<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 8, 1996, the Registrant had outstanding 91,137,968 shares of common
stock of $1 par value, which is the Registrant's only class of common stock.
<PAGE> 2
PAINE WEBBER GROUP INC.
FORM 10-Q
SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended
September 30, 1996 and 1995. 2
Consolidated Statements of Financial
Condition (unaudited) at September 30, 1996
and December 31, 1995. 3
Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended
September 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
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAINE WEBBER GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 306,173 $ 333,686 $ 1,037,053 $ 927,772
Principal transactions 240,261 264,049 788,485 682,026
Asset management 115,614 104,159 334,661 292,031
Investment banking 93,285 93,988 277,217 232,380
Other 42,033 39,587 113,491 118,081
Interest 577,882 544,089 1,685,531 1,693,423
------------ ------------ ------------ ------------
Total revenues 1,375,248 1,379,558 4,236,438 3,945,713
Interest expense 492,262 467,533 1,441,194 1,483,106
------------ ------------ ------------ ------------
Net revenues 882,986 912,025 2,795,244 2,462,607
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits 524,612 537,870 1,660,293 1,475,637
Office and equipment 66,781 67,689 200,755 199,716
Communications 37,725 38,130 116,237 111,459
Business development 17,705 23,364 55,221 68,358
Brokerage, clearing & exchange fees 19,134 24,432 65,874 72,556
Professional services 29,436 24,531 78,063 72,910
Other 64,278 79,307 200,544 438,097
------------ ------------ ------------ ------------
Total non-interest expenses 759,671 795,323 2,376,987 2,438,733
------------ ------------ ------------ ------------
NET EARNINGS BEFORE TAXES 123,315 116,702 418,257 23,874
------------ ------------ ------------ ------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Federal 33,940 24,099 110,227 (11,890)
State, local and foreign 9,220 14,413 35,162 13,812
------------ ------------ ------------ ------------
43,160 38,512 145,389 1,922
------------ ------------ ------------ ------------
NET EARNINGS $ 80,155 $ 78,190 $ 272,868 $ 21,952
============ ============ ============ ============
Net earnings (loss) applicable to common shares $ 73,695 $ 71,202 $ 254,202 $ (16)
============ ============ ============ ============
Earnings per common share:
Primary $ 0.79 $ 0.71 $ 2.67 $ 0.00
Fully diluted $ 0.75 $ 0.67 $ 2.55 $ 0.00
Weighted average common shares:
Primary 93,875,777 100,931,592 95,084,609 92,597,619
Fully diluted 100,072,690 108,158,981 101,368,050 92,597,619
Dividends declared per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
PAINE WEBBER GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 199,366 $ 222,497
Cash and securities segregated and on deposit for
federal and other regulations 415,263 427,068
Trading assets, at fair value 15,674,064 14,095,446
Securities purchased under agreements to resell 22,248,702 16,699,295
Securities borrowed 7,056,283 7,226,515
Receivables:
Clients, net of allowance for doubtful accounts of
$13,421 and $12,400 at September 30, 1996 and
December 31, 1995, respectively 4,137,507 4,070,599
Brokers and dealers 206,482 279,676
Dividends and interest 333,821 263,948
Fees and other 368,041 200,444
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $329,688 and $288,807 at
September 30, 1996 and December 31, 1995, respectively 316,411 322,056
Other assets 1,817,795 1,863,750
------------ ------------
$ 52,773,735 $ 45,671,294
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 951,186 $ 991,227
Trading liabilities, at fair value 6,992,858 6,233,054
Securities sold under agreements to repurchase 31,133,247 25,199,377
Securities loaned 2,694,971 2,752,429
Payables:
Clients 3,839,169 3,698,477
Brokers and dealers 293,672 155,118
Dividends and interest 266,675 256,338
Other liabilities and accrued expenses 1,555,391 1,639,403
Accrued compensation and benefits 618,521 570,786
------------ ------------
