FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____.
Commission File Number 1-4346
SALOMON INC
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(Exact name of registrant as specified in its charter)
Delaware 22-1660266
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Seven World Trade Center, New York, New York 10048
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 783-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Number of shares of common stock outstanding
at October 31, 1997: 111,171,954
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SALOMON INC
Form 10-Q
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<S> <C>
Part I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements (unaudited):
Consolidated Statement of Income -
Three and Nine months ended September 30, 1997 and 1996 3
Condensed Consolidated Statement of Financial Condition -
September 30, 1997 and December 31, 1996 4-5
Consolidated Summary of Options and Contractual Commitments -
September 30, 1997 and December 31, 1996 6
Consolidated Statement of Cash Flows -
Nine months ended September 30, 1997 and 1996 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-18
Part II OTHER INFORMATION
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Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19-20
SIGNATURES 21
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Dollars in millions, except per share amounts Three months Nine months
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Period ended September 30, 1997 1996 1997 1996
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Revenues from continuing operations:
<S> <C> <C> <C> <C>
Interest and dividends $ 1,651 $ 1,366 $ 4,696 $ 4,374
Principal transactions 522 307 1,449 1,542
Investment banking 233 187 674 619
Commissions 90 69 289 234
Other 29 56 56 78
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Total revenues 2,525 1,985 7,164 6,847
Interest expense 1,417 1,132 3,944 3,533
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Revenues, net of interest expense 1,108 853 3,220 3,314
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Noninterest expenses:
Compensation and employee-related 595 441 1,706 1,537
Technology 61 59 176 155
Professional services and business development 53 45 143 137
Occupancy 39 41 121 126
Clearing and exchange fees 23 21 63 55
Other 15 14 60 59
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Total noninterest expenses 786 621 2,269 2,069
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Income from continuing operations before income taxes 322 232 951 1,245
Income tax expense 116 92 352 497
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Income from continuing operations 206 140 599 748
Loss from discontinued operations, net of taxes - (28) - (69)
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Net income $ 206 $ 112 $ 599 $ 679
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Earnings available for fully diluted earnings per common share
from continuing operations $ 198 $ 131 $ 576 $ 723
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Per common share:
Primary earnings from continuing operations $ 1.77 $ 1.15 $ 5.10 $ 6.56
Primary earnings 1.77 0.88 5.10 5.90
Fully diluted earnings from continuing operations* 1.66 1.08 4.79 5.98
Fully diluted earnings* 1.66 0.85 4.79 5.41
Cash dividends 0.16 0.16 0.48 0.48
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Weighted average shares of common stock outstanding (in thousands):
For primary earnings per common share 107,700 105,500 108,500 105,800
For fully diluted earnings per common share 119,300 120,600 120,100 121,000
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<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
* Assumes conversion of redeemable preferred stock unless such assumption
results in higher earnings per share than determined under the primary method.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
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ASSETS September 30, 1997 December 31, 1996
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<S> <C> <C> <C> <C>
Cash and interest bearing equivalents $ 1,134 $ 1,230
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 48,216 $ 45,123
Government and government agency securities - non-U.S. 49,493 35,189
Corporate debt securities 14,886 12,415
Options and contractual commitments 8,058 6,592
Equity securities 6,587 7,094
Mortgage loans and collateralized mortgage securities 3,615 3,126
Other 3,297 2,947
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134,152 112,486
Commodities and related products and instruments:
Physical commodities inventory 1,426 995
Options and contractual commitments 296 315
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1,722 1,310
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 69,078 56,536
Securities borrowed and other 20,800 16,162
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89,878 72,698
Receivables 6,950 5,118
Assets securing collateralized mortgage obligations 272 394
Property, plant and equipment, net 499 521
Net realizable value of discontinued operations (Note 3) - 490
Other assets, including intangibles 620 634
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Total assets $ 235,227 $ 194,881
===================================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
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LIABILITIES AND STOCKHOLDERS' EQUITY September 30, 1997 December 31, 1996
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<S> <C> <C> <C> <C>
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 113,461 $ 77,632
Securities loaned 5,638 1,495
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$ 119,099 $ 79,127
Short-term borrowings 6,086 6,817
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments:
Government and government agency securities - U.S. 24,441 34,311
Government and government agency securities - non-U.S. 35,920 31,699
Financial options and contractual commitments 10,246 9,391
Equity securities 4,713 5,840
Corporate debt securities and other 1,644 1,942
Commodities, including options and contractual commitments 209 324
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77,173 83,507
Payables and accrued liabilities 9,864 6,054
Collateralized mortgage obligations 264 384
Term debt 16,710 13,370
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Total liabilities 229,196 189,259
Commitments and contingencies (Note 4)
Redeemable preferred stock, Series A 420 420
Guaranteed preferred beneficial interests in Company subordinated
debt securities (Note 5) 345 345
Stockholders' equity:
Preferred stock, Series D and E 450 450
Common stock 159 159
Additional paid-in capital 439 437
Retained earnings 5,985 5,482
Cumulative translation adjustments - 6
Common stock held in treasury, at cost (1,767) (1,677)
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Total stockholders' equity 5,266 4,857
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Total liabilities and stockholders' equity $ 235,227 $ 194,881
==================================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
(unaudited)
September 30, 1997 December 31, 1996
------------------------------------ ------------------------------------
Current Market or Current Market or
Notional Fair Value Notional Fair Value
------------------------ ------------------------
Dollars in billions Amounts Assets Liabilities Amounts Assets Liabilities
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<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 648.6 $ - $ - $ 525.3 $ $ -
-
Other exchange-issued products:
Equity contracts 16.8 .2 .6 12.9 .1 .2
Fixed income contracts 81.0 - - 59.0 - -
Foreign exchange contracts - - - - - -
Commodities-related contracts 3.9 - - 4.9 - -
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Total exchange-issued products 750.3 .2 .6 602.1 .1 .2
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Over-the-counter ("OTC") swaps, swap options,
caps and floors:
Swaps (b) 1,218.8 852.4
Swap options written 20.1 9.7
Swap options purchased 36.1 23.3
Caps and floors 135.4 114.4
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Total OTC swaps, swap options, caps and floors 1,410.4 4.5 5.8 999.8 4.2 6.5
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OTC foreign exchange contracts and options:
Forward currency contracts (b) 98.7 .7 .8 69.0 .5 .5
Options written 25.6 - .2 31.6 - .2
Options purchased 28.0 .2 - 32.9 .4 -
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Total OTC foreign exchange contracts and options 152.3 .9 1.0 133.5 .9 .7
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Other options and contractual commitments:
Options, warrants and forwards on equities and 60.9 2.1 2.7 45.6 1.1 1.8
equity indices (c)
Options and forward contracts on fixed-income 308.0 .4 .2 179.0 .3 .2
securities (c)
Commodities-related contracts (d) 15.6 .3 .2 22.0 .3 .3
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Total $2,697.5 $ 8.4 $ 10.5 $1,982.0 $ 6.9 $ 9.7
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<FN>
(a) Margin on futures contracts is included in receivables or payables on the
Condensed Consolidated Statement of Financial Condition.
