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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission File Number 1-4346
SALOMON INC
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-1660266
(State of incorporation) (I.R.S. Employer Identification No.)
Seven World Trade Center, New York, New York 10048 (212) 783-7000
(Address of principal executive offices)(Zip Code) (Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $1 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
9.50% Trust Preferred Stock ("TRUPS") Units consisting of
9.25% Preferred Securities of SI Financing Trust I New York Stock Exchange
and SI Purchase Contracts
Depositary Shares, Each Representing a One-Twentieth Interest in a
Share of 8.08% Cumulative Preferred Stock, Series D New York Stock Exchange
Depositary Shares, Each Representing a One-Twentieth Interest in a
Share of 8.40% Cumulative Preferred Stock, Series E New York Stock Exchange
6.25% Exchangeable Notes due 2001 New York Stock Exchange
Securities registered pursuant to Number of shares of common stock
Section 12(g) of the Act: outstanding at February 28, 1997:
NONE 109,296,178
Aggregate market value at
February 28, 1997:
$6.1 billion
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Documents incorporated by reference:
Salomon Inc 1996 Annual Report Financial Information (incorporated in 10-K
Parts I, II and I1V)
Proxy Statement for the 1997 Annual Meeting of Stockholders (incorporated,
in part, in 10-K Part III)
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PART I
Item 1.* Business
Salomon Inc (the "Company") was incorporated in 1960 under the laws of
the State of Delaware. At December 31, 1996, the Company had 8,614
full time employees, including 1,468 at Basis Petroleum, a
discontinued operation. Information concerning the business of Salomon
Inc under the following captions in Exhibit 13, "Salomon Inc 1996
Annual Report Financial Information," is deemed part of this Annual
Report on Form 10-K and is hereby incorporated herein by reference:
Salomon Inc - Overview of 1996 (on pages 11 through 13)
Salomon Brothers - Description of Business (on pages 15
through 16)
Phibro - Description of Business (on page 20)
Note 1 Revenues by Business Activity (on pages 58 through 61)
Note 2 Discontinued Operations (on pages 61 through 62)
Note 3 Industry Segment and Geographic Data (on pages 62
through 63)
Note 12 Capital Requirements (on pages 71 through 72)
Item 2. Properties
Since 1991, the Company's headquarters have been at Seven World Trade
Center, located in lower Manhattan, New York. In 1993, a subsidiary of
Salomon Brothers purchased two long-term leasehold interests in
property located in London that was previously leased on a short-term
basis. Salomon Brothers' 132,000-square-foot operational support
facility in Tampa, Florida was completed and became fully operational
in 1992. The Tampa facility provides clearing and operational support
services primarily for Salomon Brothers' New York-based sales, trading
and investment banking activities.
- --------
*This Form 10-K includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. All statements,
other than statements of historical facts, included or incorporated by
reference in this Form 10-K which address activities, events or developments
which the Company expects or anticipates will or may occur in the future,
including (without limitation) such things as expansion and other development
trends of the securities industry, business strategy, expansion and growth of
the Company's business and operations and certain matters discussed under Part
I, Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(incorporated herein by reference) ("MD&A"), including (without limitation),
"Salomon Inc--Consolidated Salomon Inc Results," "Salomon Brothers--Description
of Business," "Derivative Instruments" and "Risk Management" and under Note 2
and Note 18 to the Company's Consolidated Financial Statements, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions and expected future developments as
well as other factors it believes are appropriate in the circumstances. The
matters referred to in such statements could be affected by the risks and
uncertainties involved in the Company's business, including (without limitation)
the effect of economic and market conditions, the level and volatility of
interest rates and currency values, the impact of current or pending
legislation, the completion of the pending disposition of certain discontinued
operations and regulation and the other risks and uncertainties detailed in
MD&A, including (without limitation) those included under "Risk Management",
and in Notes 2 and 18 to the Company's Consolidated Financial Statements. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any statement is based.
<PAGE>
Further information concerning the Company's properties under the
following captions in Exhibit 13, "Salomon Inc 1996 Annual Report
Financial Information," is deemed part of this Annual Report on Form
10-K and is hereby incorporated herein by reference:
Salomon Brothers - Description of Business (on pages 15
through 16)
Phibro - Description of Business (on page 20)
Note 5 Property, Plant and Equipment (on page 64)
Item 3. Legal Proceedings
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT")), Ameritech Corporation, and an officer of
Ameritech filed suit against SBI and Salomon Brothers Realty Corporation
("SBRC") in the United States District Court for the Northern District of
Illinois (Harris Trust Savings Bank, not individually but solely as trustee for
the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc. and Salomon Brothers Realty Corp., (92 Civ. 5883 (MEA)).
The second amended complaint alleges that three purchases by APT from Salomon of
participation interests in net cash flow or resale proceeds of three portfolios
of motels owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase
by APT of a similar participation interest with respect to a portfolio of motels
owned by Best Inns, Inc. ("Best"), violated the Employee Retirement Income
Security Act ("ERISA"), and that the purchase of the participation interests for
the third MOA portfolio and for the Best portfolio violated RICO and state law.
SBI had acquired the participation interests in transactions in which it
purchased as principal mortgage notes issued by MOA and Best to finance
purchases of motel portfolios; 95% of three such interests and 100% of one such
interest were sold to APT for purchase prices aggregating approximately $20.9
million. Plaintiffs' second amended complaint seeks (i) a judgment on the ERISA
claims in the amount of the purchase prices of the four participation interests
(approximately $20.9 million), for rescission and for disgorgement of profits,
as well as other relief, and (ii) a judgment on the claims brought under RICO
and state law in the amount of $12.3 million, with damages trebled to $37
million on the RICO claims and punitive damages in excess of $37 million on
certain of the state law claims as well as other relief. SBI and SBRC answered
the second amended complaint in part, moved to dismiss in part and asserted
counterclaims against plaintiff Ameritech Corp. On August 16, 1993 the court (i)
dismissed the RICO claims as well as plaintiffs' claims for breach of contract
and unjust enrichment; (ii) denied SBI's motion to dismiss one of the ERISA
claims (which alleges that SBI participated in a fiduciary's breach); and (iii)
denied Ameritech's motion to dismiss SBI's counterclaims.
By decision and order dated June 13, 1996, the Court (i) granted in
part defendants' motion for summary judgment on the federal ERISA claims,
dismissing counts I and III of the second amended complaint and any claims
contained in count II which are premised on an alleged breach of fiduciary duty;
(ii) otherwise denied defendants' motion for summary judgment as it related to
the remaining portions of the claims in count II; (iii) denied plaintiffs'
motion for partial summary judgment with respect to count II; and (iv) granted
plaintiffs' motion for summary judgment dismissing defendants' counterclaims
against Ameritech for contribution. Defendants' alternative motion for summary
judgment on the state law claims remains pending. Each of the Department of
Labor and the Internal Revenue Service has advised SBI that it was or is
reviewing the transactions in which APT acquired such participation interests.
With respect to the Internal Revenue Service investigation, the Company, SBI and
SBRC have consented to extensions of time for the assessment of excise taxes
which may be claimed to be due with respect to the transactions for the years
1987, 1988 and 1989. On August 15, 1996 the IRS sent the Company, SBI and SBRC
what appeared to be draft "30 day letters" with respect to the transactions and
the Company, SBI and SBRC were given an opportunity to comment on whether the
IRS should issue 30 day letters to such entities. On October 21, 1996, the
Company, SBI and SBRC submitted a memorandum setting forth reasons why the IRS
should not issue 30 day letters with respect to the transactions.
Between May 1994 and the present, SBI, along with a number of other
broker-dealers, was named as a defendant in approximately 25 federal court
lawsuits and two state court lawsuits, principally alleging that companies that
make markets in securities traded on Nasdaq violated the federal antitrust laws
by conspiring to maintain a minimum spread of $.25 between the price bid and the
price asked for certain securities. The federal lawsuits and one state court
case were consolidated for pre-trial purposes in the Southern District of New
York in the fall of 1994 under the caption In re Nasdaq Market-Makers Antitrust
Litigation, United States District Court, Southern District of New York No.
94-CIV-3996(RWS); M.D.L. No. 1023. The other state court suit, Lawrence A. Abel
v. Merrill Lynch & Co., Inc., et al., Superior Court of San Diego, Case No.
677313, has been dismissed without prejudice in conjunction with a tolling
agreement.
In the federal suits, the plaintiffs purport to represent the class of
persons who bought one or more of what they currently estimate to be
approximately 1,650 securities on Nasdaq between May 1, 1989, and May 27, 1994.
They seek unspecified monetary damages, which would be trebled under the
antitrust laws. The plaintiffs also seek injunctive relief, as well as
attorneys' fees and the costs of the action. (The state cases seek similar
relief.) Plaintiffs in the federal suits filed an amended consolidated complaint
that defendants answered in December 1995. On November 26, 1996, the Court
certified a class composed of retail purchasers. A motion to include
institutional investors in the class and to add class representatives is also
pending. Discovery on the merits is now proceeding.
On July 17, 1996, the Antitrust Division of the Department of Justice
filed a complaint against a number of firms that act as market makers in Nasdaq
stocks. The complaint basically alleged that a common understanding arose among
Nasdaq market makers which worked to keep quote spreads in Nasdaq stocks
artificially wide. Contemporaneous with the filing of the complaint, SBI and the
other defendants entered into a stipulated settlement agreement which, if
approved, will result in dismissal of the complaint. In entering into the
stipulated settlement, SBI did not admit any liability. There are no fines,
penalties, or other payments of monies in connection with the settlement. SBI
did agree to follow certain standards with respect to Nasdaq market-making and
to implement certain compliance procedures. A motion to approve the settlement
is pending.
The Securities and Exchange Commission ("SEC") is also conducting an
intensive review of the Nasdaq marketplace, during which it has subpoenaed
documents and taken the depositions of various individuals including SBI
personnel. In July 1996, the SEC reached a settlement with the National
Association of Securities Dealers and issued a report detailing certain
conclusions with respect to the NASD and the Nasdaq market. The SEC's
investigation of other participants in the Nasdaq market is not yet complete.
Under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), under certain circumstances, a
potentially responsible party ("PRP"), may be held jointly and severally liable,
without regard to fault, for response costs at a CERCLA site. A PRP's ultimate
cost at a site generally depends on its involvement with the site and the nature
and extent of contamination, the remedy selected, the role of other PRPs in
creating the alleged contamination and the availability of contribution from
those PRPs, as well as any insurance or indemnification agreements which may
apply. In most cases, both the resolution of the complex issues involved and any
necessary remediation expenditures occur over a number a years.
In 1988, a subsidiary of Salomon Inc, The S.W. Shattuck Chemical
Company, Inc. ("Shattuck"), along with 350 industrial, municipal and other
entities, was named by the federal Environmental Protection Agency ("EPA") as a
PRP subject to liability under CERCLA at a site, Section 6 of the Lowry Landfill
in Arapaho County, Colorado ("Lowry"), owned by the city and county of Denver
("Denver"). Shattuck was named a PRP based on disposal of its wastes at Lowry.
In March 1994, EPA selected a remedy for Lowry, estimated to cost approximately
$94 million. Based on current EPA estimates, and under the terms of settlements
between the Company, Shattuck and certain PRPs, the Company's ultimate share of
remediation costs is not expected to exceed $13 million, of which approximately
60% has been paid into a trust fund.
In August 1992, EPA issued a Unilateral Administrative Order (the
"Order") for remedial design/remedial action to be performed by Shattuck under
CERCLA at a site (Denver Radium Site, Operable Unit VIII), which includes
property owned by, and a metal processing plant previously operated by, Shattuck
at Bannock Street in Denver, Colorado. The remedy selected by EPA requires
onsite stabilization/solidification of radium contaminated soils found at the
Bannock Street plant and at various properties in the vicinity of the plant. The
Order provides that, in the course of performing the remedial design/remedial
action, Shattuck shall demonstrate financial assurance in an amount not less
than $26.6 million. Shattuck has performed significant remediation activities at
the site in accordance with the Order since August 1992.
In May 1994, Denver, alleging a violation of its zoning laws, issued a
Cease and Desist Order ("CD Order") to Shattuck to stop work under the Order. In
August 1994, EPA filed suit in the Federal District Court in Colorado, seeking
to set aside the CD Order. Pending resolution of the suit, Shattuck complied
with the CD Order. In January 1996, the Court ruled in favor of EPA, enjoining
enforcement of the CD Order. Following the Court's ruling, Shattuck resumed
remediation activities at the site. Denver appealed the District Court's
decision to the United States Court of Appeals for the Tenth Circuit. The appeal
was denied in November 1996.
In July 1996, Denver enacted an ordinance (the "Ordinance") which, as
amended on March 3, 1997, seeks to impose a "fee" of $5.10 per cubic foot of
radioactive waste or radium contaminated material which is disposed of in the
City of Denver. In December 1996, Shattuck filed suit against Denver in the
Federal District Court in Colorado seeking to enjoin enforcement of the
Ordinance against Shattuck. Denver has moved to dismiss the complaint, claiming
that the Court lacks jurisdiction over the subject matter of the suit. To date,
the Court has not ruled on Denver's motion. The fee, if assessed against
Shattuck for its disposal of radium contaminated soil at its Bannock Street
plant site pursuant to the Order, could result in Shattuck incurring liability
of approximately $9 million, which would become payable should Shattuck be
unsuccessful in its suit against Denver.
In May 1993, the National Zinc site in Bartlesville, Oklahoma was
proposed for listing as a superfund site on EPA's National Priorities List under
CERCLA. Final listing remains subject to EPA's determination. In May 1993, both
Salomon Inc and a current subsidiary received notices from EPA of designation as
PRPs with respect to National Zinc. The National Zinc site was defined by EPA to
include a smelter facility which had been owned by a former subsidiary of the
Company and an eight square mile area surrounding such facility. In October
1993, the Company and two other unrelated parties were designated by EPA as PRPs
with respect to a removal action involving the area at the National Zinc site
surrounding the smelter facility. In February 1994, EPA issued to the Company
and two other PRPs a Unilateral Administrative Order ("UAO") with respect to
this removal action. The Company and one other PRP, Cyprus Amax Minerals Company
("Cyprus") complied with the UAO and completed the removal work required under
the UAO.
In November 1993, EPA notified the Company and the same two other PRPs
of its intent to conduct a remedial investigation, feasibility study and
remedial design ("RI/FS/RD") for the area of the site surrounding the smelter
facility and offered the PRPs the opportunity to do this work. EPA also stated
its willingness to consider a State Delegation Pilot Project whereunder PRPs,
including the Company, could conduct the RI/FS/RD pursuant to an Administrative
Order of Consent with the State of Oklahoma, with limited oversight by EPA. In
April 1994, the Company, Cyprus and the City of Bartlesville entered into a
Consent Agreement and Final Order ("CAFO") with the Oklahoma Department of
Environmental Quality ("ODEQ") to conduct the RI/FS/RD. The RI/FS activities
required by the CAFO have been timely completed to date. In December 1994, ODEQ
issued a Record of Decision selecting a remedy for Operable Unit 1, relating to
protection of human health, covering the area at the National Zinc site
surrounding the smelter facility. The selected remedy is estimated to cost
approximately $24.3 million. In August 1995, Cyprus and the City of Bartlesville
(but not the Company) entered into a CAFO with ODEQ to perform the remediation
of Operable Unit 1. Remediation activities pursuant thereto have been
conducted and are continuing. In October 1996, ODEQ issued a Record of Decision
selecting a remedy for Operable Unit 2, relating to protection of ecologically
sensitive areas at the National Zinc site surrounding the smelter facility. The
selected remedy is estimated to cost approximately $2.8 million. In February
1997, Cyprus (but not the Company) entered into a CAFO with ODEQ to perform the
remediation of Operable Unit 2. To date, remediation activities at Operable Unit
2 have not commenced. Except for an anticipated cost of $50,000 to complete the
remedial design for Operable Unit 2, the Company is not expected to have any
further expenditures with respect to the remediation of the area at the National
Zinc Site surrounding the smelter facility.
In February 1994, Horseheads Industries, Inc. d/b/a/ Zinc Corporation
of America ("ZCA"), the current owner of the smelter facility at the National
Zinc site, filed suit in the United States District Court for the Northern
District of Oklahoma against the Company, St. Joe Minerals Company ("St. Joe"),
Fluor Corporation ("Fluor") and Cyprus alleging that the defendants are liable
to it under CERCLA for response costs incurred in connection with the smelter
facility, because of the release of hazardous substances during periods of
ownership or operation by them or their affiliates or predecessors in interest.
In August 1994, a settlement agreement was entered into between ZCA, Fluor/St.
Joe and the Company (but not Cyprus), allocating both past and future response
costs between the settling parties. With respect to future remediation (the
determination and implementation of which is expected to take several years) and
the costs thereof, the settlement agreement established a management committee
comprised of representatives of the settling parties to oversee study and
clean-up of the facility and the costs associated therewith. Pursuant to the
settlement, the Company and Fluor assumed ZCA's role in the litigation,
including defense of ZCA against a pending counterclaim of Cyprus, and pursuit
of claims against Cyprus. Cyprus subsequently counter-claimed against the
Company for recovery of response costs incurred by Cyprus, commencing in August
1995, under its CAFO with ODEQ. In April 1996, the Court issued its decision,
allocating past and future response costs at the National Zinc site 70% to
plaintiffs (i.e. the Company, Fluor and ZCA) and 30% to Cyprus, except for
response costs relating to certain residue piles stored on the smelter facility
which the Court allocated 100% to plaintiffs. The Company, subsequently, has
entered into an agreement with Cyprus which satisfies certain of the respective
liabilities and obligations of the parties as set forth in the Court's decision.
The Company's future costs related to the remediation of the smelter facility
cannot be ascertained at this time, because the timing, nature and extent of any
such remediation are yet to be finally decided by ODEQ. However, under a
tentative determination by ODEQ regarding the appropriate corrective measures
for the smelter facility, the Company's costs related to the remediation are not
expected to exceed $15 million.
In July 1994, a lawsuit was filed in the Federal Court in Texas against
Phibro Energy USA, Inc., a subsidiary of the Company now known as Basis
Petroleum, Inc. ("Basis"), by the Friends of the Earth, Inc. The action, a
citizen's suit brought under Section 505 of the Federal Water Pollution Control
Act, alleges violations by Basis of the monitoring, record keeping and discharge
limitations of its Houston refinery wastewater discharge permit during the
period from September 1989 to the date of the suit. Subsequent to the filing of
the lawsuit, the EPA filed an Administrative Complaint against Basis, alleging
substantially the same violations under the Clean Water Act and implementing
regulations. Basis settled the EPA's claim. In March 1995, Basis' motion for
summary judgment against the plaintiff was granted, and judgment was entered in
favor of Basis. Plaintiff appealed to the United States Court of Appeals for the
Fifth Circuit, which reversed and remanded to allow additional discovery. The
parties have agreed to stay proceedings pending determination of an appeal by
Friends of the Earth, Inc., in a similar action brought against another
defendant. Accordingly, Basis' liability, if any, with respect to the claim
alleged in the lawsuit cannot be determined at this time.
In addition, other legal proceedings are pending against or involve the
Company and its subsidiaries. Based on information currently available and
established reserves, the Company believes the ultimate resolution of pending
legal proceedings will not result in any material adverse impact on the
Company's consolidated financial condition; however, such resolution could have
a material adverse impact on operating results in future periods depending in
part on the results for such periods.
2
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.
Executive Officers of the Registrant at December 31, 1996
Name and Age Office
- ------------ ------
Jerome H. Bailey (44) Chief Financial Officer since June 1993;
previously employed at Morgan Stanley in various
executive capacities for more than five years
Richard J. Carbone (49) Controller since June 1995; previously employed by
Bankers Trust Company in various executive
capacities for more than five years
Robert E. Denham (51)* Chairman and Chief Executive Officer since June
1992; previously General Counsel from September
1991
Gedale B. Horowitz (64)* Executive Vice President since 1981
Thomas W. Jasper (48) Treasurer of the Company and Salomon Brothers Inc
since April 1, 1996 and Managing Director of
Salomon Brothers for more than five years
Deryck C. Maughan (49)* Executive Vice President since May 1993; Chairman
and Chief Executive Officer of Salomon Brothers
Inc since May 1992; previously Chief Operating
Officer of Salomon Brothers Inc from August 1991;
Vice Chairman of Salomon Brothers Inc from January
1991 to August 1991; Chairman of Salomon Brothers
Asia Limited from 1986 to 1991
Robert H. Mundheim (64) Executive Vice President and General Counsel since
December 1993; General Counsel since September
1992; previously co-chairman of the law firm
Fried, Frank, Harris, Shriver and Jacobson, from
March 1990
* Also a Director of Salomon Inc
Officers of the Registrant are elected annually at the May meeting of the
Company's Board of Directors that follows the Annual Meeting of Stockholders.
3
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Information concerning the market for the Registrant's common equity
and related stockholder matters in Exhibit 13, "Salomon Inc 1996
Annual Report Financial Information," under the following captions, is
deemed part of this Annual Report on Form 10-K and is hereby
incorporated herein by reference.
Note 10 - Preferred Stock (on pages 70 through 71)
Exemption from registration claimed
pursuant to 3(a)(9) of the Securities Act
of 1933, as amended.
Note 11 - Common Stock (on page 71)
Common Stock Data (on page 90)
Item 6. Selected Financial Data
Selected financial data in Exhibit 13, "Salomon Inc 1996 Annual Report
Financial Information," under the caption "Five-Year Summary of
Selected Financial Information" on pages 88 and 89, is deemed part of
this Annual Report on Form 10-K and is hereby incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained under the following captions in
Exhibit 13, "Salomon Inc 1996 Annual Report Financial Information," is
deemed part of this Annual Report on Form 10-K and is hereby
incorporated herein by reference:
Financial Highlights (page 1)
Salomon Inc - Overview of 1996 (on pages 11 through 13)
Business Unit Information (on pages 14 through 20)
Derivative Instruments (on pages 21 through 26)
Capital and Liquidity Management (on pages 27 through 36)
Risk Management (on pages 37 through 44)
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company and subsidiaries,
together with the Consolidated Summary of Options and Contractual
Commitments, the Summary of Accounting Policies, the Notes to
Consolidated Financial Statements and the Report of Independent Public
Accountants, contained in Exhibit 13, "Salomon Inc 1996 Annual Report
Financial Information" on pages 47 through 86, and the information
appearing under the caption "Selected Quarterly Financial Data
(Unaudited)" on page 87 of such Exhibit are deemed part of this Annual
Report on Form 10-K and are hereby incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants reportable
herein.
4
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors -
Information concerning directors of the Registrant is
contained under the caption "Election of Directors" in
the Proxy Statement for the 1997 Annual Meeting of
Stockholders, which information is hereby incorporated
herein by reference.
(b) Executive Officers -
Information concerning executive officers of the
Registrant is presented in Part I of this Annual Report
on Form 10-K.
Item 11. Executive Compensation
Information concerning executive compensation is contained under the
captions "Election of Directors - Executive Compensation" and
"Election of Directors - Board of Directors' Role, Meetings,
Committees and Fees" in the Proxy Statement for the 1997 Annual
Meeting of Stockholders, which information is hereby incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is contained under the caption "Election of Directors -
Information as to Certain Stockholdings" in the Proxy Statement for
the 1997 Annual Meeting of Stockholders, which information is hereby
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is contained under the caption "Election of Directors - Certain
Transactions" in the Proxy Statement for the 1997 Annual Meeting of
Stockholders, which information is hereby incorporated herein by
reference.
5
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules
(1) Financial Statements
The Consolidated Financial Statements of the Company and subsidiaries, together
with the Consolidated Summary of Options and Contractual Commitments, Summary
of Accounting Policies, the Notes to Consolidated Financial Statements and the
Report of Independent Public Accountants, dated March 13, 1997, are contained
in Exhibit 13, "Salomon Inc 1996 Annual Report Financial Information," and are
hereby incorporated herein by reference.
(2) Schedules
(Schedules are omitted because the required information either is not
applicable or is included in the financial statements or the notes thereto.)
(3) Exhibits
3.a Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibits 3 to Quarterly Reports on
Form 10-Q for the quarters ended June 30, 1987 and June 30, 1986,
Exhibit 4(a) to Registration Statement Number 2-84733 on Form S-3
filed June 30, 1983, Exhibit 4 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987, Exhibit A to Exhibit 1
to Registration Statement on Form 8-A filed February 11, 1988,
Exhibit 3 to Current Report on Form 8-K dated June 13, 1991,
Exhibit 4(a) to Current Report on Form 8-K dated February 22,
1993, and Exhibit 4(a) to Current Report on Form 8-K dated
February 12, 1996)
3.b By-laws of the Company, as amended February 26, 1995
(incorporated by reference to Exhibit 3.b to Annual Report on
Form 10-K for the year ended December 31, 1994)
4.a Certificate of Incorporation of the Company. See Exhibit 3(a)
above.
4.b Rights Agreement dated as of February 8, 1988 between Salomon
Brothers Inc and Morgan Shareholders Services Trust Company and
related letter dated February 9, 1988 from Berkshire Hathaway
Inc. (incorporated by reference to Exhibit 28 to Annual Report on
Form 10-K for the year ended December 31, 1987)
4.c First Amendment dated December 7, 1988 to Rights Agreement dated
as of February 8, 1988 between Salomon Inc and Morgan Shareholder
Services Trust Company (incorporated by reference to Exhibit 28
to Annual Report on Form 10-K for the year ended December 31,
1988)
4.d Contract dated September 27, 1987 between Berkshire Hathaway Inc.
and Salomon Inc and letter dated September 28, 1987 amending said
contract (incorporated by reference to Exhibit 10(c) to Annual
Report on Form 10-K for the year ended December 31, 1987)
6
<PAGE>
Item 14. (continued)
Exhibits (continued)
4.e The Company agrees to furnish the Securities and Exchange
Commission upon its request a copy of any instrument which
defines the rights of holders of long-term debt of the Company
and its consolidated subsidiaries that does not exceed 10 percent
of the total consolidated assets of the Company.
10.a Lease between 7 World Trade Center Company and Salomon Inc dated
November 23, 1988 (incorporated by reference to Exhibit 10(a) to
the Annual Report on Form 10-K, as amended, for the year ended
December 31, 1991)
10.b Foundation Agreement for the creation of the Joint Enterprise
"White Nights" between Varyeganneftegaz Production Association,
Phibro Energy Production, Inc. and Anglo-Suisse (U.S.S.R.) L.P.
dated November 1, 1990 (incorporated by reference to Exhibit 10(b)
to the Annual Report on Form 10-K, as amended, for the year ended
December 31, 1991)
10.c Charter of the Joint Enterprise "White Nights" (incorporated by
reference to Exhibit 10(c) to the Annual Report on Form 10-K, as
amended, for the year ended December 31, 1991)
10.d Non-Qualified Stock Option Plan of 1984 (incorporated by reference
to Exhibit A to the Proxy Statement for the 1988 Annual Meeting of
the Stockholders)
10.e Salomon Inc Stock Incentive Plan (incorporated by reference to
Exhibit C to the Proxy Statement for the 1994 Annual Meeting of
the Stockholders)
12.a* Calculation of Ratio of Earnings to Fixed Charges
12.b* Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends
13* Salomon Inc 1996 Annual Report Financial Information (furnished
for the information of the Securities and Exchange Commission and
not deemed "filed" as part of this Report except for those
portions which are expressly incorporated by reference)
21* Subsidiaries of the Registrant
23* Consent of Independent Public Accountants
24* Powers of Attorney
27* Financial Data Schedule
99.a Copies of the settlement documents relating to the resolution of
certain governmental investigations with respect to the U.S.
