<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, 1996
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 2, 1996, the Registrant had outstanding 92,801,513 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, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C>
Item 1. Financial Statements.
Consolidated Statements of Operations (unaudited)
for the Three Months and Six Months Ended
June 30, 1996 and 1995. 2
Consolidated Statements of Financial
Condition (unaudited) at June 30, 1996
and December 31, 1995. 3
Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended
June 30, 1996 and 1995. 4
Notes to Consolidated Financial Statements
(unaudited). 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 14-17
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signature. 19
</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,
---------------------------------- ----------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
REVENUES
<S> <C> <C> <C> <C>
Commissions $ 362,695 $ 323,824 $ 730,880 $ 594,086
Principal transactions 251,848 204,307 548,224 417,977
Investment banking 102,077 88,592 183,932 138,392
Asset management 111,392 97,985 219,047 187,872
Other 40,962 42,607 71,458 78,494
Interest 562,190 574,930 1,107,649 1,149,334
------------- ------------- ------------- -------------
Total revenues 1,431,164 1,332,245 2,861,190 2,566,155
Interest expense 481,541 507,447 948,932 1,015,573
------------- ------------- ------------- -------------
Net revenues 949,623 824,798 1,912,258 1,550,582
------------- ------------- ------------- -------------
NON-INTEREST EXPENSES
Compensation and benefits 568,690 504,810 1,135,681 937,767
Office and equipment 65,233 67,347 133,974 132,027
Communications 39,821 38,172 78,512 73,329
Business development 18,965 23,444 37,516 44,994
Brokerage, clearing & exchange fees 21,248 24,592 46,740 48,124
Professional services 25,052 26,192 48,627 48,379
Other 70,288 285,854 136,266 358,790
------------- ------------- ------------- -------------
Total non-interest expenses 809,297 970,411 1,617,316 1,643,410
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) BEFORE TAXES 140,326 (145,613) 294,942 (92,828)
------------- ------------- ------------- -------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Federal 38,933 (47,319) 76,286 (35,989)
State, local and foreign 9,181 (7,746) 25,943 (601)
------------- ------------- ------------- -------------
48,114 (55,065) 102,229 (36,590)
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 92,212 $ (90,548) $ 192,713 $ (56,238)
============= ============= ============= =============
Net earnings (loss) applicable to common shares $ 86,088 $ (97,872) $ 180,435 $ (70,882)
============= ============= ============= =============
Earnings (loss) per common share:
Primary $ 0.90 $ (1.06) $ 1.87 $ (0.76)
Fully diluted $ 0.86 $ (1.06) $ 1.76 $ (0.76)
Weighted average common shares:
Primary 95,198,040 92,594,748 96,476,520 92,901,835
Fully diluted 102,317,004 92,594,748 103,958,404 92,901,835
Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24
</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>
June 30, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 150,837 $ 222,497
Cash and securities segregated and on deposit for
federal and other regulations 435,042 427,068
Trading assets, at fair value 14,274,463 14,095,446
Securities purchased under agreements to resell 21,047,424 16,699,295
Securities borrowed 6,937,053 7,226,515
Receivables:
Clients, net of allowance for doubtful accounts of
$13,513 and $12,400 at June 30, 1996 and
December 31, 1995, respectively 4,217,801 4,070,599
Brokers and dealers 257,274 279,676
Dividends and interest 322,245 263,948
Fees and other 327,825 200,444
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $316,283 and $288,807 at
June 30, 1996 and December 31, 1995, respectively 318,858 322,056
Other assets 1,795,590 1,863,750
------------ ------------
$ 50,084,412 $ 45,671,294
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,229,472 $ 991,227
Trading liabilities, at fair value 6,025,159 6,233,054
Securities sold under agreements to repurchase 28,720,797 25,199,377
Securities loaned 3,579,275 2,752,429
Payables:
Clients 3,623,702 3,698,477
Brokers and dealers 241,201 155,118
Dividends and interest 266,853 256,338
Other liabilities and accrued expenses 1,513,178 1,639,403
Accrued compensation and benefits 520,886 570,786
------------ ------------
45,720,523 41,496,209
Long-term borrowings 2,552,306 2,436,037
------------ ------------
48,272,829 43,932,246
------------ ------------
Commitments and contingencies
Redeemable Preferred Stock 187,208 186,760
Stockholders' Equity:
Convertible Preferred Stock 100,000 100,000
Common stock, $1 par value, 200,000,000 shares authorized;
issued 105,420,742 shares and 104,492,091 shares at
June 30, 1996 and December 31, 1995, respectively 105,421 104,492
Additional paid-in capital 840,805 831,763
Retained earnings 874,584 719,325
------------ ------------
1,920,810 1,755,580
Treasury stock, at cost; 12,376,960 shares at June 30, 1996
and 7,417,845 shares at December 31, 1995, respectively (254,834) (151,616)
Unamortized cost of restricted stock (38,788) (55,302)
Foreign currency translation adjustment (2,813) 3,626
------------ ------------
1,624,375 1,552,288
