<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 June 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)
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 August 6, 1999, the Registrant had outstanding 145,576,877 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
JUNE 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 Six Months Ended
June 30, 1999 and 1998. 2
Condensed Consolidated Statements of Financial
Condition (unaudited) at June 30, 1999
and December 31, 1998. 3
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended
June 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 488,878 $ 402,094 $ 967,751 $ 810,218
Principal transactions 279,846 244,146 594,054 521,109
Asset management 224,487 182,128 430,538 340,864
Investment banking 160,133 176,687 286,086 301,656
Interest 770,271 860,707 1,527,431 1,663,085
Other 47,363 34,521 88,428 68,461
------------ ------------ ------------ -----------
Total revenues 1,970,978 1,900,283 3,894,288 3,705,393
Interest expense 623,071 738,115 1,231,490 1,428,248
------------ ------------ ------------ -----------
Net revenues 1,347,907 1,162,168 2,662,798 2,277,145
------------ ------------ ------------ -----------
NON-INTEREST EXPENSES
Compensation and benefits 780,078 682,088 1,548,792 1,332,663
Office and equipment 89,330 74,862 170,782 147,402
Communications 42,645 37,140 84,848 74,896
Business development 28,534 26,290 52,401 48,369
Brokerage, clearing & exchange fees 23,487 22,081 47,877 47,577
Professional services 32,397 30,390 62,849 63,982
Other 81,769 77,318 160,563 152,062
------------ ------------ ------------ -----------
Total non-interest expenses 1,078,240 950,169 2,128,112 1,866,951
------------ ------------ ------------ -----------
INCOME BEFORE TAXES AND MINORITY INTEREST 269,667 211,999 534,686 410,194
Provision for income taxes 98,102 74,437 194,461 143,836
------------ ------------ ------------ -----------
INCOME BEFORE MINORITY INTEREST 171,565 137,562 340,225 266,358
Minority interest 8,061 8,061 16,122 16,122
------------ ------------ ------------ -----------
NET INCOME $ 163,504 $ 129,501 $ 324,103 $ 250,236
============ ============ ============ ===========
Net income applicable to common shares $ 157,555 $ 123,589 $ 312,205 $ 238,413
============ ============ ============ ===========
Earnings per common share:
Basic $ 1.08 $ 0.88 $ 2.14 $ 1.71
Diluted $ 1.02 $ 0.82 $ 2.02 $ 1.59
Weighted-average common shares:
Basic 145,742,741 140,032,972 145,631,920 139,609,704
Diluted 154,960,397 151,161,713 154,305,795 150,177,958
Dividends declared per common share $ 0.11 $ 0.11 $ 0.22 $ 0.22
</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>
June 30, December 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 298,020 $ 228,359
Cash and securities segregated and on deposit for
federal and other regulations 685,857 631,272
Trading assets 21,515,370 19,299,869
Securities received as collateral 988,079 1,189,331
------------ ------------
Total trading assets, at fair value 22,503,449 20,489,200
Securities purchased under agreements to resell 14,523,964 14,217,062
Securities borrowed 8,914,986 8,717,476
Receivables, net of allowance for doubtful accounts of
$18,222 and $20,496 at June 30, 1999 and
December 31, 1998, respectively 8,906,407 7,876,619
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $475,815 and $431,460 at
June 30, 1999 and December 31, 1998, respectively 492,462 434,895
Other assets 1,781,902 1,581,038
------------ ------------
$ 58,107,047 $ 54,175,921
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,184,494 $ 1,417,783
Trading liabilities, at fair value 8,040,353 5,177,099
Securities sold under agreements to repurchase 25,646,267 23,948,872
Securities loaned 4,983,659 4,969,638
Obligation to return securities received as collateral 988,079 1,189,331
Payables 6,314,705 7,519,368
Other liabilities and accrued expenses 2,721,347 2,675,520
Long-term borrowings 4,942,785 4,255,802
------------ ------------
54,821,689 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 190,464 189,815
Stockholders' Equity:
Common stock, $1 par value, 400,000,000 shares authorized, issued
192,585,042 shares and 191,047,151 shares at
June 30, 1999 and December 31, 1998, respectively 192,585 191,047
Additional paid-in capital 1,601,052 1,525,938
Retained earnings 1,969,134 1,689,386
Treasury stock, at cost; 47,216,571 shares and 45,527,707 shares at
June 30, 1999 and December 31, 1998, respectively (1,054,060) (962,792)
Accumulated other comprehensive income (7,567) (4,636)
------------ ------------
2,701,144 2,438,943
------------ ------------
$ 58,107,047 $ 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>
Six Months Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 324,103 $ 250,236