Treasury auction and related matters (incorporated by reference
to Exhibit 28(a) to the Annual Report on Form 10-K for the year
ended December 31, 1992)
99.b Copies of the amended consolidated complaints filed in connection
with In re Salomon Inc Securities Litigation, In re Salomon
Brothers Treasury Litigation and In re Salomon Inc Shareholders'
Derivative Litigation (incorporated by reference to Exhibit 28(b)
to the Annual Report on Form 10-K for the year ended December 31,
1992)
7
<PAGE>
Item 14. (continued)
Exhibits (continued)
99.c Summaries of the complaints filed against the Company, SBI and
certain present and former directors, officers and employees of
the Company and SBI in the six individual actions named in Item 3
with respect to the U.S. Treasury auction and related matters
(incorporated by reference to Exhibit 28(c) to the Annual Report
on Form 10-K for the year ended December 31, 1992)
99.d Copies of the six complaints summarized in Exhibit 28(c) which
were filed against the Company, SBI or certain present and former
directors, officers and employees of the Company and SBI with
respect to the U.S. Treasury auction and related matters
(incorporated by reference to Exhibit 28(c) to the Company's
Annual Report on Form 10-K, as amended, for the year ended
December 31, 1991; Exhibit 28(h) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1991; Exhibit
28(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992; Exhibit 28(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992;
Exhibit 28(f) to the Company's Current Report on Form 8-K dated
September 16, 1991 and Exhibits 28(b) and (c) to the Company's
Current Report on Form 8-K dated July 28, 1992).
* Filed herewith
8
<PAGE>
Item 14. (continued)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January 21,
1997, reporting under Item 5 ("Other Events") and Item 7
("Financial Statements, Pro Forma Financial Information and
Exhibits").
The Company filed a Current Report on Form 8-K dated March 17,
1997, reporting under Item 5 ("Other Events") and Item 7
("Financial Statements, Pro Forma Financial Information and
Exhibits").
9
<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, on the 31st day of March, 1997.
SALOMON INC By /s/ Arnold S. Olshin
- --------------------------------- ------------------------------
(Registrant) (Secretary)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Robert E. Denham Chief Executive Officer March 31, 1997
and Director
Jerome H. Bailey Chief Financial Officer March 31, 1997
Richard J. Carbone Chief Accounting Officer March 31, 1997
Dwayne O. Andreas* Director March 31, 1997
Warren E. Buffett* Director March 31, 1997
Claire M. Fagin* Director March 31, 1997
John L. Haseltine* Director March 31, 1997
Gedale B. Horowitz* Director March 31, 1997
Deryck C. Maughan* Director March 31, 1997
David O. Maxwell* Director March 31, 1997
William F. May* Director March 31, 1997
Charles T. Munger* Director March 31, 1997
Shigeru Myojin* Director March 31, 1997
Louis A. Simpson* Director March 31, 1997
Robert G. Zeller* Director March 31, 1997
*The undersigned, by signing his or her name hereto, does hereby sign this
report on behalf of each of the above-indicated directors of the Registrant
pursuant to powers of attorney, executed on behalf of each such director, on
the 31st day of March, 1997.
By /s/ Arnold S. Olshin
------------------------------------------
(Attorney-In-Fact)
<PAGE>
SALOMON INC
FORM 10-K EXHIBIT INDEX
Certain exhibits to this Form 10-K have been incorporated by reference in Part
IV Item 14. The following exhibits are being filed herewith:
Exhibit Number Description
-------------- -----------
12.a Calculation of Ratio of Earnings to Fixed Charges
12.b Calculation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
13 Salomon Inc 1996 Annual Report Financial Information
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
24 Powers of Attorney
27 Financial Data Schedule
<PAGE>
EXHIBIT 12(a)
SALOMON INC AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
Dollars in millions 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <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 $ 1,610 $ 799 $ (849) $ 1,511 $ 1,103
Add fixed charges (see below) 4,711 5,786 4,898 4,625 4,347
Other adjustments 1 0 0 22 20
--------- --------- --------- --------- ---------
Earnings as defined $ 6,322 $ 6,585 $ 4,049 $ 6,158 $ 5,470
========= ========= ========= ========= =========
Fixed Charges from continuing operations:
Interest expense $ 4,679 $ 5,754 $ 4,873 $ 4,581 $ 4,299
Other adjustments 32 32 25 44 48
--------- --------- --------- --------- ---------
Fixed charges from continuing operations as defined $ 4,711 $ 5,786 $ 4,898 $ 4,625 $ 4,347
========= ========= ========= ========= =========
Ratio of earnings to
to fixed charges 1.34 1.14 0.83* 1.33 1.26
========= ========= ========= ========= =========
</TABLE>
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.
<PAGE>
EXHIBIT 12(b)
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
Dollars in millions 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <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 $ 1,610 $ 799 $ (849) $ 1,511 $ 1,103
Add fixed charges (see below) 4,711 5,786 4,898 4,625 4,347
Other adjustments 1 0 0 22 20
------- ------- ------- ------- -------
Earnings as defined $ 6,322 $ 6,585 $ 4,049 $ 6,158 $ 5,470
======= ======= ======= ======= =======
Fixed Charges from continuing operations
and Preferred Dividends:
Interest expense $ 4,679 $ 5,754 $ 4,873 $ 4,581 $ 4,299
Other adjustments 32 32 25 44 48
------- ------- ------- ------- -------
Fixed charges from continuing operations as defined 4,711 5,786 4,898 4,625 4,347
Preferred stock dividends
(tax equivalent basis) 111 106 129 83 131
------- ------- ------- ------- -------
Combined fixed charges
and preferred dividends $ 4,822 $ 5,892 $ 5,027 $ 4,708 $ 4,478
======= ======= ======= ======= =======
Ratio of earnings to
combined fixed charges
and preferred dividends 1.31 1.12 0.81* 1.31 1.22
======= ======= ======= ======= =======
</TABLE>
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.
<PAGE>
SALOMON INC
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principles by
business unit:
Salomon Brothers $1,365 $704 $(963) $1,575 $1,390
Phibro 192 85 81 (15) (194)
Corporate and Other 53 10 33 (49) (93)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principles 1,610 799 (849) 1,511 1,103
Income tax expense (benefit) 628 286 (439) 619 524
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative effect
of change in accounting principles 982 513 (410) 892 579
Income (loss) from discontinued operations, net of taxes (365) (56) 11 (28) (29)
Cumulative effect of change in accounting principles, net of taxes - - - (37) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 617 $457 $(399) $827 $550
====================================================================================================================================
Return on average common stockholders' equity from continuing
operations:
Primary 23.7% 13.6% (13.2)% 25.1% 16.2%
Fully diluted* 21.7 12.5 (13.2) 21.7 14.9
====================================================================================================================================
Per common share:
Primary earnings (loss) from continuing operations $8.59 $4.17 $(4.41) $7.59 $4.43
Fully diluted earnings (loss) from continuing operations* 7.85 3.95 (4.41) 6.79 4.27
Cash dividends .64 .64 .64 .64 .64
Book value at year-end* 40.03 35.84 32.65 37.93 32.06
====================================================================================================================================
Capital and liquidity:
Common equity $4,407 $3,831 $3,480 $4,234 $3,519
Perpetual preferred stock and TRUPS** 795 312 312 312 112
Redeemable preferred stock 420 560 700 700 700
Long-term capital 16,823 15,433 16,138 16,834 11,735
Working capital usage 15,024 14,026 15,045 12,767 12,400
Working capital coverage ratio 1.12 1.10 1.07 1.32 .95
====================================================================================================================================
</TABLE>
* Assumes conversion of convertible notes and redeemable preferred
stock, unless such assumptions result in higher returns on equity,
earnings per share or book value than determined under the primary
method.
** Guaranteed preferred beneficial interests in Company subordinated
debt securities.
Net Income - Graph
Net Income Income from
(in millions of dollars) Net Income Continuing Operations
------------------------------------------------
92 550 579
93 827 892
94 (399) (410)
95 457 513
96 617 982
1
BOOK VALUE PER COMMON SHARE AND SHARES OUTSTANDING AT YEAR-END - Graph
Book Value per Common Share
(in dollars)
92 32.06
93 37.93
94 32.65
95 35.84
96 40.03
Shares Outstanding at Year-End
(in millions)
92 109.8
93 110.6
94 105.8
95 106.4
96 109.0
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS*
SALOMON INC
OVERVIEW OF 1996
The principal businesses of Salomon Inc (referred to herein, together with its
subsidiaries, as "the Company") are investment banking and securities and
commodities trading, all of which are conducted on a global basis. Investment
banking and securities trading activities are conducted by Salomon Brothers
Holding Company Inc and its subsidiaries ("Salomon Brothers"). Salomon Brothers
provides capital raising, advisory, research and trading services to its
customers, and executes proprietary trading strategies on its own behalf. The
Company's commodities trading business is conducted by the Company's
wholly-owned subsidiary, Phibro Inc. and its subsidiaries ("Phibro"). As a
dealer, Phibro takes positions in commodities with longer-term time horizons and
engages in counterparty flow business on a short-term basis.
Salomon Inc's 1996 results were indicative of the strong results for both
Salomon Brothers and Phibro. Salomon Brothers generated record investment
banking revenues, reflecting strong results across advisory activities and debt
and equity underwriting. Fixed income sales and trading revenues were a near
record, indicative of strong performances in both trading for the firm's account
and in customer sales and trading. Revenues from equity sales and trading
declined from a year ago, principally as the result of losses on long-term
proprietary trading positions. Phibro's 1996 pretax earnings were more than
double the amount earned in 1995.
In March 1997, the Company's Board of Directors approved a non-binding letter of
intent to sell all of the outstanding stock of Basis Petroleum, Inc. to Valero
Energy Corporation and a plan of disposition for Basis Petroleum, Inc. ("Basis
Petroleum" or "Basis"). Basis is a wholly-owned subsidiary of the Company, which
owns and operates three oil refineries in the U.S. Gulf Coast region. Basis
Petroleum is presented as a discontinued operation in this report.
* Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements that discuss the risks and uncertainties involved in
the Company's business. The Company undertakes no obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise.
11
<PAGE>
SALOMON INC
CONSOLIDATED SALOMON INC RESULTS
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting
principles by business unit:
Salomon Brothers $1,365 $704 $(963) $1,575 $1,390
Phibro 192 85 81 (15) (194)
Corporate and Other 53 10 33 (49) (93)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles 1,610 799 (849) 1,511 1,103
Income tax expense (benefit) 628 286 (439) 619 524
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principles 982 513 (410) 892 579
Income (loss) from discontinued operations, net of taxes (75) (56) 11 (28) (29)
Loss on disposal of Basis Petroleum, net of tax benefit of $215 (290) - - - -
Cumulative effect of change in accounting principles,
net of tax benefit of $28 - - - (37) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $617 $457 $(399) $827 $550
===================================================================================================================
</TABLE>
The Company's 1996 results reflect a $290 million aftertax loss related to the
expected sale of Basis Petroleum. In March 1997, the Board of Directors approved
a non-binding letter of intent to sell Basis and a plan of disposition for
Basis. As a result, as discussed further in the Discontinued Operations section
that follows, Basis Petroleum, including the loss on the disposal of Basis, is
presented as a discontinued operation in this report.
The Company's income from continuing operations was $982 million in 1996, up
from $513 million in 1995. In the fourth quarter, the Company adjusts its
effective tax rate and related reserves for actual experience. The favorable
resolution of certain tax matters in the 1996 fourth quarter resulted in a $16
million reduction in income tax expense and a reduction in related interest
reserves of $39 million ($24 million aftertax). These amounts are part of many
adjustments that go into finalizing the full year tax provision. The Company's
$410 million loss from continuing operations in 1994 included pretax charges of
$303 million ($189 million aftertax) to correct unsupported general ledger
balances (see "Salomon Brothers--Results of Operations" for a discussion of
these charges) and a $102 million income tax benefit that resulted from the
reversal of reserves established in prior years to cover potential tax
liabilities.
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. The
combination of these factors causes the Company's results to be more volatile
than those of its competitors. The Company expects that its year-to-year and
quarter-to-quarter results will continue to show significant volatility.
12
<PAGE>
CONSOLIDATED SALOMON INC RESULTS
Immediately following this section of the report are discussions of the
businesses and results of Salomon Brothers and Phibro. Business unit results
reflect the allocation of certain expenses, the most significant of which is net
interest expense, incurred by Salomon Inc.
CORPORATE AND OTHER
Corporate and Other includes certain Salomon Inc corporate revenues and expenses
which cannot be attributed to any of the Company's business units. Also included
are the results of Phibro Energy Production, Inc. ("PEPI"), environmental
reserve activity related to the former Philipp Brothers commodities segment and,
beginning in the 1993 third quarter, the results of The Mortgage Corporation
Limited ("TMC"), and the pretax gain of $48 million ($31 million aftertax) on
the sale of TMC in the third quarter of 1996.
PEPI's principal asset is its 45% direct and indirect investment in the White
Nights Limited Liability Company ("White Nights"), a Russian-American oil
production joint venture located in Western Siberia. White Nights is entitled to
production resulting from the development of three oil fields, two of which are
currently in production. The future of White Nights is dependent not only on its
ability to produce and export crude oil in an economical manner, but also on
Russian fiscal, legislative and regulatory policy. In 1996, White Nights
continued to make principal and interest payments on its loan from PEPI; such
payments were recorded as reductions in the carrying value of the investment.
The White Nights investment had a carrying value of $30 million at December 31,
1996, down from $47 million at December 31, 1995.
DISCONTINUED OPERATIONS
In March 1997, the Company's Board of Directors approved a non-binding letter of
intent to sell all of the outstanding stock of Basis Petroleum, the Company's
oil refining and marketing segment, to Valero Energy Corporation and a plan of
disposition for Basis. This expected sale resulted in an estimated aftertax loss
of $290 million. For a description of the terms of this expected sale see
Note 2.
In 1996, Basis and Howell Corporation contributed their respective crude oil
gathering, marketing and transportation activities to form Genesis Energy, L.P.
("Genesis"). In December 1996, interests in Genesis were sold to the public. The
Company's investment in Genesis will not be transferred to Valero.
Basis Petroleum had aftertax operating losses of $75 million and $56 million in
1996 and 1995, respectively. In 1994, Basis had aftertax operating income of $11
million. Basis' 1996 results included an aftertax gain of $37 million ($60
million pretax) related to the Genesis public offering and an aftertax gain of
$14 million ($23 million pretax) related to the reduction of its minimum
physical inventories needed to support its refining operations. In addition,
1996 results include an aftertax charge of $13 million ($22 million pretax)
related to the shutdown of Basis' chemical processing facility in Houston.
13
<PAGE>
SALOMON INC
BUSINESS UNIT INFORMATION
SALOMON BROTHERS
PRETAX RESULTS - Graph
Salomon Brothers
Pretax Results
(in billions of dollars)
92 1.390
93 1.575
94 (0.963)
95 0.704
96 1.365
PHIBRO
PRETAX RESULTS - Graph
Phibro
Pretax Results
(in millions of dollars)
92 (194)
93 (15)
94 81
95 85
96 192
SALOMON BROTHERS
15. DESCRIPTION OF BUSINESS
17. RESULTS OF OPERATIONS
PHIBRO
20. DESCRIPTION OF BUSINESS
20. RESULTS OF OPERATIONS
14
<PAGE>
SALOMON BROTHERS
DESCRIPTION OF BUSINESS
Salomon Brothers is a global investment banking firm with branches, subsidiaries
or representative offices in Australia, Canada, China, France, Germany, Hong
Kong, India, Italy, Japan, Korea, Mexico, Russia, Singapore, Spain, Switzerland,
Taiwan, Thailand, the United Kingdom and the United States, and affiliates in
Argentina, Brazil, Indonesia and Korea. Principal operating subsidiaries of
Salomon Brothers Holding Company Inc ("SBHC") are Salomon Brothers Inc ("SBI")
in New York, Salomon Brothers International Limited ("SBIL") in London, Salomon
Brothers Asia Limited ("SBAL") in Tokyo, Salomon Brothers AG ("SBAG") in
Frankfurt with a branch in Tokyo, Salomon (International) Finance AG ("SIFAG")
in Zug, Switzerland and Salomon Swapco Inc ("Swapco") in New York.
Salomon Brothers provides a broad range of products and services to its
government, financial institution and corporate clients including fixed income
and equity sales and trading, foreign exchange trading, fixed income and equity
market research, investment banking and asset management. Global investment
banking services encompass a full range of capital market activities, including
underwriting and distributing debt, equity and derivative securities, executing
secondary market transactions, and providing alternative financing options
through bank and bridge loans. Financial advisory services cover a broad range
of transactions, including mergers and acquisitions, divestitures, leveraged
buyouts, financial restructurings and a variety of cross-border transactions.
Salomon Brothers also executes trading and arbitrage strategies for its own
account. Financial products offered by Salomon Brothers include debt and equity
instruments, contractual commitments, such as forward securities and currency
agreements, swap agreements, caps and floors, options, warrants and other
derivative products.
Salomon Brothers is a major dealer in government securities in New York, London,
Frankfurt and Tokyo and is a member of major international securities, financial
futures and options exchanges, as well as other organized markets. It is also a
major participant in over-the-counter ("OTC") markets. In addition to providing
liquidity to investors across a broad range of markets and financial
instruments, Salomon Brothers' significant capital base and extensive
distribution capabilities enable it to execute numerous capital-intensive
transactions on behalf of its customers and for its own account. Salomon
Brothers' ability to execute arbitrage and other trading strategies is enhanced
by its established presence in international capital markets, its use of
information technology and quantitative risk management tools, its research
capabilities, and its knowledge and experience in various derivative markets.
Counterparty credit quality is a significant consideration for participants in
the long-term derivatives markets. In 1993, SBHC established Swapco, a
wholly-owned subsidiary with credit ratings of Aaa from Moody's, AAAt from
Standard & Poor's and AAA from Fitch. Swapco's capital and collateral rules
enable it to withstand a high level of counterparty defaults and extreme market
price fluctuations while maintaining its own ability to make payments. Swapco
can directly transact or guarantee a wide range of derivative products,
including interest rate swaps and options, currency swaps, currency forwards and
options, and equity derivatives. At December 31, 1996, Swapco had over 2,750
transactions outstanding and over 275 master netting agreements in place.
Notional contracts outstanding with third parties totaled $166 billion at
December 31, 1996, compared with $113 billion at December 31, 1995. Swapco's
counterparties
15
<PAGE>
SALOMON BROTHERS
are located in 19 countries and transactions are executed in 18 currencies.
Swapco's counterparties include banks, insurance and finance companies, other
derivatives dealers, governments, government agencies and multinational
corporations.
Through Salomon Brothers Asset Management ("SBAM"), Salomon Brothers provides
portfolio management services to pension funds, investment companies,
endowments, foundations, banks, insurance companies, other corporations,
governmental agencies and individuals. As of December 31, 1996, assets
managed by SBAM totaled $19.6 billion.
The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. As a registered broker-dealer, SBI is subject to
regulation by the U.S. Securities and Exchange Commission ("SEC") and various
state and self-regulatory authorities. SBI is also subject to regulation by the
Commodity Futures Trading Commission ("CFTC"). Futures and option activities are
also subject to regulation by exchanges and self-regulatory organizations. As a
registered investment advisor, SBAM is subject to federal and state securities
regulations. Certain non-U.S. subsidiaries are subject to regulation in the
jurisdictions in which they conduct their businesses. Principal non-U.S.
regulated subsidiaries are SBIL, subject to regulation in the United Kingdom by
the Securities and Futures Authority; SBAL, subject to regulation in Japan by
the Ministry of Finance; and SBAG, subject to regulation in Germany by the
Banking Supervisory Authority.
Salomon Brothers faces intense competition from other investment banks,
commercial banks, insurance companies and other corporations which have entered
the securities and related businesses, as well as from large private investment
funds that actively engage in proprietary trading. Traditional investment
banking activities are also subject to increased competition, as governmental
bodies reduce restrictions on commercial banks related to their involvement in
these activities. Effective March 6, 1997, the Federal Reserve Board increased
to 25% from 10% the portion of revenues that Section 20 subsidiaries (securities
affiliates of bank holding companies) can derive from underwriting and dealing
in securities. Salomon Brothers' success depends on its ability to manage risk,
respond to customer needs and anticipate changes in the markets, access to
funding and capital, creditworthiness in transactions as agent and counterparty,
efficiency in executing a substantial volume of transactions and providing other
financial services, and its ability to retain key personnel.
In January, 1997, Salomon Brothers announced a strategic alliance with Fidelity
Investments which allows Salomon Brothers to offer its corporate finance clients
exclusive access to Fidelity's 6.1 million retail brokerage and mutual fund
clients. The purpose of the partnership is to capitalize on the highly
complementary nature of each firm's distinct distribution strengths in a manner
that provides prospective equity issuers with a powerful source of institutional
and retail distribution worldwide. The partnership aligns Salomon Brothers with
one of the most powerful brands in retail financial services which, the Company
believes, creates a highly differentiated source of comparative advantage for
Salomon Brothers in the solicitation of new equity mandates. As part of this
exclusive arrangement, Fidelity will have the opportunity to participate in all
equity transactions lead managed by Salomon Brothers and be able to distribute
Salomon Brothers' equity research to its retail clients.
16
<PAGE>
SALOMON BROTHERS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues, net of interest expense:
Global investment banking:
Advisory $ 272 $ 247 $ 219 $ 151 $ 142
Equity underwriting 334 147 190 296 111
Debt underwriting 247 78 77 344 197
- ---------------------------------------------------------------------------------------------------
Total global investment banking 853 472 486 791 450
- ---------------------------------------------------------------------------------------------------
Fixed income sales and trading 2,624 1,603 644 2,381 2,637
Equity sales and trading 389 828 157 867 793
Asset management 51 39 38 29 20
Unallocated charges and other 31 6 (247) 67 51
- ---------------------------------------------------------------------------------------------------
Revenues, net of interest expense $3,948 $2,948 $1,078 $4,135 $3,951
===================================================================================================
Income (loss) before income taxes and cumulative
effect of change in accounting principles $1,365 $ 704 $ (963) $1,575 $1,390
===================================================================================================
</TABLE>
"Unallocated charges and other" in 1994 included pretax charges of $278 million
(of the aggregate charge of $303 million) to correct unsupported general ledger
balances.
"Income (loss) before income taxes and cumulative effect of change in accounting
principles" in 1992 includes a pretax charge of $185 million in connection with
the U.S. Treasury auction and related matters.
Salomon Brothers recorded pretax income of $1,365 million in 1996, nearly double
the $704 million earned in 1995. Salomon Brothers' 1996 results reflect
substantial improvements in both investment banking and fixed income sales and
trading. Net revenues in 1996 increased $1 billion over 1995 levels. Salomon
Brothers' 1994 results included charges incurred in connection with the
resolution of past accounting problems that reduced net revenues by $303
million, as discussed below.
Global investment banking revenues for 1996 were a record $853 million, up from
$472 million in 1995 and $486 million in 1994. The 1996 increase in revenues was
attributable to significant improvements in equity and debt underwriting,
combined with a higher level of advisory fees. Salomon Brothers continues to
focus on strengthening its investment banking practice by strategically
recruiting key banking and research personnel and more closely aligning its
investment banking efforts with its research and sales and trading units.
U.S. MARKET SHARE (LEAD-MANAGED BASIS)
1996 1995 1994
Rank Rank Rank
- ----------------------------------------------------------
Mergers and Acquisitions
(announced deals) 5 10 4
Investment Grade Debt* 2 2 6
High Yield Debt 5 6 3
Equity (excluding straight preferred
and 144A transactions) 6 9 5
==========================================================
* Excludes mortgages and asset-backed securities.
Fixed income sales and trading net revenues for the year increased to $2.6
billion from $1.6 billion in 1995, reflecting strong performances in customer
sales and trading, favorable market conditions, and excellent results in trading
for Salomon Brothers' own account. Salomon Brothers' 1994 fixed income sales and
trading results were negatively impacted by a low volume of customer activity
and trading losses in certain businesses.
Equity sales and trading net revenues decreased to $389 million in 1996 from
$828 million in 1995. In 1994, equity sales and trading net revenues were $157
million. The decline in 1996 primarily reflects losses
17
<PAGE>
SALOMON BROTHERS
associated with long-term proprietary trading strategies compared with a strong
performance from proprietary trading in 1995. The favorable 1995 results also
reflect a strong performance in customer sales and trading. The poor 1994
results reflect modest losses from proprietary trading coupled with a low level
of revenues from customer sales and trading.
"Unallocated charges and other" in 1996 includes a $31 million pretax gain from
the sale of twelve limited service hotel properties. Salomon Brothers had
obtained ownership of the properties in 1993 upon the resolution of certain
legal matters arising out of the financing of the properties.
Salomon Brothers' 1994 results include an accounting charge of $303 million
($189 million aftertax). This charge includes a pretax charge of $194 million
($126 million aftertax) attributable to unsupported balances related to Salomon
Brothers' London-based companies. These balances were identified as Salomon
Brothers changed operational systems and conducted a detailed review of
databases supporting general ledger balances. The 1994 accounting charge also
included a pretax charge of $109 million ($63 million aftertax) arising from the
completion of a detailed review of Salomon Brothers' general ledger accounts
related to interest rate swaps. In the preceding table, $278 million of the $303
million 1994 charge is reflected in "Unallocated charges and other," and the
remainder is included in business unit revenues. There are no comparable charges
in 1995 or 1996.
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and employee-related expenses $1,891 $1,599 $1,355 $1,810 $1,577
====================================================================================================================================
Compensation expense ratio* 58% 69% n/m 53% 53%
====================================================================================================================================
Recurring non-compensation expenses:
Technology $ 197 $ 205 $ 210 $ 222 $ 245
Professional services and business development 167 152 143 116 108
Occupancy 166 166 163 175 196
Clearing and exchange fees 72 62 67 62 64
Other 90 83 103 130 104
- ------------------------------------------------------------------------------------------------------------------------------------
Total recurring non-compensation expenses 692 668 686 705 717
Non-recurring non-compensation expenses - (23) - 45 267
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-compensation expenses $ 692 $ 645 $ 686 $ 750 $ 984
====================================================================================================================================
Non-compensation expense ratios:**
Total non-compensation expenses 18% 22% 64% 18% 25%
Recurring non-compensation expenses 18 23 64 17 18
====================================================================================================================================
</TABLE>
n/m - Not meaningful
* Compensation and employee-related expenses as a percent of earnings
before income taxes and compensation and employee-related expenses.
** Non-compensation expenses as a percent of revenues, net of interest expense.
18
<PAGE>
SALOMON BROTHERS
The increase in compensation and employee-related expenses in 1996 primarily
reflects the significant improvement in Salomon Brothers' operating results,
increases in market level compensation and increased headcount. Headcount
increased from approximately 6,400 at the end of 1995 to 6,800 at the end of
1996. Salomon Brothers' compensation as a percentage of earnings before income
taxes and compensation and employee-related expenses was 58% in 1996, among the
lowest in the securities industry. Recurring non-compensation expenses increased
4% in 1996. The increase in professional services and business development
expenses primarily resulted from higher travel and entertainment expenses which
resulted from increased underwriting volume and continued expansion in
international markets. Salomon Brothers' ratio of recurring non-compensation
expenses to revenues net of interest expense was 18% in 1996, the lowest among
its major competitors.