------------ ------------
$ 50,084,412 $ 45,671,294
============ ============
</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>
Six Months Ended
June 30,
------------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) $ 192,713 $ (56,238)
Adjustments to reconcile net earnings (loss) to cash provided by
(used for) operating activities:
Noncash items included in net earnings (loss):
Depreciation and amortization 29,891 26,965
Deferred income taxes 89,047 (14,818)
Amortization of deferred charges 79,448 78,052
Other 18,992 218,564
(Increase) decrease in operating receivables:
Clients (150,640) (962,017)
Brokers and dealers 22,402 195,400
Dividends and interest (58,297) (116,394)
Fees and other (127,381) 2,746
Increase (decrease) in operating payables:
Clients (74,775) 1,621,751
Brokers and dealers 86,083 (140,581)
Dividends and interest 10,515 45,847
Other (187,583) 254,836
(Increase) decrease in:
Trading assets (179,017) (3,238,538)
Securities purchased under agreements to resell (4,348,129) (7,121,551)
Securities borrowed 289,462 602,202
Cash and securities on deposit (7,974) (63,637)
Other assets (207,782) (403,495)
Increase (decrease) in:
Trading liabilities (207,895) 1,990,586
Securities sold under agreements to repurchase 3,521,420 8,509,803
Securities loaned 826,846 108,945
----------- -----------
Cash provided by (used for) operating activities (382,654) 1,538,428
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Net assets acquired in business acquisition -- (624,090)
Sales of investments 122,032 --
Office equipment and leasehold improvements (24,812) (56,391)
----------- -----------
Cash provided by (used for) investing activities 97,220 (680,481)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on):
Short-term borrowings 238,245 (836,496)
Proceeds from:
Long-term borrowings 160,126 350,396
Employee stock transactions 19,341 6,631
Payments for:
Long-term borrowings (44,840) (195,455)
Repurchases of common stock (121,646) (32,299)
Dividends (37,452) (38,450)
----------- -----------
Cash provided by (used for) financing activities 213,774 (745,673)
----------- -----------
(Increase) decrease in cash and cash equivalents (71,660) 112,274
Cash and cash equivalents, beginning of period 222,497 259,238
----------- -----------
Cash and cash equivalents, end of period $ 150,837 $ 371,512
=========== ===========
</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: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Certain
reclassifications have been made in prior year amounts to conform to current
year presentations. The financial information as of and for the periods ended
June 30, 1996 and 1995 is unaudited. All normal recurring adjustments which, in
the opinion of management, are necessary for a fair presentation have been made.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996. The results of operations reported for interim periods are not necessarily
indicative of the results of operations for the entire year. The Company's
principal line of business is to serve the investment and capital needs of
individual, corporate, institutional and public agency clients.
Stock Based Compensation
The Company grants stock options to employees and non-employee directors with an
exercise price not less than the fair market value at the date of grant. The
Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and intends to continue to do so. In accordance with APB No. 25, the
Company recognizes no compensation expense related to the granting of such stock
options.
Accounting Changes
In January 1996, the Company adopted Financial Accounting Standards Board
("FASB") Statements of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The adoption of SFAS No. 121 had no material impact on the
Company's consolidated financial statements, taken as a whole.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for transactions occurring after December 31, 1996. The Company does
not expect the adoption of this Statement to have a material impact on its
results of operations. The Company has not quantified the impact that adoption
of this Statement will have on its Consolidated Statement of Financial
Condition.
NOTE 2: 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
assets, resale agreements, securities borrowed, and certain receivables, are
carried at fair value or contracted amounts which approximate fair value.
Similarly, liabilities, including short-term borrowings, trading liabilities,
repurchase agreements, securities loaned, and certain payables, are carried at
fair value or contracted amounts approximating fair value.
At June 30, 1996 and December 31, 1995, the fair values of long-term borrowings
were $2,553,004 and $2,478,095, respectively, as compared to the carrying
amounts of $2,552,306 and $2,436,037, 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.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 values of the interest rate
swaps were $49,868 payable and $33,756 receivable at June 30, 1996 and December
31, 1995, respectively. The carrying amounts of the interest rate swap
agreements at June 30, 1996 and December 31, 1995 were net receivables of $4,495
and $1,730, respectively, and are included in "Dividends and interest" in the
Company's Consolidated Statement of Financial Condition.
