<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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, NEW YORK 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 6, 1998, the Registrant had outstanding 143,039,953 shares of
common stock of $1 par value, which is the Registrant's only class of
common stock.
<PAGE> 2
PAINE WEBBER GROUP INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements.
Condensed Consolidated Statements of Income
(unaudited) for the Three and Nine Months Ended
September 30, 1998 and 1997. 2
Condensed Consolidated Statements of Financial
Condition (unaudited) at September 30, 1998
and December 31, 1997. 3
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended
September 30, 1998 and 1997. 4
Notes to Condensed Consolidated Financial Statements
(unaudited). 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 14-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 22
Item 6. Exhibits and Reports on Form 8-K. 22
Signature. 23
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAINE WEBBER GROUP INC.
CONDENSED 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,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 410,832 $ 387,210 $ 1,221,050 $ 1,104,507
Principal transactions 148,453 289,276 669,562 801,037
Asset management 184,691 141,707 525,555 388,002
Investment banking 119,629 128,414 421,285 337,126
Interest 909,168 785,564 2,572,253 2,176,655
Other 36,375 32,285 104,836 104,589
------------ ------------ ------------ ------------
Total revenues 1,809,148 1,764,456 5,514,541 4,911,916
Interest expense 777,672 682,513 2,205,920 1,869,199
------------ ------------ ------------ ------------
Net revenues 1,031,476 1,081,943 3,308,621 3,042,717
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits 616,927 640,113 1,949,590 1,788,361
Office and equipment 76,170 69,341 223,572 206,165
Communications 38,791 38,083 113,687 114,052
Business development 27,568 22,174 75,937 58,984
Brokerage, clearing & exchange fees 24,270 22,068 71,847 66,130
Professional services 30,581 35,107 94,563 91,923
Other 78,570 73,485 230,632 219,299
------------ ------------ ------------ ------------
Total non-interest expenses 892,877 900,371 2,759,828 2,544,914
------------ ------------ ------------ ------------
INCOME BEFORE TAXES AND MINORITY INTEREST 138,599 181,572 548,793 497,803
Provision for income taxes 47,646 60,729 191,482 170,091
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 90,953 120,843 357,311 327,712
Minority interest 8,061 8,061 24,183 20,971
------------ ------------ ------------ ------------
NET INCOME $ 82,892 $ 112,782 $ 333,128 $ 306,741
============ ============ =========== ============
Net income applicable to common shares (1) $ 76,980 $ 105,404 $ 315,393 $ 284,606
============ ============ ============ ============
Earnings per common share:
Basic $ 0.54 $ 0.78 $ 2.25 $ 2.09
Diluted $ 0.51 $ 0.70 $ 2.10 $ 1.88
Weighted-average common shares:
Basic 141,322,783 134,301,924 140,153,619 136,423,151
Diluted 151,356,690 152,097,987 150,538,364 154,182,923
Dividends declared per common share $ 0.11 $ 0.10 $ 0.33 $ 0.30
</TABLE>
(1) Amounts shown used to calculate basic earnings per common share.
See notes to condensed consolidated financial statements.
2
<PAGE> 4
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 209,979 $ 233,787
Cash and securities segregated and on deposit for
federal and other regulations 694,715 569,138
Trading assets 19,468,336 16,373,792
Securities received as collateral 1,811,299 --
------------ ------------
Total trading assets, at fair value 21,279,635 16,373,792
Securities purchased under agreements to resell 21,362,501 21,562,739
Securities borrowed 8,766,896 9,573,187
Receivables, net of allowance for doubtful accounts of
$27,825 and $21,315 at September 30, 1998 and
December 31, 1997, respectively 8,613,140 6,904,492
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $412,112 and $400,346 at
September 30, 1998 and December 31, 1997, respectively 401,991 334,401
Other assets 1,572,059 1,513,497
------------ ------------
$ 62,900,916 $ 57,065,033
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 2,317,741 $ 1,666,216
Trading liabilities, at fair value 7,780,312 7,102,144
Securities sold under agreements to repurchase 29,786,897 29,628,902
Securities loaned 6,131,045 4,733,961
Obligation to return securities received as collateral 1,811,299 --
Payables 6,148,640 5,663,957
Other liabilities and accrued expenses 2,280,730 2,358,511
Long-term borrowings 3,796,647 3,397,961
------------ ------------
60,053,311 54,551,652
------------ ------------
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts holding solely Company Guaranteed Related Subordinated Debt 393,750 393,750
Redeemable Preferred Stock 189,528 188,668
Stockholders' Equity:
Common stock, $1 par value, 400,000,000 shares authorized (1); issued
190,767,103 shares and 188,458,083 shares at
September 30, 1998 and December 31, 1997, respectively 190,767 188,458
Additional paid-in capital 1,481,359 1,405,329
Retained earnings 1,609,899 1,340,966
Treasury stock, at cost; 47,959,342 shares and 48,557,788 shares at
September 30, 1998 and December 31, 1997, respectively (1,014,087) (998,300)
Foreign currency translation adjustment (3,611) (5,490)
------------ ------------
2,264,327 1,930,963
------------ ------------
$ 62,900,916 $ 57,065,033
============ ============
</TABLE>
(1)On May 7, 1998, the shareholders of the Company approved an amendment to the
Company's charter which increased the number of common shares authorized for
issuance from 200,000,000 to 400,000,000 shares.
See notes to condensed consolidated financial statements.
