<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, 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 November 7, 1997 the Registrant had outstanding 132,384,135* shares of common
stock of $1 par value, after giving retroactive effect to a three-for-two common
stock split in the form of a 50% stock dividend, which is payable on November
17, 1997.
* 88,256,090 shares on a pre-split basis
<PAGE> 2
PAINE WEBBER GROUP INC.
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements.
Consolidated Statements of Income
(unaudited) for the Three Months and Nine
Months Ended September 30, 1997 and 1996. 2
Consolidated Statements of Financial
Condition (unaudited) at September 30, 1997
and December 31, 1996. 3
Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended
September 30, 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. 15-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19-20
Item 2. Change in Securities. 20
Item 6. Exhibits and Reports on Form 8-K. 20
Signature. 21
<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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 387,210 $ 306,173 $ 1,104,507 $ 1,037,053
Principal transactions 289,276 240,261 801,037 788,485
Asset management 141,707 115,614 388,002 334,661
Investment banking 128,414 93,285 337,126 277,217
Other 32,285 42,033 104,589 113,491
Interest revenue 785,564 577,882 2,176,655 1,685,531
------------ ------------ ------------ ------------
Total revenues 1,764,456 1,375,248 4,911,916 4,236,438
Interest expense 682,513 492,262 1,869,199 1,441,194
------------ ------------ ------------ ------------
Net revenues 1,081,943 882,986 3,042,717 2,795,244
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits 640,113 524,612 1,788,361 1,660,293
Office and equipment 69,341 66,781 206,165 200,755
Communications 38,083 37,725 114,052 116,237
Business development 22,174 17,705 58,984 55,221
Brokerage, clearing & exchange fees 22,068 19,134 66,130 65,874
Professional services 35,107 29,436 91,923 78,063
Other 73,485 64,278 219,299 200,544
------------ ------------ ------------ ------------
Total non-interest expenses 900,371 759,671 2,544,914 2,376,987
------------ ------------ ------------ ------------
INCOME BEFORE TAXES AND MINORITY INTEREST 181,572 123,315 497,803 418,257
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES:
Federal 47,218 33,940 128,151 110,227
State, local and foreign 13,511 9,220 41,940 35,162
------------ ------------ ------------ ------------
60,729 43,160 170,091 145,389
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 120,843 80,155 327,712 272,868
Minority interest 8,061 -- 20,971 --
------------ ------------ ------------ ------------
NET INCOME $ 112,782 $ 80,155 $ 306,741 $ 272,868
============ ============ ============ ============
Net income applicable to common shares $ 105,639 $ 73,695 $ 285,399 $ 254,202
============ ============ ============ ============
Earnings per common share: *
Primary $ 0.74 $ 0.52 $ 1.98 $ 1.78
Fully diluted $ 0.70 $ 0.50 $ 1.88 $ 1.70
Weighted-average common shares: *
Primary 142,567,811 140,813,666 143,885,817 142,626,913
Fully diluted 152,186,955 150,109,036 154,359,860 152,052,075
Dividends per common share * $ 0.10 $ 0.08 $ 0.30 $ 0.24
</TABLE>
* Retroactively adjusted to reflect a three-for-two common stock split in
the form of a 50% stock dividend, payable November 17, 1997 to
stockholders of record on October 24, 1997.
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,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 211,398 $ 383,856
Cash and securities segregated and on deposit for
federal and other regulations 504,972 499,761
Trading assets, at fair value 16,330,531 16,823,307
Securities purchased under agreements to resell 23,948,782 20,746,831
Securities borrowed 9,247,513 7,380,374
Receivables:
Clients, net of allowance for doubtful accounts of
$20,712 and $12,109 at September 30, 1997 and
December 31, 1996, respectively 5,282,731 4,327,996
Brokers and dealers 824,412 273,737
Dividends and interest 383,621 350,796
Fees and other 175,910 136,545
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $385,466 and $343,322 at
September 30, 1997 and December 31, 1996, respectively 320,853 313,261
Other assets 1,694,798 1,277,036
------------ ------------
$ 58,925,521 $ 52,513,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,592,445 $ 1,337,646
Trading liabilities, at fair value 7,896,190 6,621,891
Securities sold under agreements to repurchase 31,449,651 28,797,276
Securities loaned 4,693,489 3,459,860
Payables:
Clients 4,564,610 4,883,344
Brokers and dealers 458,467 205,437
Dividends and interest 353,029 285,341
Other liabilities and accrued expenses 1,414,753 1,290,555
Accrued compensation and benefits 768,588 737,376
------------ ------------
53,191,222 47,618,726
Long-term borrowings 3,295,119 2,781,694
------------ ------------
56,486,341 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 188,415 187,655
------------ ------------
Stockholders' Equity:
Convertible Preferred Stock 100,000 100,000
Common stock $1 par value, 200,000,000 shares authorized;
issued 187,882,386 shares and 162,537,267 shares at
September 30, 1997 and December 31, 1996, respectively* 187,882 162,537
Additional paid-in capital* 1,452,778 792,215
Retained earnings 1,253,742 1,009,448
Treasury stock, at cost; 55,543,830 shares and 23,049,351 shares at
September 30, 1997 and December 31, 1996, respectively* (1,131,759) (331,907)
Foreign currency translation adjustment (5,628) (1,868)
------------ ------------
1,857,015 1,730,425
------------ ------------
$ 58,925,521 $ 52,513,500
============ ============
</TABLE>
* Retroactively adjusted to reflect a three-for-two common stock split in the
form of a 50% stock dividend, payable November 17, 1997 to stockholders of
record on October 24, 1997.
