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 June 30, 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 August 4, 1994, the Registrant had outstanding 76,100,912 shares of
common stock of $1 par value, which is the Registrant's only class of common
stock.
<PAGE>1
PAINE WEBBER GROUP INC.
FORM 10-Q
June 30, 1994
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Operations
(unaudited) for the Three Months and
Six Months Ended June 30, 1994 and 1993. 2
Consolidated Statements of Financial
Condition (unaudited) at June 30, 1994
and December 31, 1993. 3
Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended
June 30, 1994 and 1993. 4
Notes to Consolidated Financial Statements
(unaudited). 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
<PAGE>2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
Paine Webber Group Inc.
Consolidated Statements of Operations (unaudited)
(In thousands of dollars except share and per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1994 1993 1994 1993
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues
Commissions $ 240,729 $ 239,980 $ 521,385 $ 482,111
Principal transactions 91,687 181,910 275,561 384,505
Investment banking 59,140 96,597 156,734 198,286
Asset management 89,589 77,419 180,972 150,755
Other 36,135 30,919 67,039 52,385
Interest 385,069 328,111 783,106 617,595
--------- -------- --------- ---------
Total revenues 902,349 954,936 1,984,797 1,885,637
Interest expense 323,383 268,473 653,754 502,424
--------- -------- --------- ---------
Net revenues 578,966 686,463 1,331,043 1,383,213
--------- -------- --------- ---------
Non-interest expenses
Compensation and benefits 344,729 388,568 776,443 783,878
Office and equipment 56,399 50,685 111,825 102,232
Communications 33,023 31,017 65,021 60,541
Business development 21,544 23,000 43,551 41,698
Professional services 22,471 15,846 40,801 29,158
Brokerage, clearing &
exchange fees 20,488 20,347 42,466 39,302
Other 122,070 59,785 199,947 112,986
--------- -------- --------- ---------
Total non-interest expenses 620,724 589,248 1,280,054 1,169,795
--------- -------- --------- ---------
Earnings (loss) before taxes (41,758) 97,215 50,989 213,418
--------- -------- --------- ---------
Provision (benefit) for
income taxes:
Federal (17,127) 26,109 5,952 57,099
State, local and foreign 424 11,805 14,444 26,134
--------- -------- --------- ---------
(16,703) 37,914 20,396 83,233
--------- -------- --------- ---------
Net earnings (loss) $ (25,055) $ 59,301 $ 30,593 $ 130,185
========== ========= ========= =========
Earnings (loss) applicable to
common shares $ (25,055) $ 58,768 $ 30,593 $ 129,119
========== ========= ========= =========
Earnings (loss) per
common share:
Primary $ (0.35) $ 0.74 $ 0.41 $ 1.62
Fully diluted $ (0.35) $ 0.69 $ 0.41 $ 1.53
Weighted average common shares:
Primary 70,728,823 79,775,700 79,196,930 79,590,882
Fully diluted 70,728,823 86,484,090 80,602,482 86,534,715
Dividends declared per
common share $ 0.12 $ 0.10 $ 0.24 $ 0.18
</TABLE>
[FN]
See notes to consolidated financial statements.
<PAGE>3
<TABLE>
Paine Webber Group Inc.