3
<PAGE> 5
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 333,128 $ 306,741
Adjustments to reconcile net income to cash
used for operating activities:
Noncash items included in net income:
Depreciation and amortization 54,229 52,105
Deferred income taxes 19,643 (151,172)
Amortization of deferred charges 66,551 125,371
Other 77,829 47,116
(Increase) decrease in operating assets:
Cash and securities on deposit (125,577) (5,211)
Trading assets (3,094,544) 492,776
Securities purchased under agreements to resell 200,238 (3,201,951)
Securities borrowed 806,291 (1,867,139)
Receivables (1,702,138) (1,568,997)
Other assets (137,040) (366,772)
Increase (decrease) in operating liabilities:
Trading liabilities 678,168 1,274,299
Securities sold under agreements to repurchase 157,995 2,652,375
Securities loaned 1,397,084 1,233,629
Payables 484,683 1,984
Other (72,613) 177,918
----------- -----------
Cash used for operating activities (856,073) (796,928)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements (126,937) (59,014)
----------- -----------
Cash used for investing activities (126,937) (59,014)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 651,525 254,799
Proceeds from:
Long-term borrowings 673,909 704,192
Employee stock transactions 41,387 48,716
Issuance of Preferred Trust Securities -- 198,750
Payments for:
Long-term borrowings (276,875) (192,346)
Repurchases of common stock (67,410) (268,942)
Dividends (63,334) (61,685)
----------- -----------
Cash provided by financing activities 959,202 683,484
----------- -----------
Decrease in cash and cash equivalents (23,808) (172,458)
Cash and cash equivalents, beginning of period 233,787 383,856
----------- -----------
Cash and cash equivalents, end of period $ 209,979 $ 211,398
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
NOTES TO CONDENSED 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 condensed 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 December 31, 1997 Condensed
Consolidated Statement of Financial Condition was derived from the audited
consolidated financial statements of the Company. The financial information as
of and for the periods ended September 30, 1998 and 1997 is unaudited. All
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation have been made.
Certain financial information that is normally in annual financial statements
but is not required for interim reporting purposes has been condensed or
omitted. The condensed 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 condensed 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, 1997 and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, and June 30, 1998. The results of operations reported
for interim periods are not necessarily indicative of the results of operations
for the entire year.
Accounting Changes
On January 1, 1998, Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" became fully effective. Previously, the
Financial Accounting Standards Board had deferred until January 1, 1998 the
implementation of SFAS No. 125 as it related 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. The
adoption of those deferred portions of SFAS No. 125 created the following
additional captions on the Company's Consolidated Statement of Financial
Condition:
- - Securities received as collateral; and
- - Obligation to return securities received as collateral.
The balances recognized in these captions are carried at the fair market value
of the securities received and represent securities received as collateral in
term resale agreements for which the collateral provider does not have the
explicit contractual right to substitute.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SFAS No. 133
establishes revised accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity measure all
derivative instruments at fair value and recognize such instruments as either
assets or liabilities in the consolidated statements of financial condition. The
accounting for changes in the fair value of a derivative instrument depends on
the intended use of the derivative as either a fair value hedge, a cash flow
hedge or a foreign currency hedge. The effect of the changes in fair value of
the derivatives and, in certain cases, the hedged items are to be reflected in
either the consolidated statements of income or as a component of other
comprehensive income based upon the resulting designation. The Company has not
yet determined the impact of this statement on the Company's Consolidated
Financial Statements, taken as a whole.
NOTE 2: COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which established standards for the reporting and display
of comprehensive income. Comprehensive income combines net income and certain
items that directly affect stockholders' equity, such as foreign currency
translation adjustments. The adoption of SFAS No. 130 had no impact on the
Company's net income or stockholders' equity. The components of comprehensive
income for the three-month and nine-month periods ended September 30, 1998 and
1997 were as follows:
5
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 82,892 $ 112,782 $ 333,128 $ 306,741
Foreign currency translation 1,082 (1,082) 1,879 (3,760)
adjustment
--------- --------- --------- ---------
Comprehensive income $ 83,974 $ 111,700 $ 335,007 $ 302,981
========= ========= ========= =========
</TABLE>
NOTE 3: 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, 1998 and December 31, 1997, the fair values of long-term
borrowings were $3,885,811 and $3,469,950, respectively, as compared to the
carrying amounts of $3,796,647 and $3,397,961, 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 fixed rate
debt 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 net fair values of the interest rate swaps were $182,314
and $50,796 receivable at September 30, 1998 and December 31, 1997,
respectively. The carrying amounts of the interest rate swap agreements included
in the Company's Condensed Consolidated Statements of Financial Condition at
September 30, 1998 and December 31, 1997 were net receivables of $2,654 and
$7,193, respectively. See Note 8 for further discussion of interest rate swap
agreements used for hedging purposes.
NOTE 4: TRADING ASSETS AND LIABILITIES
At September 30, 1998 and December 31, 1997, trading assets and liabilities,
recorded at fair value and on a trade date basis, consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Trading assets:
U.S. government and agency obligations $ 5,597,223 $ 3,449,159
Mortgages and mortgage-backed securities 8,711,102 6,557,629
Corporate debt securities 2,619,780 3,820,317
Commercial paper and other short-term debt 1,477,473 1,410,726
State and municipal obligations 567,798 482,678
Corporate equity securities 494,960 653,283
----------- -----------
19,468,336 16,373,792
Securities received as collateral (1) 1,811,299 --
----------- -----------
$21,279,635 $16,373,792
=========== ===========
Trading liabilities:
U.S. government and agency obligations $ 5,732,824 $ 5,882,082
Mortgages and mortgage-backed securities 381,702 81,330
Corporate debt securities 1,401,448 851,413
State and municipal obligations 19,215 14,191
Corporate equity securities 245,123 273,128
----------- -----------
$ 7,780,312 $ 7,102,144
=========== ===========
</TABLE>
(1) This amount relates to the Company's adoption of the deferred portions of
SFAS No. 125.
6
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: 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, 1998 and December 31, 1997 consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Commercial paper $ 988,462 $ 606,012
Bank loans 1,037,279 808,204
Medium-Term Notes 292,000 252,000
---------- ----------
$2,317,741 $1,666,216
========== ==========
</TABLE>
NOTE 6: LONG-TERM BORROWINGS
Long-term borrowings at September 30, 1998 and December 31, 1997 consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Fixed Rate Notes due 2000 - 2014 $1,595,476 $1,547,817
Fixed Rate Subordinated Notes due 2002 174,655 174,588
Medium-Term Senior Notes 1,814,285 1,461,185
Medium-Term Subordinated Notes 186,950 186,950
Convertible Debentures and Other 25,281 27,421
---------- ----------
$3,796,647 $3,397,961
========== ==========
</TABLE>
On April 23, 1998, the Company issued $250,000 of 6.55% senior notes due 2008.
On June 15, 1998, $200,000 6-1/4% senior notes matured. On August 10, 1998, the
Company called for the redemption of the remaining 6.5% Convertible Debentures
due 2002. Such debentures were converted by the holders into 1,149,523 shares
of the Company's common stock.
