<PAGE> 1
FINANCIAL HIGHLIGHTS
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997 1996 1995(2)
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<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
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Total revenues $ 7,822,753 $ 7,249,582 $ 6,656,952 $ 5,705,966 $ 5,320,090
Net revenues
(including net interest) $ 5,290,175 $ 4,405,114 $ 4,112,402 $ 3,735,212 $ 3,350,279
Income before taxes and
minority interest $ 1,034,802 $ 715,007 $ 673,107 $ 560,033 $ 102,677
Net income $ 628,599 $ 433,555 $ 415,449 $ 364,350 $ 80,750
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PER COMMON SHARE(1)
Basic earnings $ 3.77(3) $ 2.91 $ 2.84 $ 2.55 $ 0.37
Diluted earnings $ 3.56(3) $ 2.72 $ 2.56 $ 2.24 $ 0.35
Dividends declared $ 0.44 $ 0.44 $ 0.41 $ 0.32 $ 0.32
Book value $ 20.04 $ 16.76 $ 13.80 $ 12.19 $ 10.41
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FINANCIAL CONDITION
Total assets $61,612,376 $54,175,921 $57,065,033 $52,513,500 $45,671,294
Long-term borrowings
and preferred securities $ 5,617,576 $ 4,839,367 $ 3,980,379 $ 3,164,349 $ 2,622,797
Stockholders' equity $ 2,917,257 $ 2,438,943 $ 1,930,963 $ 1,730,425 $ 1,552,288
Total capitalization $ 8,534,833 $ 7,278,310 $ 5,911,342 $ 4,894,774 $ 4,175,085
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</TABLE>
[NET INCOME BAR CHART]
[COMMON STOCK PRICE BAR CHART]
[BOOK VALUE BAR CHART]
(1) All per share data reflect a three-for-two common stock split in
November 1997.
(2) The 1995 results include after-tax charges of $146 million ($230
million before income taxes) related to the resolution of the issues
arising from the Company's sale of public proprietary limited
partnerships.
(3) Reflects the effect of the unamortized discount of $59.9 million
charged to stockholders' equity resulting from the redemption of
preferred stock on December 16, 1999.
>> PAINEWEBBER / 18
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
>> BUSINESS DESCRIPTION -- PAINE WEBBER GROUP INC. ("PWG") IS A HOLDING COMPANY
WHICH, TOGETHER WITH ITS OPERATING SUBSIDIARIES (COLLECTIVELY, THE "COMPANY"),
FORMS ONE OF THE LARGEST FULL-SERVICE SECURITIES FIRMS IN THE U.S. FOUNDED IN
1879, THE COMPANY EMPLOYS APPROXIMATELY 19,620 PEOPLE IN 315 OFFICES WORLDWIDE.
The Company's principal line of business is to serve the investment and capital
needs of individual and institutional clients through its broker-dealer
subsidiary, PaineWebber Incorporated ("PWI"), and other specialized
subsidiaries. The Company's business activities are divided along two operating
segments: Individual and Institutional. The Individual segment provides
financial products and services to individual clients and includes principally
the Private Client Group, Asset Management, and Transaction Services groups. The
Institutional segment delivers similar products and services to institutional
clients and includes the Capital Markets group. These interrelated business
groups utilize common operational and administrative personnel and facilities.
The Company holds memberships in the major securities and commodities exchanges
in the United States, and makes a market in many securities traded on the
National Association of Securities Dealers Automated Quotation system ("NASDAQ")
or in other over-the-counter markets.
The Private Client Group consists primarily of a domestic branch office system
and consumer product groups through which PWI and certain other subsidiaries
provide clients with financial services and products, including the purchase and
sale of securities, option contracts, commodity and financial futures contracts,
fixed income instruments, mutual funds, trusts, wrap-fee products, and selected
insurance products. The Company may act as principal or agent in providing these
services. Fees charged vary according to the size and complexity of a
transaction, and the activity level of a client's account. Also part of the
Private Client Group is the Municipal Securities Group, which structures,
underwrites, sells and trades taxable and tax-exempt issues for municipal and
public agency clients.