In 1995, recognition of amounts to be received in settlement of the Shareholder
Derivative Action against certain former executives in connection with Salomon
Brothers' 1991 Treasury auction matter caused non-compensation expenses to be
reduced by $23 million. The settlement of the Shareholder Derivative Action
brought to a conclusion all legal actions with respect to the 1991 U.S. Treasury
auction and related matters.
COMPENSATION EXPENSE RATIO - Graph
Compensation Expense Ratio(1)
Latest Four Quarters
1996
------------------------
Lehman Brothers(2) 73%
Merrill Lynch 72%
Bankers Trust 68%
Morgan Stanley 65%
Bear Stearns 63%
Salomon Brothers 58%
J.P. Morgan 55%
(1) Compensation as a percent of earnings before taxes and compensation.
(2) Excludes $84 million severance charge.
NON-COMPENSATION EXPENSE RATIO - Graph
Non-Compensation Expense Ratio(1)
Latest Four Quarters
1996
------------------------
Bankers Trust 35
Merrill Lynch(2) 29
Lehman Brothers 28
J.P. Morgan 24
Morgan Stanley 23
Bear Stearns 22
Salomon Brothers 18
(1) Non-compensation expense as a percent of revenues, net of interest expense.
(2) Excludes $40 million of non-recurring occupancy expenses.
19
<PAGE>
PHIBRO
DESCRIPTION OF BUSINESS
Phibro conducts a global commodities dealer business through its principal
offices in Westport (Connecticut), London and Singapore. Commodities traded
include crude oil, refined oil products, natural gas, electricity, metals,
petrochemicals, ethanol, sugar, cocoa, grains and coffee. In 1996, Phibro
discontinued trading coal, coke and fertilizers. Phibro makes extensive use of
futures markets and is a participant in the OTC derivatives market. The
principal competitors of Phibro are major integrated oil companies, other
commodity trading companies, certain investment banks and other financial
institutions.
RESULTS OF OPERATIONS
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues, net of interest expense $353 $207 $191 $ 46 $(28)
- ---------------------------------------------------------------------------------------------
Compensation and employee-related expenses 122 92 83 40 45
Other general and administrative expenses 32 30 27 21 43
Restructuring and relocation 7 - - - 78
- ---------------------------------------------------------------------------------------------
Total noninterest expenses 161 122 110 61 166
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principles $192 $ 85 $ 81 $(15) $(194)
=============================================================================================
Compensation expense ratio* 39% 52% 51% 160% n/m
Non-compensation expense ratio** 9 14 14 46 n/m
=============================================================================================
</TABLE>
n/m - not meaningful
* Compensation and employee-related expenses as a percent of earnings before
income taxes and compensation and employee-related expenses.
** Other general and administrative expenses as a percent of revenues,
net of interest expense.
As a dealer, Phibro's strategy is to focus on taking positions in commodities on
a longer-term horizon while also engaging in counterparty flow business on a
short-term basis. Phibro's operating results are subject to a high degree of
quarterly volatility due to the predominance of directional positions in
commodities that have a longer-term horizon until realization. Thus, results are
better evaluated over the longer term.
Phibro's 1996 pretax income of $192 million was more than double the $85 million
earned in 1995 and the $81 million earned in 1994. The higher level of
compensation expense recorded in 1996 results from the improvement in Phibro's
earnings. The 1996 restructuring expenses are related to the discontinuation of
trading activity in coal, coke and fertilizers and the reduction in size of
other departments.
20
<PAGE>
SALOMON INC
DERIVATIVE INSTRUMENTS
Derivatives are an integral element of the world's financial and commodities
markets. Globalization of economic activity has brought more market participants
in contact with foreign exchange and interest rate risk at a time when market
volatility has increased. The Company has developed many techniques using
derivatives which enhance the management of capital and trading risk and is
committed to the further development of these techniques and to the delivery of
enhanced risk management capabilities to its clients.
22. OVERVIEW
24. NATURE AND TERMS OF DERIVATIVE INSTRUMENTS
24. SALOMON INC'S USE OF DERIVATIVE INSTRUMENTS
25. NOTIONAL AMOUNTS
25. ACCOUNTING FOR DERIVATIVES
ADDITIONAL DERIVATIVES--RELATED DISCLOSURES
50. CONSOLIDATED SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
53. SUMMARY OF ACCOUNTING POLICIES
58. NOTE 1 - REVENUES BY BUSINESS ACTIVITY
66. NOTE 8 - TERM DEBT
79. NOTE 18 - FINANCIAL AND COMMODITIES-RELATED INSTRUMENTS AND RELATED RISKS
83. NOTE 19 - FAIR VALUE INFORMATION
21
<PAGE>
DERIVATIVE INSTRUMENTS
OVERVIEW
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. The markets for these instruments
have grown tremendously over the past decade. A vast increase in the types of
derivative users and their motivations in using these products has resulted in
an expansion of geographic coverage, transaction volume and liquidity, and the
number of underlying products and instruments.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk, and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, considering such factors as taxes, regulations,
capital, and liquidity, they provide the most efficient means of taking a
desired market position. These are just a few of the business objectives for
which derivatives are used. The list of objectives is large and continues to
grow.
Derivatives are accounted for and settled differently than cash instruments and
their use requires special management oversight. Such oversight should ensure
that management understands the transactions to which they commit their firms
and that the transactions are executed in accordance with sensible corporate
risk policies and procedures. Publications such as the Basle Committee on
Banking Supervision's July 1994 report, Risk Management Guidelines for
Derivatives; the International Organization of Securities Commissions' July 1994
report, Operational and Financial Risk Management Control Implications for
Over-The-Counter Derivatives Activities of Regulated Securities Firms; or the
Group of Thirty ("G-30") July 1993 report, Derivatives: Practices and
Principles, each provide an excellent framework for developing strong management
policies and procedures.
In 1994, the Company adopted the G-30 report as its model for control of its OTC
derivatives activities. Subsequently, the Company began working with five other
U.S. securities firms, forming the Derivatives Policy Group ("DPG"), to develop
the "Framework for Voluntary Oversight" of OTC derivatives activities of
unregulated affiliates of SEC registered broker-dealers. In March of 1995, the
DPG agreed with the SEC to implement the framework. The framework encompasses
management controls, enhanced reporting, evaluation of risk in relation to
capital and counterparty relations.
The Company's adoption of the DPG framework resulted in modifications and/or
enhancements to the Company's control procedures, including the establishment by
the Board of Directors of an OTC Derivatives Activity and Transaction Oversight
Committee ("Authorizing Body"), a Board-reviewed firmwide market risk limit, a
quarterly SEC and CFTC reporting package, annual reviews of internal risk
management control objectives and reviews by the Company's external auditors
(provided to the SEC and CFTC) of inventory pricing and modeling procedures.
22
<PAGE>
DERIVATIVE INSTRUMENTS
The Authorizing Body, which consists of senior risk managers and senior control
managers from the Company's businesses, has established guidelines which include
the Company's framework for independent market risk measurement and monitoring;
the scope of permitted activity for the Company's OTC derivative activities both
as dealer and end user; and the establishment of requirements for the periodic
review of risks related to the credit, funding, legal and processing aspects of
its derivatives activities.
The reports provided to the SEC and CFTC by the Company and other DPG
participants provide insight into the OTC derivative activities conducted by
unregulated affiliates of U.S. broker-dealers. Information provided by the
Company on such reports includes:
o firmwide current credit exposure to its top
20 current net exposure counterparties,
o firmwide current exposures by counterparty
credit rating,
o potential exposures by counterparty credit rating,
o net revenues derived from OTC derivative activities
in unregulated entities, and
o OTC derivatives business revenue sensitivity to
certain market movements.
Derivatives activities, like the Company's other ongoing business activities,
give rise to market, credit, and operational risks. Market risk represents the
risk of loss from adverse market price movements. While market risk relating to
derivatives is clearly an important consideration for intermediaries such as
Salomon Brothers and Phibro, such risk represents only a component of overall
market risk, which arises from activities in non-derivative instruments as well.
Consequently, the scope of the Company's market risk management procedures
extends beyond derivatives to include all financial and commodities-related
instruments. Credit risk is the loss that the Company would incur if
counterparties failed to perform pursuant to their contractual obligations.
While credit risk is not a principal consideration with respect to
exchange-traded instruments, it is a major factor with respect to
non-exchange-traded OTC instruments. Whenever possible, the Company uses
industry master netting agreements to reduce aggregate credit exposure. Swap and
foreign exchange agreements are documented utilizing counterparty master netting
agreements supplemented by trade confirmations. Over the past several years, the
Company has enhanced the funding and risk management of its derivatives
activities through the increased use of bilateral security agreements. Salomon
Brothers, in particular, has been an industry leader in promoting the use of
this risk reduction technique. Based on notional amounts, at December 31, 1996
and 1995, respectively, 80% and 72% of the Company's swap portfolio was subject
to the bilateral exchange of collateral. This initiative, combined with the
success of Swapco, has greatly strengthened the liquidity profile of the
Company's derivative trading activities. See "Risk Management" for discussions
of the Company's management of market, credit, and operational risks.
23
<PAGE>
DERIVATIVE INSTRUMENTS
NATURE AND TERMS OF DERIVATIVE INSTRUMENTS
The Company and its subsidiaries enter into various bilateral financial
contracts involving future settlement, which are based upon a predetermined
principal or par value (referred to as the "notional" amount). Such instruments
include swaps, swap options, caps and floors, futures contracts, forward
purchase and sale agreements, option contracts and warrants. Transactions are
conducted either through organized exchanges or OTC. For a discussion of the
nature and terms of these instruments see Note 18.
SALOMON INC'S USE OF DERIVATIVE
INSTRUMENTS
The Company's use of derivatives can be broadly classified between trading and
non-trading activities. The vast majority of the Company's derivatives use is in
its trading activities, which include market-making activities for customers and
the execution of proprietary trading strategies. Counterparties with which the
Company conducts derivative transactions consist primarily of other major
derivative dealers, financial institutions, insurance companies, pension funds
and investment companies, and other corporations. The scope of permitted
derivatives activities both for trading and non-trading purposes for each of the
Company's businesses is defined by the Authorizing Body.
TRADING ACTIVITIES
SALOMON BROTHERS A fundamental activity of Salomon Brothers is to provide market
liquidity to its customers across a broad range of financial instruments,
including derivatives. Salomon Brothers also seeks to generate returns by
executing proprietary trading strategies which are generally longer term in
nature. By their very nature, proprietary trading activities represent the
assumption of risk. However, trading positions are constructed in a manner that
seeks to define and limit risk taking only to those risks that Salomon Brothers
intends to assume. The most significant derivatives-related activity conducted
by Salomon Brothers is in fixed-income derivatives, which include interest rate
swaps, financial futures, swap options, and caps and floors. Other derivative
transactions, such as currency swaps, forwards and options as well as
derivatives linked to equities, are also regularly executed by Salomon Brothers.
Salomon Brothers generally earns a spread from market-making transactions
involving derivatives, as it generally does from its market-making activities
for non-derivative transactions. Salomon Brothers also utilizes derivatives to
manage the market risk inherent in the securities inventories and derivative
portfolios it maintains for market-making purposes as well as its "book" of swap
agreements and related transactions with customers.
PHIBRO The fundamental nature of Phibro's activities is similar to Salomon
Brothers. Phibro conducts its commodities dealer activities in organized futures
exchanges as well as in OTC forward markets. Phibro executes transactions
involving commodities options, forwards and swaps, much in the same manner as
Salomon Brothers in the financial markets.
NON-TRADING ACTIVITIES
The Company also uses financial derivatives for non-trading, or end user,
purposes. Such activities are significant, though not nearly as extensive as its
use of derivatives for trading purposes. As an end
24
<PAGE>
DERIVATIVE INSTRUMENTS
user, these instruments provide the Company with added flexibility in the
management of its capital and funding costs. Interest rate swaps are utilized to
effectively convert the majority of its fixed rate term debt, preferred stock
and TRUPS to variable rate obligations. Cross-currency swaps and forward
currency contracts are utilized to effectively convert a portion of its non-U.S.
dollar denominated term debt to U.S. dollar denominated obligations and to
minimize the variability in equity and book value per share otherwise
attributable to exchange rate movements.
NOTIONAL AMOUNTS
Notional amounts of derivatives are the underlying reference amounts used to
calculate contractual cash flows to be exchanged between derivatives
counterparties. The notional amounts presented in this report are only a rough
indicator of the volume of derivative instrument activity and are not indicative
of the level of market or credit risk assumed by the Company through their use.
NOTIONAL AMOUNTS - Graph
Notional Amounts
(in billions of dollars) OTC Swap OTC Foreign
Agreements, Exchange
Swap Options, Contracts and
Exchange-Issued Products Caps and Floors Options Other
------------------------------------------------------------------------
92 342 204 64 166
93 500 322 72 157
94 786 486 80 158
95 636 682 99 242
96 602 1000 133 246
ACCOUNTING FOR DERIVATIVES
The way in which the Company accounts for and reports derivative instruments in
its financial statements depends on both the type and purpose of the derivative
instruments. Derivative instruments used for trading purposes, including those
used to hedge trading positions, are marked to market value or, when market
prices are not readily available, fair value, which is determined under an
alternative approach, such as matrix or model pricing. Changes in market prices
or fair value are recognized currently in earnings in "Principal transactions."
The market or fair value of derivatives used for trading purposes is included in
"Options and contractual commitments" within either assets or liabilities, as
appropriate, in the Consolidated Statement of Financial Condition. Derivative
receivables and payables are netted by counterparty when a legal right of offset
exists under a legally enforceable master netting agreement. Derivative
receivables and payables are netted across products and against cash collateral
if such provisions are included in the master netting and cash collateral
agreements. The determination of market or fair value includes consideration of
various factors, including the potential impact on market prices of liquidating
positions over a reasonable time period, and counterparty credit quality. When
marking derivative positions to market, higher risk counterparties warrant a
higher risk premium, or yield to the Company, which equates to a lower price.
Credit-related adjustments are applied in determining the carrying amount of the
Company's derivatives portfolio. These adjustments consider, among other things,
concentrations of exposure, netting agreements,
25
<PAGE>
DERIVATIVE INSTRUMENTS
and expected defaults. In specific situations in which individual counterparties
experience financial difficulties that compromise their ability to meet their
contractual obligations to the Company, reserves are established to cover such
exposure. As part of its mark-to-market policy, the Company provides for the
future operational costs of maintaining long-term contractual commitments.
Interest rate swaps, including cross-currency swaps, which are used to convert
the Company's fixed rate preferred stock, TRUPS and term debt obligations to
variable rate obligations, are not marked to market. Instead, the net inflows or
outflows are recorded as adjustments to interest expense or dividends, as
appropriate. Adjustments to dividends are recorded on an aftertax basis.
Non-U.S. dollar denominated debt issued by Salomon Inc (Parent Company) is
translated to U.S. dollars at exchange rates prevailing at the end of each
reporting period. Except for debt specifically identified as a hedge of an
investment in a subsidiary with a functional currency other than the U.S.
dollar, the translation impact is included in income. The Company mitigates this
exposure by entering into forward currency contracts and currency swap
agreements. The impact of marking such agreements to prevailing exchange rates
is also included in income. The Company also enters into forward currency
contracts to hedge certain investments in subsidiaries with functional
currencies other than the U.S. dollar. The impact of marking such contracts to
prevailing exchange rates is included in "Cumulative translation adjustments,"
as is the impact of translating the investments being hedged.
26
<PAGE>
SALOMON INC
CAPITAL AND LIQUIDITY MANAGEMENT
Capital is an expensive resource. To maximize the return to
shareholders, it is essential that the Company deploy its
capital in an efficient manner. Liquidity management is
integral to capital management and is especially important
for a financial intermediary. Access to funding must be
assured under all market conditions. The confidence of
creditors and counterparties in the Company's ability to
perform pursuant to its contractual obligations is critical
to the Company's survival and continued success.
28. CAPITAL MANAGEMENT -- OVERVIEW
28. WORKING CAPITAL
29. LEVERAGE
30. REGULATORY CAPITAL AND DOUBLE LEVERAGE
31. ECONOMIC RISK CAPITAL
32. BALANCE SHEET
32. CAPITAL AND FUNDING SOURCES
36. OTHER
27
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
CAPITAL MANAGEMENT -- OVERVIEW
The Company has significant capital requirements. The Company's capital strategy
is driven by its need to respond quickly to market developments and the
following factors: working capital requirements; regulatory capital requirements
and double leverage; and economic risk capital requirements.
The principal determinant of the Company's total long-term capital requirements
is its working capital usage. The principal determinants of the Company's equity
capital requirements are regulatory capital and double leverage, and economic
risk capital requirements.
Long-term capital requirements are funded by common equity, perpetual preferred
stock, TRUPS, redeemable preferred stock and unsecured obligations (primarily
term debt). 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); it excludes all amounts scheduled to mature within six months.
Dollars in billions
Year Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Long-term capital:
Common equity capital $ 4.4 $ 3.8 $ 3.5 $ 4.2 $ 3.5
Perpetual preferred stock and TRUPS* .8 .3 .3 .3 .1
Redeemable preferred stock .4 .5 .7 .7 .7
Term debt and other 11.2 10.8 11.6 11.6 7.4
- --------------------------------------------------------------------------------
Total long-term capital $16.8 $15.4 $16.1 $16.8 $11.7
================================================================================
* Guaranteed preferred beneficial interests in
Company subordinated debt securities.
LONG-TERM CAPITAL - Graph
Long-Term Capital
(in billions of dollars)
Perpetual Redeemable Term Debt
Common Equity Capital Preferred & TRUPS Preferred and Other
-----------------------------------------------------------------------------
92 3.519 0.112 0.700 7.404
93 4.234 0.312 0.700 11.588
94 3.480 0.312 0.700 11.646
95 3.831 0.312 0.497 10.793
96 4.407 0.795 0.357 11.264
From January 1, 1997 through March 15, 1997, the Company issued approximately
$1.3 billion in long-term debt, net of the long-term debt that rolled off during
this period. These issuances are intended to partially replace the roll-off of
long-term capital which is expected to occur during the balance of 1997.
WORKING CAPITAL
The Company defines working capital usage as the amount needed to fund the
difference between the Company's total cash requirements and the cash which
28
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
could be reasonably raised through secured financing under normal market
conditions. The amount of cash which can be raised through secured financing is
dependent upon many factors, including: the credit quality and market liquidity
of the Company's assets; legal requirements; market conventions; and lender
requirements. For example, the Company can obtain secured financing by pledging
as collateral an investment grade corporate bond that it owns. Based upon the
quality of this bond, the Company may reasonably expect to obtain secured
financing equal to 90% of the bond's value. Thus, the Company would apply a lO%
working capital margin or "haircut" to its holding of this particular security.
Securities such as U.S. government obligations require a smaller haircut, while
other less liquid assets require a greater haircut, perhaps as much as 100%. The
aggregate of these haircuts represents a large percentage of the Company's
working capital usage. Remaining usage is principally related to collateral
requirements of swap counterparties, exchanges and clearing organizations and
the Company's fixed assets. The Company monitors its ability to raise secured
funding against actual capacity as well as adjusted capacity taking into
consideration potential changes in market conditions and the Company's credit
status.
The Company's policy is to fund working capital requirements with long-term
capital. As of December 31,1996, the Company's working capital coverage ratio,
which represents total long-term capital divided by working capital usage, was
1.12. The Company's internal guideline is 1.10. The 10% cushion is designed to
provide a layer of protection against volatility in capital usage.
W0RKING CAPITAL USAGE - Graph
Working Capital Usage
(in billions of dollars)
Working Capital Working Capital Coverage Ratio:
- --------------------------------------------------------------
92 12.400 0.95
93 12.767 1.32
94 15.045 1.07
95 14.026 1.10
96 15.024 1.12
LEVERAGE
The assets to equity ratio is frequently cited as a leverage measure for the
securities industry. This ratio was initially developed as a tool to
analyze the leverage, or risk, of a commercial bank's loan portfolio. Later,
rating agencies and analysts applied this ratio to the securities industry due
to its ease of calculation and the lack of any more broadly accepted benchmark
based on publicly available information. For several reasons, this ratio has
significantly less value as a leverage indicator for securities firms than it
has for commercial banks. Securities firms make extensive use of
"off-balance-sheet" derivative instruments to manage the market risk
attributable to items recorded "on-balance-sheet." For example, a portfolio of
government securities perfectly hedged with off-balance-sheet instruments will
have the same impact on the assets to equity ratio as an unhedged portfolio of
identical size. Another limitation of this ratio is that it does not consider
asset quality. For example, a large portion of many securities firms' assets are
U.S. government securities that can be financed on a secured basis with little
refinancing risk, as there exists a large, liquid secured funding market for
such assets. A third limitation of this ratio is that it typically does not
recognize the
29
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
variability of securities firms' assets within a reporting period. A ratio based
on period-end balances may differ greatly from the ratio that would have been
obtained using average balances for the period.
A more relevant leverage measure for securities firms would focus upon working
capital usage relative to equity. Working capital is primarily required to
support less liquid assets as well as the portion of assets that cannot normally
be funded on a secured basis. One of the Company's fundamental principles is
that it funds its working capital usage with long-term debt and equity. The
ratio of long-term debt to equity measures the degree to which long-term debt
supports less liquid assets and other cash requirements. It is a relevant
measure of the ability of a firm to maintain its current level and composition
of assets during long periods of limited access to the long-term capital
markets. While securities firms have contingency plans to handle such events -
usually through the sale of a portion of their assets - such actions could
impact overall profitability.
The accompanying chart compares the long-term debt to equity ratios of the
Company and certain of its securities industry competitors. The Company believes
that working capital is the primary driver of the level of long-term capital
across the securities industry. Thus, long-term capital is used as a proxy for
working capital usage as the Company's major securities industry competitors do
not publicly disclose their working capital requirements. Long-term debt, as
presented in the chart, excludes 50% of the current portion (i.e., first year
maturities). Preferred equity and mezzanine capital are treated as equity only
to the extent that in total they are not greater than 15% of total equity
capital. Amounts above 15% are treated as long-term debt.
LONG-TERM DEBT TO EQUITY RATIOS - Graph
Long-Term Debt to Equity Ratios(1)
FYE 1993 FYE 1994 FYE 1995 FYE 1996
------------------------------------------------------
Lehman Brothers(2) 3.17 3.29 3.74
Merrill Lynch 1.94 2.03 2.37 3.2
Salomon Inc 2.16 3.33 2.6 2.38
Morgan Stanley 1.39 1.845 1.87 2.22
Goldman Sachs(3) 2.01 2.9 2.59 2.18
Bear Stearns 1.59 1.65 1.99
(1) Preferred equity and mezzanine capital that exceed 15% of total equity
capital have been reflected as debt. This results in the following
adjustments at fiscal year end ("FYE"):
- Lehman Brothers' equity excludes $234 million and $180 million of
perpetual preferred at 11/94 and 11/95, respectively.
- Salomon Inc's equity excludes $265 million, $398 million, $197 million,
and $437 million of Preferred Stock at 12/93, 12/94, 12/95 and 12/96,
respectively.
- Morgan Stanley's equity excludes $48 million, $394 million, $810 million
and $1,058 million of Capital Units/Preferred Stock at 1/94, 1/95, 11/95
and 11/96, respectively.
- Bear Sterns' equity excludes $182 million, $149 million, and $68 million
of EPICS at 6/94, 6/95, and 6/96, respectively.
(2) Lehman Brothers' fiscal year 1993 debt to equity ratio is not meaningful, as
Lehman had not yet been recapitalized in connection with its May 1994
spin-off from American Express.
(3) Goldman Sachs' equity is defined as "Partners' Capital."
There are limitations to this measure, just as there are with any measure. For
example, the Company believes that most securities firms maintain some
long-term capital cushion against volatility of working capital usage (the
Company maintains a 10% cushion), but is not aware of the comparability of such
cushions. Nevertheless, in the Company's view, a long-term debt to equity ratio
entails significantly fewer limitations than an assets to equity ratio and is
therefore more meaningful.
REGULATORY CAPITAL AND DOUBLE LEVERAGE
The Company operates globally through a network of subsidiaries, each with its
own capital requirements. A number of the Company's subsidiaries are subject to
30
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CAPITAL AND LIQUIDITY MANAGEMENT
regulatory capital requirements. Regulated entities such as SBI, SBIL, SBAL and
SBAG are required to maintain minimum amounts of regulatory capital, which
generally consists of both equity capital and subordinated debt. In addition,
limits exist pertaining to the maximum amount of capital which may be maintained
in the form of subordinated debt. Actual requirements vary by jurisdiction.
Regulatory requirements also govern dividends and certain other payments made by
regulated subsidiaries. In addition, Swapco, in order to maintain its triple-A
rating, must maintain levels of capital in accordance with agreements with its
rating agencies. Swapco's capital requirements are dynamic, varying with the
size and concentration of its counterparty receivables. Subsidiaries' capital
requirements, which are largely driven by regulatory capital requirements, are
generally met by the parent company's infusion of equity and/or subordinated
debt. If the parent company could not refinance its own debt and simultaneously
could not withdraw regulatory capital from its subsidiaries, it could experience
liquidity difficulty.
Double leverage is a measure of a parent company's investment in its
subsidiaries in relation to its own capital. The Company views double leverage
from two perspectives. Under the "total capital" view, the sum of long-term
intercompany subordinated debt, third party long-term debt and the equity of the
Company's subsidiaries ("subsidiaries' total capital") is divided by the total
long-term capital of Salomon Inc. Total capital view double leverage in excess
of 1.0 occurs if a portion of subsidiaries' total capital is funded with
short-term debt of the parent. Under the "equity capital" view, the equity of
the Company's operating units is divided by the sum of Salomon Inc's common
equity, TRUPS and perpetual and redeemable preferred stock. Equity basis double
leverage in excess of 1.0 arises from the funding of subsidiaries' equity with
debt of the parent. The Company's objectives are to maintain total capital basis
and equity capital basis double leverage ratios of no more than 1.0. As shown in
the following table, total capital and equity basis double leverage are both
below the 1.0 level at December 31,1996.
December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Total capital basis .76 .98 .87 .96 1.15
Equity capital basis .79 1.19 1.18 1.45 1.61
================================================================================
Certain rating agencies use additional measures of double leverage. As a general
rule, it is Company policy to dividend subsidiary earnings to the parent on a
regular basis, subject to regulatory constraints and tax management
considerations.
ECONOMIC RISK CAPITAL
Economic risk capital represents the equity capital required to absorb potential
losses that can result from the various risks to which the Company is exposed.
Key risks are market risk, credit risk, and operational risk (see "Risk
Management" for a further discussion of these risks). One means of measuring
these risks is earnings volatility, including a comparison of expected
("ex-ante") volatility to historical ("ex-post") volatility to help ensure that
risks have been appropriately identified and quantified. The Company manages to
a ratio of equity capital to earnings volatility, which is adjusted over time to
reflect the expected level of core earnings capacity and credit ratings
considerations.