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,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 306,741 $ 272,868
Adjustments to reconcile net income to cash
used for operating activities:
Noncash items included in net income:
Depreciation and amortization 52,105 45,343
Deferred income taxes (151,172) 73,440
Amortization of deferred charges 125,371 118,992
Other 47,116 19,529
(Increase) decrease in operating receivables:
Clients (946,132) (67,929)
Brokers and dealers (550,675) 73,194
Dividends and interest (32,825) (69,873)
Fees and other (39,365) (167,597)
Increase (decrease) in operating payables:
Clients (318,734) 140,692
Brokers and dealers 253,030 138,554
Dividends and interest 67,688 10,337
Other 177,918 (52,434)
(Increase) decrease in:
Trading assets 492,776 (1,578,618)
Securities purchased under agreements to resell (3,201,951) (5,549,407)
Securities borrowed (1,867,139) 170,232
Cash and securities on deposit (5,211) 11,805
Other assets (366,772) (246,304)
Increase (decrease) in:
Trading liabilities 1,274,299 759,804
Securities sold under agreements to repurchase 2,652,375 5,933,870
Securities loaned 1,233,629 (57,458)
----------- -----------
Cash used for operating activities (796,928) (20,960)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Payments for) proceeds from:
Sales of investments -- 122,032
Office equipment and leasehold improvements (59,014) (36,813)
----------- -----------
Cash (used for) provided by investing activities (59,014) 85,219
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments for) short-term borrowings 254,799 (40,041)
Proceeds from:
Long-term borrowings 704,192 234,064
Employee stock transactions 48,716 23,435
Issuance of Preferred Trust Securities 198,750 --
Payments for:
Long-term borrowings (192,346) (105,895)
Repurchase of common stock (268,942) (143,671)
Dividends (61,685) (55,282)
----------- -----------
Cash provided by (used for) financing activities 683,484 (87,390)
----------- -----------
Decrease in cash and cash equivalents (172,458) (23,131)
Cash and cash equivalents, beginning of period 383,856 222,497
----------- -----------
Cash and cash equivalents, end of period $ 211,398 $ 199,366
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
PAINE WEBBER GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands of dollars except share and per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Paine Webber Group
Inc. ("PWG") and its wholly owned subsidiaries, including its principal
subsidiary, PaineWebber Incorporated ("PWI") (collectively, the "Company"). All
material intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to prior year amounts to conform to current
year presentations. The financial information as of and for the periods ended
September 30, 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 and
the Company's Quarterly Report on Form 10-Q for the quarters ended June 30, and
March 31, 1997. The results of operations reported for interim periods are not
necessarily indicative of the results of operations for the entire year.
Trading Assets and Liabilities
Trading assets and liabilities are recorded in the Consolidated Statement of
Financial Condition on a trade date basis at September 30, 1997 and a settlement
date basis at December 31, 1996. The difference between trade date and
settlement date basis was not material.
Derivative Financial Instruments
A derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument or index such as a forward, future, swap or option
contract and other financial instruments with similar characteristics. A
derivative financial instrument also includes firm or standby commitments for
the purchase of securities. The derivative definition does not include cash
instruments whose values are derived from changes in the value of some asset or
index, such as mortgage-backed securities and structured notes. Derivative
contracts generally represent future commitments to exchange interest payment
streams based on the gross contract or notional amount or to purchase or sell
financial instruments at specified terms and future dates.
In connection with the Company's market risk management and 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.
Derivative instruments held or issued for trading purposes are marked to market
daily with the resulting unrealized gains and losses recorded on the
Consolidated Statement of Financial Condition in trading assets or liabilities
and the related profit or loss reflected in principal transactions revenues on
the Consolidated Statement of Income. The fair value of an exchange-traded
derivative, such as futures and certain option contracts, is determined by
quoted market prices while the fair value of derivatives negotiated in
over-the-counter markets are valued based upon pricing models which consider
time value and volatility, as well as other economic factors.
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 securities business, the Company has outstanding forward
purchase and sale agreements committing the Company to receive or deliver
mortgage-backed securities. These forward contracts are generally short-term
with maturity or settlement dates ranging from 30 to 90 days. The forward
contracts are marked to market daily, with unrealized gains and losses recorded
in trading assets or liabilities on the Consolidated Statement of Financial
Condition and the related profit or loss reflected in principal transactions
revenues on the Consolidated Statement of Income. The fair value of these
contracts are determined based upon quoted market prices and pricing models.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also enters into interest rate swap agreements to modify the
interest rate characteristics of its outstanding fixed rate debt. These
agreements involve the exchange of amounts based on a fixed interest rate for
amounts based on a variable interest rate over the life of the agreement without
the exchange of the notional amount upon which the payments are based. The
Company accounts for interest rate swap agreements used for hedging purposes on
the accrual method. The difference to be paid or received on the swap agreements
is accrued as an adjustment to interest expense as incurred. The related
receivable from or payable to counterparties is reflected as an asset or
liability, accordingly. The fair value of the swap agreements are not recognized
in the financial statements. Any gains and losses on early terminations of swap
agreements are deferred as an adjustment to the carrying amount of the debt and
amortized as an adjustment to interest expense over the remaining term of the
original contract life of the terminated swap agreement. In the event of the
early extinguishment of debt, any realized or unrealized gain or loss from the
related swap would be recognized in income coincident with the extinguishment.
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.
In connection with certain of the Company's employee compensation programs, a
portion of the Company's treasury shares (those expected to be issued within the
next year) are recorded in other assets on the Consolidated Statement of
Financial Condition at September 30, 1997.
Stock Split
On October 13, 1997, the Board of Directors declared a three-for-two stock split
of the Company's common stock, effected in the form of a 50% stock dividend. The
stock dividend is payable on November 17, 1997 to stockholders of record on
October 24, 1997. All share and per share data have been retroactively restated
to reflect the stock split.
