<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 June 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 August 4, 1995, the Registrant had outstanding 98,992,871 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
JUNE 30, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Operations
(unaudited) for the Three Months and Six Months Ended
June 30, 1995 and 1994. 2
Consolidated Statements of Financial
Condition (unaudited) at June 30, 1995
and December 31, 1994. 3
Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended
June 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. 20
Signature 21
</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 Six Months Ended
June 30, June 30,
------------------------------- ---------------------------
1995 1994 1995 1994
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 323,824 $ 240,729 $ 594,086 $ 521,385
Principal transactions 204,307 91,687 417,977 275,561
Investment banking 88,592 59,140 138,392 156,734
Asset management 97,985 89,589 187,872 180,972
Other 42,607 36,135 78,494 67,039
Interest 574,930 385,069 1,149,334 783,106
----------- ------------ ----------- -----------
Total revenues 1,332,245 902,349 2,566,155 1,984,797
Interest expense 507,447 323,383 1,015,573 653,754
----------- ------------ ----------- -----------
Net revenues 824,798 578,966 1,550,582 1,331,043
----------- ------------ ----------- -----------
NON-INTEREST EXPENSES
Compensation and benefits 504,810 344,729 937,767 776,443
Office and equipment 67,347 56,399 132,027 111,825
Communications 38,172 33,023 73,329 65,021
Business development 23,444 21,544 44,994 43,551
Brokerage, clearing & exchange fees 24,592 20,488 48,124 42,466
Professional services 26,192 22,471 48,379 40,801
Other 285,854 122,070 358,790 199,947
----------- ------------ ----------- -----------
Total non-interest expenses 970,411 620,724 1,643,410 1,280,054
----------- ------------ ----------- -----------
EARNINGS (LOSS) BEFORE TAXES (145,613) (41,758) (92,828) 50,989
----------- ------------ ------------ -----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Federal (47,319) (17,127) (35,989) 5,952
State, local and foreign (7,746) 424 (601) 14,444
----------- ------------ ------------ -----------
(55,065) (16,703) (36,590) 20,396
----------- ------------ ----------- -----------
NET EARNINGS (LOSS) $ (90,548) $ (25,055) $ (56,238) $ 30,593
=========== ============ =========== ===========
Net earnings (loss) applicable to common shares $ (97,872) $ (25,055) $ (70,882) $ 32,439
=========== ============ =========== ===========
Earnings (loss) per common share:
Primary $ (1.06) $ (0.35) $ (0.76) $ 0.41
Fully diluted $ (1.06) $ (0.35) $ (0.76) $ 0.41
Weighted average common shares:
Primary 92,594,748 70,728,823 92,901,835 79,196,930
Fully diluted 92,594,748 70,728,823 92,901,835 80,602,482
Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
PAINE WEBBER GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 371,512 $ 259,238
Cash and securities segregated and on deposit for
federal and other regulations 433,222 369,585
Trading inventories, at fair value 14,023,347 10,784,117
Securities borrowed or purchased under agreements to resell 25,224,739 18,630,656
Receivables:
Clients 5,225,707 3,495,670
Brokers and dealers 237,165 432,565
Dividends and interest 346,734 229,462
Fees and other 234,822 233,027
Office equipment and leasehold improvements, net
of accumulated depreciation and amortization of $265,227
at June 30, 1995 and $245,225 at December 31, 1994 322,760 272,365
Other assets 1,529,416 1,149,440
----------- -----------
$47,949,424 $35,856,125
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,053,113 $ 1,889,609
Commitments for securities sold but not yet purchased, at fair value 8,025,292 6,034,706
Securities loaned or sold under agreements to repurchase 27,758,664 19,099,766
Payables:
Clients 4,732,430 2,899,240
Brokers and dealers 162,663 303,244
Dividends and interest 264,583 218,719
Other liabilities and accrued expenses 1,394,192 933,977
Accrued compensation and benefits 363,619 344,981
----------- -----------
43,754,556 31,724,242
Long-term borrowings 2,471,258 2,315,415
----------- -----------
