SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 24, 1997
----------------------------
Smith Barney Holdings Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-12484 06-1274088
--------------- ----------- -------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
388 Greenwich Street, New York, New York 10013
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(Address of principal executive offices) (Zip Code)
(212) 816-6000
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(Registrant's telephone number, including area code)
<PAGE>
SMITH BARNEY HOLDINGS INC.
Current Report on Form 8-K
Item 5. Other Events.
On September 24, 1997, Travelers Group Inc. ("Travelers Group") and
Salomon Inc ("Salomon") announced that they have entered into a definitive
agreement pursuant to which a wholly owned subsidiary of Travelers Group will
merge with and into Salomon. The transaction has been approved by the Boards of
Directors of both Travelers Group and Salomon. Pursuant to the Merger Agreement,
Salomon common stockholders will receive 1.13 shares of Travelers Group common
stock for each share of Salomon common stock that they own, for a total value of
approximately $9 billion; each share of preferred stock of Salomon will be
converted into a share of a substantially identical series of preferred stock of
Travelers Group; and Salomon will become a wholly owned subsidiary of Travelers
Group. After the merger, Salomon and Smith Barney Holdings Inc. will merge to
form Salomon Smith Barney Holdings Inc.
The transaction is expected to be completed by year-end 1997. It is
subject to various regulatory approvals, including under the Hart-Scott-Rodino
Antitrust Improvements Act and by certain regulatory entities, and approval by
Salomon stockholders. The merger will be a tax-free exchange and will be
accounted for on a "pooling of interests" basis.
The consolidated financial statements of Salomon and its subsidiaries as
of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996 are being filed as Exhibit 99.01 to this Form 8-K and
are incorporated herein by reference. The unaudited consolidated financial
statements of Salomon and its subsidiaries as of June 30, 1997 and for the
six-month periods ended June 30, 1997 and 1996 are being filed as Exhibit 99.02
to this Form 8-K and are incorporated herein by reference. Certain pro forma
financial information with respect to the proposed transaction is being filed as
Exhibit 99.03 to this Form 8-K and is incorporated herein by reference.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits:
Exhibit No. Description
23.01 Consent of Arthur Andersen LLP
99.01 Consolidated financial statements of Salomon Inc
and its subsidiaries as of December 31, 1996 and
1995 and for each of the years in the three-year
period ended December 31, 1996, together with the
notes thereto and the report of the independent
auditors
99.02 Unaudited consolidated financial statements of
Salomon Inc as of June 30, 1997 and for the
six-month periods ended June 30, 1997 and 1996,
together with the notes thereto
99.03 Unaudited Pro Forma Condensed Combined Statement
of Financial Condition as of June 30, 1997, and
Unaudited Pro Forma Condensed Combined Statement
of Operations for the six months ended June 30,
1997 and 1996 and for each of the years in the
three-year period ended December 31, 1996
<PAGE>
SIGNATURE
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 hereunto duly authorized.
Dated: September 25, 1997
SMITH BARNEY HOLDINGS INC.
By: /s/ Mark I. Kleinman
----------------------
Mark I. Kleinman
Executive Vice President
and Treasurer
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements on Form S-3 (Nos. 33-70340, 33-72856,
33-78010, 33-92706, 333-17831 and 333-30175) of Smith Barney Holdings Inc. of
our report dated March 13, 1997, related to the consolidated statement of
financial position of Salomon Inc 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, which report is incorporated by reference or included
in the annual report on Form 10-K of Salomon Inc for the year ended December 31,
1996.
/s/ ARTHUR ANDERSEN LLP
New York, New York
September 25, 1997
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
1
<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
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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.
2
<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.
3
<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>
4
<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.
5
<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.
6
<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.
7
<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
8
<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.
9
<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.
10
<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.
11
<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.
12
<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>
13
<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.
14
<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.
15
<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
==============================================================================
16
<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.
17
<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.
18
<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.
19
<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.
20
<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>
21
<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.
22
<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.
23
<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.
24
<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).
25
<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.
26
<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
27
<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.
28
<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.
29
<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.
30
<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%
==============================================================================
31
<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.
32
<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.
33
<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.
34
<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.
35
<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.
