<PAGE> 1
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 September 30, 1995
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 November 3, 1995, the Registrant had outstanding 97,437,306 shares of common
stock of $1 par value, which is the Registrant's only class of common stock.
<PAGE> 2
PAINE WEBBER GROUP INC.
FORM 10-Q
SEPTEMBER 30, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C> <C>
Item 1. Financial Statements.
Consolidated Statements of Operations
(unaudited) for the Three Months and Nine Months Ended
September 30, 1995 and 1994. 2
Consolidated Statements of Financial
Condition (unaudited) at September 30, 1995
and December 31, 1994. 3
Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended
September 30, 1995 and 1994. 4
Notes to Consolidated Financial Statements
(unaudited). 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 14-18
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings. 19
Item 6. Exhibits and Reports on Form 8-K. 19
Signature 20
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAINE WEBBER GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
1995 1994 1995 1994
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 333,686 $ 220,677 $ 927,772 $ 742,062
Principal transactions 264,049 110,965 682,026 386,526
Investment banking 93,988 64,864 232,380 221,598
Asset management 104,159 87,084 292,031 268,056
Other 39,587 35,775 118,081 102,814
Interest 544,089 420,684 1,693,423 1,203,790
----------- ---------- ---------- ----------
Total revenues 1,379,558 940,049 3,945,713 2,924,846
Interest expense 467,533 350,235 1,483,106 1,003,989
----------- ---------- ---------- ----------
Net revenues 912,025 589,814 2,462,607 1,920,857
----------- ---------- ---------- ----------
NON-INTEREST EXPENSES
Compensation and benefits 537,870 362,284 1,475,637 1,138,727
Office and equipment 67,689 56,620 199,716 168,445
Communications 38,130 32,521 111,459 97,542
Business development 23,364 19,616 68,358 63,167
Brokerage, clearing & exchange fees 24,432 19,499 72,556 61,965
Professional services 24,531 17,976 72,910 58,777
Other 79,307 47,403 438,097 247,350
----------- ---------- ---------- ----------
Total non-interest expenses 795,323 555,919 2,438,733 1,835,973
----------- ---------- ---------- ----------
EARNINGS BEFORE TAXES 116,702 33,895 23,874 84,884
----------- ---------- ---------- ----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Federal 24,099 9,262 (11,890) 15,214
State, local and foreign 14,413 4,296 13,812 18,740
----------- ---------- ---------- ----------
38,512 13,558 1,922 33,954
----------- ---------- ---------- ----------
NET EARNINGS $ 78,190 $ 20,337 $ 21,952 $ 50,930
=========== ========== ========== ==========
Net earnings (loss) applicable to
common shares $ 71,202 $ 20,952 $ (16) $ 53,428
=========== ========== ========== ==========
Earnings per common share:
Primary $ 0.71 $ 0.27 $ 0.00 $ 0.67
Fully diluted $ 0.67 $ 0.26 $ 0.00 $ 0.67
Weighted average common shares:
Primary 100,931,592 78,798,202 92,597,619 79,320,442
Fully diluted 108,158,981 80,203,754 92,597,619 80,725,994
Dividends declared per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
PAINE WEBBER GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 196,111 $ 259,238
Cash and securities segregated and on deposit for
federal and other regulations 419,419 369,585
Trading inventories, at fair value 13,274,228 10,784,117
Securities borrowed or purchased under agreements to resell 27,621,675 18,630,656
Receivables:
Clients 5,376,274 3,495,670
Brokers and dealers 189,821 432,565
Dividends and interest 268,594 229,462
Fees and other 237,086 233,027
Office equipment and leasehold improvements, net
of accumulated depreciation and amortization of $278,838
at September 30, 1995 and $245,225 at December 31, 1994 321,697 272,365
Other assets 1,640,246 1,149,440
----------- -----------
$49,545,151 $35,856,125
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,672,755 $ 1,889,609
Commitments for securities sold but not yet purchased, at fair value 7,251,044 6,034,706
Securities loaned or sold under agreements to repurchase 29,539,571 19,099,766
Payables:
Clients 4,470,885 2,899,240
Brokers and dealers 224,739 303,244
Dividends and interest 268,619 218,719
Other liabilities and accrued expenses 1,372,805 933,977
Income taxes 102,652 -
Accrued compensation and benefits 466,995 344,981
----------- -----------
45,370,065 31,724,242
Long-term borrowings 2,423,001 2,315,415
----------- -----------
47,793,066 34,039,657
----------- -----------
Commitments and contingencies
Redeemable Preferred Stock 186,562 185,969
Stockholders' Equity:
Convertible Preferred Stock 100,000 100,000
Common stock, $1 par value, 200,000,000 shares
authorized; issued 102,083,692 shares at September 30, 1995 and
100,613,737 shares at December 31, 1994 102,084 100,614
Additional paid-in capital 786,841 784,974
Retained earnings 679,414 715,052
----------- -----------
1,668,339 1,700,640
Treasury stock, at cost;
3,740,987 shares at September 30, 1995 and
1,297,081 shares at December 31, 1994 (71,717) (21,981)
Unamortized cost of restricted stock (36,407) (51,803)
Foreign currency translation adjustment 5,308 3,643
----------- -----------
1,565,523 1,630,499
----------- -----------
$49,545,151 $35,856,125
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
PAINE WEBBER GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1995 1994
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 21,952 $ 50,930
Adjustments to reconcile net earnings to cash (used for)
provided by operating activities:
Noncash items included in net earnings:
Depreciation and amortization 41,661 29,978
Deferred income taxes (100,304) (20,785)
Amortization of deferred charges 119,465 85,026
Other 218,654 26,560
(Increase) decrease in operating receivables:
Clients (1,885,764) (718,757)
Brokers and dealers 242,744 436,645
Dividends and interest (39,132) 41,980
Fees and other (4,058) (25,963)
Increase (decrease) in operating payables:
Clients 1,571,645 783,632
Brokers and dealers (78,505) (326,030)
Dividends and interest 49,899 (92,772)
Other 453,674 (178,270)
(Increase) decrease in:
Trading inventories (2,490,111) 6,054,748