46,225,814 34,039,657
----------- -----------
Commitments and contingencies
Redeemable Preferred Stock 186,362 185,969
Stockholders' Equity:
Convertible Preferred Stock 100,000 100,000
Common stock, $1 par value, 200,000,000 shares
authorized; issued 102,082,741 shares at June 30, 1995 and
100,613,737 shares at December 31, 1994 102,083 100,614
Additional paid-in capital 802,553 784,974
Retained earnings 620,364 715,052
----------- -----------
1,625,000 1,700,640
Treasury stock, at cost;
3,091,368 shares at June 30, 1995 and
1,297,081 shares at December 31, 1994 (53,233) (21,981)
Unamortized cost of restricted stock (46,131) (51,803)
Foreign currency translation adjustment 11,612 3,643
----------- -----------
1,537,248 1,630,499
----------- -----------
$47,949,424 $35,856,125
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
PAINE WEBBER GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (56,238) $ 30,593
Adjustments to reconcile net earnings (loss) to cash (used for)
provided by operating activities:
Noncash items included in net earnings (loss):
Depreciation and amortization 26,965 19,712
Deferred income taxes (14,818) (22,213)
Amortization of deferred charges 78,052 58,634
Other 18,564 22,569
(Increase) decrease in operating receivables:
Clients (1,733,339) (106,611)
Brokers and dealers 195,400 599,355
Dividends and interest (117,272) 26,929
Fees and other (1,795) (27,062)
Increase (decrease) in operating payables:
Clients 1,833,190 64,401
Brokers and dealers (140,581) (410,818)
Dividends and interest 45,864 17,469
Other 472,478 (150,835)
(Increase) decrease in:
Trading inventories (3,239,230) 3,417,279
Securities borrowed or purchased under agreements to resell (7,959,945) (2,268,429)
Cash and securities on deposit (63,637) 6,685
Other assets (425,200) (185,871)
Increase (decrease) in:
Commitments for securities sold but not yet purchased 1,990,586 (278,946)
Securities loaned or sold under agreements to repurchase 8,356,030 1,307,719
----------- -----------
Cash (used for) provided by operating activities (734,926) 2,120,560
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements (75,857) (36,180)
----------- -----------
Cash used for investing activities (75,857) (36,180)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on):
Short-term borrowings (836,496) (1,714,855)
Securities sold under agreements to repurchase,
net of securities purchased under agreements to resell 1,668,730 (768,057)
Proceeds from:
Long-term borrowings 350,396 488,052
Employee stock transactions 6,631 9,807
Payments for:
Long-term borrowings (195,455) (107,420)
Repurchases of common stock (32,299) (31,333)
Dividends (38,450) (18,317)
----------- -----------
Cash provided by (used for) financing activities 923,057 (2,142,123)
----------- ----------
Increase (decrease) in cash and cash equivalents 112,274 (57,743)
Cash and cash equivalents, beginning of period 259,238 241,038
----------- -----------
Cash and cash equivalents, end of period $ 371,512 $ 183,295
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<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 June 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 the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995. 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 six months ended June 30, 1994 assumes the acquisition of the Kidder
businesses occurred at the beginning of the year ended December 31, 1994:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, 1994 Ended June 30, 1994
------------------- -------------------
<S> <C> <C>
Revenues $ 1,169,408 $2,518,915
Net revenues $ 763,439 $1,699,989
Net earnings (loss) $ (4,856) $ 70,991
Earnings (loss) per common share:
Primary $ (0.13) $ 0.58
Fully diluted $ (0.13) $ 0.57
</TABLE>
The unaudited pro forma condensed results of operations for the three months and
six months ended June 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 CHARGES
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.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 30, 1995 and December 31, 1994, the fair value of long-term borrowings
was $2,459,016 and $2,107,538, respectively, as compared to the carrying amounts