NOTE 3: TRADING INVENTORIES
Trading assets and liabilities, recorded at fair value, consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -----------
Trading assets:
<S> <C> <C>
U.S. government and agency obligations $ 4,220,212 $ 4,854,878
Mortgages and mortgage-backed securities 4,936,524 4,240,163
Corporate debt securities 2,972,280 2,364,597
State and municipal obligations 444,783 821,487
Corporate equity securities 334,303 561,669
Commercial paper and other short-term debt 1,366,361 1,252,652
----------- -----------
$14,274,463 $14,095,446
=========== ===========
Trading liabilities:
U.S. government and agency obligations $ 4,633,344 $ 4,570,733
Mortgages and mortgage-backed securities 145,193 127,708
Corporate debt securities 743,865 714,588
State and municipal obligations 22,530 21,467
Corporate equity securities 480,227 798,558
----------- -----------
$ 6,025,159 $ 6,233,054
=========== ===========
</TABLE>
NOTE 4: 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, 1996 and December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ----------
<S> <C> <C>
Commercial paper $ 725,512 $ 547,554
Bank loans and other 503,960 443,673
---------- ----------
$1,229,472 $ 991,227
========== ==========
</TABLE>
NOTE 5: LONG-TERM BORROWINGS
Long-term borrowings at June 30, 1996 and December 31, 1995 consisted of the
following :
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ----------
<S> <C> <C>
Fixed Rate Notes due 1998-2014 $1,374,934 $1,289,478
Fixed Rate Subordinated Notes due 2002 170,706 174,412
Medium-Term Senior Notes 688,575 651,475
Medium-Term Subordinated Notes 282,150 283,150
Other 35,941 37,522
---------- ----------
$2,552,306 $2,436,037
========== ==========
</TABLE>
6
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 1996, interest rates on the remaining fixed rate notes and
subordinated notes due 1998 - 2014 range from 6 1/4% to 9 1/4% and the weighted
average interest rate on these notes outstanding at June 30, 1996 was 7.50%.
Interest on the notes is payable semi-annually.
At June 30, 1996, the Company had outstanding $734,025 of fixed rate Medium-Term
Notes and $236,700 of variable rate Medium-Term Notes. The Medium-Term Notes
outstanding at June 30, 1996 had an average maturity of 3.43 years and a
weighted average interest rate of 6.94%.
Total interest payments relating to agreements to repurchase, short-term
borrowings, securities loaned and long-term borrowings were $938,439 and
$970,068 for the six months ended June 30, 1996 and 1995, respectively.
NOTE 6: COMMON STOCK
On August 7, 1996, the Board of Directors declared a regular quarterly dividend
on the Company's common stock of $0.12 per share payable on October 3, 1996 to
stockholders of record on September 4, 1996. As of June 30, 1996, the Company
had 34,208,867 authorized shares of common stock reserved for issuance in
connection with convertible securities and stock option and stock award plans.
NOTE 7: 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 June 30, 1996, PWI's net capital of
$933,453 was 19% of aggregate debit balances and its net capital in excess of
the minimum required was $835,464.
NOTE 8: 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 FASB in SFAS 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 values are
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.
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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, 1996 and December 31, 1995. 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, 1996 December 31, 1995
----------------------------- -----------------------------
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
Mortgage-backed forward contracts
<S> <C> <C> <C> <C>
and options written and purchased $17,114,821 $20,137,509 $13,140,269 $15,861,501
Foreign currency forward contracts,
futures contracts, and options
written and purchased 747,942 1,056,096 1,894,724 2,040,414
Equity securities contracts including
futures, forwards, and options written
and purchased 168,836 211,561 993,161 1,220,400
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 2,922,303 3,228,141 2,647,504 3,148,312
Interest rate swaps, caps and floors 66,550 -- 104,050 --
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of June 30, 1996 and December 31, 1995. 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, 1996 December 31, 1995
------------------------- -------------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
Mortgage-backed forward contracts and
<S> <C> <C> <C> <C>
options written and purchased $128,426 $139,654 $129,272 $116,536
Foreign currency forward contracts,
futures contracts, and options
written and purchased 23,815 35,073 83,222 48,710
Equity securities contracts including
futures, forwards, and options written
and purchased 10,522 4,072 135,977 52,250
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 23,722 70,788 22,353 58,148
Interest rate swaps, caps and floors 473 -- 4,660 --
</TABLE>
8
<PAGE> 10
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, 1996 and
the twelve months ended December 31, 1995. The 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 Twelve Months Ended
June 30, 1996 December 31, 1995
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
Mortgage-backed forward contracts and
<S> <C> <C> <C> <C>
options written and purchased $ 140,599 $ 144,474 $ 118,784 $ 108,825
Foreign currency forward contracts,
futures contracts, and options
written and purchased 47,169 58,983 71,805 89,857
Equity securities contracts including
futures, forwards, and options written
and purchased 10,613 2,349 217,849 142,507
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 23,463 51,264 16,620 21,449
Interest rate swaps, caps and floors 515 -- 2,132 --
</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 off-balance-sheet derivative trading transactions are generally short-term.