The Asset Management group is comprised of Mitchell Hutchins Asset Management
Inc., which includes the Mitchell Hutchins Investment Advisory division,
Mitchell Hutchins Institutional Investors Inc., NewCrest Advisors Inc. and DSI
International Management, Inc. The Asset Management group provides investment
advisory and portfolio management services to mutual funds, institutions,
pension funds, endowment funds, individuals and trusts.
The Transaction Services group includes the correspondent services, prime
brokerage and securities lending businesses, as well as floor trading
operations. Through Correspondent Services Corporation [csc], the Company
provides execution and clearing services to correspondent broker-dealers to
support transactions for their individual customers.
Capital Markets is comprised of Research, Global Fixed Income, Global Equities,
Commercial Real Estate and Investment Banking.
The Research group provides investment advice to institutional and individual
investors, and other business areas of the Company, covering approximately 800
companies in 52 industries.
Through the Global Fixed Income and Global Equities groups, the Company places
securities for, and executes trades on behalf of, institutional clients both
domestically and internationally. The Company also takes positions in fixed
income securities, listed and over-the-counter equity securities to facilitate
client transactions or for its own account. As part of the Company's principal
investing activities, the Company holds private debt and equity investments and
direct equity investments in partnerships and other entities that invest in
fixed income securities, equity securities and other financial instruments.
The Commercial Real Estate group provides a full range of capital market
services to real estate clients, including underwriting of debt and
>> PAINEWEBBER /25
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
equity securities, principal lending, debt restructuring, property sales and
bulk sales services, and a broad range of other advisory services.
Through the Investment Banking group, the Company provides financial advice to,
and raises capital for, a broad range of domestic and international corporate
clients. Investment Banking manages and underwrites public and private
offerings, participates as an underwriter in syndicates of public offerings
managed by others, and provides advice in connection with mergers and
acquisitions, restructurings and recapitalizations.
The Company's businesses operate in some of the most highly regulated
industries. Violations of applicable regulations can result in the revocation of
broker-dealer or futures commission merchant licenses, the imposition of
censures or fines, and the suspension or expulsion of a firm, its officers or
employees. The Company's businesses are regulated by various agencies, including
the Securities and Exchange Commission ("SEC"), the New York Stock Exchange
("NYSE"), the Commodity Futures Trading Commission ("CFTC"), the National
Association of Securities Dealers, and the Securities and Futures Authority.
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 annual 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.
GENERAL BUSINESS ENVIRONMENT
The business environment was generally favorable in 1999, and less volatile than
in 1998. The domestic economic background was positive as the U.S. Real Gross
Domestic Product increased 4.0 percent, versus 4.3 percent in 1998, and
inflation, as measured by the Consumer Price Index, was 2.7 percent, versus the
1998 rate of 1.6 percent. The S&P 500 Index appreciated 20 percent in 1999,
versus 27 percent in 1998, and the NASDAQ Composite Index rose 86 percent,
versus 40 percent in 1998. The yield on the thirty-year U.S. Treasury bond rose
from 5.09 percent at the end of 1998 to 6.48 percent at the end of 1999.
Many indicators of the securities industry's health were positive. Average daily
volume increased approximately 20 percent on the NYSE and approximately 33
percent on the NASDAQ. The value of U.S. mergers and acquisitions increased over
7 percent while total U.S. debt and equity offerings declined only slightly, or
1.5 percent, from 1998 levels. The net flow of capital into U.S. equity mutual
funds in 1999 was $187.5 billion, up 18.1 percent from $158.8 billion in 1998.