of $2,471,258 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 substantially all 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 $19,774 and $172,193 payable at June 30, 1995 and December 31, 1994,
respectively. The carrying amounts of the interest rate swap agreements at June
30, 1995 and December 31, 1994 were $372 payable 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>
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Trading inventories:
U.S. government and agency obligations $ 5,439,620 $ 3,560,201
Mortgages and mortgage-backed securities 3,734,012 2,441,940
Corporate debt securities 2,254,755 1,816,747
State and municipal obligations 939,048 1,018,875
Corporate equity securities 835,533 703,366
Commercial paper and other short-term debt 820,379 1,242,988
----------- -----------
$14,023,347 $10,784,117
=========== ===========
Commitments for securities sold but not yet purchased:
U.S. government and agency obligations $ 6,203,980 $ 4,918,655
Mortgages and mortgage-backed securities 89,526 44,370
Corporate debt securities 518,188 398,913
State and municipal obligations 25,717 57,751
Corporate equity securities 1,187,881 615,017
----------- -----------
$ 8,025,292 $ 6,034,706
=========== ===========
</TABLE>
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 30, 1995 and December 31, 1994 consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Commercial paper $ 547,445 $ 906,650
Bank loans and other 505,668 972,959
Medium-Term Notes -- 10,000
----------- -----------
$ 1,053,113 $ 1,889,609
=========== ===========
</TABLE>
NOTE 7: LONG-TERM BORROWINGS
Long-term borrowings at June 30, 1995 and December 31, 1994 consisted of the
following :
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Fixed Rate Notes due 1998-2014 $ 1,297,324 $ 1,177,159
Fixed Rate Subordinated Notes due 2002 174,368 174,324
Medium-Term Senior Notes 653,475 618,070
Medium-Term Subordinated Notes 308,150 308,150
Other 37,941 37,712
----------- -----------
$ 2,471,258 $ 2,315,415
=========== ===========
</TABLE>
On May 2, 1995, the Company issued $125,000 of 8 1/4% Notes Due May 1, 2002. The
Notes are not redeemable prior to maturity. Interest on the Notes is payable
semiannually on May 1 and November 1. This issuance replaces $150,000 of 9 5/8%
Notes that matured on May 1, 1995. Interest rates on the remaining fixed rate
notes outstanding at June 30, 1995 range from 6 1/4% to 9 1/4%. The weighted
average interest rate on the fixed rate notes outstanding at June 30, 1995 was
7.53%. The Fixed Rate Subordinated Notes Due 2002 have an interest rate of 7
3/4%.
As of June 30, 1995, the Company had $961,625 of Medium-Term Senior and
Subordinated Notes outstanding, with an average maturity of 3.4 years and a
weighted average interest rate of 7.03%.
Total interest payments relating to agreements to repurchase, short-term
borrowings, stock loans and long-term borrowings were $970,068 and $651,604 for
the six months ended June 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 June 30, 1995 and December 31, 1994 was as follows:
<TABLE>
<CAPTION>
June 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 $186,362 $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>
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: COMMON STOCK
As of June 30, 1995, the Company had 36,262,355 authorized shares of common
stock reserved for issuance in connection with convertible securities and stock
option and stock award plans.
On August 4, 1995, the Board of Directors declared a regular quarterly dividend
on the Company's common stock of $0.12 per share payable on October 4, 1995 to
stockholders of record on September 5, 1995.
NOTE 10: CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the SEC 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
June 30, 1995, PWI's net capital of $446,844 was 11% of aggregate debit balances
and its net capital in excess of the minimum required was $351,779.
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.
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Set forth below 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 June
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.
