<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 March 31, 1997
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 May 9, 1997, the Registrant had outstanding 91,550,117 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
March 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements.
Consolidated Statements of Income
(unaudited) for the Three Months Ended
March 31, 1997 and 1996. 2
Consolidated Statements of Financial
Condition (unaudited) at March 31, 1997
and December 31, 1996. 3
Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended
March 31, 1997 and 1996. 4
Notes to Consolidated Financial Statements
(unaudited). 5-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 15-17
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings. 18
Item 4. Submissions of Matters to a Vote of
Security Holders. 18
Item 6. Exhibits and Reports on Form 8-K. 19
Signature. 20
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Paine Webber Group Inc.
Consolidated Statements of Income (unaudited)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Commissions $ 370,386 $ 368,185
Principal transactions 256,536 296,376
Asset management 120,968 107,655
Investment banking 97,774 81,855
Other 38,074 30,496
Interest 643,953 545,459
----------- -----------
Total revenues 1,527,691 1,430,026
Interest expense 542,857 467,391
----------- -----------
Net revenues 984,834 962,635
----------- -----------
Non-interest expenses
Compensation and benefits 574,017 566,991
Office and equipment 68,067 68,741
Communications 38,207 38,691
Business development 18,620 18,551
Brokerage, clearing & exchange fees 22,555 25,492
Professional services 27,540 23,575
Other 70,924 65,978
----------- -----------
Total non-interest expenses 819,930 808,019
----------- -----------
Income before taxes and minority interest 164,904 154,616
----------- -----------
Provision for income taxes:
Federal 45,859 37,353
State, local and foreign 13,361 16,762
----------- -----------
59,220 54,115
----------- -----------
Income before minority interest 105,684 100,501
Minority interest 4,849 --
----------- -----------
Net income $ 100,835 $ 100,501
============ ============
Net income applicable to common shares $ 93,788 $ 94,504
============ ============
Earnings per common share:
Primary $ 0.99 $ 0.96
Fully diluted $ 0.95 $ 0.92
Weighted-average common shares:
Primary 94,601,898 98,007,758
Fully diluted 100,722,147 104,465,206
Dividends declared per common share $ 0.15 $ 0.12
</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>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 244,991 $ 383,856
Cash and securities segregated and on deposit for
federal and other regulations 504,391 499,761
Trading assets, at fair value 17,995,295 16,823,307
Securities purchased under agreements to resell 23,059,736 20,746,831
Securities borrowed 8,778,900 7,380,374
Receivables:
Clients, net of allowance for doubtful accounts of
$20,449 and $12,109 at March 31, 1997 and
December 31, 1996, respectively 4,558,307 4,327,996
Brokers and dealers 274,650 273,737
Dividends and interest 347,857 350,796
Fees and other 138,369 136,545
Office equipment and leasehold improvements,
net of accumulated depreciation and amortization
of $357,085 and $343,322 at March 31, 1997 and
December 31, 1996, respectively 313,029 313,261
Other assets 1,415,840 1,277,036
------------ ------------
$ 57,631,365 $ 52,513,500
============ ============
Liabilities and Stockholders' Equity
Short-term borrowings $ 1,764,905 $ 1,337,646
Trading liabilities, at fair value 8,279,465 6,621,891
Securities sold under agreements to repurchase 30,893,690 28,797,276
Securities loaned 4,614,652 3,459,860
Payables:
Clients 4,658,180 4,883,344
Brokers and dealers 211,100 205,437
Dividends and interest 282,260 285,341
Other liabilities and accrued expenses 1,097,207 1,290,555
Accrued compensation and benefits 492,477 737,376
---------- ----------
52,293,936 47,618,726
Long-term borrowings 2,976,779 2,781,694
---------- ----------
55,270,715 50,400,420
---------- ----------
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding solely
Company Guaranteed Related Subordinated Debt 393,750 195,000
Redeemable Preferred Stock 187,908 187,655
Stockholders' Equity:
Convertible Preferred Stock 100,000 100,000
Common stock, $1 par value, 200,000,000 shares authorized;
issued 108,804,040 shares and 108,358,178 shares at
March 31, 1997 and December 31, 1996, respectively 108,804 108,358
Additional paid-in capital 942,676 913,927
Retained earnings 1,089,142 1,009,448
--------- ---------
2,240,622 2,131,733
Treasury stock, at cost; 17,158,361 shares at March 31, 1997
and 15,366,234 shares at December 31, 1996, respectively (402,868) (331,907)
Unamortized cost of restricted stock (54,327) (67,533)
Foreign currency translation adjustment (4,435) (1,868)
------------ ------------
1,778,992 1,730,425
------------ ------------
$ 57,631,365 $ 52,513,500
============ ============
</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>
Three Months Ended
March 31,
--------------------------------
