<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, 1999
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 5, 1999 the Registrant had outstanding 142,716,688 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, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C> <C>
Item 1. Financial Statements.
Condensed Consolidated Statements of Income
(unaudited) for the Three and Nine Months Ended
September 30, 1999 and 1998. 2
Condensed Consolidated Statements of Financial
Condition (unaudited) at September 30, 1999
and December 31, 1998. 3
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended
September 30, 1999 and 1998. 4
Notes to Condensed Consolidated Financial Statements
(unaudited). 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 14-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 6. Exhibits and Reports on Form 8-K. 23
Signature. 24
</TABLE>
<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,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 451,341 $ 410,832 $ 1,419,092 $ 1,221,050
Principal transactions 235,914 148,453 829,968 669,562
Asset management 235,712 184,691 666,250 525,555
Investment banking 134,235 119,629 420,321 421,285
Interest 762,205 909,168 2,289,636 2,572,253
Other 40,785 36,375 129,213 104,836
------------ ------------ ------------ ------------
Total revenues 1,860,192 1,809,148 5,754,480 5,514,541
Interest expense 623,025 777,672 1,854,515 2,205,920
------------ ------------ ------------ ------------
Net revenues 1,237,167 1,031,476 3,899,965 3,308,621
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits 711,783 616,927 2,260,575 1,949,590
Office and equipment 89,159 76,170 259,941 223,572
Communications 42,331 38,791 127,179 113,687
Business development 30,861 27,568 83,262 75,937
Brokerage, clearing & exchange fees 23,391 24,270 71,268 71,847
Professional services 33,469 30,581 96,318 94,563
Other 80,188 78,570 240,751 230,632
------------ ------------ ------------ ------------
Total non-interest expenses 1,011,182 892,877 3,139,294 2,759,828
------------ ------------ ------------ ------------
INCOME BEFORE TAXES AND MINORITY INTEREST 225,985 138,599 760,671 548,793
Provision for income taxes 79,722 47,646 274,183 191,482
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 146,263 90,953 486,488 357,311
Minority interest 8,061 8,061 24,183 24,183
------------ ------------ ------------ ------------
NET INCOME $ 138,202 $ 82,892 $ 462,305 $ 333,128
============ ============ ============ ============
Net income applicable to common shares $ 132,253 $ 76,980 $ 444,458 $ 315,393
============ ============ ============ ============
Earnings per common share:
Basic $ 0.91 $ 0.54 $ 3.05 $ 2.25
Diluted $ 0.86 $ 0.51 $ 2.88 $ 2.10
Weighted-average common shares:
Basic 145,633,697 141,322,783 145,583,134 140,153,619
Diluted 153,857,503 151,356,690 154,106,985 150,538,364
Dividends declared per common share $ 0.11 $ 0.11 $ 0.33 $ 0.33
</TABLE>
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,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 219,565 $ 228,359
Cash and securities segregated and on deposit for
federal and other regulations 718,429 631,272
Trading assets 20,907,717 19,299,869
Securities received as collateral 527,728 1,189,331
------------ ------------
Total trading assets, at fair value 21,435,445 20,489,200
Securities purchased under agreements to resell 12,812,044 14,217,062
Securities borrowed 9,369,098 8,717,476
Receivables, net of allowance for doubtful accounts of
$22,576 and $20,496 at September 30, 1999 and
December 31, 1998, respectively 9,426,762 7,876,619
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $499,285 and $431,460 at
September 30, 1999 and December 31, 1998, respectively 536,229 434,895
Other assets 1,826,562 1,581,038
------------ ------------
$ 56,344,134 $ 54,175,921
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,428,266 $ 1,417,783
Trading liabilities, at fair value 5,622,606 5,177,099
Securities sold under agreements to repurchase 26,176,188 23,948,872
Securities loaned 5,169,106 4,969,638
Obligation to return securities received as collateral 527,728 1,189,331
Payables 6,270,283 7,519,368
Other liabilities and accrued expenses 2,787,135 2,675,520
Long-term borrowings 4,968,068 4,255,802
------------ ------------
52,949,380 51,153,413
------------ ------------
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 190,788 189,815
Stockholders' Equity:
Common stock, $1 par value, 400,000,000 shares authorized, issued
192,844,806 shares and 191,047,151 shares at
September 30, 1999 and December 31, 1998, respectively 192,845 191,047
Additional paid-in capital 1,613,123 1,525,938
Retained earnings 2,085,347 1,689,386
Treasury stock, at cost; 47,670,688 shares and 45,527,707 shares at
September 30, 1999 and December 31, 1998, respectively (1,075,578) (962,792)
Accumulated other comprehensive income (5,521) (4,636)
------------ ------------
2,810,216 2,438,943
------------ ------------
$ 56,344,134 $ 54,175,921
============ ============
</TABLE>
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,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 462,305 $ 333,128
Adjustments to reconcile net income to cash
used for operating activities:
Noncash items included in net income:
Depreciation and amortization 73,035 54,229
Deferred income taxes (45,757) 19,643
Amortization of deferred charges 81,708 66,551
(Increase) decrease in operating assets:
Cash and securities on deposit (87,157) (125,577)
Trading assets (1,582,711) (3,094,544)
Securities purchased under agreements to resell 1,405,018 200,238
Securities borrowed (651,622) 806,291
Receivables (1,548,063) (1,702,138)
Other assets (282,626) (137,040)
Increase (decrease) in operating liabilities:
Trading liabilities 445,507 678,168
Securities sold under agreements to repurchase 2,227,316 157,995
Securities loaned 199,468 1,397,084
Payables (1,249,085) 484,683
Other 147,118 5,216
----------- -----------
Cash used for operating activities (405,546) (856,073)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements (179,731) (126,937)
----------- -----------
Cash used for investing activities (179,731) (126,937)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 10,483 651,525
Proceeds from:
Long-term borrowings 1,010,984 673,909
Employee stock transactions 72,410 41,387
Payments for:
Long-term borrowings (300,575) (276,875)
Repurchases of common stock (151,446) (67,410)
Dividends (65,373) (63,334)
----------- -----------
Cash provided by financing activities 576,483 959,202
----------- -----------
Decrease in cash and cash equivalents (8,794) (23,808)
Cash and cash equivalents, beginning of period 228,359 233,787
----------- -----------
Cash and cash equivalents, end of period $ 219,565 $ 209,979
=========== ===========
</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, 1998 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, 1999 and 1998 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, 1998 and the Company's Quarterly Reports on Form 10-Q for the
quarters ended June 30, and March 31, 1999. The results of operations reported
for interim periods are not necessarily indicative of the results of operations
for the entire year.
