
76,299 65,415
Receivables 4,895 4,472
Assets securing collateralized mortgage obligations 414 2,431
Property, plant and equipment, net 1,350 1,343
Other assets, including intangibles 711 769
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 190,987 $ 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 September 30, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase $ 78,251 $ 91,813
Bank borrowings 2,981 3,856
Securities loaned 1,603 1,040
Deposit liabilities 687 1,347
Commercial paper 1,032 797
Other 1,576 2,304
--------- ---------
$ 86,130 $ 101,157
Financial and commodities-related instruments sold, not yet purchased,
and contractual commitments:
Government and government agency securities - U.S. 29,609 21,132
Government and government agency securities - non-U.S. 31,185 21,994
Financial options and contractual commitments 7,992 8,858
Equity securities 5,119 3,489
Corporate debt securities and other 1,359 1,448
Commodities, including options and
contractual commitments 289 607
--------- ---------
75,553 57,528
Payables and accrued liabilities 10,173 9,658
Collateralized mortgage obligations 403 2,337
Term debt 13,032 13,045
---------- -----------
Total liabilities 185,291 183,725
---------- -----------
Commitments and contingencies (Note 2)
Redeemable preferred stock, Series A 560 560
Guaranteed preferred beneficial interests
in Company subordinated debt securities (Note 3) 345 -
Stockholders' equity:
Preferred stock, Series C, D and E 450 312
Common stock 156 156
Additional paid-in capital 289 296
Retained earnings 5,575 5,001
Cumulative translation adjustments (1) 13
Common stock held in treasury, at cost (1,678) (1,635)
--------- ---------
Total stockholders' equity 4,791 4,143
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 190,987 $ 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)
September 30, 1996 December 31, 1995
----------------------------------- -------------------------------------
Current Market or Current Market or
Notional Fair Market Value Notional Fair Market Value
Amounts ------------------------ Amounts ------------------------
Dollars in billions Assets Liabilities Assets Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
Exchange-issued products:
<S> <C> <C> <C> <C> <C> <C>
Financial futures contracts* $505.7 $ - $ - $ 570.5 $ - $ -
Other exchange-issued products:
Equity contracts 10.9 .1 .2 16.8 .5 .3
Fixed income contracts 92.0 - - 44.5 .2 -
Foreign exchange contracts .2 - - - - -
Commodities-related contracts 4.6 - - 4.3 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 613.4 .1 .2 636.1 .7 .3
- -----------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options,
caps and floors:
Swaps 751.1 555.5
Swap options written 8.5 5.2
Swap options purchased 22.8 20.4
Caps and floors 111.1 100.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors ** 893.5 3.4 5.7 681.9 4.3 6.5
- -----------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts** 60.4 .4 .3 57.4 .3 .4
Options written 23.1 - .4 21.0 - .6
Options purchased 23.5 .3 - 20.2 .3 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 107.0 .7 .7 98.6 .6 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity 41.7 1.3 1.2 24.0 1.0 .6
indices***
Options and forward contracts on fixed income 57.1 .3 .2 196.6 .1 .5
securities***
Commodities-related contracts**** 20.6 .4 .3 21.8 .4 .3
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,733.3 $6.2 $8.3 $1,659.0 $7.1 $9.2
===================================================================================================================================
<FN>
* Margin on futures contracts is included in receivables/payables on the Condensed Consolidated
Statement of Financial Condition.
** Notional values of swap agreements and forward currency contracts related to non-trading activities
were $15.8 billion and $1.5 billion at September 30, 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 September 30,
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.
</FN>
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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
3 years to
Dollars in billions All Transactions maturity
- -----------------------------------------------------------------------------------------------------------------------------------
Other Major
Derivatives Financial Governments/ Year-to-Date
September 30, 1996 Dealers Corporates Institutions Supranationals Other Total Average Total
- -----------------------------------------------------------------------------------------------------------------------------------
Swaps, swap options, caps
and floors:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk classes 1 and 2 $ .4 $ - $ .5 $ - $ - $ .9 $ 1.0 $ .6
Risk class 3 .5 .2 .2 - - .9 .9 .4
Risk classes 4 and 5 .2 .4 .1 - .1 .8 .8 .3
Risk classes 6, 7 and 8 - .1 - - - .1 .1 .1
$ 1.1 $ .7 $ .8 $ - $ .1 $ 2.7 $2.8 $ 1.4
Foreign exchange
contracts and options:
Risk classes 1 and 2 $ .4 $ - $ - $ .1 $ - $ .5 $ .4 $ -
Risk class 3 .2 - - - - .2 .2 -
Risk classes 4 and 5 - - - - - - .1 -
$ .6 $ - $ - $ .1 $ - $ .7 $ .7 $ -
<FN>
*To monitor credit risk, the Company utilizes a series of eight internal designations of counterparty credit quality.