36
<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-
37
<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.
38
<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.
39
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Dollars in millions, except per share amounts Six months
- ------------------------------------------------------------------------------------------------
Period ended June 30, 1997 1996
- ------------------------------------------------------------------------------------------------
Revenues from continuing operations:
<S> <C> <C>
Interest and dividends $ 3,045 $ 3,008
Principal transactions 927 1,235
Investment banking 441 432
Commissions 199 165
Other 27 22
- ------------------------------------------------------------------------------------------------
Total revenues 4,639 4,862
Interest expense 2,527 2,401
- ------------------------------------------------------------------------------------------------
Revenues, net of interest expense 2,112 2,461
- ------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee-related 1,111 1,096
Technology 115 96
Professional services and business development 90 92
Occupancy 82 85
Clearing and exchange fees 40 34
Other 45 45
- ------------------------------------------------------------------------------------------------
Total noninterest expenses 1,483 1,448
- ------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 629 1,013
Income tax expense 236 405
- ------------------------------------------------------------------------------------------------
Income from continuing operations 393 608
Loss from discontinued operations, net of taxes - (41)
- ------------------------------------------------------------------------------------------------
Net income $ 393 $ 567
================================================================================================
Earnings available for fully diluted earnings per common share
from continuing operations $ 378 $ 593
================================================================================================
Per common share:
Primary earnings from continuing operations $ 3.34 $ 5.41
Primary earnings 3.34 5.02
Fully diluted earnings from continuing operations* 3.14 4.89
Fully diluted earnings* 3.14 4.55
Cash dividends 0.32 0.32
================================================================================================
Weighted average shares of common stock outstanding (in thousands):
For primary earnings per common share 108,800 106,000
For fully diluted earnings per common share 120,300 121,200
================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
* Assumes conversion of redeemable preferred stock unless such assumption
results in higher earnings per share than determined under the primary method.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
- -----------------------------------------------------------------------------------------------
ASSETS June 30, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and interest bearing equivalents $ 2,081
Financial instruments and contractual commitments:
Government and government agency securities - U.S. $ 53,364
Government and government agency securities - non-U.S. 43,407
Corporate debt securities 14,235
Equity securities 7,851
Options and contractual commitments 7,145
Mortgage loans and collateralized mortgage securities 3,234
Other 3,612
------------
132,848
Commodities and related products and instruments:
Physical commodities inventory 1,366
Options and contractual commitments 167
------------
1,533
Collateralized short-term financing agreements:
Securities purchased under agreements to resell 62,547
Securities borrowed and other 28,773
------------
91,320
Receivables 6,638
Assets securing collateralized mortgage obligations 337
Property, plant and equipment, net 505
Net realizable value of discontinued operations (Note 3) -
Other assets, including intangibles 691
- -----------------------------------------------------------------------------------------------
Total assets $ 235,953
===============================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(unaudited)
Dollars in millions
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Collateralized short-term financing agreements:
Securities sold under agreements to repurchase $ 105,999
Securities loaned 2,815
------------
$ 108,814
Short-term borrowings 8,036
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments:
Government and government agency securities - U.S. 31,857
Government and government agency securities - non-U.S. 36,126
Financial options and contractual commitments 10,037
Equity securities 7,027
Corporate debt securities and other 1,834
Commodities, including options and contractual commitments 177
------------
87,058
Payables and accrued liabilities 9,785
Collateralized mortgage obligations 327
Term debt 16,080
-----------
Total liabilities 230,100
Commitments and contingencies (Note 4)
Redeemable preferred stock, Series A 420
Guaranteed preferred beneficial interests in Company subordinated
debt securities (Note 5) 345
Stockholders' equity:
Preferred stock, Series D and E 450
Common stock 159
Additional paid-in capital 438
Retained earnings 5,811
Cumulative translation adjustments (1)
Common stock held in treasury, at cost (1,769)
------------
Total stockholders' equity 5,088
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 235,953
=====================================================================================================