1997 1996
------------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 100,835 $ 100,501
Adjustments to reconcile net income to cash
used for operating activities:
Noncash items included in net income:
Depreciation and amortization 17,350 15,058
Deferred income taxes 15,395 114,095
Amortization of deferred charges 43,806 41,397
Other 23,392 11,670
(Increase) decrease in operating receivables:
Clients (221,971) (140,123)
Brokers and dealers (913) (589,291)
Dividends and interest 2,939 (9,605)
Fees and other (1,824) (28,163)
Increase (decrease) in operating payables:
Clients (225,164) (14,083)
Brokers and dealers 5,663 674,537
Dividends and interest (3,081) (9,914)
Other (443,501) (408,594)
Increase in:
Trading assets (1,171,988) (186,972)
Securities purchased under agreements to resell (2,312,905) (3,697,713)
Securities borrowed (1,398,526) (261,867)
Cash and securities on deposit (4,630) (29,457)
Other assets (189,472) (145,569)
Increase in:
Trading liabilities 1,657,574 772,247
Securities sold under agreements to repurchase 2,096,414 2,903,669
Securities loaned 1,154,792 380,929
----------- -----------
Cash used for operating activities (855,815) (507,248)
----------- -----------
Cash flows from investing activities:
(Payments for) proceeds from:
Sales of investments -- 122,032
Office equipment and leasehold improvements (16,290) (11,727)
----------- -----------
Cash (used for) provided by investing activities (16,290) 110,305
----------- -----------
Cash flows from financing activities:
Net proceeds from short-term borrowings 427,259 348,854
Proceeds from:
Long-term borrowings 261,299 113,436
Employee stock transactions 28,727 12,929
Issuance of Preferred Trust Securities 198,750 --
Payments for:
Long-term borrowings (66,733) (31,235)
Repurchases of common stock (95,174) (93,342)
Dividends (20,888) (18,895)
----------- -----------
Cash provided by financing activities 733,240 331,747
----------- -----------
Decrease in cash and cash equivalents (138,865) (65,196)
Cash and cash equivalents, beginning of period 383,856 222,497
----------- -----------
Cash and cash equivalents, end of period $ 244,991 $ 157,301
=========== ===========
</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 March 31, 1997 and 1996 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, 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 certain employees and non-employee directors
with an exercise price equal to 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, accordingly, recognizes no compensation expense related to such
grants.
Accounting Changes
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 introduces the financial-components approach which focuses on the
recognition of financial assets an entity controls and the derecognition of
financial assets for which control has been transferred. This statement is
effective for certain types of transactions occurring after December 31, 1996,
including securitizations, sales of mortgages and other receivables. For the
quarter ended March 31, 1997, the Company has adopted this portion of the
provision, and this provision did not have a material impact on the Company's
Consolidated Financial Statements, taken as a whole. The FASB has deferred the
effective date of accounting for other types of transfers of financial assets,
including repurchase agreements and securities lending transactions, until
January 1, 1998. The Company does not expect the adoption of the deferred
portion of this Statement to have a material impact on the Company's
Consolidated Financial Statements, taken as a whole.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which allows an entity to continue to measure compensation cost
for employee stock compensation plans in accordance with APB No. 25 or adopt the
fair value based method of accounting prescribed by SFAS No. 123. Entities
electing to continue to apply APB No. 25 must disclose pro forma net income and
earnings per share using the fair value method. The Company has elected to
continue to account for stock option grants under APB No. 25, however, the
disclosure requirements do not apply to interim financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which is
effective for financial statements issued for periods ending after December 15,
1997 and requires restatement of all prior periods. SFAS No. 128 was issued to
simplify the standards for calculating earnings per share ("EPS") previously
found in APB No. 15, "Earnings Per Share." Under the new requirements for
calculating EPS, the presentation of primary EPS will be replaced with basic EPS
and fully diluted EPS will be replaced with diluted EPS. Basic EPS excludes
dilution and is calculated by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS will reflect all potential dilutive securities (similar to fully
diluted EPS under APB No. 15). For the quarters ended March 31, 1997 and 1996,
basic EPS would have been $0.09 higher than the amounts reported as primary EPS;
the difference between diluted and fully diluted would not have been material.