<TABLE>
<CAPTION>
Notional or Contract Amount
------------------------------------------------------------
June 30, 1995 December 31, 1994
--------------------------- ------------------------
Purchases Sales Purchases Sales
--------------------------- ------------------------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $19,032,199 $20,792,484 $8,757,807 $9,256,738
Foreign currency forward contracts,
futures contracts, and options
written and purchased 2,223,209 2,247,332 2,325,721 1,855,557
Equity securities contracts including
futures, forwards, and options written
and purchased 3,816,168 2,488,315 1,931,330 2,216,565
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 2,909,029 2,697,034 5,321,100 5,374,546
Interest rate swaps, caps and floors 326,150 200,000 285,450 230,000
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of June 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
June 30, 1995 December 31, 1994
----------------------------- ----------------------------
Assets Liabilities Assets Liabilities
--------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $113,517 $83,225 $30,606 $25,209
Foreign currency forward contracts,
futures contracts, and options
written and purchased 55,857 54,476 55,345 44,244
Equity securities contracts including
futures, forwards, and options written
and purchased 388,679 332,416 204,938 116,973
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 11,939 13,220 10,150 8,988
Interest rate swaps, caps and floors 1,341 259 1,372 128
</TABLE>
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended June 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.
<TABLE>
<CAPTION>
Average Fair Value Average Fair Value
Three Months Ended June 30, 1995 Twelve Months Ended December 31, 1994
-------------------------------- -------------------------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $116,217 $103,483 $202,484 $191,687
Foreign currency forward contracts,
futures contracts, and options
written and purchased 73,301 74,680 56,528 53,810
Equity securities contracts including
futures, forwards, and options written
and purchased 300,301 312,290 162,388 155,422
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 14,044 9,037 23,527 13,293
Interest rate swaps, caps and floors 1,282 248 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 $571,333
and $302,411 at June 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 six months ended
June 30, 1995.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, 1995 Ended June 30, 1995
------------------- -------------------
<S> <C> <C>
Corporate equities (includes equity securities, equity index futures, equity
index options and swaps, and equity options contracts) $ 71,407 $ 153,462
Municipals (includes municipal and government securities) 34,099 76,656
U.S. government (includes U.S. government securities, financial futures and
options contracts) 18,099 44,296
Mortgage and mortgage-backed (includes mortgage-backed and government
securities, mortgage-backed forwards and options contracts) 24,326 41,531
Corporate debt and other (includes debt, foreign currency forwards, futures
and options contracts and other securities) 56,376 102,032
---------- ----------
$ 204,307 $ 417,977
========== ==========
</TABLE>
Principal transaction revenues include realized and unrealized gains and losses
in the fair value of derivative and other financial instruments.
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June
30, 1995 and December 31, 1994, the Company had outstanding interest rate swap
agreements with large financial institutions with a notional principal amount of
$1,836,250. These agreements effectively converted approximately 84% of the
Company's fixed rate debt at June 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 $1,466 for the six months ended
June 30, 1995 and reducing net interest expense by $19,169 for the six months
ended June 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 June 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.
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.
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 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 June 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 June 30, 1995 and December 31, 1994, the Company was contingently liable
under unsecured letters of credit totaling $100,218 and $212,211, respectively,
which approximates fair value. In addition, at June 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 $18,551 to contribute capital to limited
partnerships as of June 30, 1995.
At June 30, 1995 and December 31, 1994, securities with a fair value of $873,947
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 $16,778 at June 30, 1995. The standby
letters of credit are fully collateralized by marginable securities.
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Six Months Ended
June 30, June 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 6.3 5.5 7.4 5.5
Foreign rate differential 1.3 (0.3) 0.8 (0.3)
Nontaxable dividends & interest 2.9 2.2 6.0 (3.6)
Other, net (7.7) (2.4) (9.8) 3.4
---- ---- ---- ----
37.8% 40.0% 39.4% 40.0%
==== ==== ==== ====
</TABLE>
Income taxes paid were $1,805 and $57,263 for the six months ended June 30, 1995
and 1994, respectively.
NOTE 16: EARNINGS (LOSS) PER COMMON SHARE
For the three months ended June 30, 1995 and 1994 and for the six months ended
June 30, 1995, as a result of the net losses reported, the Company computed its
loss per common share by dividing the net loss by the weighted average common
shares outstanding, which excludes restricted stock and antidilutive securities,
during the respective periods.
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 by dividing net earnings, adjusted
for any interest savings, by the weighted average common and common equivalent
shares outstanding during the period. 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.