(b) Includes notional values of swap agreements and forward currency contracts
for non-trading activities (primarily related to the Company's fixed-rate
long-term debt, TruPS and preferred stock) of $19.0 billion and $3.5 billion
at September 30, 1997 and $15.5 billion and $2.0 billion at December 31,
1996, respectively.
(c) The fair value of such instruments recorded as assets includes approximately
$1.2 billion at September 30, 1997 and $.6 billion at December 31, 1996,
respectively, of over-the-counter instruments, primarily with investment
grade counterparties. The remainder consists primarily of highly liquid
instruments actively traded on organized exchanges.
(d) A substantial majority of these over-the-counter contracts are with
investment grade counterparties.
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CONSOLIDATED CREDIT EXPOSURE, NET OF SECURITIES AND CASH COLLATERAL ON OTC
SWAPS, SWAP OPTIONS, CAPS AND FLOORS AND OTC FOREIGN EXCHANGE CONTRACTS AND
OPTIONS, BY RISK CLASS*
Note: Amounts represent current exposure and do not
include potential credit exposure that may result from factors that influence
market risk.
Transactions
with over
Dollars in billions All Transactions 3 years to
maturity
- ----------------------------------------------------------------------------------------------------------------------------------
Other Major
Derivatives Financial Governments/ Year-to-date
September 30, 1997 Dealers Corporates Institutions Supranationals Other Total Average Total
- --------------------------------------------------------------------------------------------------------------------- ------------
Swaps, swap options, caps
and floors:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk classes 1 and 2 $ .5 $ - $ .6 $ - $ - $ 1.1 $ 1.0 $ .8
Risk class 3 .8 .2 .1 - - 1.1 1.1 .7
Risk classes 4 and 5 .4 .2 .2 - .1 .9 .7 .5
Risk classes 6, 7 and 8 - - - - - - .1 -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
$ 1.7 $ .4 $ .9 $ - $ .1 $ 3.1 $ 2.9 $ 2.0
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
Foreign exchange contracts
and options:
Risk classes 1 and 2 $ .4 $ - $ - $ .1 $ - $ .5 $ .7 $ -
Risk class 3 .3 - - - - .3 .3 -
Risk classes 4 and 5 - - - - .1 .1 .1 -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
$ .7 $ - $ - $ .1 $ .1 $ .9 $ 1.1 $ -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
<FN>
* To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are analogous
to external credit ratings whereby risk classes one through three are high
quality investment grades. Risk classes four and five include counterparties
ranging from the lowest investment grade to the highest non-investment grade
level. Risk classes six, seven and eight represent higher risk
counterparties.
</FN>
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SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Dollars in millions
- ----------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash and non-operating activities -
Net income $ 599 $ 679
Depreciation, amortization and other 61 85
Gain on sale of The Mortgage Corporation - (31)
- ----------------------------------------------------------------------------------------------------------------------
Cash items included in net income 660 733
- ----------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets -
Financial instruments and contractual commitments (21,666) 6,602
Commodities and related products and instruments (412) (44)
Collateralized short-term financing agreements (17,180) (10,884)
Receivables (1,966) (266)
Other 11 (126)
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Net (increase) in operating assets (41,213) (4,718)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 39,972 (12,998)
Short-term borrowings (731) (1,977)
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments (6,334) 18,025
Payables and accrued liabilities 3,813 507
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Net increase in operating liabilities 36,720 3,557
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Net cash used in operating activities (3,833) (428)
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Cash flows from financing activities:
Issuance of term debt 6,433 2,914
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 6 4
Term debt maturities and repurchases (2,830) (2,708)
Collateralized mortgage obligations (129) (380)
Purchase of common stock for treasury (103) (49)
Redemption of Series C preferred stock - (112)
Dividends on common stock (51) (50)
Dividends on preferred stock* (45) (54)
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Net cash provided by financing activities 3,281 160
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Cash flows from investing activities:
Assets securing collateralized mortgage obligations 131 456
Proceeds from the sale of Basis Petroleum 365 -
Proceeds from the sale of The Mortgage Corporation - 82
Property, plant and equipment (40) (104)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 456 434
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Net (decrease) increase in cash and interest bearing equivalents (96) 166
Cash and interest bearing equivalents at January 1, 1,230 1,454
- ---------------------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at September 30, $ 1,134 $ 1,620
======================================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
* For the nine months ended September 30, 1997 and 1996, dividends on preferred
stock were reduced by the aftertax impact ( $11 million and $16 million) of
interest rate swaps that effectively convert the Company's fixed-rate
obligations to variable-rate obligations.