These designations are analogous to external credit ratings whereby risk classes one through three are high quality
investment grades. Risk classes four and five include counterparties ranging from the lowest investment grade to the
highest non-investment grade level. Risk classes six, seven and eight represent higher risk counterparties.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Dollars in millions
- ------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income adjusted for noncash items and non-operating activities -
<S> <C> <C>
Net income $ 679 $ 289
Depreciation, amortization and other 85 110
Less: Gain on the sale of TMC (31) -
- ------------------------------------------------------------------------------------------------------------------
Cash items included in net income 733 399
- ------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets -
Financial instruments and contractual commitments 6,602 1,678
Commodities-related products and instruments (44) (144)
Collateralized short-term financing agreements (10,884) 2,631
Receivables (266) 3,726
Other (126) 63
- ------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets (4,718) 7,954
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities -
Short-term borrowings (14,975) 5,658
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments 18,025 (13,706)
Payables and accrued liabilities 507 377
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities 3,557 (7,671)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (428) 682
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from -
Issuance of term debt 2,914 2,371
Issuance of guaranteed preferred beneficial interests
in Company subordinated debt securities 345 -
Issuance of preferred stock, Series E 250 -
Employee stock purchase and option plans 4 14
- ------------------------------------------------------------------------------------------------------------------
Total cash proceeds from financing activities 3,513 2,385
- ------------------------------------------------------------------------------------------------------------------
Payments for -
Term debt maturities and repurchases 2,708 4,318
Collateralized mortgage obligations 380 552
Purchase of common stock for treasury 49 2
Redemption of Series C preferred stock 112 -
Dividends on common stock 50 51
Dividends on preferred stock* 54 53
- ------------------------------------------------------------------------------------------------------------------
Total cash payments for financing activities 3,353 4,976
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 160 (2,591)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from -
Sale of TMC 82 -
Assets securing collateralized mortgage obligations 456 526
- ------------------------------------------------------------------------------------------------------------------
Total cash proceeds from investing activities 538 526
- ------------------------------------------------------------------------------------------------------------------
Payments for -
Property, plant and equipment 104 236
- ------------------------------------------------------------------------------------------------------------------
Total cash payments for investing activities 104 236
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 434 290
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and interest bearing equivalents 166 (1,619)
Cash and interest bearing equivalents at January 1, 1,454 3,539
- ------------------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at September 30, $ 1,620 $ 1,920
==================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Summary of Options and Contractual Commitments are integral
parts of this statement.
* For the nine months ended September 30, 1996 and
1995, dividends on preferred stock were reduced by the aftertax impact ($16
million and $14 million respectively) of interest rate swaps that effectively
convert the Company's fixed-rate dividend obligations to variable-rate
obligations.
</FN>
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Salomon Inc and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1996
1. Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements include the
accounts of Salomon Inc and all majority-owned subsidiaries
(collectively, the "Company"). Such statements are prepared in
accordance with generally accepted accounting principles in the U.S.
which require the use of management's best judgment and estimates. The
Unaudited Condensed Consolidated Financial Statements 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 nature of the Company's business is such that the results of any
interim period are not necessarily indicative of the results for a full
year. 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. Commitments and Contingencies
Legal Proceedings
Outstanding legal matters are discussed in Note 15 to the Audited
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.
3. Guaranteed preferred beneficial interests in Company subordinated debt
securities ("TRUPS")
On July 3, 1996, the Company issued $345 million TRUPS, which are made
up of units consisting of a 9 1/4% mandatorily redeemable preferred
security of the SI Financing Trust I (the "Trust"), and a purchase
contract which requires the holder to purchase, in 2021 (or earlier if
the Company elects to accelerate the contract), one depositary share
representing a one-twentieth interest in a share of Salomon Inc's
9 1/2% Cumulative Preferred Stock, Series F ("Series F Preferred").
The Company is obligated under the terms of each purchase contract
to pay contract fees of 0.25% per annum. The Trust is a
wholly-owned subsidiary of the Company and the Company's
obligations under the guarantee, the subordinated debt securities and
other contracts, in the aggregate, constitute a full and unconditional
guarantee by the Company of the Trust's obligations under the
preferred securities.
The Trust was established by the Company for the sole purpose of
issuing the 9 1/4% preferred securities and common securities and
investing the proceeds in 9 1/4% subordinated debt securities issued by
Salomon Inc due June 30, 2026. All payments associated with the 9 1/4%
preferred securities are fully and unconditionally guaranteed by
Salomon Inc. The common securities are directly owned by Salomon Inc.
The 9 1/2% per annum on the TRUPS units was accrued from date of
issuance and is payable quarterly, commencing September 30, 1996. Tax
counsel to the Company has advised the Company that the 9 1/4% interest
on the subordinated debt security will be deductible for Federal income
tax purposes. The Company has entered into an interest rate swap
agreement to effectively convert the fixed rate obligations on the
TRUPS units to variable rate obligations.
<PAGE>
It is the Company's understanding that the rating agencies, in their
analysis of the Company's capital structure, will treat the TRUPS units
similarly to the Company's perpetual preferred stock. The TRUPS units
are redeemable at the option of the Company at any time on or after
June 30, 2001. However, if the purchase contracts are accelerated or
exercised by the Company and the holders elect not to settle the
purchase contracts by delivering the Trust preferred security, the
right of the Company to cause the preferred stock to be redeemed is
postponed for five years. The Series F Preferred is redeemable at the
Company's option at any time on or after June 30, 2001 or the date of
issue, if later.
4. 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 September 30, 1996, SBI's net capital was
$1,529 million, $1,499 million in excess of minimum regulatory
requirements.