At September 30, 1998, the Company had outstanding $1,273,585 of fixed rate
Medium-Term Notes and $727,650 of variable rate Medium-Term Notes. The
Medium-Term Notes outstanding at September 30, 1998 had an average maturity of
5.0 years and a weighted-average interest rate of 6.60%.
At September 30, 1998, interest rates on the fixed rate notes and fixed rate
subordinated notes range from 6-1/2% to 9-1/4% and the weighted-average interest
rate on these notes outstanding at September 30, 1998 was 7.73%. Interest on the
notes is payable semi-annually.
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were
$2,252,355 and $1,807,115 for the nine months ended September 30, 1998 and 1997,
respectively.
NOTE 7: CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission Uniform Net Capital Rule and New York Stock Exchange Growth and
Business Reduction capital requirements. Under the method of computing capital
requirements adopted by PWI, minimum net capital shall not be less than 2% of
combined aggregate debit items arising from client transactions, plus excess
margin collected on securities purchased under agreements to resell, as defined.
A reduction of business is required if net capital is less than 4% of such
aggregate debit items. Business may not be expanded if net capital is less than
5% of such aggregate debit items. As of September 30, 1998, PWI's net capital of
$1,369,801 was 16.7% of aggregate debit items and its net capital in excess of
the minimum required was $1,197,842.
7
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Condensed
Consolidated Statements of Financial Condition and are indicative only of the
volume of activity at September 30, 1998 and December 31, 1997. 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. The amounts are netted by counterparty only when
the criteria of FASB Interpretation No. 39 are met.
<TABLE>
<CAPTION>
Notional or Contract Amount
September 30, 1998 December 31, 1997
Purchases Sales Purchases Sales
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $35,721,181 $39,684,893 $20,269,175 $22,948,068
Foreign currency forward contracts,
futures contracts, and options
written and purchased 2,939,508 2,934,851 1,517,584 1,317,162
Equity securities contracts including
futures, forwards, and options written
and purchased 165,226 272,892 139,800 517,327
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 5,182,289 8,195,999 3,580,697 7,906,777
Interest rate swaps and caps 1,116,629 301,524 143,961 140,292
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Fair Value at Fair Value at
September 30, 1998 December 31, 1997
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $375,268 $375,095 $ 88,428 $ 84,400
Foreign currency forward contracts,
futures contracts, and options
written and purchased 71,533 70,864 25,749 24,773
Equity securities contracts including
futures, forwards, and options written
and purchased 18,882 46,455 30,561 39,276
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 40,908 108,846 13,080 26,588
Interest rate swaps and caps 3,208 14,715 24,579 3,160
</TABLE>
8
<PAGE> 10
NOTES TO CONDENSED 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,
1998 and the twelve months ended December 31, 1997. The average fair value is
based on 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, 1998 December 31, 1997
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $204,419 $202,980 $112,763 $111,655
Foreign currency forward contracts,
futures contracts, and options
written and purchased 59,211 58,321 30,875 32,808
Equity securities contracts including
futures, forwards, and options written
and purchased 21,884 46,232 49,112 33,604
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 21,287 70,543 16,251 76,814
Interest rate swaps and caps 11,427 30,617 5,499 5,195
</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 Condensed
Consolidated Statements of Financial Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At September 30, 1998 approximately 98% of the off-balance-sheet trading-related
derivative and other 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 Condensed Consolidated Statements of Financial Condition and amounted
to $509,799 and $182,397 at September 30, 1998 and December 31, 1997,
respectively. Options written do not expose the Company to credit risk since
they do not obligate the counterparty to perform. Transactions in futures
contracts are conducted through regulated exchanges which have margin
requirements, and are settled in cash on a daily basis, thereby minimizing
credit risk.
The following table summarizes the Company's principal transactions revenues by
business activity for the three months and nine months ended September 30, 1998
and 1997. 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,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Taxable fixed income (includes futures, forwards,
options contracts and other securities) $ 66,180 $146,444 $340,298 $398,210
Equities (includes futures, forwards and options contracts) 45,238 110,521 224,328 302,217
Municipals 37,035 32,311 104,936 100,610
-------- -------- -------- --------
$148,453 $289,276 $669,562 $801,037
======== ======== ======== ========
</TABLE>
9
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to manage the
interest rate characteristics of its assets and liabilities. As of September 30,
1998 and December 31, 1997, the Company had outstanding interest rate swap
agreements with commercial banks with notional amounts of $2,955,985 and
$2,658,485, respectively. These agreements effectively converted substantially
all of the Company's fixed rate debt at September 30, 1998 into floating rate
debt. The interest rate swap agreements entered into have had the effect of
reducing net interest expense on the Company's fixed rate debt by $10,620 and
$8,709 for the nine months ended September 30, 1998 and 1997, respectively. The
Company had no deferred gains or losses related to terminated swap agreements at
September 30, 1998 and December 31, 1997. 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 3 for further discussion of interest rate swap agreements used
for hedging purposes.
NOTE 9: RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily basis and through a variety of
financial, security position and credit exposure reporting and control
procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices, and foreign currency
exchange rates. 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. The Company also has an independent risk management group which
reviews the Company's risk profile and 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 group managers, is responsible for
establishing trading position and exposure limits.
Market risk modeling is based on estimating loss exposure through sensitivity
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, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and government-agency securities, or 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, 1998, the market
value of client securities loaned to other brokers approximated the amounts due
or collateral obtained.
10
<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Amounts loaned are limited by
margin regulations of the Federal Reserve Board and other regulatory authorities
and are subject to the Company's credit review and daily monitoring procedures.
Market declines could, however, reduce the value of any collateral below the
principal amount loaned, plus accrued interest, before the collateral can be
sold.
Client transactions include positions in commodities and financial futures,
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 30,1998
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 underwriting and other financing
activities with a broad range of customers, including other financial
institutions, municipalities, governments, financing companies, and commercial
real estate investors and operators. These activities could result in
concentrations of credit risk with a particular counterparty, or with groups of
counterparties operating in a particular geographic area or engaged in business
in a particular industry. 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, investment funds and insurance companies.