48,345,690 41,496,209
Long-term borrowings 2,565,440 2,436,037
------------ ------------
50,911,130 43,932,246
------------ ------------
Commitments and contingencies
Redeemable Preferred Stock 187,431 186,760
Stockholders' Equity:
Convertible Preferred Stock 100,000 100,000
Common stock, $1 par value, 200,000,000 shares authorized;
issued 105,435,836 shares and 104,492,091 shares at
September 30, 1996 and December 31, 1995, respectively 105,436 104,492
Additional paid-in capital 837,265 831,763
Retained earnings 936,239 719,325
------------ ------------
1,978,940 1,755,580
Treasury stock, at cost; 13,115,949 shares at September 30, 1996
and 7,417,845 shares at December 31, 1995, respectively (270,852) (151,616)
Unamortized cost of restricted stock (28,998) (55,302)
Foreign currency translation adjustment (3,916) 3,626
------------ ------------
1,675,174 1,552,288
------------ ------------
$ 52,773,735 $ 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>
Nine Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 272,868 $ 21,952
Adjustments to reconcile net earnings to cash (used for)
provided by operating activities:
Noncash items included in net earnings:
Depreciation and amortization 45,343 41,661
Deferred income taxes 73,440 (100,304)
Amortization of deferred charges 118,992 119,465
Other 19,529 218,654
(Increase) decrease in operating receivables:
Clients (67,929) (1,114,442)
Brokers and dealers 73,194 242,744
Dividends and interest (69,873) (38,254)
Fees and other (167,597) 484
Increase (decrease) in operating payables:
Clients 140,692 1,360,206
Brokers and dealers 138,554 (78,505)
Dividends and interest 10,337 49,882
Other (52,434) 436,032
(Increase) decrease in:
Trading assets (1,578,618) (2,489,419)
Securities purchased under agreements to resell (5,549,407) (9,338,499)
Securities borrowed 170,232 422,214
Cash and securities on deposit 11,805 (49,834)
Other assets (246,304) (462,240)
Increase (decrease) in:
Trading liabilities 759,804 1,216,338
Securities sold under agreements to repurchase 5,933,870 10,822,256
Securities loaned (57,458) (422,601)
------------ ------------
Cash (used for) provided by operating activities (20,960) 857,790
------------ ------------
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 (36,813) (69,233)
------------ ------------
Cash provided by (used for) investing activities 85,219 (693,323)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on short-term borrowings (40,041) (216,854)
Proceeds from:
Long-term borrowings 234,064 412,586
Employee stock transactions 23,435 33,818
Payments for:
Long-term borrowings (105,895) (306,370)
Repurchases of common stock (143,671) (93,184)
Dividends (55,282) (57,590)
------------ ------------
Cash used for financing activities (87,390) (227,594)
------------ ------------
Decrease in cash and cash equivalents (23,131) (63,127)
Cash and cash equivalents, beginning of period 222,497 259,238
------------ ------------
Cash and cash equivalents, end of period $ 199,366 $ 196,111
============ ============
</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. The
financial information as of and for the periods ended September 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 Reports on Form 10-Q for the quarters ended June 30,
and 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 certain types of transactions occurring after December 31, 1996,
including securitizations, sales of mortgages and other receivables. In November
1996, the FASB issued an exposure draft which deferred the effective date of
accounting for other types of transfers of financial assets, including
repurchase and securities lending transactions, until after December 31, 1997.
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.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At September 30, 1996 and December 31, 1995, the fair values of long-term
borrowings were $2,556,456 and $2,478,095, respectively, as compared to the
carrying amounts of $2,565,440 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.