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. In
December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125", which delays until January 1, 1998 the
implementation of SFAS No. 125 as it relates to 1) secured borrowings and
collateral, and 2) the transfer of financial assets that are part of repurchase
agreements, dollar-roll, securities lending and similar transactions.
Effective January 1, 1997 the Company adopted portions of SFAS No. 125 (those
not deferred by SFAS No. 127) which did not have a material impact on the
Company's consolidated financial statements, taken as a whole. The Company does
not expect the adoption of the portions of SFAS No. 125 deferred by SFAS No.
127 to have a material impact on the Company's consolidated financial
statements, taken as a whole.
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 potentially dilutive securities (similar to fully
diluted EPS under APB No. 15). If this statement had been in effect, basic EPS
would have been $0.04 higher than primary EPS for the quarters ended
September 30, 1997 and 1996, respectively, and $0.11 and $0.12 higher for the
nine month periods ended September 30, 1997 and 1996, respectively. The
difference between diluted and fully diluted would not have been material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for the reporting and display of a new
reporting item, termed comprehensive income, which will combine net income and
certain items that directly effect stockholders' equity, such as foreign
currency translation adjustments. SFAS No. 131 establishes standards for
disclosures about the Company's reportable operating segments.
6
<PAGE> 8
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 September 30, 1997 and December 31, 1996, the fair values of long-term
borrowings were $3,357,745 and $2,813,699, respectively, as compared to the
carrying amounts of $3,295,119 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.
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 $6,317 and $21,170 payable at September 30, 1997 and December 31,
1996, respectively. The carrying amounts of the interest rate swap agreements at
September 30, 1997 and December 31, 1996 were net receivables of $1,157 and
$3,252, respectively, and are included in "Dividends and interest" in the
Company's Consolidated Statement of Financial Condition. See Notes 1 and 9 for
further discussion of interest rate swap agreements used for hedging purposes.
NOTE 3: TRADING ASSETS AND LIABILITIES
Trading assets and liabilities, recorded at fair value, consisted of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Trading assets:
U.S. government and agency obligations $ 4,433,251 $ 4,767,991
Mortgages and mortgage-backed securities 6,126,345 5,968,704
Corporate debt securities 3,302,690 3,284,235
Commercial paper and other short-term debt 1,212,325 1,457,226
Corporate equity securities 754,864 776,352
State and municipal obligations 501,056 568,799
----------- -----------
$16,330,531 $16,823,307
=========== ===========
Trading liabilities:
U.S. government and agency obligations $ 6,109,155 $ 5,118,658
Corporate equity securities 797,245 756,686
Corporate debt securities 795,878 672,683
Mortgages and mortgage-backed securities 151,626 53,845
State and municipal obligations 42,286 20,019
----------- -----------
$ 7,896,190 $ 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.
Short-term borrowings at September 30, 1997 and December 31, 1996 consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Commercial paper $ 684,912 $ 688,910
Bank loans 702,533 648,736
Medium-Term Note - Fixed Rate 50,000 --
Medium-Term Notes - Variable Rate 155,000 --
---------- ----------
$1,592,445 $1,337,646
========== ==========
</TABLE>
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: LONG-TERM BORROWINGS
Long-term borrowings at September 30, 1997 and December 31, 1996 consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Fixed Rate Notes due 1998-2014 $1,543,713 $1,547,398
Fixed Rate Subordinated Notes due 2002 174,566 174,500
Medium-Term Senior Notes 1,361,685 747,725
Medium-Term Subordinated Notes 187,950 276,150
Other 27,205 35,921
---------- ----------
$3,295,119 $2,781,694
========== ==========
</TABLE>
At September 30, 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 September 30, 1997
was 7.52%. Interest on the notes is payable semi-annually.
At September 30, 1997, the Company had outstanding $945,985 of fixed rate
Medium-Term Notes and $603,650 of variable rate Medium-Term Notes, with
maturities of one year to twenty years from the date of issuance. The
Medium-Term Notes outstanding at September 30, 1997 had an average maturity of
5.0 years and a weighted-average interest rate of 6.78%.
Total interest payments relating principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings were
$1,807,115 and $1,430,878 for the nine months ended September 30, 1997 and 1996,
respectively.
NOTE 6: PREFERRED STOCK
Preferred stock, including preferred securities issued by subsidiary trusts, at
September 30, 1997 and December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
September 30, 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 $ 188,415 $ 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>
The 6% Cumulative Convertible Redeemable Preferred Stock is convertible into the
Company's common stock, in whole or in part, at the option of the holder, at a
conversion price of $12.09 per common share ($18.13 pre-split).
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 a 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.
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 30, 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 October 13, 1997 the Board of Directors declared a three-for-two stock split
of the Company's common stock, effected in the form of a 50% stock dividend. The
stock dividend is payable on November 17, 1997 to stockholders of record on
October 24, 1997. The Board of Directors also increased the effective dividend
by 10%, declaring a quarterly cash dividend of $0.11 per common share on a
post-split basis. The dividend is payable on January 2, 1998 to shareholders of
record on December 2, 1997. As of September 30, 1997, the Company had 50,096,457
(33,397,638 shares pre-split) authorized shares of common stock reserved for
issuance in connection with convertible securities and stock option and stock
award plans.