<FN>
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
and the Unaudited Consolidated Summary of Options and Contractual Commitments
are integral parts of this statement.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPTIONS AND CONTRACTUAL COMMITMENTS
(unaudited)
June 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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $ 567.5 $ - $ - $ 525.3 $ - $ -
Other exchange-issued products:
Equity contracts 15.1 .2 .5 12.9 .1 .2
Fixed income contracts 89.4 - - 59.0 - -
Foreign exchange contracts .1 - - - - -
Commodities-related contracts 4.0 - - 4.9 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 676.1 .2 .5 602.1 .1 .2
- -----------------------------------------------------------------------------------------------------------------------------------
Over-the-counter ("OTC") swaps, swap options,
caps and floors:
Swaps (b) 1,057.2 852.4
Swap options written 15.5 9.7
Swap options purchased 30.8 23.3
Caps and floors 137.6 114.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 1,241.1 3.7 6.2 999.8 4.2 6.5
- -----------------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts (b) 82.3 .6 .4 68.3 .5 .5
Options written 26.8 - .3 31.6 - .2
Options purchased 29.9 .5 - 32.9 .4 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 139.0 1.1 .7 132.8 .9 .7
- -----------------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options, warrants and forwards on equities
and equity indices (c) 57.0 1.8 2.5 45.6 1.1 1.8
Options and forward contracts on fixed-income
securities (c) 244.6 .3 .1 179.0 .3 .2
Commodities-related contracts (d) 16.5 .2 .2 22.0 .3 .3
- -----------------------------------------------------------------------------------------------------------------------------------
Total $2,374.3 $ 7.3 $ 10.2 $1,981.3 $ 6.9 $ 9.7
- -----------------------------------------------------------------------------------------------------------------------------------
<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 or forward currency contracts
for non-trading activities (primarily related to the Company's fixed-rate
long-term debt, TRUPS and preferred stock) of $18.9 billion and $1.7
billion at June 30, 1997 and $15.5 billion and $1.3 billion at December 31,
1996, respectively.
(c) The fair value of such instruments recorded as assets includes
approximately $1.0 billion at June 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.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CREDIT EXPOSURE, NET OF SECURITIES AND CASH COLLATERAL ON OTC
SWAPS, SWAP OPTIONS, CAPS AND FLOORS AND OTC FOREIGN EXCHANGE CONTRACTS AND
OPTIONS, BY RISK CLASS*
Note: Amounts represent current exposure and do not include potential
credit exposure that may result from factors that influence market risk.
Transactions
with over
Dollars in billions All Transactions 3 years to
maturity
- ----------------------------------------------------------------------------------------------------------------------------------
Other Major
Derivatives Financial Governments/ Year-to-date
June 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 $ .4 $ - $ .5 $ - $ - $ .9 $ 1.0 $ .8
Risk class 3 .7 .2 .1 - .1 1.1 1.1 .6
Risk classes 4 and 5 .3 .1 .2 - .1 .7 .7 .4
Risk classes 6, 7 and 8 - - - - - - - -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
$ 1.4 $ .3 $ .8 $ - $ .2 $ 2.7 $ 2.8 $ 1.8
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
Foreign exchange contracts
and options:
Risk classes 1 and 2 $ .5 $ - $ - $ .1 $ - $ .6 $ .8 $ -
Risk class 3 .3 - .1 - - .4 .3 -
Risk classes 4 and 5 .1 - - - - .1 .1 -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
$ .9 $ - $ .1 $ .1 $ - $ 1.1 $ 1.2 $ -
------------ ---------- ----------- ------------- ----------- ---------- --------------- ------------
<FN>
* To monitor credit risk, the Company utilizes a series of eight internal
designations of counterparty credit quality. These designations are analogous
to external credit ratings whereby risk classes one through three are high
quality investment grades. Risk classes four and five include counterparties
ranging from the lowest investment grade to the highest non-investment grade
level. Risk classes six, seven and eight represent higher risk
counterparties.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SALOMON INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Dollars in millions
- ----------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income adjusted for noncash and non-operating activities -
Net income $ 393 $ 567
Depreciation, amortization and other 42 57
- ----------------------------------------------------------------------------------------------------------------------
Cash items included in net income 435 624
- ----------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets -
Financial instruments and contractual commitments (20,362) 11,422
Commodities and related products and instruments (223) 292
Collateralized short-term financing agreements (18,622) (6,234)
Receivables (1,535) (157)
Other (71) (72)
- ----------------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating assets (40,813) 5,251
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in operating liabilities -
Collateralized short-term financing agreements 29,687 (16,448)
Short-term borrowings 1,219 (3,014)
Financial and commodities-related instruments sold,
not yet purchased, and contractual commitments 3,551 14,175