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 $50,687 payable and $33,756 receivable at September 30, 1996 and
December 31, 1995, respectively. The carrying amounts of the interest rate swap
agreements at September 30, 1996 and December 31, 1995 were net receivables of
$1,177 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>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Trading assets:
U.S. government and agency obligations $ 5,621,180 $ 4,854,878
Mortgages and mortgage-backed securities 5,422,186 4,240,163
Corporate debt securities 2,746,312 2,364,597
State and municipal obligations 544,467 821,487
Corporate equity securities 371,008 561,669
Commercial paper and other short-term debt 968,911 1,252,652
----------- -----------
$15,674,064 $14,095,446
=========== ===========
Trading liabilities:
U.S. government and agency obligations $ 5,609,146 $ 4,570,733
Mortgages and mortgage-backed securities 123,685 127,708
Corporate debt securities 626,815 714,588
State and municipal obligations 33,009 21,467
Corporate equity securities 600,203 798,558
----------- -----------
$ 6,992,858 $ 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 September 30, 1996 and December 31, 1995 consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
Commercial paper $483,865 $547,554
Bank loans and other 467,321 443,673
-------- --------
$951,186 $991,227
======== ========
</TABLE>
6
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: LONG-TERM BORROWINGS
Long-term borrowings at September 30, 1996 and December 31, 1995 consisted of
the following :
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---------- ----------
<S> <C> <C>
Fixed Rate Notes due 1998 - 2014 $1,413,265 $1,289,478
Fixed Rate Subordinated Notes due 2002 174,478 174,412
Medium-Term Senior Notes 682,001 651,475
Medium-Term Subordinated Notes 281,150 283,150
Other 14,546 37,522
---------- ----------
$2,565,440 $2,436,037
========== ==========
</TABLE>
At September 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 September 30, 1996 was
7.51%. Interest on the notes is payable semi-annually.
At September 30, 1996, the Company had outstanding $699,001 of fixed rate
Medium-Term Notes and $264,150 of variable rate Medium-Term Notes. The
Medium-Term Notes outstanding at September 30, 1996 had an average maturity of
3.5 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 $1,430,878 and
$1,433,205 for the nine months ended September 30, 1996 and 1995, respectively.
NOTE 6: COMMON STOCK
On November 7, 1996, the Board of Directors declared a regular quarterly
dividend on the Company's common stock of $0.12 per share payable on January 3,
1997 to stockholders of record on December 4, 1996. In addition, the Board
authorized an increase of 10 million shares to its share repurchase program
bringing the current total amount of shares that can be repurchased to
approximately 15 million shares. As of September 30, 1996, the Company had
34,447,584 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 September 30, 1996, PWI's net capital of
$940,163 was 18% of aggregate debit balances and its net capital in excess of
the minimum required was $832,480.
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
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
September 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
-----------------------------------------------------------------
September 30, 1996 December 31, 1995
----------------------------- -----------------------------
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $18,663,406 $21,059,813 $13,140,269 $15,861,501
Foreign currency forward contracts,
futures contracts, and options
written and purchased 654,535 1,335,882 1,894,724 2,040,414
Equity securities contracts including
futures, forwards, and options written
and purchased 419,603 450,130 993,161 1,220,400
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 5,674,406 4,485,737 2,647,504 3,148,312
Interest rate swaps, caps and floors 78,750 -- 104,050 --
</TABLE>
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of September 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
September 30, 1996 December 31, 1995
------------------------ ------------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $112,750 $122,422 $129,272 $116,536
Foreign currency forward contracts,
futures contracts, and options
written and purchased 8,409 15,938 83,222 48,710
Equity securities contracts including
futures, forwards, and options written
and purchased 45,407 27,086 135,977 52,250
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 24,284 143,759 22,353 58,148
Interest rate swaps, caps and floors 4,408 -- 4,660 --
</TABLE>
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended September 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
September 30, 1996 December 31, 1995
------------------------ ------------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $137,379 $127,610 $118,784 $108,825
Foreign currency forward contracts,
futures contracts, and options
written and purchased 20,149 25,554 71,805 89,857
Equity securities contracts including
futures, forwards, and options written
and purchased 35,352 24,821 217,849 142,507
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 22,273 117,467 16,620 21,449
Interest rate swaps, caps and floors 4,339 -- 2,132 --
</TABLE>
9
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 30, 1996 approximately 90% of the off-balance-sheet derivative
trading financial instruments were scheduled to mature during the fourth 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 $195,258
and $375,484 at September 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 below summarizes the Company's principal transaction revenue (net
trading revenues) by business activity for the three and nine months ended
September 30, 1996 and 1995. Principal transaction revenues include realized and
unrealized gains and losses in the fair value of derivative and other financial
instruments.