Statement of Cash Flows
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were
$1,834,039 and $2,252,355 for the nine months ended September 30, 1999 and 1998,
respectively. Income taxes paid were $268,289 and $185,992 for the nine months
ended September 30, 1999 and 1998, respectively.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which 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 will depend 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. As issued, SFAS No. 133 was
effective for fiscal years beginning after June 15, 1999. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 defers the effective date of SFAS No. 133 for one year to fiscal years
beginning after June 15, 2000. The Company has not yet determined the impact of
this statement on the Company's Consolidated Financial Statements, taken as a
whole.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 required the capitalization of certain
costs incurred from developing or obtaining software for internal use. The
Company early adopted SOP 98-1 in 1998, which did not have a material impact on
the Company's consolidated financial statements, taken as a whole.
In September 1998, the AcSEC of the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-up Activities." SOP 98-5 required the costs of certain start-up
activities, which includes organizational costs, to be expensed as incurred. The
Company early adopted SOP 98-5 in 1998, which did not have a material impact on
the Company's consolidated financial statements, taken as a whole.
5
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: TRADING ASSETS AND LIABILITIES
At September 30, 1999 and December 31, 1998, trading assets and liabilities,
recorded at fair value or amounts approximating fair value, consisted of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Trading assets:
U.S. government and agencies $ 7,293,351 $ 4,858,189
Mortgages and mortgage-backed 8,179,343 8,861,944
Corporate debt 1,805,847 2,466,322
Commercial paper and other short-term debt 2,130,533 1,534,913
Equities 905,132 1,078,322
State and municipals 593,511 500,179
----------- -----------
20,907,717 19,299,869
Securities received as collateral 527,728 1,189,331
$21,435,445 $20,489,200
=========== ===========
Trading liabilities:
U.S. government and agencies $ 4,104,984 $ 4,031,254
Mortgages and mortgage-backed 155,488 79,521
Corporate debt 1,033,783 837,099
Equities 267,393 215,991
State and municipals 60,958 13,234
----------- -----------
$ 5,622,606 $ 5,177,099
=========== ===========
</TABLE>
NOTE 3: LONG-TERM BORROWINGS
Long-term borrowings at September 30, 1999 and December 31, 1998 consisted of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Fixed Rate Notes due 2000 - 2014 $2,485,165 $1,961,340
Fixed Rate Subordinated Notes due 2002 174,743 174,677
Medium-Term Senior Notes 2,159,960 1,936,835
Medium-Term Subordinated Notes 148,200 182,950
---------- ----------
$4,968,068 $4,255,802
========== ==========
</TABLE>
At September 30, 1999, interest rates on the fixed rate notes and fixed rate
subordinated notes ranged from 6.38 percent to 9.25 percent and the
weighted-average interest rate was 7.16 percent. Interest on the notes is
payable semi-annually. The fixed rate notes and fixed rate subordinated notes
outstanding at September 30, 1999 had an average maturity of 5.4 years.
At September 30, 1999, the Company had outstanding $1,378,010 of fixed rate
Medium-Term Notes and $930,150 of variable rate Medium-Term Notes. The
Medium-Term Notes outstanding at September 30, 1999 had an average maturity of
4.2 years and a weighted-average interest rate of 6.51 percent.
At September 30, 1999 and December 31, 1998, the fair values of long-term
borrowings were $4,893,870 and $4,325,014, respectively, as compared to the
carrying amounts of $4,968,068 and $4,255,802, 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 net fair values of the interest rate swaps were $68,364 and $122,053
receivables at September 30, 1999 and December 31, 1998, respectively. 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.
