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, 1997.
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 (I.R.S. Employer Identification No.)
of 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, 1997: 108,105,048
<PAGE>
<TABLE>
Salomon Inc
Form 10-Q
<CAPTION>
<S> <C>
Part I FINANCIAL INFORMATION Page No.
- -------------------------------------------------------------------------------------------------------------------
Item 1. Financial Statements (unaudited):
Consolidated Statement of Income -
Three months ended March 31, 1997 and 1996 3
Condensed Consolidated Statement of Financial Condition -
March 31, 1997 and December 31, 1996 4-5
Consolidated Summary of Options and Contractual Commitments -
March 31, 1997 and December 31, 1996 6
Consolidated Statement of Cash Flows -
Three months ended March 31, 1997 and 1996 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Part II OTHER INFORMATION
- -------------------------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
- -----------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Revenues from continuing operations:
<S> <C> <C>
Interest and dividends $ 1,367 $ 1,572
Principal transactions 484 651
Investment banking 220 181
Commissions 99 90
Other 14 11
- -------------------------------------------------------------------------------------------------------------------
Total revenues 2,184 2,505
Interest expense 1,162 1,267
- -------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 1,022 1,238
- -------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 565 550
Technology 56 46
Professional services and business development 40 43
Occupancy 40 43
Clearing and exchange fees 18 17
Other 24 23
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 743 722
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 279 516
Income tax expense 106 206
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations 173 310
Loss from discontinued operations, net of taxes - (34)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 173 $ 276
===================================================================================================================
Earnings available for fully diluted earnings per common share
from continuing operations $ 166 $ 303
===================================================================================================================
Per common share:
Primary earnings from continuing operations $ 1.44 $ 2.75
Primary earnings 1.44 2.44
Fully diluted earnings from continuing operations* 1.37 2.49
Fully diluted earnings* 1.37 2.21
Cash dividends 0.16 0.16
===================================================================================================================
Weighted average shares of common stock outstanding (in thousands):
For primary earnings per common share 109,500 106,600
For fully diluted earnings per common share 120,900 121,800
===================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated 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>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS March 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and interest bearing equivalents $ 1,278 $ 1,230
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 45,437 $ 45,123
Government and government agency securities - non-U.S. 38,659 35,189
Corporate debt securities 13,435 12,415
Equity securities 7,201 7,094
Options and contractual commitments 6,290 6,592
Mortgage loans and collateralized mortgage securities 3,606 3,126
Other 3,742 2,947
------------ -----------
118,370 112,486
Commodities and related products and instruments:
Physical commodities inventory 1,150 995
Options and contractual commitments 209 315
------------ -----------
1,359 1,310
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 70,318 56,536
Securities borrowed and other 15,785 16,162
------------ -----------
86,103 72,698
Receivables 4,903 5,118
Assets securing collateralized mortgage obligations 378 394
Property, plant and equipment, net 506 521
Net realizable value of discontinued operations (Note 2) 490 490
Other assets, including intangibles 664 634
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 214,051 $ 194,881
===================================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 88,792 $ 77,632
Securities loaned 2,967 1,495
------------ -----------
$ 91,759 $ 79,127
Short-term borrowings 8,587 6,817
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments:
Government and government agency securities - U.S. 40,306 34,311
Government and government agency securities - non-U.S. 29,097 31,699
Financial options and contractual commitments 9,175 9,391
Equity securities 6,106 5,840
Corporate debt securities and other 1,760 1,942
Commodities, including options and contractual commitments 184 324
------------ -----------
86,628 83,507
Payables and accrued liabilities 6,439 6,054
Collateralized mortgage obligations 368 384
Term debt 14,511 13,370
----------- -----------
Total liabilities 208,292 189,259
Commitments and contingencies (Note 3)
Redeemable preferred stock, Series A 420 420
Guaranteed preferred beneficial interests in Company subordinated
debt securities (Note 4) 345 345
Stockholders' equity:
Preferred stock, Series D and E 450 450
Common stock 159 159
Additional paid-in capital 438 437
Retained earnings 5,622 5,482
Cumulative translation adjustments (1) 6
Common stock held in treasury, at cost (1,674) (1,677)
------------ -----------
Total stockholders' equity 4,994 4,857
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 214,051 $ 194,881
===================================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
March 31, 1997 December 31, 1996
------------------------------------ ------------------------------------