On August 20, 1997, PWG acquired a subsidiary from General Electric Capital
Services, Inc. ("GECS"), the principal asset of which consists of PWG's common
stock acquired by General Electric Company in connection with the sale of
certain assets and businesses of Kidder, Peabody Group Inc. to PWG in 1994. The
transaction involved the acquisition of 32,250,000 shares of PWG common stock
(21,500,000 shares pre-split) and the issuance of 23,250,000 shares of PWG
common stock (15,500,000 shares pre-split) and cash paid of $219,000. The
principal effect of the transaction was the repurchase of 9,000,000 shares of
PWG's common stock (6,000,000 shares pre-split) for $24.33 per share ($36.50
per share pre-split).
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 September 30, 1997, PWI's net capital of
$895,390 was 12.9% of aggregate debit items and its net capital in excess of the
minimum required was $750,838.
NOTE 9: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
In order to measure derivative activity, notional or contract amounts are
frequently utilized. Set forth on the following page are the gross contract or
notional amounts of the Company's outstanding 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 September 30, 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.
9
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Notional or Contract Amount
--------------------------------------------------------
September 30, 1997 December 31, 1996
-------------------------- --------------------------
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $22,066,885 $25,135,382 $13,443,158 $16,383,162
Foreign currency forward contracts,
futures contracts, and options
written and purchased 1,110,871 1,090,083 440,864 434,072
Equity securities contracts including
futures, forwards, and options written
and purchased 672,892 1,059,214 442,500 888,784
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 2,521,623 3,724,874 2,916,929 3,183,749
Interest rate swaps and caps 106,693 111,575 438,562 415,597
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of September 30, 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 on the
Consolidated Statement of Income 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.
<TABLE>
<CAPTION>
Fair Value at Fair Value at
September 30, 1997 December 31, 1996
--------------------- ---------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $143,536 $156,101 $ 78,800 $ 50,480
Foreign currency forward contracts,
futures contracts, and options
written and purchased 22,611 22,468 21,857 21,647
Equity securities contracts including
futures, forwards, and options written
and purchased 94,098 51,376 56,679 30,919
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 9,709 36,839 15,431 131,088
Interest rate swaps and caps 4,509 2,122 12,654 8,216
</TABLE>
10
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended September 30,
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
September 30, 1997 December 31, 1996
--------------------- ---------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $125,563 $124,788 $150,053 $145,396
Foreign currency forward contracts,
futures contracts, and options
written and purchased 29,979 30,317 37,872 43,132
Equity securities contracts including
futures, forwards, and options written
and purchased 72,742 41,543 34,583 20,699
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 15,388 50,481 25,027 90,877
Interest rate swaps and caps 3,121 4,932 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. See Note 1 for further discussion of
derivative financial instruments.
The off-balance-sheet derivative trading transactions are generally short-term.
At September 30, 1997 approximately 98% of the off-balance-sheet derivative
trading financial instruments had remaining maturities of less than one year.
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
$274,463 and $185,421 at September 30, 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 transactions revenues by
business activity for the three months and nine months ended September 30, 1997
and 1996. Principal transactions 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 Transactions Revenues
--------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Taxable fixed income (including futures and options contracts,
mortgage-backed forwards, foreign currency forwards,
and other securities) $146,444 $116,716 $398,210 $395,357
Equities (includes equity index futures, equity index options
and swaps, and equity options contracts) 110,521 86,806 302,217 282,251
Municipals 32,311 36,739 100,610 110,877
-------- -------- -------- --------
$289,276 $240,261 $801,037 $788,485
======== ======== ======== ========
</TABLE>
11
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to modify the interest
rate characteristics of substantially all its fixed rate debt. As of September
30, 1997 and December 31, 1996, the Company had outstanding interest rate swap
agreements with commercial banks with notional principal amounts of $2,595,485
and $2,112,200, respectively. These agreements effectively converted
substantially all of the Company's fixed rate debt at September 30, 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
$8,709 and $6,938 for the nine months ended September 30, 1997 and 1996. The
Company had no deferred gains or losses related to terminated swap agreements at
September 30, 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 Notes 1 and 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 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 September 30, 1997, the market value of client
securities loaned to other brokers approximated the amounts due or collateral
obtained.
12
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 30, 1997
were settled without material adverse effect on the Company's consolidated
financial statements, taken as a whole.
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 September 30, 1997 and December 31, 1996, the Company was contingently liable
under unsecured letters of credit totaling $221,569 and $303,543, respectively,
which approximates fair value. At September 30, 1997, certain of the Company's
subsidiaries were contingently liable as issuer of $46,936 of notes payable to
managing general partners of various limited partnerships pursuant to certain
partnership agreements. 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 September 30, 1997,
$59,377 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 September 30, 1997, the Company had outstanding $32,476 of such
standby letters of credit. At September 30, 1997 and December 31, 1996,
securities with fair value of $67,561 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; the
unused portion of such lines of credit amounted to $1,055,186 at September 30,
1997. These commercial real estate commitments are generally entered into at
variable rates of interest based on LIBOR. Settlement of these transactions at
September 30, 1997 would not have had a material impact on the Company's
consolidated financial statements, taken as a whole.
13
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has been named as defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
<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 3.5 3.4 3.8 4.1
Foreign rate differential 0.1 0.1 0.2 (0.7)
Nontaxable interest (1.5) (1.0) (1.1) (1.3)
Minority Interest (1.6) -- (1.5) --
Other, net (2.1) (2.5) (2.2) (2.3)
------ ------ ------ ------
33.4% 35.0% 34.2% 34.8%
====== ====== ====== ======
</TABLE>
Income taxes paid were $221,625 and $60,534 for the nine months ended September
30, 1997 and 1996, respectively.
NOTE 13: EARNINGS PER COMMON SHARE
For the three months and nine months ended September 30, 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.
The earnings per common share computation has been retroactively adjusted to
reflect the three-for-two common stock split in the form of a 50% stock
dividend, payable on November 17, 1997.