Consolidated Statements of Financial Condition (unaudited)
(In thousands of dollars except share and per share amounts)
June 30, December 31,
1994 1993
--------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 183,295 $ 241,038
Cash and securities segregated and on deposit for
Federal and other regulations 320,487 327,172
Securities inventory, at market value 11,429,950 14,847,229
Securities borrowed or purchased under agreements
to resell 18,382,310 16,190,818
Receivables:
Clients 3,521,406 3,417,093
Brokers and dealers 309,113 908,468
Dividends and interest 178,367 205,296
Fees and other 182,351 155,289
Office equipment and leasehold improvements, net
of accumulated depreciation and amortization of
$229,029 at June 30, 1994 and $209,738 at
December 31, 1993 245,496 228,441
Other assets 674,231 506,065
------------ -----------
$35,427,006 $37,026,909
============ ===========
Liabilities and Stockholders' Equity
Short-term borrowings $ 1,064,358 $ 2,779,213
Securities sold but not yet purchased,
at market value 7,086,931 7,365,877
Securities loaned or sold under agreements
to repurchase 19,492,279 19,029,553
Payables:
Clients 2,809,610 2,745,209
Brokers and dealers 253,442 664,260
Dividends and interest 283,444 265,975
Other liabilities and accrued expenses 630,486 693,947
Income taxes 32,911 62,174
Accrued compensation and benefits 242,088 289,572
----------- -----------
31,895,549 33,895,780
Long-term borrowings 2,317,555 1,936,082
----------- -----------
34,213,104 35,831,862
----------- ----------
Commitments and contingencies
Stockholders' Equity
Common stock, $1 par value, 200,000,000 shares
authorized; issued 84,064,387 shares at
June 30, 1994; 83,603,262 shares at
December 31, 1993 84,064 83,603
Additional paid-in capital 574,640 568,487
Retained earnings 733,392 721,115
----------- ----------
1,392,096 1,373,205
Common stock held in treasury, at cost:
8,013,444 shares at June 30, 1994;
6,568,433 shares at December 31, 1993 (137,470) (112,390)
Unamortized cost of restricted stock (42,688) (60,980)
Foreign currency translation adjustment 1,964 (4,788)
----------- ----------
1,213,902 1,195,047
----------- ----------
$35,427,006 $37,026,909
=========== ===========
</TABLE>
[FN]
See notes to consolidated financial statements.
<PAGE>4
<TABLE>
Paine Webber Group Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
<CAPTION>
Six Months Ended
June 30,
------------------------
1994 1993
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 30,593 $ 130,185
Adjustments to reconcile net earnings to cash
provided by (used for) operating activities:
Noncash items included in net earnings:
Depreciation and amortization 19,712 14,648
Deferred income taxes (22,213) 5,107
Amortization of deferred charges 58,634 33,262
Other 22,569 27,455
(Increase) decrease in operating receivables:
Clients (106,611) (382,749)
Brokers and dealers 599,355 133,411
Dividends and interest 26,929 (33,691)
Fees and other (27,062) 72,380
Increase (decrease) in operating payables:
Clients 64,401 20,982
Brokers and dealers (410,818) (360,958)
Dividends and interest 17,469 39,715
Other (150,835) 42,157
(Increase) decrease in:
Securities inventory 3,417,279 (2,794,669)
Securities borrowed or purchased under
agreements to resell (2,268,429) (3,210,967)
Cash and securities on deposit 6,685 17,533
Other assets (185,871) (87,782)
Increase (decrease) in:
Securities sold but not yet purchased (278,946) 2,274,910
Securities loaned or sold under
agreements to repurchase 1,307,719 1,262,501
---------- ----------
Cash provided by (used for) operating activities 2,120,560 (2,796,570)
---------- ----------
Cash flows from financing activities:
Net proceeds from (payments on):
Short-term borrowings (1,714,855) 356,885
Securities sold under agreements to repurchase,
net of securities purchased under
agreements to resell (768,057) 1,932,489
Proceeds from:
Issuance of long-term borrowings 488,052 607,529
Employee stock transactions 9,807 7,823
Payments for:
Settlement of long-term borrowings (107,420) (92,265)
Repurchases of common stock (31,333) (30,048)
Dividends (18,317) (15,152)
---------- ---------
Cash (used for) provided by financing activities (2,142,123) 2,767,261
---------- ---------
Cash flows from investing activities:
Net payments for:
Office equipment and leasehold improvements (36,180) (39,272)
---------- ---------
Cash used for investing activities (36,180) (39,272)
---------- ---------
Decrease in cash and cash equivalents (57,743) (68,581)
Cash and cash equivalents, beginning of period 241,038 282,990
---------- ---------
Cash and cash equivalents, end of period $ 183,295 $ 214,409
========== =========
<FN>
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 June 30, 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 and previously issued
quarterly 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:
June 30, December 31,
1994 1993
------------ ------------
Securities inventory:
U.S. government and agency obligations $ 7,476,605 $ 8,453,431
First mortgage notes held for resale 959,321 3,125,445
State and municipal obligations 752,515 719,008
Commercial paper and other short-term debt 810,135 652,636
Corporate debt securities 836,008 864,293
Corporate equity securities 595,366 1,032,416
----------- -----------
$11,429,950 $14,847,229
=========== ===========
Securities sold but not yet purchased:
U.S. government and agency obligations $ 6,054,281 $ 6,395,861
State and municipal obligations 137,713 25,653
Corporate debt securities 453,002 177,611
Corporate equity securities 441,935 766,752
----------- -----------
$ 7,086,931 $ 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 June 30, 1994 and December 31, 1993 were
the following:
June 30, December 31,
1994 1993
---------- ----------
Commercial paper $ 751,367 $1,083,483
Bank loans 252,991 1,670,730
Medium-Term Notes 60,000 25,000
---------- ----------
$1,064,358 $2,779,213
========== ==========
<PAGE>6
Notes to Consolidated Financial Statements (continued)
Long-Term Borrowings
Long-term borrowings at June 30, 1994 and December 31, 1993 consisted of the
following :
June 30, December 31,
1994 1993
----------- -----------
Fixed Rate Notes Due 1995-2014 $ 1,188,800 $ 998,156
Fixed Rate Subordinated Notes Due 2002 174,280 174,236
Medium-Term Senior Notes 487,100 331,975
Medium-Term Subordinated Notes 350,150 298,650
Bank Term Loans 50,000 70,000
Convertible Debentures 19,299 15,435
Other 47,926 47,630
---------- ----------
$2,317,555 $1,936,082
========== ==========
As of June 30, 1994, the Company had $837,250 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 5.56%.