Current Market or Current Market or
Notional Fair Value Notional Fair Value
------------------------ ------------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts* $ 636.6 $ - $ - $ 525.3 $ - $ -
Other exchange-issued products:
Equity contracts 12.0 .1 .3 12.9 .1 .2
Fixed income contracts 128.7 - - 59.0 - -
Foreign exchange contracts .2 - - - - -
Commodities-related contracts 3.9 - - 4.9 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 781.4 .1 .3 602.1 .1 .2
- ----------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options,
caps and floors:
Swaps** 919.2 852.4
Swap options written 14.9 9.7
Swap options purchased 26.7 23.3
Caps and floors 120.1 114.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 1,080.9 3.5 5.7 999.8 4.2 6.5
- ----------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts** 90.8 .7 .5 68.3 .5 .5
Options written 35.5 - .4 31.6 - .2
Options purchased 34.9 .5 - 32.9 .4 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 161.2 1.2 .9 132.8 .9 .7
- ----------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and
equity indices*** 51.8 1.2 2.0 45.6 1.1 1.8
Options and forward contracts on
fixed-income securities*** 262.3 .3 .3 179.0 .3 .2
Commodities-related contracts**** 20.9 .2 .2 22.0 .3 .3
- ----------------------------------------------------------------------------------------------------------------------------------
Total $2,358.5 $6.5 $9.4 $1,981.3 $6.9 $9.7
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Margin on futures contracts is included in receivables or payables on the
Condensed Consolidated Statement of Financial Condition.
** Includes notional values of swap agreements or forward currency contracts
for non-trading activities (primarily related to the Company's fixed-rate
long-term debt, TruPS and preferred stock) of $16.9 billion and $.9 billion
at March 31, 1997 and $15.5 billion and $1.3 billion at December 31, 1996,
respectively.
*** The fair value of such instruments recorded as assets includes
approximately $.7 billion at March 31, 1997 and $.6 billion at December 31,
1996 respectively, of over-the-counter instruments primarily with
investment grade counterparties. The remainder consists primarily of highly
liquid instruments actively traded on organized exchanges.
**** A substantial majority of these over-the-counter contracts are with
investment grade counterparties.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CREDIT EXPOSURE, NET OF SECURITIES AND CASH 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, 1997 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 $ .1 $ .3 $ .1 $ - $ .9 $ 1.0 $ .7
Risk class 3 .7 .2 .1 - .1 1.1 1.2 .7
Risk classes 4 and 5 .2 .2 .2 - - .6 .6 .3
Risk classes 6, 7 and 8 - .1 - - - .1 .1 -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
$ 1.3 $ .6 $ .6 $ .1 $ .1 $ 2.7 $ 2.9 $ 1.7
============ ========== =========== ============= =========== ========== =============== ============
Foreign exchange
contracts and options:
Risk classes 1 and 2 $ .7 $ - $ - $ .1 $ - $ .8 $ .8 $ -
Risk class 3 .3 - - - - .3 .3 -
Risk classes 4 and 5 - - - - .1 .1 .1 -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
$ 1.0 $ - $ - $ .1 $ .1 $ 1.2 $ 1.2 $ -
============ ========== =========== ============= =========== ========== =============== ============
<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>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Dollars in millions
- ----------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash and non-operating activities -
Net income $ 173 $ 276
Depreciation, amortization and other 24 44
- ----------------------------------------------------------------------------------------------------------------------
Cash items included in net income 197 320
- ----------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets -
Financial instruments and contractual commitments (5,884) 8,419
Commodities and related products and instruments (49) 4
Collateralized short-term financing agreements (13,405) (3,389)
Receivables 112 (1,432)
Other (200) (70)
- ----------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets (19,426) 3,532
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 12,632 (16,075)
Short-term borrowings 1,770 (2,053)
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments 3,121 15,421
Payables and accrued liabilities 384 (756)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities 17,907 (3,463)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,322) 389
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of term debt 2,195 1,271
Issuance of preferred stock, Series E - 250
Employee stock purchase and option plans 4 -
Term debt maturities and repurchases (780) (1,132)
Collateralized mortgage obligations (17) (134)
Purchase of common stock for treasury (6) -
Dividends on common stock (17) (17)
Dividends on preferred stock* (15) (16)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,364 222
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 17 128
Property, plant and equipment (11) (30)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 6 98
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and interest bearing equivalents 48 709
Cash and interest bearing equivalents at January 1, 1,230 1,454
- ----------------------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at March 31, $ 1,278 $ 2,163
======================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
* For the three months ended March 31, 1997 and 1996, dividends on preferred
stock were reduced by the aftertax impact ( $4 million and $6 million) of
interest rate swaps that effectively convert the Company's fixed-rate
obligations to variable-rate obligations.