Salomon Brothers International Limited ("SBIL") is authorized to
conduct investment business in the United Kingdom by the Securities and
Futures Authority ("SFA") in accordance with the Financial Services Act
1986. The SFA requires SBIL to have available at all times financial
resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At September 30, 1996, SBIL's financial resources were
$475 million in excess of minimum 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 September 30, 1996, SBAL's net capital
was $294 million above the minimum required by Japan's Ministry of
Finance. SBAG's net capital was $76 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 September 30, 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.
5. Expected Fourth Quarter Transactions
As previously reported, Basis Petroleum Inc. ("Basis") signed a
non-binding letter of intent with Howell Corporation, providing that
following a definitive agreement the two entities will contribute their
respective crude oil gathering, marketing and transportation activities
to form a Master Limited Partnership ("MLP"). The book value of the
fixed assets being contributed by Basis was approximately $3 million at
September 30, 1996. The new entity would be 54% owned by Basis and 46%
owned by Howell Corporation. Concurrent with the formation of the MLP,
it is expected that, subject to market conditions and satisfactory
resolution of certain other matters, interests in the MLP will be
offered for sale to the public pursuant to a prospectus.
<PAGE>
In September 1996, subsidiaries of the Company reached an agreement to
sell their interests in twelve limited service hotels to Hudson Hotels
for $61 million.
These transactions, when and if completed, are expected to result in a
total pretax gain of approximately $70 million.
6. 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. "Corporate and Other" includes 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. Also included in
Corporate and Other are the results of The Mortgage Corporation Limited
and its affiliates ("TMC"), inclusive of a 1996 third quarter pretax
gain of $48 million resulting from the sale of TMC to First National
Building Society of Ireland.
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 and nine months ended September 30, 1996 and 1995.
Three Months Ended September 30, 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 $ 595 $ - $ 3 $ - $ 598
Equity sales and trading (87) - 65 (4) (26)
Global investment banking - 187 - - 187
Asset management 1 - - 12 13
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers' revenues, net of interest expense 509 187 68 8 772
Phibro 36 - - - 36
Basis Petroleum (11) - - (26) (37)
Corporate and Other (4) - 1 48 45
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Inc revenues, net of interest expense $ 530 $ 187 $ 69 $ 30 $ 816
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 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 $ 723 $ - $ 8 $ 2 $ 733
Equity sales and trading 122 - 73 1 196
Global investment banking - 128 - - 128
Asset management - - - 9 9
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers' revenues, net ofinterest expense 845 128 81 12 1,066
Phibro 103 - - 2 105
Basis Petroleum (7) - - 9 2
Corporate and Other 6 - 1 1 8
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Inc revenues, net of interest expense $ 947 $ 128 $ 82 $ 24 $ 1,181
==============================================================================================================================
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<CAPTION>
Nine Months Ended September 30, 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 $ 2,025 $ - $ 11 $ - $ 2,036
Equity sales and trading 88 - 222 (4) 306
Global investment banking - 619 - - 619
Asset management 2 - - 34 36
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers' revenues, net of interest expense 2,115 619 233 30 2,997
Phibro 253 - - - 253
Basis Petroleum (27) - - (59) (86)
Corporate and Other 15 - 1 48 64
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Inc revenues, net of interest expense $ 2,356 $ 619 $ 234 $ 19 $ 3,228
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 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 $ 1,190 $ - $ 32 $ 2 $ 1,224
Equity sales and trading 426 - 216 1 643
Global investment banking - 304 - - 304
Asset management - - - 28 28
Other 4 - 2 - 6
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers' revenues, net of interest expense 1,620 304 250 31 2,205
Phibro 108 - - 4 112
Basis Petroleum (20) - - (7) (27)
Corporate and Other 31 - 2 2 35
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Inc revenues, net of interest expense $ 1,739 $ 304 $ 252 $ 30 $ 2,325
==============================================================================================================================
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
<CAPTION>
SUMMARY OF CONSOLIDATED OPERATING RESULTS
Dollars in millions, except per share amounts Three months Nine months
Period ended September 30, 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes:
<S> <C> <C> <C> <C>
Salomon Brothers $ 176 $ 381 $ 1,069 $ 497
Phibro 7 68 135 29
Basis Petroleum (46) (9) (114) (59)
Corporate and Other 49 (1) 41 7
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 186 439 1,131 474
Income tax expense 74 171 452 185
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 112 $ 268 $ 679 $ 289
=================================================================================================================================
Per common share:
Primary earnings $ 0.88 $ 2.36 $ 5.90 $ 2.22
Fully diluted earnings* 0.85 2.10 5.41 2.19
Cash dividends 0.16 0.16 0.48 0.48
Book value at period-end 40.67 34.49 40.67 34.49
=================================================================================================================================
Annualized return on average common stockholders' equity:
Primary 8.7 % 28.0 % 20.2 % 8.9 %
Fully diluted* 8.5 24.6 18.6 8.6
=================================================================================================================================
<FN>
* Assumes conversion of redeemable preferred stock unless such assumption
results in higher earnings per share, book value or return on equity than
determined under the primary method.