Payables and accrued liabilities 3,733 (1,011)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in operating liabilities 38,190 (6,298)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,188) (423)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of term debt 4,055 2,621
Issuance of preferred stock, Series E - 250
Employee stock purchase and option plans 5 -
Term debt maturities and repurchases (1,192) (1,969)
Collateralized mortgage obligations (63) (284)
Purchase of common stock for treasury (103) (49)
Dividends on common stock (34) (34)
Dividends on preferred stock* (30) (35)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,638 500
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Assets securing collateralized mortgage obligations 63 351
Proceeds from sale of Basis Petroleum 365 -
Property, plant and equipment (27) (69)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 401 282
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and interest bearing equivalents 851 359
Cash and interest bearing equivalents at January 1, 1,230 1,454
- ----------------------------------------------------------------------------------------------------------------------
Cash and interest bearing equivalents at June 30, $ 2,081 $ 1,813
======================================================================================================================
<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 six months ended June 30, 1997 and 1996, dividends on preferred stock
were reduced by the aftertax impact ( $8 million and $12 million) of interest
rate swaps that effectively convert the Company's fixed-rate obligations to
variable-rate obligations.
</FN>
</TABLE>
6
<PAGE>
Salomon Inc and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 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
discontinued operations 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 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.
7
<PAGE>
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. 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 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."
8
<PAGE>
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. Additionally, in
order to adapt systems for Year 2000 processing and the European
Monetary Union, the Company anticipates incurring $100 million to $150
million in additional expenses through the Year 2000.
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 June 30, 1997, SBI's net capital was $1.0
billion, $938 million in excess of regulatory requirements.
Salomon Brothers International Limited ("SBIL") is authorized to
conduct investment business in the United Kingdom by the Securities and
Futures Authority ("SFA") in accordance with the Financial Services Act
1986. The SFA requires SBIL to have available at all times financial
resources, as defined, sufficient to demonstrate continuing compliance
with its rules. At June 30, 1997, SBIL's financial resources were $483
million in excess of regulatory requirements.
Salomon Brothers Asia Limited ("SBAL") and Salomon Brothers AG ("SBAG")
are also subject to requirements to maintain specified levels of net
capital or its equivalent. At June 30, 1997, SBAL's net capital was
$305 million above the minimum required by Japan's Ministry of Finance.
SBAG's net capital was $1 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 June 30, 1997,
9
<PAGE>
Swapco was in compliance with all such agreements. Swapco's capital
requirements are dynamic, varying with the size and concentration of
its counterparty receivables.
7. Summary of Revenues from Continuing Operations
The following tables present revenues, net of interest expense for the six
months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Six Months Ended June 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 $ 1,046 $ - $ 5 $ - $ 1,051
Equity sales and trading 278 - 194 - 472
Global investment banking - 441 - - 441
Commodities trading 116 - - - 116
Asset management 8 - - 29 37
Other (3) - - (2) (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,445 $ 441 $ 199 $ 27 $ 2,112
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 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 $ 1,430 $ - $ 8 $ - $ 1,438
Equity sales and trading 175 - 157 - 332
Global investment banking - 432 - - 432
Commodities trading 217 - - - 217
Asset management 1 - - 22 23
Other 19 - - - 19
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,842 $ 432 $ 165 $ 22 $ 2,461
==================================================================================================================================
</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.
10
Unaudited Pro Forma Condensed Combined Financial Statements
The Merger Agreement provides that each share of Salomon Inc ("Salomon") common
stock will be exchanged for 1.13 shares of Travelers Group Inc. ("Travelers
Group") common stock. The merger, which is expected to be completed in the
fourth quarter of 1997, is expected to be accounted for under the pooling of
interests method. Pursuant to the Merger Agreement, Salomon will be merged with
Smith Barney Holdings Inc. ("Smith Barney"), a wholly owned subsidiary of
Travelers Group. The assets and liabilities of both companies will be combined
at historical cost. Historical consolidated financial statements presented in
future reports will be restated to include the accounts and results of Salomon.