14
<PAGE> 16
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 in the
third quarter of 1997. Long-term interest rates declined during the quarter,
with the yield on the 30-year Treasury bond falling from 6.8% to 6.4%, and the
U.S. economy growing at a 3.5% GDP annual rate. The S&P 500 stock index
appreciated 7.0% during the third quarter and the NASDAQ Composite index
advanced 16.9%. Stock market volume also increased. Average daily volume on the
New York Stock Exchange was 533.3 million shares, versus 493.3 million in the
second quarter of 1997. NASDAQ average daily volume increased from 593.7 million
shares in the second quarter of 1997 to 662.5 million in the third quarter.
Market and economic conditions during the first nine months of 1997 compared
favorably with the prior year period of 1996. Long-term interest rates declined
during the first nine months, with the yield on the 30-year Treasury bond
falling twenty four basis points. The S&P 500 stock index appreciated 27.8% for
the first nine months of 1997, as compared to the 11.6% increase for the first
nine months of 1996. The NASDAQ Composite index advanced 30.6% for the first
nine months of 1997, up from the 16.6% increase for the first nine months of
1996. Stock market volume also increased. Average daily volume on the New York
Stock Exchange was 514.4 million shares for the first nine months of 1997,
versus 402.8 million shares for the prior year period. The NASDAQ average daily
volume increased from 537.2 million shares for first nine months of 1996 to
626.1 million shares for the first nine months of 1997.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1997 compared to Quarter Ended September 30, 1996
The Company's net income for the quarter ended September 30, 1997 was a record
$112.8 million, a 41% increase over the $80.2 million earned during the third
quarter of 1996. Earnings per common share after giving retroactive effect to
the three-for-two common stock split, payable November 17, 1997, were $0.74 per
primary share ($0.70 per fully diluted share) compared to $0.52 per primary
share ($0.50 per fully diluted share) earned during the third quarter of 1996.
During the third quarter of 1997, revenues, net of interest expense, were also a
record $1,081.9 million, 22.5% higher than the third quarter of 1996.
Commission revenues earned during the third quarter of 1997 were $387.2 million,
as compared to $306.2 million earned during the prior year quarter. Commissions
on the sale of listed securities and options increased $49.6 million or 27.6%,
mutual fund and insurance commissions increased $18.8 million or 21.4%, and
commissions from over-the-counter securities and other commissions increased
$12.6 million or 32.7%.
Principal transactions revenues were $289.3 million, 20.4% higher than the
$240.3 million earned in the prior year period. For financial reporting
purposes, realized and unrealized gains and losses on trading positions,
including hedges, are recorded in principal transactions revenues. The increase
from the prior year period reflects improved trading results in taxable fixed
income and equity securities partially offset by lower results in municipal
securities.
Asset management fees increased 22.6% to $141.7 million, due principally to
higher revenues earned on managed or "wrap" and trust accounts. Average assets
in wrap and trust accounts during the third quarter of 1997 were approximately
50% higher than during the third quarter of 1996. The average assets under
management in money market, institutional and long-term mutual funds were
approximately $47.9 billion during the third quarter of 1997.
Investment banking revenues were $128.4 million, 37.7% higher than the $93.3
million earned during the third quarter of 1996 reflecting principally an
increase in advisory and underwriting activities in the commercial real estate
business, and an increased level of municipal underwriting.
Net interest increased $17.4 million or 20.4%. Interest revenue was $785.6
million, 35.9% higher than the $577.9 million earned in the prior year period,
primarily due to an increased level of securities purchased under agreements to
resell and securities borrowed, and increased margin lending to customers.
Interest expense increased 38.7% to $682.5 million principally due to higher
fixed income positions and increased borrowings.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Compensation and benefits expenses for the quarter ended September 30, 1997 were
$640.1 million as compared to $524.6 million during the prior year quarter. The
increased costs reflect higher product-based compensation and higher
performance-based incentives. In addition, the third quarter 1997 compensation
costs reflect the higher number of systems professionals working on the
millennium project and other technology initiatives.
All other operating expenses were $260.3 million, as compared to $235.1 million
for the prior year quarter. The principal items driving this increase were
higher technology associated costs (related to the Millennium and other
technology initiatives), as well as higher promotional costs (including
advertising).
Nine Months Ended September 30, 1997 compared to Nine Months Ended September
30, 1996
The Company's net income for the nine months ended September 30, 1997 was a
record $306.7 million, a 12.4% increase over the $272.9 million earned during
the first nine months of 1996.
Earnings per common share after giving retroactive effect to the three-for-two
common stock split, payable November 17, 1997, were $1.98 per primary share
($1.88 per fully diluted share) compared to $1.78 per primary share ($1.70 per
fully diluted share) earned during the first nine months of 1996. During the
first nine months of 1997, revenues, net of interest expense, were a record
$3,042.7 million, as compared to $2,795.2 during the first nine months of 1996.
Commission revenues were $1,104.5 million, as compared to the $1,037.1 million
earned during the first nine months of 1996. Commissions on the sale of listed
securities and options increased $39.9 million or 6.5%, mutual fund and
insurance commissions increased $19.0 million or 6.6%, and commissions from
over-the-counter securities and other commissions increased $8.5 million or
6.3%.
Principal transactions revenues increased $12.6 million, or 1.6% from the prior
year period. For financial reporting purposes, realized and unrealized gains and
losses on trading positions, including hedges, are recorded in principal
transactions revenues. The increase from the prior year period reflects improved
trading results in taxable fixed income and equity securities partially offset
by lower results in municipal securities.
