United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-7367
PAINE WEBBER GROUP INC.
______________________________________________________
(Exact name of Registrant as specified in its charter)
Delaware 13-2760086
_________________________________________ _____________________
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1285 Avenue of the Americas, New York, N.Y. 10019
___________________________________________ _____________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 713-2000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
________ ________
_______________________
On May 5, 1994, the Registrant had outstanding 76,480,395 shares of
common stock of $1 par value, which is Registrant's only class of
common stock.
<PAGE>1
PAINE WEBBER GROUP INC.
FORM 10-Q
March 31, 1994
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Income
(unaudited) for the Three Months Ended
March 31, 1994 and 1993. 2
Consolidated Statements of Financial
Condition (unaudited) at March 31, 1994
and December 31, 1993. 3
Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended
March 31, 1994 and 1993. 4
Notes to Consolidated Financial Statements
(unaudited). 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 10-12
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Securities Holders 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
<PAGE>2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
Paine Webber Group Inc.
Consolidated Statements of Income (unaudited)
(In thousands of dollars except share and per share amounts)
Three Months Ended
March 31,
------------ -------------
1994 1993
------------ -------------
Revenues
Commissions $ 280,656 $ 242,131
Principal transactions 183,874 202,595
Investment banking 97,594 101,689
Asset management 91,383 73,336
Other 30,904 21,466
Interest 398,037 289,484
--------- --------
Total revenues 1,082,448 930,701
Interest expense 330,371 233,951
--------- --------
Net revenues 752,077 696,750
--------- --------
Non-interest expenses
Compensation and benefits 431,714 395,310
Office and equipment 55,426 51,547
Communications 31,998 29,524
Business development 22,007 18,698
Professional services 18,330 13,312
Brokerage, clearing & exchange fees 21,978 18,955
Other 77,877 53,201
--------- ---------
Total non-interest expenses 659,330 580,547
--------- ---------
Income before taxes 92,747 116,203
--------- ---------
Provision for income taxes:
Federal 23,079 30,990
State, local and foreign 14,020 14,329
--------- ---------
37,099 45,319
--------- ---------
Net income $ 55,648 $ 70,884
========= =========
Earnings applicable to common shares $ 55,648 $ 70,351
Earnings per common share: ========= =========
Primary $ 0.71 $ 0.89 <F1>
Fully diluted $ 0.70 $ 0.84 <F1>
Weighted average common shares:
Primary 79,911,116 79,320,235 <F1>
Fully diluted 81,316,668 85,746,403 <F1>
Dividends declared per common share $ 0.12 $ 0.08 <F1>
[FN]
<F1> Retroactively adjusted to reflect the three-for-two common stock split
in the form of a 50% stock dividend, effective March 10, 1994 to
to stockholders of record on February 17, 1994.
See notes to consolidated financial statements.
<PAGE>3
Paine Webber Group Inc.
Consolidated Statements of Financial Condition (unaudited)
(In thousands of dollars except share and per share amounts)
March 31, December 31,
1994 1993
----------- -----------
Assets
Cash and cash equivalents $ 297,076 $ 241,038
Cash and securities segregated and on deposit for
Federal and other regulations 403,030 327,172
Securities inventory, at market value 14,505,800 14,847,229
Securities borrowed or purchased under agreements
to resell 18,948,146 16,190,818
Receivables:
Clients 3,638,590 3,417,093
Brokers and dealers 483,687 908,468
Dividends and interest 195,099 205,296
Fees and other 207,731 155,289
Office equipment and leasehold improvements, net
of accumulated depreciation and amortization of
$219,182 at March 31, 1994 and $209,738 at
December 31, 1993 237,080 228,441
Other assets 550,605 506,065
----------- -----------
$39,466,844 $37,026,909
=========== ===========
Liabilities and Stockholders' Equity
Short-term borrowings $ 1,821,514 $ 2,779,213
Securities sold but not yet purchased,
at market value 7,924,201 7,365,877
Securities loaned or sold under agreements
to repurchase 21,941,314 19,029,553
Payables:
Clients 2,574,717 2,745,209
Brokers and dealers 470,731 664,260
Dividends and interest 239,249 265,975
Other liabilities and accrued expenses 645,664 693,947
Income taxes 91,627 62,174
Accrued compensation and benefits 245,796 289,572
----------- -----------
35,954,813 33,895,780
Long-term borrowings 2,264,520 1,936,082
----------- -----------
38,219,333 35,831,862
----------- -----------
Commitments and contingencies
Stockholders' Equity
Common stock, $1 par value, 100,000,000 shares
authorized; issued 83,989,865 shares at
March 31, 1994; 83,603,262 shares at
December 31, 1993 83,990 83,603
Additional paid-in capital 573,933 568,487
Retained earnings 767,564 721,115
----------- -----------
1,425,487 1,373,205
Common stock held in treasury, at cost:
7,328,244 shares at March 31, 1994;
6,568,433 shares at December 31, 1993 (126,454) (112,390)
Unamortized cost of restricted stock (50,148) (60,980)
Foreign currency translation adjustment (1,374) (4,788)
----------- -----------
1,247,511 1,195,047
----------- -----------
$39,466,844 $37,026,909
=========== ===========
See notes to consolidated financial statements.