At June 30, 1996 approximately 90% of the off-balance-sheet derivative trading
financial instruments were scheduled to mature during the third quarter of 1996.
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 $186,958
and $375,484 at June 30, 1996 and December 31, 1995, 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 table on the following page summarizes the Company's principal transaction
revenue (net trading revenues) by business activity for the three and six months
ended June 30, 1996 and 1995. Principal transaction revenues include realized
and unrealized gains and losses in the fair value of derivative and other
financial instruments.
9
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Principal Transaction Revenue
-----------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
-------- -------- -------- --------
Corporate equities (includes equity securities, equity index futures,
<S> <C> <C> <C> <C>
equity index options and swaps, and equity options contracts) $104,258 $ 71,407 $218,366 $153,462
Municipals (includes municipal and government securities) 41,267 34,099 74,138 76,656
U.S. government (includes U.S. government securities, financial
futures and options contracts) 35,678 18,099 92,126 44,296
Mortgage and mortgage-backed (includes mortgage-backed and
government securities, mortgage-backed forwards and options
contracts) 24,685 24,326 66,360 41,531
Corporate debt and other (includes debt, foreign currency forwards,
futures and options contracts and other securities) 45,960 56,376 97,234 102,032
-------- -------- -------- --------
$251,848 $204,307 $548,224 $417,977
======== ======== ======== ========
</TABLE>
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, 1996 and December 31, 1995, the Company had outstanding interest rate swap
agreements with commercial banks with notional principal amounts of $1,950,725
and $1,938,700, respectively, which effectively converted the majority of the
Company's fixed rate debt into floating rate debt. The interest rate swap
agreements entered into have had the effect of reducing net interest expense on
the Company's long-term borrowings by $4,870 for the six months ended June 30,
1996 and increasing net interest expense by $1,466 for the six months ended June
30, 1995. 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, 1996 and December 31, 1995. 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. See Note 2 for further discussion of interest rate swap agreements used
for hedging purposes.
NOTE 9: 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,
comprised of senior corporate and business unit managers, is responsible for
establishing trading position and exposure limits.
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.
10
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The Company may pledge clients' margined securities as collateral in support of
securities loaned and bank loans, to deliver against firm and clients' short
positions, 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, 1996, the market value of client securities loaned to other
brokers approximated the amounts due or collateral obtained.
Credit Risk in Client and Other 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,
trading liabilities 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.
Client 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, 1996 were
settled without adverse effect on the Company's financial statements, taken as a
whole.
In the normal course of business, clients may be extended lines of credit
collateralized by mortgages and other real estate interests. These commitments
are generally entered into at variable rates of interest based on LIBOR. At June
30, 1996, the unused portion of such lines of credit amounted to $456,895. The
majority of the commitments terminate within one year. In meeting the financing
needs of certain of its clients, the Company may also issue standby letters of
credit which are fully collateralized by marginable securities. At June 30, 1996
and December 31, 1995, the Company had outstanding $24,156 and $20,322,
respectively, of such standby letters of credit.
At June 30, 1996 and December 31, 1995, securities with a fair value of $399,387
and $441,612, respectively, had been loaned or pledged as collateral for
securities borrowed of approximately equal fair value.
11
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
seeks to control its credit risk and the potential for risk concentration
through a variety of reporting and control procedures described above.
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. At June 30, 1996 and
December 31, 1995, the Company had outstanding resale agreements and securities
borrowed of $6,966,205 and $8,502,505, respectively, with brokers and dealers
and $9,693,708 and $7,032,233, respectively, with commercial banks which were
collateralized by cash and securities of approximately equal fair value.
NOTE 10: COMMITMENTS AND CONTINGENCIES
At June 30, 1996 and December 31, 1995, the Company was contingently liable
under unsecured letters of credit totaling $108,461 and $114,090, respectively,
which approximates fair value. In addition, at June 30, 1996, 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 commitments to invest up to $20,209 in certain investment funds as of June
30, 1996.