Securities borrowed or purchased under agreements to resell (11,344,326) (6,261,608)
Cash and securities on deposit (49,834) (2,382)
Other assets (483,944) (384,389)
Increase (decrease) in:
Commitments for securities sold but not yet purchased 1,216,338 (640,698)
Securities loaned or sold under agreements to repurchase 10,636,232 4,799,029
----------- ----------
Cash (used for) provided by operating activities (1,903,714) 3,656,874
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements (88,698) (51,076)
----------- ----------
Cash used for investing activities (88,698) (51,076)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on):
Short-term borrowings (216,854) (1,513,291)
Securities sold under agreements to repurchase,
net of securities purchased under agreements to resell 2,156,879 (2,530,625)
Proceeds from:
Long-term borrowings 412,586 623,030
Employee stock transactions 33,818 10,710
Payments for:
Long-term borrowings (306,370) (120,040)
Repurchases of common stock (93,184) (39,546)
Dividends (57,590) (27,453)
----------- ----------
Cash provided by (used for) financing activities 1,929,285 (3,597,215)
----------- ----------
Increase (decrease) in cash and cash equivalents (63,127) 8,583
Cash and cash equivalents, beginning of period 259,238 241,038
----------- ----------
Cash and cash equivalents, end of period $ 196,111 $ 249,621
=========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
PAINE WEBBER GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands of dollars except share and per share amounts)
NOTE 1: 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 September 30, 1995 and
1994 is unaudited. However, in the opinion of management of the Company, such
information includes all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation. These financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and previously issued quarterly reports. The results of
operations reported for interim periods are not necessarily indicative of the
results of operations for the entire year. Certain reclassifications have been
made in prior year amounts 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.
NOTE 2: BUSINESS ACQUISITION
The purchase of certain assets and liabilities and specific businesses of
Kidder, Peabody Group Inc. ("Kidder") from General Electric Company was
completed in the first quarter of 1995 with the closing on the retail and asset
management businesses.
The following unaudited pro forma condensed results of operations for the three
months and nine months ended September 30, 1994 assumes the acquisition of the
Kidder businesses occurred at the beginning of the year ended December 31,
1994:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1994 September 30, 1994
------------------ ------------------
<S> <C> <C>
Revenues $1,207,108 $3,726,023
Net revenues $ 774,287 $2,474,277
Net earnings $ 40,536 $ 111,527
Earnings per common share:
Primary $ 0.34 $ 0.91
Fully diluted $ 0.33 $ 0.90
</TABLE>
The unaudited pro forma condensed results of operations for the three months
and nine months ended September 30, 1994 are not necessarily indicative of the
Company's results of operations that might have occurred had the transaction
been executed at the beginning of 1994, or of any future results of operations
of the Company. Adjustments to 1995 to develop pro forma results as if the
retail and asset management closings had occurred on January 1, 1995 were not
material.
NOTE 3: LIMITED PARTNERSHIP INVESTMENT CHARGE
In the second quarter of 1995, the Company recorded an after-tax charge of
$126,000 ($200,000 before income taxes) reflecting the Company's assessment of
the total financial cost of resolving Securities and Exchange Commission
("SEC"), individual and class action claims arising out of the sale of limited
partnerships that began in the mid-1980's. The Company has reached a stage in
its settlement discussions with the SEC staff and in its evaluation of
individual and class action claims such that it now has a sound and
comprehensive basis for quantifying the total costs of resolving limited
partnership investment issues. The charge is included in "Other liabilities"
and "Other expenses" in the Company's Consolidated Statement of Financial
Condition and Consolidated Statement of Operations, respectively.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
NOTE 4: FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Assets, including cash and cash
equivalents, cash and securities segregated for regulatory purposes, trading
inventories, securities borrowed or purchased under agreements to resell, and
certain receivables, are carried at fair value or contracted amounts which
approximate fair value. Similarly, liabilities, including short-term
borrowings, commitments for securities sold but not yet purchased, securities
loaned or sold under agreements to repurchase, and certain payables, are
carried at fair value or contracted amounts approximating fair value.
At September 30, 1995 and December 31, 1994, the fair value of long-term
borrowings was $2,429,057 and $2,107,538, respectively, as compared to the
carrying amounts of $2,423,001 and $2,315,415, respectively. The estimated
fair value of long-term borrowings is based upon quoted market prices for the
same or similar issues and pricing models. However, for the majority of its
fixed rate debt, the Company enters into interest rate swap agreements to
convert its fixed rate payments into floating payments, which partially offset
the effect of the changes in interest rates on the fair value of the Company's
long-term borrowings.
The fair value of interest rate swaps used to hedge the Company's long-term
borrowings is based upon the amounts the Company would receive or pay to
terminate the agreements, taking into account current interest rates and
creditworthiness of the counterparties. The fair value of the interest rate
swaps was $16,512 and $172,193 payable at September 30, 1995 and December 31,
1994, respectively. The carrying amounts of the interest rate swap agreements
at September 30, 1995 and December 31, 1994 were $317 and $4,480 receivable,
respectively, and are included in "Dividends and interest" in the Company's
Consolidated Statement of Financial Condition.