</FN>
</TABLE>
<PAGE>
Salomon Inc and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1997
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 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"), with the exception of Basis Petroleum,
Inc. ("Basis"), which is shown as a discontinued operation as discussed
in Note 2 below. 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, 1996.
2. Discontinued Operations
On May 1, 1997, the Company completed the sale of all of the
outstanding stock of Basis Petroleum, Inc. to Valero Energy Corporation
("Valero"). The Company received cash proceeds of $365 million (subject
to increase or decrease to the extent that net working capital as of
the closing date is determined to have been more or less than $200
million), and Valero common stock with a market value of $120 million.
In addition, the Company is entitled to participation payments based on
a fixed notional throughput and the difference, if any, between an
average market crackspread, as defined, and a base crackspread, as
defined, over each of the next ten years, but subject to the limitation
that the total of the participation payments is capped at $200 million,
with a maximum of $35 million per year. Basis is classified as a
discontinued operation in the Company's Condensed Consolidated
Financial Statements.
3. Commitments and Contingencies
Outstanding legal matters are discussed in Note 17 to the Audited
Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. 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 adverse impact on operating results in future
periods depending in part on the results for such periods.
The Company has initiated a long-term and ongoing process of upgrading
its financial and operating systems. This effort is focused on:
supporting the multi-entity, multi-currency, multi-time zone aspects of
the Company's businesses; improving control over complex, cross-entity
transactions; facilitating standardized technology platforms, operating
procedures, and fungibility of resources around the world; eliminating
redundant regional applications; reducing technology and operations
costs; efficiently meeting market and regulatory changes. Expenditures
relating to these technology initiatives are expected to occur over the
next four to five years.
Additionally, in order to adapt systems for year 2000 processing and
the European Monetary Union, the Company anticipates incurring $100
million to $150 million in additional expenses through the year 2000.
<PAGE>
4. Guaranteed preferred beneficial interests in Company subordinated debt
securities ("TruPS")
The Company has $345 million, or 13,800,000 TruPS units outstanding.
Each TruPS unit includes 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. The Trust, which is a
wholly-owned subsidiary of the Company, was established for the sole
purpose of issuing the 9 1/4% preferred securities and common
securities and investing the proceeds in $356 million aggregate
principal amount of 9 1/4% subordinated debt securities issued by
Salomon Inc due June 30, 2026.
5. 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, 1997, SBI's net capital was $1.0
billion, $978 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, 1997, SBIL's financial resources were $583
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, 1997, SBAL's net capital was
$372 million above the minimum required by Japan's Ministry of Finance.
SBAG's net capital was $7 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, 1997, Swapco was
in compliance with all such agreements. Swapco's capital requirements
are dynamic, varying with the size and concentration of its
counterparty receivables.
<PAGE>
<TABLE>
<CAPTION>
6. Summary of Revenues from Continuing Operations
The following tables present revenues, net of interest expense for the three
months ended March 31, 1997 and 1996.
Three Months Ended March 31, 1997
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income sales and trading $ 517 $ - $ 2 $ - $ 519
Equity sales and trading 146 - 97 - 243
Global investment banking - 220 - - 220
Commodities trading 25 - - - 25
Asset management 3 - - 14 17
Other (2) - - - (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 689 $ 220 $ 99 $ 14 $ 1,022
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<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
Commodities trading 235 - - - 235
Asset management 1 - - 11 12
Other 14 - - - 14
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 956 $ 181 $ 90 $ 11 $ 1,238
====================================================================================================================================
</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 Percent
Three months ended March 31, 1997 1996 Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues, net of interest expense:
Global investment banking:
Advisory $ 72 $ 60 20%
Equity underwriting 58 53 9
Debt underwriting 90 68 32
- ----------------------------------------------------------------------------------------------------------------
Total global investment banking 220 181 22
Fixed income sales and trading 519 732 (29)
Equity sales and trading 243 64 280
Commodities trading 25 235 (89)
Asset management 17 12 42
Other (2) 14 (114)
- ----------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,022 $ 1,238 (17)%
================================================================================================================
Income from continuing operations $ 173 $ 310 (44)%
================================================================================================================
Per common share:
Primary earnings from continuing operations $ 1.44 $ 2.75
Fully diluted earnings from continuing operations* 1.37 2.49
Cash dividends 0.16 0.16
Book value at period-end* 41.13 37.98
====================================================================================================
Annualized return on average common stockholders'
equity from continuing operations:
Primary 14.0% 33.4%
Fully diluted* 13.4 29.7
====================================================================================================
<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>
The Company recorded income from continuing operations of $173 million, or $1.37
per common share on a fully diluted basis, for the first quarter of 1997,
compared with $310 million, or $2.49 per common share for the first quarter of
1996.