Financial markets were considerably less volatile in 1999 than 1998, when
investors were alarmed by economic weakness in foreign economies (particularly
Asia), by the default of Russia on its external obligations, and by weaker U.S.
corporate profit growth. Financial markets did not experience problems of
comparable magnitude in 1999. With economic growth improving outside the U.S.
and commodity prices trending up, corporate profit growth improved. Operating
profits of the S&P 500 increased approximately 14 percent in 1999. Responding to
the positive trend in global economic growth, the Federal Reserve tightened
monetary policy during 1999, with the federal funds rate rising from 4.75
percent to 5.5 percent between June and November. This rise in the federal funds
rate, combined with generally rising commodity prices, continued strong economic
growth in the U.S., and improving economic growth in many foreign economies, led
to the aforementioned 139 basis point rise in the yield on the thirty-year U.S.
Treasury bond during 1999.
RESULTS OF OPERATIONS
1999 Compared with 1998
Net income for the year ended December 31, 1999 was a record $628.6 million, a
45 percent increase over the previous record of $433.6 million earned during the
year ended December 31, 1998. Earnings per common share were a record $4.18 per
basic share ($3.95 per diluted share) for the year ended December 31, 1999
before giving effect to a charge to stockholders' equity of $59.9 million
resulting from the redemption of the Company's preferred stock during the fourth
quarter. The charge to stockholders' equity reflects the difference between the
par value and the carrying value of the preferred stock as of the December 16,
1999 redemption date and although not affecting net income, reduced earnings per
common share by $0.41 per basic share ($0.39 per diluted share) for the year
ended December 31, 1999. Including the charge, earnings per common share were
>> PAINEWEBBER / 26
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
$3.77 per basic share ($3.56 per diluted share) for the year ended December 31,
1999. Earnings per common share for the prior year period were $2.91 per basic
share ($2.72 per diluted share).
Revenues, net of interest expense, were a record $5,290.2 million for 1999, an
increase of 20 percent from the previous record $4,405.1 million in 1998.
Commission revenues earned during 1999 were a record $1,949.0 million, 19
percent higher than the previous record $1,641.3 million earned in 1998,
reflecting increases in both individual and institutional businesses.
Commissions on listed securities and options increased $122.7 million, or 12
percent, mutual fund and insurance commissions increased $106.5 million, or 24
percent, and commissions from over-the-counter securities and other commissions
increased $78.5 million, or 37 percent.
Principal transactions revenues increased to a record $1,110.1 million, or 28
percent higher than the 1998 level of $868.8 million driven by improved results
in taxable fixed income, equities and municipals. The increase was in large part
due to the improved market and economic conditions experienced during 1999
relative to the volatile conditions experienced during the second half of 1998.
For financial reporting purposes, principal transactions revenues include
realized and unrealized gains and losses on trading positions and principal
investing activities, including hedges. In assessing the profitability of its
trading activities, the Company views net interest and principal transactions
revenues in the aggregate.
Asset management fees increased to a record $911.1 million, 28 percent higher
than the previous record of $713.6 million primarily due to higher revenues
earned on managed accounts and proprietary mutual funds. Average assets in wrap
and trust accounts during 1999 were approximately 48 percent higher than during
1998. Average assets under management in money market, institutional and
long-term mutual funds increased to $62 billion during 1999 compared to $54
billion in 1998. At the end of 1999, total assets under management reached a
record $68.8 billion. Contributing to the increase was the introduction of the
PaineWebber Strategy Fund, a new equity fund managed by Mitchell Hutchins Asset
Management Inc. which raised $2.1 billion in assets. Also, in December 1999, the
Company acquired Decision Services Incorporated, an asset management firm
specializing in enhanced index portfolio management.
Investment banking revenues were a record $558.2 million, 5 percent higher than
the previous record $531.0 million earned during the prior year period,
reflecting increases in private placement and other fees partially offset by
declines in underwriting fees, management fees and selling concessions on lower
volume of lead-managed and co-managed corporate and municipal issues.
Contributing to the increase was the rise in mergers and acquisitions activity
during the year.
Other revenues increased to a record $171.0 million, 20 percent higher than the
1998 level of $142.2 million, primarily due to an increase in customer
transaction fees.