<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 experienced improved conditions in the second 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 second quarter of 1995, the average daily
volume on the three primary U.S. equity markets reached record levels. In
addition, there was a resurgence in new equity and debt issues during the
quarter.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1995 Compared to Quarter Ended June 30, 1994
The Company's net earnings for the quarter ended June 30, 1995, before giving
effect to a one-time after-tax 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 $35.4
million or $0.28 per primary and fully diluted share. This compares to net
earnings of $9.1 million or $0.12 per primary and fully diluted share during the
second quarter of 1994, before giving effect to an after-tax charge of
approximately $34 million related to the PaineWebber Short-Term U.S. Government
Income Fund (the "Fund"). The net loss for the second quarter of 1995, after
giving effect to the one-time charge, was $90.5 million or $1.06 per primary and
fully diluted share. This compares to a net loss in the second quarter of 1994
of $25.1 million or $0.35 per primary and fully diluted share, after giving
effect to the non-recurring charge related to the Fund. During the second
quarter of 1995, net revenues were $824.8 million, 42.5% higher than the prior
year period, primarily due to higher principal transaction and commission
revenues.
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 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.
Results for the second quarter of 1994 were reduced by an after-tax charge of
approximately $34 million ($57 million pre-tax) relating 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 second quarter of 1995 were $323.8
million, 34.5% higher than the $240.7 million earned during the second 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 $73.9 million or 61.0%, mutual fund commissions
increased $8.8 million or 22.2%, and over-the-counter commissions increased $8.0
million or 46.0%. These gains were partially offset by lower insurance
commissions due to decreased sales of insurance annuities.
Principal transactions revenues were $204.3 million, as compared to $91.7
million for the prior year quarter. The increase in these revenues reflects
improved results in mortgages, corporate debt and municipal securities. These
improvements were partially offset by a decline in U.S. government securities.
Investment banking revenues increased 49.8% during the second quarter of 1995 to
$88.6 million, reflecting a higher level of corporate and municipal offerings
and increased private placements.
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Asset management fees, which are largely recurring in nature, increased $8.4
million or 9.4%, primarily due to increased fees earned on managed or "wrap"
accounts, and higher investment advisory fees earned on money market and
institutional accounts. Average assets in wrap accounts during the second
quarter of 1995 were approximately 45% higher than the prior year period.
Average assets in money market and institutional accounts increased
approximately 34% and 24%, respectively. These increases were partially offset
by lower investment advisory and distribution fees earned on long-term mutual
funds as a result of lower average assets.
Net interest increased $5.8 million or 9.4% due to lower financing costs
relating to lower equity inventory positions, expansion of the stock loan
business, and increased margin lending to clients, offset by a decreased spread
on fixed income inventory positions.
Other income increased $6.5 million or 17.9% primarily due to higher transaction
fees.
Compensation and benefits were $504.8 million, as compared to $344.7 million for
the second quarter of 1994. Compensation costs increased following 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
61.2% during the second quarter of 1995, as compared to 59.5% during the second
quarter of 1994.
All other operating expenses were $465.6 million, as compared to $276.0 million
during the prior year period. For the second quarter of 1995, other expenses
includes the charge related to the sale of limited partnerships, and, for the
second quarter of 1994, other expenses includes the charge related to the Fund.
Higher litigation related costs are also included in other expenses and
professional services. Higher office and equipment, communications and
brokerage, clearing and exchange fees are due to the incremental business
activity attributable to the acquired Kidder businesses.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994
Net earnings for the six months ended June 30, 1995, before giving effect to the
one-time charge, were $69.7 million or $0.54 per fully diluted share ($0.56
primary), as compared to $64.8 million or $0.83 per fully diluted share ($0.84
primary) for the six months ended June 30, 1994, before giving effect to the
non-recurring charge related to the Fund. Including the charges, the net loss
for the first six months of 1995 was $56.2 million or $0.76 per primary and
fully diluted share, as compared to net earnings of $30.6 million or $0.41 per
primary and fully diluted share for the first six months of 1994. Revenues, net
of interest expense, were $1,550.6 million, 16.5% higher than the $1,331.0
million earned during the prior year period. The increase in revenues is
primarily attributable to the incremental business related to the acquired
Kidder businesses and improved market conditions.