</FN>
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Salomon Inc and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 1997
1. Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements are prepared
in accordance with generally accepted accounting principles in the U.S.
and prevailing industry practice, both of which require the use of
management's best judgment and estimates. Estimates, including the fair
value of financial instruments, may vary from actual results. In the
opinion of management, the statements of income, financial condition
and cash flows include all normal recurring adjustments necessary for a
fair presentation for the periods presented. Certain reclassifications
have been made from amounts previously reported to conform to the
current year presentation. The Unaudited Condensed Consolidated
Financial Statements include the accounts of Salomon Inc and all
majority-owned subsidiaries (collectively, the "Company"), with the
exception of Basis Petroleum, Inc. ("Basis"), which is presented as a
discontinued operation as discussed in Note 3. The Unaudited Condensed
Consolidated Financial Statements should be read in conjunction with
the Audited Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
2. Accounting Policies
Derivatives Used for Trading Purposes
Derivative instruments ("derivatives" or "contractual commitments")
used for trading purposes are carried on the balance sheet at either
market value or, when market prices are not readily available, fair
value, with changes in value recognized currently in earnings.
Contractual commitments used for trading purposes include interest rate
swap agreements, swap options, caps and floors, options, warrants,
futures and forward contracts as well as commodity swaps, options,
futures and forward contracts. Contractual commitments 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" or "Commodities, including 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" and "Payables and
accrued liabilities." The market values (unrealized gains and losses)
associated with contractual commitments are reported net by
counterparty, provided a legally enforceable master netting agreement
exists, and are netted across products and against cash collateral when
such provisions are stated in the master netting agreement. Revenues
generated from derivative instruments 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
Non-trading derivative instruments which are designated as hedges must
be effective at reducing the risk associated with the exposure being
hedged and must be designated as a hedge at the inception of the
derivative contract. Accordingly, changes in the market or fair value
of the derivative instrument must
<PAGE>
be highly correlated with changes in the market or fair value of the
underlying hedged item. The Company monitors the effectiveness of its
hedges by periodically comparing the change in value of the derivative
instrument with the change in value of the underlying hedged item.
Contractual commitments used as hedges include interest rate swaps,
cross currency swaps and forward currency contracts. Interest rate
swaps, including cross currency swaps, are utilized to effectively
convert the Company's fixed rate preferred stock and guaranteed
preferred beneficial interests in Company subordinated debt securities
("TRUPS"), a portion of its short-term borrowings and the majority of
its fixed rate term debt to variable rate instruments. These swaps are
recorded "off-balance sheet," with accrued inflows and outflows
reflected as adjustments to interest expense and/or dividends, as
appropriate. Adjustments to preferred stock dividends are recorded on
an after tax basis. Upon early termination of an underlying hedged
instrument, the derivative is accounted for at market or fair value.
The impact of recording the market or fair value of the derivative
instrument "on-balance sheet" is recognized immediately in earnings.
Changes in market or fair value of such instruments, or realized gains
or losses resulting from the termination of such instruments, are
recognized currently in earnings.
The Company utilizes forward currency contracts to hedge a portion of
the currency exchange rate exposure relating to non-U.S. dollar term
debt issued by Salomon Inc (Parent Company). The impact of translating
the forward currency contracts and the related debt to prevailing
exchange rates is recognized currently in earnings. 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 open contracts to prevailing exchange rates and the
impact of realized gains or losses on maturing contracts, both net of
the related tax effects, are included in "Cumulative translation
adjustments" in Stockholders' equity as is the impact of translating
the investments being hedged. Upon the disposition of an investment in
a subsidiary with a functional currency other than the U.S. dollar,
accumulated gains or losses previously included in "Cumulative
translation adjustments" are recognized immediately in earnings.
Derivative instruments that do not meet the criteria to be designated
as a hedge are considered trading derivatives and are recorded at
market or fair value.
3. Discontinued Operations
On May 1, 1997, the Company completed the sale of all of the
outstanding stock of Basis Petroleum, Inc. to Valero Energy Corporation
("Valero"). Upon closing, the Company received cash proceeds of $365
million and Valero common stock with a market value of $120 million,
which was subsequently converted to common stock of PG&E Corporation
and common stock of "New Valero". During the third quarter, the Company
liquidated its interest in the PG&E and New Valero common stock. In
July 1997, the Company paid Valero $3 million in connection with the
final determination of working capital. In addition, the Company is
entitled to participation payments based on a fixed notional throughput
and the difference, if any, between an average market crackspread, as
defined, and a base crackspread, as defined, over each of the next ten
years, but subject to the limitation that the total of the
participation payments is capped at $200 million, with a maximum of $35
million per year. Basis is classified as a discontinued operation in
the Company's Condensed Consolidated Financial Statements.
4. Commitments and Contingencies
Outstanding legal matters are discussed in Note 17 to the Audited
Consolidated Financial Statements
<PAGE>
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Management of the Company, after consultation with
outside legal counsel, believes that the ultimate resolution of legal
proceedings and environmental matters (taking into consideration
applicable reserves) will not have a material adverse effect on the
Company's financial condition; however, there could be a material
adverse impact on operating results in future periods depending in part
on the results for such periods. Additional information on legal
proceedings is included in "Item 1. Legal Proceedings."