</FN>
</TABLE>
Two of Salomon Inc's significant businesses, Salomon Brothers and Phibro, are
subject to a high degree of quarterly earnings volatility, thus, such results
are better evaluated over periods of a year or more. Salomon Brothers' and
Phibro's businesses are driven significantly by trading activities. At Salomon
Brothers, these include market-making across a broad range of financial and
derivative instruments. Volatility in this business is a consequence of changes
in market conditions, including price levels and levels of market trading
volume. Salomon Brothers and Phibro also execute proprietary trading strategies
which frequently have longer-term time horizons. Interim results of proprietary
trading, which reflect quarter-end market values of all positions, are volatile.
The combination of these factors causes Salomon Inc's interim results to be more
volatile than those of its competitors. Year-to-year and quarter-to-quarter
results have varied materially in recent years and can be expected to continue
to vary materially in the future.
In a rapidly changing and increasingly global marketplace, a major challenge the
Company faces is its ability to effectively manage operational risk by enhancing
its technological capabilities and back office support functions. The Company is
subject to increased risks with respect to its trading activities in emerging
markets securities, where clearance, settlement and custodial activities
continue to evolve. Additional challenges include the enhancements necessary for
the transition of the Company's systems to be able to process dates starting
with the year 2000 as well as the technological implications of European
monetary union.
Salomon Inc recorded net income of $112 million, or $.85 per common share on a
fully diluted basis, for the third quarter of 1996, compared with net income of
$268 million, or $2.10 per common share on a fully diluted basis in the
comparable 1995 quarter. Net income for the nine months ended September 30, 1996
was $679 million, or $5.41 per share on a fully diluted basis, up from $289
million or $2.19 per common share on a fully diluted basis for the 1995 nine
month period.
Corporate and Other includes certain Salomon Inc corporate-level expenses that
cannot be attributed to any of the Company's businesses; the results of PEPI,
whose primary asset is its investment in White Nights; and the results of TMC.
Results for the 1996 third quarter include a pretax gain of $48 million ($31
million aftertax) from the sale of TMC. Results also include a reduction in
environmental reserves as a result of favorable experience in the management of
such exposures.
See Note 5 to the Unaudited Condensed Consolidated Financial Statements for a
discussion of the expected fourth quarter sale of twelve limited service hotels
to Hudson Hotels.
<PAGE>
<TABLE>
<CAPTION>
Salomon Brothers
Results of Operations
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1996 1995 Change 1996 1995 Change
- ------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense:
<S> <C> <C> <C> <C> <C> <C>
Global investment banking:
Advisory $ 65 $ 66 (2)% $ 197 $ 170 16%
Equity underwriting 83 32 159 268 99 171
Debt underwriting 39 30 30 154 35 340
- ------------------------------------------------------------------------------------------------------------------------------
Total global investment banking 187 128 46 619 304 104
Fixed income sales and trading 598 733 (18) 2,036 1,224 66
Equity sales and trading (26) 196 n/m 306 643 (52)
Asset management 13 9 44 36 28 29
Other - - n/m - 6 n/m
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 772 $ 1,066 (28)% $ 2,997 $ 2,205 36%
==============================================================================================================================
Income before income taxes $ 176 $ 381 (54)% $ 1,069 $ 497 115%
==============================================================================================================================
<FN>
n/m - not meaningful
</FN>
</TABLE>
Salomon Brothers, the Company's global investment banking and securities
business, recorded pretax income of $176 million in the third quarter of 1996,
compared with pretax income of $381 million in the third quarter of 1995. For
the 1996 nine month period, Salomon Brothers recorded pretax income of $1.1
billion, more than double the $497 million reported for the comparable period of
1995.
Global investment banking revenues were $187 million in the third quarter of
1996, up 46% from the third quarter of 1995, reflecting a doubling of
underwriting revenues. Global investment banking revenues for the nine months
ended September 30, 1996 were $619 million, up from $304 million in the
comparable 1995 period. The year-over-year increase in revenues was attributable
to a significant improvement in domestic equity and debt underwriting revenues,
combined with a higher level of advisory fees. Salomon Brothers ranked third as
a lead manager in underwriting domestic public new issues for both the three and
nine month periods ended September 30, 1996 (Securities Data Company results,
measured by total volume of domestic debt and equity public new issues, with
full credit to lead). Underwriting rankings were much weaker in Europe and Asia.
Fixed income sales and trading net revenues (total revenues less interest
expense) in the third quarter of 1996 were $598 million, down from the
exceptional $733 million recorded in the 1995 third quarter, reflecting a
decline in both proprietary and customer sales and trading net revenues. Fixed
income sales and trading net revenues were $2.0 billion for the nine months
ended September 30, 1996, compared with $1.2 billion in the 1995 nine month
period. The increase in nine month revenues reflects strong performances both in
trading for Salomon Brothers' own account and in customer sales and trading.
Equity sales and trading net revenues were negative $26 million for the quarter,
compared with positive results of $196 million in the third quarter of 1995. For
the nine months ended September 30, 1996, equity sales and trading revenues were
$306 million, down from $643 million in the 1995 nine month period. The decline
in third quarter and nine month equity sales and trading net revenues primarily
reflects losses associated with long-term proprietary equity strategies.