Commission revenues increased $72.7 million or 13.9% over the first six months
of 1994. Listed commissions increased $87.3 million or 32.8%, over-the-counter
commissions increased $6.1 million or 16.1%, and commodities commissions
increased $5.6 million or 28.1%. These increases were offset by lower insurance
commissions as a result of decreased sales of insurance annuities.
Principal transaction revenues were $418.0 million, as compared to $275.6
million. This increase reflects improved results in mortgages, corporate debt
and municipal securities, partially offset by lower results in U.S. government
securities.
Investment banking revenues were $138.4 million, as compared to $156.7 million
earned during the first six months of 1994. The decreased revenues reflect a
lower level of corporate debt and equity underwritings.
Asset management fees increased 3.8% to $187.9 million, primarily due to higher
fees earned on wrap accounts and increased advisory fees earned on money market
and institutional accounts, partially offset by lower advisory and distribution
fees earned on long-term mutual funds.
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Net interest increased $4.4 million or 3.4% to $133.8 million for the first six
months of 1995. This increase is primarily due to lower financing costs relating
to lower equity inventory positions, expansion of the stock loan business and
increased margin lending to clients, offset by a decreased spread on fixed
income inventory positions.
Other income increased $11.5 million or 17.1%, 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 $937.8 million, as compared to $776.4 million for
the first six months of 1994. Compensation costs increased following the
acquisition of the 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
60.5%, as compared to 58.3% during the prior year period.
All other operating expenses were $705.6 million, as compared to $503.6 million
during the first six months of 1994. In 1995, other expenses includes the $200.0
million charge related to the sale of limited partnerships, and, in 1994, other
expenses includes the charge related to the Fund. Higher litigation related
costs are also included in other expenses and professional services. Higher
office and equipment, communications and brokerage, clearing and exchange fees
are due to the incremental business activity 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 June 30, 1995 were $47.9 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 senior and subordinated debt.
The Company maintains committed and uncommitted credit facilities from a diverse
group of banks. The Company has two unsecured senior 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 June 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 June 30, 1995.
The Company maintains public shelf registration statements for the issuance of
debt securities with the Securities and Exchange Commission ("SEC"). The Company
issued $125.0 million of 8 7/8% Notes in March 1995 Due 2005, $125.0 million of
8 1/4% Notes in May 1995 Due 2002, and $80.0 million of Medium-Term Senior
Notes, with varying maturities and rates of interest, during the six months
ended June 30, 1995, under these registration statements. At June 30, 1995, the
Company had $527.6 million in debt securities available for issuance.
<PAGE> 18
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 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 June 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 $63.0
million from December 31, 1994. The additions to capital primarily reflect an
increase in long-term borrowings of $155.8 million offset by a decrease in
stockholders' equity of $93.3 million. The increase in long-term borrowings
reflects the issuances of $125.0 million of 8 7/8% Notes, $125.0 million of 8
1/4% Notes, and $80.0 million of Medium-Term Senior Notes. These increases were
offset by the maturities of $150.0 million of 9 5/8% Notes in May 1995 and $45.0
million of Medium-Term Notes. The decrease in stockholders' equity is primarily
the result of the Company's net loss for the six months ended June 30, 1995 of
$56.2 million, dividends accrued and paid of $38.5 million, and the repurchase
of approximately 1,856,000 shares of common stock for $32.3 million. These
decreases were offset by net amortization of restricted stock awards of $18.6
million. At June 30, 1995, the remaining number of shares of common stock
authorized to be repurchased by the Company's Board of Directors was 7,025,369
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 June 30, 1995, the Company had investments in merchant banking transactions
which were affected by liquidity, reorganization or restructuring issues
amounting to $79.4 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 June 30,
1995 was an investment of $52.2 million in a limited partnership which
specializes in investments in corporate restructurings and special situations.