5
<PAGE> 7
Notes to Consolidated Financial Statements (Continued)
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 March 31, 1997 and December 31, 1996, the fair values of long-term borrowings
were $2,942,404 and $2,813,699, respectively, as compared to the carrying
amounts of $2,976,779 and $2,781,694, respectively. The estimated fair value of
long-term borrowings is based upon quoted market prices for the same or similar
issues and pricing models. However, for substantially all of its fixed rate
debt, the Company enters into interest rate swap agreements to convert its fixed
rate payments into floating rate 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 $69,862 and $21,170 payable at March 31, 1997 and December 31, 1996,
respectively. The carrying amounts of the interest rate swap agreements at March
31, 1997 and December 31, 1996 were net receivables of $2,679 and $3,252,
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>
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Trading assets:
U.S. government and agency obligations $ 6,302,742 $ 4,767,991
Mortgages and mortgage-backed securities 6,077,878 5,968,704
Corporate debt securities 3,126,716 3,284,235
Commercial paper and other short-term debt 1,003,155 1,457,226
Corporate equity securities 768,840 776,352
State and municipal obligations 715,964 568,799
----------- -----------
$17,995,295 $16,823,307
=========== ===========
Trading liabilities:
U.S. government and agency obligations $ 6,519,444 $ 5,118,658
Corporate equity securities 805,889 756,686
Corporate debt securities 747,041 672,683
Mortgages and mortgage-backed securities 183,550 53,845
State and municipal obligations 23,541 20,019
----------- -----------
$ 8,279,465 $ 6,621,891
=========== ===========
</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.
6
<PAGE> 8
Notes to Consolidated Financial Statements (Continued)
Short-term borrowings at March 31, 1997 and December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Commercial paper $ 615,733 $ 688,910
Bank loans and other 999,172 648,736
Medium-Term Notes 150,000 --
---------- ----------
$1,764,905 $1,337,646
========== ==========
</TABLE>
Note 5: Long-Term Borrowings
Long-term borrowings at March 31, 1997 and December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Fixed Rate Notes due 1998 - 2014 $1,547,503 $1,547,398
Fixed Rate Subordinated Notes due 2002 174,522 174,500
Medium-Term Senior Notes 975,975 747,725
Medium-Term Subordinated Notes 251,150 276,150
Other 27,629 35,921
---------- ----------
$2,976,779 $2,781,694
========== ==========
</TABLE>
At March 31, 1997, 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 March 31, 1997 was 7.52%.
Interest on the notes is payable semi-annually.
At March 31, 1997, the Company had outstanding $853,175 of fixed rate
Medium-Term Notes and $373,950 of variable rate Medium-Term Notes. The
Medium-Term Notes outstanding at March 31, 1997 had an average maturity of 4.9
years and a weighted average interest rate of 6.93%.
Total interest payments relating to agreements to repurchase, short-term
borrowings, securities loaned and long-term borrowings were $545,938 and
$477,305 for the three months ended March 31, 1997 and 1996, respectively.
Note 6: Preferred Stock
Preferred stock, including preferred securities issued by subsidiary trusts, at
March 31, 1997 and December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
9% Cumulative Redeemable Preferred Stock,
Series C, $100.00 liquidation value; 2,500,000
shares authorized, issued and outstanding $187,908 $187,655
6% Cumulative Convertible Redeemable Preferred
Stock, Series A, $100.00 liquidation value; 1,000,000
shares authorized, issued and outstanding $100,000 $100,000
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding solely
Company Guaranteed Related Subordinated Debt $393,750 $195,000
</TABLE>
7
<PAGE> 9
Notes to Consolidated Financial Statements (Continued)
Preferred Securities Issued by Subsidiary Trusts
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts holding solely Company Guaranteed Related Subordinated Debt
In March 1997, PWG Capital Trust II, a business trust formed under Delaware law
and a wholly owned subsidiary of the Company, issued $198,750 (7,950,000
securities) of 8.08% Preferred Trust Securities to the public at $25.00 per
security and $6,147 (245,877 securities) of 8.08% Common Trust Securities to the
Company at $25.00 per security.