<PAGE>4
Paine Webber Group Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
Three Months Ended
March 31,
----------------------
1994 1993
--------- ---------
Cash flows from operating activities:
Net income $ 55,648 $ 70,884
Adjustments to reconcile net income to
cash used for operating activities:
Noncash items included in net income:
Depreciation and amortization 9,593 7,565
Deferred income taxes (9,793) 4,574
Amortization of deferred charges 30,227 17,833
Other 21,269 18,019
(Increase) decrease in operating receivables:
Clients (222,656) 416
Brokers and dealers 424,781 (505,602)
Dividends and interest 10,197 (13,890)
Fees and other (52,443) 22,593
Increase (decrease) in operating payables:
Clients (170,492) (150,671)
Brokers and dealers (193,529) 361,382
Dividends and interest (26,726) 23,969
Other (76,598) (108,097)
(Increase) decrease in:
Securities inventory 341,429 (2,224,696)
Securities borrowed or purchased under
agreements to resell (3,804,739) (995,475)
Cash and securities on deposit (75,858) 2,721
Other assets (54,060) (22,844)
Increase (decrease) in:
Securities sold but not yet purchased 558,324 1,996,409
Securities loaned or sold under agreements
to repurchase 2,455,652 470,084
--------- ---------
Cash used for operating activities (779,774) (1,024,826)
--------- ---------
Cash flows from financing activities:
Net proceeds from (payments on):
Short-term borrowings (957,699) (276,548)
Securities sold under agreements to repurchase,
net of securities purchased under agreements
to resell 1,503,520 912,465
Proceeds from:
Issuance of long-term borrowings 382,363 386,209
Employee stock transactions 8,829 4,643
Payments for:
Settlement of long-term borrowings (54,341) (76,755)
Repurchases of common stock (19,735) (27,743)
Dividends (9,199) (6,722)
--------- ---------
Cash provided by financing activities 853,738 915,549
--------- ---------
Cash flows from investing activities:
Net payments for:
Office equipment and leasehold improvements (17,926) (11,068)
--------- ---------
Cash used for investing activities (17,926) (11,068)
--------- ---------
Increase (decrease) in cash and cash equivalents 56,038 (120,345)
Cash and cash equivalents, beginning of period 241,038 282,990
--------- ---------
Cash and cash equivalents, end of period $ 297,076 $ 162,645
========= =========
See notes to consolidated financial statements.
<PAGE>5
Paine Webber Group Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands of dollars except share and per share amounts)
Basis of Presentation
The consolidated financial statements include the accounts of Paine Webber Group
Inc. ("PWG") and its wholly owned subsidiaries, including its principal
subsidiary, PaineWebber Incorporated ("PWI"), (collectively the "Company"). All
material intercompany balances and transactions have been eliminated. The
financial information as of and for the periods ended March 31, 1994 and 1993 is
unaudited. However, in the opinion of management of the Company, such
information includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. These financial statements should
be read in conjunction with the most recent annual report. Certain
reclassifications have been made in prior year financial statements to conform
to current year presentations. The Company's principal line of business is to
serve the investment and capital needs of individual, corporate, institutional
and public agency clients.
Securities Inventory
Securities inventory and securities sold but not yet purchased, which consist of
the Company's trading accounts, are recorded at market value and are comprised
of:
March 31, December 31,
1994 1993
------------ ------------
Securities inventory:
U.S. government and agency obligations $ 8,881,410 $ 8,453,431
First mortgage notes held for resale 2,240,498 3,125,445
State and municipal obligations 681,419 719,008
Commercial paper and other short-term debt 700,099 652,636
Corporate debt securities 1,296,622 864,293
Corporate equity securities 705,752 1,032,416
----------- -----------
$14,505,800 $14,847,229
=========== ===========
Securities sold but not yet purchased:
U.S. government and agency obligations $ 6,904,723 $ 6,395,861
State and municipal obligations 18,534 25,653
Corporate debt securities 381,227 177,611
Corporate equity securities 619,717 766,752
----------- -----------
$ 7,924,201 $ 7,365,877
=========== ===========
Short-Term Borrowings
The Company meets its short-term financing needs by obtaining bank loans on
either a secured or unsecured basis; by issuing commercial paper and medium-
term notes; by entering into repurchase agreements, whereby securities are
sold with a commitment to repurchase at a future date; and through securities
lending activity.