NOTE 10: COMMITMENTS AND CONTINGENCIES
At September 30, 1998 and December 31, 1997, the Company was contingently liable
under unsecured letters of credit totaling $241,695 and $186,279, respectively,
which approximates fair value. At September 30, 1998, certain of the Company's
subsidiaries were contingently liable as issuer of $45,073 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 are 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 through February 2000. The Company entered into an agreement
with the bank to purchase the loans under certain specific circumstances. At
September 30, 1998, $30,046 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 collateralized by marginable
securities. At September 30, 1998, the Company had outstanding $67,056 of such
standby letters of credit. At September 30, 1998 and December 31, 1997,
securities with fair value of $124,577 and $48,378, respectively, had been
loaned or pledged as collateral for securities borrowed of approximately equal
fair value.
11
<PAGE> 13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $366,708 at September 30,
1998. These commercial real estate commitments are generally entered into at
variable rates of interest based on LIBOR. Settlement of these transactions at
September 30, 1998 would not have had a material impact on the Company's
consolidated financial statements, taken as a whole.
The Company has been named as defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 11: INCOME TAXES
The reconciliation of income taxes, computed at the statutory federal rates, to
the provision for income taxes recorded was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<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 2.2 3.5 2.1 3.8
Foreign rate differential 0.9 0.1 0.1 0.2
Nontaxable dividends & interest (1.5) (1.5) (0.9) (1.1)
Minority interest (2.1) (1.6) (1.5) (1.5)
Other, net (0.1) (2.1) 0.1 (2.2)
---- ---- ---- ----
34.4% 33.4% 34.9% 34.2%
==== ==== ==== ====
</TABLE>
Income taxes paid were $185,992 and $221,625 for the nine months ended September
30, 1998 and 1997, respectively.
NOTE 12: EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," during the quarter ended
December 31, 1997. Basic earnings per share is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities. The 1997 earnings per common share amounts have been
restated to conform to the SFAS No. 128 requirements.
Set forth on the following page is the reconciliation of net income applicable
to common shares and weighted-average common and common equivalent shares of the
basic and diluted earnings per common share computations:
12
<PAGE> 14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 82,892 $ 112,782 $ 333,128 $ 306,741
Preferred stock dividends (5,912) (7,378) (17,735) (22,135)
------------- ------------- ------------- -------------
Net income applicable to common shares
for basic earnings per share 76,980 105,404 315,393 284,606
Effect of dilutive securities:
Preferred stock dividends -- 1,500 -- 4,500
Interest savings on convertible debentures 69 235 278 812
------------- ------------- ------------- -------------
69 1,735 278 5,312
------------- ------------- ------------- -------------
Net income applicable to common shares
for diluted earnings per share $ 77,049 $ 107,139 $ 315,671 $ 289,918
============= ============= ============= =============
DENOMINATOR:
Weighted-average common shares for basic
earnings per share 141,322,783 134,301,924 140,153,619 136,423,151
Weighted-average effect of dilutive securities:
Employee stock options and awards 9,180,978 7,846,111 9,212,369 7,346,952
Convertible debentures 852,929 1,676,352 1,172,376 2,139,220
6% Convertible Preferred Stock -- 8,273,600 -- 8,273,600
------------- ------------- ------------- -------------
Dilutive potential common shares 10,033,907 17,796,063 10,384,745 17,759,772
------------- ------------- ------------- -------------
Weighted-average common and common equivalent
shares for diluted earnings per share 151,356,690 152,097,987 150,538,364 154,182,923
============= ============= ============= =============
EARNINGS PER SHARE:
Basic $ 0.54 $ 0.78 $ 2.25 $ 2.09
============= ============= ============= =============
Diluted $ 0.51 $ 0.70 $ 2.10 $ 1.88
============= ============= ============= =============
</TABLE>
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal business activities are, by their nature, affected by
many factors, including general economic and financial conditions, the level and
volatility of interest rates, currency and security valuations, competitive
conditions, counterparty risk, transactional volume and market liquidity. As a
result, revenues and profitability have been in the past, and are likely to
continue to be, subject to fluctuations reflecting the impact of these factors.
Certain statements included in this discussion and in other parts of this report
include "forward-looking statements" that involve known and unknown risks and
uncertainties including (without limitation) those mentioned above, the impact
of current, pending and future legislation and regulation and other risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements. The Company disclaims any obligation or
undertaking to update publicly or revise any "forward-looking statements".
Market and economic conditions were volatile in the third quarter of 1998, after
a relatively subdued second quarter. In the third quarter of 1998, the U.S.
economy accelerated with Real Gross Domestic Product growth rising from 1.8% in
the second quarter of 1998 to 3.3% in the third quarter. Inflation, as measured
by the Consumer Price Index, remained moderate increasing at an annual rate of
1.8% from the second quarter to the third quarter of 1998. At the end of the
quarter the Federal Reserve Board lowered the targeted overnight lending rate by
25 basis points, impacting already volatile financial markets. The yield on
90-day Treasury bills dropped from 5.10% to 4.37% during the quarter driven by
an international "flight to quality" engendered by the severe financial problems
in Russia and Asia and the prospect of further action on the part of the Federal
Reserve Board. The yield on the 30-year Treasury bond fell from 5.62% to 4.96%
during the quarter. Investor concerns regarding the impact of financial and
economic turmoil abroad drove the equity markets downward during the quarter.
The Dow Jones Industrial Average declined 12.4%, the NASDAQ Composite Index fell
10.6% and the S&P 500 stock index fell 10.3%. Stock market volume was record
breaking in the third quarter of 1998 with the New York Stock Exchange average
daily volume rising 16.6% to 719.1 million shares and the NASDAQ average daily
volume increasing 1.9% to 769.2 million shares.
The unfavorable equity market conditions during the third quarter of 1998
largely offset strong gains for various indices posted in the first half of the
year. The Dow Jones Industrial Average declined 0.8% for the first nine months
of 1998 as compared to the 23.2% gain for the first nine months of 1997. The
NASDAQ Composite Index advanced 7.9% for the first nine months of 1998, down
from the 30.6% increase in the first nine months of 1997. The S&P 500 stock
index appreciated 4.8% in the first nine months of 1998, as compared to an
increase of 27.8% for the first nine months of 1997. Average daily volume on the
New York Stock Exchange was 651.8 million shares for the first nine months of
1998, versus 514.4 million shares for the prior year period. The NASDAQ average
daily volume increased from 626.1 million shares for the first nine months of
1997 to 755.6 million shares for the first nine months of 1998. In contrast to
the equity market, substantial advances in Treasury bond prices during the third
quarter of 1998 augmented gains for the first half of the year. The yield on the
30-year Treasury bond fell 95 basis points during the first nine months of 1998
compared to the 24 basis point decline in the prior year period.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1998 compared to Quarter Ended September 30, 1997
The Company's net income for the quarter ended September 30, 1998 was $82.9
million, or $0.54 per basic share ($0.51 per diluted share) compared to net
income of $112.8 million, or $0.78 per basic share ($0.70 per diluted share)
earned during the third quarter of 1997. During the third quarter of 1998,
revenues, net of interest expense, were $1,031.5 million, 4.7% lower than the
third quarter of 1997.