Total interest payments relating to repurchase agreements, short-term
borrowings, stock loans and long-term borrowings were $651,604 and $462,710 for
the six months ended June 30, 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 June
30, 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)
June 30, December 31,
1994 1993
---------- ----------
Mortgage-backed securities, forward contracts and
options written $27,744,756 $54,803,708
Foreign exchange forward contracts, futures
contracts and options written 3,995,556 2,819,063
Securities contracts including futures, forwards
and options written 14,243,658 7,832,106
Interest rate swaps, caps and floors 250,644 408,583
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 $161,812 at June 30, 1994. The net realizable value
of options purchased amounted to $240,831 at June 30, 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 June 30, 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 June 30, 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 $23,132. 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 $25,015 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 June 30, 1994, securities with a market value of $419,352 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
$232,071 at June 30, 1994.
Stockholders' Equity
At the Annual Meeting of Stockholders 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.
On August 4, 1994, the Board of Directors declared a regular quarterly cash
dividend on the Company's common stock of $0.12 per share payable on October 3,
1994 to stockholders of record on September 2, 1994.
As of June 30, 1994, the Company had 24,137,699 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 June 30, 1994, PWI's net capital of $600,420 was
17% of aggregate debit balances and its net capital in excess of the minimum
required was $524,739.
Income Taxes
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense (benefit) is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1994 1993 1994 1993
-------- ------- ------- ------
Tax at U.S.
statutory rates 35.0% 34.0% 35.0% 34.0%
State, local and foreign
income taxes, net of
federal tax benefit 5.5 5.6 5.5 5.6
Foreign rate differential (0.3) (1.1) (0.3) (0.9)
Nontaxable dividends &
interest 2.2 (0.7) (3.6) (0.6)
Other, net (2.4) 1.2 3.4 0.9
------- ------- ------- ------
40.0% 39.0% 40.0% 39.0%
======= ======= ======= ======
Income taxes paid were approximately $57,263 and $74,183 for the six months
ended June 30, 1994 and 1993, respectively.
Earnings (Loss) Per Common Share
Earnings per common share is computed by dividing net earnings 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, the conversion of convertible debentures and preferred
equities, and restricted stock outstanding.
In the second quarter of 1994, as a result of the net loss reported, the Company
computed its loss per common share by dividing the net loss by the weighted
average common shares outstanding during the quarter.
For the three months ended March 31, 1994 and for the six months ended June 30,
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
Notes to Consolidated Financial Statements (continued)
Subsequent Event
In July 1994, the Company made a firm bid to purchase two structured floating
rate securities from the PaineWebber Short-Term U.S. Government Income Fund, a
mutual fund managed by the Company's investment subsidiary, Mitchell Hutchins
Asset Management Inc. The bid was for an aggregate price of approximately
$180,000.
<PAGE>11
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 reflecting the impact of these factors.
At the beginning of 1994, the favorable trends in the U.S. securities markets
continued. Beginning in early February, the Federal Reserve Board shifted to a
more restrictive monetary policy due to inflationary fears, and increased the
short-term interest rates four times from February through May. The advance in
interest rates triggered declines in the prices of stocks and bonds. A slowdown
in institutional and retail customer activity started toward the end of February
and continued through June affecting the liquidity of certain securities
markets, particularly the mortgage-backed markets, thus negatively impacting the
firm's earnings beginning in the latter part of the first quarter and continuing
to date.