Adjustments to reconcile net income to cash
used for operating activities:
Noncash items included in net income:
Depreciation and amortization 49,206 35,456
Deferred income taxes (10,317) 46,732
Amortization of deferred charges 51,736 53,559
(Increase) decrease in operating assets:
Cash and securities on deposit (54,585) (24,932)
Trading assets (2,200,354) (2,324,744)
Securities purchased under agreements to resell (306,902) (1,857,032)
Securities borrowed (197,510) 251,021
Receivables (1,032,062) (1,120,493)
Other assets (243,111) (377,786)
Increase (decrease) in operating liabilities:
Trading liabilities 2,863,254 1,560,244
Securities sold under agreements to repurchase 1,697,395 1,902,372
Securities loaned 14,021 755,494
Payables (1,204,663) 235,781
Other 85,416 (28,027)
-------------- --------------
Cash used for operating activities (164,373) (642,119)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements (110,289) (90,833)
------------ ------------
Cash used for investing activities (110,289) (90,833)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments on) proceeds from short-term borrowings (233,289) 469,602
Proceeds from:
Long-term borrowings 875,985 641,459
Employee stock transactions 56,593 35,741
Payments for:
Long-term borrowings (190,180) (223,132)
Repurchases of common stock (121,080) (59,465)
Dividends (43,706) (42,068)
-------------- -------------
Cash provided by financing activities 344,323 822,137
------------ ------------
Increase in cash and cash equivalents 69,661 89,185
Cash and cash equivalents, beginning of period 228,359 233,787
------------ ------------
Cash and cash equivalents, end of period $ 298,020 $ 322,972
=========== ===========
</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 June 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 Report on Form 10-Q for the
quarter ended 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
$1,211,332 and $1,465,639 for the six months ended June 30, 1999 and 1998,
respectively. Income taxes paid were $118,274 and $104,585 for the six months
ended June 30, 1999 and 1998, respectively.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board 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 June 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>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Trading assets:
U.S. government and agencies $ 7,561,634 $ 4,858,189
Mortgages and mortgage-backed 8,665,234 8,861,944
Corporate debt 1,818,824 2,466,322
Commercial paper and other short-term debt 1,790,036 1,534,913
Equities 849,232 1,078,322
State and municipals 830,410 500,179
------------ --------------
21,515,370 19,299,869
Securities received as collateral 988,079 1,189,331
------------ --------------
$ 22,503,449 $ 20,489,200
============ ============
Trading liabilities:
U.S. government and agencies $ 6,393,034 $ 4,031,254
Mortgages and mortgage-backed 232,272 79,521
Corporate debt 1,070,527 837,099
Equities 310,494 215,991
State and municipals 34,026 13,234
------------- -------------
$ 8,040,353 $ 5,177,099
============= =============
</TABLE>
NOTE 3: LONG-TERM BORROWINGS
Long-term borrowings at June 30, 1999 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C> <C> <C>
Fixed Rate Notes due 2000 - 2014 $ 2,487,009 $ 1,961,340
Fixed Rate Subordinated Notes due 2002 174,721 174,677
Medium-Term Senior Notes 2,122,855 1,936,835
Medium-Term Subordinated Notes 158,200 182,950
------------- -------------
$ 4,942,785 $ 4,255,802
============= =============
</TABLE>
At June 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 on these notes outstanding at June 30, 1999 was
7.16 percent. Interest on the notes is payable semi-annually. The fixed rate
notes and fixed rate subordinated notes outstanding at June 30, 1999 had an
average maturity of 5.6 years.
At June 30, 1999, the Company had outstanding $1,355,905 of fixed rate
Medium-Term Notes and $925,150 of variable rate Medium-Term Notes. The
Medium-Term Notes outstanding at June 30, 1999 had an average maturity of 4.5
years and a weighted-average interest rate of 6.37 percent.
At June 30, 1999 and December 31, 1998, the fair values of long-term borrowings
were $4,904,753 and $4,325,014, respectively, as compared to the carrying
amounts of $4,942,785 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 $27,786 payable and $122,053
receivable at June 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 June 30,
1999 and December 31, 1998 were net receivables of $12,564 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 June 30,
1999, PWI's net capital of $1,144,367 was 12.1 percent of aggregate debit items
and its net capital in excess of the minimum required was $946,736.