Net interest increased $82.6 million to a record $590.9 million, 16 percent
higher than the prior year record $508.2 million. The net increase was
principally due to an increased level of margin lending to clients during the
year and lower funding costs.
Compensation and benefit expenses for 1999 increased $448.2 million, or 17
percent, versus 1998. The number of employees increased by 1,853 or 10 percent,
during 1999, reflecting increases in Private Client Group financial advisors,
related financial advisor support personnel, and technology specialists hired to
implement the Company's technology initiatives. In addition, the Company's
improved operating results for the year 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
percentage of net revenues declined to 57.6 percent in 1999 versus 59.1 percent
in 1998, as the growth in net revenues exceeded the growth in these expenses.
All other operating expenses increased $117.1 million, or 11 percent, from 1998.
Office and equipment expenses increased $50.9 million, or 17 percent, due to an
increase in office space and equipment necessary to support the additional
headcount, as well as normal escalation charges, and higher depreciation
associated with the firm's technology initiatives. Also, the number of sales
offices increased from 303 at the end of 1998 to 315 at the end of 1999.
Business development expenses increased $19.4 million, or 19 percent, reflecting
higher costs associated with the Company's advertising campaign, PaineWebber
EDGE(R) and PaineWebber InsightOne(SM). Communications expenses increased $13.8
million from the prior year, or 9 percent, 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
headcount. Professional service fees increased $13.5 million, or 11 percent, due
principally
>> PAINEWEBBER / 27
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
to financial advisor and other employee recruiting fees. The Company's cost
containment efforts (including renegotiation of vendor contracts and review of
market data usage) continued and served to partially offset the expenses related
to growth initiatives noted above. Despite these increases, the Company's
non-compensation expenses as a percentage of net revenues declined to 22.8
percent compared to 24.7 percent for 1998, as the growth in net revenues
exceeded the growth in these expenses.
1998 COMPARED WITH 1997
Net income for the year ended December 31, 1998 was $433.6 million, a 4 percent
increase over the $415.4 million earned during the year ended December 31, 1997.
Earnings per common share were $2.91 per basic share ($2.72 per diluted share)
compared to $2.84 per basic share ($2.56 per diluted share) for the prior year
period. Revenues, net of interest expense, were $4,405.1 million for 1998, an
increase of 7 percent from the previous record $4,112.4 million in 1997.
Commission revenues earned during 1998 were $1,641.3 million. This was 10
percent higher than the $1,496.8 million earned in 1997, reflecting increases in
both individual and institutional businesses. Commissions on listed securities
and options increased $108.5 million, or 12 percent, mutual fund and insurance
commissions increased $22.7 million, or 5 percent, and commissions from
over-the-counter securities and other commissions increased $13.3 million, or 7
percent.
Revenues from principal transactions decreased $186.8 million, or 18 percent
from the 1997 level of $1,055.6 million. The decline was principally due to the
market volatility experienced during the second half of 1998. During 1998,
principal transactions revenues from equities and taxable fixed income declined
31.6 percent and 12.3 percent for the year, respectively, from the records
established in the previous year, while results were relatively constant for
municipal securities.
Asset management fees increased 31 percent to $713.6 million, primarily due to
higher revenues earned on managed accounts and proprietary mutual funds. Average
assets in wrap and trust accounts during 1998 were 40 percent higher than during
1997. Average assets under management in money market, institutional and
long-term mutual funds increased to $54 billion during 1998 compared to $47
billion in 1997. Contributing to the increase was the introduction of several
new Mitchell Hutchins Asset Management funds including the Managed High Yield
Fund and the LIR Select Fund.
Investment banking revenues were $531.0 million, 15 percent higher than the
$460.0 million earned during the prior year period, reflecting increases in
private placement and other fees, and underwriting fees, management fees and
selling concessions. Benefiting from the increased levels of activity
industry-wide, the Company increased its volume of lead-managed and co-managed
municipal issues, as well as increased mergers and acquisitions during the year.