Results of Operations
Quarter Ended June 30, 1994 compared to Quarter Ended June 30, 1993
The Company's net earnings for the quarter ended June 30, 1994, before giving
effect to a non-recurring after-tax charge of approximately $34 million related
to the PaineWebber Short-Term U.S. Government Income Fund (the "Fund"), were
$9.1 million or $0.12 per primary and fully diluted share, as compared to $59.3
million or $0.74 per primary share ($0.69 per fully diluted share) earned in the
second quarter of 1993. The net loss for the second quarter of 1994, after
giving effect to the non-recurring charge, was $25.1 million or $0.35 per
primary and fully diluted share. Total revenues of $902.3 million were 5.5%
lower than those reported for the second quarter of 1993, while revenues, net of
interest expense, decreased $107.5 million to $579.0 million. The decrease in
revenues is primarily attributable to reduced client demand for fixed income
products, particularly in the mortgage business, in response to the changing
interest rate environment.
Results for the second quarter were adversely affected by a non-recurring after-
tax charge of approximately $34 million ($57 million pre-tax) relating to the
proposed reimbursement of the Fund, a mutual fund managed by the Company's
investment subsidiary, Mitchell Hutchins Asset Management Inc., for losses and
other expenses attributable to mortgage-derivative securities owned by the Fund.
The Fund's performance was adversely affected by the rapid and substantial
decline in the mortgage-backed securities market which was triggered by rising
interest rates. Beyond these unusual market conditions, however, certain of the
Fund's securities, known as Non-Planned Amortization Class (non-PAC) interest
only and principal only ("I/O and P/O") securities contributed about $.06 of the
decline in the Fund's per share net asset value ("NAV") during the period. As a
result of the decline in the Fund's NAV due to the non-PAC I/O and P/O
securities, payments expected to approximate $33 million will be made for the
benefit of Fund shareholders, subject to court approval. These payments reflect
the losses incurred by the Fund by reason of its investments in those non-PAC
I/O and P/O securities and would be made to the Fund or directly to shareholders
participating in the class action settlement. In addition, in June the Company
purchased all the Fund's remaining I/O and P/O securities. In July, the Company
made a firm bid to purchase two structured floating rate securities from the
Fund for an aggregate price of approximately $180 million (see also the
"Subsequent Event" footnote).
Commission revenues in the second quarter of 1994 were relatively unchanged at
$240.7 million as compared to $240.0 million during the second quarter of 1993.
During the second quarter of 1994, insurance commissions increased $9.6 million
or 38.8% over the prior year period on increased sales of annuity contracts and
mutual fund commissions improved $2.2 million or 5.7%. These gains were offset
by lower commissions from listed securities and commodities.
Principal transactions revenues decreased $90.2 million or 49.6% from the second
quarter 1993 reflecting lower results in mortgage and corporate debt
obligations. This decrease was the direct result of further rises in interest
rates which caused illiquidity in the mortgage business and reduced customer
demand for fixed income products. These losses were partially offset by higher
results in U.S. Government and corporate equity securities.
<PAGE>12
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Results of Operations (continued)
Investment banking revenues for the quarter ended June 30, 1994 were $59.1
million as compared to the $96.6 million earned during the second quarter of
1993 reflecting a lower level of corporate and municipal offerings.
Asset management fees, which are largely recurring in nature, increased $12.2
million or 15.7% over the second quarter of 1993 as average client assets in
managed or wrap fee accounts increased 32% and average assets in long-term
mutual funds increased 17% over the second quarter of 1993. Total assets under
management were $36.3 billion as of June 30, 1994 compared to $37.6 billion as
of June 30, 1993.
Net interest increased $2.0 million or 3.4% due to increased margin lending to
customers. Average margin debits during the quarter increased 20% from the
prior year quarter and the interest spread earned increased 23 basis points.
Other income rose 16.9% to $36.1 million primarily due to higher transaction and
account fees and increased dividends on higher equity inventory.