Included in short-term borrowings at March 31, 1994 and December 31, 1993 were
the following:
March 31, December 31,
1994 1993
---------- ----------
Commercial paper $ 958,756 $1,083,483
Bank loans 802,758 1,670,730
Medium-Term Notes 60,000 25,000
---------- ----------
$1,821,514 $2,779,213
========== ==========
<PAGE>6
Notes to Consolidated Financial Statements (continued)
Long-Term Borrowings
Long-term borrowings at March 31, 1994 and December 31, 1993 consisted of the
following :
March 31, December 31,
1994 1993
----------- ----------
Fixed Rate Notes Due 1995-2014 $1,197,420 $ 998,156
Fixed Rate Subordinated Notes Due 2002 174,258 174,236
Medium-Term Senior Notes 381,475 331,975
Medium-Term Subordinated Notes 374,150 298,650
Bank Term Loans 70,000 70,000
Convertible Debentures 19,610 15,435
Other 47,607 47,630
---------- ----------
$2,264,520 $1,936,082
========== ==========
As of March 31, 1994, the Company had $755,625 of Medium-Term Senior and
Subordinated Notes outstanding, with maturities of one year to thirty years
from the date of issuance, at a weighted average interest rate of 5.50%.
On February 8, 1994, the Company issued $200,000 of 7 5/8% Senior Notes due
February 15, 2014 at a discount of $812. The Notes are not redeemable prior to
maturity. Interest on the Notes is payable semiannually on February 15 and
August 15.
Total interest payments relating to repurchase agreements, short-term
borrowings, stock loans and long-term borrowings were $359,996 and $199,982 for
the three months ended March 31, 1994 and 1993, respectively.
Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit
Risk
Market Risk
In the normal course of business, the Company enters into transactions in a
variety of financial instruments as part of the Company's market risk
management, trading and financing activities, and to facilitate client
transactions. These financial instruments include forward and futures
contracts, option contracts, interest rate swaps and other contracts committing
the Company to purchase or deliver other instruments at specified future dates
and prices, or to make or receive payments based on notional amounts and
specified rates or indices.
These financial instruments involve varying degrees of off-balance-sheet market
risk. Market risk is the potential change in value of the financial instrument
caused by unfavorable changes in interest rates, foreign currency exchange rates
or the market values of the securities underlying the instruments. The Company
monitors its exposure to market risk through a variety of control procedures,
including review of trading positions and hedging strategies, and establishing
limits by the Risk Management Committee.
These contracts are valued at market, and unrealized gains and losses are
reflected in the financial statements. The gross contract or notional amounts
of the financial instruments which are not reflected in the Consolidated
Statements of Financial Condition, are set forth in the following table and
provide only a measure of the Company's involvement in these contracts at March
31, 1994 and December 31, 1993. They do not represent amounts subject to market
risks and, in many cases, serve to reduce the Company's overall exposure to
market and other risks.
<PAGE>7
Notes to Consolidated Financial Statements (continued)
Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit
Risk (continued)
Market Risk (continued)
March 31, December 31,
1994 1993
----------- ----------
Mortgage-backed securities, forward contracts and
options written $50,335,313 $54,803,708
Foreign exchange forward contracts, futures
contracts and options written 4,800,379 2,819,063
Securities contracts including futures,
forwards and options written 10,775,765 7,832,106
Interest rate swaps, caps and floors 403,511 408,583
In addition to forwards, futures, options and swap contracts, the Company enters
into agreements to sell securities, at predetermined prices, which have not yet
been purchased. To satisfy the obligation, the Company must acquire the
securities at market prices, which may exceed the values reflected on the
Consolidated Statements of Financial Condition.
Credit Risk in Proprietary and Client Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions including brokers and
dealers, banks and institutional clients. Credit losses could arise should
counterparties fail to perform and the value of any collateral obtained proves
inadequate. The Company manages credit risk by monitoring net exposure to
individual counterparties on a daily basis, monitoring credit limits and
requiring additional collateral where appropriate.