NOTE 5: TRADING INVENTORIES
Trading inventories and commitments for securities sold but not yet purchased,
recorded at fair value, consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------------- --------------
<S> <C> <C>
Trading inventories:
U.S. government and agency obligations $ 4,293,056 $ 3,560,201
Mortgages and mortgage-backed securities 4,178,201 2,441,940
Corporate debt securities 2,317,574 1,816,747
Commercial paper and other short-term debt 890,006 1,242,988
State and municipal obligations 798,870 1,018,875
Corporate equity securities 796,521 703,366
------------ -----------
$ 13,274,228 $10,784,117
============ ===========
Commitments for securities sold but not yet purchased:
U.S. government and agency obligations $ 5,406,527 $ 4,918,655
Mortgages and mortgage-backed securities 86,101 44,370
Corporate debt securities 662,966 398,913
State and municipal obligations 15,911 57,751
Corporate equity securities 1,079,539 615,017
------------ -----------
$ 7,251,044 $ 6,034,706
============ ===========
</TABLE>
6
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
NOTE 6: 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 agreements to repurchase, whereby
securities are sold with a commitment to repurchase at a future date; and
through securities lending activity.
Short-term borrowings at September 30, 1995 and December 31, 1994 consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ -------------
<S> <C> <C>
Bank loans and other $1,151,497 $ 972,959
Commercial paper 521,258 906,650
Medium-Term Notes - 10,000
---------- ----------
$1,672,755 $1,889,609
========== ==========
</TABLE>
NOTE 7: LONG-TERM BORROWINGS
Long-term borrowings at September 30, 1995 and December 31, 1994 consisted of
the following :
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- ------------
<S> <C> <C>
Fixed Rate Notes due 1998-2014 $1,287,690 $1,177,159
Fixed Rate Subordinated Notes due 2002 174,390 174,324
Medium-Term Senior Notes 636,475 618,070
Medium-Term Subordinated Notes 287,150 308,150
Other 37,296 37,712
---------- ----------
$2,423,001 $2,315,415
========== ==========
</TABLE>
At September 30, 1995, interest rates on the Fixed Rate Notes due 1998-2014
range from 6 1/4% to 9 1/4% and the weighted average interest rate on these
notes at September 30, 1995 was 7.53%. The Fixed Rate Subordinated Notes Due
2002 have an interest rate of 7 3/4%.
As of September 30, 1995, the Company had $923,625 of Medium-Term Senior and
Subordinated Notes outstanding, with an average maturity of 4.1 years and a
weighted average interest rate of 7.05%.
Total interest payments relating to agreements to repurchase, short-term
borrowings, stock loans and long-term borrowings were $1,433,205 and $1,120,250
for the nine months ended September 30, 1995 and 1994, respectively.
NOTE 8: PREFERRED STOCK
The Company has authorization to issue up to 20,000,000 shares of preferred
stock, in one or more series, with a par value of $20.00 per share. Preferred
stock outstanding at September 30, 1995 and December 31, 1994 was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- --------------
<S> <C> <C>
9% Cumulative Redeemable Preferred Stock,
Series C, $100.00 liquidation value; 2,500,000
shares authorized, issued and outstanding $186,562 $185,969
6% Cumulative Convertible Redeemable Preferred
Stock, Series A, $100.00 liquidation value; 1,000,000
shares authorized, issued and outstanding $100,000 $100,000
</TABLE>
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
NOTE 9: COMMON STOCK
As of September 30, 1995, the Company had 33,591,234 authorized shares of
common stock reserved for issuance in connection with convertible securities
and stock option and stock award plans.
On November 2, 1995, the Board of Directors declared a regular quarterly
dividend on the Company's common stock of $0.12 per share payable on January 4,
1996 to stockholders of record on December 4, 1995.
NOTE 10: CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission Uniform Net Capital Rule and 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 September 30, 1995, PWI's
net capital of $592,623 was 14% of aggregate debit balances and its net capital
in excess of the minimum required was $497,697.
NOTE 11: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
In the normal course of business, the Company engages in a variety of
derivative and non-derivative financial instrument transactions in connection
with its market risk management, its principal trading activities and also on
behalf of its clients. Derivative financial instruments include forward and
futures contracts, options 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 upon notional
amounts and specified rates or indices. As defined by the Financial Accounting
Standards Board ("FASB") in Statement of Financial Accounting Standards No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," a derivative financial instrument also includes
unsettled purchase and sale agreements and firm or standby commitments for the
purchase of securities. It does not include on-balance-sheet receivables and
payables whose value is derived from changes in the value of some underlying
asset or index, such as mortgage-backed securities and structured notes.
In connection with its market risk management and principal trading activities,
the Company may enter into a derivative contract to manage the risk arising
from other financial instruments or to take a position based upon expected
future market conditions. The Company also takes positions to facilitate
client transactions and acts as a market-maker in certain listed and unlisted
securities. These contracts are valued at market, and unrealized gains and
losses are reflected in the financial statements.
A large portion of the Company's derivative financial instruments are "to be
announced" mortgage securities requiring forward settlement. As a principal in
the mortgage-backed securitization business, the Company has outstanding
forward purchase and sale agreements committing the Company to deliver
participation certificates and mortgage-backed securities.
Set forth on the following page are the gross contract or notional amounts of
all off-balance-sheet derivative financial instruments held or issued for
trading purposes. These amounts are not reflected in the Consolidated
Statement of Financial Condition and are indicative only of the volume of
activity at September 30, 1995 and December 31, 1994. They do not represent
amounts subject to market risks, and in many cases, limit the Company's overall
exposure to market losses by hedging other on- and off-balance-sheet
transactions.
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Notional or Contract Amount
---------------------------
September 30, 1995 December 31, 1994
-------------------------- -------------------------
Purchases Sales Purchases Sales
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $15,476,354 $18,298,816 $8,757,807 $9,256,738
Foreign currency forward contracts,
futures contracts, and options
written and purchased 2,377,872 2,625,984 2,325,721 1,855,557
Equity securities contracts including
futures, forwards, and options
written and purchased 2,438,773 2,331,250 1,931,330 2,216,565
Other fixed income securities contracts
including futures, forwards, and
options written and purchased 3,092,403 4,440,237 5,321,100 5,374,546
Interest rate swaps, caps and floors 104,550 20,000 285,450 230,000
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of September 30, 1995 and December 31, 1994.