Asset management fees increased 15.9% to $388.0 million primarily due to higher
revenues earned on wrap and trust accounts and higher advisory fees earned on
money market accounts. Average assets in wrap and trust accounts during the
first nine months of 1997 were approximately 29.5% higher than during the prior
year period. The average assets under management in money market, institutional
and long-term mutual funds were approximately $46.6 billion during the first
nine months of 1997.
Investment banking revenues were $337.1 million, 21.6% higher than the $277.2
million earned during the first nine months of 1996 reflecting principally an
increase in advisory and underwriting activity and an increased level of
municipal underwriting.
Net interest increased $63.1 million or 25.8%. Interest revenue was $2,176.7
million, 29.1% higher than the $1,685.5 million earned in the prior year period
primarily due to an increased level of securities purchased under agreements to
resell and securities borrowed, and increased margin lending to customers.
Interest expense increased 29.7% to $1,869.2 million due principally to higher
fixed income positions and increased borrowings.
Compensation and benefit expenses for the nine months ended September 30, 1997
were $1,788.4 million as compared to $1,660.3 million during the prior year
period. The increased costs include higher production-based compensation to
investment executives and higher performance-based incentive compensation. In
addition, compensation increases reflect the increased number of system
professionals working on the millennium and other technology initiatives.
All other operating expenses increased 5.6% to $756.6 million. The principal
items driving this increase were higher technology associated costs (related to
the Millennium and other technology initiatives), as well as higher promotional
costs (including advertising).
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.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 assets and
liabilities 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, 1997 were $58.9 billion compared to
$52.5 billion at December 31, 1996, reflecting increases primarily in securities
purchased under agreements to resell and securities borrowed. 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. This credit
agreement is in the process of being replaced with an agreement with similar
provisions. 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 1998, 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 September 30, 1997, there were no outstanding borrowings under
these credit facilities. Additionally, the Company had approximately $5.4
billion in uncommitted lines of credit at September 30, 1997.
The Company maintains public shelf registration statements with the SEC for the
issuance of debt securities. During the third quarter of 1997, the Company
issued $313.3 million of Medium-Term Senior Notes under these registration
statements. At September 30, 1997, the Company had approximately $1.4 billion in
debt securities available for issuance under these registration statements.
The Company maintains a public shelf registration statement with the SEC for the
issuance 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. At September 30, 1997, $106.5 million in Preferred Trust Securities 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 $5.7 billion at September 30, 1997, an increase of
$839.5 million from December 31, 1996. The growth in capital is primarily due to
the net increase in long-term borrowings of $513.4 million, the issuance of
$198.8 million of Preferred Trust Securities and a net increase in stockholders'
equity of $126.6 million.
On August 20, 1997, PWG acquired a subsidiary from General Electric Capital
Services, Inc. ("GECS"), the principal asset of which consists of PWG's common
stock acquired by General Electric Company in connection with the sale of
certain assets and businesses of Kidder, Peabody Group Inc. to PWG in 1994. The
transaction involved the acquisition of 32,250,000 shares of PWG common stock
(21,500,000 shares pre-split) and the issuance of 23,250,000 shares of PWG
common stock (15,500,000 shares pre-split) and cash paid of $219,000. The
principal effect of the transaction was the repurchase of 9,000,000 shares of
PWG's common stock (6,000,000 shares pre-split) for $24.33 per share ($36.50
per share pre-split).
During 1997, the Company issued 4,347,000 (2,898,000 shares pre-split) shares of
common stock related to employee compensation programs. Activity related to
these programs had the effect of increasing equity capital by more than $154.9
million. Offsetting this increase was the repurchase of 6,699,000 (4,466,000
shares pre-split) shares of the Company's common stock (exclusive of the GECS
transaction), at an aggregate cost of $152.1 million; a portion of which (those
expected to be issued within the next year in connection with certain of the
Company's employee compensation programs) are recorded in other assets on the
Consolidated Statement of Financial Condition at September 30, 1997. Also
offsetting this increase was dividends accrued of $61.7 million. At September
30, 1997, the remaining number of common shares authorized to be repurchased by
the Company's Board of Directors was 14.3 million (9.5 million pre-split).
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 corporate debt and mortgage-backed securities, and emerging market
securities (collectively, "high yield securities"). These securities generally
involve greater risks than investment-grade 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,
1997, the Company held $442.9 million of high-yield securities, with
approximately 17% 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 principal transactions revenues on
the Consolidated Statements of Income.
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 in 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 $60.2 billion and $41.1 billion at September 30,
1997 and December 31, 1996, respectively. These amounts included $45.6 billion
and $22.4 billion, respectively, related to "to be announced" mortgage-backed
securities requiring forward settlement. Also included in these amounts were
$2.6 billion and $2.1 billion notional amounts used to hedge the Company's
long-term borrowings at September 30, 1997 and December 31, 1996, respectively.
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.
18
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in a number of proceedings concerning matters arising in
connection with the conduct of its business. Certain actions in which
compensatory damages of $176 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 $176 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $176 million. The Company has denied, or believes it has
legitimate defenses in all significant cases pending against it. The following
material developments have occurred in the cases below, which were previously
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 1996 and Quarterly Report on Form 10-Q for the quarters ended June 30, and
March 31, 1997, except with respect to the Kidder, Peabody and Co.
Incorporated matters described below.
IN RE NASDAQ MARKET-MAKER SECURITIES LITIGATIONS
On October 29, 1997, the United States Court of Appeals for the Third Circuit
held an en banc rehearing on the appeal from the District Court's grant of
defendants' motions for summary judgment in In Re Merrill Lynch, et al.
Securities Litigation.