Commission revenues earned during the third quarter of 1998 were a record $410.8
million, 6.1% higher than the $387.2 million earned during the prior year
quarter. Commissions on the sale of listed securities and commodities increased
$28.2 million or 13.0%, mutual fund and insurance commissions increased $2.9
million or 2.7%, and commissions from over-the-counter securities and options
decreased $7.5 million or 11.8%.
Principal transactions revenues decreased $140.8 million, or 48.7%, reflecting
lower trading results in taxable fixed income and equities securities as a
result of the market and economic conditions described above.
Asset management fees increased 30.3% to a record $184.7 million, due to higher
revenues earned on managed or wrap accounts and trust accounts. Average assets
in wrap and trust accounts during the third quarter of 1998 were approximately
30.7% higher than during the third quarter of 1997. The increase also reflects
higher advisory fees earned on money market accounts and mutual funds. The
average assets under management in money market, institutional and
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
long-term mutual funds were approximately $54.1 billion during the third quarter
of 1998 and approximately $47.9 billion during the third quarter of 1997.
Investment banking revenues were $119.6 million, 6.8% lower than the $128.4
million earned during the third quarter of 1997. The current year quarter
reflects decreases in underwriting fees, management fees and selling concessions
on decreased volume of lead-managed and co-managed corporate issues.
Net interest increased $28.4 million, or 27.6% to a record $131.5 million
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 September 30, 1998 were $616.9
million as compared to $640.1 million during the prior year quarter. The
Company's operating results for the third quarter of 1998 versus the prior year
period, resulted in lower performance-based compensation. Compensation and
benefits as a percent of net revenues were 59.8% during the third quarter 1998
and 59.2% for the third quarter 1997.
All other operating expenses were $276.0 million, as compared to $260.3 million
for the prior year quarter. Principal drivers of the increase in
non-compensation costs were higher technology costs associated with preparations
for the millenium and other technology initiatives, higher brokerage, clearing
and exchange fees associated with increased levels of business and higher
advertising expenditures. The ratio of other operating expenses as a percentage
of net revenues increased to 26.8% for the quarter ended September 30, 1998
compared to 24.1% for the prior year quarter.
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997
The Company's net income for the nine months ended September 30, 1998 was a
record $333.1 million, or $2.25 per basic share ($2.10 per diluted share)
compared to net income of $306.7 million, or $2.09 per basic share ($1.88 per
diluted share) earned during the first nine months of 1997. During the first
nine months of 1998, revenues, net of interest expense, were a record $3,308.6
million, 8.7% higher than the first nine months of 1997.
Commission revenues earned during the first nine months of 1998 were a record
$1,221.1 million, 10.6% higher than the $1,104.5 million earned during the prior
year period. Commissions on the sale of listed securities and options increased
$81.8 million or 12.5%, mutual fund and insurance commissions increased $25.4
million or 8.3%, and commissions from over-the-counter securities and other
commissions increased $9.3 million or 6.5%.
Principal transactions revenues decreased $131.5 million, or 16.4%, reflecting
lower trading results in taxable fixed income and equities securities offset by
increased results in municipal securities.
Asset management fees increased 35.5% to a record $525.6 million, due to higher
revenues earned on managed or wrap accounts and trust accounts. Average assets
in wrap and trust accounts during the first nine months of 1998 were
approximately 41.2% higher than during the first nine months of 1997. The
increase also reflects higher advisory fees earned on money market accounts and
mutual funds. The average assets under management in money market, institutional
and long-term mutual funds were approximately $52.9 billion during the first
nine months of 1998 and approximately $46.6 billion during the first nine months
of 1997.
Investment banking revenues were a record $421.3 million for the first nine
months of 1998, 25.0% higher than the $337.1 million earned during the prior
year period. The current year period reflects increases in merger and
acquisition fees, underwriting fees, management fees and selling concessions on
increased volume of lead-managed and co-managed corporate and municipal issues
and an increase in private placement and other fees.
Net interest increased $58.9 million, or 19.2% to a record $366.3 million
primarily due to increased margin lending to customers and an increased level of
fixed income positions offset by higher interest expense on increased
borrowings.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Compensation and benefits for the nine months ended September 30, 1998 were
$1,949.6 million as compared to $1,788.4 million during the prior year period.
The number of employees increased by 987, or 6.0%, from September 30, 1997 to
September 30, 1998, principally due to an expansion in Private Client Group
investment executives and technology personnel working on the millenium and
other technology initiatives. In addition, the Company's improved operating
results for the nine months ended 1998 versus the prior year period, resulted in
higher production-based compensation to Private Client Group investment
executives, and higher performance-based compensation. Compensation and benefits
as a percent of net revenues were 58.9% during the first nine months of 1998 and
58.8% for the first nine months of 1997.
All other operating expenses were $810.2 million, as compared to $756.6 million
for the prior year period. Principal drivers of the increase in non-compensation
costs were higher technology costs associated with preparations for the
millenium and other technology initiatives, higher brokerage, clearing and
exchange fees associated with increased levels of business and higher
advertising expenditures. The ratio of other operating expenses as a percentage
of net revenues declined to 24.5% for the nine months ended September 30, 1998
compared to 24.9% for the prior year period.
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 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, 1998 were $62.9 billion compared to
$57.1 billion at December 31, 1997, primarily attributable to an increase in
trading assets, including $1.8 billion related to securities received as
collateral under the SFAS No. 125 guidance, and receivables from clients. 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 $1.2 billion unsecured revolving credit
agreement which expires in December 1998, with provisions for renewal through
December 2001. This credit agreement is in the process of being renewed. In
addition, certain of the Company's subsidiaries have a committed secured
revolving credit facility to provide up to an aggregate of $750.0 million. In
August 1998, the Company renewed this facility through August 1999, with
provisions for renewal through August 2000. The secured borrowings under this
facility can be collateralized using a variety of securities. The facilities are
available for general corporate purposes. At September 30, 1998, 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,
1998.