Net interest increased $89.7 million, or 21 percent to $508.2 million. Interest
revenue was $3,352.7 million, 13 percent higher than the $2,963.1 million earned
in the prior year period due to an increased level of trading positions and
margin lending to clients during the year. Interest expense increased 12 percent
to $2,844.5 million, principally due to higher levels of securities sold under
agreements to repurchase, securities loaned and short-term borrowings during the
year.
Compensation and benefit expenses for 1998 increased $181.1 million, or 7
percent, versus 1997. The number of employees increased by 1,140 or 7 percent,
during 1998, reflecting an additional 702 Private Client Group financial
advisors, as well as related financial advisor support personnel and technology
support personnel. In addition, the Company's improved operating results for the
year 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 percentage of net revenues remained relatively
constant at 59.1 percent in 1998 versus 58.9 percent in 1997.
All other operating expenses increased $69.7 million, or 7 percent, from 1997.
Office and equipment expenses increased $26.3 million, or 10 percent, due to an
increase in office space and equipment necessary to support the additional
headcount, as well as normal escalation charges. Business development expenses
increased $21.2 million, or 26 percent, reflecting higher advertising and
promotional expenditures, including the Company's new advertising campaign.
Brokerage, clearing and exchange fees and other expenses also increased
primarily due to increased levels of business. Offsetting these increases was a
reduction in professional services reflecting lower consulting expenses.
Communications expenses remained relatively flat compared to last year,
reflecting the firm's ongoing cost containment efforts (such as the review of
market data usage), which served to largely offset the effect of the increase in
headcount. The ratio of other operating expenses as a percentage of net revenues
remained relatively constant at 24.7 percent for 1998 versus 24.8 percent in
1997.
>> PAINEWEBBER / 28
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAXES
The effective income tax rate for the year ended December 31, 1999, increased to
36.1 percent from 34.9 percent in 1998 reflecting an increase in nondeductible
expenses and lower nontaxable interest. The effective income tax rate of 34.0
percent in 1997 was comparable to the 1998 rate.
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 the
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 the 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 increased to $61.6 billion at December 31, 1999 from
$54.2 billion at December 31, 1998. The increase is primarily attributable to an
increase in client receivables, securities borrowed and securities purchased
under agreements to resell. 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 September 2000, 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 $1.0 billion through
August 2000. The secured borrowings under this facility can be collateralized
using a variety of securities. The facilities are available for general
corporate purposes and are tested on a regular basis. At December 31, 1999,
there were no outstanding borrowings under either facility. Additionally, the
Company had $4.9 billion in uncommitted lines of credit at December 31, 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 Delaware law which are wholly owned subsidiaries of
the Company. At December 31, 1999, the Company had $1,038.6 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 another registration statement. (For further
discussion on the Preferred Trust Securities, see Note 5 in the Company's Notes
to Consolidated Financial Statements.)
Long-term borrowings at December 31, 1999 grew to $5,223.8 million from $4,255.8
million at December 31, 1998. This increase reflects the issuances of $525
million of 6.38 percent Notes in May 1999, $275 million of 7.63 percent Notes in
December 1999 and $618 million of Medium-Term Notes offset by the maturities of
$439.5 million of Medium-Term Notes. At December 31, 1999, $875.4 million of
long-term borrowings had maturity dates in 2000.
At the earliest redemption date of December 16, 1999, the Company redeemed
$250.0 million of 9 percent Redeemable Preferred Stock at par value. The
redemption resulted in a $59.9 million charge to stockholders' equity reflecting
the difference between the carrying value on the redemption date of $190.1
million and the par value of $250.0 million. Although the redemption did not
affect net income, earnings per common share were reduced by $0.41 per basic
share ($0.39 per diluted share).
The weighted-average maturity on all outstanding long-term borrowings and
Preferred Trust Securities at December 31, 1999 and 1998 was 7.2 years and 8.2
years, respectively.