SHORT-TERM U.S. GOVERNMENT INCOME FUND PROCEEDING
On September 2, 1997, Mitchell Hutchins Asset Management consented to the
Securities and Exchange Commission's filing of an administrative order, without
admitting or denying the matters set forth therein In the Matter of PaineWebber
Short-Term U.S. Government Fund. The SEC's order alleged that, in connection
with the PaineWebber Short-Term U.S. Government Income Fund, Mitchell Hutchins,
among other things, failed reasonably to supervise a portfolio manager, issued
false and misleading disclosures in the Fund's prospectus and certain marketing
materials, and through the Fund's portfolio manager made inappropriate
securities valuation and net asset value determinations. Mitchell Hutchins
consented to a censure and to cease and desist from further violations of the
Investment Company Act of 1940, the Investment Advisors Act of 1940, the
Securities Exchange Act of 1934 and the Securities Act of 1933, and to the
payment of a civil money penalty of $500,000. Mitchell Hutchins also agreed to
retain an outside consultant to review and make recommendations concerning
certain compliance policies and procedures.
ASKIN LITIGATION*
Kidder, Peabody & Co. Incorporated ("Kidder, Peabody"), a subsidiary of the
Company, together with other unrelated individuals and firms, has been named as
a defendant in certain actions pending in the United States District Court for
the Southern District of New York brought on behalf of individuals and two
purported classes of investors in three funds (the "Funds") managed by Askin
Capital Management, L.P. and David J. Askin (collectively, the "Askin
Parties"). The actions are Primavera Familienstiftung v. David J. Askin, et
al., Docket No. 95 Civ. 8905; ABF Capital Management, et al. v. Askin Capital
Management, L.P., Docket No. 96 Civ. 2978; Montpellier Resources, Limited et
al. v. Askin Capital Management, L.P., et al., Docket No. 97 Civ 1856; Richard
Johnston as Trustee for the Demeter Trust, et al. v. Askin Capital Management,
L.P., et al., Docket No. 97 Civ 4335. The plaintiffs have alleged, among other
things, that Kidder, Peabody and other brokerage firms aided and abetted false
and misleading representations made to investors in violation of federal and
state securities laws, used the Funds as an outlet for otherwise unmarketable
tranches of collateralized mortgage obligations, and violated various rules of
the New York Stock Exchange and National Association of Securities Dealers.
Collectively in the four lawsuits the plaintiffs claim damages of approximately
$650 million, as well as unspecified punitive damages. As a result of various
decisions by the District Court, the only claim remaining in these cases
against Kidder, Peabody is for aiding and abetting the Askin Parties' fraud on
the investors. The parties are presently engaged in pre-trial discovery. No
trial date has been set.
In a separate, but related action now pending in the United States Bankruptcy
Court for the Southern District of New York captioned ABF Capital Management, et
al. v. Kidder, Peabody & Co. Incorporated, a group of investors in the Funds
have sought to equitably subordinate, pursuant to Section 510(c) of the
Bankruptcy Code, certain recoveries received by Kidder, Peabody, amounting to
approximately $15.5 million, in connection with the settlement of Kidder,
Peabody's claims in the Funds' bankruptcy proceedings. This action is also at an
early stage; no trial date has been set.
* This item relates to a matter involving Kidder, Peabody & Co. Incorporated
which was acquired by the Company in August 1997. In connection with the
acquisition, the seller and its parent General Electric Company agreed to
indemnify the Company for all losses relating to this matter.
19
<PAGE> 21
LEGAL PROCEEDINGS (CONTINUED)
KEANE LITIGATION*
Kidder, Peabody is a defendant, along with other unrelated individuals and
entities, in Richard A. Lippe, et al. v. Bairnco Corp. et al., 96 Civ. 7600, in
the United States District Court for the Southern District of New York brought
by the Trustees of the Keene Creditors' Trust ("KCT"). This action originally
was filed on June 8, 1995 as Adversary Proceeding No. 95/9393A in the Bankruptcy
Court for the Southern District of New York. On April 10, 1997, the District
Court ordered the withdrawal of the bankruptcy court. KCT was established
pursuant to the Plan of Reorganization approved in connection with the
bankruptcy proceedings related to Keene Corporation ("Keene"). The KCT claims
against Kidder, Peabody arise from fairness opinions rendered by Kidder, Peabody
during the 1980's in connection with the sale of various businesses by Keene.
KCT alleges that Kidder, Peabody's fairness opinions intentionally or recklessly
undervalued the assets being sold. KCT further alleges that such acts
constituted aiding and abetting breaches of fiduciary duties and self-dealing by
Keene's corporate officers and directors, who are also defendants, in violation
of the New York Business Corporation Law and the Racketeer Influenced and
Corrupt Organizations Act. KCT seeks damages from Kidder, Peabody and other
unrelated individuals and firms in excess of $700 million. On September 15,
1997, Kidder, Peabody filed a motion to dismiss the complaint. KCT has not yet
filed its opposition to the motion.
ITEM 2. CHANGE IN SECURITIES
On August 20, 1997, PWG acquired a subsidiary from General Electric Capital
Services, Inc. ("GECS"), the principal asset of which consists of 32.25 million
shares (21.5 million pre-split) of common stock, par value $1.00 per share
("Common Stock"), of PWG, originally acquired by General Electric Company in
connection with the sale of certain assets and businesses of Kidder, Peabody
Group Inc. to PWG in 1994. As consideration for the acquisition, PWG paid to
GECS $219 million in cash and issued to GECS 23.25 million shares (15.5 million
pre-split) (the "Shares") of Common Stock. The issuance of the Shares was exempt
from the registration requirements of the Securities Act of 1933, as amended,
(the "Securities Act") pursuant to Section 4 (2) of the Securities Act on the
basis that such transactions did not involve a public offering.