6
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts of the interest rate swap agreements included in the
Company's Condensed Consolidated Statements of Financial Condition at September
30, 1999 and December 31, 1998 were net receivables of $9,396 and $8,827,
respectively. See Note 5 for further discussion of interest rate swap agreements
used for hedging purposes.
NOTE 4: 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
percent 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
percent of such aggregate debit items. Business may not be expanded if net
capital is less than 5 percent of such aggregate debit items. As of September
30, 1999, PWI's net capital of $1,349,150 was 14 percent of aggregate debit
items and its net capital in excess of the minimum required was $1,149,417.
NOTE 5: 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, 1999 and December 31, 1998. 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
specific conditions are met.
<TABLE>
<CAPTION>
Notional or Contract Amount
--------------------------------------------------------
September 30, 1999 December 31, 1998
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $19,881,324 $25,115,509 $30,296,601 $35,558,370
Foreign currency forward contracts,
futures contracts, and options
written and purchased 1,569,937 1,574,467 2,709,421 2,628,824
Equity securities contracts including
stock index futures, forwards, and
options written and purchased 158,402 132,799 156,519 332,248
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 3,758,078 3,093,374 3,890,619 4,336,300
Interest rate swaps and caps 1,145,505 406,164 1,292,620 282,546
</TABLE>
7
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Fair Value at Fair Value at
September 30, 1999 December 31, 1998
--------------------------------------------
Assets Liabilities Assets Liabilities
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $ 99,747 $135,596 $ 85,995 $ 76,315
Foreign currency forward contracts,
futures contracts, and options
written and purchased 20,515 20,232 31,622 31,726
Equity securities contracts including
stock index futures, forwards, and
options written and purchased 51,752 36,127 26,806 46,606
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 6,113 2,273 12,183 55,015
Interest rate swaps and caps 20,537 8,768 34,749 8,096
</TABLE>
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended September 30,
1999 and the twelve months ended December 31, 1998. 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, 1999 December 31, 1998
------------------------ ------------------------
Assets Liabilities Assets Liabilities
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $171,954 $177,806 $158,215 $146,522
Foreign currency forward contracts,
futures contracts, and options
written and purchased 20,822 19,671 46,222 45,895
Equity securities contracts including
stock index futures, forwards, and
options written and purchased 51,706 37,762 20,836 42,995
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 8,113 4,974 16,547 41,786
Interest rate swaps and caps 26,085 6,024 13,423 40,760
</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.
8
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The off-balance-sheet derivative trading transactions are generally short-term.
At September 30, 1999 approximately 98 percent 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 $198,664 and $191,355 at September 30, 1999 and December 31, 1998,
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, 1999
and 1998. 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,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Taxable fixed income (includes futures, forwards,
options contracts and other securities) $ 72,228 $ 66,180 $404,278 $340,298
Equities (includes stock index futures, forwards
and options contracts) 119,968 45,238 312,299 224,328
Municipals 43,718 37,035 113,391 104,936
-------- -------- -------- --------
$235,914 $148,453 $829,968 $669,562
======== ======== ======== ========
</TABLE>
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, 1999 and
December 31, 1998, the Company had outstanding interest rate swap agreements
with commercial banks with notional amounts of $3,844,510 and $3,096,985,
respectively. These agreements effectively converted substantially all of the
Company's fixed rate debt at September 30, 1999 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 $20,370 and $10,620 for the
nine months ended September 30, 1999 and 1998, respectively. The Company had no
deferred gains or losses related to terminated swap agreements at September 30,
1999 and December 31, 1998 on its long-term borrowings. 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
generally 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 6: 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
9
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 banks,
brokers and dealers, investment funds and insurance companies. 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, and letters
of credit. The market value of the initial collateral received approximates or
is greater than 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, 1999, the market
value of client securities loaned to other brokers approximated the amounts due
or collateral obtained.