<TABLE>
<CAPTION>
Principal Transaction Revenue
-----------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Corporate equities (includes equity securities, equity index futures,
equity index options and swaps, and equity options contracts) $ 94,540 $124,238 $312,906 $277,700
Municipals (includes municipal and government securities) 36,739 30,515 110,877 107,171
U.S. government (includes U.S. government securities, financial
futures and options contracts) 20,339 32,683 112,465 76,979
Mortgage and mortgage-backed (includes mortgage-backed and
government securities, mortgage-backed forwards and options
contracts) 32,119 32,406 98,479 73,937
Corporate debt and other (includes debt, foreign currency forwards,
futures and options contracts and other securities) 56,524 44,207 153,758 146,239
-------- -------- -------- --------
$240,261 $264,049 $788,485 $682,026
======== ======== ======== ========
</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
September 30, 1996 and December 31, 1995, the Company had outstanding interest
rate swap agreements with commercial banks with notional principal amounts of
$1,905,725 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 $6,938 for the nine months
ended September 30, 1996 and increasing net interest expense by $2,354 for the
nine months ended September 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 September 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.
10
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 September 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.
11
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 30, 1996
were settled without material 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
September 30, 1996, the unused portion of such lines of credit amounted to
$679,122. 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 September 30, 1996 and December 31, 1995, the Company had
outstanding $23,762 and $20,322, respectively, of such standby letters of
credit.
At September 30, 1996 and December 31, 1995, securities with a fair value of
$210,530 and $441,612, respectively, had been loaned or pledged as collateral
for securities borrowed of approximately equal fair value.
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 September 30, 1996
and December 31, 1995, the Company had outstanding resale agreements and
securities borrowed of $6,415,622 and $8,502,505, respectively, with brokers and
dealers and $10,531,519 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 September 30, 1996 and December 31, 1995, the Company was contingently
liable under unsecured letters of credit totaling $194,722 and $114,090,
respectively, which approximates fair value. At September 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
addition, during 1995 the Company recorded charges, as previously disclosed,
related to a final and comprehensive resolution of the issues arising from the
Company's sale of public proprietary limited partnerships. As part of the
settlement of related class action litigation, the Company has agreed, under
certain circumstances, to provide to class members additional consideration
including assignment of any and all fees the Company is entitled to receive
from certain partnerships. In the opinion of management, these contengencies
will not have a material adverse effect on the Company's consolidated financial
statements, taken as a whole.
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 September 30, 1996, $55,082
had been loaned to the limited partnerships.
12
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the normal course of business, the Company enters into when-issued
transactions and underwriting commitments. Settlement of these transactions at
September 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 Nine Months Ended
September 30 September 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 3.4 4.3 4.1 (7.7)
Foreign rate differential 0.1 0.7 (0.7) 0.4
Nontaxable dividends & interest (1.0) (2.0) (1.3) (33.3)
Other, net (2.5) (5.0) (2.3) 13.7
----- ----- ----- ------
35.0% 33.0% 34.8% 8.1%
===== ===== ===== =======
</TABLE>
Income taxes paid were $60,534 and $23,072 for the nine months ended September
30, 1996 and 1995, respectively.
NOTE 12: EARNINGS PER COMMON SHARE
For the three months and nine months ended September 30, 1996, and the three
months ended September 30, 1995, 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 nine months ended September 30, 1995, as a result of the net loss
applicable to common shares, the Company computed per share results by dividing
the net loss by the weighted average common shares outstanding, which excludes
restricted stock and antidilutive securities.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal business activities are, by their nature, affected by
many factors, including general economic and financial conditions, the level and
volatility of interest rates, currency and security valuations, competitive
conditions, counterparty risk, transactional volume and market liquidity. As a
result, revenues and profitability have been in the past, and are likely to
continue to be, subject to fluctuations reflecting the impact of these factors.
Business conditions in the securities industry were less favorable in the third
quarter of 1996 than the second quarter. Stock prices of large companies, as
represented by the S&P 500, rose 2.5% in the quarter, less than the 3.9% gain
of the second quarter. Moreover, stock market volatility increased, with prices
declining sharply in July before recovering later in the quarter. As for the
credit markets, they were comparatively stable, with the yield on the 10-year
government bond being virtually flat during the quarter.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1996 compared to Quarter Ended September 30, 1995
The Company's net earnings for the quarter ended September 30, 1996 were $80.2
million, or $.79 per primary share ($.75 per fully diluted share) compared to
net earnings of $78.2 million, or $.71 per primary share ($.67 per fully diluted
share) earned during the third quarter of 1995. During the third quarter of
1996, revenues, net of interest expense, were $883.0 million, 3.2% lower than
the third quarter of 1995, reflecting lower commissions and principal
transactions revenues.