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 June 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
-----------------------------------------------------------------
June 30, 1999 December 31, 1998
----------------------------- ----------------------------
Purchases Sales Purchases Sales
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $26,544,086 $32,791,507 $30,296,601 $35,558,370
Foreign currency forward contracts,
futures contracts, and options
written and purchased 1,994,790 2,001,660 2,709,421 2,628,824
Equity securities contracts including
stock index futures, forwards, and
options written and purchased 152,302 190,468 156,519 332,248
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 4,993,292 2,059,055 3,890,619 4,336,300
Interest rate swaps and caps 1,295,880 459,898 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 June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Fair Value at Fair Value at
June 30, 1999 December 31, 1998
---------------------------- --------------------------
Assets Liabilities Assets Liabilities
-------- ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $180,667 $230,454 $ 85,995 $ 76,315
Foreign currency forward contracts,
futures contracts, and options
written and purchased 18,227 17,872 31,622 31,726
Equity securities contracts including
stock index futures, forwards, and
options written and purchased 67,452 41,226 26,806 46,606
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 11,666 7,120 12,183 55,015
Interest rate swaps and caps 20,554 6,243 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 June 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
June 30, 1999 December 31, 1998
------------- -----------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $193,756 $180,962 $158,215 $146,522
Foreign currency forward contracts,
futures contracts, and options
written and purchased 19,856 19,804 46,222 45,895
Equity securities contracts including
stock index futures, forwards, and
options written and purchased 64,895 41,767 20,836 42,995
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 9,881 44,546 16,547 41,786
Interest rate swaps and caps 17,238 5,165 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 June 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 $298,566 and $191,355 at June 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 six months ended June 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 Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Taxable fixed income (includes futures, forwards,
options contracts and other securities) $137,646 $132,635 $332,050 $274,118
Equities (includes stock index futures, forwards and options contracts) 107,424 74,794 192,331 179,090
Municipals 34,776 36,717 69,673 67,901
-------- -------- -------- --------
$279,846 $244,146 $594,054 $521,109
======== ======== ======== ========
</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 June 30, 1999 and
December 31, 1998, the Company had outstanding interest rate swap agreements
with commercial banks with notional amounts of $3,693,985 and $3,096,985,
respectively. These agreements effectively converted substantially all of the
Company's fixed rate debt at June 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 $13,791 and $6,986 for the six
months ended June 30, 1999 and 1998, respectively. The Company had no deferred
gains or losses related to terminated swap agreements at June 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 hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
9
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 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 June 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 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.
10
<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 30, 1999 and December 31, 1998, the Company was contingently liable
under unsecured letters of credit totaling $185,551 and $159,647, respectively,
which approximated fair value. At June 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 June 30, 1999 and December 31, 1998, the Company had outstanding
$90,300 and $78,787, respectively, of such standby letters of credit. At June
30, 1999 and December 31, 1998, securities with fair value of $171,132 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 June 30, 1999 and
December 31, 1998, the Company had commitments of $1,019,179 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 June 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 six months ended June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 163,504 $ 129,501 $ 324,103 $ 250,236
Foreign currency translation adjustment (1,419) (229) (2,931) 797
--------- --------- --------- ---------
Total comprehensive income $ 162,085 $ 129,272 $ 321,172 $ 251,033
========= ========= ========= =========
</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 Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 163,504 $ 129,501 $ 324,103 $ 250,236
Preferred stock dividends (5,949) (5,912) (11,898) (11,823)
------------- ------------- ------------- -------------
Net income applicable to common shares
for basic earnings per share 157,555 123,589 312,205 238,413
Effect of dilutive securities:
Interest savings on convertible debentures(1) -- 104 -- 209
------------- ------------- ------------- -------------
Net income applicable to common shares
for diluted earnings per share $ 157,555 $ 123,693 $ 312,205 $ 238,622
============= ============= ============= =============
DENOMINATOR:
Weighted-average common shares for basic
earnings per share 145,742,741 140,032,972 145,631,920 139,609,704
Weighted-average effect of dilutive securities:
Employee stock options and awards 9,217,656 9,881,681 8,673,875 9,231,916
Convertible debentures(1) -- 1,247,060 -- 1,336,338
------------- ------------- ------------- -------------
Dilutive potential common shares 9,217,656 11,128,741 8,673,875 10,568,254
------------- ------------- ------------- -------------
Weighted-average common and common equivalent
shares for diluted earnings per share 154,960,397 151,161,713 154,305,795 150,177,958
============= ============= ============= =============
EARNINGS PER SHARE:
Basic $ 1.08 $ 0.88 $ 2.14 $ 1.71
============= ============= ============= =============
Diluted $ 1.02 $ 0.82 $ 2.02 $ 1.59
============= ============= ============= =============
</TABLE>
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).