In December 1996, PWG Capital Trust I, a business trust formed under Delaware
law and wholly owned subsidiary of the Company, issued $195,000 (7,800,000
securities) of 8.30% Preferred Trust Securities to the public at $25.00 per
security and $6,031 (241,238 securities) of 8.30% Common Trust Securities to the
Company at $25.00 per security.
PWG Capital Trust I and II each exists for the sole purpose of issuing
Preferred Trust Securities and Common Trust Securities (the "Trust Securities")
and investing the proceeds in an equivalent amount of junior subordinated
debentures of the Company. At March 31, 1997, the sole assets of PWG Capital
Trust I and II, respectively, were $201,031 of 8.30% Junior Subordinated
Debentures due December 1, 2036 and $204,897 of 8.08% Junior Subordinated
Debentures due March 1, 2037 (collectively, the "Junior Subordinated
Debentures"). The Company guarantees payments due from PWG Capital Trust I and
II to the holders of the Preferred Trust Securities, on a subordinated basis,
to the extent the Company has made principal and interest payments on the
Junior Subordinated Debentures. These guarantees, together with the Company's
obligations under the Junior Subordinated Debentures, provide a full and
unconditional guarantee on a subordinated basis of amounts due on the Preferred
Trust Securities. Distributions on the Preferred Trust Securities have been
classified as minority interest in the Company's Consolidated Statement of
Income. The Trust Securities have a stated liquidation value of $25.00 per
security.
Note 7: Common Stock
On May 1, 1997, the Board of Directors declared a regular quarterly
dividend on the Company's common stock of $0.15 per share payable on July 3,
1997 to stockholders of record on June 3, 1997. As of March 31, 1997, the
Company had 35,036,545 authorized shares of common stock reserved for
issuance in connection with convertible securities and stock option and stock
award plans.
Note 8: 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 March 31, 1997, PWI's net capital of
$1,078,573 was 18% of aggregate debit items and its net capital in excess of the
minimum required was $958,766.
Note 9: 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
8
<PAGE> 10
Notes to Consolidated Financial Statements (Continued)
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 consolidated 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 Statements of
Financial Condition and are indicative only of the volume of activity at March
31, 1997 and December 31, 1996. 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
--------------------------------------------------------------
March 31, 1997 December 31, 1996
--------------------------------------------------------------
Purchases Sales Purchases Sales
--------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $18,126,310 $21,000,318 $13,443,158 $16,383,162
Foreign currency forward contracts,
futures contracts, and options
written and purchased 1,638,101 1,662,126 440,864 434,072
Equity securities contracts including
futures, forwards, and options written
and purchased 545,384 856,795 442,500 888,784
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 4,722,355 4,258,314 2,916,929 3,183,749
Interest rate swaps and caps 391,046 325,670 438,562 415,597
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of March 31, 1997 and December 31, 1996. 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 principal transactions revenues as incurred. The
amounts are netted by counterparty only when the criteria of FASB Interpretation
No. 39, "Offsetting of Amounts Related to Certain Contracts," are met.
9
<PAGE> 11
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
Fair Value at Fair Value at
March 31, 1997 December 31, 1996
----------------------------------- ----------------------
Assets Liabilities Assets Liabilities
-------------- ----------------- ------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $208,600 $177,396 $78,800 $ 50,480
Foreign currency forward contracts,
futures contracts, and options
written and purchased 31,983 31,583 21,857 21,647
Equity securities contracts including
futures, forwards, and options written
and purchased 52,098 38,006 56,679 30,919
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 11,161 117,853 15,431 131,088
Interest rate swaps and caps 10,670 4,828 12,654 8,216
</TABLE>
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended March 31, 1997
and the twelve months ended December 31, 1996. 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
March 31, 1997 December 31, 1996
---------------------------------------- ----------------------
Assets Liabilities Assets Liabilities
------------------ ------------------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $125,036 $114,252 $150,053 $145,396
Foreign currency forward contracts,
futures contracts, and options
written and purchased 36,254 35,778 37,872 43,132
Equity securities contracts including
futures, forwards, and options written
and purchased 49,159 28,973 34,583 20,699
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 8,000 129,313 25,027 90,877
Interest rate swaps and caps 10,976 5,024 5,407 1,782
</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
Statements of Financial Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At March 31, 1997 approximately 99% of the off-balance-sheet derivative trading
financial instruments had remaining maturities of less than one year.