Commission revenues earned during the third quarter of 1996 were $306.2 million,
8.3% lower than the $333.7 million earned during the prior year quarter.
Commissions on the sale of listed securities decreased $19.8 million or 10.7%,
commissions on the sale of options decreased $9.3 million or 39.8% and
commissions on the sale of over-the-counter securities decreased $4.5 million or
13.9%. These declines were partially offset by higher mutual fund commissions
and insurance annuity commissions.
Principal transactions revenues decreased $23.8 million, or 9.0%, reflecting
lower results in U.S. government obligations and corporate equity securities.
These gains were partially offset by improved results in corporate debt,
municipal and mortgage securities.
Asset management fees increased 11.0% to $115.6 million, due to higher revenues
earned on managed or "wrap" and trust accounts. Average assets in wrap and trust
accounts during the third quarter of 1996 were approximately 34% higher than
during the third quarter of 1995. The average assets under management in money
market, institutional and long-term mutual funds were approximately $43.6
billion during the third quarter of 1996 as compared to $44.1 billion during the
third quarter of 1995.
Investment banking revenues were $93.3 million, as compared to $94.0 million
earned during the third quarter of 1995. The current year quarter reflects a
lower level of corporate equity underwritings offset by increased municipal
underwritings.
Net interest increased $9.1 million, or 11.8% primarily due to increased margin
lending to customers and an increased level of fixed income positions.
Compensation and benefits for the quarter ended September 30, 1996 were $524.6
million as compared to $537.9 million during the prior year quarter.
Compensation costs decreased primarily due to lower revenue-driven compensation
paid to retail investment executives. Compensation and benefits as a percent of
net revenues were 59.4% during the third quarter of 1996, as compared to 59.0%
during the comparable period in 1995.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
All other operating expenses were $235.1 million, as compared to $257.5 million
for the prior year quarter. The decrease in other operating expenses reflect the
lower costs resulting from renegotiated leases and vendor contracts as well as
the consolidation of branch offices. In addition, the current year quarter
includes lower settlement-related expenses. These decreases were partially
offset by higher legal fees and depreciation.
Nine Months Ended September 30, 1996 compared to Nine Months Ended September 30,
1995
Net earnings for the nine months ended September 30, 1996 were $272.9 million,
or $2.67 per primary share ($2.55 per fully diluted share) as compared to net
earnings of $147.9 million, or $1.27 per primary share ($1.21 per fully diluted
share) for the first nine months of 1995, before giving effect to a charge in
the year ago period relating to limited partnership investment issues. Including
the charge, the net earnings for the first nine months of 1995 were $22.0
million or $0.00 per primary share. During the first nine months of 1996,
revenues, net of interest expense, increased 13.5% to $2,795.2 million primarily
due to higher commissions and principal transactions revenues.
The results for the nine months ended September 30, 1995 were reduced by an
after-tax charge of approximately $126.0 million ($200.0 million before taxes),
taken in the second quarter, relating to the cost of resolving 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 first nine months of 1996 were $1,037.1
million, 11.8% higher than the $927.8 million earned during the first nine
months of 1995. Mutual funds commissions increased $58.4 million, or 41.6%,
commissions earned on the sale of listed securities increased $23.9 million, or
4.4%, commissions earned on the sale of over-the-counter securities increased
$26.9 million, or 35.1%, and insurance annuity commissions increased $18.0
million, or 25.1%. These increases were partially offset by lower commissions on
options and commodities.
Principal transactions revenues increased $106.5 million or 15.6% 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.
Asset management fees increased 14.6% to $334.7 million, primarily due to higher
revenues earned on wrap and trust accounts and increased advisory fees earned on
money market accounts.
Investment banking revenues were $277.2 million, as compared to $232.4 million
earned during the first nine months of 1995, reflecting a higher level of
financial advisory activity and an increased level of corporate equity and
municipal underwriting.
Net interest increased $34.0 million, or 16.2% primarily due to increased margin
lending to clients and higher levels of fixed income positions.