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. Receivables from customers
are substantially collateralized by customer securities. 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 exchange-traded 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, 1999
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
10
<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 7: COMMITMENTS AND CONTINGENCIES
At September 30, 1999 and December 31, 1998, the Company was contingently liable
under unsecured letters of credit totaling $133,813 and $159,647, respectively,
which approximated fair value. At September 30, 1999 and December 31, 1998
certain of the Company's subsidiaries were contingently liable as issuer of
approximately $45,000 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 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 meeting the financing needs of certain of its clients, the Company may also
issue standby letters of credit which are collateralized by customer margin
securities. At September 30, 1999 and December 31, 1998, the Company had
outstanding $90,300 and $78,787, respectively, of such standby letters of
credit. At September 30, 1999 and December 31, 1998, securities with fair value
of $97,345 and $139,445, 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, at September 30, 1999
and December 31, 1998, the Company had commitments of $768,835 and $929,713,
respectively, consisting of secured credit lines to real estate operators,
mortgage and asset-backed originators, and other commitments to investment
partnerships. Settlement of these transactions at September 30, 1999 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 8: COMPREHENSIVE INCOME
Comprehensive income is calculated in accordance with SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income combines net income and certain
items that directly affect stockholders' equity, such as foreign currency
translation adjustments. The components of comprehensive income for the three
months and nine months ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 138,202 $ 82,892 $ 462,305 $ 333,128
Foreign currency translation adjustment 2,046 1,082 (885) 1,879
--------- --------- --------- ---------
Total comprehensive income $ 140,248 $ 83,974 $ 461,420 $ 335,007
========= ========= ========= =========
</TABLE>
11
<PAGE> 13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes the dilutive effects of
options and convertible securities and 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. Set forth below 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 138,202 $ 82,892 $ 462,305 $ 333,128
Preferred stock dividends (5,949) (5,912) (17,847) (17,735)
------------- ------------- ------------- -------------
Net income applicable to common shares
for basic earnings per share 132,253 76,980 444,458 315,393
Effect of dilutive securities:
Interest savings on convertible debentures (1) -- 69 -- 278
------------- ------------- ------------- -------------
Net income applicable to common shares
for diluted earnings per share $ 132,253 $ 77,049 $ 444,458 $ 315,671
============= ============= ============= =============
DENOMINATOR:
Weighted-average common shares for basic
earnings per share 145,633,697 141,322,783 145,583,134 140,153,619
Weighted-average effect of dilutive securities:
Employee stock options and awards 8,223,806 9,180,978 8,523,851 9,212,369
Convertible debentures (1) -- 852,929 -- 1,172,376
------------- ------------- ------------- -------------
Dilutive potential common shares 8,223,806 10,033,907 8,523,851 10,384,745
------------- ------------- ------------- -------------
Weighted-average common and common equivalent
shares for diluted earnings per share 153,857,503 151,356,690 154,106,985 150,538,364
============= ============= ============= =============
EARNINGS PER SHARE:
Basic $ 0.91 $ 0.54 $ 3.05 $ 2.25
============= ============= ============= =============
Diluted $ 0.86 $ 0.51 $ 2.88 $ 2.10
============= ============= ============= =============
</TABLE>
(1) In August 1998, the 6.5% convertible debentures were called for redemption
by the Company and converted into common stock of the Company.
NOTE 10: SEGMENT REPORTING DATA
In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company offers a wide variety of
products and services, primarily those of a full service domestic broker-dealer
to a domestic market, through its two operating segments: Individual and
Institutional. The Individual segment offers brokerage services and products
(such as the purchase and sale of securities, margin and securities lending,
insurance annuity contracts, mutual funds, and wrap fee products), asset
management and other investment advisory and portfolio management products and
services, and execution and clearing services for transactions originated by
individual investors. The Institutional segment principally includes capital
market products and services (such as the placing of securities and other
financial instruments for - and the execution of trades on behalf of -
institutional clients, investment banking services such as the underwriting of
debt and equity securities, and mergers and acquisitions advisory services).
12
<PAGE> 14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment revenues and expenses in the table below consist of those that are
directly attributable, combined with segment amounts based on Company allocation
methodologies (for example, allocating a portion of investment banking revenues
to the Individual segment; relative utilization of the Company's square footage
for certain cost allocations).
<TABLE>
<CAPTION>
Three months ended September 30, 1999 Three months ended September 30, 1998
------------------------------------------- ------------------------------------------
Individual Institutional Total Individual Institutional Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $1,167,330 $ 692,862 $1,860,192 $ 999,112 $ 810,036 $1,809,148
Net revenues 1,010,919 226,248 1,237,167 838,479 192,997 1,031,476
Income before taxes
and minority interest 186,513 39,472 225,985 123,273 15,326 138,599
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999 Nine months ended September 30, 1998
------------------------------------------ ------------------------------------------
Individual Institutional Total Individual Institutional Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $3,407,685 $2,346,795 $5,754,480 $2,983,167 $2,531,374 $5,514,541
Net revenues 2,946,050 953,915 3,899,965 2,537,868 770,753 3,308,621
Income before taxes
and minority interest 491,386 269,285 760,671 376,216 172,577 548,793
</TABLE>
Total assets for the Individual and Institutional segments were $20,863,620 and
$35,480,514, respectively, at September 30, 1999 and $18,330,427 and
$35,845,494, respectively at December 31, 1998.
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, market liquidity and
technological changes. 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.
For the securities industry, market and economic conditions deteriorated in the
third quarter of 1999, after a generally strong first six months. The U.S.
economy failed to slow down, as investors had hoped, with GDP growing at a 4.8
percent annual rate in the third quarter. In addition, oil prices continued to
rise. With rapid U.S. GDP growth and rising oil prices increasing inflationary
pressure, the Consumer Price Index rose at a 4.2 percent annual rate in the
third quarter, versus 2.9 percent in the second quarter and 1.5 percent in the
first quarter of 1999. Responding to rising inflationary pressure, the Federal
Reserve Board increased the overnight lending rate by 25 basis points on August
24, to 5.25 percent, after having raised the rate by a like amount on the last
day of the second quarter.