The Company's risk of loss in the event of counterparty default is typically
limited to the cost of replacing all contracts on which the Company has recorded
an unrealized gain or for purchased options, the net realizable value. With
respect to forward contracts and interest rate swaps, caps and floors, the
unrealized gain amounted to $511,061 at March 31, 1994. The net realizable
value of options purchased amounted to $216,340 at March 31, 1994. Transactions
in futures contracts are conducted through regulated exchanges which guarantee
performance of counterparties and are settled in cash on a daily basis, thereby,
minimizing credit risk.
Receivables and payables with brokers and dealers, and agreements to resell and
repurchase securities are generally collateralized by cash, government and
government-agency securities, and letters of credit. The market value of the
initial collateral received is, at a minimum, equal to the contract value.
Additional collateral is requested when considered necessary.
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Amounts loaned are limited
by margin regulations of the Federal Reserve Board and other regulatory
authorities and are subject to the Company's credit review and daily monitoring
procedures. Market declines could, however, reduce the value of any collateral
below the principal amount loaned, plus accrued interest, before the collateral
can be sold.
Client transactions include positions in commodities and financial futures,
securities sold but not yet purchased and written options. The risk to the
Company's clients in these transactions can be substantial, principally due to
price volatility which can reduce the clients' ability to meet their
obligations. Margin deposit requirements pertaining to commodity futures and
options transactions are generally lower than those for exchange traded
securities. To the extent clients are unable to meet their commitments to the
Company and margin deposits are insufficient to cover outstanding liabilities,
the Company may take market action and credit losses could be realized.
<PAGE>8
Notes to Consolidated Financial Statements (continued)
Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit
Risk (continued)
Credit Risk in Proprietary and Client Transactions (continued)
Trades are recorded on a settlement date basis. Should either the client or
broker fail to perform, the Company may be required to complete the transaction
at prevailing market prices. Trades pending at March 31, 1994 were settled
without adverse effect on the Company's financial statements, taken as a whole.
The Company may pledge clients' securities as collateral in support of
securities loaned and bank loans, or to satisfy margin requirements at clearing
organizations. The amounts loaned or pledged are limited to the extent
permitted by applicable margin regulations. Should the counterparty fail to
return the clients' securities, the Company may be required to replace them at
prevailing market prices. At March 31, 1994, the market value of client
securities loaned to other brokers approximated the amounts due or collateral
obtained.
Concentrations of Credit Risk
As a major securities firm, the Company's activities are executed primarily with
and on behalf of other financial institutions, including brokers and dealers,
banks and other institutional clients. Concentrations of credit risk can be
affected by changes in economic, industry or geographic factors. The Company
seeks to control its credit risk and the potential for risk concentration
through a variety of reporting and control procedures described in the preceding
discussion of credit risk.
Commitments and Contingencies
The Company is contingently liable as guarantor of certain partnerships'
obligations for $24,340. In addition, certain of the Company's subsidiaries are
contingently liable as issuer of $89,410 of notes payable to managing general
partners of various limited partnerships pursuant to Internal Revenue Service
guidelines. In the opinion of management of the Company, these contingencies
will have no material adverse effect on the Company's financial statements taken
as a whole. The Company has conditional commitments of $28,494 to contribute
capital to investment partnerships.
The Company has been named as defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's financial statements
taken as a whole.
As of March 31, 1994, securities with a market value of $1,146,119 had been
loaned or pledged as collateral for securities borrowed of approximately equal
market value.
The Company was contingently liable under unsecured letters of credit totaling
$396,048 at March 31, 1994.
Stockholders' Equity
On February 3, 1994, the Board of Directors declared a three-for-two common
stock split in the form of a 50% stock dividend, effective on March 10, 1994 to
stockholders of record on February 17, 1994. All per common share and share
amounts have been retroactively adjusted throughout the consolidated financial
statements for periods presented previous to March 31, 1994.
On May 5, 1994, the Board of Directors declared a regular quarterly dividend on
the Company's common stock of $0.12 per share payable on July 1, 1994 to
stockholders of record on June 1, 1994. In addition, the stockholders of the
Company voted to increase the number of common shares authorized for issuance
from 100,000,000 shares to 200,000,000 shares.
As of March 31, 1994, the Company had 14,930,486 authorized shares of common
stock reserved for issuance in connection with stock option and stock award
plans.
<PAGE>9
Notes to Consolidated Financial Statements (continued)
Capital Requirements
PWI is subject to the Securities and Exchange Commission Uniform Net Capital
Rule and the New York Stock Exchange Growth and Business Reduction capital
requirements. Under the method of computing capital requirements adopted by
PWI, minimum net capital shall not be less than 2% of combined aggregate debit
items arising from client transactions, plus excess margin collected on
securities purchased under agreements to resell, as defined. A reduction of
business is required if net capital is less than 4% of such aggregate debit
items. Business may not be expanded if net capital is less than 5% of such
aggregate debit items. As of March 31, 1994, PWI's net capital of $587,999 was
17% of aggregate debit balances and its net capital in excess of the minimum
required was $517,226.