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CAPITAL AND LIQUIDITY MANAGEMENT
BALANCE SHEET
Average weekly balance sheet information is as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended ------------------------------------------------- Year Ended
Dollars in millions Dec. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1996 1996 1996 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government and government agency securities - U.S. $ 45,505 $ 48,978 $ 45,464 $ 43,106 $ 44,470 $ 34,991
Government and government agency securities - non-U.S. 34,434 35,946 32,017 34,770 35,001 34,828
Financial options and contractual commitments 5,887 6,637 5,061 5,619 6,230 6,624
Other financial instruments owned 21,663 25,594 21,481 20,372 19,206 19,288
- ----------------------------------------------------------------------------------------------------------------------------------
Total financial instrument inventories 107,489 117,155 104,023 103,867 104,907 95,731
- ----------------------------------------------------------------------------------------------------------------------------------
Securities purchased under agreements to resell 60,635 64,573 60,971 60,087 56,909 45,097
Securities borrowed 16,278 16,488 16,672 15,170 16,783 17,486
Other assets 11,599 11,245 9,300 13,380 12,472 15,281
- ----------------------------------------------------------------------------------------------------------------------------------
Average total assets $196,001 $209,461 $190,966 $192,504 $191,071 $173,595
==================================================================================================================================
Period-end total assets $194,881 $194,881 $190,987 $181,445 $185,341 $188,428
==================================================================================================================================
Period-end net assets* $138,345 $138,345 $129,335 $125,434 $128,484 $140,006
==================================================================================================================================
Average net assets* $135,366 $144,888 $129,995 $132,417 $134,162 $128,498
==================================================================================================================================
Average net assets, excluding securities borrowed
and government and government
agency securities* $ 39,149 $ 43,476 $ 35,842 $ 39,371 $ 37,908 $ 41,193
==================================================================================================================================
Average equity** $ 5,377 $ 5,700 $ 5,612 $ 5,295 $ 4,934 $ 4,567
==================================================================================================================================
Average net assets to average equity 25.2 25.4 23.2 25.0 27.2 28.1
==================================================================================================================================
</TABLE>
* Net assets are total assets less the lower of securities purchased under
agreements to resell or securities sold under agreements to repurchase.
** Based on month-end balances and includes common equity, perpetual preferred
stock, TRUPS and redeemable preferred stock.
The Company's total assets were $195 billion at December 31,1996, up from $188
billion at year end 1995. This increase was primarily the result of an increase
in the Company's matched book activity (the lower of "Securities purchased under
agreements to resell" or "Securities sold under agreements to repurchase"). Due
to the nature of the Company's trading activities, including its matched book
activities, it is not uncommon for the Company's asset level to fluctuate from
period to period.
CAPITAL AND FUNDING SOURCES
The Company's liquidity management process includes a contingency funding plan
designed to ensure adequate liquidity even if access to unsecured funding
sources is severely restricted or unavailable. This plan was successfully
executed in 1991 following the Treasury auction matter. It is reviewed
periodically to keep the funding options current and in line with market
conditions. The management of this plan includes an analysis which is utilized
to determine the Company's ability to withstand varying levels of stress, which
could impact its liquidation horizons and required margins.
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CAPITAL AND LIQUIDITY MANAGEMENT
The liquidity management process considers the ability of the Company to repay
unsecured obligations when they mature through the proceeds of secured
financing, using unpledged collateral, or asset sales, if necessary. As of
December 31,1996, the Company had sufficient unencumbered assets to support,
under normal market conditions, all maturing short-term unsecured liabilities.
The rationale for maintaining unencumbered assets is that they represent a
source of short-term liquidity and could be used as collateral to raise the
funds needed in the event that the Company's access to unsecured financing was
impaired.
SBI has a committed secured standby bank credit facility for financing
securities positions. It enables SBI to borrow on a secured basis using a
variety of financial instruments as collateral. The capacity of the facility at
December 31, 1996 was $2.1 billion. In addition, SBIL has a committed securities
repurchase facility in the amount of $1.0 billion and Phibro has a $500 million
unsecured committed revolving line of credit. At December 31,1996, there were no
outstanding borrowings under these facilities.
SECURED SHORT-TERM BORROWINGS Secured short-term financing, including repurchase
agreements and secured loans, is the Company's principal funding source. A
repurchase agreement is a sale of securities to a counterparty and a
simultaneous agreement to repurchase similar securities in the future from the
same counterparty for the same price plus interest at an agreed upon rate; in
economic substance, a repurchase agreement is a collateralized borrowing. The
market for repurchase agreements collateralized by U.S. government and
government agency securities is very active and has remained available even in
the most disruptive market conditions. Markets for repurchase agreements
collateralized by securities issued by non- U.S. governments, corporate debt and
equity securities continue to develop and represent another source of liquidity,
particularly for the Company's non U.S. operations.
In addition to utilizing repurchase agreements to finance trading activities,
the Company uses these instruments in conjunction with offsetting positions in
reverse repurchase agreements to benefit from favorable interest rate spreads.
These matched book activities provide the Company with a low-risk source of
revenues while utilizing available secured financing capacity. Securities loaned
in return for cash collateral, another form of collateralized short-term
financing, and secured bank borrowings represent a small portion of the
Company's secured financing.
UNSECURED SHORT-TERM BORROWINGS Unsecured short-term borrowings provide the
Company with a source of short-term liquidity and are also utilized as an
alternative to secured financing when they represent a cheaper funding source.
Sources of short-term unsecured borrowings include commercial paper (issued
mainly in the U.S.), unsecured bank borrowings and letters of
credit, deposit liabilities (principally at the Tokyo branch of SBAG, the
Company's German banking subsidiary) and corporate loans. See Note 6 for
additional information regarding short-term borrowings and committed credit
facilities.
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<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
TERM DEBT Unsecured term debt is a significant component of the Company's
long-term capital. In its calculation of long-term capital, the Company includes
all term debt with a remaining maturity in excess of one year and portions of
term debt with remaining maturities between six months and one year on a
weighted basis. The average remaining maturity of the Company's term debt was
3.5 years at December 31, 1996 and 3.3 years at December 31, 1995. See Note 8
for additional information regarding term debt.
The Company utilizes interest rate swaps to convert fixed rate term debt used to
fund inventory-related working capital requirements into variable rate
obligations. See Note 8 for an analysis of the impact of such swaps. Fixed rate
term debt used to fund Salomon Brothers' fixed assets is not converted to
variable rate obligations. Term debt issuances denominated in currencies other
than the U.S. dollar which are not used to finance assets in the same currency
are effectively converted to U.S. dollar obligations through the use of currency
swaps and forward currency contracts.
In 1996, both IBCA and Thomson Bankwatch upgraded the Company's issuer rating to
B/C from C. Thomson Bankwatch also upgraded its short-term rating to TBW-1 and
assigned a new long-term debt rating of A. ln early 1997, Fitch upgraded the
Company's long-term debt and commercial paper credit ratings to A- and F-1,
respectively, from BBB+ and F-2. In addition, Moody's and S&P revised their
outlook for the Company to "positive." The following table summarizes the
Company's credit ratings as of February 28, 1997:
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
================================================================================
TRUPS In July 1996, the Company issued $345 million of TRUPS which pay interest
at an annual rate of 9 1/2%. It is the Company's understanding that the rating
agencies, in their analysis of the Company's capital structure, treat the TRUPS
units similarly to the Company's perpetual preferred stock. The Company has
entered into an interest rate swap agreement to effectively convert the expected
future fixed rate payments on the TRUPS to variable rate obligations. For a
detailed description of these securities see Note 9.
PREFERRED STOCK The Company is authorized to issue a total of 5,000,000 shares
of preferred stock. Three separate series (Series A, D and E) were issued and
outstanding at December 31, 1996. The Company issued 700,000 shares of Series A
Preferred in 1987. At December 31, 1996, 420,000 of such shares were
outstanding, each with a redemption value of $1,000. All of the outstanding
shares are held by affiliates of Berkshire Hathaway Inc. Dividends are payable
at an annual rate of 9% and the shares are convertible into Salomon Inc common
stock at the rate of $38 per common share. The first of five tranches of 140,000
shares of Series A Preferred was redeemed by the Company on October 31, 1995. On
October 29, 1996, the second tranche was converted into 3.7 million shares of
Salomon Inc common stock. If not previously
34
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
converted, one third of the remaining 420,000 shares are to be redeemed annually
on October 31 at $1,000 per share plus any accrued but unpaid dividends.
An aggregate of $200 million of Series D Preferred (400,000 shares) was issued
in 1993, with dividends payable at an annual rate of 8.08%. In February 1996,
the Company issued 500,000 shares of 8.40% Cumulative Preferred Stock, Series E,
for an aggregate of $250 million. Both of these series are redeemable, at par,
only at the Company's option. Series D is redeemable at any time on or after
March 31, 1998 and Series E is redeemable at any time on or after March 31,
2001.
The Company has entered into interest rate swap agreements that effectively
convert expected future fixed rate dividends on all of its preferred stock
issues to variable rate obligations. Such agreements effectively reduced
dividends on preferred stock in 1996 by $21 million, net of taxes.
COMMON EQUITY In May 1994, the Company's Board of Directors authorized the
repurchase of up to 10 million shares of the Company's common stock, including
4.6 million shares remaining under previous authorizations. In 1996, the Company
repurchased, for $49 million, approximately 1.3 million common shares held by
the Equity Partnership Plan ("EPP") trustee for treasury (see discussion below).
Shares authorized for additional repurchase by the Company's Board of Directors
totaled 8.5 million at December 31, 1996.
The Company has several programs intended to encourage employee equity ownership
in Salomon Inc. Under the EPP (as amended for 1996 and future awards),
qualifying employees ("participants") receive a portion of their compensation in
the form of Salomon Inc common stock, the payment of which is deferred for three
years and is subject to forfeiture provisions. Participants receive the shares
with an incentive whereby the Company makes an additional contribution to
participants' accounts of 25% of their award. The award is forfeited if the
participant's employment is terminated for cause. The award is subject to
forfeiture provisions if the participant leaves the Company to join a competitor
within three years after the award date. If a participant leaves the Company
other than by virtue of death, disability or retirement during the three years
following the award, the entire 25% award incentive is forfeited. Stock is
purchased to fund the awards by the EPP's trustee in the open market as well as
from participants upon distribution in order to satisfy their income tax
withholding liabilities. The portion of each participant's compensation paid in
stock is fixed in relation to total annual compensation, to a maximum of $1.5
million.
In early 1996, 3.3 million shares held by the EPP trustee were distributed to
certain employees. To facilitate satisfaction of employees' tax obligations,
approximately 1.3 million of those shares were repurchased by the Company as
treasury stock. The remaining 2.0 million shares are subject to the same
restrictions on transferability that existed prior to the distribution.
In 1996, 3.6 million shares were awarded under the EPP. In addition, in December
1996, restrictions on transferability were lifted on 2.4 million shares (net of
withholding tax requirements) awarded by the EPP in 1991.
35
<PAGE>
CAPITAL AND LIQUIDITY MANAGEMENT
The Company's 401(k) plan, as amended in 1996, (the "401 (k)") matches 75% of
the lesser of the eligible employee's contribution to the 401 (k) or 6% of the
eligible employee's total compensation. Prior to the amendment, the Company
match was 50%. The increase in the Company's match is in the form of Salomon Inc
common stock and is limited to eligible employees that are not eligible for
awards under the EPP.
The Employee Stock Purchase Plan ("ESPP") was approved by the Company's
stockholders in 1989. The ESPP allows eligible employees to make purchases,
through payroll deductions, of the Company's common stock at a price of 85% of
fair market value, limited by tax regulations to an annual maximum per employee
of the lesser of $21,250 or 10% of the individual's annual compensation. Shares
purchased under the ESPP are purchased on the open market. Prior to the second
quarter of 1994, these shares were issued from the Company's common stock held
in treasury. Thus far, nearly 1.9 million shares have been purchased by
employees under the ESPP, including approximately 191,000 shares in 1996.
In December 1996, the Company issued 1.6 million options under the Salomon Inc
Stock Incentive Plan. These options, which have an exercise price set at the
market value of Salomon Inc common stock on the date of grant ($44 7/8), expire
five years from the date of grant and will vest l00% three years after the grant
date.
At December 31, 1996, Salomon employees (excluding Basis' employees) owned
15.5% of the Company's outstanding common shares. For additional information
regarding the Company's employee benefit plans see Note 13.
OTHER
HIGH YIELD PORTFOLIO Salomon Brothers' activities include trading securities
that are less than investment grade, characterized as "high yield." High yield
securities include corporate debt, convertible debt, preferred and convertible
preferred equity securities rated lower than "triple B-" by internationally
recognized rating agencies, unrated securities with market yields comparable to
entities rated below "triple B-," as well as sovereign debt issued by certain
countries in currencies other than their local currencies and which are not
collateralized by U.S. government securities. For example, high yield securities
exclude the collateralized portion of Salomon Brothers' holdings of "Brady
Bonds," but include such securities to the extent they are not collateralized.
The Company's trading portfolio of high yield securities owned is carried at
market or fair value and totaled $4.4 billion at December 31, 1996; the largest
high yield exposure to one counterparty was $247 million.
36
<PAGE>
SALOMON INC
RISK MANAGEMENT
Effective management of the risks inherent in the Company's businesses is
critical. The following section discusses the risks inherent in the Company's
businesses, procedures in place to manage such risks, and initiatives underway
to continue to enhance the Company's management of risk.
38. MARKET RISK
40. CREDIT RISK
43. OPERATIONAL RISK
44. ENVIRONMENTAL RISK
37
<PAGE>
RISK MANAGEMENT
MARKET RISK
Market risk represents the potential loss the Company may incur as a result of
absolute and relative price movements in financial and commodities-related
instruments, price volatility, changes in yield curves, currency fluctuations
and changes in market liquidity. The Company utilizes a mark-to-market
accounting policy for a substantial majority of items recorded on the balance
sheet as well as off-balance-sheet contractual commitments. When market prices
are not readily available, fair value is determined under an alternative
approach, such as matrix or model pricing. Prices are adjusted, where
appropriate, to address factors such as the market liquidity of the instrument,
aging or holding period of the instrument, and credit quality of the
counterparty. The market liquidity component considers the size of positions
relative to the market and would generally result in a markdown of a position as
its relative size is increased. The Company considers this to be an integral
component of mark-to-market accounting. The Company manages market risk across
both on- and off-balance-sheet products. This, together with the Company's
mark-to-market accounting policy, means that separate discussion of market risk
for individual products, including derivatives, is not meaningful. The
distinguishing risks relative to derivatives are credit risk and funding
(liquidity) risk, which is roughly equivalent to the risk of margin calls. Each
type of risk can be increased or decreased by market movements. See "Risk
Management--Credit Risk--Credit Exposure from Derivative Activities."
Within the Company's trading businesses, sound management of market risk has
always been a critical consideration. The sections that follow discuss
organizational elements of market risk management, as well as specific risk
management tools and techniques. The Company has sought to institutionalize
these elements across all its businesses. Efforts to further strengthen the
Company's management of market risk are ongoing and the enhancement of risk
management systems and reporting, including the development and utilization of
quantitative tools, is of major importance. Nevertheless, the basis for strong
risk management is the expertise and judgment of the Company's trading
professionals and senior management, and open lines of communication.
THE COMPANY'S RISK MANAGEMENT STRUCTURE AND OVERSIGHT
THE RISK MANAGEMENT GROUP The Company's Risk Management Group (the "Group") is
chaired by the Vice Chairman of Salomon Brothers and includes the Global Risk
Manager, the Chairman and CEO of the Company, the Chairman and CEO of Salomon
Brothers and the heads of the major risk-taking business units and trading desks
throughout the world, including the President of Phibro. The Group's primary
functions are not to eliminate risk but to monitor overall risk levels so that
they are in accordance with firmwide guidelines; to identify and report to the
Company's Board of Directors, on a timely basis, major risks undertaken by the
trading businesses; to perform risk reviews to enhance the analysis and
management of major risks by the heads of the trading desks; to set and review
risk limits and approve limit excessions; and, when appropriate, to adjust the
levels of risk assumed.
THE GLOBAL RISK MANAGER The Global Risk Manager is responsible for the continued
development of the Company's risk management systems and processes and for
monitoring and reporting aggregate risk-taking activity. This responsibility
includes the analysis and monitoring of market risks, as well as oversight of
the process for position marking and inventory management. The responsibility of
the Global Risk Manager
38
<PAGE>
RISK MANAGEMENT
extends to Phibro, and the risks of Phibro are integrated for risk monitoring
and risk management purposes with those of Salomon Brothers. The Global Risk
Manager reports to the Company's Chief Financial Officer and is independent of
the Company's business units.
RISK REVIEWS Members of the Group perform periodic risk reviews of the Company's
risk taking business units. The risk review process is overseen by the Global
Risk Manager. The Global Risk Manager is assisted in this role by members of the
Group, and by senior traders and risk managers from the various business units
with expertise in the respective market arenas. By including senior traders from
other businesses, risk reviews provide a forum for the communication of risk
management approaches and ideas across the Company.
The risk reviews include a review of models and controls related to market risk
management and measurement, and a detailed critique of the positions,
strategies, and risk management methods utilized by the business units. The risk
review process is an important tool for critical review and refinement of the
risk management measurement and reporting that the Company has in place.
THE SALOMON INC BOARD OF DIRECTORS The Company maintains an overall guideline as
to firmwide risk, expressed as a multiple of the equity capital available to
support volatility to the expected annual earnings volatility of the Company's
trading businesses. In determining the expected annual earnings volatility, the
Group uses all known relevant risk factors and historical market responses to
changes in these factors. Historical market responses to these factors may not
necessarily be indicative of future responses. The equity/volatility guideline,
which is subject to periodic reexamination, is reviewed with the Company's Board
of Directors.
TOOLS FOR RISK MANAGEMENT AND REPORTING The Company's global risk measurement
begins with the identification of relevant market risk factors. These core risk
factors vary from market to market, and region to region. For example, in fixed
income markets, risk factors include interest rates, yield curve slopes, credit
spreads and interest rate volatility. In equity markets, risk factors include
equity index exposure, equity volatility and equity index spreads. In the
foreign exchange market, risk factors are exchange rates and exchange rate
volatility. In the commodities markets, risk factors include price levels,
spreads and the volatility of prices. The Company identifies other factors
specific to trading strategies as well as risk factors significant to the
Company as a whole, such as aggregate credit spread exposure, that may not be
significant for individual desks. Overall, more than one hundred risk factors
are employed. Risk factors are used in three types of analysis: stress analysis,
value-at-risk analysis and scenario analysis.
STRESS ANALYSIS The Company performs stress analysis by repricing inventory
positions for specified upward and downward moves in risk factors, and computing
the revenue implications of these repricings. Stress analysis is a useful tool
for identifying exposures that appear to be relatively small in the current
environment but grow more than proportionately with changes in risk factors.
Such risk is typical of a number of derivative instruments, including options
sold, many mortgage derivatives and a number of structured products. Stress
analysis provides for the measurement of the potential impact of extremely large
moves in risk factors, which, though infrequent, can be expected to occur from
time to time.
39
<PAGE>
RISK MANAGEMENT
VALUE-AT-RISK ANALYSIS Under value-at-risk analysis, revenue implications are
computed for individual simulations, each based on a random outcome for the
individual risk factors. Value-at-risk is a summary statistic constructed by
performing thousands of simulations from which a probability distribution of
revenues is derived. It is of limited value for internal risk management in that
it does not give any indication of which individual exposures are problematic
or which of the many risk factor simulations are particularly worrisome.
However, it does provide a concise and simple measure of risk.
SCENARIO ANALYSIS Scenario analysis is a tool that generates forward-looking
"what-if" simulations for specified changes in market factors. For example, a
scenario analysis could simulate the impact of a dramatic tightening by the
Federal Reserve Board. The revenue implications of the specified scenario are
quantified not only for the Company as a whole, but on a business unit basis
and on a geographic basis. The risk management system keeps track of many
scenarios developed by both members of the Group and the Company's economists
and strategists.
RISK MANAGEMENT CONTROLS
RISK LIMITS The Company's trading businesses have implemented desk and business
unit limits on exposure to risk factors. These limits, which are intended to
enforce the discipline of communicating and gaining approval for higher risk
positions, are periodically reviewed by the Group. Individual desks may not
exceed risk limits without the approval of the business unit head. Business
units may not exceed risk limits without the approval of the appropriate members
of the Group.
INVENTORY CONTROL AND VALUATION Inventory is necessary for an active market
maker, but can be a major source of liquidity risk and can result in hedge
mistracking. Monitoring the Company's inventory levels and composition and
oversight for inventory pricing is the responsibility of the Global Risk
Manager, who monitors inventory on a position by position level, and employs
specific risk models to track inventory exposure in credit markets, emerging
markets and the mortgage market. The Company also provides for liquidity risk by
imposing markdowns as the age of the inventory increases. Inventory event risk,
both for issuer credit and emerging markets, is analyzed with the involvement of
senior traders, economists and credit department personnel. Market scenarios for
the major emerging markets are maintained and updated to reflect the event risk
for the emerging market inventory.
THEORETICAL REVENUE RECONCILIATION Both the trading units of the Company and the
Global Risk Manager perform periodic revenue reconciliations, comparing actual
revenues with the revenue outcome that would have been expected based on the
risk factor exposures. A discrepancy between the expected revenue impact for a
given market event and the actual revenues may indicate an unexplained dimension
of market risk. Comparing the two thus provides a fundamental check that risk
management is capturing all the material market risk factors and that the
sources of trading risk and trading revenue are consistent with the realized
revenue.
CREDIT RISK
Credit risk represents the loss the Company could incur if an issuer or
counterparty is unable or unwilling to perform on its commitments, including the
timely payment of principal and interest or settlement of swap and foreign
exchange transactions, repurchase agreements, securities purchases and sales,
and other
40
<PAGE>
RISK MANAGEMENT
contractual obligations. The Company's credit risk management process considers
the many factors that influence the probability of a potential loss, including,
but not limited to, the issuer's or counterparty's financial profile, its
business prospects and reputation, the specific terms and duration of the
transactions, the exposure of the transactions to market risk, macroeconomic
developments and sovereign risk.
ORIGIN OF CREDIT RISK
In the normal course of its operations, the Company and its subsidiaries enter
into various transactions which give rise to credit risk. Credit risk is
generally attributable to one or more of the following risks: market, delivery
and principal. Market and delivery risks create credit risk with respect to
transactions with counterparties. Principal risk is the risk of nonpayment of
the principal and interest of a security.
The components of market risk such as absolute and relative price movements,
price volatility, changes in yield curves, currency fluctuations, and changes in
market liquidity, result in credit risk when a counterparty's obligation to the
Company exceeds the obligation of the Company to the counterparty. Delivery risk
arises from the requirement, in many circumstances, to release cash or
securities before receiving payment. For both market and delivery risk, the
Global Credit Review Department (the "Department") sets credit limits or
requires specific approvals which anticipate the potential exposure of
transactions.
The Company, as a dealer of securities in the global capital markets, has risk
to issuers of fixed income securities for the timely payment of principal and
interest. Principal risk is reviewed by the Risk Management Group, which
identifies and reports major risks undertaken by the trading businesses. The
Department combines principal risk positions with credit risks resulting from
market and delivery risk to review aggregate exposures by counterparty, industry
and country.
CREDIT RISK MANAGEMENT AT SALOMON BROTHERS
The Chief Credit Officer of Salomon Brothers is a Managing Director and reports
directly to the General Counsel of Salomon Inc. Independent of any revenue-
generating function, the Chief Credit Officer of Salomon Brothers manages the
Department, whose professionals assess, approve, monitor, and coordinate the
extension of credit on a global basis. In considering such risk, the Department
evaluates the risk/return trade-offs as well as current and potential credit
exposures to a counterparty or to groups of counterparties that are related
because of industry, geographic, or economic characteristics. The Department
also has established various credit policies and control procedures used
singularly or in combination, depending upon the circumstances, including:
o establishment of internal guidelines monitored by the Chief Credit Officer for
maximum potential credit exposure to each counterparty or each issuer and to
each country;
o initial credit approval, whereby the approval of a designated member of the
Department is required before execution of a transaction that does not meet
defined parameters;
o credit limits, against which monitoring of transactions is performed on a
daily basis;
o specific clauses in legal agreements for collateral requirements,
cross-default, right of set-off, guarantees, event risk covenants and two-way
mark-to-market, among others;
41
<PAGE>
RISK MANAGEMENT
o establishment of collateral standards for financing activities and secured
contractual commitments;
o quarterly analysis of potential exposure for DPG reporting to the SEC and
CFTC, see "Derivative Instruments--Overview";
o periodic scenario analysis of subsets of the credit portfolio to evaluate
sensitivity to market variables;
o periodic assessment of sovereign risk through analysis of economic and
political developments; and
o periodic review of aged and large inventory positions with the Global Risk
Manager.
CREDIT RISK MANAGEMENT OF COMMODITIES-RELATED TRANSACTIONS
Phibro's credit department determines the credit limits for counterparties in
its commodities-related activities. Exposure reports, which contain detailed
information about cash flows with customers, goods in transit and forward
mark-to-market positions, are reviewed daily.
CREDIT EXPOSURE FROM DERIVATIVES ACTIVITIES
The accompanying charts display Salomon Brothers' credit exposure, net of
collateral, at December 31, 1996, for swap agreements, swap options, caps and
floors (together referred to as "swaps" in the charts) and foreign exchange
contracts and options. They do not present potential credit exposure that may
result from factors that influence market risk or from the passage of time.
Severe changes in market factors may cause credit exposure to increase suddenly
and dramatically. Swap agreements, swap options, caps and floors include
transactions with both short- and long-term periods of commitment. Foreign
exchange contracts have maturities that are generally less than one year.
Amounts shown include the effect of legally enforceable master netting
agreements, where applicable.
SWAP AND FOREIGN EXCHANGE CONTRACTS
CURRENT CREDIT EXPOSURE
NET OF COLLATERAL - Graphs
<PAGE>
ALL TRANSACTIONS
(in billions of dollars)
Risk Classes
1 & 2 3 4 5 6,7 & 8
--------------------------------------------------------
MAJOR DERIVATIVES
DEALERS
- -----------------
Swaps 0.4417 0.858 0.2243 0.0156 0
FX 0.5051 0.2087 0.0273 0.0106 0
OTHER
- -----------------
Swaps 0.6529 0.3321 0.3138 0.1051 0.0543
FX 0.1299 0.0362 0.0197 0.007 0.001
CREDIT EXPOSURE
WEIGHTED BY
HISTORICAL DEFAULT
RATIOS**
($ IN MILLIONS): $3.2 $7.4 $9.2 $14.2 $18.5
TRANSACTIONS WITH MORE THAN 3 YEARS TO MATURITY
(in billions of dollars)
Risk Classes
1 & 2 3 4 5 6,7 & 8
--------------------------------------------------------
MAJOR DERIVATIVES
DEALERS
- -----------------
Swaps 0.2729 0.4457 0.1206 0.0133 0
FX 0 0 0 0 0
OTHER
- -----------------
Swaps 0.5509 0.1475 0.1287 0.0259 0.0051
FX 0 0 0 0 0
* 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.
** This calculation uses conservative assumptions about average duration of
exposures for each risk class and historical default statistics collected by
Moody's for securities of similar duration and risk class.