The Company's ongoing process of upgrading its financial and operating
systems is focused on: supporting the multi-entity, multi-currency,
multi-time zone aspects of its businesses; improving control over
complex, cross-entity transactions; facilitating standardized
technology platforms, operating procedures, and fungibility of
resources around the world; eliminating redundant regional
applications; reducing future technology and operations costs; and
efficiently meeting market and regulatory changes. The Company also
anticipates incurring additional expenses to adapt systems for Year
2000 processing and the European Monetary Union through the Year 2000.
5. Guaranteed preferred beneficial interests in Company subordinated debt
securities
The Company has $345 million, or 13,800,000 TRUPS units, outstanding.
Each TRUPS unit includes a 9 1/4% mandatorily redeemable preferred
security of the SI Financing Trust I (the "Trust") and a purchase
contract which requires the holder to purchase, in 2021 (or earlier if
the Company elects to accelerate the contract), one depositary share
representing a one-twentieth interest in a share of Salomon Inc's 9
1/2% Cumulative Preferred Stock, Series F. The Trust, which is a
wholly-owned subsidiary of the Company, was established for the sole
purpose of issuing the 9 1/4% preferred securities and common
securities and investing the proceeds in $356 million aggregate
principal amount of 9 1/4% subordinated debt securities issued by
Salomon Inc due June 30, 2026.
6. Net Capital
Certain U.S. and non-U.S. subsidiaries are subject to securities and
commodities regulations and capital adequacy requirements promulgated
by the regulatory and exchange authorities of the countries in which
they operate. The Company's principal regulated subsidiaries are
discussed below.
Salomon Brothers Inc ("SBI") is registered as a broker-dealer with the
U.S. Securities and Exchange Commission ("SEC") and is subject to the
SEC's Uniform Net Capital Rule, Rule 15c3-1, which requires net
capital, as defined under the alternative method, of not less than the
greater of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds required to be segregated for
customers' regulated commodity accounts, as defined. Although net
capital, aggregate debit items and funds required to be segregated
change from day to day, at September 30, 1997, SBI's net capital was
$1.2 billion, $1.0 billion in excess of regulatory requirements.
Salomon Brothers International Limited ("SBIL") is authorized to
conduct investment business in the United Kingdom by the Securities and
Futures Authority ("SFA") in accordance with the Financial Services Act
1986. The SFA requires SBIL to have available at all times financial
resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At September 30, 1997, SBIL's financial resources were
$614 million in excess of regulatory requirements.
<PAGE>
Salomon Brothers Asia Limited ("SBAL") and Salomon Brothers AG ("SBAG")
are also subject to requirements to maintain specified levels of net
capital or its equivalent. At September 30, 1997, SBAL's net capital
was $255 million above the minimum required by Japan's Ministry of
Finance. SBAG's net capital was $40 million above the minimum required
by Germany's Banking Supervisory Authority.
In addition, in order to maintain its triple-A rating, Salomon Swapco
Inc ("Swapco") must maintain minimum levels of capital in accordance
with agreements with its rating agencies. At September 30, 1997, Swapco
was in compliance with all such agreements. Swapco's capital
requirements are dynamic, varying with the size and concentration of
its counterparty receivables.
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<CAPTION>
7. Summary of Revenues from Continuing Operations
The following tables present revenues, net of interest expense for the three and
nine months ended September 30, 1997 and 1996.
Three Months Ended September 30, 1997
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income sales and trading $ 737 $ - $ 3 $ 11 $ 751
Equity sales and trading 5 - 86 5 96
Global investment banking - 233 - - 233
Commodities trading 16 - - - 16
Asset management 1 - 1 15 17
Other (3) - - (2) (5)
==================================================================================================================================
Total revenues, net of interest expense $ 756 $ 233 $ 90 $ 29 $ 1,108
==================================================================================================================================
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Three Months Ended September 30, 1996
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income sales and trading $ 595 $ - $ 3 $ - $ 598
Equity sales and trading (87) - 65 (4) (26)
Global investment banking - 187 - - 187
Commodities trading 36 - - - 36
Asset management 1 - - 12 13
Other (4) - 1 48 45
==================================================================================================================================
Total revenues, net of interest expense $ 541 $ 187 $ 69 $ 56 $ 853
==================================================================================================================================
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<CAPTION>
Nine Months Ended September 30, 1997
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income sales and trading $ 1,783 $ - $ 8 $ 11 $ 1,802
Equity sales and trading 283 - 280 5 568
Global investment banking - 674 - - 674
Commodities trading 132 - - - 132
Asset management 9 - 1 44 54
Other (6) - - (4) (10)
==================================================================================================================================
Total revenues, net of interest expense $ 2,201 $ 674 $ 289 $ 56 $ 3,220
==================================================================================================================================
</TABLE>
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<CAPTION>
Nine Months Ended September 30, 1996
Principal
Transactions
& Net
Interest and Investment
(Dollars in millions) Dividends Banking Commissions Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income sales and trading $ 2,025 $ - $ 11 $ - $ 2,036
Equity sales and trading 88 - 222 (4) 306
Global investment banking - 619 - - 619
Commodities trading 253 - - - 253
Asset management 2 - - 34 36
Other 15 - 1 48 64
==================================================================================================================================
Total revenues, net of interest expense $ 2,383 $ 619 $ 234 $ 78 $ 3,314
==================================================================================================================================
</TABLE>
8. Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company
is currently assessing these statements, which are effective for fiscal
years beginning after December 15, 1997 and establish standards for the
reporting and display of comprehensive income and disclosure related to
segments.
9. Recent Developments
The Company's Board of Directors has approved a merger in which the
Company will become a wholly-owned subsidiary of Travelers Group Inc.
("Travelers"). Following the merger, the Company will be combined with
Travelers' subsidiary, Smith Barney Holdings Inc., to form Salomon
Smith Barney Holdings Inc. as a wholly-owned subsidiary of Travelers.