The merger is subject to customary closing conditions, including regulatory and
Salomon stockholder approval.
The following unaudited pro forma condensed combined statement of financial
condition combines the historical consolidated statement of financial condition
of Smith Barney and the historical consolidated statement of financial condition
of Salomon giving effect to the merger as though the transaction had been
consummated on June 30, 1997. The following unaudited pro forma condensed
combined statements of operations combine the historical statements of
operations of Smith Barney and Salomon giving effect to the merger. This
information should be read in conjunction with the accompanying notes hereto;
the separate historical financial statements of Smith Barney as of June 30, 1997
and for the six months ended June 30, 1997 and 1996, and for each of the three
years ended December 31, 1996 which are contained in Smith Barney's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997 and its Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, respectively;
and the separate historical financial statements of Salomon as of June 30, 1997
and for the six months ended June 30, 1997 and 1996, and for each of the three
years ended December 31, 1996 which are contained in Salomon's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1997 and its Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, respectively.
The pro forma financial data is not necessarily indicative of the results of
operations that would have occurred had the merger been consummated or of future
operations of the combined company.
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1997
(In millions)
<TABLE>
<CAPTION>
Smith Barney Salomon Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents $ 232 $ 2,081 $ 2,313
Cash segregated and on deposit for Federal and other
regulations and deposits with clearing organizations 1,421 - 1,421
Securities purchased under agreements to resell 14,610 62,547 77,157
Deposits paid for securities borrowed 13,340 28,773 42,113
Receivables:
Customers 7,561 4,877 12,438
Brokers and dealers 946 1,137 2,083
Other 762 624 1,386
Securities owned, at market value 14,014 132,848 146,862
Commodities and related products and instruments - 1,533 1,533
Property, equipment and leasehold improvements, at
cost, net of accumulated depreciation and amortization 450 505 955
Excess of purchase price over fair value of net assets
acquired, net of accumulated amortization 274 - 274
Other assets 2,127 1,028 - 3,155
-----------------------------------------------------
Total assets $55,737 $235,953 $ - $291,690
=====================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Commercial paper and other short-term borrowings $ 4,268 $ 8,036 12,304
Securities sold under agreements to repurchase 19,479 105,999 125,478
Deposits received for securities loaned 6,431 2,815 9,246
Payables to Customers 4,784 3,290 8,074
Payables to Brokers and dealers 258 3,979 4,237
Securities sold not yet purchased, at market value 9,640 87,058 96,698
Notes payable 2,735 16,050 18,785
Other payables and accrued liabilities 4,927 2,843 7,770
Subordinated indebtedness 224 30 254
-----------------------------------------------------
Total liabilities 52,746 230,100 - 282,846
-----------------------------------------------------
Redeemable preferred stock - 420 (420) 0
Guaranteed preferred beneficial interests in
subordinated debt securities - 345 345
Stockholder's equity:
Preferred stock - 450 (450) 0
Common stock - 159 (53) 106
Additional paid-in capital 1,803 438 750 2,991
Retained earnings 1,183 5,811 (1,596) 5,398
Treasury stock, at cost - (1,769) 1,769 0
Cumulative translation adjustment 5 (1) 4
-----------------------------------------------------
Total stockholder's equity 2,991 5,088 420 8,499
-----------------------------------------------------
Total liabilities and stockholder's equity $55,737 $235,953 $ - $291,690
=====================================================
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(In millions)
<TABLE>
<CAPTION>
Smith Barney Salomon Pro Forma
Historical Historical Combined
---------- ---------- --------
<S> <C> <C> <C>
Revenues:
Commissions $1,183 $ 199 $1,382
Principal transactions 514 927 1,441
Investment banking 518 441 959
Asset management and administration fees 762 29 791
Other 52 -- 52
-----------------------------------
Total non-interest revenues 3,029 1,596 4,625
Interest and dividends 1,160 3,045 4,205
Interest expense 926 2,527 3,453
-----------------------------------
Net interest and dividends 234 518 752
-----------------------------------
Net revenues 3,263 2,114 5,377
Expenses, excluding interest:
Employee compensation and benefits 1,812 1,111 2,923
Communications, occupancy and equipment 274 197 471
Floor brokerage and other production 84 40 124
Other operating and administrative expenses 306 137 443
-----------------------------------
Total expenses, excluding interest 2,476 1,485 3,961
-----------------------------------
Income before income taxes 787 629 1,416
Income tax expense 318 236 554
-----------------------------------
Income from continuing operations $ 469 $ 393 $ 862
===================================
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(In millions)
<TABLE>
<CAPTION>
Smith Barney Salomon Pro Forma
Historical Historical Combined
---------- ---------- --------
<S> <C> <C> <C>
Revenues:
Commissions $1,182 $ 165 $1,347
Principal transactions 543 1,235 1,778
Investment banking 576 432 1,008
Asset management and administration fees 648 22 670
Other 57 -- 57
-----------------------------------
Total non-interest revenues 3,006 1,854 4,860
Interest and dividends 908 3,008 3,916
Interest expense 713 2,401 3,114
-----------------------------------
Net interest and dividends 195 607 802
-----------------------------------
Net revenues 3,201 2,461 5,662
Expenses, excluding interest:
Employee compensation and benefits 1,811 1,096 2,907
Communications, occupancy and equipment 278 181 459
Floor brokerage and other production 74 34 108
Other operating and administrative expenses 298 137 435
-----------------------------------
Total expenses, excluding interest 2,461 1,448 3,909
-----------------------------------
Income before income taxes 740 1,013 1,753
Income tax expense 288 405 693
-----------------------------------
Income from continuing operations $ 452 $ 608 $1,060
===================================
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(In millions)
<TABLE>
<CAPTION>
Smith Barney Salomon Pro Forma
Historical Historical Combined
---------- ---------- --------
<S> <C> <C> <C>
Revenues:
Commissions $2,250 $ 326 $ 2,576
Principal transactions 990 1,990 2,980
Investment banking 1,148 853 2,001
Asset management and administration fees 1,349 48 1,397
Other 111 81 192
-----------------------------------
Total non-interest revenues 5,848 3,298 9,146
Interest and dividends 1,926 5,748 7,674
Interest expense 1,507 4,679 6,186
-----------------------------------
Net interest and dividends 419 1,069 1,488
-----------------------------------
Net revenues 6,267 4,367 10,634
Expenses, excluding interest:
Employee compensation and benefits 3,522 2,039 5,561
Communications, occupancy and equipment 565 374 939
Floor brokerage and other production 147 74 221
Other operating and administrative expenses 579 270 849
-----------------------------------
Total expenses, excluding interest 4,813 2,757 7,570
-----------------------------------
Income before income taxes 1,454 1,610 3,064
Income tax expense 571 628 1,199
-----------------------------------
Income from continuing operations $ 883 $ 982 $ 1,865
===================================
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(In millions)
<TABLE>
<CAPTION>
Smith Barney Salomon Pro Forma
Historical Historical Combined
---------- ---------- --------
<S> <C> <C> <C>
Revenues:
Commissions $2,008 $ 332 $2,340
Principal transactions 1,016 1,077 2,093
Investment banking 847 472 1,319
Asset management and administration fees 1,052 39 1,091
Other 108 12 120
------------------------------
Total non-interest revenues 5,031 1,932 6,963
Interest and dividends 1,752 7,021 8,773
Interest expense 1,375 5,754 7,129
------------------------------
Net interest and dividends 377 1,267 1,644
------------------------------
Net revenues 5,408 3,199 8,607
Expenses, excluding interest:
Employee compensation and benefits 3,193 1,710 4,903
Communications, occupancy and equipment 572 385 957
Floor brokerage and other production 137 63 200
Other operating and administrative expenses 485 242 727
------------------------------
Total expenses, excluding interest 4,387 2,400 6,787
------------------------------
Income before income taxes 1,021 799 1,820
Income tax expense 426 286 712
------------------------------
Income from continuing operations $ 595 $ 513 $1,108
==============================
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
SMITH BARNEY HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(In millions)
<TABLE>
<CAPTION>
Smith Barney Salomon Pro Forma
Historical Historical Combined
---------- ---------- --------
<S> <C> <C> <C>
Revenues:
Commissions $1,800 $ 336 $ 2,136
Principal transactions 900 (560) 340
Investment banking 680 486 1,166
Asset management and administration fees 941 23 964
Other 98 7 105
---------------------------------
Total non-interest revenues 4,419 292 4,711