42
<PAGE>
RISK MANAGEMENT
Collateral securing such transactions reduced gross credit exposure to a net
unsecured credit exposure of approximately $3.0 billion from swaps, caps and
floors and swap options and $.9 billion from foreign exchange contracts. With
respect to sovereign risk related to derivatives, credit exposure at December
31, 1996 was primarily to counterparties in the U.S. ($1.4 billion), Germany
($.5 billion), Japan ($.4 billion), Great Britain ($.3 billion), Italy ($.2
billion) and Switzerland ($.2 billion).
OPERATIONAL RISK
As a major intermediary in financial and commodities markets, the Company is
directly exposed to market risk and credit risk, which arise in the normal
course of its business activities. Slightly less direct, but of critical
importance, are risks pertaining to operational and back office support. This is
particularly the case in a rapidly changing and increasingly global environment
with increasing transaction volumes and an expansion in the number and
complexity of products in the marketplace. Such risks include:
o OPERATIONAL/SETTLEMENT RISK
The risk of financial and opportunity loss and legal liability attributable to
operational problems, such as inaccurate pricing of transactions, untimely trade
execution, clearance and/or settlement, or the inability to process large
volumes of transactions. The Company is subject to increased risks with respect
to its trading activities in emerging markets securities, where clearance,
settlement, and custodial risks are often greater than in more established
markets.
o TECHNOLOGICAL RISK
The risk of loss attributable to technological limitations or hardware failure
that constrain the Company's ability to gather, process, and communicate
information efficiently and securely, without interruption, with customers,
among units within the Company, and in the markets where the Company
participates. In addition, the Company must enhance its systems to process dates
starting with the year 2000 and to address the technological implications that
will result from regulatory and market changes, such as Europe's Economic and
Monetary Union.
o LEGAL/DOCUMENTATION RISK
The risk of loss attributable to deficiencies in the documentation of
transactions (such as trade confirmations) and customer relationships (such as
master netting agreements) or errors that result in noncompliance with
applicable legal and regulatory requirements.
o FINANCIAL CONTROL RISK
The risk of loss attributable to limitations in financial systems and controls;
strong financial systems and controls ensure that assets are safeguarded, that
transactions are executed in accordance with management's authorization, and
that financial information utilized by management and communicated to external
parties, including stockholders, creditors, and regulators, is free of material
errors.
As the above risks are largely interrelated, so are the Company's actions to
mitigate and manage them. Salomon Brothers' Chief Administrative Officer is
responsible for, among other things, oversight of global operations and
technology. An essential element in mitigating the risks noted above is the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data. Salomon Brothers has
initiated a long-term and
43
<PAGE>
RISK MANAGEMENT
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, operations
procedures, and fungibility of resources around the world; eliminating redundant
regional applications; reducing technology and operations costs; efficiently
meeting market and regulatory changes; and ensuring year 2000 processing without
disruption. A critical challenge is to accomplish the transition to the new
technology while supporting the current platform.
ENVIRONMENTAL RISK
The Company is subject to ongoing environmental risk from discontinued
commodities processing and oil refining operations, and existing energy-related
transportation activities. The Environmental Committee of the Board of Directors
oversees adherence to the commitment set forth in the Company's environmental
policy statement, adopted in 1992.
The Company is subject to uncertain remedial liability as a result of
commodities-related industrial operations, which were discontinued in or prior
to 1984. Such liability arises under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
which provides that potentially responsible parties ("PRPs"), including waste
generators and past and present site owners and operators, may be held jointly
and severally liable for the entire cost of site clean-up. The Company may also
be subject to liability under state or other U.S. environmental laws.
The process of remediating hazardous waste sites under CERCLA is normally
lengthy and involves a series of events including initial site identification,
environmental site studies and evaluations, issuance of the "Preliminary
Identification of Remedial Alternatives," completion of the "Remedial
Investigation and Feasibility Study," selection of an appropriate site remedy
and its related cost estimate known as the "Record of Decision," performance of
site remediation and post-remediation site monitoring. Factors that influence
the cost and time of completion include the remediation method selected; the
number of financially solvent PRPs responsible for payment; whether PRPs were
owners, operators or generators; determination of cost allocation among PRPs;
and the ongoing development of more efficient and effective remediation
technologies. The process may take ten years or more from site identification to
completion and may be further complicated by protracted legal proceedings
involving numerous PRPs.
The ultimate share of remediation costs that will be borne by the Company and
its subsidiaries cannot be predicted with accuracy. Although certain exposures
may be covered by insurance contracts or indemnification agreements from other
parties, the Company has incurred and will continue to incur costs related to
remediation at certain sites already identified. Further, it is possible that
the Company will be named as a PRP at additional sites. Management believes,
based upon currently known facts and established reserves, that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.
Phibro has potential environmental exposure in connection with activities in
which cargoes of products are transported and stored. Phibro mitigates this
exposure through insurance coverage and consideration of ports of delivery and
storage terminals.
44
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR COMPLIANCE
AND FINANCIAL REPORTING
TO THE SHAREHOLDERS:
Management has developed and maintains controls to provide reasonable assurance
that assets are safeguarded and transactions are executed in accordance with
management's authorization. These controls are augmented by established policies
and procedures and include a substantial internal auditing function.
The Board of Directors, acting through its Audit and Compliance Committee ("the
Committee"), provides general oversight of the Company's accounting policies and
internal controls, and reviews Company-wide compliance with legal and regulatory
requirements. The Committee is comprised entirely of directors who are not
officers or employees of the Company. The Director of Internal Audit oversees
the performance of a worldwide audit program and reports directly to the
Committee on matters of internal control. Senior legal and compliance personnel
have been directed to report compliance concerns directly to the Chairman of the
Committee and the Chairman of the Company. Ongoing oversight of compliance
activities is the responsibility of the Company's General Counsel.
The financial statements of Salomon Inc, and all other information presented in
this Annual Report, are the responsibility of Management. The financial
statements have been prepared, under the direction of the Chief Financial
Officer, in accordance with generally accepted accounting principles. Management
is responsible for the integrity and objectivity of the financial statements,
including estimates and judgments reflected in them.
Arthur Andersen LLP, a firm of independent public accountants, audits the
Company's financial statements and meets regularly with the Committee,
including sessions in which no member of management is present, to discuss the
nature, scope and results of their audits. Arthur Andersen LLP's report is
presented on the following page.
/s/ Robert E. Denham /s/ Robert H. Mundheim /s/ Jerome H. Bailey
ROBERT E. DENHAM ROBERT H. MUNDHEIM JEROME H. BAILEY
CHAIRMAN AND EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER GENERAL COUNSEL
45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SALOMON INC:
We have audited the accompanying consolidated statement of financial condition
of Salomon Inc (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Salomon Inc and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
NEW YORK, NEW YORK
MARCH 13, 1997
46
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest and dividends $ 5,748 $ 7,021 $ 5,902
Principal transactions 1,990 1,077 (560)
Investment banking 853 472 486
Commissions 326 332 336
Other 129 51 30
- -----------------------------------------------------------------------------------------------------------
Total revenues 9,046 8,953 6,194
Interest expense 4,679 5,754 4,873
- -----------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 4,367 3,199 1,321
- -----------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 2,039 1,710 1,455
Technology 206 215 221
Professional services and business development 189 172 160
Occupancy 168 170 162
Clearing and exchange fees 74 63 70
Other 81 70 102
- -----------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,757 2,400 2,170
- -----------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 1,610 799 (849)
Income tax expense (benefit) 628 286 (439)
- -----------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 982 513 (410)
- -----------------------------------------------------------------------------------------------------------
Discontinued operations (Note 2):
Income (loss), net of tax expense (benefit) of $(48), $(35) and $7 (75) (56) 11
Loss on disposal of Basis Petroleum, net of tax benefit of $215 (290) - -
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 617 $ 457 $ (399)
===========================================================================================================
Primary earnings (loss) per common share:
Continuing operations $ 8.59 $ 4.17 $ (4.41)
Net income (loss) $ 5.16 $ 3.64 $ (4.31)
- -----------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) per common share:
Continuing operations $ 7.85 $ 3.95 $ (4.41)
Net income (loss) $ 4.84 $ 3.50 $ (4.31)
===========================================================================================================
</TABLE>
The accompanying Summary of Accounting Policies, Notes to Consolidated
Financial Statements, and Consolidated Summary of Options and Contractual
Commitments are integral parts of this statement.
47
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Dollars in millions
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest bearing equivalents $ 1,230 $ 1,454
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 45,123 $ 45,121
Government and government agency securities - non-U.S. 35,189 39,843
Corporate debt securities 12,415 11,150
Equity securities 7,094 3,915
Options and contractual commitments 6,592 6,713
Mortgage loans and collateralized mortgage securities 3,126 1,959
Other 2,947 2,248
------- -------
112,486 110,949
Commodities and related products and instruments:
Crude oil, refined products and other physical commodities 995 1,223
Options and contractual commitments 315 372
------- -------
1,310 1,595
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 56,536 48,422
Securities borrowed and other 16,162 16,993
------- -------
72,698 65,415
Receivables:
Customers 2,642 2,668
Brokers, dealers and clearing organizations 1,801 1,205
Other 675 599
------- -------
5,118 4,472
Assets securing collateralized mortgage obligations 394 2,431
Property, plant and equipment, net of accumulated depreciation
and amortization of $556 in 1996 and $669 in 1995 521 1,343
Net realizable value of discontinued operations (Note 2) 490 -
Other assets, including intangibles 634 769
- --------------------------------------------------------------------------------------------------------------
Total assets $194,881 $188,428
==============================================================================================================
</TABLE>
The accompanying Summary of Accounting Policies, Notes to Consolidated
Financial Statements, and Consolidated Summary of Options and Contractual
Commitments are integral parts of this statement.
48
<PAGE>
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholders' Equity:
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 77,632 $ 91,813
Securities loaned 1,495 1,040
-------- --------
$ 79,127 $ 92,853
Short-term borrowings 6,817 8,304
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments:
Government and government agency securities - U.S. 34,311 21,132
Government and government agency securities - non-U.S. 31,699 21,994
Financial options and contractual commitments 9,391 8,858
Equity securities 5,840 3,489
Corporate debt securities and other 1,942 1,448
Commodities, including options and contractual commitments 324 607
-------- --------
83,507 57,528
Payables and accrued liabilities:
Customers and suppliers 2,671 3,372
Brokers, dealers and clearing organizations 1,638 4,440
Other 1,745 1,846
-------- --------
6,054 9,658
Collateralized mortgage obligations 384 2,337
Term debt 13,370 13,045
-------- --------
Total liabilities 189,259 183,725
Commitments and contingencies (Notes 16, 17 and 18)
Redeemable preferred stock, Series A 420 560
Guaranteed preferred beneficial interests in
Company subordinated debt securities (Note 9) 345 -
Stockholders' equity:
Preferred stock, Series C, D and E 450 312
Common stock, par value $1 per share
(250,000,000 shares authorized; shares issued:
159,341,676 in 1996 and 155,642,470 in 1995) 159 156
Additional paid-in capital 437 296
Retained earnings 5,482 5,001
Cumulative translation adjustments 6 13
Common stock held in treasury, at cost
(shares: 50,292,298 in 1996 and 49,194,744 in 1995) (1,677) (1,635)
-------- --------
Total stockholders' equity 4,857 4,143
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $194,881 $188,428
===============================================================================================================
</TABLE>
49
<PAGE>
SALOMON INC AND SUBSIDIARIES
SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
<TABLE>
<CAPTION>
1996 1995
------------------------------- ------------------------------
CURRENT MARKET OR CURRENT MARKET OR
FAIR VALUE FAIR VALUE
Dollars in billions NOTIONAL ------------------- NOTIONAL -------------------
December 31, AMOUNTS ASSETS LIABILITIES AMOUNTS ASSETS LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts* $ 525.3 $ - $ - $ 570.5 $ - $ -
Other exchange-issued products:
Equity contracts 12.9 .1 .2 16.8 .5 .3
Fixed income contracts 59.0 - - 44.5 .2 -
Commodities-related contracts 4.9 - - 4.3 - -
- ------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 602.1 .1 .2 636.1 .7 .3
- ------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps,
swap options, caps and floors:
Swaps** 852.4 555.5
Swap options written 9.7 5.2
Swap options purchased 23.3 20.4
Caps and floors 114.4 100.8
- ------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 999.8 4.2 6.5 681.9 4.3 6.5
- ------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts** 68.3 .5 .5 57.4 .3 .4
Options written 31.6 - .2 21.0 - .6
Options purchased 32.9 .4 - 20.2 .3 -
- ------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 132.8 .9 .7 98.6 .6 1.0
- ------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity
indices*** 45.6 1.1 1.8 24.0 1.0 .6
Options and forward contracts on fixed-
income securities*** 179.0 .3 .2 196.6 .1 .5
Commodities-related contracts**** 22.0 .3 .3 21.8 .4 .3
- ------------------------------------------------------------------------------------------------------------------------
Total $1,981.3 $6.9 $9.7 $1,659.0 $7.1 $9.2
========================================================================================================================
</TABLE>
* Margin on futures contracts is included in receivables from/payables to
brokers, dealers and clearing organizations on the 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
$15.5 billion and $1.3 billion at December 31, 1996 and $12.8 billion
and $1.9 billion at December 31, 1995, respectively.
*** The fair value of such instruments recorded as assets includes
approximately $.6 billion at December 31, 1996 and $.4 billion at
December 31, 1995, respectively, of OTC instruments primarily with
investment grade counterparties. The remainder consists primarily of
highly liquid instruments actively traded on organized exchanges.
**** A substantial majority of these OTC contracts are with investment grade
counterparties.
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.
<TABLE>
<CAPTION>
TRANSACTIONS
WITH OVER
3 YEARS TO
ALL TRANSACTIONS MATURITY
----------------------------------------------------------------------------- -----------
OTHER MAJOR GOVERNMENTS/
Dollars in billions DERIVATIVES FINANCIAL SUPRA- 1996
December 31, 1996 DEALERS CORPORATES INSTITUTIONS NATIONALS OTHER TOTAL AVERAGE TOTAL
- ---------------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps, swap options,
caps and floors:
Risk classes 1 and 2 $ .5 $ - $ .6 $ - $ - $1.1 $1.0 $ .8
Risk class 3 .9 .1 .1 - .1 1.2 .9 .6
Risk classes 4 and 5 .2 .2 .2 - - .6 .8 .3
Risk classes 6, 7 and 8 - .1 - - - .1 .1 .1
- ---------------------------------------------------------------------------------------------------------- -----------
$1.6 $ .4 $ .9 $ - $ .1 $3.0 $2.8 $1.8
========================================================================================================== ===========
Foreign exchange
contracts and options:
Risk classes 1 and 2 $ .5 $ - $ - $ .1 $ - $ .6 $ .4 $ -
Risk class 3 .2 - - - - .2 .2 -
Risk classes 4 and 5 - - - - .1 .1 .1 -
- ---------------------------------------------------------------------------------------------------------- -----------
$ .7 $ - $ - $ .1 $ .1 $ .9 $ .7 $ -
========================================================================================================== ===========
</TABLE>
* To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are
analogous to external credit ratings whereby risk classes one through
three are high quality investment grades. Risk classes four and five
include counterparties ranging from the lowest investment grade to the
highest non-investment grade level. Risk classes six, seven and eight
represent higher risk counterparties.
See Note 18 to the Consolidated Financial Statements for average values and a
discussion of the market risk and credit risk associated with options and
contractual commitments.
50
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
COMMON TOTAL COMMON
ADDITIONAL CUMULATIVE STOCK STOCK- STOCK
PREFERRED COMMON PAID-IN RETAINED TRANSLATION HELD IN HOLDERS' COMMON HELD IN
Amounts in millions STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS TREASURY EQUITY STOCK TREASURY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $312 $156 $ 295 $5,208 $(11) $(1,414) $ 4,546 155.5 (44.9)
Net loss - - - (399) - - (399) - -
Dividends on--
Common stock - - - (66) - - (66) - -
Preferred stock* - - - (62) - - (62) - -
Purchase of common stock
for treasury - - - - - (252) (252) - (5.2)
Net change in cumulative
translation adjustments - - - - 16 - 16 - -
Other - - (3) - - 12 9 .1 .3
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 312 156 292 4,681 5 (1,654) 3,792 155.6 (49.8)
Net income - - - 457 - - 457 - -
Dividends on--
Common stock - - - (68) - - (68) - -
Preferred stock* - - - (69) - - (69) - -
Exercise of stock options - - (4) - - 21 17 - .6
Net change in cumulative
translation adjustments - - - - 8 - 8 - -
Other - - 8 - - (2) 6 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 312 156 296 5,001 13 (1,635) 4,143 155.6 (49.2)
Net income - - - 617 - - 617 - -
Dividends on--
Common stock - - - (68) - - (68) - -
Preferred stock* - - - (68) - - (68) - -
Purchase of common stock
for treasury - - - - - (49) (49) - (1.3)
Issuance of preferred stock,
Series E 250 - - - - - 250 - -
Conversion of preferred stock,
Series A to common stock - 3 137 - - - 140 3.7 -
Redemption of preferred stock,
Series C (112) - - - - - (112) - -
Exercise of stock options - - - - - 7 7 - .2
Net change in cumulative
translation adjustments - - - - (7) - (7) - -
Other - - 4 - - - 4 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $450 $159 $ 437 $5,482 $ 6 $(1,677) $ 4,857 159.3 (50.3)
====================================================================================================================================
</TABLE>
* Net of aftertax impact of related interest rate swaps that effectively convert
fixed rate dividend obligations to variable rate obligations.
The accompanying Summary of Accounting Policies, Notes to Consolidated
Financial Statements, and Consolidated Summary of Options and Contractual
Commitments are integral parts of this statement.
51
<PAGE>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Dollars in millions
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) adjusted for noncash items and non-operating activities
Net income (loss) $ 617 $ 457 $ (399)
Loss on disposal of Basis Petroleum 290 - -
Deferred income tax benefit (160) (308) (873)
Depreciation, amortization and other 164 149 130
Less: Gain on Genesis transaction and
the sales of TMC and limited service motels (89) - -
- --------------------------------------------------------------------------------------------------------------------
Cash items included in net income (loss) 822 298 (1,142)
- --------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets
Financial instruments and contractual commitments (1,841) (17,652) 20,671
Commodities and related products and instruments (94) (105) (636)
Collateralized short-term financing agreements (7,283) (4,589) (11,937)
Receivables (718) 3,755 1,490
Other (115) 20 162
- --------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets (10,051) (18,571) 9,750
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities
Collateralized short-term financing agreements (13,726) 20,948 (16,333)
Short-term borrowings (1,436) 1,630 (2,978)
Financial and commodities-related instruments sold, not yet
purchased, and contractual commitments 25,996 (4,541) 5,599
Payables and accrued liabilities (2,865) 875 270
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities 7,969 18,912 (13,442)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,260) 639 (4,834)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of term debt 4,708 2,797 6,500
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 15 13
Redemption of redeemable preferred stock, Series A - (140) -
Redemption of preferred stock, Series C (112) - -
Term debt maturities and repurchases (4,118) (4,972) (3,281)
Collateralized mortgage obligations (403) (704) (945)
Purchase of common stock for treasury (49) (2) (252)
Dividends (136) (137) (128)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 489 (3,143) 1,907
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Genesis transaction and sales of TMC and limited service motels 205 - -
Assets securing collateralized mortgage obligations 480 721 930
Property, plant and equipment (129) (302) (212)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 556 419 718
- --------------------------------------------------------------------------------------------------------------------
Net decrease in cash and interest bearing equivalents (215) (2,085) (2,209)
Cash and interest bearing equivalents at beginning of year 1,454 3,539 5,748
Cash of discontinued operations (9) - -
- --------------------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at end of year $ 1,230 $ 1,454 $ 3,539
====================================================================================================================
</TABLE>
The accompanying Summary of Accounting Policies, Notes to Consolidated Financial
Statements, and Consolidated Summary of Options and Contractual Commitments are
integral parts of this statement.
52
<PAGE>
SALOMON INC AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements are prepared in accordance with Generally
Accepted Accounting Principles in the United States and prevailing industry
practice, both of which require the use of management's best judgment and
estimates. Estimates, including the fair value of financial instruments and
contractual commitments, may vary from actual results.
The Consolidated Financial Statements include the accounts of Salomon Inc and
its majority-owned subsidiaries (collectively, the "Company"), including Salomon
Brothers Holding Company Inc and its subsidiaries ("Salomon Brothers"), and
Phibro Inc. and its subsidiaries ("Phibro"). Salomon Brothers provides capital
raising, advisory, research and trading services to its customers, and engages
in proprietary trading activities for its own account. Phibro conducts a global
commodities dealer business.
Material intercompany transactions have been eliminated in consolidation.
Long-term investments in operating joint ventures and affiliated (20% to 50%
owned) companies in which the Company has significant influence are carried
under the equity method of accounting and are included in "Other assets,
including intangibles." The Company's equity in the earnings of joint ventures
and affiliates is reported in "Other" revenues.
Assets and liabilities denominated in non-U.S. dollar currencies are translated
into U.S. dollar equivalents using year-end spot foreign exchange rates. The
income statements are translated monthly at amounts which approximate weighted
average exchange rates. Gains and losses resulting from foreign currency
transactions are included in income. The effects of translating the statements
of financial condition of non-U.S. subsidiaries with functional currencies other
than the U.S. dollar are recorded, net of related hedge gains and losses and
income taxes, as "Cumulative translation adjustments," a separate component of
"Stockholders' equity." Hedges of such exposure include designated issues of
non-U.S. dollar term debt and, to a lesser extent, forward currency contracts.
As discussed in Note 2, pursuant to the Board of Directors approval of a
non-binding letter of intent to sell Basis Petroleum, Inc. ("Basis Petroleum"
or "Basis") to Valero Energy Corporation ("Valero") and a plan of disposition
for Basis, Basis is classified as a discontinued operation in the Company's
financial statements.
Certain prior period amounts have been reclassified to conform with the current
presentation.
FINANCIAL INSTRUMENTS AND CONTRACTUAL COMMITMENTS
Financial instruments and contractual commitments, including derivatives used
for trading purposes, are recorded at either market value or, when market prices
are not readily available, fair value, which is determined under an alternative
approach, such as matrix or model pricing. Fair value includes related accrued
interest or dividends. The determination of market or fair value considers
various factors, including: closing exchange or over-the-counter
53
<PAGE>
market price quotations; time value and volatility factors underlying options,
warrants and contractual commitments; price activity for equivalent or
synthetic instruments in markets located in different time zones; counterparty
credit quality; and the potential impact on market prices of liquidating the
Company's positions in an orderly manner over a reasonable period of time under
present market conditions. As part of its mark-to-market policy, the Company
provides for the future operational costs of maintaining long-term contractual
commitments.
The majority of the Company's financial instruments are recorded on a trade
date basis. Recording the remaining instruments on a trade date basis would not
result in a material difference. Gains and losses and commission revenues and
expenses are also recognized on a trade date basis.
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVES USED FOR TRADING PURPOSES Contractual commitments (also referred
to as "derivative instruments") used for trading purposes are carried at either
market value or, when market prices are not readily available, fair value. The
market or fair values of swap agreements, swap options, caps and floors, and
forward contracts in a net receivable position, as well as options owned and
warrants held, are reported as assets in "Options and contractual commitments."
Similarly, contractual commitments in a net payable position, as well as
options written and warrants issued, are reported as liabilities in "Financial
options and contractual commitments." This category also includes the
Company's long-term obligations that have principal repayments directly linked
to equity securities of unaffiliated issuers for which the Company holds in
inventory a note exchangeable for the same equity securities. Margin on futures
contracts is included in receivables from/payables to brokers, dealers and
clearing organizations. The market or fair values (unrealized gains and losses)
associated with contractual commitments are reported net by counterparty,
provided a legally enforceable master netting agreement exists and are netted
across products and against cash collateral when such provisions are stated in
the master netting agreement. Revenues generated from derivatives used for
trading purposes are reported as "Principal transactions" and include realized
gains and losses, as well as unrealized gains and losses resulting from changes
in the market or fair value of such instruments.
DERIVATIVES USED FOR NON-TRADING PURPOSES Substantially all of the Company's
non-trading derivatives are transacted with the Company's swap and foreign
exchange dealer subsidiaries, which manage the related interest rate and
currency risk in the normal course of their trading activities.
The Company utilizes interest rate swaps to effectively convert fixed rate
preferred stock, guaranteed preferred beneficial interests in Company
subordinated debt securities ("TRUPS"), a portion of its short-term borrowings
and a significant portion of its fixed rate term debt to variable rate
obligations. These swaps are recorded "off-balance-sheet," with accrued inflows
and outflows reflected as adjustments to interest and/or dividends, as
appropriate. Adjustments to preferred stock dividends are recorded on an
aftertax basis.
54
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
As previously noted, the Company utilizes forward currency contracts to hedge a
portion of the currency exposure relating to non-U.S. dollar term debt issued
by Salomon Inc (Parent Company). The impact of marking such contracts and the
related debt to prevailing exchange rates is included in income. The Company
also utilizes forward currency contracts to hedge certain investments in
subsidiaries with functional currencies other than the U.S. dollar. The impact
of marking such contracts to prevailing exchange rates, net of the related tax
effects, is included in "Cumulative translation adjustments" in Stockholders'
equity, as is the impact of translating the investments being hedged.
See Notes 8, 9 and 10 for a further discussion of the use of interest rate
swaps and forward currency contracts.
COMMODITIES AND RELATED PRODUCTS AND INSTRUMENTS
Commodities and related products and instruments include physical quantities of
commodities, as well as swaps, options and contractual commitments involving
future delivery or settlement. These products and instruments are carried at
market or fair value and related gains or losses are reported as "Principal
transactions."
COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS
Collateralized short-term financing agreements are carried at their contractual
amounts, including accrued interest. In the determination of income, certain
financing transactions are marked to fair value, which has no material effect
on the results of operations. Interest income and expense related to matched
book activity is reported net in interest and dividend revenue. The Company
generally takes possession of the underlying collateral, monitors its market
value relative to the amounts due under the agreements, and, when necessary,
requires prompt transfer of additional collateral or reduction in the loan
balance in order to maintain contractual margin protection. In the event of
counterparty default, the financing agreement provides the Company with the
right to liquidate the collateral held. Securities sold under agreements to
repurchase and securities purchased under agreements to resell are reported net
by counterparty when permitted under Financial Accounting Standards Board
("FASB") Interpretation No. 41, Offsetting of Amounts Related to Certain
Repurchase and Reverse Repurchase Agreements ("FIN 41").
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSETS SECURING COLLATERALIZED MORTGAGE
OBLIGATIONS
Collateralized mortgage obligations issued by the Company are carried at their
principal amounts, net of unamortized discounts, plus accrued interest payable.
Assets securing collateralized mortgage obligations are carried at their
principal amounts, net of unamortized discounts and premiums, plus deferred
issuance costs and accrued interest receivable. Discounts, premiums and deferred
issuance costs are amortized on an effective yield basis over the expected lives
of the obligations and assets, on a retrospective basis, taking into
consideration the prepayment experience of the underlying mortgage collateral.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including leasehold improvements and capitalized
interest, are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are recorded substantially on a straight-line
basis over the lesser of the estimated useful lives of the related assets or
noncancelable lease terms, as appropriate. Maintenance and repairs are charged
to occupancy expense as incurred.