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:
PWG filed a Current Report on Form 8-K dated August 15, 1997 with the
Securities and Exchange Commission reporting under "Item 5 - Other Events"
and "Item 7 - Exhibit" relating to the acquisition of a subsidiary of
General Electric Capital Services, Inc., the principal asset of which was
PWG common stock acquired in connection with the sale of certain assets
and businesses of Kidder, Peabody Group Inc. to PWG in 1994.
* This item relates to a matter involving Kidder, Peabody & Co. Incorporated
which was acquired by the Company in August 1997. In connection with the
acquisition, the seller and its parent General Electric Company agreed to
indemnify the Company for all losses relating to this matter.
20
<PAGE> 22
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Paine Webber Group Inc.
-----------------------
(Registrant)
Date: November 14, 1997 By: /s/ Regina A. Dolan
------------------ -----------------------
Regina A. Dolan
Vice President,
Chief Financial Officer
21
<PAGE> 23
EXHIBIT INDEX
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
<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 September 30, Nine Months September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted-average common shares outstanding 134,301,924 130,176,071 136,423,151 131,989,318
Incremental stock options and awards 8,265,887 10,637,595 7,462,666 10,637,595
------------- ------------- ------------- -------------
Weighted-average common and common
equivalent shares 142,567,811 140,813,666 143,885,817 142,626,913
============= ============= ============= =============
Net income $ 112,782 $ 80,155 $ 306,741 $ 272,868
Interest savings on convertible
debentures and
short-term borrowings 235 889 793 3,380
Preferred dividend requirements (7,378) (7,349) (22,135) (22,046)
------------- ------------- ------------- -------------
Net income applicable to common shares $ 105,639 $ 73,695 $ 285,399 $ 254,202
============= ============= ============= =============
Primary earnings per common share $ 0.74 $ 0.52 $ 1.98 $ 1.78
============= ============= ============= =============
FULLY DILUTED:
Weighted-average common shares outstanding 134,301,924 130,176,071 136,423,151 131,989,318
Incremental stock options and awards 9,611,451 10,637,595 9,611,451 10,637,595
Weighted-average common shares issuable
assuming conversion of 8% Convertible
Debentures and 6% Cumulative
Convertible Redeemable Preferred Stock 8,273,580 9,295,370 8,325,258 9,425,162
------------- ------------- ------------- -------------
Weighted-average common and common
equivalent shares 152,186,955 150,109,036 154,359,860 152,052,075
============= ============= ============= =============
Net income $ 112,782 $ 80,155 $ 306,741 $ 272,868
Interest savings on convertible debentures and
short-term borrowings 235 924 812 3,290
Preferred dividend requirements (5,878) (5,849) (17,635) (17,546)
------------- ------------- ------------- -------------
Net income applicable to common shares $ 107,139 $ 75,230 $ 289,918 $ 258,612
============= ============= ============= =============
Fully diluted earnings per common share $ 0.70 $ 0.50 $ 1.88 $ 1.70
============= ============= ============= =============
</TABLE>
Note: Share and per share data have been retroactively adjusted to give effect
to a three-for-two common stock split in the form of a 50% stock dividend, which
will become effective November 17, 1997.
<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 Years Ended December 31,
September 30,
------------- ------------------------------------------------------------------
1997* 1996* 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 476,832 $ 558,999 $ 102,677 $ 44,385 $ 407,576 $ 339,115
---------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 33,929 43,712 36,260 1,710 5,828 27,789
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,869,199 1,971,788 1,969,811 1,428,653 1,130,712 879,242
Interest factor in rents 42,483 54,537 59,491 51,102 50,133 45,962
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,911,682 2,026,325 2,029,302 1,479,755 1,180,845 925,204
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 1,945,611 2,070,037 2,065,562 1,481,465 1,186,673 952,993
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes
and fixed charges $2,388,514 $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 1.2 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 principally 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>
Nine Months
Ended
September 30, Years Ended December 31,
------------- ------------------------------------------------------------------
1997* 1996* 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 476,832 $ 558,999 $ 102,677 $ 44,385 $ 407,576 $ 339,115
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,869,199 1,971,788 1,969,811 1,428,653 1,130,712 879,242
Interest factor in rents 42,483 54,537 59,491 51,102 50,133 45,962
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,911,682 2,026,325 2,029,302 1,479,755 1,180,845 925,204
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and fixed charges $2,388,514 $2,585,324 $2,131,979 $1,524,140 $1,588,421 $1,264,319
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.2 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
principally 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 nine months ended
September 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 716,370
<RECEIVABLES> 8,361,472
<SECURITIES-RESALE> 23,948,782
<SECURITIES-BORROWED> 9,247,513
<INSTRUMENTS-OWNED> 16,330,531
<PP&E> 320,853
<TOTAL-ASSETS> 58,925,521
<SHORT-TERM> 1,592,445
<PAYABLES> 7,559,447
<REPOS-SOLD> 31,449,651
<SECURITIES-LOANED> 4,693,489
<INSTRUMENTS-SOLD> 7,896,190
<LONG-TERM> 3,295,119
582,165
100,000
<COMMON> 187,882
<OTHER-SE> 1,569,133
<TOTAL-LIABILITY-AND-EQUITY> 58,925,521
<TRADING-REVENUE> 801,037
<INTEREST-DIVIDENDS> 2,176,655
<COMMISSIONS> 1,104,507
<INVESTMENT-BANKING-REVENUES> 337,126
<FEE-REVENUE> 388,002
<INTEREST-EXPENSE> 1,869,199
<COMPENSATION> 1,788,361
<INCOME-PRETAX> 497,803
<INCOME-PRE-EXTRAORDINARY> 306,741
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306,741
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.88
</TABLE>