Compensation and benefits decreased $43.8 million to $344.7 million primarily
due to lower revenue driven compensation paid to institutional and retail
investment executives and lower performance based incentives. This decrease was
partially offset by increases reflecting strategic hiring, salary increases,
higher costs related to employee benefit plan enhancements and a change in
pension plan assumptions. Employee compensation and related expenses as a
percentage of revenues was 59.5% as compared to 56.6% during the second quarter
of 1993.
All other operating expenses increased $75.3 million or 37.5% during the second
quarter of 1994 as compared to the second quarter of 1993. Other expenses
increased $62.3 million primarily due to the charge related to the Fund and
litigation-related expenses. Litigation-related expenses also contributed to the
increase in professional services. Higher office and equipment expense, as well
as communications expense, reflects increased costs associated with technology
initiatives. Lower advertising expenditures resulted in reduced business
development expenses.
Six Months Ended June 30, 1994 compared to Six Months Ended June 30, 1993
Net income for the six months ended June 30, 1994, before giving effect to the
non-recurring charge, was $64.8 million or $0.84 per primary share ($0.83 per
fully diluted share), as compared to the $130.2 million earned during the six
months ended June 30, 1993 or $1.62 per primary share ($1.53 per fully diluted
share). Net income, including the charge, was $30.6 million or $0.41 per
primary and fully diluted share. Revenues, net of interest expense, decreased
$52.2 million to $1,331.0 million. These declines were primarily attributable
to reduced client demand for fixed income products and the charges related to
the Fund.
During the six months ended June 30, 1994, commission revenues improved 8.2%
over the six months ended June 30, 1993 to $521.4 million. Insurance commissions
gained $23.5 million or 55.5%, mutual fund commissions rose $12.5 million or
16.5%, options commissions rose $9.4 million or 28.0%, and commissions from
listed securities rose $6.3 million or 2.4%. These gains were partially offset
by a decrease in commissions earned from commodities.
Principal transactions revenues decreased $108.9 million or 28.3% from the six
months ended June 30, 1993 due to less profitable trading results in mortgage-
backed securities, corporate debt, and municipal obligations. These decreases
reflect the difficult fixed income market during the first half of 1994. These
declines were partially offset by higher results in U.S Government and corporate
equity securities.
Investment banking revenues for the six months ended June 30, 1994 decreased
$41.6 million to $156.7 million as compared to the $198.3 million earned during
the six months ended June 30, 1993. This decrease reflects a lower number of
corporate and municipal underwritings.
Asset management fees increased $30.2 million or 20.0% over the prior year
period to $181.0 million primarily due to increased advisory, distribution, and
wrap account fees on higher average assets.
<PAGE>13
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Net interest increased $14.2 million or 12.3% due to increased margin lending to
customers and improved spreads on higher fixed income inventory levels. Average
margin debits increased 23% from the prior year period while the interest spread
increased 15 basis points. These gains were partially offset by increased
financing costs on higher equity inventory.
Other income rose $14.7 million or 28.0% primarily due to higher transaction and
account fees, and increased dividends on higher equity inventory. In addition,
other income includes increased fees on Individual Retirement Accounts ("IRA")
and the Company's Resource Management Accounts ("RMA"), as the number of IRA and
RMA accounts increased 9.7% and 6.2%, respectively.
Compensation and benefits decreased $7.4 million to $776.4 million primarily due
to lower performance based incentives. This decrease is offset by higher
revenue driven compensation paid to retail investment executives, strategic
hiring, salary increases, higher costs related to employee benefit plan
enhancements and a change in pension plan assumptions. Employee compensation and
related expenses as a percentage of revenues was 58.3% as compared to 56.7%
during the first half of 1993.
All other operating expenses increased $117.7 million or 30.5% in the six months
ended June 30, 1994 as compared to the six months ended June 30, 1993. Other
expenses increased $87.0 million over the prior year period primarily due to the
charge related to the Fund. Increased litigation-related expenses are included
in other expenses and professional services. Higher office, equipment and
communication expenses reflect increased costs associated with technology
initiatives.
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 June 30, 1994 were $35.4 billion compared to $37.0
billion at December 31, 1993, reflecting decreases primarily in U.S. government
inventory positions and first mortgage notes held for resale. 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 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 March 1995 with provisions for
renewal through November 1996. At June 30, 1994, there were no outstanding
borrowings under these facilities. Additionally, the Company had more than $5
billion in uncommitted lines of credit at June 30, 1994.