The Company maintains public shelf registration statements for the issuance of
debt securities with the SEC. On September 23, 1998, the Company filed a shelf
registration statement with the SEC providing for the issuance of an additional
$3.0 billion of debt securities. During the third quarter of 1998, the Company
issued $25.0 million of debt under these registration statements. At September
30, 1998, the Company had approximately $3,353.1 million in debt securities
available for issuance.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company also maintains a shelf registration statement with the SEC for the
issuance of preferred trust securities of PWG Capital Trusts III and IV,
business trusts formed under the Delaware law which are wholly owned
subsidiaries of the Company, and debt securities of the Company. At September
30, 1998, $106.2 million in Preferred Trust Securities and debt securities of
the Company were available for issuance under this registration statement.
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 securities and
stockholders' equity, grew to $6.6 billion at September 30, 1998, an increase of
$732.9 million from December 31, 1997. The growth in total capital is primarily
due to the net increase in long-term borrowings of $398.7 million and an
increase in stockholders' equity of $333.4 million.
The net increase in long-term borrowings primarily reflects the net issuance of
medium-term notes of $349.2 million and the issuance of $250.0 million 6.55%
senior notes due 2008, offset by the maturity of $200.0 million 6-1/4% senior
notes. The increase in stockholders' equity is primarily the result of net
income for the nine months ended September 30, 1998 of $333.1 million and the
issuance of approximately 4,373,000 shares of common stock related to employee
compensation programs. Issuances and tax credits related to these programs had
the effect of increasing equity capital by $122.0 million. These increases were
offset by the repurchase of approximately 2,128,000 shares of common stock for
$67.4 million, principally during the first quarter, and dividends accrued of
$63.3 million. At September 30, 1998, the remaining number of shares authorized
to be repurchased, in the open market or otherwise, under the Company's common
stock repurchase program was approximately 11.0 million. On November 5, 1998,
the Company's Board of Directors authorized for repurchase an additional 15.0
million shares of its common stock increasing the total number of shares
authorized for repurchase to approximately 26.0 million.
On May 7, 1998, the shareholders of the Company approved an amendment to the
Company's charter which increased the number of PWG common shares authorized for
issuance from 200,000,000 to 400,000,000 shares. On November 5, 1998, the Board
of Directors declared a regular quarterly dividend on the Company's common stock
of $0.11 per share payable on January 6, 1999 to stockholders of record on
December 4, 1998.
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.
At September 30, 1998, the Company had investments in merchant banking
transactions which were affected by liquidity, reorganization or restructuring
issues amounting to $19.7 million, net of reserves, compared to $31.9 million,
net of reserves, at December 31, 1997. These investments have not had a material
effect on the Company's results of operations.
The Company's activities also include underwriting and market-making
transactions in high-yield corporate debt and non-investment-grade
mortgage-backed securities, and emerging market securities (collectively,
"high-yield securities"). These securities generally involve greater risks than
investment-grade corporate debt securities because these issuers usually have
high levels of indebtedness or lower credit ratings and are, therefore, more
vulnerable to general economic conditions. At September 30, 1998, the Company
held $345.9 million of high-yield securities, with approximately 27% 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. These high-yield securities have not had a
material effect on the Company's results of operations.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument represents a contractual agreement between
counterparties 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
option 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 manage the interest rate characteristics of its
assets and liabilities.
The notional amount of a derivative contract is used to measure the volume of
activity and is not reflected on the Condensed Consolidated Statement of
Financial Condition. The Company had off-balance-sheet derivative contracts
outstanding with gross notional amounts of $99.5 billion and $61.1 billion at
September 30, 1998 and December 31, 1997, respectively. These amounts included
$74.5 billion and $42.3 billion, respectively, related to "to be announced"
mortgage-backed securities requiring forward settlement. Also included in these
amounts were $3.0 billion and $2.7 billion notional amounts of interest rate
swap agreements used to change the interest rate characteristics of the
Company's fixed rate debt at September 30, 1998 and December 31, 1997,
respectively. For further discussion on the Company's derivative financial
instruments, see Note 8 in the Notes to Condensed Consolidated Financial
Statements.
The Company records any unrealized gains and losses on its derivative contracts
used in a trading capacity by marking-to-market the contracts on a daily basis.
The unrealized gain or loss is recorded on the Condensed Consolidated Statements
of Financial Condition with the related profit or loss reflected in "Principal
transactions" revenues. The Company accrues interest income and expense on
interest rate swap agreements used to change the interest rate characteristics
of the Company's fixed rate debt. The interest rate swap agreements had the
effect of reducing net interest expense on the Company's fixed rate debt by
$10.6 million and $8.7 million for the nine months ended September 30, 1998 and
1997, respectively. The Company had no deferred gains or losses recorded at
September 30, 1998 and December 31, 1997 related to terminated swap agreements.
The fair value of an exchange-traded derivative financial instrument is
determined by quoted market prices, while over-the-counter derivatives are
valued based upon pricing models which consider time value and volatility, as
well as other economic factors. The fair values of the Company's derivative
financial instruments held for trading purposes at September 30, 1998 were
$509.8 million and $616.0 million for assets and liabilities, respectively, and
are reflected on the Condensed Consolidated Statements of Financial Condition.
The fair values of these instruments at December 31, 1997 were $182.4 million
and $178.2 million for assets and liabilities, respectively.
The Company's exposure to market risk relates to changes in interest rates,
equity prices, foreign currency exchange rates or the market values of the
assets underlying the financial instruments. The Company's exposure to credit
risk at any point is represented by the fair value or replacement cost on
contracts in which the Company has recorded an unrealized gain. At September 30,
1998 and December 31, 1997, the fair values amounted to $509.8 million and
$182.4 million, respectively. The risks inherent in derivative financial
instruments are managed consistent with the Company's overall risk management
policies. (See Risk Management section below)
RISK MANAGEMENT
Risk is an inherent part of the Company's principal business activities.