The fair value amounts are determined by quoted market prices and pricing
models which consider the time value and volatility of the underlying
instruments. Changes in fair value are reflected in trading revenues or net
interest as incurred, depending on the nature of the contract. The amounts are
netted by counterparty only when the criteria of FASB Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts," are met.
<TABLE>
<CAPTION>
Fair Value at Fair Value at
September 30, 1995 December 31, 1994
--------------------------- --------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $86,425 $77,110 $30,606 $25,209
Foreign currency forward contracts,
futures contracts, and options
written and purchased 72,320 81,039 55,345 44,244
Equity securities contracts including
futures, forwards, and options
written and purchased 314,758 124,733 204,938 116,973
Other fixed income securities contracts
including futures, forwards, and
options written and purchased 14,756 19,831 10,150 8,988
Interest rate swaps, caps and floors 2,849 988 1,372 128
</TABLE>
Set forth on the following page are the average fair values of derivative
financial instruments held or issued for trading purposes for the three months
ended September 30, 1995 and the twelve months ended December 31, 1994.
Average fair value is based upon the average of the month-end balances during
the periods indicated.
9
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Average Fair Value Average Fair Value
Three Months Ended Twelve Months Ended
September 30, 1995 December 31, 1994
--------------------------- --------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $120,501 $107,325 $202,484 $191,687
Foreign currency forward contracts,
futures contracts, and options
written and purchased 56,330 63,349 56,528 53,810
Equity securities contracts including
futures, forwards, and options
written and purchased 219,624 98,257 162,388 155,422
Other fixed income securities contracts
including futures, forwards, and
options written and purchased 13,419 17,332 23,527 13,293
Interest rate swaps, caps and floors 2,891 961 1,757 1,147
</TABLE>
The Company also enters into agreements to sell securities, at predetermined
prices, which have not yet been purchased. The Company is exposed to market
risk since to satisfy the obligation, the Company must acquire the securities
at market prices, which may exceed the values reflected on the Consolidated
Statement of Financial Condition.
The Company's risk of loss in the event of counterparty default is limited to
the current fair value or the replacement cost on contracts in which the
Company has recorded an unrealized gain. These amounts are reflected as assets
on the Company's Consolidated Statement of Financial Condition and amounted to
$491,108 and $302,411 at September 30, 1995 and December 31, 1994,
respectively. Options written do not expose the Company to credit risk since
they do not obligate the counterparty to perform. Transactions in futures
contracts are conducted through regulated exchanges which have margin
requirements, and are settled in cash on a daily basis, thereby minimizing
credit risk.
The following table summarizes the Company's principal transaction revenue (net
trading revenues) by business activity for the three months and nine months
ended September 30, 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
------------------ ------------------
<S> <C> <C>
Corporate equities (includes equity securities, equity index futures, equity
index options and swaps, and equity options contracts) $124,238 $277,700
Municipals (includes municipal and government securities) 30,515 107,171
U.S. government (includes U.S. government securities, financial futures and
options contracts) 32,683 76,979
Mortgage and mortgage-backed (includes mortgage-backed and government
securities, mortgage-backed forwards and options contracts) 32,406 73,937
Corporate debt and other (includes debt, foreign currency forwards, futures
and options contracts and other securities) 44,207 146,239
-------- --------
$264,049 $682,026
======== ========
</TABLE>
Principal transaction revenues include realized and unrealized gains and losses
in the fair value of derivative and other financial instruments.
10
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to ensure that the
interest rate characteristics of assets and liabilities are matched. As of
September 30, 1995 and December 31, 1994, the Company had outstanding interest
rate swap agreements with large financial institutions with notional principal
amounts of $1,931,200 and $1,836,250, respectively. These agreements
effectively converted approximately 79% of the Company's fixed rate debt at
September 30, 1995 into floating rate debt. The interest rate swap agreements
entered into have had the effect of increasing net interest expense on the
Company's long-term borrowings by $2,354 for the nine months ended September
30, 1995 and reducing net interest expense by $25,659 for the nine months ended
September 30, 1994. The difference to be received or paid on the swap
agreements is included in interest expense as incurred and any related
receivable from or payable to counterparties is reflected as an asset or
liability, accordingly. The Company had no deferred gains or losses related to
terminated swap agreements at September 30, 1995 and December 31, 1994. The
Company is subject to market risk as interest rates fluctuate. The interest
rate swaps contain credit risk to the extent the Company is in a receivable or
gain position and the counterparty defaults. However, the counterparties to
the agreements are large financial institutions and the Company has not
experienced defaults in the past and management does not anticipate any
counterparty defaults in the foreseeable future.
NOTE 12: RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors
its exposure to market and credit risk on a daily basis and through a variety
of financial, security position and credit exposure reporting, and control
procedures.
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 fair values of the securities underlying the instrument. The Company has a
variety of methods to monitor its market risk profile. The senior management
of each business group is responsible for reviewing trading positions,
exposures, profits and losses, and trading strategies on a daily basis. The
Company also has an independent risk management group which aids in setting and
monitoring risk management policies of the Company, including monitoring
adherence to the established limits, performing market risk modeling, and
reviewing trading positions and hedging strategies. The Asset/Liability
Management Committee is responsible for establishing trading position and
exposure limits and is comprised of senior corporate and business unit
managers.
Market risk modeling is based on estimating loss exposure through daily stress
testing. These results are compared to daily limits and exceptions are subject
to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks and
regular meetings between the senior management of the business groups and the
risk management group.
Credit Risk in Proprietary 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 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.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
11
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
Receivables and payables with brokers and dealers, and agreements to resell and
repurchase securities are generally collateralized by cash, U.S. 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.
The Company may pledge clients' securities as collateral in support of
securities loaned and bank loans as well as 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 September 30, 1995, the market value of
client securities loaned to other brokers approximated the amounts due or
collateral obtained.