The Company maintains public debt shelf registrations with the Securities and
Exchange Commission ("SEC"). The Company issued $200.0 million of 7 5/8% Senior
Notes in the first quarter of 1994 and $345.0 million of Medium-Term Senior and
Subordinated Notes, with varying rates of interest, during the six months ended
June 30, 1994 under these registration statements. At June 30, 1994, the
Company had $1,007.6 million in debt securities available for issuance under
previously filed shelf registrations.
<PAGE>14
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
Capital Resources and Capital Adequacy
The Company's total capital base at June 30, 1994, which includes long-term
borrowings and stockholders' equity, was $3.5 billion, an increase of $400.3
million from December 31, 1993. The additions to capital reflect increases in
both long-term borrowings and stockholders' equity of $381.5 million and $18.9
million, respectively.
The increase in long-term borrowings from December 31, 1993 primarily reflects
the issuance of $200.0 million of 7 5/8% Senior Notes in the first quarter of
1994 and the net issuance of $206.6 million of Medium-Term Senior and
Subordinated Notes. Offsetting these increases was the maturity of a $20.0
million bank term loan in May 1994.
The increase in stockholders' equity from December 31, 1993 is primarily the
result of the Company's net earnings for the six months of $30.6 million and net
amortization of restricted stock awards of $18.8 million. This increase was
offset by the repurchase of 1.8 million shares of the Company's common stock for
$31.3 million. As of June 30, 1994, the Company had authorization to repurchase
up to 9.6 million additional shares of its common stock.
At the Annual Meeting of Stockholders which was held on May 5, 1994, the
stockholders approved an increase in the number of the Company's 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, Highly Leveraged and Structured Securities Transactions
In connection with its merchant banking activities, the Company has provided
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 June 30, 1994, the Company had investments in merchant banking transactions
which were affected by liquidity, reorganization or restructuring issues of
$53.1 million, net of reserves, compared to $52.1 million, net of reserves, at
December 31, 1993. Included in the portfolio at June 30, 1994 is an investment
of $49.6 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 June 30, 1994, the Company held
in long and short inventory approximately $178.7 million and $48.7 million,
respectively, of high-yield debt securities, which accounted for approximately
1.2% of gross inventory positions. No one issuer accounted for more than 11% 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.
On June 8, 1994, the Company purchased $55 million of mortgage derivative
securities from the Short-Term U.S. Government Income Fund. Due to disruptions
over the past several months in the mortgage-backed securities markets, these
securities are subject to liquidity constraints.
<PAGE>15
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 cases, each of which was previously
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 1993 or in its Quarterly Report on Form 10-Q for the three months ended
March 31, 1994.
Northview Corporation Litigation
On May 10, 1994, the Court granted PaineWebber Incorporated's motion to strike
certain exhibits attached to plaintiff's fourth amended complaint. On July 13,
1994, the trial court overruled the demurrer filed by PaineWebber Incorporated
to plaintiff's fourth amended complaint as well as the demurrers filed by the
other defendants, and in addition, denied the motion for summary adjudication
filed by the law firm that acted as outside counsel to both Northview
Corporation and Calmark Financial Corporation.
The time within which to file an answer to plaintiff's fourth amended complaint
has been extended for a period of thirty days from the date of the above ruling.
ICN Pharmaceuticals Litigation
On July 27, 1994, the Trial Court issued an order and final judgement approving
the Stipulation of Settlement reached between plaintiffs and PaineWebber
Incorporated in the consolidated class actions.
Arizona State Carpenters Pension Trust Fund, et al. v. Mitchell Hutchins
Institutional Investors, et al.
All parties to the litigation have reached an agreement in principle to resolve
all claims in this matter.
ITEM 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following exhibits are filed herewith:
Exhibit 11 - Computation of Earnings (Loss) 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 June 6, 1994
relating to the Amendment of Certificate of Incorporation to increase
the number of common shares authorized for issuance from 100,000,000
shares to 200,000,000 shares. The item reported on such Current
Report was "Item 5 - Other Events" and "Item 7 - Exhibits".
<PAGE>16
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K (continued)
- ----------------------------------------------------
The Company filed a Current Report on Form 8-K dated June 8, 1994
relating to a press release issued by the Company regarding the
Company's actions to increase the net asset value and reduce the
volatility of the Short-Term U.S. Government Income Fund. The item
reported on such Current Report was "Item 5 - Other Events".