Income Taxes
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
Three Months Ended
March 31,
--------------
1994 1993
----- ----
Tax at U.S. statutory rates 35.0% 34.0%
State, local and foreign income taxes,
net of federal tax benefit 5.5 5.6
Foreign rate differential (0.3) (0.8)
Nontaxable dividends & interest (1.0) (0.5)
Other, net 0.8 0.7
----- -----
40.0% 39.0%
===== =====
Income taxes paid were approximately $16,491 and $24,684 for the three months
ended March 31, 1994 and 1993, respectively.
Earnings Per Common Share
Earnings per common share is computed by dividing net income applicable to
common shares, adjusted for any interest savings, by the weighted average common
and common equivalent shares outstanding during each period presented. Common
equivalent shares include common shares issuable under the Company's stock
option and award plans and the conversion of convertible debentures and
preferred equities.
In the first quarter of 1994, the Company computed its earnings per common share
under the modified treasury stock method in accordance with Accounting
Principles Board Opinion No. 15. The modified treasury stock method is used
when the number of shares obtainable upon exercise of outstanding options,
warrants and their equivalents exceeds 20% of the Company's outstanding common
stock. Under this method, all options, warrants and their equivalents are
assumed to have been exercised, whether or not dilutive, and the aggregate
proceeds used to repurchase up to 20% of the outstanding shares. Any remaining
proceeds are then used to reduce short-term or long-term borrowings.
In 1993, the Company computed its earnings per common share under the treasury
stock method which assumes the aggregate proceeds obtainable upon exercise of
dilutive options, warrants and their equivalents were used to repurchase
outstanding shares.
<PAGE>10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
General
The Company's principal business activities are, by their nature, affected by
many factors, including general economic and financial conditions, the level and
volatility of interest rates, currency and security valuations, competitive
conditions, counterparty risk, transactional volume and market liquidity. As a
result, revenues and profitability have been in the past, and are likely to
continue to be subject to fluctuations.
At the beginning of 1994, the favorable trends in the U.S. securities markets
continued. In early February, the Federal Reserve shifted to a more restrictive
monetary policy, triggering rising interest rates and declines in the prices of
stocks and bonds. A slowdown in instititional and retail customer activity
started towards the end of February and continued through March affecting
the liquidity of certain securities markets, thus negatively impacting
the firm's earnings in the latter part of the quarter. These conditions
have persisted in the second quarter to date.
Results of Operations
Quarter Ended March 31, 1994 compared to Quarter Ended March 31, 1993
Net income for the quarter ended March 31, 1994 was $55.6 million, 21.5% lower
than the $70.9 million earned during the quarter ended March 31, 1993. Total
revenues of $1.1 billion were 16.3% higher than those reported for the first
quarter of 1993 while revenues, net of interest expense, rose $55.3 million to
$752.1 million. Net earnings per common share were $0.71 primary ($0.70 fully
diluted) as compared to net earnings per common share of $0.89 primary ($0.84
fully diluted) for the prior year quarter. This decrease was primarily
attributable to reduced client demand for fixed income products in response to
the changing interest rate environment.
During the first quarter, commission revenues improved 15.9% to $280.7 million
due to increases in equity market volume and an increase in the number of
investment executives. Recruiting activities resulted in 325 additional
investment executives from last year. Commissions from listed securities rose
$12.6 million or 9.5%, mutual fund commissions rose $10.3 million or 26.9%, and
options commissions rose $8.0 million or 49.4%. In addition, insurance
commissions rose $13.9 million or 79.0% as sales of deferred annuity contracts
continued to increase. These gains were partially offset by a decrease in
commissions earned from commodities.
Principal transactions revenues decreased $18.7 million or 9.2% from the first
quarter of 1993 reflecting lower revenues in corporate debt, municipal and
mortgage backed obligations. These decreases reflect the difficult fixed income
market that began in the first quarter of 1994. These gains were partially
offset by improved results in corporate equity securities.
Investment banking revenues for the quarter ended March 31, 1994 decreased $4.1
million to $97.6 million as compared to the $101.7 million earned during the
first quarter of 1993. This decrease reflects a lower level of both new
corporate equity and debt issues brought to the market during the quarter.