10
<PAGE> 12
Notes to Consolidated Financial Statements (Continued)
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 Statements of Financial Condition and amounted to
$314,512 and $185,421 at March 31, 1997 and December 31, 1996, 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 revenues by
business activity for the three months ended March 31, 1997 and 1996. Principal
transaction revenues include realized and unrealized gains and losses on trading
positions, including hedges. In assessing the profitability of its trading
activities, the Company views net interest and principal transactions revenues
in the aggregate.
<TABLE>
<CAPTION>
Principal Transaction Revenue
-----------------------------
Three Months
Ended March 31,
---------------
1997 1996
-------- --------
<S> <C> <C>
Taxable fixed income (includes futures and options contracts, mortgage-backed
forwards, foreign currency forwards, and other securities) $132,591 $157,483
Equities (includes equity index futures, equity index options and swaps, and
equity options contracts) 93,285 106,022
Municipals 30,660 32,871
-------- --------
$256,536 $296,376
======== ========
</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 March
31, 1997 and December 31, 1996, the Company had outstanding interest rate swap
agreements with commercial banks with notional principal amounts of $2,495,925
and $2,112,200, respectively. These agreements effectively converted
substantially all of the Company's fixed rate debt at March 31, 1997 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
$3,120 and $1,921 for the three months ended March 31, 1997 and 1996. 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 March 31, 1997 and
December 31, 1996. 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 10: 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
11
<PAGE> 13
Notes to Consolidated Financial Statements (Continued)
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 stress
testing. These results are compared to established 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, 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 March 31, 1997, 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 March 31, 1997 were
settled without material adverse effect on the Company's consolidated financial
statements, taken as a whole.
12
<PAGE> 14
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.
Note 11: Commitments and Contingencies
At March 31, 1997 and December 31, 1996, the Company was contingently liable
under unsecured letters of credit totaling $154,458 and $303,543, respectively,
which approximates fair value. At March 31, 1997, certain of the Company's
subsidiaries were contingently liable as issuer of $85,517 of notes payable to
managing general partners of various limited partnerships pursuant to Internal
Revenue Service guidelines. There is no market for these contingent liabilities,
therefore, it is not practicable to estimate their fair value. In addition, as
part of the 1995 limited partnership settlements, 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 contingencies 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 certain specific circumstances. At March 31, 1997,
$55,709 had been loaned to the limited partnerships.
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 March 31, 1997, the Company had outstanding $31,521 of such
standby letters of credit. At March 31, 1997 and December 31, 1996, securities
with fair value of $229,857 and $215,286, respectively, had been loaned or
pledged as collateral for securities borrowed of approximately equal fair value.
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, 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 March 31, 1997, the unused portion of such lines of credit amounted
to $636,031, relating to commercial real estate commitments. Settlement of these
transactions at March 31, 1997 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.
13
<PAGE> 15
Notes to Consolidated Financial Statements (Continued)
Note 12: 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
March 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Tax at statutory federal rate 35.0% 35.0%
State and local income taxes,
net of federal tax benefit 4.0 4.3
Foreign rate differential (1.1) (0.8)
Nontaxable dividends & interest (0.8) (1.0)
Minority interest (1.1) --
Other, net (0.1) (2.5)
---- ----
35.9% 35.0%
==== ====
</TABLE>
Income taxes paid were $102,598 and $47,742 for the three months ended March 31,
1997 and 1996, respectively.
Note 13: Earnings Per Common Share
For the three months ended March 31, 1997 and 1996, the Company computed its
earnings per common share under the modified treasury stock method in accordance
with APB Opinion No. 15, "Earnings Per Share", 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
convertible preferred stock, and restricted stock outstanding.
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 were generally favorable for the securities industry for the
first two months of 1997 before experiencing a market decline in March. Overall,
there was considerable volatility in financial markets in the first quarter of
1997. U.S. economic growth was strong during the quarter and the Federal Reserve
pursued a more restrictive monetary policy. During the quarter the yield on the
30-year Treasury bond increased from 6.62% to 7.10% and the yield on 90-day
Treasury bills increased from 5.21% to 5.33%. Stock prices were volatile, with
the S&P 500 Index appreciating 6.8% during the first two months of the quarter
but declining 4.3% in March. Trading was active during the quarter, with average
daily volume on the New York Stock Exchange of 515 million shares, versus 428
million shares in the first quarter of 1996.