CAPITAL RESOURCES AND CAPITAL ADEQUACY
The Company's businesses are capital intensive. In addition to a funding policy
that provides for diversification of funding sources and maximization of
liquidity, the Company maintains a strong capital base.
>> PAINEWEBBER / 29
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's total capital base, which includes long-term borrowings, Preferred
Trust Securities and stockholders' equity, grew to a record $8.5 billion at
December 31, 1999, an increase of $1.2 billion from the prior year. The growth
in total capital is due to the net increase in long-term borrowings of $968.0
million and a net increase in stockholders' equity of $478.3 million, offset by
the redemption of the $250.0 million Redeemable Preferred Stock.
During 1999, the Company issued 7.3 million shares of its common stock related
to employee compensation and stock purchase programs. Issuances and tax credits
related to these programs had the effect of increasing equity capital by $267.1
million. Offsetting these issuances was the repurchase of 7.3 million shares of
common stock at an aggregate cost of $270.6 million. At December 31, 1999, the
remaining number of shares of common stock authorized to be repurchased by the
Company's Board of Directors under the common stock repurchase program was 18.7
million. On February 3, 2000, the Company's Board of Directors authorized for
repurchase, in the open market or otherwise, an additional 18.0 million shares
of its common stock.
The Board of Directors declared quarterly cash dividends of $0.11 per share on
the Company's common stock during 1999. On February 3, 2000, the Board of
Directors declared a 2000 first quarter dividend of $0.12 per share, an increase
of 9 percent over the prior quarter, payable on April 5, 2000. Dividends were
also declared during 1999 on preferred stock.
PWI is subject to the net capital requirements of the SEC, the NYSE and the CFTC
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, principal investing, commercial real
estate, and asset finance activities, the Company has provided financing and
made investments in companies and other entities, 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 December 31, 1999, the Company had investments which were affected by
liquidity, reorganization or restructuring issues amounting to $120.1 million,
net of reserves. These investments have not had a material effect on the
Company's results of operations. At December 31, 1999, the Company also had
commitments of $105.7 million to investment partnerships, which in turn had
commitments to invest in entities affected by restructuring issues, including
principally a commitment related to the Long-Term Credit Bank of Japan.
The Company's activities 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 and
lower credit ratings and are, therefore, more vulnerable to general economic
conditions. At December 31, 1999, the Company held $327.5 million of high-yield
securities, with approximately 8 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.
CASH FLOWS
The Company's cash and cash equivalents at December 31, 1999 totaled $176.4
million, down $52.0 million from year-end 1998. Cash used for operating
activities was $710.4 million in 1999 primarily to fund the increase in client
receivables and in securities borrowed at December 31, 1999. Cash used for
investing activities in 1999 was $252.2 million, principally reflecting capital
expenditures on Private Client Group branch office expansions and renovations,
the Company's new broker workstations, and other technology initiatives. Cash
provided by financing activities was $910.6 million in 1999, primarily due to
increased long-term and short-term borrowings.
Cash and cash equivalents at December 31, 1998 totaled $228.4 million, down $5.4
million from year-end 1997. Cash used for operating and investing activities was
$324.9 million and $181.4 million, respectively, and cash provided by financing
activities was $500.9 million.
Cash and cash equivalents at December 31, 1997 totaled $233.8 million, down
$150.1 million from year-end 1996. Cash
>> PAINEWEBBER / 30
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
used for operating and investing activities was $778.8 million and $90.9
million, respectively, and cash provided by financing activities was $719.7
million.
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 options
contracts and structured products (e.g. indexed warrants) are traded on
exchanges, while derivatives such as forward contracts, certain options
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.