55
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
The cost of purchased software is capitalized and amortized over a three-year
period. Costs incurred in connection with the internal development of software,
solely for the Company's use, as well as the customization of purchased
software, are expensed in the period incurred.
OTHER ASSETS, INCLUDING INTANGIBLES
Other assets, including intangibles, include goodwill, investments in
affiliates accounted for under the equity method and prepaid expenses. At
December 31, 1996, goodwill totaled $127 million and is being amortized over 40
years, at an annual rate of approximately $5 million.
REVENUES
See Note 1 for detail regarding the Company's revenues, net of interest expense
from continuing operations.
EXPENSES
COMPENSATION AND EMPLOYEE-RELATED EXPENSES include employee base salaries,
bonuses and fringe benefits, including medical and life insurance, retirement
plans, payroll taxes, training expenses, expatriate expenses, recruiting agency
fees and expenses related to temporary employees. These expenses also include
the cost of shares allocated to individual employee accounts pursuant to the
Company's Equity Partnership Plan.
TECHNOLOGY EXPENSE includes costs for computer hardware and software;
workstations; data center equipment; market data services; data storage; and
voice, data, audio-visual and network communications. Technology expense also
includes technology consulting expenses.
PROFESSIONAL SERVICES AND BUSINESS DEVELOPMENT EXPENSE includes legal fees,
audit, tax, non-technology consulting, travel, entertainment, and advertising
expenses.
OCCUPANCY EXPENSE includes rent, depreciation, amortization of leasehold
improvements, maintenance, utilities, occupancy taxes, property insurance and
moving and other occupancy-related expenses.
CLEARING AND EXCHANGE FEES include clearance, transaction, and commission
fees and exchange dues and assessments.
OTHER EXPENSE includes goodwill amortization, expenses recorded for
environmental matters, provisions for legal matters, insurance expense, printing
and supplies, messenger, courier, and postage expenses, and other expenses not
included in the captions above.
CASH AND INTEREST BEARING EQUIVALENTS
The Company defines cash and interest bearing equivalents as highly liquid
investments with original maturities of three months or less, at the time of
purchase, other than those held for sale in the ordinary course of business.
56
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting Standards
("SFAS") 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively. However, in
December 1996, the FASB issued SFAS 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, which delayed the effective date
of certain provisions of SFAS 125 until January 1, 1998. SFAS 125 defines when
financial assets and liabilities should either be recognized or derecognized,
when transfers of assets should be accounted for as sales versus secured
borrowings, and when collateral received or pledged should be recorded on, or
removed from, the balance sheet. This statement is based on a
"financial-components approach" which focuses on control of the assets. The
provisions of SFAS 125, which went into effect on January 1, 1997, are not
expected to have a material impact on the Company's financial statements. The
Company is in the process of evaluating the effect of the SFAS 125 provisions
that have been deferred to January 1, 1998 pursuant to SFAS 127. These
provisions are not expected to materially affect stockholders' equity or
reported net income.
In February 1997, the FASB issued SFAS 128, Earnings per Share, which will be
effective commencing with the Company's financial statements for the year ended
December 31, 1997. Under this standard, the Company will replace its disclosure
of "primary" earnings per share with "basic" earnings per share. Basic earnings
per share excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Upon adoption of the standard, prior period amounts must be
restated. The impact on previously reported primary earnings per share will be
immaterial. Diluted earnings per share, as required under the new standard, is
computed similarly to fully diluted earnings per share under existing
accounting principles.
57
<PAGE>
SALOMON INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: REVENUES BY BUSINESS ACTIVITY
The following tables present revenues, net of interest expense, by business
activity, from continuing operations for the years ended December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
Principal
Transactions
& Net
Dollars in millions Interest and Investment
Year Ended December 31, 1996 Dividends Banking Commissions Other Total
_____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Salomon Brothers:
Fixed income sales and trading $2,609 $ - $ 15 $ - $2,624
Equity sales and trading 80 - 310 (1) 389
Global investment banking - 853 - - 853
Asset management 3 - - 48 51
Other - - - 31 31
_____________________________________________________________________________________________________________________________
Salomon Brothers' revenues, net of interest expense 2,692 853 325 78 3,948
Phibro 353 - - - 353
Corporate and Other 14 - 1 51 66
_____________________________________________________________________________________________________________________________
Revenues, net of interest expense $3,059 $853 $326 $129 $4,367
=============================================================================================================================
Principal
Transactions
& Net
Dollars in millions Interest and Investment
Year Ended December 31, 1995 Dividends Banking Commissions Other Total
_____________________________________________________________________________________________________________________________
Salomon Brothers:
Fixed income sales and trading $1,560 $ - $ 40 $ 3 $1,603
Equity sales and trading 538 - 288 2 828
Global investment banking - 472 - - 472
Asset management - - - 39 39
Other 4 - 2 - 6
_____________________________________________________________________________________________________________________________
Salomon Brothers' revenues, net of interest expense 2,102 472 330 44 2,948
Phibro 202 - - 5 207
Corporate and Other 40 - 2 2 44
_____________________________________________________________________________________________________________________________
Revenues, net of interest expense $2,344 $472 $332 $51 $3,199
=============================================================================================================================
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Principal
Transactions
& Net
Dollars in millions Interest and Investment
Year Ended December 31, 1994 Dividends Banking Commissions Other Total
_____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Salomon Brothers:
Fixed income sales and trading $ 605 $ - $ 39 $ - $ 644
Equity sales and trading (124) - 281 - 157
Global investment banking - 486 - - 486
Asset management 15 - - 23 38
Other 18 - 13 - 31
Unallocated charges (278) - - - (278)
_______________________________________________________________________________________________________________________________
Salomon Brothers' revenues, net of interest expense 236 486 333 23 1,078
Phibro 190 - 1 - 191
Corporate and Other 43 - 2 7 52
______________________________________________________________________________________________________________________________
Revenues, net of interest expense $469 $486 $336 $30 $1,321
===============================================================================================================================
</TABLE>
SALOMON BROTHERS
FIXED INCOME SALES AND TRADING
Fixed income sales and trading revenues include realized and unrealized gains
and losses and fees arising from the trading, as principal and agent, of
government and government agency securities, investment and non-investment
grade corporate debt and preferred stock, mortgage securities (primarily U.S.
government agencies, including interest only and principal only strips), and
emerging market fixed income securities. Revenues also include realized and
unrealized gains and losses generated from a variety of fixed income securities
utilized in arbitrage strategies for the Company's own account, and realized
and unrealized gains and losses arising from the spot and forward trading of
currencies and exchange-traded and over-the-counter ("OTC") currency options.
Realized and unrealized gains and losses resulting from changes in the market
or fair value of options on fixed income securities, interest rate swaps,
currency swaps, swap options, caps and floors, financial futures, OTC options
and forward contracts on fixed income securities are reflected as fixed income
sales and trading revenue. Revenues are increased by interest income generated
from inventories, and reduced by the interest expense incurred to finance
inventories as well as interest on securities sold, not yet purchased.
EQUITY SALES AND TRADING
Equity sales and trading revenues consist of realized and unrealized gains and
losses and fees arising from the trading of U.S. and non-U.S. equity
securities, including common and convertible preferred stock, convertible
corporate debt, equity-linked notes and exchange-traded and OTC equity options
and warrants. Revenues also include realized and unrealized gains and losses on
equity securities and related derivatives utilized in arbitrage strategies for
the Company's own account. Revenues are increased by interest and dividends
generated from inventories, and are reduced by interest expense incurred to
finance inventories as well as interest and dividends on securities sold, not
yet purchased. Commission income is generated primarily from equity-related
block trading and program trading transactions executed for customers.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL INVESTMENT BANKING
Global investment banking revenues include gains, losses and fees, net of
syndicate expenses, arising from securities offerings in which Salomon Brothers
acts as an underwriter or agent and fees earned from providing merger and
acquisition and financial restructuring advisory services.
ASSET MANAGEMENT
Asset management revenues consist of investment advisory fees generated from
providing specialized investment and portfolio management services to
institutional and private investors.
OTHER
Other revenues in 1996 include the $31 million pretax gain resulting from the
sale of twelve limited service hotel properties. In 1995 and 1994, other
revenues include commissions generated from the Private Investment Department,
which was discontinued in the first quarter of 1995.
UNALLOCATED CHARGES
Salomon Brothers' 1994 results reflect a pretax charge of $303 million ($189
million aftertax) to correct unsupported general ledger balances, of which $194
million ($126 million aftertax) related to Salomon Brothers' London-based
companies. These balances were identified as Salomon Brothers changed
operational systems and conducted a detailed review of databases supporting
general ledger balances. The review necessitated a number of adjustments
affecting transactions going back at least until 1989 involving many different
instruments, positions and related currency effects. The remaining pretax
charge of $109 million ($63 million aftertax) arose from the completion of a
detailed review of Salomon Brothers' general ledger accounts related to
interest rate swaps and the interest rate swap transactions database.
Although the 1994 charge of $303 million related to a number of years, Salomon
Brothers' accounting systems do not contain sufficient information to permit
allocation of the largest part of the charge to individual years. Based on the
analysis of available information, management believes that, were it possible
to allocate the charge to prior years, the impact of such an allocation would
not have been material in any single prior year.
In the preceding table, $278 million of the $303 million 1994 charge is
reflected in "Unallocated charges," and the remainder is included in business
unit revenues.
PHIBRO
Phibro trades crude oil, refined oil products, natural gas, electricity,
metals, petrochemicals, ethanol, coffee, grains, cocoa and sugar. In 1996,
Phibro discontinued trading coal, coke and fertilizers. Phibro's revenues
consist of realized and unrealized gains and losses from trading these
commodities and related derivative instruments.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CORPORATE AND OTHER
Corporate and Other includes the Company's equity in the earnings of Phibro
Energy Production, Inc. ("PEPI"), a partner in the White Nights Limited
Liability Company ("White Nights"), a Russian-American oil production venture
located in Western Siberia. Corporate and Other also included the results of
The Mortgage Corporation Limited ("TMC"), including the $48 million pretax gain
on its sale which was recorded in the third quarter of 1996. TMC originated and
serviced residential mortgages in the United Kingdom.
NOTE 2: DISCONTINUED OPERATIONS
In March 1997, the Board of Directors approved a non-binding letter of intent
to sell all of the outstanding stock of Basis Petroleum, Inc. to Valero and a
plan of disposition for Basis. This transaction will result in a pretax loss of
approximately $505 million ($290 million aftertax). The sale is expected to be
completed in May 1997. Proceeds from the sale will include cash of
approximately $365 million, Valero common stock with a market value of $120
million and 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. The total of the
participation payments is capped at $200 million, with a maximum of $35 million
per year. In addition, as a result of Valero's merger agreement with PG&E
Corporation, Valero's common stock is expected to be exchanged for stock of
PG&E Corporation and a new stock of the "spin-off" company, representing
Valero's refining assets. The sale is subject to negotiation of a final
agreement and to the satisfaction of other customary conditions. The estimated
loss includes severance costs and anticipated operating losses to be incurred
prior to the completion of the sale, and reflects other estimates of value at
time of closing. The Company's investment in Genesis Energy, L.P., a
publically-traded crude oil gathering, marketing and transportation
partnership, will not be transferred to Valero.
The following tables present Basis' results of operations and the loss on the
disposal of Basis which are included in "Discontinued operations" on the
Consolidated Statement of Income as well as details of Basis' net assets at
December 31, 1996 which are included in "Net realizable value of discontinued
operations" on the Consolidated Statement of Financial Condition.
Dollars in millions
Year Ended December 31, 1996 1995 1994
______________________________________________________________________________
Discontinued operations:
Revenues, net of interest expense $(85) $(48) $65
Noninterest expenses 38 43 47
______________________________________________________________________________
Income (loss) before income taxes (123) (91) 18
Income tax expense (benefit) (48) (35) 7
______________________________________________________________________________
Income (loss) from operations (75) (56) 11
Loss on disposal, net of tax benefit of $215 (290) - -
______________________________________________________________________________
Income (loss) from discontinued operations,
net of taxes $(365) $(56) $11
==============================================================================
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions
December 31, 1996
_____________________________________________________________________________
Assets:
Commodities and related products and instruments $ 379
Receivables 438
Property, plant and equipment, net of accumulated depreciation of $202 823
Other assets 34
______________________________________________________________________________
Total assets $1,674
==============================================================================
Liabilities:
Customer and supplier payables $ 512
Other payables 150
Commodities-related contractual commitments 17
______________________________________________________________________________
Total liabilities 679
______________________________________________________________________________
Net assets 995
Pretax loss on disposal (505)
______________________________________________________________________________
Net realizable value of discontinued operations $ 490
==============================================================================
NOTE 3: INDUSTRY SEGMENT AND GEOGRAPHIC DATA
The Company's operating results by segment for each of the last three years
were:
Income (Loss)
Before Income
Revenues from Taxes from
Continuing Continuing
Dollars in millions Operations Operations Total Assets*
_______________________________________________________________________________
Year Ended December 31, 1996
Salomon Brothers $8,514 $1,365 $191,127
Phibro 408 192 2,554
Corporate and Other 124 53 1,200
_______________________________________________________________________________
Consolidated $9,046 $1,610 $194,881
===============================================================================
Year Ended December 31, 1995
Salomon Brothers $8,467 $ 704 $181,342
Phibro 261 85 2,709
Corporate and Other 225 10 4,377
______________________________________________________________________________
Consolidated $8,953 $ 799 $188,428
==============================================================================
Year Ended December 31, 1994
Salomon Brothers $5,751 $ (963) $165,155
Phibro 208 81 2,375
Corporate and Other 235 33 4,922
_____________________________________________________________________________
Consolidated $6,194 $ (849) $172,452
=============================================================================
* The net realizable value of Basis is included in "Corporate and Other" in
1996. The total assets of Basis Petroleum of $1,747 million and $1,602 million
are included in "Corporate and Other" in 1995 and 1994, respectively.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment results for all periods presented include a partial allocation of
Salomon Inc corporate-level expenses. Corporate-level expenses incurred for the
benefit of a particular operating segment are allocated directly to that
segment. "Corporate and Other" assets consist primarily of the assets of Basis
Petroleum, certain corporate fixed assets, PEPI's investment in White Nights
and the assets of TMC prior to its sale in 1996, which consisted primarily of
assets securing sterling-denominated collateralized mortgage obligations.
The accompanying table summarizes the Company's operations by geographic area.
Amounts are determined principally by the respective legal jurisdictions of the
Company's subsidiaries. Because of the global nature of the financial and
commodities markets in which the Company competes and the integration of the
Company's worldwide business activities, the Company believes that amounts
determined in this manner are not particularly useful in understanding its
business.
Income (Loss)
Before Income
Revenues from Taxes from
Continuing Continuing
Dollars in millions Operations Operations* Total Assets**
_______________________________________________________________________________
Year Ended December 31, 1996
North America $6,145 $1,488 $101,935
Europe 2,800 80 76,297
Asia and Other 101 42 16,649
_______________________________________________________________________________
Consolidated $9,046 $1,610 $194,881
==============================================================================
Year Ended December 31, 1995
North America $4,719 $ 224 $102,455
Europe 4,039 611 74,014
Asia and Other 195 (36) 11,959
_______________________________________________________________________________
Consolidated $8,953 $ 799 $188,428
==============================================================================
Year Ended December 31, 1994
North America $4,365 $ (137) $ 99,602
Europe 1,332 (841) 65,014
Asia and Other 497 129 7,836
_______________________________________________________________________________
Consolidated $6,194 $ (849) $172,452
==============================================================================
* For the year ended December 31, 1994, North America and Europe include pretax
charges of $109 million and $194 million, respectively, to correct
unsupported Salomon Brothers' general ledger balances.
** The net realizable value of Basis is included in North America in 1996. The
total assets of Basis Petroleum of $1,747 million and $1,602 million are
included in North America in 1995 and 1994, respectively.
63
<PAGE>
NOTE 4: COLLATERALIZED SHORT-TERM FINANCING AGREEMENTS
Securities purchased under agreements to resell are collateralized principally
by government and government agency securities. Securities borrowed agreements
are collateralized principally by government and government agency securities,
corporate debt and equity securities. Securities purchased under agreements to
resell and securities borrowed agreements generally have terms ranging from
overnight to up to six months. Excluding the impact of FIN 41, securities
purchased under agreements to resell totaled $67.1 billion and $53.2 billion at
December 31, 1996 and 1995, respectively. Securities borrowed and other
short-term financing agreements totaled $16.2 billion and $17.0 billion at
December 31, 1996 and 1995, respectively. At December 31, 1996, the market
value of securities collateralizing resale agreements and securities borrowed
and other short-term financing agreements was $68.2 billion and $15.7 billion,
respectively. The interest rate on these instruments depends on, among other
things, the underlying collateral, the term of the agreement and the credit
quality of the counterparty. At December 31, 1996, these instruments had a
weighted average rate of 4.7%.
Securities sold under agreements to repurchase are collateralized principally
by government and government agency securities. Securities loaned agreements
are collateralized principally by corporate debt and equity securities. See
Note 16. Securities sold under agreements to repurchase generally have terms
ranging from overnight to up to six months.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
Dollars in millions
December 31, 1996 1995
__________________________________________________________________________
Land $ 4 $ 4
Buildings, improvements and equipment 1,073 1,030
Refining and other energy-related assets* - 978
__________________________________________________________________________
Total 1,077 2,012
Accumulated depreciation and amortization (556) (669)
__________________________________________________________________________
Property, plant and equipment, net $ 521 $1,343
==========================================================================
* The decrease in 1996 is due to the treatment of Basis as a discontinued
operation. See Note 2.
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: SHORT-TERM BORROWINGS
Information regarding the Company's bank borrowings and commercial paper is
presented below. Average balances were computed based on month-end outstanding
balances.
Dollars in millions
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Bank borrowings:
Balance at year-end $4,287 $3,856 $2,333
Weighted average interest rate 5.8% 4.8% 6.0%
Annual averages -
Amount outstanding $2,857 $2,743 $3,045
Weighted average interest rate 4.7% 5.7% 4.9%
Maximum amount outstanding at any month-end $4,287 $4,856 $4,173
- -------------------------------------------------------------------------------
Commercial paper:
Balance at year-end $1,106 $ 797 $ 865
Weighted average interest rate 5.8% 6.0% 5.7%
Annual averages -
Amount outstanding $1,060 $ 907 $1,094
Weighted average interest rate 5.6% 6.2% 4.4%
Maximum amount outstanding at any month-end $1,548 $1,106 $1,309
================================================================================
Outstanding bank borrowings include both U.S. dollar and non-U.S. dollar
denominated loans. The non-U.S. dollar loans are denominated in multiple
currencies including Japanese yen, German mark and U.K. sterling. All of the
Company's commercial paper outstanding at December 31, 1996, 1995 and 1994 was
U.S. dollar denominated. Also included in short-term borrowings are deposit
liabilities, securities loaned and other short-term obligations.
In 1992, Salomon Brothers Inc ("SBI"), an indirect wholly-owned subsidiary,
entered into a committed secured standby bank credit facility for financing
securities positions. The facility, which has a capacity of $2.1 billion,
contains certain restrictive covenants that require, among other things, that
SBI maintain minimum levels of excess net capital and net worth, as defined.
SBI's excess net capital exceeded the minimum required under the facility by
$587 million and SBI's net worth exceeded the minimum amount required by $496
million at December 31, 1996. In 1996, Salomon Brothers International Limited
("SBIL"), an indirect wholly-owned subsidiary, entered into a $1.0 billion
committed securities repurchase facility. The facility is subject to restrictive
covenants including a requirement that SBIL maintain minimum levels of tangible
net worth and excess financial resources, as defined. At December 31, 1996, SBIL
was in compliance with all covenants related to this facility. In 1996, Phibro
Inc. entered into an unsecured committed revolving line of credit. This
facility, which has a capacity of $500 million, requires Phibro Inc. to maintain
minimum levels of capital and net working capital, as defined. Phibro Inc.
exceeded these minimums at December 31, 1996. At December 31, 1996, there were
no outstanding borrowings under any of these facilities.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: COLLATERALIZED MORTGAGE OBLIGATIONS
Certain special purpose wholly-owned subsidiaries have been organized to issue
collateralized mortgage obligations ("CMOs"). The CMOs are collateralized by
mortgages, mortgage-backed securities and short-term investments (collectively,
the "Collateral"). Principal and interest payments received on the Collateral
are utilized to meet periodic principal and interest payments on the CMOs.
Although the CMOs have contractual maturities, their actual maturities may be
shorter as a result of prepayments of the Collateral.
The CMOs, which were all U.S. dollar denominated at December 31, 1996, consisted
of the following:
Dollars in millions
December 31, 1996 1995
- -------------------------------------------------------------------------------
Contractual Maturity
2006 to 2010 $ 12 $ 60
2011 to 2031 402 2,308
Accrued interest payable 8 23
Unamortized discounts (38) (54)
- -------------------------------------------------------------------------------
Collateralized mortgage obligations $ 384 $ 2,337
===============================================================================
The decrease in the CMO balance at December 31, 1996 is due to the sale of TMC
in the third quarter of 1996.
NOTE 8: TERM DEBT
Term debt, net of unamortized discount and including unamortized premium, if
applicable, consists of issues with original maturities in excess of one year.
Certain issues are redeemable, in whole or in part, at par or at premiums prior
to maturity.
<TABLE>
<CAPTION>
Fixed Rate
Obligations Fixed Rate Total Variable Total Total
Swapped to Obligations Fixed Rate Rate December 31, December 31,
Dollars in millions Variable Not Swapped Obligations Obligations 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated:
Salomon Inc (Parent Company) $6,670 $355 $7,025 $2,289 $ 9,314 $ 9,249
Other Subsidiaries -- -- -- 19 19 22
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. dollar denominated 6,670 355 7,025 2,308 9,333 9,271
- ------------------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated:
Salomon Inc (Parent Company) 680 144 824 1,331 2,155 2,366
Other Subsidiaries 1,421 95 1,516 366 1,882 1,408
- ------------------------------------------------------------------------------------------------------------------------------------
Non-U.S. dollar denominated 2,101 239 2,340 1,697 4,037 3,774
- ------------------------------------------------------------------------------------------------------------------------------------
Term debt $8,771 $594 $9,365 $4,005 $13,370 $13,045
====================================================================================================================================
</TABLE>
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The maturity structure of the Company's term debt, based on contractual
maturities or the earliest date on which the debt is repayable at the option of
the holder, was as follows at December 31, 1996:
Salomon Inc Other
Dollars in millions (Parent Company) Subsidiaries Total
- ------------------------------------------------------------------------------
1997 $ 2,525 $ 378 $ 2,903
1998 2,650 137 2,787
1999 2,119 25 2,144
2000 978 322 1,300
2001 784 248 1,032
Thereafter 2,413 791 3,204
- ------------------------------------------------------------------------------
Total $11,469 $1,901 $13,370
==============================================================================
The Company issues U.S. dollar and non-U.S. dollar denominated fixed and
variable rate term debt. Fixed rate debt matures at various dates through 2023.
The contractual interest rates on fixed rate debt ranged from 1.25% (Japanese
yen denominated) to 10.13% (U.S. dollar denominated) at December 31, 1996 and
1.25% (Japanese yen denominated) to 12.87% (Italian lira denominated) at
December 31, 1995. The weighted average contractual rate on total fixed rate
term debt (both U.S. dollar denominated and non-U.S. dollar denominated term
debt) was 6.77% at December 31, 1996 and 6.78% at December 31, 1995. The Company
utilizes interest rate swap agreements to convert most of its fixed rate term
debt to variable rate obligations. The maturity structure of the swaps generally
corresponds with the maturity structure of the debt being hedged. The Company's
non-U.S. dollar fixed rate term debt was issued across a broad range of
currencies (including Japanese yen, German mark, U.K. sterling, Italian lira,
Swiss franc, and Portuguese escudo) and, consequently, the term debt bears a
wide range of interest rates.
At December 31, 1996, the Company had outstanding $4.0 billion of non-U.S.
dollar denominated term debt, of which $1.8 billion was Japanese yen
denominated, $1.4 billion was German mark denominated and $.6 billion was U.K.
sterling denominated (converted at the December 31, 1996 spot rates). Of the
$4.0 billion, approximately $1.0 billion of Salomon Inc (Parent Company)
non-U.S. dollar denominated debt has been designated as a hedge of investments
in subsidiaries with functional currencies other than the U.S. dollar. Another
$.7 billion of Salomon Inc (Parent Company) debt has been effectively converted
to U.S. dollar denominated obligations using cross-currency swaps. The remaining
$2.3 billion is used for general corporate purposes.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company's fixed rate term debt that is
swapped to variable rate obligations using interest rate swaps at December 31,
1996 and 1995. The variable rates presented are indicative of the Company's
actual costs related to such obligations.
<TABLE>
<CAPTION>
1996 1995
--------------------------------------- -------------------------------------------
Contractual Contractual
Weighted Weighted
Average Weighted Average Weighted
Fixed Rate Average Fixed Rate Average
on Swapped Variable Rate on Swapped Variable Rate
Principal Fixed Rate on Swapped Principal Fixed Rate on Swapped
Dollars in millions Balance Term Debt Term Debt Balance Term Debt Term Debt
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar denominated $6,670 7.0% 6.7% $6,610 6.9% 6.9%
German mark denominated 1,252 7.4 4.7 1,014 7.9 4.2
Japanese yen denominated 420 4.3 .8 519 4.4 .9
Japanese yen swapped to
U.S. dollar denominated 317 3.6 6.9 265 4.1 6.8
Swiss franc swapped to
U.S. dollar denominated 65 5.1 6.1 75 5.1 6.1
Italian lira swapped to
U.S. dollar denominated 40 9.9 6.8 -- -- --
U.K. sterling denominated 4 7.6 7.5 16 11.4 7.0
Portuguese escudo swapped to
U.S. dollar denominated 3 9.5 7.1 -- -- --
Italian lira denominated -- -- -- 5 12.9 11.0
European Currency Units swapped to
U.S. dollar denominated -- -- -- 17 8.5 5.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total swapped fixed rate term debt $8,771 6.8% 6.1% $8,521 6.8% 6.2%
==================================================================================================================================
</TABLE>
Variable rate term debt matures at various dates through 2004. The interest
rates are determined periodically by reference to money market rates, or in
certain instances, are calculated based on stock or bond market indices as
specified in the agreements governing the respective issues. The coupon interest
rates on variable rate term debt ranged from .41% (Japanese yen denominated) to
9.36% (U.S. dollar denominated) at December 31, 1996 and .71% (Japanese yen
denominated) to 10.97% (Italian lira denominated) at December 31, 1995. The
weighted average contractual rate on total variable rate term debt (both U.S.
dollar denominated and non-U.S. dollar denominated) was 4.89% at December 31,
1996 and 4.87% at December 31, 1995.
Term debt includes subordinated notes, which totaled $32 million at December 31,
1996 and $34 million at December 31, 1995. At December 31, 1996 and 1995,
subordinated debt included approximately $6 million of convertible restricted
notes, which were convertible at the rate of $13.89 per share into 404,434
shares and 419,435 shares of the Company's common stock at December 31, 1996 and
1995, respectively. At December 31, 1996, the Company had outstanding $214
million of term debt for which the principal repayment is linked to certain
equity securities of unaffiliated issuers.