14
<PAGE> 16
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Quarter Ended March 31, 1997 compared to Quarter Ended March 31, 1996
The Company's net income for the quarter ended March 31, 1997 was $100.8
million, or $0.99 per primary share ($0.95 per fully diluted share) compared to
net income of $100.5 million, or $0.96 per primary share ($0.92 per fully
diluted share) earned during the first quarter of 1996. During the first quarter
of 1997, revenues, net of interest expense, were $984.8 million, 2.3% higher
than the first quarter of 1996.
Commission revenues earned during the first quarter of 1997 were $370.4 million,
slightly higher than the $368.2 million earned during the prior year quarter.
Commissions on the sale of over-the-counter securities increased $5.2 million or
16.2% and mutual funds and insurance commissions increased $3.0 million or 3.0%.
These increases were partially offset by a decline in listed securities and
options commissions.
Principal transactions revenues decreased $39.8 million, or 13.4%, principally
reflecting lower results in taxable fixed income securities and equities.
Asset management fees increased 12.4% to $121.0 million, due to higher revenues
earned on managed or "wrap" and trust accounts. Average assets in wrap and trust
accounts during the first quarter of 1997 were approximately 35% higher than
during the first quarter of 1996. The average assets under management in money
market, institutional and long-term mutual funds were approximately $44.4
billion during the first quarter of 1997 and approximately $45.4 billion during
the first quarter of 1996.
Investment banking revenues were $97.8 million, 19.4% higher than the $81.9
million earned during the first quarter of 1996. The current year quarter
reflects an increase in financial advisory activity and increased level of
corporate securities and municipal underwritings.
Net interest increased $23.0 million, or 29.5% primarily due to increased margin
lending to customers and an increased level of fixed income positions offset by
higher interest expense on increased borrowings.
Compensation and benefits for the quarter ended March 31, 1997 were $574.0
million as compared to $567.0 million during the prior year quarter.
Compensation increased primarily due to normal salary increases. Compensation
and benefits as a percent of net revenues were 58.3% during the first quarter of
1997, as compared to 58.9% during the comparable period in 1996.
All other operating expenses were $245.9 million, as compared to $241.0 million
for the prior year quarter. Principal drivers of the increase in
non-compensation costs were technology costs associated with preparations for
the millenium, as well as increased legal fees.
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 highly liquid balance sheet with the majority of assets
consisting of trading assets, securities purchased under agreements to resell,
securities borrowed, 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 March 31, 1997 were $57.6 billion compared to
$52.5 billion at December 31, 1996, reflecting increases primarily in securities
purchased under agreements to resell, securities borrowed and securities
inventory. 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 long-term borrowings.
The Company maintains committed and uncommitted credit facilities from a diverse
group of banks. The Company has a committed unsecured senior revolving credit
agreement to provide up to $1.2 billion through December 1997. Certain of the
Company's subsidiaries have a committed secured revolving credit facility to
provide up to an aggregate of $750.0 million through August 1997, with
provisions for renewal through August 2000. The secured borrowings under this
facility can be collateralized using a variety of financial instruments. The
facilities are available for general corporate purposes. At March 31, 1997,
there were no outstanding borrowings under these credit facilities.
Additionally, the Company had approximately $4.9 billion in uncommitted lines of
credit at March 31, 1997.
The Company maintains public shelf registration statements with the SEC for the
issuance of debt securities. During the first quarter of 1997, the Company
issued $246.5 million of Medium-Term Senior Notes under these registration
statements. At March 31, 1997, the Company had approximately $2.1 billion in
debt securities available for issuance under these registration statements.
In October 1996, the Company filed a shelf registration statement with the SEC
to issue up to an aggregate of $500.0 million of preferred trust securities of
PWG Capital Trusts I, II, III, and IV ("Preferred Trust Securities"), business
trusts formed under the Delaware law which are wholly owned subsidiaries of the
Company, and debt securities of the Company. In December 1996, PWG Capital Trust
I issued $195.0 million of 8.30% Preferred Trust Securities, and in January
1997, PWG Capital Trust II issued $198.5 million of 8.08% Preferred Trust
Securities, under this registration statement. At March 31, 1997, $106.5 million
in Preferred Trust Securities of the remaining business trusts and debt
securities of the Company were available for issuance under this registration
statement. (For further discussion on the Preferred Trust Securities, see Note 6
in the Company's Notes to Consolidated Financial Statements.)