(1) In August 1998, the 6.5% convertible debentures were called for redemption
by the Company and converted into common stock of the Company.
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 June 30, 1999 Three months ended June 30, 1998
-------------------------------- --------------------------------
Individual Institutional Total Individual Institutional Total
---------- ------------- ----- ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $1,135,946 $ 835,032 $1,970,978 $1,027,078 $ 873,205 $1,900,283
Net revenues 980,018 367,889 1,347,907 873,127 289,041 1,162,168
Income before taxes
and minority interest 152,980 116,687 269,667 134,165 77,834 211,999
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999 Six months ended June 30, 1998
------------------------------ ------------------------------
Individual Institutional Total Individual Institutional Total
---------- ------------- ----- ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $2,240,355 $1,653,933 $3,894,288 $1,984,055 $1,721,338 $3,705,393
Net revenues 1,935,131 727,667 2,662,798 1,699,389 577,756 2,277,145
Income before taxes
and minority interest 304,873 229,813 534,686 252,943 157,251 410,194
</TABLE>
Total assets for the Individual and Institutional segments were $20,997,189 and
$37,109,858, respectively, at June 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.
Market and economic conditions were mixed in the second quarter of 1999. On the
negative side, bond yields rose and in June the Federal Reserve Board increased
the overnight lending rate by 25 basis points. The yield on 90-day Treasury
bills rose from 4.48 percent to 4.77 percent during the quarter while the yield
on the 30-year Treasury bond rose from 5.63 percent to 5.98 percent. On the
positive side, the U.S. equity market rallied as the economy continued to expand
at a moderate rate and inflation remained subdued. The U.S. economy, as measured
by real GDP, grew at a rate of 2.3 percent down from 4.3 percent in the first
quarter. Inflation, as measured by the Consumer Price Index, increased at an
annual rate of 2.9 percent from the first quarter to the second quarter of 1999.
The Dow Jones Industrial Average increased 12.1 percent, the NASDAQ Composite
index climbed 9.1 percent and the S&P 500 stock index rose 6.7 percent in the
second quarter of 1999. Stock market volume remained relatively constant in the
second quarter of 1999 versus the first quarter of 1999 with the New York Stock
Exchange average daily volume increasing 1.0 percent to 803.5 million shares and
the NASDAQ average daily volume increasing 3.9 percent to 977.0 million shares.
The favorable economic and equity market conditions of the first six months of
1999 represent a continuation of the recovery from 1998's third quarter
contraction. The Dow Jones Industrial Average increased 19.5 percent for the
first six months of 1999 as compared to the 13.2 percent increase for the first
six months of 1998. The NASDAQ Composite index advanced 22.5 percent for the
first six months of 1999, up from the 20.7 percent increase in the first six
months of 1998. The S&P 500 stock index appreciated 11.7 percent in the first
six months of 1999, as compared to the increase of 16.8 percent for the first
six months of 1998. Average daily volume on the New York Stock Exchange was
800.5 million shares for the first six months of 1999, versus 620.5 million
shares for the prior year period. The NASDAQ average daily volume increased from
747.8 million shares for the first six months of 1998 to 973.0 million shares
for the first six months of 1999. The yield on the 30-year Treasury bond rose 89
basis points during the first six months of 1999 compared to a 31 basis point
decline in the prior year period.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 compared to Quarter Ended June 30, 1998
For the quarter ended June 30, 1999, the Company achieved its strongest
quarterly earnings and revenues in the firm's 119-year history. The Company's
net income for the quarter ended June 30, 1999 was a record $163.5 million, or
$1.08 per basic share ($1.02 per diluted share) compared to net income of $129.5
million, or $0.88 per basic share ($0.82 per diluted share) earned during the
second quarter of 1998. During the second quarter of 1999, revenues, net of
interest expense, were a record $1,347.9 million, 16.0 percent higher than the
second quarter of 1998.