<PAGE>
<TABLE>
<CAPTION>
Noninterest Expenses
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Compensation and employee-related expenses $ 416 $ 515 (19)% $ 1,425 $ 1,217 17%
===================================================================================================================================
Compensation expense ratio* 70% 57% 57% 71%
===================================================================================================================================
Non-compensation expenses:
Technology $ 67 $ 60 12% $ 174 $ 181 (4)%
Occupancy 41 44 (7) 125 124 1
Professional services and business development 40 39 3 119 107 11
Clearing and exchange fees 20 15 33 54 47 15
Other 12 12 - 31 32 (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-compensation expenses $ 180 $ 170 6% $ 503 $ 491 2%
===================================================================================================================================
Non-compensation expense ratio** 23% 16% 17% 22%
====================================================================================================================================
<FN>
* 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.
</FN>
</TABLE>
Compensation expense is significantly impacted by the Firm's performance. It is
the Company's practice to adjust incentive compensation each quarter based upon
the compensation year-to-date earnings. September 30, 1996 marked the end of
Salomon Brothers most recent compensation year. Third quarter 1996 compensation
and employee-related expenses decreased $99 million from the third quarter of
1995, reflecting, among other factors, the decline in Salomon Brothers'
earnings. Compensation and employee-related expenses for the nine months ended
September 30, 1996 were $1.4 billion compared with $1.2 billion in the
comparable 1995 period. The increase was attributable to an improvement in
Salomon Brothers' performance, increases in market level compensation and
increased headcount. Salomon Brothers anticipates increasing headcount by up to
500 in the next twelve months. The Company currently expects that approximately
half of this increase will be in production, which equates to the same growth
rate as 1996. The increase in support headcount is primarily related to
technology.
Noncompensation expenses were $180 million in the 1996 third quarter compared
with average quarterly recurring noncompensation expenses of $168 million for
the prior four quarters. The increase in the 1996 third quarter was primarily
attributable to a higher level of technology hardware purchases and an increase
in clearing and exchange fees. Looking ahead, Salomon Brothers expects that over
the next year, on average, its level of recurring noncompensation expenses will
likely increase modestly from the aforementioned $168 million level.
<TABLE>
<CAPTION>
Phibro
Condensed Statement of Income
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense $ 36 $ 105 (66)% $ 253 $ 112 126%
- ---------------------------------------------------------------------------------------------------------------------------------
Compensation and employee-related expenses 20 30 (33) 93 61 52
Other general and administrative expenses 9 7 29 25 22 14
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 29 37 (22) 118 83 42
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 7 $ 68 (90)% $ 135 $ 29 366%
=================================================================================================================================
Compensation expense ratio * 74% 31% 41% 68%
Non-compensation expense ratio** 25 7 10 20
=================================================================================================================================
<FN>
* 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.
</FN>
</TABLE>
Phibro's strategy is to take 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,
thus, such results are better evaluated over the longer term. Phibro recorded
pretax income of $7 million in the third quarter of 1996, compared with $68
million in the comparable 1995 period. For the nine months ended September 30,
1996, Phibro recorded pretax income of $135 million, up from $29 million in the
1995 nine month period. Compensation and employee-related expenses in the third
quarter include $3 million of severance related expenses. Severance expenses are
attributable to Phibro's plan to reduce headcount worldwide by 20% to 25%,
including discontinuing trading of certain non-terminal market commodities (such
as coal, coke and fertilizer). Future costs associated with the downsizing are
not expected to be material to the Company. Phibro expects that the downsizing
will result in a reduction of ongoing operating expenses. Other general and
administrative expenses for the 1996 three and nine month periods increased by
$2 million and $3 million, respectively, over the comparable 1995 periods.
<PAGE>
<TABLE>
<CAPTION>
Basis Petroleum
Condensed Statement of Income
Dollars in millions
Three months Percent Nine months Percent
Period ended September 30, 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Sales $ 2,067 $ 2,206 (6)% $ 6,743 $ 7,010 (4)%
Cost of sales 2,093 2,196 (5) 6,803 7,016 (3)
- --------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (26) 10 n/m (60) (6) (900)
Net interest and other (11) (8) (38) (26) (21) (24)
- --------------------------------------------------------------------------------------------------------------------------------
Operating income (loss), net of interest and other (37) 2 n/m (86) (27) (219)
- --------------------------------------------------------------------------------------------------------------------------------
Compensation and employee-related expenses 6 8 (25) 17 21 (19)
Other expenses 3 3 - 11 11 -
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 9 11 (18) 28 32 (13)
- --------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes $ (46) $ (9) (411)% $ (114) $ (59) (93)%
================================================================================================================================
<FN>
*n/m - not meaningful
</FN>
</TABLE>
Basis, the Company's oil refining and marketing business, recorded a pretax loss
of $46 million in the third quarter of 1996, compared with a pretax loss of $9
million in the third quarter of 1995. The decline in Basis' results was
attributable to weaker U.S. Gulf Coast refining margins and weaker results in
its crude oil gathering and petrochemicals businesses. For the nine months ended
September 30, 1996, Basis recorded a pretax loss of $114 million, compared with
a pretax loss of $59 million in the comparable nine month period of 1995. Basis'
1996 nine month results were adversely impacted by historically weak refining
margins and a severely backwardated crude oil market, partially offset by $23
million of nonrecurring income recorded in the second quarter of 1996. The
nonrecurring income resulted from a reduction of Basis' minimum crude oil
inventory needed to support refining activities. At September 30, 1996, this
inventory, which is carried at the lower of aggregate cost or market, had a
carrying value of $132 million and a market value of $204 million. Basis' 1996
nine month results also include $11 million of nonrecurring start-up expenses
($3 million in the third quarter) in connection with the Residfiner/ROSE unit
complex.