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. The Company's total
capital base, which includes long-term borrowings, preferred stock and
stockholders' equity, grew to $5.3 billion at March 31, 1997, an increase of
$442.7 million from December 31, 1996. The growth in capital is primarily due to
the net increase in long-term borrowings of $195.1 million, the issuance of
$198.5 million of Preferred Trust Securities and an increase in stockholders'
equity of $48.6 million.
16
<PAGE> 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The increase in long-term borrowings primarily reflects the net issuance of
medium term notes. The increase in stockholders' equity is primarily the result
of net income for the three months ended March 31, 1997 of $100.8 million, the
issuance of approximately 1,998,000 shares of common stock related to employee
compensation programs for $28.7 million, and net amortization of restricted
stock awards of $13.2 million. These increases were offset by the repurchase of
approximately 2,876,000 shares of common stock for $95.2 million and dividends
accrued of $20.9 million. At March 31, 1997, the remaining number of shares
authorized to be repurchased under the Company's common stock repurchase program
was approximately 11.1 million.
PWI is subject to the net capital requirements of the Securities and Exchange
Commission, 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 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 and commercial real estate 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.
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 March 31, 1997, the Company held
$207.9 million of high-yield securities, with approximately 42% 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 three months ended March 31, 1997 and
1996, the Company recorded pre-tax trading revenues on transactions in
high-yield securities of $1.8 million and $2.7 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, certain option
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 $56.0 billion and $41.1 billion at March 31, 1997
and December 31, 1996, respectively. These amounts included $36.8 billion and
$22.4 billion, respectively, related to "to be announced" mortgage-backed
securities requiring forward settlement.
For a more detailed discussion and disclosure on derivative financial
instruments, see Note 9 "Financial Instruments with Off-Balance-Sheet Risk" and
Note 10 "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 $168 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 $168 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $168 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 10-K for the year ended December 31, 1996.
In Re NASDAQ Market-Maker Antitrust Litigations
In Re NASDAQ Market-Maker Antitrust Litigation, the United States District
Court for the Southern District of New York granted plaintiffs' motion for
certification of a class that includes institutional investors, as well as the
retail investors previously certified.
The Stipulation and Order among various firms, including PaineWebber
Incorporated, and the United States Department of Justice resolving a civil
complaint filed by the Department of Justice has been approved by the United
States District Court of the Southern District of New York.
Limited Partnership Class Actions
A notice of appeal to the Federal Court of Appeals has been filed from the
judgment approving the settlement by the same investors who objected in the
District Court.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Proxies for the Annual Meeting of Stockholders held on May 1, 1997 were
solicited by the Company pursuant to Regulation 14A of the Securities
Act of 1934, as amended.
(c) Matters voted upon at the Annual Meeting of Stockholders:
(1) The election of five directors to the Board of Directors to hold
office for a term of three years. There was no solicitation in opposition of the
nominees and all such nominees were elected. There were no broker non-votes
with respect to the election of Directors.
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
E.G. Bewkes, Jr. 72,366,108 683,125
F.P. Doyle 72,398,557 650,676
N. Kiyono 72,406,433 642,800
E. Randall, III 72,378,089 671,144
Y. Seki 69,796,271 3,252,962
</TABLE>
(2) The ratification of the selection by the Board of Directors of
Ernst & Young LLP as the Company's independent public accountants for the 1997
fiscal year.
<TABLE>
<S> <C>
Votes for: 72,765,123
Votes against: 119,610
Abstentions: 164,500
Broker Non-Votes: 0
</TABLE>
18
<PAGE> 20
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
19
<PAGE> 21
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Paine Webber Group Inc.