Asset management fees, which are largely recurring in nature, increased $18.0
million or 24.6% over the first quarter of 1993, primarily due to a 33% increase
in client assets in wrap fee accounts and a 32% increase in client assets in
long term mutual funds. Total assets under management were relatively unchanged
at $37.4 billion as of March 31, 1994 compared to $37.6 billion as of March 31,
1993.
Net interest increased $12.1 million or 21.8% due to improved spreads on higher
fixed income inventory levels and increased margin lending to customers. These
gains were partially offset by increased financing costs on higher equity
inventory levels.
Other income rose $9.4 million or 44.0% primarily due to higher transaction and
account fees and increased dividends. In addition, fees received from
individual retirement accounts ("IRAs") and the Company's Resource Management
Accounts ("RMAs") increased as total IRA and RMA accounts grew by 9.7% and
14.8%, respectively, since March 31, 1993.
<PAGE>11
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Results of Operations (continued)
Compensation and benefits rose by $36.4 million to $431.7 million primarily due
to higher revenue driven compensation paid to retail investment executives.
This increase also reflects strategic hiring, normal salary increases, higher
costs related to employee benefit plan enhancements and a change in pension plan
assumptions. Compensation and benefits as a percentage of net revenues was
57.4% as compared to 56.7% during the first quarter of 1993.
All other operating expenses increased $42.4 million or 22.9% in the first
quarter of 1994 as compared to the first quarter of 1993. Increased levels of
business activity contributed to higher business development and communication
expenses. Higher office and equipment expense reflects increased costs
associated with technology initiatives. The increases in professional fees and
other expenses include higher litigation-related expenses.
Liquidity and Capital Resources
The primary objectives of the Company's funding policies are to ensure ample
liquidity at all times and a strong capital base. These objectives are met by
maximization of self-funded assets, diversification of funding sources,
maintenance of prudent liquidity and capital ratios, and contingency planning.
Liquidity
The Company maintains a highly liquid balance sheet with the majority of assets
consisting of inventories, securities borrowed or purchased under agreements to
resell, and receivables from clients, and brokers and dealers, which are readily
convertible into cash. The nature of the Company's business as a securities
dealer results in its carrying significant levels of securities inventories in
order to meet its client and proprietary trading needs. The Company's total
assets may fluctuate from period to period as a result of changes in the level
of trading positions held to facilitate client transactions, the volume of
resale and repurchase transactions, and proprietary trading strategies. These
fluctuations depend significantly upon economic and market conditions, and
transactional volume.
The Company's total assets at March 31, 1994 were $39.5 billion compared to
$37.0 billion at December 31, 1993. The majority of the Company's assets are
financed by daily operations such as securities sold under agreements to
repurchase, free credit balances in client accounts and securities lending
activity. Additional financing sources are available through bank loans and
commercial paper, committed and uncommitted lines of credit, and the issuance of
long-term senior and subordinated debt. The Company's ability to obtain short-
term secured and unsecured funding as well as long-term capital enables the
Company to support the increased level of total assets.
The Company maintains committed and uncommitted credit facilities from a diverse
group of banks. The Company has a committed revolving credit agreement with a
group of banks to provide $225.0 million through March 1995 and a $275.0 million
revolving credit facility which expires in May 1994 with provisions for renewal
through November 1996. At March 31, 1994, there were no outstanding borrowings
under these facilities. Additionally, the Company had more than $5 billion in
uncommitted lines of credit at March 31, 1994.
The Company maintains public debt shelf registrations with the Securities and
Exchange Commission ("SEC"). During the quarter, the Company issued $200.0
million of 7 5/8% Senior Notes and $239.0 million of Medium-Term Senior and
Subordinated Notes under these registration statements. At March 31, 1994, the
Company had $1,113.6 million in debt securities available for issuance.
Capital Resources and Capital Adequacy
At March 31, 1994, the Company's total capital base, which includes long-term
borrowings and stockholders' equity, was $3.5 billion, an increase of $380.9
million from December 31, 1993. The additions to capital reflect increases in
both long-term borrowings and stockholders' equity of $328.4 million and $52.5
million, respectively.
The increase in long-term borrowings reflects the issuance of $200.0 million of
7 5/8% Senior Notes in February 1994 due 2014 and the net issuance of $125.0
million of medium-term senior and subordinated notes.
<PAGE>12
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
The increase in stockholders' equity is primarily the result of the Company's
net income for the quarter of $55.6 million and net amortization of restricted
stock awards of $11.1 million. This increase was offset by the repurchase of
1.1 million shares of common stock for $19.0 million. As of March 31, 1994, the
Company has authorization to repurchase up to 10,383,598 additional shares of
common stock.