<PAGE>
In the merger, each share of the Company's common stock will be
exchanged for 1.695 shares of Travelers common stock (after the
three-for-two split of Travelers' common stock to be completed on
November 19, 1997). Each share of the Company's preferred stock will be
exchanged for a share of Travelers' preferred stock with substantially
identical terms, except that all the Travelers' preferred stock will
have general voting rights.
Travelers and the Company expect that the merger, which is expected to
close before the end of the year, will be accounted for using the
pooling of interests method of accounting. Travelers has informed
Salomon Inc that as a result of the merger, they expect Salomon Smith
Barney Holdings Inc. to record a restructuring charge of between $400
million and $500 million (after-tax) primarily for severance and costs
related to excess or unused office space and other facilities.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
<TABLE>
<CAPTION>
SUMMARY OF CONSOLIDATED OPERATING RESULTS
Dollars in millions, except per share amounts Three Months Percent Nine Months Percent
Period ended September 30, 1997 1996 Change 1997 1996 Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net of interest expense:
Global investment banking:
Advisory $ 87 $ 65 34 % $ 242 $ 197 23 %
Equity underwriting 82 83 (1) 212 268 (21)
Debt underwriting 64 39 64 220 154 43
- --------------------------------------------------------------------------------------------------------------------------------
Total global investment banking 233 187 25 674 619 9
Fixed income sales and trading 751 598 26 1,802 2,036 (11)
Equity sales and trading 96 (26) n/m 568 306 86
Commodities trading 16 36 (56) 132 253 (48)
Asset management 17 13 31 54 36 50
Other (5) 45 n/m (10) 64 n/m
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,108 $ 853 30 % $ 3,220 $ 3,314 (3)%
================================================================================================================================
Income from continuing operations $ 206 $ 140 47 % $ 599 $ 748 (20)%
================================================================================================================================
Per common share:
Primary earnings from continuing operations $ 1.77 $ 1.15 $ 5.10 $ 6.56
Fully diluted earnings from continuing operations* 1.66 1.08 4.79 5.98
Cash dividends 0.16 0.16 0.48 0.48
Book value at period-end* 43.93 40.67 43.93 40.67
================================================================================================================================
Annualized return on average common stockholders'
equity from continuing operations:
Primary 16.2 % 12.4 % 16.1 % 24.9 %
Fully diluted* 15.4 11.7 15.3 22.5
================================================================================================================================
<FN>
*Assumes conversion of redeemable preferred stock unless such assumption
results in higher earnings per share, book value or return on equity than
determined under the primary method.
</FN>
</TABLE>
The Company recorded income from continuing operations of $206 million, or $1.66
per common share on a fully diluted basis, for the third quarter of 1997,
compared with $140 million, or $1.08 per common share for the third quarter of
1996. Income from continuing operations for the nine months ended September 30,
1997 was $599 million, or $4.79 per common share on a fully diluted basis,
compared with $748 million, or $5.98 per common share for the first nine months
of 1996.
Global investment banking revenues (underwriting plus advisory) for the three
months ended September 30, 1997, were $233 million, a 25% increase over $187
million reported in last year's third quarter. Advisory and debt underwriting
revenues strengthened year over year while equity underwriting revenues were
about even with last year's third quarter. Investment banking revenues for the
nine months ended September 30, 1997 were $674 million, up from $619 million for
the comparable 1996 period.
<PAGE>
Fixed income sales and trading net revenues were $751 million in the third
quarter of 1997, up from $598 million in the year ago quarter. The increase
reflects continued strength in customer sales and trading as well as strong
proprietary trading results. Net revenues for the nine months ended September
30, 1997 were $1,802 million compared with $2,036 million for the nine months
ended September 30, 1996. The year-to-year decrease was attributable to lower
proprietary trading revenues partially offset by increased revenues from
customer sales and trading.
Equity sales and trading net revenues were $96 million in the 1997 third quarter
compared with negative revenues of $26 million for the third quarter of 1996.
Revenues for the third quarter of 1997 were adversely affected by a loss on a
risk arbitrage position in British Telecommunications PLC and MCI Communications
Corporation which has been largely liquidated, partially offset by a gain on the
sale of Valero Energy Corporation common stock received earlier this year in
connection with the sale of Basis Petroleum, Inc. Revenues for the third quarter
of 1996 were adversely affected by losses on long-term proprietary equity
strategies. For the nine months ended September 30, 1997, equity sales and
trading net revenues were $568 million, up from $306 million in the year ago
period, principally reflecting improved results in proprietary trading.
Net revenues from commodities trading activities, which are conducted by Phibro
Inc., were $16 million in the third quarter of 1997, compared with $36 million
in the year ago quarter. Net revenues for the nine months ended September 30,
1997 were $132 million compared with $253 million for the nine months ended
September 30, 1996.
Asset management revenues for the 1997 third quarter were $17 million compared
with $13 million in the year ago quarter. Revenues for the nine months ended
September 30, 1997 were $54 million, up from $36 million in the nine months
ended September 30, 1996.
<TABLE>
<CAPTION>
Noninterest Expenses
(Dollars in millions)
Three Months Nine Months
Period ended September 30, 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and employee-related expenses $ 595 $ 441 $ 1,706 $ 1,537
========================================================================================================================
Compensation expense ratio * 65 % 66 % 64 % 55 %
========================================================================================================================
Total non-compensation expenses $ 191 $ 180 $ 563 $ 532
========================================================================================================================
Non-compensation expense ratio ** 17 % 21 % 17 % 16 %
========================================================================================================================
<FN>
* Compensation and employee-related expenses as a percentage of earnings before
income taxes and compensation and employee-related expenses.
** Non-compensation expenses as a percentage of revenues, net of interest
expense.