The Company filed a Current Report on Form 8-K dated July 22, 1994
relating to a press release issued by the Company reporting the
results for the second quarter of 1994. The item reported on such
Current Report was "Item 5 - Other Events".
The Company filed as Amendment No. 1 to its Current Report on Form
8-K/A dated July 25, 1994 relating to the correction of its Current
Report on Form 8-K dated June 8, 1994. The item reported on such
Amendment No. 1 to its Current Report was "Item 5 - Other Events".
The Company filed a Current Report on Form 8-K dated July 29, 1994
relating to the sale of 1,300,000 U.S. Dollar Increase Warrants on
the Japanese Yen expiring July 31, 1996. The item reported on such
Current Report was "Item 5 - Other Events" and "Item 7 - Exhibits".
<PAGE>17
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: August 10, 1994 By: /s/ Regina A. Dolan
--------------- -----------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
<PAGE>18
</TABLE>
<TABLE>
Exhibit 11
Paine Webber Group Inc.
Computation of Earnings (Loss) Per Common Share
(In thousands of dollars except share and per share amounts)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
1994 1993 <F1> 1994 1993 <F1>
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares
outstanding 70,728,823 68,512,450 71,028,825 64,785,516
Equivalent shares outstanding for:
Stock options and awards - 7,125,302 6,697,995 6,896,700
Participating Preferred Stock - 4,137,948 - 7,908,666
6.5% Convertible Debentures - - 1,470,110 -
------------ ---------- ----------- ----------
Total weighted average common and
common equivalent shares 70,728,823 79,775,700 79,196,930 79,590,882
============ ========== =========== ==========
Net earnings (loss) $ (25,055) $ 59,301 $ 30,593 $ 130,185
Preferred dividend requirements - (533) - (1,066)
Interest savings - - 1,846 -
------------- ---------- ----------- ----------
Earnings (loss) applicable for common shares $ (25,055) $ 58,768 $ 32,439 $ 129,119
============ ========== =========== ==========
Earnings (loss) per common share $ (0.35) $ 0.74 $ 0.41 $ 1.62
============ ========== =========== ==========
Fully Diluted:
Weighted average common shares outstanding 70,728,823 68,512,450 71,028,825 64,785,516
Equivalent shares outstanding for:
Stock options and awards - 8,054,430 6,697,995 7,901,937
Participating Preferred Stock - 4,137,948 - 7,908,666
6.5% Convertible Debentures - - 1,470,110 -
Assumed conversion of 8% Convertible Debentures
and $1.375 Preferred Stock - 5,779,262 1,405,552 5,938,596
----------- ---------- ----------- ----------
Total weighted average common and
common equivalent shares 70,728,823 86,484,090 80,602,482 86,534,715
=========== ========== =========== ==========
Net earnings (loss) $ (25,055) $ 59,301 $ 30,593 $ 130,185
Interest savings - 903 2,242 1,900
----------- ---------- ----------- ----------
Earnings (loss) applicable for
common shares $ (25,055) $ 60,204 $ 32,835 $ 132,085
============= =========== =========== ==========
Earnings (loss) per common share $ (0.35) $ 0.69 $ 0.41 $ 1.53
============= =========== =========== ==========
</TABLE>
[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>19
<TABLE>
Exhibit 12
Paine Webber Group Inc.
Computation of Ratio of Earnings to Fixed Charges
(In thousands of dollars)
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
------------- ------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
------------ ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss)
before taxes $ 50,989 $ 407,576 $ 339,115 $ 226,247 $ (102,633) $ 82,568
------------ ----------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 653,754 1,130,712 879,242 1,056,124 1,242,151 1,198,640
Interest factor in rents 25,711 50,133 45,962 43,804 42,223 40,360
------------ ---------- ---------- --------- --------- ---------
Total fixed charges 679,465 1,180,845 925,204 1,099,928 1,284,374 1,239,000
------------ ---------- ---------- --------- --------- ---------
Earnings before taxes
and fixed charges $ 730,454 $1,588,421 $1,264,319 $1,326,175 $1,181,741 $1,321,568
============ ========== ========== ========== ========== ==========
Ratio of earnings to
fixed charges 1.1 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 earnings (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.
<FN>
<F1> Earnings were inadequate to cover fixed charges and would have had to
increase approximately $102,633 in order to cover the deficiency.
</TABLE>