In February 1996, two limited partnerships, in which a subsidiary of the Company
serves as the general partner and certain key employees serve as the limited
partners, entered into two unsecured credit facilities with a commercial bank
under which the bank agreed to make unsecured loans to the limited partnerships
of up to $77,525. The Company entered into an agreement with the bank to
purchase the loans under specific circumstances. At June 30, 1996, $37,932 had
been loaned to the limited partnerships.
In the normal course of business, the Company enters into when-issued
transactions and underwriting commitments. Settlement of these transactions at
June 30, 1996 would not have had a material impact on the Company's consolidated
financial statements, taken as a whole.
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 11: INCOME TAXES
The reconciliation of income taxes, computed at the statutory federal rates, to
the provision for income taxes recorded is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ----------------------
1996 1995 1996 1995
----------- ----------- ----------- ---------
<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 4.6 6.3 4.4 7.4
Foreign rate differential (1.2) 1.3 (1.0) 0.8
Nontaxable dividends & interest (2.0) 2.9 (1.5) 6.0
Other, net (2.2) (7.7) (2.3) (9.8)
----- ----- ----- -----
34.2% 37.8% 34.6% 39.4%
===== ===== ===== =====
</TABLE>
Income taxes paid were $66,195 and $1,805 for the three months ended June
30, 1996 and 1995, respectively.
12
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: EARNINGS PER COMMON SHARE
For the three months and six months ended June 30, 1996, 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
income, adjusted for preferred stock dividends and any interest savings, by the
weighted average common and common equivalent shares outstanding during each
period presented. Common equivalent shares include common shares issuable under
the Company's stock option and award plans, the conversion of convertible
debentures and preferred stock, and restricted stock outstanding.
For the three months and 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.
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.
In the second quarter of 1996, business conditions in the securities industry
continued to be favorable. Stock prices of large companies, as represented by
the S&P 500, rose 3.9% during the quarter, versus 4.8% during the first quarter
of 1996. The corporate finance market was also very strong in the second
quarter. Due to surprisingly strong economic growth, which raised the
possibility of a tighter monetary policy, the bond market was decidedly weaker
than the stock market during the second quarter of 1996.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1996 compared to Quarter Ended June 30, 1995
The Company's net earnings for the quarter ended June 30, 1996 were $92.2
million, or $0.90 per primary share ($0.86 per fully diluted share) compared to
net earnings of $35.4 million, or $0.28 per primary and fully diluted share
earned during the second quarter of 1995, before giving effect to a charge in
the year-ago quarter relating to limited partnership investment issues. The net
loss for the second quarter of 1995, after giving effect to this charge, was
$90.5 million, or $1.06 per primary and fully diluted share. During the second
quarter of 1996, revenues, net of interest expense, increased 15.1% to $949.6
million, primarily due to higher commissions and principal transactions
revenues.
The results for the quarter ended June 30, 1995 were reduced by an after-tax
charge of approximately $126 million ($200.0 million before income taxes)
relating to the resolution of the Securities and Exchange Commission ("SEC"),
individual, and class action claims arising out of the sale of public
proprietary limited partnerships in the 1980's and early 1990's. The charges are
included in other expenses in the Consolidated Statement of Operations.
Commission revenues earned during the second quarter of 1996 were $362.7
million, 12.0% higher than the $323.8 million earned during the prior year
quarter. Mutual funds commissions increased $20.7 million, or 42.7%, commissions
from over-the-counter securities increased $18.4 million, or 72.7%, and
insurance annuity commissions increased $9.3 million, or 41.6%. These increases
were partially offset by lower commissions from listed securities, options and
commodities.
Principal transactions revenues increased $47.5 million, or 23.3%, reflecting
improved results in U.S. government obligations and corporate equity securities.
These gains were partially offset by lower results in mortgages and corporate
debt securities.
Investment banking revenues were $102.1 million, as compared to $88.6 million
earned during the second quarter of 1995, reflecting a higher level of financial
advisory activity and an increased level of corporate equity and municipal
underwriting.
Asset management fees increased 13.7% to $111.4 million, due to higher revenues
earned on managed or "wrap" and trust accounts. Average assets in wrap and trust
accounts during the second quarter of 1996 were approximately 42% higher than
during the second quarter of 1995. The increase also includes higher advisory
fees earned on money market accounts. These gains were partially offset by lower
advisory and distribution fees on long term and institutional funds. The average
assets under management in money market, institutional and long-term mutual
funds were approximately $43.9 billion during the second quarter of 1996 as
compared to $42.0 billion during the second quarter of 1995.
Net interest increased $13.2 million, or 19.5% primarily due to increased margin
lending to customers and an increased level of fixed income positions.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Compensation and benefits for the quarter ended June 30, 1996 were $568.7
million as compared to $504.8 million during the prior year quarter.