Commission revenues earned during the second quarter of 1999 were a record
$488.9 million, 21.6 percent higher than the $402.1 million earned during the
prior year quarter. Commissions on the sale of listed securities and options
increased $49.6 million or 21.0 percent, mutual fund and insurance commissions
increased $18.2 million or 16.2 percent, and commissions from over-the-counter
securities and commodities increased $19.0 million or 35.9 percent.
Principal transactions revenues increased $35.7 million, or 14.6 percent, to
$279.8 million primarily driven by improved trading results in equities and
taxable fixed income partially offset by lower trading results in municipal
securities. These results reflect the market and economic conditions described
above.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset management fees increased $42.4 million, or 23.3 percent to a record
$224.5 million, reflecting higher revenues earned on managed accounts. Average
assets in wrap and trust accounts during the second quarter of 1999 were
approximately 42 percent higher than during the second quarter of 1998. At June
30, 1999, assets in wrap and trust accounts reached a record $37.9 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 $62 billion during the second quarter of 1999 and approximately
$54 billion during the second quarter 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 second quarter of 1999 were $160.1
million, $16.6 million lower than the record $176.7 million earned during the
second quarter of 1998. The current year quarter reflects declines in
underwriting fees, management fees and selling concessions on lower volume of
lead-managed and co-managed corporate issues. Partially offsetting these
declines were increases in private placement and other fees, and increases in
municipal securities underwriting fees, management fees and selling concessions.
The Municipal Securities Group ranked number one in the industry for
lead-managed negotiated underwriting for the third consecutive quarter.
Other income increased $12.8 million, 37.2 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 $24.6 million, or 20.1 percent to $147.2 million
primarily due to more favorable interest rate spreads on fixed income positions
and increased margin interest.
Compensation and benefits expenses for the quarter ended June 30, 1999 were
$780.1 million, a 14.4 percent increase as compared to $682.1 million during the
prior year quarter. The number of employees at June 30, 1999 increased 1,407, or
8.3 percent, as compared to the June 30, 1998 reflecting an additional 567
Private Client Group financial advisors, related financial advisor support
personnel, and technology specialists hired to implement our technology
initiatives. Also, the Company's operating results for the second 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 57.9 percent versus 58.7 percent in the
prior year quarter, as growth in net revenues exceeded growth in these expenses.
All other operating expenses increased $30.1 million, or 11.2 percent to $298.2
million, as compared to $268.1 million for the prior year quarter. Office and
equipment expenses increased $14.5 million, or 19.3 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
$5.5 million, or 14.8 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 $2.2 million, or 8.5
percent reflecting higher advertising costs associated with the Company's
advertising campaign. Other expenses increased $4.5 million, or 5.8 percent
principally due to increased bad debt and litigation-related expenses. The ratio
of non-compensation expenses as a percentage of net revenues was 22.1 percent
for the quarter ended June 30, 1999 compared to 23.1 percent for the prior year
quarter.
The effective income tax rate for the quarter ended June 30, 1999 was 36.4
percent compared to 35.1 percent from the prior year quarter reflecting an
increase in state and local taxes and non-deductible expenses.
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998
The Company's net income for the six months ended June 30, 1999 was a record
$324.1 million, or $2.14 per basic share ($2.02 per diluted share) compared to
net income of $250.2 million, or $1.71 per basic share ($1.59 per diluted share)
earned during the first six months of 1998. During the first six months of 1999,
revenues, net of interest expense, were a record $2,662.8 million, 16.9 percent
higher than the corresponding period a year ago.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Commission revenues earned during the first six months of 1999 were a record
$967.8 million, 19.4 percent higher than the $810.2 million earned during the
prior year period. Commissions on the sale of listed securities and options
increased $90.3 million or 18.7 percent, mutual fund and insurance commissions
increased $31.9 million or 14.3 percent, and commissions from over-the-counter
securities and commodities increased $35.4 million or 33.9 percent.
Principal transactions revenues increased $72.9 million, or 14.0 percent, to a
record $594.1 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 $89.7 million, or 26.3 percent to a record
$430.5 million, reflecting higher revenues earned on managed accounts. Average
assets in wrap and trust accounts during the first six months of 1999 were
approximately 42 percent higher than during the corresponding period of 1998. At
June 30, 1999, assets in wrap and trust accounts reached a record $37.9 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 $62 billion during the first six months of 1999, up from the
approximately $51 billion during the first six 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 first six months of 1999 were
$286.1 million, $15.6 million lower than the record $301.7 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. Partially offsetting these
declines were increases in private placement and other fees, and increases in
municipal securities underwriting fees, management fees and selling concessions.