In August 1996, Basis' Residfiner/ROSE unit complex became operational at its
Texas City refinery. This enables Basis to improve margins by processing
heavier, lower cost, crude oil feedstocks into higher valued refined products
while significantly reducing Basis' exposure to the residual fuel oil market.
For several weeks after becoming operational the complex was in a start-up mode,
resulting in a less than optimal throughput and yield. Nevertheless, the complex
contributed to an improvement in gross refining margins later in the quarter
that offset the incremental operating costs attributable to the complex that
were incurred throughout the quarter. The aggregate impact of the
Residfiner/ROSE unit complex on Basis' third quarter results was not
significant. Basis estimates that its pretax loss for the quarter ended
September 30, 1996 would have been reduced by $20-$25 million assuming the
operation of a fully optimized Residfiner/ROSE unit complex for the entire
quarter. In periods of depressed crackspreads and tightness in the spreads
between heavy and light crudes, a fully optimized Residfiner/ROSE unit complex,
in and of itself, is not enough to restore Basis' refining operations to
profitability. Further, as a consequence of ROSE unit engineering modifications
that required the unit to be taken off-line for approximately one month, Basis
will not capture the full benefit of the Residfiner/ROSE unit complex in the
fourth quarter of 1996.
<PAGE>
At September 30, 1996, the Company's total investment in Basis was $1.0 billion,
comprised of $144 million of working capital advances, $525 million of
intercompany subordinated debt and $365 million in equity. Basis is not directly
linked to the Company's primary broker-dealer and commodities businesses. The
Company will seek to maximize shareholder value with respect to Basis, which,
depending upon opportunities, could include reducing or eliminating the
Company's interest in Basis or in particular assets of Basis. As more fully
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, the vast majority of the Company's assets and liabilities are
carried at either market or fair value or amounts which approximate market or
fair value. The most significant exception to the Company's mark-to-market
practice is the accounting model applied by Basis. Basis accounts for its
refining facilities, including the Residfiner/ROSE unit complex, at historical
cost less accumulated depreciation. Statement of Financial Accounting Standards
No. 121 provides accounting guidance with regard to the impairment of long-lived
assets, requiring an impairment adjustment if expected future cash flows,
undiscounted and excluding interest, are less than the asset carrying value.
Management has concluded that, pursuant to this standard, no impairment
adjustment is warranted. This does not mean, however, that Basis' refining
assets could be sold at a price at least equal to their carrying value. Indeed,
a sale of Basis' refining assets during a prolonged period of depressed refining
margins would likely result in a price less than the carrying value of those
assets. A sale in a different environment might produce a price higher or lower
than carrying value based upon the variety of factors that affect market
conditions for refining assets.
See Note 5 to the Unaudited Condensed Consolidated Financial Statements for a
discussion of the expected fourth quarter MLP public offering.
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC
Capital and Liquidity Management
Dollars in millions
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
Quarter ended 1996 1996 1996 1995 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Weekly Balance Sheet Information:
Government and agency securities - U.S. $ 45,464 $ 43,106 $ 44,470 $ 41,446 $ 33,871
Government and agency securities - non-U.S. 32,017 34,770 35,001 34,466 33,202
Financial options and contractual commitments 5,061 5,619 6,230 5,731 5,988
Other financial instruments owned 21,481 20,372 19,206 20,421 18,500
- -----------------------------------------------------------------------------------------------------------------------------------
Total financial instrument inventories 104,023 103,867 104,907 102,064 91,561
- -----------------------------------------------------------------------------------------------------------------------------------
Securities purchased under agreements to resell 60,971 60,087 56,909 51,348 42,123
Securities borrowed 16,672 15,170 16,783 17,219 14,694
Other assets 9,300 13,380 12,472 13,002 14,122
- ----------------------------------------------------------------------------------------------------------------------------------
Average total assets $ 190,966 $ 192,504 $ 191,071 $ 183,633 $ 162,500
===================================================================================================================================
Period-end total assets $ 190,987 $ 181,445 $ 185,341 $ 188,428 $ 162,586
===================================================================================================================================
Period-end net assets* $ 129,335 $ 125,434 $ 128,484 $ 140,006 $ 119,089
===================================================================================================================================
Average net assets* $ 129,995 $ 132,417 $ 134,162 $ 132,285 $ 120,377
===================================================================================================================================
Average net assets, excluding securities
borrowed and government securities* $ 35,842 $ 39,371 $ 37,908 $ 39,154 $ 38,610
===================================================================================================================================
Long-term capital at period-end $ 16,334 $ 16,253 $ 15,685 $ 15,433 $ 16,112
===================================================================================================================================
Ratios at period-end:**
Working capital coverage 1.11 1.13 1.10 1.10 1.24
Total capital basis double leverage 0.81 0.82 0.88 0.98 0.88
Equity capital basis double leverage 0.85 0.90 0.98 1.19 1.18
Average net assets to total equity* 23 25 26 28 26
Average net assets, excluding securities borrowed
and government securities, to total equity* 6 7 7 8 8
===================================================================================================================================
Common shares outstanding (in millions) 105.3 105.2 106.5 106.4 106.4
===================================================================================================================================
<FN>
* Net assets are total assets less securities purchased under
agreements to resell.