On February 3, 1994, the Company's Board of Directors approved a three-for-two
common stock split in the form of a 50% stock dividend, effective March 10, 1994
to stockholders of record on February 17, 1994. Also, on February 3, 1994, the
Board approved a 20% increase in the dividend payout from $.10 per share to $.12
per share, payable on April 18, 1994 to stockholders of record on March 28,
1994.
At the Annual Meeting of Stockholders which was held on May 5, 1994, the
stockholders approved an increase in the number of common shares authorized for
issuance from 100,000,000 shares to 200,000,000 shares.
PWI is subject to the net capital requirements of the SEC, the New York Stock
Exchange and the Commodities Futures Trading Commission, which are designed to
measure the financial soundness and liquidity of broker-dealers. PWI has
consistently maintained net capital in excess of the minimum requirements as
imposed by these agencies. In addition, the Company has other banking and
securities subsidiaries, both domestic and foreign, which have also consistently
maintained net regulatory capital in excess of requirements.
Merchant Banking and Highly Leveraged Transactions
In connection with its merchant banking activities, the Company has provided
loan financing and made investments in companies, some of which are involved in
highly leveraged transactions. Positions taken or commitments made by the
Company may involve credit or market risk from any one issuer or industry.
At March 31, 1994, the Company had investments in merchant banking transactions
which were affected by liquidity, reorganization or restructuring issues of
$51.9 million, net of reserves, compared to $52.1 million, net of reserves, at
December 31, 1993. Included in the portfolio is an investment of $45.7 million
in a limited partnership which specializes in investments in corporate
restructurings and special situations.
The Company's trading activities include market-making transactions in high-
yield debt securities. These securities generally involve greater risks than
investment-grade corporate debt securities because these issuers usually have
high levels of indebtedness and lower credit ratings and are, therefore, more
vulnerable to general economic conditions. At March 31, 1994, the Company held
in long and short inventory approximately $207.3 million and $20.8 million,
respectively, of high-yield debt securities, which accounted for approximately
1.0% of gross inventory positions. One issuer accounted for approximately 23%
of the total amount. Historically, the Company's high-yield portfolio has not
been material to the Company's financial condition. The Company continually
monitors its risk positions associated with high-yield debt securities and
establishes limits with respect to overall market exposure, industry group and
individual issuer. The Company accounts for these positions at market value,
with unrealized gains and losses reflected in revenues.
<PAGE>13
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
- - --------------------------
The Company is involved in a number of proceedings concerning matters arising in
connection with the conduct of its business. Certain actions in which
compensatory damages of $125 million or more appear to be sought, and in which
there have been material developments during the quarter, are described below.
The Company is also involved in numerous proceedings in which compensatory
damages of less than $125 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $125 million. The Company has denied, or believes it has
legitimate defenses and will deny, liability in all significant cases pending
against it, and intends to defend vigorously each such case. The following
developments have occurred in the indicated case, which was previously reported
in the Company's Annual Report on Form 10-K for the year ended December 31,
1993.
Northview Corporation Litigation
On April 15, 1994, PaineWebber filed a demurrer and motion to strike certain
exhibits attached to plaintiff's fourth amended complaint. Other defendants
have filed demurrers as well and one defendant has filed an answer to
plaintiff's fourth amended complaint. A hearing on the respective demurrers has
been scheduled for May 10, 1994.
ITEM 4 - Submission of Matters to a Vote of Security Holders
- - -------------------------------------------------------------
(a) Proxies for the Annual Meeting of Stockholders held on May 5, 1994 were
solicited by the Company pursuant to Regulation 14A of the Securities
Act of 1934, as amended.
(c) Matters voted upon at the Annual Meeting of Stockholders:
(1) The election of four directors to the Board of Directors to hold office
for a term of three years. There was no solicitation in opposition
of the nominees and all such nominees were elected. There were no
broker non-votes with respect to the election of Directors.
Votes For Votes Withheld
---------- --------------
E.G. Bewkes, Jr. 48,537,660 635,835
Y. Fujisawa 48,505,038 668,457
E. Randall, III 48,504,455 669,040
K. Sorimachi 48,502,539 670,956
(2) The approval to amend the Restated Certificate of Incorporation of the
Company to increase the number of shares of common stock authorized
for issuance from 100,000,000 shares to 200,000,000 shares.
Votes for: 46,522,570
Votes against: 2,485,839
Abstentions: 118,248
Broker Non-Votes: 46,838
(3) The approval of the 1994 Non-Employee Directors Stock Plan.
Votes for: 44,735,010
Votes against: 4,017,117
Abstentions: 368,223
Broker Non-Votes: 53,145
(4) The approval of the 1994 Executive Incentive Compensation Plan.