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY SUBORDINATED DEBT SECURITIES ("TRUPS")
On July 3, 1996, the Company issued $345 million or 13,800,000 TRUPS units. 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 ("Series F
Preferred"). The Company is obligated under the terms of each purchase contract
to pay contract fees of 0.25% per annum, which is included as preferred
dividends on the Statement of Changes in Stockholders' Equity. 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
$356 million aggregate principal amount of 9 1/4% subordinated debt securities
issued by Salomon Inc due June 30, 2026. The sole assets of the Trust are the
subordinated debt securities. All payments associated with the 9 1/4% preferred
securities are fully and unconditionally guaranteed 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 securities
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.
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 Series F Preferred 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.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: PREFERRED STOCK
The Company is authorized to issue a total of 5,000,000 shares of preferred
stock. The Company has entered into interest rate swap agreements that
effectively convert expected future fixed rate dividends into variable rate
obligations. For financial reporting purposes, dividends on preferred stock are
adjusted by the aftertax income or loss generated by these swaps. These swaps
reduced preferred dividends by $21 million, $19 million and $28 million in 1996,
1995 and 1994, respectively.
REDEEMABLE PREFERRED STOCK, SERIES A
At December 31, 1996, 420,000 shares of Series A cumulative preferred stock
("Series A Preferred"), were outstanding and held by affiliates of Berkshire
Hathaway Inc. ("Berkshire"). Each share has a redemption value of $1,000, is
preferentially entitled to receive quarterly cash dividends, if declared, at the
annual rate of $90 and can be converted into shares of common stock at $38 per
share (11,052,632 shares at December 31, 1996). The number of shares of common
stock into which each Series A Preferred share is convertible is subject to
adjustment in the event of stock splits, stock dividends and certain other
events, none of which have occurred to date. The redeemable preferred stock is
entitled to one vote per common share into which it is convertible, voting
together as one class with the Company's common stock. At December 31, 1996, the
redeemable preferred stock represented 9.2% of the votes entitled to be cast by
holders of the Company's voting securities.
On October 31, 1995, the first of five tranches of 140,000 shares of Series A
Preferred held by Berkshire was redeemed by the Company for $140 million. On
October 29, 1996, Berkshire converted the second tranche of 140,000 shares ($140
million) of Series A Preferred into 3.7 million shares of Salomon Inc common
stock. If not previously converted, one third of the remaining 420,000 shares
are to be redeemed annually on October 31 at $1,000 per share plus any accrued
but unpaid dividends. No cash dividends may be paid on the Company's common
stock, nor may the Company repurchase any of its common stock, if dividends or
required redemptions of Series A Preferred are in arrears.
PREFERRED STOCK, SERIES C
In June 1991, the Company issued $112.5 million (225,000 shares) of Series C
9.50% cumulative preferred stock ("Series C Preferred") represented by 4,500,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. On August 15, 1996 the Company redeemed all of the Series C
Preferred.
PREFERRED STOCK, SERIES D
In February 1993, the Company issued $200 million (400,000 shares) of Series D
8.08% cumulative preferred stock ("Series D Preferred") represented by 8,000,000
depositary shares, each representing a one-twentieth interest in a share of such
preferred stock. Series D Preferred is redeemable at the Company's option at any
time on or after March 31, 1998, at a price of $500 for each preferred share
($25 for each depositary share).
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK, SERIES E
In February 1996, the Company issued $250 million (500,000 shares) of Series E
8.40% cumulative preferred stock ("Series E Preferred") represented by
10,000,000 depositary shares, each representing a one-twentieth interest in a
share of such preferred stock. Series E Preferred is redeemable at the Company's
option at any time on or after March 31, 2001, at a price of $500 for each
preferred share ($25 for each depositary share).
NOTE 11: COMMON STOCK
On February 8, 1988, the Company's Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of the Company's
common stock. The Board also authorized the issuance of preferred share purchase
rights for each share of Series A Preferred based on the number of shares of
common stock into which the Series A Preferred will be convertible. The rights
contain provisions to protect stockholders against certain takeover tactics and
are exercisable for shares of the Company's Series B junior participating
preferred stock only if certain specified events occur relating to changes in
ownership of the Company's stock or an attempted takeover. For additional
information see Note 13.
NOTE 12: CAPITAL REQUIREMENTS
Certain U.S. and non-U.S. subsidiaries are subject to various securities and
commodities regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the countries in which they operate. The
Company's principal regulated subsidiaries are discussed below.
SBI is registered as a broker-dealer with the U.S. Securities and Exchange
Commission ("SEC") and is subject to the SEC's Uniform Net Capital Rule, Rule
15c3-1, which requires net capital, as defined under the alternative method, of
not less than the greater of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds required to be segregated for
customers' regulated commodity accounts, as defined. Although net capital,
aggregate debit items and funds required to be segregated change from day to
day, at December 31, 1996, SBI's net capital was approximately $1 billion, $987
million in excess of regulatory requirements.
SBIL is authorized to conduct investment business in the United Kingdom by the
Securities and Futures Authority ("SFA") in accordance with the Financial
Services Act 1986. The SFA requires SBIL to have available at all times
financial resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At December 31, 1996, SBIL's financial resources were $390
million in excess of regulatory requirements.
Salomon Brothers Asia Limited ("SBAL") and Salomon Brothers AG ("SBAG"), both
indirect wholly-owned subsidiaries, are also subject to regulation in the
countries in which they do business. Such regulations include requirements to
maintain specified levels of net capital or its equivalent. At December 31,
1996, SBAL's net capital was $262 million above the minimum required by Japan's
Ministry of Finance. SBAG's net capital was $53 million above the minimum
required by Germany's Banking Supervisory Authority.
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, in order to maintain its triple-A rating, Salomon Swapco Inc
("Swapco"), an indirect wholly-owned subsidiary, must maintain minimum levels of
capital in accordance with agreements with its rating agencies. At December 31,
1996, Swapco was in compliance with all such agreements. Swapco's capital
requirements are dynamic, varying with the size and concentration of its
counterparty receivables.
NOTE 13: EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
Substantially all full-time U.S. employees of the Company participate in defined
contribution plans. Non-U.S. employees generally participate in defined benefit
plans that are insured or otherwise funded. The costs relating to such plans,
which are included in compensation and employee-related expenses from continuing
operations, were $59 million, $51 million and $40 million in 1996, 1995 and
1994, respectively.
HEALTH CARE AND LIFE INSURANCE
The Company provides certain health care and life insurance benefits for its
active employees, qualifying retired U.S. employees and certain non-U.S.
employees who reach the retirement criteria specified by the various plans. The
Company self-insures such benefit programs. At December 31, 1996, there were
approximately 7,100 active and 600 retired employees eligible for such benefits.
Expenses recorded for health care and life insurance benefits from continuing
operations were $33 million, $39 million and $39 million in 1996, 1995 and 1994,
respectively.
The Company provides for the cost of postretirement benefits other than pensions
over the service periods of eligible employees. The present value of the
liability related to these benefits and postemployment benefits, included in
"Other payables and accrued liabilities," was $84 million and $92 million at
December 31, 1996 and 1995, respectively.
EMPLOYEE INCENTIVE PLANS
SALOMON INC STOCK INCENTIVE PLAN ("SIP") In 1994, the stockholders approved the
SIP which provides for the issuance of up to 3.5 million shares in the form of
options, restricted stock and stock bonuses, as well as an additional grant of
up to 1.5 million shares in the form of stand-alone stock appreciation rights,
phantom stock and cash bonuses to key employees, including officers, whether or
not they are directors of the Company. In December 1996, 1.6 million options
were awarded under the SIP with an exercise price set at the market value of
Salomon Inc common stock on the date of grant ($44 7/8). The awards expire five
years after the grant date and vest 100% three years after the grant date. At
the grant date, the fair value per option issued was $13.16, as estimated using
the Black-Scholes option pricing model assuming a risk free interest rate of
5.88%, a constant annual dividend rate of $0.64 per share and expected
volatility of 25%. Fair value also assumes an expected term of 5 years and has
not been reduced to reflect either the non-exercisable status of the options
prior to the vesting date or the non-transferability of the options.
SFAS 123, Accounting for Stock-Based Compensation, encourages alternative
accounting treatment for stock based
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employee compensation. SFAS 123 allows the fair value of stock based
compensation to be included in expense over the period earned; alternatively, if
the fair value of stock based compensation awards is not included in expense,
SFAS 123 requires disclosure of net income, on a pro forma basis, as if expense
treatment had been applied. As permitted by SFAS 123, the Company continues to
account for such compensation under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees pursuant to which, no compensation cost
has been recognized in connection with the issuance of stock options. Due to the
timing of the issuance and the terms of the options, if the Company had recorded
compensation expense in 1996 related to the options granted in December, the
impact on the Company's Consolidated Financial Statements would have been
immaterial.
THE NON-QUALIFIED STOCK OPTION PLAN OF 1984, AS AMENDED (THE "1984 PLAN") The
1984 Plan, which terminated on June 30, 1994, provided for the granting of
options to purchase common stock to certain key employees. Stock appreciation
rights accompanied some of the options granted. Exercise of such rights
extinguishes the related options. Options issued under the 1984 Plan expire ten
years from the date of grant. Shares issued under the 1984 Plan are issued from
the Company's common stock held in treasury.
Changes in options outstanding under the SIP and 1984 Plan are summarized as
follows:
Grant Date
Number of Option Price per Fair Value of
Shares Share Options Issued
- -------------------------------------------------------------------------------
Shares under option at:
December 31, 1996 2,101,870 $18.13 to $44.88
December 31, 1995 713,470 $18.13 to $40.38
December 31, 1994 1,438,390 $18.13 to $46.00
Options issued:
1996 (under the SIP) 1,600,000 $44.88 $13.16
Options exercised:
1996 205,200 $18.13 to $40.38
1995 615,220 $18.13 to $40.38
1994 283,300 $18.13 to $46.00
Options canceled or expired:
1996 6,400 $18.13 to $40.38
1995 109,700 $46.00
1994 11,200 $18.13 to $46.00
===============================================================================
THE EMPLOYEE STOCK PURCHASE PLAN (THE "ESPP") The ESPP, which was approved by
the Company's stockholders in 1989, allows eligible employees to make purchases,
through payroll deductions, of the Company's common stock at a price of 85% of
market value, limited by tax regulations to an annual maximum per employee of
the lesser of $21,250 or 10% of the individual's annual compensation. Shares
purchased under this plan are purchased on the open market. Prior to the second
quarter of 1994, ESPP shares were issued from the Company's common stock held in
treasury. Thus far, over 1.9 million shares have been purchased by employees
under this plan, including approximately 191,000 shares in 1996.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE EQUITY PARTNERSHIP PLAN (THE "EPP") The EPP began in 1990 and was formally
approved by stockholders in 1991. For 1996 and future awards, the EPP was
amended. Under the original EPP, qualifying employees ("participants") received
a portion of their compensation in the form of the Company's common stock, the
payment of which is deferred for five years. The stock is purchased by the EPP's
trustee in the open market as well as from participants upon distribution in
order to satisfy their income tax withholding liabilities. The portion of each
participant's compensation paid in stock is fixed in relation to total
compensation, and for 1995 and prior years reached a maximum of 50% of total
compensation. Participants received the shares for 1995 and prior years with an
incentive of 17.65%, whereby the Company makes an additional contribution to
participants' accounts of 17.65% of their compensation deferred into the EPP.
The amendments for 1996 and future awards included: an increase in the award
incentive from 17.65% to 25%, a reduction in the deferral period from five years
to three years, and the introduction of additional forfeiture provisions on both
the award and the incentive. The award is forfeited if the participant's
employment is terminated for cause (no change from prior EPP). The award is also
subject to forfeiture provisions if the participant leaves the Company to join a
competitor within three years after the award date. If a participant leaves the
Company other than by virtue of death, disability, retirement or as the result
of a downsizing during the three years following the award, the entire 25% award
incentive will be forfeited. The EPP, as amended, also includes revisions to the
participation schedule which reduce the portion of participants' annual
compensation subject to the EPP (participation reaches a maximum of $1.5
million) and increase the minimum level of annual compensation required for
participation to $360,000.
Total purchases of shares by the EPP totaled $153 million (3.6 million shares)
in 1996, $76 million (2.1 million shares) in 1995 and $266 million (5.8 million
shares) in 1994. Stock awarded under the EPP totaled $147 million (3.6 million
shares), $98 million (2.7 million shares) and $264 million (5.6 million shares)
in 1996, 1995 and 1994, respectively. These amounts are included as a component
of compensation expense. The net asset related to the EPP, which represents the
cost of the unawarded shares held by the EPP less the Company's liability
related to the EPP, payable in common stock, is included in "Other assets,
including intangibles." Shares held by the trustee of the EPP are considered
outstanding for the purpose of computing earnings per share.
In early 1996, 3.3 million shares held by the EPP trustee were distributed to
certain employees. To facilitate satisfaction of employees' tax obligations,
approximately 1.3 million of those shares were repurchased by the Company as
treasury stock, for $49 million. The remaining 2.0 million shares are subject to
the same restrictions on transferability that existed prior to the distribution.
In December 1996, restrictions on transferability were lifted on 2.4 million
shares (net of withholding tax requirements) awarded by the EPP in 1991.
Employees of certain subsidiaries of the Company do not participate in the EPP
or are unable to participate in the EPP, but instead receive stock appreciation
rights subject to the same terms as shares awarded under the EPP.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE 401(k) PLAN (THE "401(k)") The 401(k) was amended effective January 1, 1996.
The amendment included an increase in the Company's match from 50% to 75% of an
eligible employee's contribution to the 401(k). As amended, the 401(k) matches
75% of the lesser of the eligible employee's contribution to the 401(k) or 6% of
the eligible employee's total compensation. The increase in the Company's match
is in the form of Salomon Inc common stock and is limited to eligible employees
with an annual compensation level less than $360,000.
In the event of certain changes of control not approved by the Company's Board
of Directors, the holders of options under the SIP and the 1984 Plan will be
entitled to receive an immediate cash payment equal to the excess of the fair
market value of the common stock over the exercise price of shares covered by
options or stock appreciation rights. All amounts credited to employees'
accounts under certain bonus plans will vest and employees will be entitled to
payment of an amount no less than the pro rata portion of their prior annualized
year-end bonus.
NOTE 14: INCOME TAXES
The components of income taxes from continuing operations reflected on the
Consolidated Statement of Income are:
Dollars in millions
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Current:
U.S. federal $590 $179 $ 25
State and local 219 78 23
Non-U.S. (21) 337 386
- -------------------------------------------------------------------------------
Total current 788 594 434
- -------------------------------------------------------------------------------
Deferred:
U.S. federal (170) (119) (188)
State and local (56) (57) (57)
Non-U.S. 66 (132) (628)
- -------------------------------------------------------------------------------
Total deferred (160) (308) (873)
- -------------------------------------------------------------------------------
Income tax expense (benefit) from continuing operations $628 $286 $(439)
===============================================================================
Under SFAS 109, Accounting for Income Taxes ("SFAS 109"), temporary differences
between recorded amounts and the tax bases of assets and liabilities are
accounted for at current income tax rates. Under certain circumstances,
estimates are used in the determination of temporary differences.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996 and December 31, 1995, respectively, the Company's
Consolidated Statement of Financial Condition included net deferred tax assets
from continuing operations of $162 million and $26 million, comprised of the
following:
Dollars in millions
December 31, 1996 1995
- -------------------------------------------------------------------------------
Mark-to-market adjustments $(284) $(442)
Employee benefits and deferred compensation 513 450
Reserves 117 161
Cumulative translation adjustments
(which do not affect the
provision for income tax expense) (111) (115)
U.S. taxes provided on the undistributed
earnings of non-U.S. subsidiaries (84) (113)
Other 11 85
- -------------------------------------------------------------------------------
Net deferred tax asset $ 162 $ 26
===============================================================================
The Company had no deferred tax valuation allowance at December 31, 1996 or
December 31, 1995.
Income taxes paid, net of refunds, totaled $981 million in 1996, $360 million in
1995 and $409 million in 1994. These amounts include estimated tax payments
during the current tax year as well as cash settlements relating to prior tax
years.
The Company provides income taxes on the undistributed earnings of non-U.S.
subsidiaries except to the extent that such earnings are indefinitely invested
outside the United States. At December 31, 1996, the accumulated undistributed
earnings of non-U.S. subsidiaries amounted to $1.5 billion, of which $1.3
billion was indefinitely invested. At the existing U.S. federal income tax rate,
additional taxes of $376 million would have to be provided if such earnings were
remitted. With respect to the remaining $177 million of such earnings, U.S.
federal taxes, current and deferred, have already been provided. Therefore,
those earnings could be remitted to the U.S. without incurring additional income
tax expense.
The following table reconciles the U.S. federal statutory income tax rate to the
Company's effective tax rate from continuing operations:
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Statutory U.S. federal income tax rate for corporations 35% 35% 35%
Impact of:
State and local taxes, net of U.S.
federal tax effect 7 2 2
Tax advantaged income (2) (4) 4
Provisions for tax contingencies
and non-deductible reserves -- 3 --
Reversal of tax contingency reserves (1) -- 12
Other, net -- -- (1)
- ------------------------------------------------------------------------------
Effective Tax Rate 39% 36% 52%
==============================================================================
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is computed by dividing net income (loss),
less dividends on preferred stock, by the weighted average number of common and
common equivalent shares outstanding, including shares held by the EPP. Common
equivalent shares include the effect of outstanding stock options, if dilutive.
Fully diluted earnings (loss) per share is computed under the assumption that
all contingent increases in common stock have occurred to the extent that they
have a dilutive effect on earnings per share. Contingent increases of common
stock include the potential impact of the conversion of Series A Preferred and
convertible debt, which are discussed in Notes 10 and 8, respectively.
<TABLE>
<CAPTION>
Amounts in millions, except per share amounts
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares used in computing earnings (loss) per share:
Average common shares outstanding 106.2 106.3 106.8
Effects of assumed exercise of stock options, if dilutive .2 .2 --
- --------------------------------------------------------------------------------------------------------------------------
Shares used in computing primary earnings (loss) per share 106.4 106.5 106.8
Effects (when dilutive) of:
Assumed conversion of convertible notes .4 .4 --
Assumed conversion of Series A Preferred 14.1 17.8 --
- --------------------------------------------------------------------------------------------------------------------------
Shares used in computing fully diluted earnings (loss) per share 120.9 124.7 106.8
==========================================================================================================================
Net income (loss) for earnings (loss) per share:
Income (loss) from continuing operations $982 $513 $(410)
Less dividends on preferred stock* 68 69 62
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations for primary earnings (loss) per share 914 444 (472)
Add dividends on Series A Preferred, when dilutive* 36 49 --
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations for fully diluted earnings (loss) per share 950 493 (472)
Income (loss) from discontinued operations, net of taxes (75) (56) 11
Loss on disposal of Basis Petroleum, net of tax benefit of $215 (290) -- --
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) for fully diluted earnings (loss) per share $ 585 $ 437 $(461)
==========================================================================================================================
Earnings (loss) per share of common stock:
Primary earnings (loss) from continuing operations $8.59 $4.17 $(4.41)
Discontinued operations (.71) (.53) .10
Loss on disposal of Basis Petroleum (2.72) -- --
- --------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) $5.16 $3.64 $(4.31)
==========================================================================================================================
Fully diluted earnings (loss) from continuing operations $7.85 $3.95 $(4.41)
Discontinued operations (.62) (.45) .10
Loss on disposal of Basis Petroleum (2.39) -- --
- --------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) $4.84 $3.50 $(4.31)
==========================================================================================================================
</TABLE>
* Dividends on preferred stock are adjusted for the aftertax impact of interest
rate swaps that effectively convert the Company's fixed rate dividends to
variable rate.
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: SECURITIES PLEDGED AND LEASE COMMITMENTS
REPURCHASE AGREEMENTS, SECURITIES PLEDGED AND LETTERS OF CREDIT
At December 31, 1996, the approximate market values of securities sold under
agreements to repurchase, excluding the impact of FIN 41, or pledged by the
Company were:
Dollars in millions
- ------------------------------------------------------------------------------
For securities sold under agreements to repurchase $ 89,466
As collateral for securities borrowed of
approximately equivalent value 37,576
As collateral for bank loans 3,195
To clearing organizations or segregated under securities
laws and regulations 1,998
For securities loaned 1,593
As collateral for letters of credit 127
Other 65
- ------------------------------------------------------------------------------
Repurchase agreements and securities pledged $134,020
==============================================================================
At December 31, 1996, the Company had $2.3 billion of outstanding letters of
credit from banks to satisfy various collateral and margin requirements.
LEASE COMMITMENTS
The Company has noncancelable leases covering office space and equipment
expiring on various dates through 2010. Presented below is a schedule of minimum
future rentals on noncancelable operating leases, net of subleases, as of
December 31, 1996. Various leases contain provisions for lease renewals and
escalation of rent based on increases in certain costs incurred by the lessors.
7 World Trade All Other
Dollars in millions Center Leases
- -------------------------------------------------------------------------------
1997 $ 42 $ 29
1998 42 26
1999 42 20
2000 42 11
2001 46 9
Thereafter 425 36
- -------------------------------------------------------------------------------
Minimum future rentals $639 $131
===============================================================================
Minimum future rentals include $22 million related to space the Company has
vacated or intends to vacate. The Company has provided reserves based on these
amounts. Rent expense under operating leases from continuing operations totaled
$77 million, $86 million and $73 million for the years ended December 31, 1996,
1995 and 1994, respectively.
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: LEGAL PROCEEDINGS
The Company is a defendant in lawsuits incidental to its securities and
commodities businesses and, as a result of such activities is subject to ongoing
legal risk. In connection with its discontinued commodities processing
operations, the Company and certain of its subsidiaries are subject to claims
asserted by the U.S. Environmental Protection Agency, certain state agencies and
private parties in connection with environmental matters. Management of the
Company, after consultation with outside legal counsel, believes that the
ultimate resolution of legal proceedings and environmental matters (net of
applicable reserves) will not have a material adverse effect on the Company's
financial condition; however, such resolution could have a material adverse
impact on operating results in future periods depending in part on the results
for such periods.
NOTE 18: FINANCIAL AND COMMODITIES-RELATED INSTRUMENTS AND RELATED RISKS
The Company and its subsidiaries enter into a variety of contractual
commitments, such as swaps, swap options, cap and floor agreements, futures
contracts, forward currency contracts, forward purchase and sale agreements,
option contracts and warrants. These transactions generally require future
settlement, and are either executed on an exchange or traded as OTC instruments.
Contractual commitments have widely varying terms, and durations that range from
a few days to a number of years depending on the instrument.
Interest rate swaps are OTC instruments where two counterparties agree to
exchange periodic interest payment streams calculated on a predetermined
notional principal amount. The most common interest rate swaps involve one party
paying a fixed interest rate and the other party paying a variable rate. Other
types of swaps include basis swaps, cross-currency swaps, equity
swaps and commodity swaps. Basis swaps consist of both parties paying variable
interest streams based on different reference rates. Cross-currency swaps
involve the exchange of coupon payments in one currency for coupon payments in
another currency. An equity swap is an agreement to exchange cash flows on a
notional amount based on changes in the values of a referenced index, such as
the Standard & Poor's 500 Index. Commodity swaps involve the exchange of a fixed
price of a commodity for a floating price, which is usually the prevailing spot
price, throughout the swap term. The most common commodity swaps are
petroleum-based; other types are based on metals or soft commodities.
Caps are contractual commitments which require the writer to pay
the purchaser an excess amount, if the reference rate exceeds a contractual rate
at specified times during the contract. Likewise, a floor is a contractual
commitment that requires the writer to pay an excess amount, if any, of a
contractual rate over a reference rate at specified times over the life of the
contract. Swap options are OTC contracts that entitle the holder to either enter
into an interest rate swap at a future date or to cancel an existing swap at a
future date.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Futures contracts are exchange-traded contractual commitments to either receive
(purchase) or deliver (sell) a standard amount or value of a commodity or
financial instrument at a specified future date and price (or, with respect to
futures contracts on indices, the net cash amount). Maintaining a futures
contract will typically require the Company to deposit with the futures exchange
(or other financial intermediary), as security for its obligations, an amount of
cash or other specified asset ("initial margin") that typically ranges from 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited daily as the mark-to-market value of the futures contract
fluctuates. Futures contracts may be settled by physical delivery of the
underlying asset or cash settlement (for index futures) on the settlement date,
or by entering into an offsetting futures contract with the futures exchange
prior to the settlement date. Forward contracts are OTC contractual commitments
to purchase or sell a specified amount of financial instruments, foreign
currency, or commodities at a future date at a predetermined price. The notional
amount for forward securities contracts represents the amount of cash that will
be paid or received by the counterparties when the contract settles. Upon
settlement, the security is recorded on the Statement of Financial Condition as
either long or short inventory.
Option contracts are contractual agreements which give the purchaser the right,
but not the obligation, to purchase or sell a financial instrument, commodity,
or currency at a predetermined price. In return for this right, the purchaser
pays a premium to the seller (or writer) of the option. Option contracts also
exist for various indices and are similar to options on a security or other
instruments except that, rather than settling by physical delivery of the
underlying instrument, they are settled in cash. Options on futures contracts
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract. The Company is obligated to post margin for
options on futures. Option contracts may be either exchange-traded or OTC.
Exchange-traded options issued by certain regulated intermediaries, such as the
Options Clearing Corporation, are the obligations of the issuing intermediary.
In contrast to such options, which generally have standardized terms and
performance mechanics, all of the terms of an OTC option, including the method
of settlement, term, exercise price, premium, guarantees and security, are
determined by negotiation of the parties, and there is no intermediary between
the parties to assume the risks of non-performance. The Company issues warrants
that entitle holders to cash settlements on exercise based upon movements in
market prices of specific financial instruments, foreign exchange rates, equity
indices and certain commodities. Warrants have characteristics similar to those
of options whereby the buyer has the right, but not the obligation, to purchase
a certain instrument at a specific future date and price.
The Company also sells various financial instruments and commodities which have
not been purchased ("short sales"). The Company borrows these securities, or
receives the securities or collateral in conjunction with short-term financing
agreements, in order to sell them short and, at a later date, must deliver
(i.e., replace) like or substantially the same financial instruments or
commodities to the parties from which they were originally received. The Company
is exposed to market risk for short sales. If the market value of an instrument
sold short increases, the Company's obligation, reflected as a liability, would
increase and revenues from principal transactions would be reduced.
80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The way in which the Company accounts for and presents contractual commitments
in its financial statements depends on both the type and purpose of the
contractual commitment held or issued. As discussed in the Summary of Accounting
Policies, the Company records all contractual commitments used for trading
purposes, including those used to hedge trading positions, at market or fair
value. Consequently, changes in the amounts recorded in the Company's
Consolidated Statement of Financial Condition resulting from movements in market
or fair value are included in "Principal transactions" in the period in which
they occur. The accounting and reporting treatment of contractual commitments
used for non-trading purposes varies, depending on the nature of exposure being
hedged (see Summary of Accounting Policies). Contractual commitments and short
sales may expose the Company to both market risk and credit risk in excess of
amounts recorded on the Consolidated Statement of Financial Condition. These
off-balance-sheet risks are discussed in more detail below.