Rising short-term interest rates and an increasing perceived risk of inflation
caused longer term market interest rates to increase during the third quarter of
1999. The yield on the 90-day Treasury bill rose 7 basis points, from 4.76
percent to 4.83 percent and the yield on the 30-year Treasury Bond rose 7 basis
points, from 5.98 percent to 6.05 percent. Rising interest rates put downward
pressure on stock prices. During the 1999 third quarter, the S&P 500 declined
6.6 percent and the Dow Jones Industrial Average dropped 5.8 percent while the
NASDAQ Composite Index rose 2.2 percent. This represented a significant shift
from the first half of 1999, when S&P 500 rose 11.7 percent, the Dow Jones
Industrial Average rose 19.5 percent and the NASDAQ Composite Index rose 22.5
percent. In addition, stock market volume declined. New York Stock Exchange
volume declined 7.3 percent to an average daily volume of 744.6 million shares
and the NASDAQ average daily volume declined 0.1 percent to 976.5 million
shares. However, market conditions during the third quarter of 1999 were
significantly more favorable than those that existed during the same period
last year. The 1998 third quarter was marked by extreme volatility and an
international "flight to quality" engendered by the severe financial problems
in Russia and Asia. Investor concerns regarding the impact of financial and
economic turmoil abroad drove the equity markets downward during that quarter.
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 rose 12.6 percent for the first nine months of
1999 as compared to the 0.8 percent decline for the first nine months of 1998.
The NASDAQ Composite Index advanced 25.2 percent for the first nine months of
1999, up from the 7.9 percent increase in the first nine months of 1998. The S&P
500 stock index appreciated 4.4 percent in the first nine months of 1999, as
compared to an increase of 4.8 percent for the first nine months of 1998.
Average daily volume on the New York Stock Exchange was 781.3 million shares for
the first nine months of 1999, versus 651.8 million shares for the prior year
period. The NASDAQ average daily volume increased from 755.6 million shares for
the first nine months of 1998 to 973.7 million shares for the first nine months
of 1999. The yield on the 30-year Treasury bond rose 97 points during the first
nine months of 1999 compared to the 95 basis point decline in the prior year
period.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1999 compared to Quarter Ended September 30, 1998
For the quarter ended September 30, 1999, the Company's net income was $138.2
million, or $0.91 per basic share ($0.86 per diluted share) compared to net
income of $82.9 million, or $0.54 per basic share ($0.51 per diluted share)
earned during the third quarter of 1998. During the third quarter of 1999,
revenues, net of interest expense, were $1,237.2 million, 19.9 percent higher
than the third quarter of 1998.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Commission revenues earned during the third quarter of 1999 were $451.3 million,
or 9.9 percent higher than the $410.8 million earned during the prior year
quarter. Mutual fund and insurance commissions increased $28.6 million or 26.1
percent, commissions from over-the-counter securities and commodities increased
$13.3 million or 27.2 percent and commissions on the sale of listed securities
and options remained relatively flat compared to the prior year quarter.
Principal transactions revenues increased $87.5 million, or 58.9 percent, to
$235.9 million driven by improved trading results in equities, taxable fixed
income and municipals, with equities contributing $74.7 million to the increase.
The increase was in large part due to the improved market and economic
conditions experienced during the quarter relative to the volatile conditions
experienced during the third quarter of 1998.
Asset management fees increased $51.0 million, or 27.6 percent to a record
$235.7 million, reflecting higher revenues earned on managed accounts. Average
assets in wrap and trust accounts during the third quarter of 1999 were
approximately 49 percent higher than during the third quarter of 1998. At
September 30, 1999, assets in wrap and trust accounts were $37.5 billion. The
increase also reflects higher investment advisory fees earned on assets managed
in long-term and money market funds. The average assets under management in
money market, institutional and long-term mutual funds were approximately $60
billion during the third quarter of 1999 and approximately $54 billion during
the third quarter of 1998.
Investment banking revenues earned during the third quarter of 1999 were $134.2
million, $14.6 million more than the $119.6 million earned during the third
quarter of 1998. The current year quarter reflects increases in underwriting
fees, management fees and selling concessions on higher volume of lead-managed
and co-managed corporate issues as well as increases in private placement and
other fees. Partially offsetting these increases were declines in municipal
securities underwriting fees, management fees and selling concessions.
Other income increased $4.4 million, 12.1 percent higher than the prior year
period principally due to higher transaction fees earned on increased client
volume and higher account fees on an increased number of IRA and RMA accounts.
Net interest increased $7.7 million, or 5.8 percent to $139.2 million primarily
due to increased margin interest.
Compensation and benefits expenses for the quarter ended September 30, 1999 were
$711.8 million, a 15.4 percent increase as compared to $616.9 million during the
prior year quarter. The number of employees at September 30, 1999 increased
1,564, or 9.0 percent, as compared to September 30, 1998 reflecting an
additional 1,173 Private Client Group financial advisors, related financial
advisor support personnel, and technology specialists hired to implement the
Company's technology initiatives. Also, the Company's improved operating
results for the third quarter of 1999 versus the prior year quarter resulted in
higher production-based compensation to Private Client Group financial
advisors, and higher performance-based compensation. The ratio of compensation
and benefits as a percent of net revenues declined to 57.5 percent versus 59.8
percent in the prior year quarter, as growth in net revenues exceeded growth in
these expenses.