--------------------------
(Registrant)
Date: May 15, 1997 By: /s/ Regina A. Dolan
-------------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
20
<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 March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Primary:
Weighted-average common shares outstanding 86,898,693 89,810,621
Incremental stock options and awards 7,703,205 8,197,137
------------- -------------
Weighted-average common and common
equivalent shares 94,601,898 98,007,758
============= ==============
Net income $ 100,835 $ 100,501
Interest savings on convertible debentures and
short-term borrowings 331 1,326
Preferred dividend requirements (7,378) (7,323)
------------- -------------
Net income applicable to common shares $ 93,788 $ 94,504
============= =============
Primary earnings per common share $ 0.99 $ 0.96
============= =============
Fully Diluted:
Weighted-average common shares outstanding 86,898,693 89,810,621
Incremental stock options and awards 8,203,229 8,197,137
Weighted-average common shares issuable
assuming conversion of 8% Convertible
Debentures and 6% Cumulative
Convertible Redeemable Preferred Stock 5,620,224 6,457,448
------------- --------------
Weighted-average common and common
equivalent shares 100,722,146 104,465,206
============= ==============
Net income $ 100,835 $ 100,501
Interest savings on convertible debentures and
short-term borrowings 350 1,144
Preferred dividend requirements (5,878) (5,823)
------------- --------------
Net income applicable to common shares $ 95,307 $ 95,822
============= ==============
Fully diluted earnings per common share $ 0.95 $ 0.92
============= ==============
</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>
Three Months Years Ended December 31,
Ended March 31, ----------------------------------------------------------------------
1997 * 1996 * 1995 1994 1993 1992
------ ------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $160,055 $ 558,999 $ 102,677 $ 44,385 $ 407,576 $ 339,115
-------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 11,310 43,712 36,260 1,710 5,828 27,789
-------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 542,857 1,971,788 1,969,811 1,428,653 1,130,712 879,242
Interest factor in rents 14,248 54,537 59,491 51,102 50,133 45,962
-------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 557,105 2,026,325 2,029,302 1,479,755 1,180,845 925,204
-------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 568,415 2,070,037 2,065,562 1,481,465 1,186,673 952,993
-------- ---------- ---------- ---------- ---------- ----------
Income before taxes and fixed charges $717,160 $2,585,324 $2,131,979 $1,524,140 $1,588,421 $1,264,319
======== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred stock dividends 1.3 1.2 1.0 1.0 1.3 1.3
======== ========== ========== ========== ========== ==========
</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, preferred trust securities and that portion of rental expense
estimated to be representative of the interest factor.
* Income before taxes includes minority interest in wholly owned subsidiary
trusts.
<PAGE> 1
Exhibit 12.2
Paine Webber Group Inc.
Computation of Ratio of Earnings to Fixed Charges
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Years Ended December 31,
Ended March 31, ---------------------------------------------------------------------
1997 * 1996 * 1995 1994 1993 1992
------ ------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $160,055 $ 558,999 $ 102,677 $ 44,385 $ 407,576 $ 339,115
-------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 542,857 1,971,788 1,969,811 1,428,653 1,130,712 879,242
Interest factor in rents 14,248 54,537 59,491 51,102 50,133 45,962
-------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 557,105 2,026,325 2,029,302 1,479,755 1,180,845 925,204
-------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
fixed charges $717,160 $2,585,324 $2,131,979 $1,524,140 $1,588,421 $1,264,319
======== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.3 1.3 1.1 1.0 1.3 1.4
======== ========== ========== ========== ========== ==========
</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, preferred trust securities and that
portion of rental expense estimated to be representative of the interest factor.
* Income before taxes includes minority interest in wholly owned subsidiary
trusts.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PAINE WEBBER GROUP INC. FOR THE THREE MONTHS ENDED MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 749,382
<RECEIVABLES> 6,735,023
<SECURITIES-RESALE> 23,059,736
<SECURITIES-BORROWED> 8,778,900
<INSTRUMENTS-OWNED> 17,995,295
<PP&E> 313,029
<TOTAL-ASSETS> 57,631,365
<SHORT-TERM> 1,764,905
<PAYABLES> 6,741,224
<REPOS-SOLD> 30,893,690
<SECURITIES-LOANED> 4,614,652
<INSTRUMENTS-SOLD> 8,279,465
<LONG-TERM> 2,976,779
581,658
100,000
<COMMON> 108,804
<OTHER-SE> 1,570,188
<TOTAL-LIABILITY-AND-EQUITY> 57,631,365
<TRADING-REVENUE> 256,536
<INTEREST-DIVIDENDS> 643,953
<COMMISSIONS> 370,386
<INVESTMENT-BANKING-REVENUES> 97,774
<FEE-REVENUE> 120,968
<INTEREST-EXPENSE> 542,857
<COMPENSATION> 574,017
<INCOME-PRETAX> 164,904
<INCOME-PRE-EXTRAORDINARY> 100,835
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,835
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.95
</TABLE>