Compensation and benefit-related expenses for the nine months ended September
30, 1996 were $1,660.3 million as compared to $1,475.6 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 nine months ended September 30, 1996, as
compared to 59.9% during the comparable period in 1995.
All other operating expenses were $716.7 million, as compared to $963.1 million
for the first nine months of 1995. For the nine months ended September 30, 1995,
other expenses include the aforementioned $200.0 million charge related to the
limited partnership issue. The current year expenses reflect lower
litigation-related costs.
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 September 30, 1996 were $52.8 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. The Company has given notice to renew this
credit agreement. During the third quarter of 1996, certain of the Company's
subsidiaries entered into new secured revolving credit agreements to provide up
to an aggregate of $750.0 million, which expires in August 1997 with provisions
for renewal through August 2000. At September 30, 1996, there were no
outstanding borrowings under these credit facilities. Additionally, the Company
had more than $4.5 billion in uncommitted lines of credit at September 30,
1996.
The Company maintains public shelf registration statements for the issuance of
debt securities with the SEC. During the third quarter of 1996, the Company
issued $59.5 million of Medium-Term Senior Notes under these registration
statements. At September 30, 1996, the Company had $564.6 million in debt
securities available for issuance. On October 11, 1996, the Company issued
$150.0 million of 7 5/8% notes due 2008.
Capital Resources and Capital Adequacy
The Company's businesses are capital intensive. In addition to a funding policy
which provides for diversification of funding sources and maximization of
liquidity, the Company maintains a strong capital base. At September 30, 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 $253.0 million from December 31, 1995. The additions to capital
primarily reflect net increases in both long-term borrowings and stockholders'
equity of $129.4 million and $122.9 million, respectively.
The increase in long-term borrowings primarily reflects the issuance of $100.0
million of 6 3/4% notes in January 1996. The increase in stockholders' equity is
primarily the result of net income for the nine months ended September 30, 1996
of $272.9 million, the issuance of approximately 2,334,000 shares of common
stock related to employee compensation programs for $23.4 million, and net
amortization of restricted stock awards of $26.3 million. These increases were
offset by the repurchase of approximately 6,898,000 shares of common stock for
$143.7 million and dividends accrued of $55.3 million. At September 30, 1996,
the remaining number of shares authorized to be repurchased under the Company's
common stock repurchase program was approximately 7.8 million. In November 1996,
the Company's Board of Directors increased the number of common shares
authorized to be repurchased by 10 million shares, bringing the total amount of
shares that can be repurchased under this plan to approximately 15 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 September 30, 1996, the Company had investments in merchant banking
transactions which were affected by liquidity, reorganization or restructuring
issues amounting to $54.7 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
September 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 September 30, 1996, the Company
held $229.0 million of high-yield securities, with approximately 69% of such
securities attributable to three 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 nine months ended September 30, 1996 and
1995, the Company recorded pre-tax trading revenues on transactions in
high-yield securities of $7.5 million and $12.9 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 $54.7 billion and $43.0 billion at September 30,
1996 and December 31, 1995, respectively, which included $35.3 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 $158 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 $158 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $158 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 case below, which was previously reported in
the Company's Annual Report on Form 10K for the year ended December 31, 1995 and
in its Quarterly Report on Form 10Q for the quarter ended June 30, 1996.
Limited Partnership Class Actions
A final hearing on the proposed settlement, preliminarily approved by the United
States District Court for the Southern District of New York on July 17, 1996,
commenced on October 25, 1996, and is to continue in November 1996.
The purported class action filed in the Circuit Court of the State of Illinois
for Cook County by two Pegasus limited partnership investors, entitled Jacobson
v. PaineWebber, Inc., has been dismissed. The Jacobsons, as class members in the
New York Limited Partnership Actions, have objected to the proposed settlement.