The Company did not enter into any significant merchant banking transactions
during the six months ended June 30, 1995.
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, 1995, the Company
held in long and short inventory $123.2 million and $24.2 million, respectively,
of high-yield debt securities, which accounted for less than 1% of gross
inventory positions. No one issuer accounted for more than 12% of the total
amount. 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 six months ended June 30, 1995, the Company recorded pre-tax trading
revenues on transactions in high-yield securities of $10.5 million. For the six
months ended June 30, 1994, the Company recorded pre-tax trading losses of $1.2
million on transactions in high-yield debt securities.
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $58.6 billion and $39.4 billion at June 30, 1995 and
December 31, 1994, respectively, which included $33.6 billion and $16.3 billion,
respectively, related to "to be announced" mortgage securities requiring forward
settlement. Also included in these amounts was $1.8 billion of interest rate
swap agreements used to hedge the Company's long-term borrowings at June 30,
1995 and December 31, 1994.
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.
<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 $144 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 $144 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $144 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 Report on Form 10-Q for the three months ended
March 31, 1995.
Northview Corporation Litigation
In May 1995, PaineWebber Incorporated and one of the individual defendants
(hereinafter referred to as the "settling defendants") agreed to settle this
action conditioned upon entry of a final judgment with respect to the settling
defendants by the Court, after notice to the remaining non-settling
co-defendants and a fairness hearing determining that such settlement was made
in good faith, approving such settlement, dismissing the complaint with
prejudice as to the settling defendants and barring all non-settling
co-defendants from maintaining any claims for contribution or indemnification
against the settling defendants.
In Re NASDAQ Market-Maker Antitrust and Securities Litigation
On May 25, 1995, the Judicial Panel on Multidistrict Litigation vacated its
conditional transfer order in the Merrill Lynch action and remanded the case to
the United States District Court for the District of New Jersey for further
proceedings.
On August 3, 1995, the defendants' motion to dismiss in the NASDAQ Litigation
was granted with leave to replead within 45 days.
Limited Partnership Class Actions
In late May and early June 1995, the courts in the Federal Court Limited
Partnership Actions and the Geodyne Limited Partnership Actions entered orders
consolidating all of the pretrial proceedings and certifying these actions as
class actions. Discovery is underway in these coordinated class actions and
PaineWebber's time to answer or otherwise move with respect to the consolidated
amended complaint in the Federal Court Limited Partnership Actions has not yet
expired.
The action that was filed in the federal court in Florida has been transferred
to the United States District Court for the Southern District of New York where
it has been consolidated with the Federal Court Limited Partnership Actions. The
action that was filed in the Supreme Court of the State of New York has been
stayed.
In the action that was filed in Brazoria County, Texas on behalf of investors in
the Pegasus aircraft leasing partnerships, PaineWebber has filed an answer
denying the allegations in the plaintiff's complaint, has removed the case to
the United States District Court for the Southern District of Texas and is
seeking to have the case transferred to the United States District Court for the
Southern District of New York for consolidation with the Federal Court Limited
Partnership Actions.