The notional amount of a derivative contract is used to measure the
volume of activity and is not reflected on the Consolidated Statements of
Financial Condition. The Company had off-balance-sheet derivative contracts
outstanding with gross notional amounts of $50.5 billion and $84.6 billion at
December 31, 1999 and 1998, respectively. These amounts included $30.9 billion
and $64.3 billion, respectively, related to "to be announced" mortgage-backed
securities requiring forward settlement. Also included in these amounts were
$4.2 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 December 31, 1999 and 1998, respectively. (For further discussion on the
Company's derivative financial instruments, see Notes 1, 4 and 8 in the
Company's Notes to 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 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
$22.6 million, $15.6 million and $11.0 million for the years ended December 31,
1999, 1998 and 1997, respectively. The Company had no deferred gains or losses
recorded at December 31, 1999 and 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 December 31, 1999 were $392.7
million and $215.1 million of assets and liabilities, respectively, and are
reflected on the Consolidated Statements of Financial Condition. The fair values
of these instruments at December 31, 1998 were $191.4 million and $217.8 million
of 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 December 31,
1999 and 1998, the fair values amounted to $392.7 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, which are discussed below, except for liquidity risk which is
discussed in the Liquidity and Capital Resources section of the Management's
Discussion and Analysis.
The Company seeks to manage risk and its impact on earnings volatility through
strategic planning and by focusing on the diversification of its
>> PAINEWEBBER / 31
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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
December 31, 1999 and 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 forward 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 that 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 its fixed
income financial instruments was based on a proprietary methodology which
converted substantially all the Company's interest rate sensitive financial
instruments at December 31, 1999 and 1998 into a uniform benchmark (a ten-year
U.S. Treasury note equivalent), and evaluated the impact assuming an 11 basis
point and a 13 basis point change to the ten-year U.S. Treasury note at December
31, 1999 and 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 proprietary
>> PAINEWEBBER / 32
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
model which stress tests the firm inventory positions by shocking those
positions for a two standard deviation move in the market (95 percent confidence
interval) using historical data over a one-year period. Based upon the
aforementioned methodologies, the Company's potential daily loss in future
earnings at December 31, 1999 was approximately $3 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.
CREDIT RISK
Credit risk represents the amount of accounting loss the Company would incur
should counterparties to its proprietary transactions fail to perform and the
value of any collateral prove inadequate. Credit risk is substantially reduced
by the industry practice of obtaining and maintaining adequate collateral until
commitments are settled. The Company also manages the credit exposure relating
to its trading activities by entering into master netting agreements when
feasible. The Company monitors its exposure to counterparty risk on a daily
basis through use of credit exposure information and monitoring of collateral
values.
The Credit department establishes and reviews credit limits for clients and
other counterparties seeking margin, resale and repurchase agreement facilities,
securities borrowed and securities loaned arrangements, and various other
products. Although the Company closely monitors the creditworthiness of its
clients, the debtors' ability to discharge amounts owed is dependent upon, among
other things, general market conditions. The Company has no material
concentration of credit risk with any individual counterparty.
LEGAL RISK
Legal risk focuses on the Company's potential non-compliance with legal and
regulatory requirements, and counterparty non-performance based upon non-credit
related conditions, such as legal authority or capacity. As a securities
broker-dealer, the Company is subject to regulations which cover all aspects of
the securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, recordkeeping, and the conduct of directors,
officers and employees. The Company has established procedures in accordance
with legal and regulatory requirements that are designed to reasonably ensure
compliance in these matters. The Company has also established procedures
reasonably designed to mitigate counterparty non-performance including adequacy
of legal documentation and consideration of counterparty legal authority and
capacity.
OPERATING RISK
Operating risk focuses on the Company's ability to accumulate, process and
communicate information necessary to conduct its daily operations. Deficiencies
in technology, financial systems and controls, and losses attributable to
operational problems all pose potential operating risks. In order to mitigate
these risks, the Company has established and maintains an effective internal
control environment that incorporates various control mechanisms throughout the
organization and involves various independent oversight groups.
YEAR 2000
The Company has successfully completed a comprehensive plan achieving Year 2000
compliance. The incremental costs of approximately $58 million were expensed as
incurred and no future costs are anticipated.