As noted above, the Court is currently conducting a hearing on the fairness of
the proposed settlement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 11 - Computation of Earnings per Common Share
Exhibit 12.1 - 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: November 13, 1996 By: /s/ Regina A. Dolan
-----------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
19
<PAGE> 1
EXHIBIT 11
PAINE WEBBER GROUP INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares outstanding 86,784,047 91,984,316 87,992,879 92,597,619
Incremental stock options and awards 7,091,730 8,947,276 7,091,730 --
------------- ------------- ------------- -------------
Weighted average common and common
equivalent shares 93,875,777 100,931,592 95,084,609 92,597,619
============= ============= ============= =============
Net earnings $ 80,155 $ 78,190 $ 272,868 $ 21,952
Interest savings on convertible debentures and
short-term borrowings 889 336 3,380 --
Preferred dividend requirements (7,349) (7,324) (22,046) (21,968)
------------- ------------- ------------- -------------
Net earnings (loss) applicable to common shares $ 73,695 $ 71,202 $ 254,202 $ (16)
============= ============= ============= =============
Primary earnings per common share $ 0.79 $ 0.71 $ 2.67 $ 0.00
============= ============= ============= =============
FULLY DILUTED:
Weighted average common shares outstanding 86,784,047 91,984,316 87,992,879 92,597,619
Incremental stock options and awards 7,091,730 9,207,329 7,091,730 --
Weighted average common shares issuable
assuming conversion of 8% Convertible
Debentures and 6% Cumulative
Convertible Redeemable Preferred Stock 6,196,913 6,967,336 6,283,441 --
------------- ------------- ------------- -------------
Weighted average common and common
equivalent shares 100,072,690 108,158,981 101,368,050 92,597,619
============= ============= ============= =============
Net earnings $ 80,155 $ 78,190 $ 272,868 $ 21,952
Interest savings on convertible debentures and
short-term borrowings 924 554 3,290 --
Preferred dividend requirements (5,849) (5,825) (17,546) (21,968)
------------- ------------- ------------- -------------
Net earnings (loss) applicable to common shares $ 75,230 $ 72,919 $ 258,612 $ (16)
============= ============= ============= =============
Fully diluted earnings per common share $ 0.75 $ 0.67 $ 2.55 $ 0.00
============= ============= ============= =============
</TABLE>
<PAGE> 1
EXHIBIT 12.1
PAINE WEBBER GROUP INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Years Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 418,257 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247
---------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 32,784 36,260 1,710 5,828 27,789 34,732
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,441,194 1,969,811 1,428,653 1,130,712 879,242 1,056,124
Interest factor in rents 43,291 59,491 51,102 50,133 45,962 43,804
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,484,485 2,029,302 1,479,755 1,180,845 925,204 1,099,928
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 1,517,269 2,065,562 1,481,465 1,186,673 952,993 1,134,660
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and fixed charges $1,902,742 $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>
Nine Months
Ended September 30, Years Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 418,257 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,441,194 1,969,811 1,428,653 1,130,712 879,242 1,056,124
Interest factor in rents 43,291 59,491 51,102 50,133 45,962 43,804
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,484,485 2,029,302 1,479,755 1,180,845 925,204 1,099,928
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
fixed charges $1,902,742 $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 nine months ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 614,646
<RECEIVABLES> 6,863,646
<SECURITIES-RESALE> 22,248,702
<SECURITIES-BORROWED> 7,056,283
<INSTRUMENTS-OWNED> 15,674,064
<PP&E> 316,411
<TOTAL-ASSETS> 52,773,735
<SHORT-TERM> 951,186
<PAYABLES> 6,573,428
<REPOS-SOLD> 31,133,247
<SECURITIES-LOANED> 2,694,971
<INSTRUMENTS-SOLD> 6,992,858
<LONG-TERM> 2,565,440
187,431
100,000
<COMMON> 105,436
<OTHER-SE> 1,469,738
<TOTAL-LIABILITY-AND-EQUITY> 52,773,735
<TRADING-REVENUE> 788,485
<INTEREST-DIVIDENDS> 1,685,531
<COMMISSIONS> 1,037,053
<INVESTMENT-BANKING-REVENUES> 277,217
<FEE-REVENUE> 334,661
<INTEREST-EXPENSE> 1,441,194
<COMPENSATION> 1,660,293
<INCOME-PRETAX> 418,257
<INCOME-PRE-EXTRAORDINARY> 272,868
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 272,868
<EPS-PRIMARY> 2.67
<EPS-DILUTED> 2.55
</TABLE>