Compensation costs increased primarily due to higher revenue-driven compensation
paid to retail investment executives and higher performance-based incentive
compensation. Compensation and benefits for the second quarter of 1996 also
includes costs related to the closure of the Tokyo-based Japanese equities
business. Compensation and benefits as a percent of net revenues were 59.9%
during the second quarter of 1996, as compared to 61.2% during the comparable
period in 1995.
All other operating expenses were $240.6 million, as compared to $465.6 million
for the prior year quarter. In the second quarter of 1995, other expenses
include the $200 million charge related to the limited partnership issue. Lower
litigation-related costs are reflected in other expenses and professional fees.
Lower occupancy costs are reflected in office and equipment.
Six Months Ended June 30, 1996 compared to Six Months Ended June 30, 1995
Net earnings for the six months ended June 30, 1996 was $192.7 million, or $1.87
per primary share ($1.76 per fully diluted share) as compared to net earnings of
$69.7 million, or $0.56 per primary share ($0.54 per fully diluted share) for
the first six months of 1995, before giving effect to the limited partnership
charge. Including the charge, the net loss for the first six months of 1995 was
$56.2 million or $0.76 per primary and fully diluted share. During the first six
months of 1996, revenues, net of interest expense, increased 23.3% to $1,912.3
million primarily due to higher commissions and principal transactions revenues.
Commission revenues earned during the first six months of 1996 were $730.9
million, 23.0% higher than the $594.1 million earned during the first six months
of 1995. Mutual funds commissions increased $54.8 million, or 64.5%, commissions
on listed securities increased $43.7 million, or 12.4%, commissions on
over-the-counter securities increased $31.4 million, or 71.1%, and insurance
annuity commissions increased $14.7 million, or 31.9%. These increases were
partially offset by lower options and commodity commissions.
Principal transactions revenues increased $130.2 million or 31.2% reflecting
improved results in U.S. government obligations and corporate equity securities.
These gains were partially offset by lower results in mortgages, corporate debt
and municipal securities.
Investment banking revenues were $183.9 million, as compared to $138.4 million
earned during the first six months of 1995, reflecting a higher level of
financial advisory activity and an increased level of corporate equity and
municipal underwriting.
Asset management fees increased 16.6% to $219.0 million, primarily due to higher
revenues earned on wrap and trust accounts and increased advisory fees earned on
money market and institutional accounts. These increases were partially offset
by lower advisory and distribution fees earned on long-term mutual funds.
Net interest increased $25.0 million, or 18.7% primarily due to increased margin
lending to clients and higher levels of fixed income positions.
Compensation and benefit related expenses for the six months ended June 30, 1996
were $1,135.7 million as compared to $937.8 million during the same period of
1995. Compensation costs increased primarily due to higher revenue-driven
compensation paid to retail investment executives and higher performance-based
incentive compensation. Compensation and benefits as a percent of net revenues
were 59.4% for the six months ended June 30, 1996, as compared to 60.5% during
the comparable period in 1995.
All other operating expenses were $481.6 million, as compared to $705.6 million
for the first six months of 1995. For the six months ended June 30, 1995, other
expenses include the $200 million charge related to the limited partnership
issue. Other expenses also reflect lower litigation-related expenses in the
current year period. Higher communication costs reflect increased business
activity.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 trading assets, securities borrowed, securities 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, 1996 were $50.1 billion compared to $45.7
billion at December 31, 1995, 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 an unsecured senior revolving credit agreement
to provide up to $1.2 billion, which expires in December 1996 with provisions
for renewal through December 1997. At June 30, 1996, there were no outstanding
borrowings under this credit facility. Additionally, the Company had more than
$4.5 billion in uncommitted lines of credit at June 30, 1996.
The Company maintains public shelf registration statements for the issuance of
debt securities with the Securities and Exchange Commission ("SEC"). During the
second quarter of 1996, the Company issued $60.5 million of Medium-Term Senior
Notes under these registration statements. At June 30, 1996, the Company had
$624.1 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 June 30, 1996, the
Company's total capital base, which includes long-term borrowings, redeemable
preferred stock and stockholders' equity, was $4.4 billion, an increase of
$188.8 million from December 31, 1995. The additions to capital primarily
reflect net increases in both long-term borrowings and stockholders' equity of
$116.3 million and $72.1 million, respectively.