**For equity-based ratios, total equity includes the Company's common equity,
perpetual preferred stock, redeemable preferred stock and TRUPS.
</FN>
</TABLE>
<PAGE>
Average assets for the third quarter of 1996 were $191 billion, down slightly
from the $193 billion in the second quarter of 1996. 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, TRUPS units, 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 $16.3
billion at September 30, 1996. The increase of approximately $1 billion reflects
growth in retained earnings, the issuance of $345 million of TRUPS (See Note 3
to the Unaudited Condensed Consolidated Financial Statements) in the third
quarter of 1996, a $250 million issuance of Cumulative Preferred Stock, Series E
in the first quarter of 1996 and term debt issuances (net of retirements and
rolloffs).
The Company's equity capital basis double leverage ratio was 0.85 at September
30, 1996, down considerably from 1.19 at December 31, 1995. Equity capital basis
double leverage is computed by dividing the equity of the Company's operating
units by the sum of the Company's common equity, TRUPS and perpetual and
redeemable preferred stock. Excluding redeemable preferred, except for the $140
million that was converted to common equity on October 29, 1996 (as discussed
below), the equity basis double leverage ratio at September 30, 1996 was 0.92.
On October 29, 1996 Berkshire Hathaway Inc ("Berkshire") converted 140,000
shares ($140 million) of Series A cumulative preferred stock into Salomon Inc
common stock (3.7 million shares). In addition, on September 12, 1996 Berkshire,
in its Securities and Exchange Commission 13D filing, stated that at some point
in the future it may sell notes exchangeable for Salomon Inc common stock at a
premium above the market price of such stock at the time the notes are issued.
At Berkshire's request, the Company filed a shelf registration statement which
would permit Berkshire to deliver Salomon Inc common stock in exchange for up to
$400 million of notes that it might sell. Berkshire has indicated that the above
transactions are dependent upon the specific price and terms that are available
in the context of market conditions.
On August 15, 1996, the Company redeemed all $112.5 million of its outstanding
9.5% Cumulative Preferred Stock, Series C.
Salomon Inc's commercial paper credit ratings at September 30, 1996 remained
unchanged from the previous quarter. During the quarter, Fitch assigned a
"positive" outlook to Salomon Inc's ratings for commercial paper, long-term debt
and preferred equity. In addition, both IBCA and Thomson Bankwatch upgraded
Salomon's issuer rating to B/C from C. Thomson Bankwatch also upgraded its
short-term ratings to TBW-1 and assigned a new long-term debt rating of A. As of
October 31, 1996 the Company's credit ratings were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Duff & Thomson
Moody's S&P Fitch Phelps IBCA Bankwatch
- --------------------------- -------------- --------------- ------------- ------------ ------------- ---------------
Long-term debt Baa1 BBB BBB+ A- A- A
Commercial paper P-2 A2 F-2 D-1 A1 TBW-1
Issuer B/C B/C
- --------------------------- -------------- --------------- ------------- ------------ ------------- ---------------
</TABLE>
Salomon Brothers' trading portfolio of high-yield securities, carried at market
value, totaled $3.4 billion at September 30, 1996. 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. Aggregate high-yield securities at September 30, 1996 were not
materially different from the level that prevailed at December 31, 1995 although
certain unrated (by internationally recognized rating agencies) securities,
previously excluded from high-yield securities, are now included.
The largest single high-yield exposure was $140 million at September 30, 1996.
<PAGE>
Book value per share increased to $40.67 at September 30, 1996, from $35.84 at
December 31, 1995. As previously reported, in April 1996 the Company repurchased
1.3 million common shares for $49 million as a result of a partial restructuring
of the Company's Equity Partnership Plan ("EPP"). At September 30, 1996, shares
authorized for additional repurchase totaled 8.5 million shares. On or about
December 6, 1996, restrictions will be lifted on approximately 2.6 million
shares of Salomon Inc common stock (net of withholding tax requirements) that
were awarded to EPP participants in 1991. The EPP is a deferred compensation
plan that distributes Salomon Inc common stock to plan participants. Shares
awarded to participants are purchased in the open market by the EPP's trustee.