</FN>
</TABLE>
Although operating results for the first nine months of 1997 were lower than the
comparable 1996 period, compensation and employee-related expenses were higher,
due to increased headcount and higher levels of market compensation in 1997.
The increases in non-compensation expenses in the first nine months of 1997 are
primarily the result of higher technology expenses. The growth in technology
expenses is due to increased technology consulting fees and desktop hardware and
software costs.
<PAGE>
<TABLE>
<CAPTION>
Capital and Liquidity Management
Dollars in millions
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
Quarter ended 1997 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Weekly Balance Sheet Information:
Government and government agency securities - U.S. $ 55,470 $ 50,279 $ 48,983 $ 48,978 $ 45,464
Government and government agency securities - non-U.S. 43,172 42,923 35,928 35,946 32,017
Financial options and contractual commitments 7,982 6,700 6,936 6,637 5,061
Other financial instruments owned 29,175 28,032 25,867 25,594 21,481
- ------------------------------------------------------------------------------------------------------------------------------------
Total financial instrument inventories 135,799 127,934 117,714 117,155 104,023
- ------------------------------------------------------------------------------------------------------------------------------------
Securities purchased under agreements to resell 76,738 73,378 69,983 64,573 60,971
Securities borrowed 12,544 13,749 13,201 16,488 16,672
Other assets 11,968 9,443 9,638 11,245 9,300
====================================================================================================================================
Average total assets $ 237,049 $ 224,504 $ 210,536 $ 209,461 $ 190,966
====================================================================================================================================
Period-end total assets $ 235,227 $ 235,953 $ 214,051 $ 194,881 $ 190,987
====================================================================================================================================
Period-end net assets* $ 166,149 $ 173,406 $ 143,733 $ 138,345 $ 129,335
====================================================================================================================================
Average net assets* $ 160,311 $ 151,126 $ 140,553 $ 144,888 $ 129,995
====================================================================================================================================
Average net assets, excluding securities borrowed and
government and government agency securities* $ 49,125 $ 44,175 $ 42,441 $ 43,476 $ 35,842
====================================================================================================================================
Average equity** $ 5,919 $ 5,786 $ 5,728 $ 5,700 $ 5,612
====================================================================================================================================
Ratios at period-end:**
Working capital coverage 1.15 1.14 1.13 1.12 1.11
Total capital basis double leverage .63 .65 .74 .76 .81
Average net assets to average equity 27.1 26.1 24.5 25.4 23.2
====================================================================================================================================
Common shares outstanding (in millions) 107.5 107.4 109.2 109.0 105.3
====================================================================================================================================
<FN>
* Net assets are total assets less the lower of securities purchased under
agreements to resell or securities sold under agreements to repurchase.
** Average equity is based on month-end balances; for equity-based ratios,
"total equity" includes common equity, perpetual preferred stock, TRUPS and
redeemable preferred stock.
</FN>
</TABLE>
Average assets for the third quarter of 1997 were $237 billion, up from $225
billion in the second quarter of 1997. Due to the nature of the Company's
trading and funding activities, including its matched-book activities, it is not
uncommon for the Company's asset levels to fluctuate from period to period.
The Company's long-term capital includes common equity, redeemable preferred
stock, perpetual preferred stock, TRUPS, unsecured obligations and long-term
deferred taxes. Long-term capital includes all amounts maturing beyond one year
and a portion of amounts maturing between six months and one year (weighted by
maturity), and excludes all amounts scheduled to mature within six months.
Long-term capital increased from $16.8 billion at December 31, 1996 to $19.3
billion at September 30, 1997, principally due to the net increase of
approximately $3.3 billion in the level of term debt since year-end. The Company
manages the level of long-term capital to be the greater of 110% of working
capital or the capital required to maintain a total capital basis double
leverage ratio of 1.0.
<PAGE>
On October 17, 1997, Berkshire Hathaway, Inc. converted 140,000 shares ($140
million) of Series A cumulative preferred stock into Salomon Inc common stock
(3.7 million shares).
The Company's long-term debt to equity ratio was 2.4 at September 30, 1997. For
this ratio, redeemable preferred stock is treated as common equity; preferred
stock and TRUPS are treated as equity only to the extent that, in total, they
are not greater than 15% of total equity. Amounts in excess of 15% are treated
as long-term debt. Long-term debt excludes 50% of first year maturities.
As of October 31, 1997, the Company's credit ratings were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Thomson
Moody's S&P Fitch Duff & Phelps IBCA Bankwatch
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt Baa1 BBB A- A- A- A
Commercial paper P-2 A2 F-1 D-1 A1 TBW-1
Issuer - - - - B/C B/C
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers' trading portfolio of high-yield securities, carried at market
value, totaled $6.4 billion at September 30, 1997, compared with $4.4 billion at
December 31, 1996. High-yield securities include corporate debt, convertible
debt, preferred and convertible preferred equity securities rated lower than
"triple B-" by internationally recognized rating agencies as well as sovereign
debt issued by less developed countries in currencies other than their local
currencies and which are not collateralized by U.S. government securities. For
example, high-yield securities exclude the collateralized portion of "Brady
Bonds," but include such securities to the extent they are not collateralized.
Unrated securities with market yields comparable to entities rated below "triple
B-" are also included in high-yield securities. The largest single high-yield
exposure to a single counterparty was $554 million at September 30, 1997. In
addition, at September 30, 1997 the Company had $166 million in bank loan
commitments outstanding.