Managing risk is critical to the Company's profitability and to reducing the
likelihood of earnings volatility. The Company's risk management policies and
procedures have been established to continually identify, monitor and manage
risk. The Company's principal risks are market, credit, liquidity, legal and
operating.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company seeks to manage risk and its impact on earnings volatility through
strategic planning and by focusing on the diversification of its business
activities. Through capital allocation, and the establishment of trading by
product and credit limits by counterparty, the Company manages the risk
associated with the various businesses. The Company may reallocate or deploy
capital to the business groups based upon changes in market conditions or
opportunities in the marketplace that are consistent with the Company's
long-term strategy.
The discussion of the Company's principal risks and the estimated amounts of the
Company's market risk exposure generated from the sensitivity analysis performed
by the Company are forward-looking statements assuming certain adverse
conditions occur. Actual results in the future may differ materially from these
projected results due to actual events in the markets in which the Company
operates and other factors. The analysis methods used by the Company to assess
and mitigate risks discussed below should not be considered projections of
future events or losses.
Market Risk
All financial instruments involve market risk. Market risk is the potential
change in value of the financial instrument caused by unfavorable changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
is inherent to both derivative and non-derivative financial instruments.
The Company actively monitors its market risk profile through a variety of
control procedures including market risk modeling, review of trading positions
and hedging strategies, and monitoring adherence to established limits. Each
department's trading positions, exposures, profits and losses, and trading
strategies are reviewed by the senior management of each business group.
Independent of the trading departments is a risk management group. The Company's
risk management group reviews the Company's risk profile and adherence to
established trading limits, and aids in the development of risk management
policies. In addition the Company has in place committees and management
controls to review inventory positions, other asset accounts and asset agings on
a regular basis.
Trading position and exposure limits are established by the Asset/Liability
Management Committee, which meets regularly and is comprised of senior corporate
and business group managers.
The following is a discussion of the Company's primary market risk exposures at
September 30, 1998 and December 31, 1997 and how those exposures are managed:
Interest Rate Risk
In connection with the Company's dealer activities, the Company is exposed to
interest rate risk due to changes in the level or volatility of interest rates,
changes in the yield curve, mortgage prepayments and credit spreads. The Company
attempts to mitigate its exposure to interest rate risk by entering into hedging
transactions such as U.S. government and Eurodollar forward and future
contracts, options, and interest rate swap and cap agreements. The Company also
issues fixed rate instruments in connection with its non-trading activities,
which expose the Company to interest rate risk. The Company enters into interest
rate swap agreements which are designed to mitigate its exposure by effectively
converting its fixed rate liabilities into floating rate liabilities.
Equity Price Risk
In connection with the Company's dealer activities, the Company buys and sells
equity and equity derivative instruments. The Company is exposed to equity price
risk due to changes in the level or volatility of equity prices. The Company
attempts to mitigate its exposure to equity price risk by entering into hedging
transactions including equity option agreements.
Sensitivity Analysis
For purposes of the Securities and Exchange Commission disclosure requirements,
the Company has elected to use a sensitivity approach to express the potential
loss in future earnings of its financial instruments. In preparing the analysis,
the Company has combined both derivative and non-derivative financial
instruments held for trading purposes with those held for purposes other than
trading because the amounts were not material.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The sensitivity calculation employed to analyze interest rate risk on fixed
income financial instruments was based on a proprietary methodology which
converted substantially all the Company's interest rate sensitive financial
instruments at September 30, 1998 and December 31, 1997, into a uniform
benchmark (a ten year U.S. Treasury note equivalent), and evaluated the impact
assuming a 13 basis point and a 10 basis point change to the ten-year U.S.
Treasury note at September 30, 1998 and December 31, 1997, respectively. The
hypothetical basis point change was derived from a proprietary model which, uses
a one-day interval and a 95% confidence level, and was based on historical data
over a one-year period. This analysis does not consider other factors that may
influence these results, such as credit spread risk, prepayment risk on
mortgage-backed securities or changes in the shape of the yield curve. The
sensitivity calculation employed to analyze equity price risk on its equity
financial instruments at September 30, 1998 and December 31, 1997, was based on
a 2% move in the Dow Jones Industrial Average at September 30, 1998 and December
31, 1997, respectively, using a one-day interval and a 95% confidence level, and
was based on historical data over a one-year period. Based upon the
aforementioned methodologies, the Company's potential daily loss in future
earnings at September 30, 1998 was approximately $8.0 million and $0.2 million
for interest rate risk and equity price risk, respectively, and the Company's
potential daily loss in future earnings at December 31, 1997 was approximately
$4 million and $0.5 million for interest rate risk and equity price risk,
respectively.
YEAR 2000
The Company uses a wide variety of computer programs and devices, some of which
use only the last two digits of each year to represent the calendar year portion
of dates. As a result, calculations performed with these abbreviated date fields
may misinterpret the year 2000 as 1900, resulting in erroneous calculations or
program failures that could cause significant disruptions in the Company's
operations.
The Company is now executing a comprehensive plan in an attempt to achieve Year
2000 compliance. The plan consists of tens of thousands of component tasks
organized into five phases: Awareness, Inventory / Assessment, Remediation,
Testing and Implementation.
The Company has completed the Awareness and Inventory / Assessment phases,
covering both information technology (IT) hardware and software and other non-IT
assets. The Inventory/Assessment phase involved more than 3,800 types of assets
grouped into the following eight broad classes: Business Relationships, Systems
(Software), External Interfaces, Hardware (including mainframe, distributed and
desktop hardware), Market Data Services, Office Equipment, Facilities and
Telecommunications.
The Remediation phase of the Company's plan specifies a remediation strategy for
each asset type and assigns remediation tasks to either third party resources,
Company personnel or in some cases, original manufacturers. Certain assets may
be replaced or retired. Remediation of the Company's application software is
complete and remediation of Hardware, Office Equipment and Facilities assets,
including desktop computers and servers, is scheduled for completion in the
second quarter of 1999.
The remaining asset categories - Business Relationships, External Interfaces,
Market Data Services and Telecommunications are part of an extensive network of
business partners and external providers of products and services that include
the major securities exchanges, self-regulatory organizations, industry clearing
and depository institutions, other broker-dealers, commercial banks with which
the Company has multiple-user business relationships, and hardware and software
technology providers. The Company has inquired whether they have made the
necessary efforts to meet their own Year 2000 objectives. For crucial
relationships, the Company's procedures may include joint testing of systems and
site visits.