All other operating expenses increased $23.4 million, or 8.5 percent to $299.4
million, as compared to $276.0 million for the prior year quarter. Office and
equipment expenses increased $13 million, or 17.1 percent principally due to an
increase in office space and equipment necessary to support the additional
headcount, as well as normal escalation costs. Communications expenses increased
$3.5 million, or 9.1 percent principally due to the Company's implementation of
advanced telecommunications technology related to the new fixed income and
equity trading floors and the new ConsultWorks platforms, as well as additional
employee headcount. Business development expenses increased $3.3 million, or
11.9 percent reflecting higher promotional costs associated with PaineWebber
EDGE and PaineWebber InsightOne. The ratio of non-compensation expenses as a
percentage of net revenues was 24.2 percent for the quarter ended September 30,
1999 compared to 26.8 percent for the prior year quarter.
The effective income tax rate for the quarter ended September 30, 1999 was 35.3
percent compared to 34.4 percent from the prior year quarter reflecting an
increase in state and local taxes and non-deductible expenses and a decrease in
non-taxable interest.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1999 compared to Nine Months Ended
September 30, 1998
The Company's net income for the nine months ended September 30, 1999 was a
record $462.3 million, compared to net income of $333.1 million earned during
the first nine months of 1998. On a per share basis, the Company earned a record
$3.05 per basic share ($2.88 per diluted share), compared to $2.25 per basic
share ($2.10 per diluted share) earned during the first nine months of 1998.
During the first nine months of 1999, revenues, net of interest expense, were a
record $3,900.0 million, 17.9 percent higher than the corresponding period a
year ago.
Commission revenues earned during the first nine months of 1999 were a record
$1,419.1 million, 16.2 percent higher than the $1,221.1 million earned during
the prior year period. Commissions on the sale of listed securities and options
increased $88.9 million or 12.1 percent, mutual fund and insurance commissions
increased $60.4 million or 18.2 percent, and commissions from over-the-counter
securities and commodities increased $48.7 million or 31.7 percent.
Principal transactions revenues increased $160.4 million, or 24.0 percent, to a
record $830.0 million reflecting improved trading results principally in taxable
fixed income and equities. These results reflect the market and economic
conditions described above.
Asset management fees increased $140.7 million, or 26.8 percent to a record
$666.3 million, reflecting higher revenues earned on managed accounts. Average
assets in wrap and trust accounts during the first nine months of 1999 were
approximately 45 percent higher than during the corresponding period of 1998. At
September 30, 1999, assets in wrap and trust accounts were $37.5 billion. The
increase also reflects higher investment advisory and distribution fees earned
on assets managed in long-term and money market funds. The average assets under
management in money market, institutional and long-term mutual funds were
approximately $60 billion during the first nine months of 1999, up from the
approximately $53 billion during the first nine months of 1998. In the second
quarter, the Company divested ownership in Financial Counselors Inc., a
subsidiary of Mitchell Hutchins Asset Management Inc., resulting in a decline in
assets under management of approximately $2 billion.
Investment banking revenues earned during the nine months of 1999 were $420.3
million, $1 million lower than the record $421.3 million earned during the same
period last year. The current year period reflects declines in underwriting
fees, management fees and selling concessions on lower volume of lead-managed
and co-managed corporate issues offset by increases in private placement and
other fees.
Other income increased $24.4 million to a record $129.2 million principally due
to higher transaction fees earned on increased client volume and higher account
fees on an increased number of IRA and RMA accounts.
Net interest increased $68.8 million, or 18.8 percent to a record $435.1 million
primarily due to increased margin interest and lower funding costs.
Compensation and benefits expenses for the nine months ended September 30, 1999
were $2,260.6 million, a 16.0 percent increase as compared to $1,949.6 million
during the prior year period. The number of employees at September 30, 1999
increased 1,564, or 9.0 percent, as compared to September 30, 1998 reflecting an
additional 1,173 Private Client Group financial advisors, related financial
advisor support personnel, and technology specialists hired to implement the
Company's technology initiatives. Also, the Company's improved operating results
for the nine months ended 1999 versus the prior year period resulted in higher
production-based compensation to Private Client Group financial advisors, and
higher performance-based compensation. The ratio of compensation and benefits as
a percent of net revenues declined to 58.0 percent versus 58.9 percent in the
prior year period, as growth in net revenues exceeded growth in these expenses.
All other operating expenses increased $68.5 million, or 8.5 percent to $878.7
million, as compared to $810.2 million for the prior year period. Office and
equipment expenses increased $36.4 million, or 16.3 percent principally due to
an increase in office space and equipment necessary to support the additional
headcount, as well as normal escalation costs. Communications expenses increased
$13.5 million, or 11.9 percent principally due to the Company's implementation
of advanced telecommunications technology related to the new fixed income and
equity trading floors and the new ConsultWorks platforms, as well as additional
employee headcount. Business development expenses increased $7.3
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
million, or 9.6 percent reflecting higher advertising costs associated with the
Company's advertising campaign and higher promotional costs associated with
PaineWebber EDGE and PaineWebber InsightOne. The ratio of non-compensation
expenses as a percentage of net revenues was 22.5 percent for the nine months
ended September 30, 1999 compared to 24.5 percent for the prior year period.
The effective income tax rate for the nine months ended September 30, 1999 was
36.0 percent compared to 34.9 percent from the prior year period reflecting an
increase in state and local taxes and non-deductible expenses and a decrease in
non-taxable interest.