Other income increased $20.0 million to a record $88.4 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 $61.1 million, or 26.0 percent to a record $295.9 million
primarily due to more favorable interest rate spreads on fixed income positions
and increased margin interest.
Compensation and benefits expenses for the six months ended June 30, 1999 were
$1,548.8 million, a 16.2 percent increase as compared to $1,332.7 million during
the prior year period. The number of employees at June 30, 1999 increased 1,407,
or 8.3 percent, as compared to June 30, 1998 reflecting an additional 567
Private Client Group financial advisors, related financial advisor support
personnel, and technology specialists hired to implement our technology
initiatives. Also, the Company's improved operating results for the six 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 58.2 percent versus 58.5 percent in the
prior year period, as growth in net revenues exceeded growth in these expenses.
All other operating expenses increased $45.0 million, or 8.4 percent to $579.3
million, as compared to $534.3 million for the prior year period. Office and
equipment expenses increased $23.4 million, or 15.9 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
$10.0 million, or 13.3 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 $4.0 million, or 8.3
percent reflecting higher advertising costs associated with the Company's
advertising campaign. Other expenses increased $8.5 million, or 5.6 percent
principally due to increased bad debt and litigation-related expenses. The ratio
of non-compensation expenses as a percentage of net revenues was 21.8 percent
for the six months ended June 30, 1999 compared to 23.5 percent for the prior
year period.
The effective income tax rate for the six months ended June 30, 1999 was 36.4
percent compared to 35.1 percent from the prior year period reflecting an
increase in state and local taxes and non-deductible expenses.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The primary objectives of the Company's funding policies are to insure ample
liquidity at all times and a strong capital base. These objectives are met by
maximization of self-funded assets, diversification of funding sources,
maintenance of prudent liquidity and capital ratios, and contingency planning.
Liquidity
The Company maintains a highly liquid balance sheet with the majority of assets
consisting of trading assets, securities purchased under agreements to resell,
securities borrowed, and receivables from clients, brokers and dealers, which
are readily convertible into cash. The nature of the Company's business as a
securities dealer results in carrying significant levels of trading 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 June 30, 1999 were $58.1 billion compared to $54.2
billion at December 31, 1998, primarily attributable to an increase in trading
assets 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. 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 extends through November 1999, with provisions for renewal
through 2001. Certain of the Company's subsidiaries also have a secured
revolving credit facility to provide up to an aggregate of $750 million through
August 1999, with provisions for renewal through August 2000. This credit
agreement is in the process of being renewed. The secured borrowings under this
facility can be collateralized using a variety of securities. The facilities are
available for general corporate purposes. At June 30, 1999, there were no
outstanding borrowings under these credit facilities. Additionally, the Company
had approximately $5.0 billion in uncommitted lines of credit at June 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 second quarter of 1999, the Company
issued $911.0 million of debt under these registration statements, including
$525.0 million of 6 3/8% senior notes due 2004 and $180 million of medium-term
notes which were included in short-term borrowings. At June 30, 1999, the
Company had $1,690.1 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.
The Company's total capital base, which includes long-term borrowings, preferred
securities and stockholders' equity, grew to a record $8.2 billion at June 30,
1999, an increase of $949.8 million from December 31, 1998. The growth in total
capital was primarily due to the net increase in long-term borrowings of $687.0
million and a net increase in stockholders' equity of $262.2 million.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The net increase in long-term borrowings primarily reflected the net issuance of
medium-term notes of $174.2 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 six months ended June 30, 1999 of $324.1 million
and the issuance of approximately 2,899,000 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
$105.8 million in the first six months of 1999. These increases were offset by
the repurchase in the first six months of 1999 of approximately 3,065,000 shares
of common stock for $121.1 million and dividends accrued of $43.7 million. At
June 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 22,881,000.
On August 5, 1999, the Board of Directors declared a regular quarterly dividend
on the Company's common stock of $0.11 per share payable on October 1, 1999 to
stockholders of record on September 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 June 30, 1999, the Company had investments in merchant banking transactions
which were affected by liquidity, reorganization or restructuring issues
amounting to $23.4 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 June 30, 1999, the Company held
$338.7 million of high-yield securities, with approximately 6 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.