Book value per share increased to $43.93 at September 30, 1997, from $40.03 at
December 31, 1996. Through September 30, 1997, the Company repurchased two
million common shares for treasury in 1997 at an average price of $51.65 per
share. Shares authorized for additional repurchase by the Company's Board of
Directors totaled approximately 6.5 million at September 30, 1997.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
Dollars in millions, except per share amounts 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the quarter:
Revenues, net of interest expense:
Global investment banking:
Advisory $ 87 $ 83 $ 72 $ 75 $ 65
Equity underwriting 82 72 58 66 83
Debt underwriting 64 66 90 93 39
- ----------------------------------------------------------------------------------------------------------------------------------
Total global investment banking 233 221 220 234 187
Fixed income sales and trading 751 532 519 588 598
Equity sales and trading 96 229 243 83 (26)
Commodities trading 16 91 25 100 36
Asset management 17 20 17 15 13
Other (5) (3) (2) 33 45
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 1,108 1,090 1,022 1,053 853
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 595 546 565 502 441
Other noninterest expenses 191 194 178 186 180
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 786 740 743 688 621
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 322 350 279 365 232
Income tax expense 116 130 106 131 92
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 206 220 173 234 140
Loss from discontinued operations, net of tax - - - (296) (28)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 206 $ 220 $ 173 $ (62) $ 112
==================================================================================================================================
Annualized return on average common stockholders'
equity from continuing operations:
Primary 16.2% 17.9% 14.0% 21.1% 12.4%
Fully diluted* 15.4 17.0 13.4 19.6 11.7
==================================================================================================================================
Per common share:
Primary earnings from continuing operations $ 1.77 $ 1.89 $ 1.44 $ 2.03 $ 1.15
Primary earnings (loss) 1.77 1.89 1.44 (0.71) 0.88
Fully diluted earnings from continuing operations* 1.66 1.77 1.37 1.88 1.08
Fully diluted earnings (loss)* 1.66 1.77 1.37 (0.71) 0.85
Cash dividends 0.16 0.16 0.16 0.16 0.16
High market price 79 15/16 58 5/8 61 3/8 49 46 7/8
Low market price 53 13/16 49 46 44 1/8 38
Ending market price 75 3/16 55 5/8 49 7/8 47 1/8 45 5/8
Book value at period-end 43.93 42.52 41.13 40.03 40.67
==================================================================================================================================
Full-time employees:
Salomon Brothers 7,269 7,027 6,858 6,808 6,683
Salomon Inc (excluding Basis) 7,514 7,294 7,151 7,146 7,084
==================================================================================================================================
<FN>
* Assumes conversion of redeemable preferred stock outstanding unless such
assumption results in higher returns on equity or earnings per share than
determined under the primary method.
</FN>
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 9, 1997, the Company's subsidiary, Philipp Brothers, Inc.,
received an information request from USEPA pursuant to Section 104(e)
of the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (CERCLA) regarding activities relating to the Bunker Hill
Superfund Site in Kellogg, Idaho. On June 26, 1997, the U.S.
Departments of Agriculture and Interior and the Coeur D'Alene Tribe
gave notice to Philipp Brothers, Inc. of their intention to join
Philipp Brothers, Inc. as a defendant in an action brought, under
CERCLA, in the Federal District Court in Idaho to recover natural
resource damages caused by activities in the "Coeur D'Alene Basin," an
area in northern Idaho encompassing the Bunker Hill Superfund Site. On
August 29, 1997, the United States moved, in the Federal District Court
in Idaho, for leave to amend its complaint in United States v. Asarco
Incorporated et al (D.C. Ida., Civ. No. 96-0122-N-EJL) to join 23
additional parties, including Philipp Brothers, Inc., as defendants in
an action brought by the United States to recover response costs and
natural resource damages under CERCLA. On the same date, the Coeur
D'Alene Tribe moved, in the same court, for leave to amend its
complaint in Coeur D'Alene Tribe v. Asarco Incorporated et al (D.C.
Ida., Civ. No. 91-0342-N-EJL) to join 13 additional parties, including
Philipp Brothers, Inc., as defendants in an action brought by the Tribe
to recover natural resource damages under CERCLA. The court has not
ruled on plaintiff's motion in either action. The Company cannot
determine at this time the extent of its liability, if any, under
CERCLA with respect to the Bunker Hill Superfund Site, although the
Company believes that it conducted no activities which give rise to
such liability.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.a Calculation of ratio of earnings to fixed charges*
12.b Calculation of ratio of earnings to combined fixed charges and
preferred dividends*
27 Financial Data Schedule*
*filed herewith
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated September 24,
1997, reporting under Item 5 ("Other Events") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits") exhibit 2,
Agreement and Plan of Merger and exhibit 99, the issuance of a press
release announcing the execution and delivery of the Merger Agreement.
The Company filed a Current Report on Form 8-K dated September 24,
1997, reporting under Item 5 ("Other Events") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits") exhibit
23.01 and 23.02, Consents of Independent Certified Public Accounts,
exhibit 99.01, Travelers Group Inc. December 31, 1996 Annual Report on
Form 10-K, exhibit 99.02, Travelers Group Inc. June 30, 1997 Quarterly
Report of Form 10-Q, exhibit 99.03, Smith Barney Holdings Inc. December
31, 1996 Annual Report on Form 10-K, exhibit 99.04, Smith Barney
Holdings Inc. June 30, 1997 Quarterly Report on Form 10-Q, exhibit
99.05, Travelers Pro Forma Financials and exhibit 99.06, Smith Barney
Pro Forma Financials.
<PAGE>
The Company filed a Current Report on Form 8-K dated October 21, 1997,
reporting under Item 5 ("Other Events") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits") the issuance
of a press release.