Global investment banking revenues (underwriting plus advisory) for the three
months ended March 31, 1997, were $220 million, up 22% from $181 million in the
first quarter of 1996. Results for debt underwriting were particularly strong.
On a lead-managed basis, Salomon Brothers ranked third in underwriting U.S. debt
and equity public issues, fourth in U.S. investment grade debt underwriting and
third in U.S. high-yield underwriting for the quarter.
Fixed income sales and trading net revenues were $519 million in the first
quarter of 1997, down from $732 million in the year ago quarter. Results for the
1997 first quarter reflect continued strengthening in customer sales and trading
as well as positive proprietary trading results. The year-to-year decrease is
indicative of exceptionally strong proprietary trading results in the first
quarter of 1996.
Equity sales and trading net revenues were $243 million in the 1997 first
quarter, up significantly from $64 million in the first quarter of 1996. This
increase reflects improved results in both customer sales and trading and
proprietary trading activities.
<PAGE>
Net revenues from commodities trading activities, which are conducted by Phibro
Inc., were $25 million in the first quarter of 1997, down significantly from the
exceptionally strong result of $235 million in the year ago quarter. As a
consequence of its cost structure, Phibro was still modestly profitable for the
quarter.
Asset management revenues for the 1997 first quarter were $17 million
compared with $12 million in the first quarter of 1996.
For the three months ended March 31, 1997, compensation and employee-related
expenses were $565 million, or 67% of earnings from continuing operations before
income taxes and compensation and employee-related expenses, compared with $550
million, or 52% in the year ago quarter. The increase was primarily driven by
higher levels of market compensation and increased headcount. Noncompensation
expenses were $178 million in the 1997 first quarter, or 17% of revenues, net of
interest expense, compared with $172 million or 14% in the year ago quarter. The
increase in technology expenses was primarily due to higher office automation
costs and technology consulting.
<TABLE>
<CAPTION>
Capital and Liquidity Management
Dollars in millions
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
Quarter ended 1997 1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Weekly Balance Sheet Information:
Government and government agency securities - U.S. $ 48,983 $ 48,978 $ 45,464 $ 43,106 $ 44,470
Government and government agency securities - non-U.S. 35,928 35,946 32,017 34,770 35,001
Financial options and contractual commitments 6,936 6,637 5,061 5,619 6,230
Other financial instruments owned 25,867 25,594 21,481 20,372 19,206
- -----------------------------------------------------------------------------------------------------------------------------------
Total financial instrument inventories 117,714 117,155 104,023 103,867 104,907
- -----------------------------------------------------------------------------------------------------------------------------------
Securities purchased under agreements to resell 69,983 64,573 60,971 60,087 56,909
Securities borrowed 13,201 16,488 16,672 15,170 16,783
Other assets 9,638 11,245 9,300 13,380 12,472
- -----------------------------------------------------------------------------------------------------------------------------------
Average total assets $ 210,536 $ 209,461 $ 190,966 $ 192,504 $ 191,071
===================================================================================================================================
Period-end total assets $ 214,051 $ 194,881 $ 190,987 $ 181,445 $ 185,341
===================================================================================================================================
Period-end net assets* $ 143,733 $ 138,345 $ 129,335 $ 125,434 $ 128,484
===================================================================================================================================
Average net assets* $ 140,553 $ 144,888 $ 129,995 $ 132,417 $ 134,162
===================================================================================================================================
Average net assets, excluding securities borrowed and
government and government agency securities* $ 42,441 $ 43,476 $ 35,842 $ 39,371 $ 37,908
===================================================================================================================================
Average equity** $ 5,728 $ 5,700 $ 5,612 $ 5,295 $ 4,934
===================================================================================================================================
Ratios at period-end:**
Working capital coverage*** 1.13 1.12 1.11 1.13 1.10
Total capital basis double leverage .74 .76 .81 .82 .88
Average net assets to average equity* 24.5 25.4 23.2 25.0 27.2
===================================================================================================================================
Common shares outstanding (in millions) 109.2 109.0 105.3 105.2 106.5
===================================================================================================================================
<FN>
* Net assets are total assets less the lower of securities purchased under
agreements to resell or securities sold under agreements to repurchase.