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.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $76.2 billion and $84.6 billion at
June 30, 1999 and December 31, 1998, respectively. These amounts included $58.0
billion and $64.3 billion, respectively, related to "to be announced"
mortgage-backed securities requiring forward settlement. Also included in these
amounts were $3.7 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 June 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
$13.8 million and $7.0 million for the six months ended June 30, 1999 and 1998,
respectively. The Company had no deferred gains or losses recorded at June 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 June 30, 1999 were $298.6
million and $302.9 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 June 30, 1999
and December 31, 1998, the fair values amounted to $298.6 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.
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.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
June 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 June 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 June 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 June 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 Company's potential daily loss in future
earnings at June 30, 1999 was approximately $4 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.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $53 million has been
incurred through June 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 Form 10-Q
for the quarter ended March 31, 1999, except as described below:
NEWTON V. MERRILL LYNCH, ET AL. SECURITIES LITIGATION
On May 20, 1999, the District Court affirmed the Magistrate Judge's grant of
plantiffs' motion to amend the complaint to add additional named class
representatives and extend the class period covered by the complaint through
August 28, 1996.
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 July 16, 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 six month
period ending June 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: August 16, 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>
Six Months
Ended June 30, Years Ended December 31,
--------------------------------------------------------------------
1999 * 1998 * 1997 * 1996 1995 1994
--------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 518,564 $ 682,763 $ 644,075 $ 558,999 $ 102,677 $ 44,385
------------ ------------ ----------- ----------- ------------ ------------
Fixed charges:
Interest 1,247,612 2,876,712 2,573,582 1,971,788 1,969,811 1,428,653
Interest factor in rents 29,657 56,139 53,665 54,537 59,491 51,102
-------------- -------------- ------------- ------------- ------------- -------------
Total fixed charges 1,277,269 2,932,851 2,627,247 2,026,325 2,029,302 1,479,755
------------ ------------ ----------- ----------- ----------- -----------
Income before taxes and
fixed charges $ 1,795,833 $ 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>
Six Months
Ended June 30, Years Ended December 31,
-----------------------------------------------------------------------
1999 * 1998 * 1997 * 1996 1995 1994
--------------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 518,564 $ 682,763 $ 644,075 $ 558,999 $ 102,677 $ 44,385
----------- ------------ ----------- ----------- ------------ ------------
Preferred stock dividends 18,000 35,433 44,186 43,712 36,260 1,710
----------- ------------ ----------- ----------- ------------ ------------
Fixed charges:
Interest 1,247,612 2,876,712 2,573,582 1,971,788 1,969,811 1,428,653
Interest factor in rents 29,657 56,139 53,665 54,537 59,491 51,102
----------- ------------ ----------- ----------- ------------ ------------
Total fixed charges 1,277,269 2,932,851 2,627,247 2,026,325 2,029,302 1,479,755
----------- ------------ ----------- ----------- ------------ ------------
Total fixed charges and preferred
stock dividends 1,295,269 2,968,284 2,671,433 2,070,037 2,065,562 1,481,465
----------- ------------ ----------- ----------- ------------ ------------
Income before taxes and fixed charges $ 1,795,833 $ 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 six months ended June
30, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 983,877
<RECEIVABLES> 8,906,432
<SECURITIES-RESALE> 14,523,964
<SECURITIES-BORROWED> 8,914,986
<INSTRUMENTS-OWNED> 22,503,424
<PP&E> 492,462
<TOTAL-ASSETS> 58,107,047
<SHORT-TERM> 1,184,494
<PAYABLES> 6,314,705
<REPOS-SOLD> 25,646,267
<SECURITIES-LOANED> 4,983,659
<INSTRUMENTS-SOLD> 8,040,353
<LONG-TERM> 4,942,785
<COMMON> 192,585
393,750
190,464
<OTHER-SE> 2,508,559
<TOTAL-LIABILITY-AND-EQUITY> 58,107,047
<TRADING-REVENUE> 594,054
<INTEREST-DIVIDENDS> 1,527,431
<COMMISSIONS> 967,751
<INVESTMENT-BANKING-REVENUES> 286,086
<FEE-REVENUE> 430,538
<INTEREST-EXPENSE> 1,231,490
<COMPENSATION> 1,548,792
<INCOME-PRETAX> 534,686
<INCOME-PRE-EXTRAORDINARY> 324,103
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324,103
<EPS-BASIC> 2.14
<EPS-DILUTED> 2.02
</TABLE>