The increase in long-term borrowings primarily reflects the issuance of $100.0
million of 6 3/4% Notes in January 1996 and $60.5 million of Medium-Term Senior
Notes during the second quarter of 1996. The increase in stockholders' equity is
primarily the result of net income for the six months ended June 30, 1996 of
$192.7 million, the issuance of approximately 1,892,000 shares of common stock
related to employee compensation programs for $19.3 million, and net
amortization of restricted stock awards of $16.6 million. These increases were
offset by the repurchase of approximately 5,869,000 shares of common stock for
$121.6 million and dividends accrued of $37.5 million.
In April 1996, the Company's Board of Directors increased the number of common
shares authorized to be repurchased by 7 million shares. At June 30, 1996, the
remaining number of shares authorized to be purchased under this plan was
approximately 8.9 million.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PWI is subject to the net capital requirements of the SEC, the New York Stock
Exchange, Inc. and the Commodity 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, 1996, the Company had investments in merchant banking transactions
which were affected by liquidity, reorganization or restructuring issues
amounting to $53.1 million, net of reserves, compared to $85.5 million, net of
reserves, at December 31, 1995. These investments have not had a material effect
on the Company's results of operations. Included in the portfolio at June 30,
1996 was an investment of $27.6 million in a limited partnership which
specializes in investments in corporate restructurings and special situations.
The Company's activities include underwriting and market-making transactions in
high-yield 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, 1996, the Company held
$249.4 million of high-yield securities, with approximately 64% of such
securities attributable to two issuers. The Company continually monitors its
risk positions associated with high-yield 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, 1996 and 1995,
the Company recorded pre-tax trading revenues on transactions in high-yield
securities of $4.8 million and $10.5 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument represents a contractual agreement between
counterparties and has value that 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, such as futures, certain
options contracts and structured products (e.g. indexed warrants) are traded on
exchanges, while derivatives such as forward contracts, interest rate swaps,
caps and floors, and other structured products are negotiated in
over-the-counter markets.
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 Consolidated Statement of Financial
Condition. The Company had off-balance-sheet derivative contracts outstanding
with gross notional amounts of $47.7 billion and $43.0 billion at June 30, 1996
and December 31, 1995, respectively, which included $37.3 billion and $26.7
billion, respectively, related to "to be announced" mortgage securities
requiring forward settlement.
For a more detailed discussion and disclosure on derivative financial
instruments, see Note 8 "Financial Instruments with Off-Balance-Sheet Risk" and
Note 9 "Risk Management" in the Notes to Consolidated Financial Statements.
17
<PAGE> 19
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 $152 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 $152 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $152 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 cases below, which were previously reported in
the Company's Annual Report on Form 10k for the year ended December 31, 1995.
In Re NASDAQ Market-Maker Antitrust Litigation
On July 16, 1996, PaineWebber Incorporated entered into a Stipulation and Order
resolving a civil complaint filed by the United States Department of Justice,
alleging that it and other NASDAQ market makers violated Section 1 of the
Sherman Act in connection with certain market making practices. In entering into
the Stipulation and Order, without admitting the allegations, the
parties agreed that the defendants would not engage in certain types of market
making activities and the defendants undertook specified steps to assure
compliance with their agreement. The Stipulation and Order are subject to
approval by the United States District Court of the Southern District of New
York following a public hearing, and if that Court approves the Stipulation and
Order, the complaint will be dismissed with prejudice.
Limited Partnership Class Actions
On July 17, 1996, the United States District Court for the Southern District of
New York granted preliminary approval of the proposed settlement of the class
action litigation. As part of the class action settlement, PaineWebber agreed to
pay $125 million and additional consideration to class members. The order
entered by the District Court provides for notice to be mailed to class members
and schedules a final hearing on the proposed settlement for October 25, 1996.
On January 18, 1996, the Securities and Exchange Commission commenced, and
PaineWebber Incorporated simultaneously settled, civil and administrative
proceedings relating to the firm's sale of public proprietary limited
partnerships in the 1980s and early 1990s. Without admitting or denying the
SEC's allegations or findings, the firm agreed to the entry of an
administrative cease and desist order, created a capped $40 million fund, paid
a $5 million civil penalty, and committed to pay $7.5 million of additional
investor claims relating to the limited partnerships. As part of the
settlement, PaineWebber Incorporated represented that it had previously paid
approximately $120 million to resolved investor claims over a period of several
years prior to the SEC settlement. Additionally, the order requires the
retention of an independent consultant to review the firm's policies and
procedures concerning retail brokerage operations and the dissemination of
sales and marketing materials, and oversight of the firm's compliance policies
by a committee of PaineWebber Incorporated's Board of Directors. On the same
date, PaineWebber Incorporated also announced an agreement to settle with the
various state securities regulators pursuant to which PaineWebber Incorporated
is required to make payments aggregating $5 million.