Unawarded shares held by the trustee, as well as shares held in participants'
accounts, are considered outstanding for the purpose of computing earnings per
share. In addition, it is management's intention to issue, in the 1996 fourth
quarter, stock options covering approximately 50% of the 3.5 million shares
previously authorized under the Salomon Inc Stock Incentive Plan of 1994.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
Dollars in millions, except per share amounts 1996 1996 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------------------------
For the quarter:
Revenues:
<S> <C> <C> <C> <C> <C>
Principal transactions, including net interest
and dividends $ 530 $ 877 $ 949 $ 578 $ 947
Investment banking 187 251 181 168 128
Commissions and other 99 91 63 80 106
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 816 1,219 1,193 826 1,181
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 447 551 556 425 557
Other noninterest expenses 183 184 176 167 185
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 630 735 732 592 742
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 186 484 461 234 439
Income tax expense 74 193 185 66 171
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 112 $ 291 $ 276 $ 168 $ 268
====================================================================================================================================
Annualized return on average common stockholders' equity:
Primary 8.7% 26.1% 26.4% 16.4% 28.0%
Fully diluted* 8.5 23.8 24.0 15.1 24.6
====================================================================================================================================
Income (loss) before taxes:
Salomon Brothers $ 176 $ 525 $ 368 $ 207 $ 381
Phibro 7 (17) 145 56 68
Basis Petroleum (46) (13) (55) (32) (9)
Corporate and Other 49 (11) 3 3 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes $ 186 $ 484 $ 461 $ 234 $ 439
====================================================================================================================================
Per common share:
Primary earnings $ 0.88 $ 2.58 $ 2.44 $ 1.42 $ 2.36
Fully diluted earnings* 0.85 2.34 2.21 1.32 2.10
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 46 7/8 44 1/4 39 1/4 40 5/8 41 1/8
Low market price 38 36 1/8 34 7/8 33 7/8 34 3/4
Ending market price 45 5/8 44 37 1/2 35 3/8 38 1/2
Book value at period-end* 40.67 40.08 37.98 35.84 34.49
====================================================================================================================================
Salomon Brothers' full-time employees 6,683 6,370 6,337 6,409 6,561
Salomon Inc's full-time employees 8,557 8,424 8,365 8,439 8,591
====================================================================================================================================
<FN>
* Assumes conversion of redeemable preferred stock outstanding unless such
assumption results in higher earnings per share, book value or return on
equity than determined under the primary method.
</FN>
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
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 September 12,
1996, reporting under Item 5 ("Other Events") the issuance of a press
release.
The Company filed a Current Report on Form 8-K dated October 22, 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 November 14, 1996 /s/ Richard Carbone
Controller and Chief
Accounting Officer
Date November 14, 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)
Nine
Months
Ended
Sept 30, 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 $ 1,131 $ 708 $ (831) $ 1,465 $ 1,056 $ 919
Add fixed charges (see below) 3,593 5,825 4,919 4,644 4,373 5,704
Other adjustments (5) (11) (3) 22 20 (4)
--------- -------- ------- -------- -------- -------
Earnings as defined $ 4,719 $ 6,522 $ 4,085 $ 6,131 $ 5,449 $ 6,619
========= ======== ======= ======== ======== =======
Fixed Charges:
Interest expense $ 3,562 $ 5,782 $ 4,892 $ 4,600 $ 4,324 $ 5,638
Other adjustments 31 43 27 44 49 66
--------- -------- ------- -------- -------- -------
Fixed charges as defined $ 3,593 $ 5,825 $ 4,919 $ 4,644 $ 4,373 $ 5,704
========= ======== ======= ======== ======== =======
Ratio of earnings to
fixed charges 1.31 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)
Nine
Months
Ended
Sept 30, 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 $ 1,131 $ 708 $ (831) $ 1,465 $ 1,056 $ 919
Add fixed charges (see below) 3,593 5,825 4,919 4,644 4,373 5,704
Other adjustments (5) (11) (3) 22 20 (4)
------- -------- -------- ------- -------- -------
Earnings as defined $ 4,719 $ 6,522 $ 4,085 $ 6,131 $ 5,449 $ 6,619
======= ======== ======== ======= ======== =======
Fixed Charges and
Preferred Dividends:
Interest expense $ 3,562 $ 5,782 $ 4,892 $ 4,600 $ 4,324 $ 5,638
Other adjustments 31 43 27 44 49 66
------- -------- -------- ------- -------- -------
Fixed charges as defined 3,593 5,825 4,919 4,644 4,373 5,704
Preferred stock dividends (tax
equivalent basis) 90 106 129 83 131 121
------- -------- -------- ------- -------- -------
Combined fixed charges
and preferred dividends $ 3,683 $ 5,931 $ 5,048 $ 4,727 $ 4,504 $ 5,825
======= ======== ======== ======= ======== =======
Ratio of earnings to
combined fixed charges
and preferred dividends 1.28 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>
EXHIBIT 27
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION AS OF SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,620
<RECEIVABLES> 4,895
<SECURITIES-RESALE> 61,652
<SECURITIES-BORROWED> 14,647
<INSTRUMENTS-OWNED> 104,059
<PP&E> 1,350
<TOTAL-ASSETS> 190,987
<SHORT-TERM> 6,276
<PAYABLES> 10,173
<REPOS-SOLD> 78,251
<SECURITIES-LOANED> 1,603
<INSTRUMENTS-SOLD> 75,553
<LONG-TERM> 13,032
<COMMON> 156
560
450
<OTHER-SE> 4,185
<TOTAL-LIABILITY-AND-EQUITY> 190,987
<TRADING-REVENUE> 1,542
<INTEREST-DIVIDENDS> 4,376
<COMMISSIONS> 234
<INVESTMENT-BANKING-REVENUES> 619
<FEE-REVENUE> 19
<INTEREST-EXPENSE> 3,562
<COMPENSATION> 1,554
<INCOME-PRETAX> 1,131
<INCOME-PRE-EXTRAORDINARY> 679
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 679
<EPS-PRIMARY> 5.90
<EPS-DILUTED> 5.41
</TABLE>