MARKET RISK
Market risk is the potential loss the Company may incur as a result of changes
in the market or fair value of a particular instrument or commodity. All
financial and commodities-related instruments, including derivatives and short
sales, are subject to market risk. The Company's exposure to market risk is
determined by a number of factors, including the size, duration, composition and
diversification of positions held, the absolute and relative levels of interest
rates and foreign currency exchange rates, as well as market volatility and
illiquidity. For instruments such as options and warrants, the time period
during which the options or warrants may be exercised and the relationship
between the current market price of the underlying instrument and the option's
or warrant's contractual strike or exercise price also affect the level of
market risk. In addition, the activities of Phibro subject the Company to the
market risk of commodities. The most significant factor influencing the overall
level of market risk to which the Company is exposed is its use of hedging
techniques to mitigate such risk. The Company manages market risk by setting
risk limits and monitoring the effectiveness of its hedging policies and
strategies.
SFAS 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and SFAS 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, require the disclosure of the notional amounts
of derivative financial instruments, distinguishing between those used for
trading purposes and those used for purposes other than trading. Notional
amounts and additional detail of the market or fair values of financial options
and contractual commitments recorded on the Consolidated Statement of Financial
Condition at December 31, 1996 and 1995 are set forth in the Consolidated
Summary of Options and Contractual Commitments that immediately follows the
Consolidated Statement of Financial Condition. The determination of notional
amounts does not consider any of the market risk factors discussed above.
Notional amounts are indicative only of the volume of activity and are not a
measure of market risk. Market risk is influenced by the nature of the items
that comprise a particular category of financial instrument. Market risk is also
influenced by the relationship among the various off-balance-sheet categories as
well as the relationship between off-balance-sheet items and items recorded in
the Company's Consolidated Statement of Financial Condition. For all of these
reasons, the interpretation of notional amounts as a measure of market risk
could be materially misleading.
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The annual average balances of the Company's options and contractual
commitments, based on month-end balances are as follows:
1996 1995
------------------- -------------------
Average Average Average Average
Dollars in billions Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Swaps, swap options, caps and floors $3.5 $5.4 $4.0 $6.5
Index and equity contracts and options 1.3 1.1 1.2 .8
Foreign exchange contracts and options .7 .8 .9 1.0
Other .5 .6 .5 .6
- --------------------------------------------------------------------------------
Total financial options and contractual
commitments $6.0 $7.9 $6.6 $8.9
- --------------------------------------------------------------------------------
Commodities-related instruments $ .4 $ .3 $ .5 $ .5
================================================================================
CREDIT RISK
Salomon Brothers regularly transacts business with, and owns securities issued
by, a broad range of corporations, governments, international organizations,
central banks and other financial institutions. Phibro regularly transacts
business with independent and government-owned oil producers, a wide variety of
end users, trading companies and financial institutions. Credit risk is measured
by the loss the Company would record if its counterparties failed to perform
pursuant to terms of their contractual obligations and the value of collateral
held, if any, was not adequate to cover such losses. The Company has established
controls to monitor the creditworthiness of counterparties, as well as the
quality of pledged collateral, and uses master netting agreements whenever
possible to mitigate the Company's exposure to counterparty credit risk. Master
netting agreements enable the Company to net certain assets and liabilities by
counterparty. The Company also nets across product lines and against cash
collateral, provided such provisions are established in the master netting and
cash collateral agreements. The Company may require counterparties to pledge
additional collateral when deemed necessary.
Salomon Brothers enters into collateralized financing agreements in which it
extends short-term credit, primarily to major financial institutions. Salomon
Brothers generally controls access to the collateral pledged by the
counterparties, which consists largely of securities issued by the G-7
governments or their agencies that may be liquidated in the event of
counterparty default.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk from financial instruments, including contractual
commitments, exist when groups of issuers or counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. The
Company monitors credit risk on both an individual and group counterparty basis.
The Company's largest single concentration of credit risk is with securities
issued by the U.S. government and its agencies which totaled $45.1 billion at
both December 31, 1996 and 1995. With the addition of U.S. government and U.S.
government agency securities pledged as collateral by counterparties in
connection with collateral-
82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ized financing activity, the Company's total holdings of U.S. government
securities were $80.3 billion or 39% of the Company's total assets at December
31, 1996 and $79.8 billion or 41% of total assets at December 31, 1995.
Similarly, concentrations with non-U.S. governments totaled $75.1 billion at
December 31, 1996 and $67.5 billion at December 31, 1995. These consist
predominantly of securities issued by the governments of major industrial
nations.
Remaining concentrations arise principally from contractual commitments with
counterparties in financial or commodities-related transactions involving future
settlement and fixed income securities owned. Excluding governments, no
concentration with a single counterparty exceeded 1% of total assets at December
31, 1996 or 1995. North America and Europe represent the largest geographic
concentrations. Among industries, other major derivatives dealers represent the
largest group of counterparties. Salomon Inc has a three-year credit support
agreement with Genesis Energy, L.P., pursuant to which it provides Genesis with
working capital support of up to $550 million through June 30, 1997, $500
million for the remainder of 1997, $400 million in 1998 and $300 million until
December 31, 1999.
NOTE 19: FAIR VALUE INFORMATION
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires the
disclosure of the fair value of all financial instruments. The following
information is presented to help users gain an understanding of the relationship
between the amounts reported in the Company's financial statements and the
related market or fair values. Specific accounting policies are discussed in the
Summary of Accounting Policies.
At December 31, 1996, $193 billion or 99% of the Company's total assets and $180
billion or 95% of the Company's total liabilities were carried at either market
or fair values or at amounts which approximate such values. At December 31,
1995, $185 billion or 98% of the Company's total assets and $174 billion or 95%
of the Company's total liabilities were carried at market value or fair value or
at amounts that approximate such values. Financial instruments recorded at
market or fair value include cash and interest bearing equivalents, financial
instruments used for trading purposes, including financial options and
contractual commitments, and commodities and related instruments used for
trading purposes, including options and contractual commitments.
Financial instruments recorded at contractual amounts that approximate market or
fair value include collateralized short-term financing agreements, receivables,
short-term borrowings, payables, and variable rate term debt. The market value
of such items are not materially sensitive to shifts in market interest rates
because of the limited term to maturity of many of these instruments and/or
their variable interest rates.
The following table reflects financial instruments which are recorded at
contractual or historical amounts that do not necessarily approximate market or
fair value. Such instruments include U.S. dollar denominated CMOs and the assets
securing U.S. dollar denominated CMOs, the Company's fixed rate term debt, as
well as the fair value of derivative instruments which are used for non-trading,
or end user, purposes.
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 1995
Assets Liabilities Assets Liabilities
------------------------------------- -------------------------------------
Dollars in billions Carrying Fair Carrying Fair Carrying Fair Carrying Fair
December 31, Value Value Value Value Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial instruments recorded at
contractual amounts or historical
amounts that do not necessarily
approximate market or fair value:
Assets securing U.S. dollar
denominated CMOs (fixed rate) $ .4 $ .5 $ .6 $ .8
U.S. dollar denominated CMOs
(fixed rate) $ .4 $ .4 $ .6 $ .7
Fixed rate term debt 9.4 9.6 8.7 9.1
Derivatives used for non-trading purposes $ -- $ .5 $ -- $ .2 $ -- $ .7 $ -- $ .2
===========================================================================================================================
</TABLE>
The fair value of fixed rate term debt has been estimated by using a discounted
cash flow analysis. The Company's U.S. dollar denominated fixed rate CMOs and
assets securing U.S. dollar denominated fixed rate CMOs are carried at their
contractual amounts. At December 31, 1996 and 1995, prevailing interest rates
and prepayments resulted in the fair value of the liabilities associated with
such CMOs exceeding their carrying amount. The fair value of assets securing the
dollar denominated CMOs also exceeded their carrying value at December 31, 1996
and 1995. CMOs and the assets which secure them should not be viewed
independently. Taken together, the fair value of the Company's dollar
denominated CMOs and the assets securing them is the present value of the
difference between future cash inflows from the CMO collateral and cash outflows
to service the CMOs. This difference was nominal at December 31, 1996 and 1995.
NOTE 20: PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following are condensed financial statements of Salomon Inc (Parent Company
Only):
PARENT COMPANY ONLY CONDENSED STATEMENT OF INCOME
Dollars in millions
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Net interest and principal transactions $101 $276 $ 129
Equity in net income (loss) of subsidiaries
and affiliates 901 431 (353)
Loss on disposal of Basis Petroleum (505) -- --
General, administrative and other expenses (113) (237) (208)
- ------------------------------------------------------------------------------
Income (loss) before income taxes 384 470 (432)
Income tax expense (benefit) (233) 13 (33)
- ------------------------------------------------------------------------------
Net income (loss) $617 $457 $(399)
==============================================================================
84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY CONDENSED STATEMENT OF FINANCIAL CONDITION
Dollars in millions
December 31, 1996 1995
- -------------------------------------------------------------------------------
Assets:
Cash and interest bearing equivalents $ 3 $ 14
Financial instruments 30 29
Commodities and related products
and instruments -- 746
Receivables 462 429
Receivables from subsidiaries:
Salomon Brothers Holding Company Inc $14,332 $11,479
Basis Petroleum, Inc.* 400 530
Phibro Inc. 254 --
Other subsidiaries 31 168
------- -------
15,017 12,177
Investments in subsidiaries:
Salomon Brothers Holding Company Inc 4,018 4,731
Basis Petroleum, Inc.* -- 299
Phibro Inc. 86 --
Other subsidiaries 12 75
------- -------
4,116 5,105
Property, plant and equipment, net 252 285
Other assets 84 55
- -------------------------------------------------------------------------------
Total assets $19,964 $18,840
===============================================================================
Liabilities and stockholders' equity:
Short-term borrowings $ 2,023 $ 1,751
Financial and commodities-related instruments
sold, not yet purchased, and
contractual commitments 542 296
Other liabilities 297 475
Term debt 11,469 11,615
Subordinated debt payable to SI Financing Trust I 356 --
------- -------
Total liabilities 14,687 14,137
Redeemable preferred stock, Series A 420 560
Stockholders' equity 4,857 4,143
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $19,964 $18,840
===============================================================================
* 1996 amounts include the effects of the loss on the disposal of
Basis Petroleum. At December 31, 1996, Basis had $90 million of payables
to other affiliates.
85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY CONDENSED STATEMENT OF CASH FLOWS
Dollars in millions
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of term debt $3,969 $2,679 $6,115
Redemption of preferred stock, Series C (112) -- --
Redemption of redeemable preferred stock,
Series A -- (140) --
Term debt maturities and repurchases (3,980) (4,898) (2,891)
Net increase (decrease) in short-term borrowings 272 (313) (381)
Issuance of preferred stock, Series E 250 -- --
Purchase of common stock for treasury (49) (2) (252)
Dividends (136) (137) (128)
Employee stock purchase and option plans 4 15 13
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 218 (2,796) 2,476
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in receivables
from subsidiaries (2,616) 2,881 (2,783)
Dividends received from subsidiaries 1,629 206 418
Capital infusions and other capital transactions
with subsidiaries (154) (69) --
Purchases of property, plant and equipment (3) (4) (11)
- -------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (1,144) 3,014 (2,376)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating and
other activities 915 (211) (99)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and interest
bearing equivalents (11) 7 1
Cash and interest bearing equivalents at
beginning of year 14 7 6
- -------------------------------------------------------------------------------
Cash and interest bearing equivalents at
end of year $ 3 $ 14 $ 7
===============================================================================
BASIS OF PRESENTATION
The accompanying Condensed Financial Statements include the accounts of Salomon
Inc (Parent Company Only). On January 1, 1996, the commodities dealer businesses
conducted by the Phibro Division of Salomon Inc (Parent Company Only) was
transferred to the Company's wholly-owned subsidiary, Phibro Inc. Therefore,
1996 results for Phibro, including activities previously conducted by the Phibro
Division, are included in equity in net income (loss) of subsidiaries and
affiliates in the Parent Company Only Condensed Statement of Income.
Investments in subsidiaries are accounted for under the equity method. For
information regarding the Company's term debt see Note 8.
86
<PAGE>
SALOMON INC AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts DECEMBER SEPTEMBER JUNE MARCH
Three Months Ended 31 30 30 31
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues from continuing operations:
Interest and dividends $1,374 $1,366 $1,436 $1,572
Principal transactions 448 307 584 651
Investment banking 234 187 251 181
Commissions 92 69 75 90
Other 51 56 11 11
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $2,199 $1,985 $2,357 $2,505
Revenues, net of interest expense $1,053 $ 853 $1,223 $1,238
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes by business unit:
Salomon Brothers $ 296 $ 176 $ 525 $ 368
Phibro 57 7 (17) 145
Corporate and Other 12 49 (11) 3
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 365 232 497 516
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 234 140 298 310
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (62) $ 112 $ 291 $ 276
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share -
Primary from continuing operations $ 2.03 $ 1.15 $ 2.65 $ 2.75
Primary (0.71) 0.88 2.58 2.44
Fully diluted from continuing operations 1.88 1.08 2.40 2.49
Fully diluted (0.71) 0.85 2.34 2.21
===================================================================================================================================
1995
Revenues from continuing operations:
Interest and dividends $1,858 $1,610 $1,944 $1,609
Principal transactions 268 691 (252) 370
Investment banking 168 128 154 22
Commissions 80 82 81 89
Other 14 16 9 12
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $2,388 $2,527 $1,936 $2,102
Revenues, net of interest expense $ 847 $1,179 $ 390 $ 783
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes by business unit:
Salomon Brothers $ 207 $ 381 $ 56 $ 60
Phibro 56 68 (162) 123
Corporate and Other 3 (1) 6 2
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 266 448 (100) 185
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 187 274 (60) 112
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 168 $ 268 $ (60) $ 81
===================================================================================================================================
Earnings (loss) per common share -
Primary from continuing operations $ 1.61 $ 2.41 $(0.73) $ 0.88
Primary 1.42 2.36 (0.73) 0.59
Fully diluted from continuing operations 1.48 2.15 (0.73) 0.85
Fully diluted 1.32 2.10 (0.73) 0.59
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share for quarterly periods are based on average common shares outstanding in individual quarters; thus, the
sum of earnings (loss) per share of the quarters may not equal the amounts reported for the full year.
</TABLE>
87
<PAGE>
SALOMON INC AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts
For the Year Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Principal transactions, including net interest
and dividends $ 3,059 $ 2,344 $ 469 $ 3,072 $ 3,189
Investment banking 853 472 486 791 450
Commissions and other 455 383 366 306 221
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 4,367 3,199 1,321 4,169 3,860
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 2,039 1,710 1,455 1,871 1,610
Other noninterest expenses 718 690 715 787 962
Charge relating to U.S. Treasury auction matters - - - - 185
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,757 2,400 2,170 2,658 2,757
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles 1,610 799 (849) 1,511 1,103
Income tax expense (benefit) 628 286 (439) 619 524
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principles 982 513 (410) 892 579
Income (loss) from discontinued operations, net of taxes (365) (56) 11 (28) (29)
Cumulative effect of change in accounting principles,
net of tax benefit of $28 - - - (37) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 617 $ 457 $ (399) $ 827 $ 550
====================================================================================================================================
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles
by business unit:
Salomon Brothers $ 1,365 $ 704 $ (963) $ 1,575 $ 1,390
Phibro 192 85 81 (15) (194)
Corporate and Other 53 10 33 (49) (93)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles $ 1,610 $ 799 $ (849) $ 1,511 $ 1,103
====================================================================================================================================
At year-end:
Total assets $194,881 $188,428 $172,452 $184,835 $159,459
Term debt 13,370 13,045 15,202 11,692 8,533
Redeemable preferred stock, Series A 420 560 700 700 700
Perpetual preferred stock and TRUPS* 795 312 312 312 112
Common equity 4,407 3,831 3,480 4,234 3,519
====================================================================================================================================
</TABLE>
Salomon Brothers' 1994 results include fourth quarter pretax charges of $278
million to correct unsupported general ledger balances. Results for 1994
include an income tax benefit of $102 million resulting from the reversal of
certain reserves previously established for tax contingencies. Salomon Brothers'
1992 results include a pretax charge of $185 million related to the U.S.
Treasury auction and related matters.
*Guaranteed preferred beneficial interests in Company subordinated debt
securities ("TRUPS") totaled $345 million at December 31, 1996.
88
<PAGE>
SALOMON INC AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts
For the Year Ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per common share:
Primary earnings (loss):
From continuing operations before cumulative effect of
change in accounting principles $ 8.59 $ 4.17 $(4.41) $ 7.59 $ 4.43
Discontinued operations (3.43) (.53) .10 (.25) (.25)
Cumulative effect of change in accounting principles - - - (.33) -
- -----------------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) $ 5.16 $ 3.64 $(4.31) $ 7.01 $ 4.18
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss):
From continuing operations before cumulative effect of
change in accounting principles $ 7.85 $ 3.95 $(4.41) $ 6.79 $ 4.27
Discontinued operations (3.01) (.45) .10 (.22) (.22)
Cumulative effect of change in accounting principles - - - (.29) -
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) $ 4.84 $ 3.50 $(4.31) $ 6.28 $ 4.05
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends $ .64 $ .64 $ .64 $ .64 $ .64
High market price 49 43 1/4 52 3/4 51 7/8 39
Low market price 34 7/8 32 1/4 35 34 3/8 26 5/8
Ending market price 47 1/8 35 3/8 37 1/2 47 5/8 38 1/8
Book value 40.03 35.84 32.65 37.93 32.06
===================================================================================================================================
Selected ratios:
Return on average common stockholders' equity
from continuing operations:*
Primary 23.7% 13.6% (13.2)% 25.1% 16.2%
Fully diluted 21.7% 12.5% (13.2)% 21.7% 14.9%
Market/book ratio 1.18 .99 1.15 1.26 1.19
===================================================================================================================================
Other data:
Common shares outstanding (in millions) 109.0 106.4 105.8 110.6 109.8
Salomon Brothers' full-time employees 6,808 6,409 6,950 6,339 6,481
Salomon Inc's full-time employees** 7,146 7,007 7,562 6,880 6,844
===================================================================================================================================
</TABLE>
* Before cumulative effect of change in accounting principles. Excludes the
impact of income (loss) from discontinued operations and the average equity
of Basis Petroleum for all periods.
** Excludes Basis' employees of 1,468; 1,432; 1,408; 1,663 and 1,702,
respectively.
89
<PAGE>
SALOMON INC
COMMON STOCK DATA
The Company's stock is listed on the New York Stock Exchange, Inc. (trading
symbol SB). As of February 28, 1997, there were 11,372 holders of record.
The ranges of market prices and cash dividends paid on common stock for each
quarterly period during 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- -----------------------------------------
Market Price Market Price
---------------------------- ---------------------------
Dividends Dividends
Three Months Ended High Low End Per Share High Low End Per Share
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $39 1/4 $34 7/8 $37 1/2 $.16 $40 1/8 $32 1/4 $33 7/8 $.16
June 30 44 1/4 36 1/8 44 .16 43 1/4 33 1/4 40 1/8 .16
September 30 46 7/8 38 45 5/8 .16 41 1/8 34 3/4 38 1/2 .16
December 31 49 44 1/8 47 1/8 .16 40 5/8 33 7/8 35 3/8 .16
- -------------------------------------------------------------------------------------------------------------------------------
$.64 $.64
==== ====
</TABLE>
90
<PAGE>
<TABLE>
<S> <C>
SALOMON INC EXHIBIT 21
Subsidiaries of the Registrant
Name under which business is conducted Jurisdiction
- -------------------------------------------------------------------------------------------------------------------------
Basis Petroleum, Inc. Texas
Phibro Inc. Delaware
Phibro Commodities United Kingdom
Phibro Energy Clearing Inc. Delaware
Phibro Trading Pte. Ltd. Singapore
Scanports Shipping Inc. Delaware
Phibro GmbH Switzerland
Phibro Holdings Limited United Kingdom
Phibro Energy Production, Inc. Delaware
White Nights Limited Liability Company (45% owned) Russia
Phibro Resources Corp. Delaware
The S.W. Shattuck Chemical Co., Inc. Colorado
Philipp Brothers, Inc. New York
Philipp Brothers Trading Corporation Delaware
Salomon Inc SI Financing Trust I Delaware
Salomon Brothers Holding Company Inc Delaware
Loan Participation Holding Corporation Delaware
Home Mortgage Access Corporation District of Columbia
Home Mac Mortgage Securities Corporation District of Columbia
Salomon Brothers Asia Capital Corp. Delaware
Salomon Brothers Asset Management Inc. Delaware
Salomon Brothers Australia Limited Australia
Salomon Brothers Canada Holding Company Inc. Canada
Salomon Brothers Canada Inc Canada
Salomon Brothers Finance AG Switzerland
Salomon Brothers Housing Investment Inc Delaware
Salomon Brothers Inc Delaware
Salomon Brothers Mortgage Securities Inc. Delaware
Salomon Brothers Mortgage Securities II, Inc. Delaware
Salomon Brothers Motel Corp. Delaware
Salomon Brothers Pacific Holding Company Inc Delaware
Salomon Brothers Realty Corp. New York
Salomon Brothers Russia Holding Co. Russia
A.O. Salomon Brothers Russia
<PAGE>
SALOMON INC EXHIBIT 21
Subsidiaries of the Registrant (continued)
Name under which business is conducted Jurisdiction
- ------------------------------------------------------------------------------------------------------------------------
Salomon Brothers S.A. France
Salomon Brothers SIM, SpA Italy
Salomon Brothers Tosca Inc Delaware
Salomon International Limited Delaware
Salomon Brothers Europe Limited United Kingdom
Salomon Brothers International Limited United Kingdom
Salomon Brothers UK Equity Limited United Kingdom
Salomon Brothers UK Limited United Kingdom
Salomon (International) Finance AG Switzerland
Salomon Brothers Overseas Inc and Branch Cayman Islands
Salomon Brothers Asia Limited Hong Kong
Salomon Brothers Hong Kong Limited Hong Kong
SB/OT Participation Corp. Delaware
Salomon Capital Access for Savings Institutions, Inc. Delaware
Salomon Capital Access Corporation Delaware
Salomon Forex Inc Delaware
Salomon Plaza Holdings Inc Delaware
Plaza Holdings, Inc. Delaware
Salomon Brothers Finance Corporation & Co. beschrankt haftende KG Germany
Salomon Brothers AG Germany
Salomon Swapco Inc Delaware
SB Contractual Products Inc. Delaware
SARCO Delaware
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Salomon Inc:
As independent public accountants, we hereby consent to the incorporation of
our report dated March 13, 1997 included in this Form 10-K, into the following
Registration Statements previously filed by the Company:
Form S-3 Registration Statement No. 33-40600,
Form S-3 Registration Statement No. 33-41932,
Form S-3 Registration Statement No. 33-48199,
Form S-3 Registration Statement No. 33-49136,
Form S-3 Registration Statement No. 33-57922,
Form S-3 Registration Statement No. 33-51269,
Form S-3 Registration Statement No. 33-54929,
Form S-3 Registration Statement No. 33-56841,
Form S-3 Registration Statement No. 333-01807,
Form S-3 Registration Statement No. 333-02897 and
Form S-3 Registration Statement No. 333-11881.
It should be noted that we have not audited any financial statements of the
Company subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
New York, New York ARTHUR ANDERSEN LLP
March 31, 1997
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Dwayne O. Andreas
----------------------------------
Dwayne O. Andreas
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Warren E. Buffet
----------------------------------
Warren E. Buffet
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Claire M. Fagin
----------------------------------
Claire M. Fagin
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ John L. Haseltine
----------------------------------
John L. Haseltine
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Gedale B. Horowitz
----------------------------------
Gedale B. Horowitz
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Deryck C. Maughan
----------------------------------
Deryck C. Maughan
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ David O. Maxwell
----------------------------------
David O. Maxwell
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ William F. May
----------------------------------
William F. May
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Charles T. Munger
----------------------------------
Charles T. Munger
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Shigeru Myojin
----------------------------------
Shigeru Myojin
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Louis A. Simpson
----------------------------------
Louis A. Simpson
<PAGE>
POWER OF ATTORNEY
WHEREAS, Salomon Inc proposes to file with the Securities and Exchange
Commission, under the Securities Act of 1934, a Form 10-K, Annual Report,
(hereinafter referred to as "Form 10-K") for the fiscal year ended December 31,
1996:
NOW, THEREFORE, I, in my capacity as a Director of Salomon Inc, hereby
appoint Richard J. Carbone and Arnold S. Olshin, and each of them severally, my
true and lawful attorney or attorneys with power to act with or without the
other and with full power of substitution and resubstitution, to execute in my
name, place and stead, in my capacity as a Director of Salomon Inc, said Form
10-K and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission, all as fully to
all intents and purposes as I might or could do in person, and I hereby ratify
and approve the acts of said attorneys and each of them.
IN WITNESS WHEREOF, I have executed this instrument this 5th day of
February, 1997.
/s/ Robert G. Zeller
----------------------------------
Robert G. Zeller
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 1996 ANNUAL REPORT FINANCIAL INFORMATION (EXHIBIT 13) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 <F3> DEC-31-1994 <F3>
<CASH> 1,230 1,454 3,539
<RECEIVABLES> 5,118 4,472 8,244
<SECURITIES-RESALE> 56,536 48,422 43,792
<SECURITIES-BORROWED> 16,162 16,993 17,034
<INSTRUMENTS-OWNED> 112,486 110,949 93,297
<PP&E> 521 1,343 1,181
<TOTAL-ASSETS> 194,881 188,428 172,452
<SHORT-TERM> 6,817 8,304 6,674
<PAYABLES> 6,054 9,658 9,084
<REPOS-SOLD> 77,632 91,813 70,405
<SECURITIES-LOANED> 1,495 1,040 1,500
<INSTRUMENTS-SOLD> 83,507 57,528 62,069
<LONG-TERM> 13,370 13,045 15,202
420 560 700
450 312 312
<COMMON> 159 156 156
<OTHER-SE> 4,248 3,675 3,324
<TOTAL-LIABILITY-AND-EQUITY> 194,881 188,428 172,452
<TRADING-REVENUE> 1,990 1,077 (560)
<INTEREST-DIVIDENDS> 5,748 7,021 5,902
<COMMISSIONS> 326 332 336
<INVESTMENT-BANKING-REVENUES> 853 472 486
<FEE-REVENUE> 129 51 30
<INTEREST-EXPENSE> 4,679 5,754 4,873
<COMPENSATION> 2,039 1,710 1,455
<INCOME-PRETAX> 1,610 799 (849)
<INCOME-PRE-EXTRAORDINARY> 982 <F1> 513 <F1> (410) <F1>
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 617 <F1> 457 <F1> (399) <F1>
<EPS-PRIMARY> 5.16 <F2> 3.64 <F2> (4.31) <F2>
<EPS-DILUTED> 4.84 <F2> 3.50 <F2> (4.31) <F2>
<FN>
<F1>
DISCONTINUED OPERATIONS:
Income (loss) from discontinued
operations, net of taxes (75) (56) 11
Loss on disposal, net of tax benefit (290) - -
<F2>
CONTINUING OPERATIONS:
Primary earnings (loss)
per common share 8.59 4.17 (4.41)
Fully diluted earnings (loss)
per common share 7.85 3.95 (4.41)
<F3>
Income Statement items have been restated for prior periods to conform to
1996 presentation.
</FN>
</TABLE>