Credit Risk in Client Activities
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.
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 September 30, 1995 were settled
without adverse effect on the Company's financial statements, taken as a whole.
NOTE 13: CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk that arise from financial instruments (whether
on- or off-balance-sheet) exist for groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
obligations to be similarly affected by economic, industry or geographic
factors. As a major securities firm, the Company engages in activities with a
broad range of corporations, governments, and institutional and individual
investors. The Company has no significant exposure to any individual
counterparty. The Company's most significant industry concentration, which
arises within its normal course of business activities, is financial
institutions including banks, brokers and dealers, mutual funds and insurance
companies. The Company seeks to control its credit risk and the potential for
risk concentration through a variety of reporting and control procedures.
NOTE 14: COMMITMENTS AND CONTINGENCIES
At September 30, 1995 and December 31, 1994, the Company was contingently
liable under unsecured letters of credit totaling $148,505 and $212,211,
respectively, which approximates fair value. In addition, at September 30,
1995, certain of the Company's subsidiaries were contingently liable as issuer
of $86,160 of notes payable to managing general partners of various limited
partnerships pursuant to Internal Revenue Service guidelines. There is no
market for these guarantees, therefore, it is not practicable to estimate their
fair value. In the opinion of management, these contingencies will not have a
material adverse effect on the Company's consolidated financial statements,
taken as a whole. The Company also had conditional commitments of $15,972 to
contribute capital to limited partnerships as of September 30, 1995.
12
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands of dollars except share and per share amounts)
At September 30, 1995 and December 31, 1994, securities with a fair value of
$335,074 and $674,669, respectively, had been loaned or pledged as collateral
for securities borrowed of approximately equal fair value.
In meeting the financing needs of certain of its clients, PWI has issued
standby letters of credit which amounted to $23,251 at September 30, 1995. The
standby letters of credit are fully collateralized by marginable securities.
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 consolidated
financial statements, taken as a whole.
NOTE 15: INCOME TAXES
The reconciliation of income taxes, computed at the statutory federal rates, to
income taxes recorded is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1995 1994 1995 1994
---- ----- -------- --------
<S> <C> <C> <C> <C>
Tax at statutory federal rates 35.0% 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefit 4.3 4.3 (7.7) 5.0
Foreign rate differential 0.7 2.2 0.4 0.7
Nontaxable dividends & interest (2.0) (2.0) (33.3) (3.0)
Other, net (5.0) 0.5 13.7 2.3
----- ------ -------- -----
33.0% 40.0% 8.1% 40.0%
===== ====== ======== =====
</TABLE>
Income taxes paid were $23,072 and $72,332 for the nine months ended September
30, 1995 and 1994, respectively.
NOTE 16: EARNINGS PER COMMON SHARE
For the three months ended September 30, 1995 and 1994, and the nine months
ended September 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 by dividing net earnings, adjusted for any
interest savings, by the weighted average common and common equivalent shares
outstanding during the respective periods. Net earnings for the three months
ended September 30, 1995 was also adjusted for preferred stock dividends.
Common equivalent shares include common shares issuable under the Company's
stock option and award plans, the conversion of convertible debentures and
restricted stock outstanding.
For the nine months ended September 30, 1995, as a result of the net loss
applicable to common shares, the Company computed its per share results by
dividing the net loss applicable to common shares by the weighted average
common shares outstanding, which excludes restricted stock and antidilutive
securities.
13
<PAGE> 15
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.
The securities industry continued to experience improved conditions through the
third quarter of 1995, as compared to the prior year. Increased investor
optimism and a declining interest rate environment have contributed to the
upturn in activity in both the stock and bond markets. During the third
quarter of 1995, the average daily volume on the three primary U.S. equity
markets reached record levels. In addition, the resurgence in new equity and
debt issues during the second quarter of 1995 continued in the third quarter.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1995 Compared to Quarter Ended September 30, 1994
The Company's net earnings for the quarter ended September 30, 1995 were $78.2
million or $0.67 per fully diluted share ($0.71 primary), as compared to $20.3
million or $0.26 per fully diluted share ($0.27 primary) for the quarter ended
September 30, 1994. Revenues, net of interest expense, were $912.0 million,
54.6% higher than the prior year period, primarily due to increased commission
and principal transaction revenues.
Commission revenues earned during the third quarter of 1995 were $333.7
million, 51.2% higher than the $220.7 million earned during the third quarter
of 1994, due to the increased number of investment executives as a result of
the Kidder, Peabody Group Inc. ("Kidder") acquisition and increased market
volume. Listed commissions increased $69.7 million or 60.2%, mutual fund
commissions increased $18.5 million or 50.1%, over-the-counter commissions
increased $16.2 million or 99.1%, and options commissions increased $7.4
million or 45.8%.
Principal transaction revenues were $264.0 million, as compared to $111.0
million for the third quarter of 1994. This increase is attributable to
improved results in mortgages, corporate equity and corporate debt securities.
These gains were partially offset by lower results in municipal and U.S.
government securities.
Investment banking revenues increased 44.9% during the third quarter of 1995 to
$94.0 million, reflecting a higher level of corporate offerings and private
placements and additional revenues related to acquired Kidder businesses.
Asset management fees, which are largely recurring in nature, increased $17.1
million or 19.6%, primarily due to increased fees earned on managed or "wrap"
accounts and increased investment advisory fees earned on money market and
institutional accounts. Average assets in wrap accounts during the third
quarter of 1995 were approximately 50% higher than the third quarter of 1994.
Average assets in money market and institutional accounts increased
approximately 44% and 26%, respectively. These increases were partially offset
by lower investment advisory and distribution fees earned on long-term mutual
funds.
Net interest increased $6.1 million or 8.7% due to increased margin lending to
clients.
Other revenues increased $3.8 million or 10.7%, primarily due to higher
transaction fees partially offset by lower dividend income.