<PAGE> 21
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
<PAGE> 22
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, 1995 By: /s/ Regina A. Dolan
------------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
<PAGE> 23
EXHIBIT INDEX
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 27.1 - Financial Data Schedule - 6 months
<PAGE> 1
EXHIBIT 11
PAINE WEBBER GROUP INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -------------------------------
1995 1994 1995 1994
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 92,594,748 70,728,823 92,901,835 71,028,825
Incremental stock options and awards -- -- -- 8,168,105
------------- ------------- ------------ ------------
Average common and common equivalent shares 92,594,748 70,728,823 92,901,835 79,196,930
============= ============= ============= ============
Net earnings (loss) $ (90,548) $ (25,055) $ (56,238) $ 30,593
Interest savings on convertible debentures and
short-term borrowings -- -- -- 1,846
Preferred dividend requirements (7,324) -- (14,644) --
------------- ------------- ------------ ------------
Net earnings (loss) applicable to common shares $ (97,872) $ (25,055) $ (70,882) $ 32,439
============== ============= ============ ============
Earnings (loss) per common share $ (1.06) $ (0.35) $ (0.76) $ 0.41
============= ============= ============ ============
FULLY DILUTED:
Weighted average common shares outstanding 92,594,748 70,728,823 92,901,835 71,028,825
Incremental stock options and awards -- -- -- 8,168,105
Weighted average common shares issuable assuming
conversion of 8% Convertible Debentures -- -- -- 1,405,552
------------- ------------- ------------ ------------
Average common and common equivalent shares 92,594,748 70,728,823 92,901,835 80,602,482
============= ============= ============= ============
Net earnings (loss) $ (90,548) $ (25,055) $ (56,238) $ 30,593
Interest savings on convertible debentures and
short-term borrowings -- -- -- 2,242
Preferred dividend requirements (7,324) -- (14,644) --
------------- ------------- ------------ ------------
Net earnings (loss) applicable to common shares $ (97,872) $ (25,055) $ (70,882) $ 32,835
============= ============= ============= ============
Earnings (loss) per common share $ (1.06) $ (0.35) $ (0.76) $ 0.41
============= ============= ============ ============
</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>
Six Months Years Ended December 31,
Ended June 30, ---------------------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before taxes $ (92,828) $ 44,385 $ 407,576 $ 339,115 $ 226,247 $ (102,633)
----------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 24,165 1,710 5,828 27,789 34,732 23,174
----------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,015,573 1,428,653 1,130,712 879,242 1,056,124 1,242,151
Interest factor in rents 29,600 51,102 50,133 45,962 43,804 42,223
----------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,045,173 1,479,755 1,180,845 925,204 1,099,928 1,284,374
----------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 1,069,338 1,481,465 1,186,673 952,993 1,134,660 1,307,548
----------- ---------- ---------- ---------- ---------- ----------
Earnings before taxes and fixed charges $ 952,345 $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 $116,993 in order to cover the deficiency.
** Earnings were inadequate to cover fixed charges and would have had to
increase $125,807 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>
Six Months Years Ended December 31,
Ended June 30, ---------------------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before taxes $ (92,828) $ 44,385 $ 407,576 $ 339,115 $ 226,247 $ (102,633)
----------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,015,573 1,428,653 1,130,712 879,242 1,056,124 1,242,151
Interest factor in rents 29,600 51,102 50,133 45,962 43,804 42,223
----------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,045,173 1,479,755 1,180,845 925,204 1,099,928 1,284,374
----------- ---------- ---------- ---------- ---------- ----------
Earnings before taxes and
fixed charges $ 952,345 $1,524,140 $1,588,421 $1,264,319 $1,326,175 $1,181,741
=========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges * 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 $92,828 in order to cover the deficiency.
** 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 six months ended June
30, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 804,734
<RECEIVABLES> 7,573,844
<SECURITIES-RESALE> 18,000,730
<SECURITIES-BORROWED> 7,224,009
<INSTRUMENTS-OWNED> 14,023,347
<PP&E> 322,760
<TOTAL-ASSETS> 47,949,424
<SHORT-TERM> 1,053,113
<PAYABLES> 6,917,487
<REPOS-SOLD> 25,423,801
<SECURITIES-LOANED> 2,334,863
<INSTRUMENTS-SOLD> 8,025,292
<LONG-TERM> 2,471,258
<COMMON> 102,083
186,362
100,000
<OTHER-SE> 1,335,165
<TOTAL-LIABILITY-AND-EQUITY> 47,949,424
<TRADING-REVENUE> 417,977
<INTEREST-DIVIDENDS> 1,149,334
<COMMISSIONS> 594,086
<INVESTMENT-BANKING-REVENUES> 138,392
<FEE-REVENUE> 187,872
<INTEREST-EXPENSE> 1,015,573
<COMPENSATION> 937,767
<INCOME-PRETAX> (92,828)
<INCOME-PRE-EXTRAORDINARY> (56,238)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56,238)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