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
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
18
<PAGE> 20
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 12, 1996 By: /s/ Regina A. Dolan
---------------- -----------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
19
<PAGE> 21
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 - Financial Data Schedule
<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,
------------------------------ ------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 87,315,131 92,594,748 88,593,710 92,901,835
Incremental stock options and awards 7,882,909 -- 7,882,810 --
------------- -------------
Weighted average common and common
equivalent shares 95,198,040 92,594,748 96,476,520 92,901,835
============= ============= ============= =============
Net earnings (loss) $ 92,212 $ (90,548) $ 192,713 $ (56,238)
Interest savings on convertible debentures and
short-term borrowings 1,225 -- 2,578 --
Preferred dividend requirements (7,349) (7,324) (14,856) (14,644)
------------- ------------- ------------- -------------
Net earnings (loss) applicable to common shares $ 86,088 $ (97,872) $ 180,435 $ (70,882)
============= ============= ============= =============
Primary earnings (loss) per common share $ 0.90 $ (1.06) $ 1.87 $ (0.76)
============= ============= ============= =============
FULLY DILUTED:
Weighted average common shares outstanding 87,315,131 92,594,748 88,593,710 92,901,835
Incremental stock options and awards 8,804,960 -- 9,037,513 --
Weighted average common shares issuable assuming
conversion of 8% Convertible
Debentures and 6% Cumulative
Convertible Redeemable Preferred Stock 6,196,913 -- 6,327,181 --
------------- -------------
Weighted average common and common
equivalent shares 102,317,004 92,594,748 103,958,404 92,901,835
============= ============= ============= =============
Net earnings (loss) $ 92,212 $ (90,548) $ 192,713 $ (56,238)
Interest savings on convertible debentures and
short-term borrowings 1,140 -- 2,262 --
Preferred dividend requirements (5,849) (7,324) (11,823) (14,644)
------------- ------------- ------------- -------------
Net earnings (loss) applicable to common shares $ 87,503 $ (97,872) $ 183,152 $ (70,882)
============= ============= ============= =============
Fully diluted earnings (loss) per common share $ 0.86 $ (1.06) $ 1.76 $ (0.76)
============= ============= ============= =============
</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
Ended June 30, Years Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 294,942 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247
---------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 21,789 36,260 1,710 5,828 27,789 34,732
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 948,932 1,969,811 1,428,653 1,130,712 879,242 1,056,124
Interest factor in rents 29,408 59,491 51,102 50,133 45,962 43,804
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 978,340 2,029,302 1,479,755 1,180,845 925,204 1,099,928
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 1,000,129 2,065,562 1,481,465 1,186,673 952,993 1,134,660
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and fixed charges $1,273,282 $2,131,979 $1,524,140 $1,588,421 $1,264,319 $1,326,175
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred stock dividends 1.3 1.0 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 income 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.
<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
Ended June 30, Years Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 294,942 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 948,932 1,969,811 1,428,653 1,130,712 879,242 1,056,124
Interest factor in rents 29,408 59,491 51,102 50,133 45,962 43,804
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 978,340 2,029,302 1,479,755 1,180,845 925,204 1,099,928
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
fixed charges $1,273,282 $2,131,979 $1,524,140 $1,588,421 $1,264,319 $1,326,175
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.3 1.1 1.0 1.3 1.4 1.2
========== ========== ========== ========== ========== ==========
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of income 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.
<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, 1996 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-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 585,879
<RECEIVABLES> 6,920,735
<SECURITIES-RESALE> 21,047,424
<SECURITIES-BORROWED> 6,937,053
<INSTRUMENTS-OWNED> 14,274,463
<PP&E> 318,858
<TOTAL-ASSETS> 50,084,412
<SHORT-TERM> 1,229,472
<PAYABLES> 6,165,820
<REPOS-SOLD> 28,720,797
<SECURITIES-LOANED> 3,579,275
<INSTRUMENTS-SOLD> 6,025,159
<LONG-TERM> 2,552,306
105,421
187,208
<COMMON> 100,000
<OTHER-SE> 1,418,954
<TOTAL-LIABILITY-AND-EQUITY> 50,084,412
<TRADING-REVENUE> 548,224
<INTEREST-DIVIDENDS> 1,107,649
<COMMISSIONS> 730,880
<INVESTMENT-BANKING-REVENUES> 183,932
<FEE-REVENUE> 219,047
<INTEREST-EXPENSE> 948,932
<COMPENSATION> 1,135,681
<INCOME-PRETAX> 294,942
<INCOME-PRE-EXTRAORDINARY> 192,713
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,713
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.76
</TABLE>