Votes for: 45,923,869
Votes against: 2,836,346
Abstentions: 360,135
Broker Non-Votes: 53,145
<PAGE>14
PART II-OTHER INFORMATION (continued)
ITEM 4 - Submission of Matters to a Vote of Security Holders (continued)
- - -----------------------------------------------------------------------
(5) The approval of the 1994 Executive Stock Award Plan.
Votes for: 35,012,152
Votes against: 13,737,888
Abstentions: 370,310
Broker Non-Votes: 53,145
(6) The ratification of the selection of the Board of Directors of Ernst &
Young as the Company's independent public accountants for the 1994
fiscal year.
Votes for: 48,750,011
Votes against: 110,373
Abstentions: 258,526
Broker Non-Votes: 54,585
ITEM 6 - Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) The following exhibits are filed herewith:
Exhibit 11 - Computation of Earnings per Common Share
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated March 9, 1994
with the Securities and Exchange Commission relating to the
issuance by the Company of 5,000,000 U.S. Dollar Increase Warrants
on the Japanese Yen Expiring March 6, 1996. The item reported on
such Current Report was "Item 5 - Other Events".
<PAGE>15
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Paine Webber Group Inc.
----------------------
(Registrant)
Date: May 13, 1994 By:/s/ Regina Dolan
------------ ----------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
<PAGE>16
Exhibit 11
Paine Webber Group Inc.
Computation of Earnings Per Common Share
(In thousands of dollars except share and per share amounts)
Three Months Ended March 31,
----------------------------
1994 1993 <F1>
---------- -----------
Primary:
Weighted average common shares outstanding 71,695,578 61,078,683
Equivalent shares outstanding for:
Stock options and awards 7,200,849 6,603,604
Participating Preferred Stock - 11,637,948
6.5% Convertible Debentures 1,014,689 -
---------- ----------
Total weighted average common and common
equivalent shares 79,911,116 79,320,235
========== ==========
Net income $ 55,648 $ 70,884
Preferred dividend requirements - (533)
Interest savings 1,063 -
---------- ----------
Earnings applicable for common shares $ 56,711 $ 70,351
========== ==========
Earnings per common share $ 0.71 $ 0.89
========== ==========
Fully Diluted:
Weighted average common shares outstanding 71,695,578 61,078,683
Equivalent shares outstanding for:
Stock options and awards 7,200,849 6,930,072
Participating Preferred Stock - 11,637,948
6.5% Convertible Debentures 1,014,689 -
Assumed conversion of 8% Convertible Debentures
and $1.375 Preferred Stock 1,405,552 6,099,700
---------- ----------
Total weighted average common and common
equivalent shares 81,316,668 85,746,403
========== ==========
Net income $ 55,648 $ 70,884
Interest savings 1,274 998
---------- ----------
Earnings applicable for common shares $ 56,922 $ 71,882
========== ==========
Earnings per common share $ 0.70 $ 0.84
========== ==========
[FN]
<F1> Common share and per share amounts have been retroactively adjusted to
reflect a three-for-two common stock split in the form of a 50% stock
dividend, effective March 10, 1994 to stockholders of record on
February 17, 1994.
<PAGE>17
<TABLE>
Exhibit 12
<CAPTION>
Paine Webber Group Inc.
Computation of Ratio of Earnings to Fixed Charges
(In thousands of dollars)
Three Months
Ended March 31, Years Ended December 31,
-------------------------------------------------------------
1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes $ 92,747 $ 407,576 $ 339,115 $ 226,247 $ (102,633) $ 82,568
-------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 330,371 1,130,712 879,242 1,056,124 1,242,151 1,198,640
Interest factor in rents 12,767 50,133 45,962 43,804 42,223 40,360
-------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 343,138 1,180,845 925,204 1,099,928 1,284,374 1,239,000
-------- ---------- ---------- ---------- ---------- ----------
Income before taxes
and fixed charges $435,885 $1,588,421 $1,264,319 $1,326,175 $1,181,741 $1,321,568
======== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.3 1.3 1.4 1.2 <F1> 1.1
======== ========== ========== ========== ========== ==========
<FN>
For purposes of computing the ratio of earnings to combined fixed charges,
"earnings" consist of income (loss) before taxes and fixed charges. "Fixed
charges" consist of interest expense incurred on securities sold under agreements
to repurchase, short-term borrowings, long-term borrowings and that portion of
rental expense estimated to be representative of the interest factor.
<F1> Earnings were inadequate to cover fixed charges and would have had to
increase approximately $102,633 in order to cover the deficiency.
</TABLE>