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, 1999 were $56.3 billion compared to
$54.2 billion at December 31, 1998, primarily attributable to an increase in
receivables from clients and trading assets offset by lower resale agreements.
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. The Company regularly reviews its mix
of assets and liabilities to maximize self-funding. 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 was renewed in September 1999 and extends through September
2000, with provisions for renewal through 2001. In August 1999, the Company also
renewed a secured revolving credit facility available to certain of the
Company's subsidiaries and increased the aggregate amount available from $750
million to $1.0 billion. The facility expires in 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, 1999, there were no outstanding borrowings under these credit
facilities. Additionally, the Company had approximately $4.8 billion in
uncommitted lines of credit at September 30, 1999.
The Company maintains public shelf registration statements with the SEC for the
issuance of debt securities of the Company and for the issuance of preferred
securities of PWG Capital Trusts III, IV and V ("Preferred Trust Securities"),
business trusts formed under the Delaware law which are wholly owned
subsidiaries of the Company. During the third quarter of 1999, the Company
issued $135.0 million of debt under these registration statements. At September
30, 1999, the Company had $1,555.1 million in debt securities available for
issuance under a shelf registration statement and $706.2 million in Preferred
Trust Securities and debt securities of the Company available for issuance under
two other registration 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.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's total capital base, which includes long-term borrowings, preferred
securities and stockholders' equity, grew to a record $8.36 billion at September
30, 1999, an increase of $1.08 billion from December 31, 1998. The growth in
total capital was primarily due to the net increase in long-term borrowings of
$712.3 million and a net increase in stockholders' equity of $371.3 million.
The net increase in long-term borrowings primarily reflected the net issuance of
medium-term notes of $190.0 million and the issuance of $525.0 million 6 3/8%
senior notes due 2004. The increase in stockholders' equity was primarily the
result of net income for the nine months ended September 30, 1999 of $462.3
million and the issuance of approximately 3,545,000 shares of common stock
related to employee compensation and stock purchase programs. Issuances and tax
credits related to these programs had the net effect of increasing equity
capital by $126.9 million in the first nine months of 1999. These increases were
offset by the repurchase in the first nine months of 1999 of approximately
3,916,000 shares of common stock for $151.4 million and dividends paid and
accrued of $65.4 million. At September 30, 1999, 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 22 million.
On November 4, 1999, the Board of Directors declared a regular quarterly cash
dividend on the Company's common stock of $0.11 per share payable on January 5,
2000 to stockholders of record on December 3, 1999.
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, commercial real estate, and asset
financing 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, 1999, the Company had investments in merchant banking
transactions which were affected by liquidity, reorganization or restructuring
issues amounting to $24.7 million, net of reserves, compared to $19.4 million,
net of reserves, at December 31, 1998. 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, 1999, the Company
held $331.9 million of high-yield securities, with approximately 7 percent of
such securities attributable to one issuer. 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. These high-yield
securities have not had a material effect on the Company's results of
operations.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument is a contractual agreement between
counterparties that derives its value from changes in the value of some
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 other
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.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 that 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 $60.7 billion and $84.6 billion at
September 30, 1999 and December 31, 1998, respectively. These amounts included
$44.3 billion and $64.3 billion, respectively, related to "to be announced"
mortgage-backed securities requiring forward settlement. Also included in these
amounts were $3.8 billion and $3.1 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, 1999 and December 31, 1998,
respectively. For further discussion on the Company's derivative financial
instruments, see Note 5 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. These interest rate swap agreements had the
effect of reducing net interest expense on the Company's fixed rate debt by
$20.4 million and $10.6 million for the nine months ended September 30, 1999 and
1998, respectively. The Company had no deferred gains or losses recorded at
September 30, 1999 and December 31, 1998 related to terminated swap agreements
on the Company's long-term borrowings.
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, 1999 were
$198.7 million and $203.0 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, 1998 were $191.4 million
and $217.8 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,
1999 and December 31, 1998, the fair values amounted to $198.7 million and
$191.4 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 risks. Included below is a discussion on market risk. For further
discussion on the Company's principal risks, see the Company's 1998 Annual
Report to Stockholders.
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 limits
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.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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, 1999 and December 31, 1998 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 forwards and futures
contracts, options, and interest rate swap and cap agreements. The Company also
issues fixed rate instruments in connection with its nontrading 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 SEC 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.
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, 1999 and December 31, 1998, into a uniform
benchmark (a ten year U.S. Treasury note equivalent), and evaluated the impact
assuming a 13 basis point change to the ten-year U.S. Treasury note at September
30, 1999 and December 31, 1998, respectively. The hypothetical basis point
change was derived from a proprietary model which uses a one-day interval and a
95 percent 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 was based on a 2 percent move in the Dow Jones Industrial Average at
September 30, 1999 and December 31, 1998, respectively, using a one-day interval
and a 95 percent confidence level, and was based on historical data over a
one-year period. Based upon the aforementioned methodologies, the
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Company's potential daily loss in future earnings at September 30, 1999 was
approximately $2 million and $0.1 million for interest rate risk and equity
price risk, respectively, and the Company's potential daily loss in future
earnings at December 31, 1998 was approximately $9 million and $0.1 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,
Implementation and Testing.