The Company filed a Current Report on Form 8-K dated October 28, 1997,
reporting under Item 5 ("Other Events") and Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits") exhibit 23,
Consent of KPMG Peat Marwick LLP and exhibit 99, Form 10-K/A-2 of
Travelers Group Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALOMON INC
(Registrant)
Date November 13, 1997 /s/ Jerome H. Bailey
----------------- --------------------
Chief Financial Officer
Date November 13, 1997 /s/ Arnold S. Olshin
----------------- --------------------
Secretary
<PAGE>
Form 10-Q Exhibit Index
The following exhibits are filed herewith:
Exhibit Number
12.a Calculation of ratio of earnings to fixed charges
12.b Calculation of ratio of earnings to combined fixed charges and
preferred dividends
27 Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 12.a
SALOMON INC AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
Nine
Months
Ended
September 30, Years Ended December 31,
---------------------------------------------------------------
Dollars in millions 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations:
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles $ 951 $ 1,610 $ 799 $ (849) $ 1,511 $ 1,103
Add fixed charges (see below) 3,967 4,711 5,786 4,898 4,625 4,347
Other adjustments 0 1 0 0 22 20
=========== ======== ======= ======= ======== ========
Earnings as defined $ 4,918 $ 6,322 $ 6,585 $ 4,049 $ 6,158 $ 5,470
=========== ======== ======= ======= ======== ========
Fixed charges from continuing operations:
Interest expense $ 3,944 $ 4,679 $ 5,754 $ 4,873 $ 4,581 $ 4,299
Other adjustments 23 32 32 25 44 48
=========== ======== ======= ======= ======== ========
Fixed charges from continuing operations as defined $ 3,967 $ 4,711 $ 5,786 $ 4,898 $ 4,625 $ 4,347
=========== ======== ======= ======= ======== ========
Ratio of earnings to fixed charges 1.24 1.34 1.14 0.83 * 1.33 1.26
=========== ======== ======= ======= ======== ========
<FN>
NOTE:
The ratio of earnings to fixed charges from continuing operations is calculated
by dividing fixed charges into the sum of income (loss) from continuing
operations before income taxes and cumulative effect of change in accounting
principles and fixed charges. Fixed charges consist of interest expense,
including capitalized interest and a portion of rental expense representative of
the interest factor.
* For the year ended December 31, 1994, earnings as defined were inadequate to
cover fixed charges. The amount by which fixed charges exceeded earnings as
defined for the year was $849 million.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12.b
SALOMON INC AND SUBSIDIARIES
Calculation of Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends
(Unaudited)
Nine
Months
Ended
September 30, Years Ended December 31,
---------------------------------------------------------------
Dollars in millions 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations:
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principles $ 951 $ 1,610 $ 799 $ (849) $ 1,511 $ 1,103
Add fixed charges (see below) 3,967 4,711 5,786 4,898 4,625 4,347
Other adjustments 0 1 0 0 22 20
----------- -------- ------- ------- -------- --------
Earnings as defined $ 4,918 $ 6,322 $ 6,585 $ 4,049 $ 6,158 $ 5,470
=========== ======== ======= ======= ======== ========
Fixed charges from continuing operations and
preferred dividends:
Interest expense $ 3,944 $ 4,679 $ 5,754 $ 4,873 $ 4,581 $ 4,299
Other adjustments 23 32 32 25 44 48
----------- -------- ------- ------- -------- --------
Fixed charges from continuing operations as defined 3,967 4,711 5,786 4,898 4,625 4,347
Preferred stock dividends (tax equivalent basis) 73 111 106 129 83 131
----------- -------- ------- ------- -------- --------
Combined fixed charges and preferred dividends $ 4,040 $ 4,822 $ 5,892 $ 5,027 $ 4,708 $ 4,478
=========== ======== ======= ======= ======== ========
Ratio of earnings to combined fixed charges
and preferred dividends 1.22 1.31 1.12 0.81 * 1.31 1.22
=========== ======== ======= ======= ======== ========
<FN>
NOTES:
The ratio of earnings to combined fixed charges from continuing operations and
preferred dividends was calculated by dividing the sum of combined fixed charges
and tax equivalent preferred dividends into the sum of income (loss) from
continuing operations before income taxes and cumulative effect of change in
accounting principles and fixed charges. Fixed charges consist of interest
expense, including capitalized interest and a portion of rental expense
representative of the interest factor.
The preferred stock dividend amounts represent the pretax earnings necessary to
cover preferred dividends after adjusting for the effects of interest rate
swaps, which effectively convert these fixed rate obligations into variable rate
obligations.
* For the year ended December 31, 1994, earnings as defined were inadequate to
cover fixed charges, including preferred dividends. The amount by which
fixed charges, including preferred dividends, exceeded earnings as defined
for the year ended December 31, 1994 was $978 million.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
Exhibit 27
THE SCHEDULE CONTAINS CERTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S September 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,134
<RECEIVABLES> 6,950
<SECURITIES-RESALE> 69,078
<SECURITIES-BORROWED> 20,800
<INSTRUMENTS-OWNED> 134,152
<PP&E> 499
<TOTAL-ASSETS> 235,227
<SHORT-TERM> 6,086
<PAYABLES> 9,864
<REPOS-SOLD> 113,461
<SECURITIES-LOANED> 5,638
<INSTRUMENTS-SOLD> 77,173
<LONG-TERM> 16,710
420
450
<COMMON> 159
<OTHER-SE> 4,657
<TOTAL-LIABILITY-AND-EQUITY> 235,227
<TRADING-REVENUE> 1,449
<INTEREST-DIVIDENDS> 4,696
<COMMISSIONS> 289
<INVESTMENT-BANKING-REVENUES> 674
<FEE-REVENUE> 56
<INTEREST-EXPENSE> 3,944
<COMPENSATION> 1,706
<INCOME-PRETAX> 951
<INCOME-PRE-EXTRAORDINARY> 599
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 599
<EPS-PRIMARY> 5.10
<EPS-DILUTED> 4.79
</TABLE>