** Average equity is based on month-end balances; for equity-based ratios,
total equity includes common equity, perpetual preferred stock, TruPS and
redeemable preferred stock.
*** As a result of the completion of the sale of Basis Petroleum on May 1, 1997,
the majority of Basis' working capital usage is short-term at March 31, 1997
and is therefore not included in the calculation of the working capital
coverage ratio.
</FN>
</TABLE>
Average assets for the first quarter of 1997 were $211 billion, compared with
$209 billion in the fourth 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.
<PAGE>
The Company's long-term capital includes common equity, redeemable preferred
stock, perpetual preferred stock, TruPS, 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 $16.8 billion at December 31, 1996 to $18.1
billion at March 31, 1997, principally due to the net increase of approximately
$1.1 billion in the level of term debt since year-end. The Company manages the
level of long-term capital to be the greater of 110% of working capital or the
capital required to maintain a total capital basis double leverage ratio of 1.0.
As of April 30, 1997 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 A- A- A- A
Commercial paper P-2 A2 F-1 D-1 A1 TBW-1
Issuer - - - - B/C B/C
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers' trading portfolio of high-yield securities, carried at market
value, totaled $4.9 billion at March 31, 1997, compared with $4.4 billion at
December 31, 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. The largest single high-yield
exposure to a single counterparty was $323 million at March 31, 1997.
Book value per share increased to $41.13 at March 31, 1997, from $40.03 at
December 31, 1996. Through April 30, 1997, the Company repurchased 1,281,000
common shares for treasury in 1997 at an average price of $51.66 per share. At
April 30, 1997, remaining shares authorized for repurchase totaled approximately
7.2 million shares.
<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 1997 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the quarter:
Revenues, net of interest expense:
Global investment banking:
Advisory $ 72 $ 75 $ 65 $ 72 $ 60
Equity underwriting 58 66 83 132 53
Debt underwriting 90 93 39 47 68
- ------------------------------------------------------------------------------------------------------------------------------
Total global investment banking 220 234 187 251 181
Fixed income sales and trading 519 588 598 706 732
Equity sales and trading 243 83 (26) 268 64
Commodities trading 25 100 36 (18) 235
Asset management 17 15 13 11 12
Other (2) 33 45 5 14
- ------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 1,022 1,053 853 1,223 1,238
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 565 502 441 546 550
Other noninterest expenses 178 186 180 180 172
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 743 688 621 726 722
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 279 365 232 497 516
Income tax expense 106 131 92 199 206
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 173 234 140 298 310
Loss from discontinued operations, net of tax - (296) (28) (7) (34)
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 173 $ (62) $ 112 $ 291 $ 276
==============================================================================================================================
Annualized return on average common stockholders'
equity from continuing operations:
Primary 14.0% 21.1% 12.4% 29.7% 33.4%
Fully diluted* 13.4 19.6 11.7 26.7 29.7
==============================================================================================================================
Per common share:
Primary earnings from continuing operations $ 1.44 $ 2.03 $ 1.15 $ 2.65 $ 2.75
Primary earnings (loss) 1.44 (0.71) 0.88 2.58 2.44
Fully diluted earnings from continuing operations* 1.37 1.88 1.08 2.40 2.49
Fully diluted earnings (loss)* 1.37 (0.71) 0.85 2.34 2.21
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 61 3/8 49 46 7/8 44 1/4 39 1/4
Low market price 46 44 1/8 38 36 1/8 34 7/8
Ending market price 49 7/8 47 1/8 45 5/8 44 37 1/2
Book value at period-end 41.13 40.03 40.67 40.08 37.98
==============================================================================================================================
<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 4. Submission of Matters to a Vote of Security Holders
The 1997 Annual meeting of shareholders was held on May 7, 1997. A Proxy
Statement, dated April 4, 1997, was distributed by management pursuant to
Regulation 14 of the Securities and Exchange Act of 1934.