Compensation and benefits were $537.9 million, as compared to $362.3 million
for the third quarter of 1994. Increased compensation costs reflect the
acquisition of Kidder businesses, higher revenues resulting from increased
market activity, higher performance based incentive compensation and normal
salary increases. Compensation and benefits as a percentage of net revenues was
59.0% during the third quarter of 1995, as compared to 61.4% during the prior
year period.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
All other operating expenses were $257.5 million, as compared to $193.6 million
for the third quarter of 1994. Higher office and equipment, communications,
business development and brokerage, clearing and exchange fees are primarily
attributable to the acquired Kidder businesses. Higher professional services
relate principally to increased attorneys' fees.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September
30, 1994
Net earnings for the nine months ended September 30, 1995, before giving effect
to an after-tax second quarter charge of approximately $126 million related to
resolving the Securities and Exchange Commission ("SEC"), individual and class
action claims arising out of the sale of limited partnerships, were $147.9
million or $1.21 per fully diluted share ($1.27 primary). This compares to net
earnings of $85.1 million or $1.09 per fully diluted share ($1.10 primary) for
the nine months ended September 30, 1994, before giving effect to an after-tax
charge of approximately $34 million in the second quarter of 1994 related to
the PaineWebber Short-Term U.S. Government Income Fund (the "Fund"). Net
earnings for the nine months ended September 30, 1995, after giving effect to
the one-time charge, were $22.0 million or $0.00 per primary and fully diluted
share. This compares to net earnings for the nine months ended September 30,
1994 of $50.9 million or $0.67 per primary and fully diluted share, after
giving effect to the non-recurring charge related to the Fund. Revenues for the
nine months ended September 30, 1995, net of interest expense, were $2,462.6
million, 28.2% higher than the $1,920.9 million earned during the first nine
months of 1994, primarily attributable to the acquired Kidder businesses and
improved market conditions.
Results for the first nine months of 1995 were reduced by an after-tax charge
of $126,000 ($200,000 before income taxes) reflecting the Company's assessment
of the total financial cost of resolving SEC, individual and class action
claims arising out of the sale of limited partnerships that began in the
mid-1980's. The Company reached a stage in its settlement discussions with the
SEC staff and in its evaluation of individual and class action claims such that
it has a sound and comprehensive basis for quantifying the total costs of
resolving limited partnership investment issues.
Results for the first nine months of 1994 were reduced by an after-tax charge
of approximately $34 million ($57 million before income taxes) related to the
reimbursement to certain shareholders 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. In addition, the Company purchased all interest only and principal
only securities held by the Fund, as well as two structured floating rate
securities from the Fund, for an aggregate price of approximately $235 million,
in order to permit the Fund to maintain an appropriate mix of investments based
on its investment objectives and reduced size.
Commission revenues earned during the first nine months of 1995 were $927.8
million, $185.7 million or 25.0% higher than the $742.1 million earned during
the prior year period. Listed commissions increased $156.9 million or 41.1%,
over-the-counter commissions increased $22.3 million or 41.0%, mutual fund
commissions increased $15.3 million or 12.2%, and commodities commissions
increased $8.4 million or 29.7%. These increases were partially offset by lower
insurance commissions as a result of decreased sales of insurance annuities.
Principal transaction revenues were $682.0 million as compared to $386.5
million. This increase reflects improved results in mortgages, corporate debt,
municipal and corporate equity securities, partially offset by lower results in
U.S. government securities.
Investment banking revenues were $232.4 million, as compared to $221.6 million
earned during the first nine months of 1994. The increased revenues reflect a
higher level of private placements and incremental revenues attributable to
acquired Kidder businesses. These gains were partially offset by a lower level
of corporate debt and equity underwritings.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Asset management fees of $292.0 million were 8.9% higher than the $268.1
million for the first nine months of 1994 primarily, due to higher fees earned
on wrap accounts and higher investment advisory fees earned on money market and
institutional accounts. Average assets in wrap accounts during the first nine
months of 1995 were approximately 42% higher than the first nine months of
1994. Average assets in money market and institutional accounts increased
approximately 34% and 19%, respectively. These gains were partially offset by
lower investment advisory and distribution fees earned on long-term mutual
funds.
Net interest increased $10.5 million, primarily due to the expansion of the
stock loan business and increased margin lending to clients.
Other revenues increased $15.3 million or 14.9%, primarily due to increased
transaction fees and higher fees from Individual Retirement Accounts due to an
increased number of accounts. These increases were partially offset by lower
dividend income.
Compensation and benefits were $1,475.6 million, as compared to $1,138.7
million for the first nine months of 1994. Increased compensation costs reflect
the acquisition of Kidder businesses, higher revenues resulting from increased
market activity, higher performance based incentive compensation and normal
salary increases. Compensation and benefits as a percentage of net revenues was
59.9% during the first nine months of 1995, as compared to 59.3% during the
prior year period.
All other operating expenses were $963.1 million, as compared to $697.2 million
for the nine months ended September 30, 1994. In 1995, other expenses include
the $200.0 million charge related to the sale of limited partnerships, and, in
1994, other expenses include the charge related to the Fund. Higher
professional services relate principally to increased attorneys' fees. Higher
office and equipment, communications and brokerage, clearing and exchange fees
are primarily attributable to the acquired Kidder businesses.
LIQUIDITY AND CAPITAL RESOURCES
The primary objectives of the Company's funding policies are to insure 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 liquid balance sheet with the majority of assets
consisting of inventories, securities borrowed or purchased under agreements to
resell, and receivables from clients, brokers and dealers, which are readily
convertible into cash. The nature of the Company's business as a securities
dealer results in carrying significant levels of trading 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 September 30, 1995 were $49.5 billion compared to
$35.9 billion at December 31, 1994, reflecting an increase primarily in
securities purchased under agreements to resell. 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 debt.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company maintains committed and uncommitted credit facilities from a
diverse group of banks. The Company has two unsecured revolving credit
agreements to provide up to $2.0 billion, including $1.2 billion, which expires
in December 1995 with provisions for renewal through December 1997, and $800.0
million, which expires in December 1997. At September 30, 1995, there were no
outstanding borrowings under these credit facilities. Additionally, the
Company had more than $5 billion in uncommitted lines of credit at September
30, 1995.