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 and Implementation phases of the Company's plan specify a
strategy for each asset type and assign 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 all changes have been implemented. Remediation of
Hardware, Office Equipment and Facilities assets, including desktop computers
and servers, and implementation of necessary changes is materially complete.
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 and commodities 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 and has received oral and written responses. The
Company's assessment of these responses is complete. For crucial relationships,
the Company's procedures have included joint testing of systems and site visits.
The Testing phase of the plan is materially complete. Testing of external
interfaces, including additional securities industry-wide testing, is materially
complete.
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 and commodities 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 and commodities industries as a whole. The scope of the
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 ongoing 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 has developed contingency plans to be executed should a Year 2000
failure affect the Company's own operations or those of a significant third
party. There can be no assurance that alternative arrangements have been
identified for all material risks or contingencies, or that these contingency
plans will be effective.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company estimates the incremental cost of achieving Year 2000 compliance to
be approximately $65 million of which approximately $55 million has been
incurred through September 30, 1999. 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; and the success of securities and commodities
exchanges, self-regulatory organizations, industry clearing and depository
institutions, other broker-dealers, and commercial banks in achieving Year 2000
compliance. 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.
22
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No significant events have occurred since the filing of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 and Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999,
except as described below:
NEWTON V. MERRILL LYNCH, ET AL. SECURITIES LITIGATION
On November 8, 1999, the District Court denied plaintiffs' motion for class
certification.
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 Fixed Charges
Exhibit 12.2 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated October 12, 1999 with
the Securities and Exchange Commission reporting under "Item 5 - Other
Events" and "Item 7 - Exhibits" relating to the Company's press release
which, among other things, reported financial results for the three and
nine month periods ending September 30, 1999.
23
<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 15, 1999 By: /s/ Regina A. Dolan
------------------ -------------------------
Regina A. Dolan
Senior Vice President and Chief Financial
Officer (principal financial and accounting
officer)
24
<PAGE> 1
EXHIBIT 12.1
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,
--------------------------------------------------------------------------
1999 * 1998 * 1997 * 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 736,488 $ 682,763 $ 644,075 $ 558,999 $ 102,677 $ 44,385
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,878,698 2,876,712 2,573,582 1,971,788 1,969,811 1,428,653
Interest factor in rents 45,762 56,139 53,665 54,537 59,491 51,102
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 1,924,460 2,932,851 2,627,247 2,026,325 2,029,302 1,479,755
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
fixed charges $2,660,948 $3,615,614 $3,271,322 $2,585,324 $2,131,979 $1,524,140
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.4 1.2 1.2 1.3 1.1 1.0
========== ========== ========== ========== ========== ==========
</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.
<PAGE> 1
EXHIBIT 12.2
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,
----------------------------------------------------------------------
1999 * 1998 * 1997 * 1996 1995 1994
--------------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 736,488 $ 682,763 $ 644,075 $ 558,999 $ 102,677 $ 44,385
----------- ----------- ---------- ---------- ---------- ----------
Preferred stock dividends 26,828 35,433 44,186 43,712 36,260 1,710
----------- ----------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 1,878,698 2,876,712 2,573,582 1,971,788 1,969,811 1,428,653
Interest factor in rents 45,762 56,139 53,665 54,537 59,491 51,102
----------- ----------- ---------- ---------- ---------- ----------
Total fixed charges 1,924,460 2,932,851 2,627,247 2,026,325 2,029,302 1,479,755
----------- ----------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 1,951,288 2,968,284 2,671,433 2,070,037 2,065,562 1,481,465
----------- ----------- ---------- ---------- ---------- ----------
Income before taxes and fixed charges $ 2,660,948 $ 3,615,614 $3,271,322 $2,585,324 $2,131,979 $1,524,140
=========== =========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred stock dividends 1.4 1.2 1.2 1.2 1.0 1.0
=========== =========== ========== ========== ========== ==========
</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.
<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, 1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 937,994
<RECEIVABLES> 9,426,762
<SECURITIES-RESALE> 12,812,044
<SECURITIES-BORROWED> 9,369,098
<INSTRUMENTS-OWNED> 21,435,445
<PP&E> 536,229
<TOTAL-ASSETS> 56,344,134
<SHORT-TERM> 1,428,266
<PAYABLES> 6,270,283
<REPOS-SOLD> 26,176,188
<SECURITIES-LOANED> 5,169,106
<INSTRUMENTS-SOLD> 5,622,606
<LONG-TERM> 4,968,068
393,750
190,788
<COMMON> 192,845
<OTHER-SE> 2,617,371
<TOTAL-LIABILITY-AND-EQUITY> 56,344,134
<TRADING-REVENUE> 829,968
<INTEREST-DIVIDENDS> 2,289,636
<COMMISSIONS> 1,419,092
<INVESTMENT-BANKING-REVENUES> 420,321
<FEE-REVENUE> 666,250
<INTEREST-EXPENSE> 1,854,515
<COMPENSATION> 2,260,575
<INCOME-PRETAX> 760,671
<INCOME-PRE-EXTRAORDINARY> 462,305
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 462,305
<EPS-BASIC> 3.05
<EPS-DILUTED> 2.88
</TABLE>