The Testing phase of the plan is in progress. Substantially all Company
developed software has been returned to production in preparation for
integrated, system-wide internal testing scheduled to be completed in the first
quarter of 1999. Testing of external interfaces will continue through 1999, and
will include securities industry-wide testing scheduled for March 1999.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Nearly every aspect of the Company's business depends on the accurate processing
of date-related information. As a result, failure by the Company or one or more
of its third-party relationships to successfully remediate systems for Year 2000
issues poses the risk of material disruption to operations and material
financial loss. A failure on the part of the Company to identify and implement
solutions to all Year 2000 issues could result in systems failures or outages,
inaccuracies in processing trades or other transactions affecting customer or
proprietary accounts, an inability to reconcile to and settle with
counterparties and other business disruptions. In addition, third parties with
whom the Company has a relationship could fail in some element of their Year
2000 efforts. The Company's operations are highly dependent on the services of
the securities exchanges, depositories, certain banking relationships, electric
utilities and telecommunications networks and a failure by one of these
institutions could disrupt the operations of the Company as well as the
securities industry as a whole. The scope of Company's relationship with
individual customers, broker-dealer counterparties and vendors varies widely as
does the resulting risk should any one of them fail to achieve Year 2000
compliance. The Company has on going communications with important third party
relationships regarding third party Year 2000 risks. The success of such third
parties achieving Year 2000 compliance can not be adequately gauged at this
time.
The Company is in the process of developing contingency plans to be executed
should a Year 2000 failure affect the Company's own operations or those of a
significant third party. The contingency planning effort is scheduled to be
completed by the end of the second quarter of 1999. There can be no assurance
that alternative arrangements will be identified for all material risks or
contingencies, or that these contingency plans will be effective.
The Company estimates the incremental cost of achieving Year 2000 compliance to
be approximately $65 million of which approximately $42 million has been
incurred through September 30, 1998. Costs relating to the Year 2000 conversion
are expensed as incurred. The estimated cost to resolve the Year 2000 issue and
the timing of achieving compliance are management's best estimates based on
current assessments of the scope of efforts required, the availability and cost
of trained personnel and of third party resources. Factors that could cause
actual results to differ materially from management estimates of future costs
and timing of remediation include, but are not limited to, the successful
identification of Company system-wide two-digit year codes, the adequacy of
labor rate and consulting fee estimates, the success of suppliers and
counterparties in achieving Year 2000 compliance or delivering compliant
products to the Company, as well as the success of securities exchanges,
self-regulatory organizations, industry clearing and depository institutions,
other broker-dealers, and commercial banks. There can be no guarantee that
future results will not differ materially from the plan, resulting in changes to
actual costs incurred and the timing of compliance.
21
<PAGE> 23
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 $226 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 $226 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $226 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
development has 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, 1997 and
the Quarterly Reports on Form 10-Q for the periods ended June 30, and March 31,
1998.
GENERAL DEVELOPMENT CORPORATION SECURITIES LITIGATION
On August 31, 1998, The Third Circuit Court of Appeals affirmed the dismissal
order.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
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 October 13, 1998 with the
Securities and Exchange Commission reporting under "Item 5 - Other Events"
and "Item 7 - Exhibit" relating to the Company's press release which, among
other things, reported financial results for the three months and nine
months periods ended September 30, 1998.
22
<PAGE> 24
EXHIBIT INDEX
-------------
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> 25
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 11, 1998 By: /s/ Regina Dolan
------------------ ------------------------------
Regina A. Dolan
Director, Senior Vice President
and Chief Financial Officer
23
<PAGE> 1
EXHIBIT 12.1
PAINE WEBBER GROUP INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Years Ended December 31,
1998 * 1997 * 1996 * 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 524,610 $ 644,075 $ 558,999 $ 102,677 $ 44,385 $ 407,576
---------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 26,533 44,186 43,712 36,260 1,710 5,828
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 2,205,920 2,573,582 1,971,788 1,969,811 1,428,653 1,130,712
Interest factor in rents 44,710 53,665 54,537 59,491 51,102 50,133
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,250,630 2,627,247 2,026,325 2,029,302 1,479,755 1,180,845
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 2,277,163 2,671,433 2,070,037 2,065,562 1,481,465 1,186,673
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and fixed charges $2,775,240 $3,271,322 $2,585,324 $2,131,979 $1,524,140 $1,588,421
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred stock dividends 1.2 1.2 1.2 1.0 1.0 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,
1998 * 1997 * 1996 * 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 524,610 $ 644,075 $ 558,999 $ 102,677 $ 44,385 $ 407,576
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 2,205,920 2,573,582 1,971,788 1,969,811 1,428,653 1,130,712
Interest factor in rents 44,710 53,665 54,537 59,491 51,102 50,133
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,250,630 2,627,247 2,026,325 2,029,302 1,479,755 1,180,845
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
fixed charges $2,775,240 $3,271,322 $2,585,324 $2,131,979 $1,524,140 $1,588,421
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.2 1.2 1.3 1.1 1.0 1.3
========== ========== =========== ========== ========== ==========
</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, 1998 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 904,694
<RECEIVABLES> 8,613,140
<SECURITIES-RESALE> 21,362,501
<SECURITIES-BORROWED> 8,766,896
<INSTRUMENTS-OWNED> 21,279,635
<PP&E> 401,991
<TOTAL-ASSETS> 62,900,916
<SHORT-TERM> 2,317,741
<PAYABLES> 6,148,640
<REPOS-SOLD> 29,786,897
<SECURITIES-LOANED> 6,131,045
<INSTRUMENTS-SOLD> 7,780,312
<LONG-TERM> 3,796,647
393,750
189,528
<COMMON> 190,767
<OTHER-SE> 2,073,560
<TOTAL-LIABILITY-AND-EQUITY> 62,900,916
<TRADING-REVENUE> 669,562
<INTEREST-DIVIDENDS> 2,572,253
<COMMISSIONS> 1,221,050
<INVESTMENT-BANKING-REVENUES> 421,285
<FEE-REVENUE> 525,555
<INTEREST-EXPENSE> 2,205,920
<COMPENSATION> 1,949,590
<INCOME-PRETAX> 548,793
<INCOME-PRE-EXTRAORDINARY> 333,128
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333,128
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.10
</TABLE>