The Company maintains public shelf registration statements for the issuance of
debt securities with the SEC. The Company issued $413.0 million in notes
during the nine months ended September 30, 1995 under these registration
statements. At September 30, 1995, the Company had $444.6 million in debt
securities available for issuance.
Capital Resources and Capital Adequacy
The Company's businesses are capital intensive. In addition to a funding
policy which provides for diversification of funding sources and maximization
of liquidity, the Company maintains a strong capital base. At September 30,
1995, the Company's total capital base, which includes long-term borrowings,
redeemable preferred stock and stockholders' equity, was $4.2 billion, an
increase of $43.2 million from December 31, 1994. The additions to capital
primarily reflect a net increase in long-term borrowings of $107.6 million
offset by a decrease in stockholders' equity of $65.0 million.
The increase in long-term borrowing reflects the issuances of $125.0 million of
8 7/8 % Notes in March 1995, $125.0 million of 8 1/4% Notes in May 1995, and
$163.0 million of Medium-Term Notes. These increases were offset by the
maturities of $150.0 million of 9 5/8% Notes in May 1995 and $160.0 million of
Medium-Term Notes. The decrease in stockholders' equity is primarily the
result of the repurchase of approximately 4,939,000 shares of common stock for
$93.2 million and dividends accrued and paid of $57.6 million. These decreases
were offset by the issuance of approximately 3,211,000 shares of common stock
related to employee compensation programs for $33.8 million, net amortization
of restricted stock awards of $26.8 million, and net earnings for the nine
months ended September 30, 1995 of $22.0 million.
At September 30, 1995, the remaining number of shares of common stock
authorized to be repurchased by the Company's Board of Directors was 3,942,353
shares. On November 2, 1995, the Company's Board of Directors increased the
number of shares of common stock authorized for repurchase by 7,500,000 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
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 September 30, 1995, the Company had investments in merchant banking
transactions which were affected by liquidity, reorganization or restructuring
issues amounting to $85.6 million, net of reserves, compared to $56.9 million,
net of reserves, at December 31, 1994. These investments have not had a
material effect on the Company's results of operations. Included in the
portfolio at September 30, 1995 was an investment of $52.2 million in a limited
partnership which specializes in investments in corporate restructurings and
special situations.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's trading and investment banking activities include market-making
and underwriting 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
September 30, 1995, the Company held in long inventory or was committed to
acquire $241.1 million of high-yield securities. At September 30, 1995, the
Company held in short inventory $29.7 million of high-yield debt securities.
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 fair value, with unrealized gains and losses reflected in revenues. For the
nine months ended September 30, 1995, the Company recorded pre-tax trading
revenues on transactions in high-yield debt securities of $12.9 million. For
the nine months ended September 30, 1994, the Company recorded pre-tax trading
losses of $10.1 million on transactions in high-yield debt securities.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument represents a contractual agreement between
counterparties whose value is derived from changes in the value of some other
underlying asset such as the price of another security, interest rates,
currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P
500), or the value referenced in the contract. Derivatives may be traded on
exchanges such as futures, certain options contracts and structured products
(e.g. indexed warrants) or negotiated in over-the-counter markets such as
forward contracts, interest rate swaps, caps and floors, and other structured
products.
In the normal course of business, the Company engages in a variety of
derivative transactions in connection with its proprietary trading activities
and asset and liability management, as well as on behalf of its clients. As a
dealer, the Company regularly makes a market in and trades a variety of
securities. The Company is also engaged in creating structured products which
are sold to clients. In connection with these activities, the Company attempts
to reduce its exposure to market risk by entering into offsetting hedging
transactions which may include derivative financial instruments. The Company
also enters into interest rate swap contracts to hedge its fixed rate
borrowings and reduce overall borrowing costs.
The notional amount of a derivative contract is used to measure the volume of
activity and is not reflected on the statement of financial condition. The
Company had off-balance-sheet derivative contracts outstanding with gross
notional amounts of $53.1 billion and $39.4 billion at September 30, 1995 and
December 31, 1994, respectively, which included $30.1 billion and $16.3
billion, respectively, related to "to be announced" mortgage securities
requiring forward settlement. Also included in these amounts at September 30,
1995 and December 31, 1994 was $1.9 billion and $1.8 billion, respectively, of
interest rate swap agreements used to hedge the Company's long-term borrowings.
For a more detailed discussion and disclosure on derivative financial
instruments, see "Financial Instruments with Off-Balance-Sheet Risk", "Risk
Management" and "Concentrations of Credit Risk" in the Notes to Consolidated
Financial Statements.
18
<PAGE> 20
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 $147 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 $147 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $147 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 actively 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, 1994 or in its Quarterly Reports on Form 10-Q.
General Development Corporation Securities Litigation
Following the remand by the Third Circuit Court of Appeals, on August 24, 1995,
the district court entered an order in Rolo v. City Liquidating Trust et. al.
dismissing the action as to all defendants.
In Re NASDAQ Market Maker Antitrust Litigation
On August 22, 1995, plaintiffs in the NASDAQ litigation filed a Refiled
Consolidated Complaint. Pursuant to court order, defendant's time to answer
the Refiled Consolidated Complaint has been extended to November 17, 1995.
Limited Partnership Class Actions
In the action that was filed in Brazoria County, Texas on behalf of investors
in the Pegasus aircraft leasing partnership, plaintiffs filed an amended
complaint in which they have elected to proceed individually and have dropped
class action allegations. The case has been transferred to the United States
District Court for the Southern District of New York for coordination with the
Federal Court Limited Partnership Actions.