Interest and dividends 1,099 5,902 7,001
Interest expense 770 4,873 5,643
---------------------------------
Net interest and dividends 329 1,029 1,358
---------------------------------
Net revenues 4,748 1,321 6,069
Expenses, excluding interest:
Employee compensation and benefits 2,953 1,455 4,408
Communications, occupancy and equipment 574 383 957
Floor brokerage and other production 138 70 208
Other operating and administrative expenses 441 262 703
---------------------------------
Total expenses, excluding interest 4,106 2,170 6,276
---------------------------------
Gain on sale of equity investment 34 -- 34
---------------------------------
Income (loss) before income taxes 676 (849) (173)
Income tax expense (benefit) 288 (439) (151)
---------------------------------
Income (loss) from continuing operations $ 388 $ (410) $ (22)
=================================
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Description of Transaction and Basis of Presentation
The Merger Agreement provides that each share of Salomon Inc
("Salomon") common stock will be exchanged for 1.13 shares of Travelers
Group Inc. ("Travelers Group") common stock. The merger, which is
expected to be completed in the fourth quarter of 1997, is expected to
be accounted for under the pooling of interests method. Pursuant to the
Merger Agreement, Salomon will be merged with Smith Barney Holdings
Inc. ("Smith Barney"), a wholly owned subsidiary of Travelers Group.
The assets and liabilities of both companies will be combined at
historical cost. Historical consolidated financial statements presented
in future reports will be restated to include the accounts and results
of Salomon. The merger is subject to customary closing conditions,
including regulatory and Salomon stockholder approval.
2. Accounting Policies
Smith Barney and Salomon are in the process of reviewing their
accounting policies and, as a result of this review, it may be
necessary to restate either Smith Barney's or Salomon's financial
statements to conform to those accounting policies that are determined
to be most appropriate. No such restatements have been made to the pro
forma combined financial statements.
3. Intercompany Transactions
Transactions between Smith Barney and Salomon are not material in
relation to the pro forma combined financial statements and therefore
intercompany balances have not been eliminated from the pro forma
combined amounts.
4. Pro Forma Adjustments
The pro forma adjustments at June 30, 1997 reflect, pursuant to the
Merger Agreement, the cancellation and retirement of all Salomon common
stock held in treasury and the conversion of Salomon redeemable
preferred stock and preferred stock into redeemable preferred stock and
preferred stock of Travelers Group with substantially identical terms.
5. Restructuring Charge
The pro forma financial data do not reflect a planned merger-related
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 since such restructuring
charge is non-recurring. Although there can be no assurance that the
restructuring charge will fall within the range provided, this range
represents management's best estimate based on the currently available
information.
<PAGE>
6. Future Cost Savings
As Salomon's operations are integrated with the existing operations of
Smith Barney, management expects to achieve, by the end of a three year
period, annual cost savings in excess of $200 million (after-tax) from
the reduction of overhead expenses, changes in corporate infrastructure
and the elimination of redundant expenses. There can be no assurance
that these projected cost savings will be achieved. These expected
future cost savings are not reflected in the pro forma financial data.
The statements contained in notes 5 and 6 above may be deemed to be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended. Forward-looking statements are typically identified by
the words "believe," "expect," "anticipate," "intend," "estimate" and similar
expressions. These forward-looking statements are based largely on management's
expectations and are subject to a number of uncertainties. Actual results could
differ materially from these forward-looking statements as a result of a number
of factors, including (1) determination of the number, job classification and
location of employee positions to be eliminated, (2) compatibility of the
operating systems of the combining companies, (3) the degree to which existing
administrative and back-office functions and costs are complementary or
redundant, and (4) the timing of implementation of changes in operations to
effect cost savings. Smith Barney undertakes no obligation to update publicly or
revise any forward-looking statements.