The shareholders voted on a proposal to approve the Board of Directors; all
nominees for the board were elected.
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 15, 1997,
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, 1997 /s/ Richard Carbone
Controller and Chief
Accounting Officer
Date May 15, 1997 /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 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations:
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principles $ 279 $ 1,610 $ 799 $ (849) $ 1,511 $ 1,103
Add fixed charges (see below) 1,172 4,711 5,786 4,898 4,625 4,347
Other adjustments (1) 1 0 0 22 20
----------- -------- ------- -------- -------- --------
Earnings as defined $ 1,450 $ 6,322 $ 6,585 $ 4,049 $ 6,158 $ 5,470
=========== ======== ======= ======== ======== ========
Fixed Charges from continuing operations:
Interest expense $ 1,162 $ 4,679 $ 5,754 $ 4,873 $ 4,581 $ 4,299
Other adjustments 10 32 32 25 44 48
=========== ======== ======= ======== ======== ========
Fixed charges from continuing operations as defined $ 1,172 $ 4,711 $ 5,786 $ 4,898 $ 4,625 $ 4,347
=========== ======== ======= ======== ======== ========
Ratio of earnings to
to fixed charges 1.24 1.34 1.14 0.83* 1.33 1.26
=========== ======== ======= ======== ======== ========
<FN>
NOTE:
The ratio of earnings to fixed charges from continuing operations is calculated
by dividing fixed charges into the sum of income (loss) from continuing
operations before income taxes and cumulative effect of change in accounting
principles 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 $849 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 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations:
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principles $ 279 $ 1,610 $ 799 $ (849) $ 1,511 $ 1,103
Add fixed charges (see below) 1,172 4,711 5,786 4,898 4,625 4,347
Other adjustments (1) 1 0 0 22 20
----------- ------- ------- ------- ------- --------
Earnings as defined $ 1,450 $ 6,322 $ 6,585 $ 4,049 $ 6,158 $ 5,470
=========== ======= ======= ======= ======= ========
Fixed Charges from continuing operations
and Preferred Dividends:
Interest expense $ 1,162 $ 4,679 $ 5,754 $ 4,873 $ 4,581 $ 4,299
Other adjustments 10 32 32 25 44 48
----------- ------- ------- ------- ------- --------
Fixed charges from continuing operations as defined 1,172 4,711 5,786 4,898 4,625 4,347
Preferred stock dividends
(tax equivalent basis) 24 111 106 129 83 131
----------- ------- ------- ------- ------- --------
Combined fixed charges
and preferred dividends $ 1,196 $ 4,822 $ 5,892 $ 5,027 $ 4,708 $ 4,478
=========== ======= ======= ======= ======= ========
Ratio of earnings to
combined fixed charges
and preferred dividends 1.21 1.31 1.12 0.81* 1.31 1.22
=========== ======= ======= ======= ======= ========
<FN>
NOTES:
The ratio of earnings to combined fixed charges from continuing operations and
preferred dividends was calculated by dividing the sum of combined fixed charges
and tax equivalent preferred dividends into the sum of income (loss) from
continuing operations before income taxes and cumulative effect of change in
accounting principles 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 $978 million.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
EXHIBIT 27
THE SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S March 31, 1997 FORM 10-Q 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,278
<RECEIVABLES> 4,903
<SECURITIES-RESALE> 70,318
<SECURITIES-BORROWED> 15,785
<INSTRUMENTS-OWNED> 119,729
<PP&E> 506
<TOTAL-ASSETS> 214,051
<SHORT-TERM> 8,587
<PAYABLES> 6,439
<REPOS-SOLD> 88,792
<SECURITIES-LOANED> 2,967
<INSTRUMENTS-SOLD> 86,628
<LONG-TERM> 14,511
420
450
<COMMON> 159
<OTHER-SE> 4,385
<TOTAL-LIABILITY-AND-EQUITY> 214,051
<TRADING-REVENUE> 484
<INTEREST-DIVIDENDS> 1,367
<COMMISSIONS> 99
<INVESTMENT-BANKING-REVENUES> 220
<FEE-REVENUE> 14
<INTEREST-EXPENSE> 1,162
<COMPENSATION> 565
<INCOME-PRETAX> 279
<INCOME-PRE-EXTRAORDINARY> 173
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173
<EPS-PRIMARY> $1.44
<EPS-DILUTED> $1.37
</TABLE>