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 12.1 - Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
Exhibit 12.2 - Computation of Ratio of Earnings to Fixed
Charges
(b) Reports on Form 8-K:
None
19
<PAGE> 21
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: November 14, 1995 By: /s/ Regina A. Dolan
----------------- -------------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
20
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Exhibit 11 Computation of Earnings (Loss) per Common Share
Exhibit 12.1 Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
Exhibit 12.2 Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
PAINE WEBBER GROUP INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 91,984,316 70,473,606 92,597,619 70,995,846
Incremental stock options and awards 8,947,276 8,324,596 - 8,324,596
----------- ---------- ---------- ----------
Average common and common equivalent shares 100,931,592 78,798,202 92,597,619 79,320,442
=========== ========== ========== ==========
Net earnings $ 78,190 $ 20,337 $ 21,952 $ 50,930
Interest savings on convertible debentures and
short-term borrowings 336 615 - 2,498
Preferred dividend requirements (7,324) - (21,968) -
----------- ---------- ---------- ----------
Net earnings (loss) applicable to common shares $ 71,202 $ 20,952 $ (16) $ 53,428
=========== ========== ========== ==========
Earnings per common share $ 0.71 $ 0.27 $ 0.00 $ 0.67
=========== ========== ========== ==========
FULLY DILUTED:
Weighted average common shares outstanding 91,984,316 70,473,606 92,597,619 70,995,846
Incremental stock options and awards 9,207,329 8,324,596 - 8,324,596
Weighted average common shares issuable assuming
conversion of 8% Convertible Debentures and
6% Cumulative Convertible Redeemable Preferred
Stock 6,967,336 1,405,552 - 1,405,552
----------- ---------- ---------- ----------
Average common and common equivalent shares 108,158,981 80,203,754 92,597,619 80,725,994
=========== ========== ========== ==========
Net earnings $ 78,190 $ 20,337 $ 21,952 $ 50,930
Interest savings on convertible debentures and
short-term borrowings 554 820 - 2,935
Preferred dividend requirements (5,825) - (21,968) -
----------- ---------- ---------- ----------
Net earnings (loss) applicable to common shares $ 72,919 $ 21,157 $ (16) $ 53,865
=========== ========== ========== ==========
Earnings per common share $ 0.67 $ 0.26 $ 0.00 $ 0.67
=========== ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 12.1
PAINE WEBBER GROUP INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Years Ended December 31,
Ended September 30, --------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before taxes $ 23,874 $ 44,385 $ 407,576 $ 339,115 $ 226,247 $ (102,633)
---------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 23,904 1,710 5,828 27,789 34,732 23,174
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,483,106 1,428,653 1,130,712 879,242 1,056,124 1,242,151
Interest factor in rents 44,240 51,102 50,133 45,962 43,804 42,223
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,527,346 1,479,755 1,180,845 925,204 1,099,928 1,284,374
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 1,551,250 1,481,465 1,186,673 952,993 1,134,660 1,307,548
---------- ---------- ---------- ---------- ---------- ----------
Earnings before taxes and fixed charges $1,551,220 $1,524,140 $1,588,421 $1,264,319 $1,326,175 $1,181,741
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred stock dividends ** 1.0 1.3 1.3 1.2 *
========== ========== ========== ========== ========== ==========
</TABLE>
For purposes of computing the ratio of earnings to combined fixed charges and
preferred stock dividends (tax effected), "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.
* Earnings were inadequate to cover fixed charges and would have had to
increase $125,807 in order to cover the deficiency.
** Earnings were inadequate to cover fixed charges and would have had to
increase $30 in order to cover the deficiency.
<PAGE> 1
EXHIBIT 12.2
PAINE WEBBER GROUP INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Years Ended December 31,
Ended September 30, -------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before taxes $ 23,874 $ 44,385 $ 407,576 $ 339,115 $ 226,247 $ (102,633)
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,483,106 1,428,653 1,130,712 879,242 1,056,124 1,242,151
Interest factor in rents 44,240 51,102 50,133 45,962 43,804 42,223
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,527,346 1,479,755 1,180,845 925,204 1,099,928 1,284,374
---------- ---------- ---------- ---------- ---------- ----------
Earnings before taxes and
fixed charges $1,551,220 $1,524,140 $1,588,421 $1,264,319 $1,326,175 $1,181,741
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.0 1.0 1.3 1.4 1.2 *
========== ========== ========== ========== ========== ==========
</TABLE>
For purposes of computing the ratio of earnings to 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.
* Earnings were inadequate to cover fixed charges and would have had to
increase $102,633 in order to cover the deficiency.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Paine Webber Group Inc. for the nine months ended
September 30, 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 615,530
<RECEIVABLES> 7,712,021
<SECURITIES-RESALE> 20,217,678
<SECURITIES-BORROWED> 7,403,997
<INSTRUMENTS-OWNED> 13,274,228
<PP&E> 321,697
<TOTAL-ASSETS> 49,545,151
<SHORT-TERM> 1,672,755
<PAYABLES> 6,906,695
<REPOS-SOLD> 27,736,254
<SECURITIES-LOANED> 1,803,317
<INSTRUMENTS-SOLD> 7,251,044
<LONG-TERM> 2,423,001
<COMMON> 102,084
186,562
100,000
<OTHER-SE> 1,363,439
<TOTAL-LIABILITY-AND-EQUITY> 49,545,151
<TRADING-REVENUE> 682,026
<INTEREST-DIVIDENDS> 1,693,423
<COMMISSIONS> 927,772
<INVESTMENT-BANKING-REVENUES> 232,380
<FEE-REVENUE> 292,031
<INTEREST-EXPENSE> 1,483,106
<COMPENSATION> 1,475,637
<INCOME-PRETAX> 23,874
<INCOME-PRE-EXTRAORDINARY> 21,952
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,952
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