INFLATION
Because the Company's assets are to a large extent liquid in nature, they are
not significantly affected by inflation. However, inflation may result in
increases in the Company's expenses that may not be readily recoverable in the
price of services offered. To the extent inflation results in rising interest
rates and has other negative effects upon the securities markets, it may
adversely affect the Company's financial condition and results of operations.
SEGMENT INFORMATION
The Company offers a wide range of highly integrated products and services,
primarily those of a full-service securities broker-dealer, to both its
individual and institutional clients, which are considered separate reporting
segments for purposes of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." For information on segment reporting and
geographic data, see Note 15 in the Company's Notes to Consolidated Financial
Statements.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 in the Company's Notes to Consolidated Financial Statements for a
discussion of new accounting pronouncements.
>> PAINEWEBBER / 33
<PAGE> 11
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Commissions $1,948,959 $1,641,283 $1,496,791
Principal transactions 1,110,080 868,807 1,055,648
Asset management 911,099 713,570 542,755
Investment banking 558,224 530,972 460,001
Interest 3,123,440 3,352,708 2,963,124
Other 170,951 142,242 138,633
----------------------------------------------
Total revenues 7,822,753 7,249,582 6,656,952
Interest expense 2,532,578 2,844,468 2,544,550
----------------------------------------------
Net revenues 5,290,175 4,405,114 4,112,402
----------------------------------------------
NON-INTEREST EXPENSES
Compensation and benefits 3,049,568 2,601,364 2,420,296
Office and equipment 352,712 301,845 275,532
Communications 168,071 154,272 153,285
Business development 122,678 103,287 82,099
Brokerage, clearing and exchange fees 95,211 97,430 86,808
Professional services 136,758 123,265 129,066
Other 330,375 308,644 292,209
----------------------------------------------
Total non-interest expenses 4,255,373 3,690,107 3,439,295
----------------------------------------------
Income before taxes and minority interest 1,034,802 715,007 673,107
Provision for income taxes 373,959 249,208 228,626
----------------------------------------------
Income before minority interest 660,843 465,799 444,481
Minority interest 32,244 32,244 29,032
Net income $ 628,599 $ 433,555 $ 415,449
----------------------------------------------
Dividends and amortization of discount on preferred stock 22,802 23,647 29,513
Unamortized discount charged to equity on redemption of preferred stock 59,883 -- --
----------------------------------------------
Net income applicable to common shares $ 545,914 $ 409,908 $ 385,936
====================================================================================================================================
EARNINGS PER COMMON SHARE (1)
Basic $ 3.77 $ 2.91 $ 2.84
Diluted $ 3.56 $ 2.72 $ 2.56
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1999 amounts reflect the effect of the unamortized discount of $59,883
charged to stockholders' equity resulting from the redemption of preferred
stock on December 16, 1999.
See Notes to Consolidated Financial Statements.
PAINEWEBBER / 34
<PAGE> 12
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
December 31, 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 176,401 $ 228,359
Cash and securities segregated and on deposit for federal and other regulations 823,059 631,272
Financial instruments owned 21,144,830 20,021,351
Securities received as collateral 1,079,976 1,189,331
Securities purchased under agreements to resell 15,923,948 14,217,062
Securities borrowed 10,526,638 8,717,476
Receivables:
Clients, net of allowance for doubtful accounts of $30,039 and $20,496
in 1999 and 1998, respectively 8,918,069 6,667,055
Brokers and dealers 701,497 634,825
Dividends and interest 376,380 306,998
Fees and other 291,991 267,741
Office equipment and leasehold improvements, net of accumulated depreciation
and amortization of $527,718 and $431,460 in 1999 and 1998, respectively 579,819 434,895
Other assets 1,069,768 859,556
----------------------------------------------
$ 61,612,376 $ 54,175,921
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,884,250 $ 1,417,783
Financial instruments sold, not yet purchased 7,099,208 5,177,099
Securities sold under agreements to repurchase 25,740,196 23,948,872
Securities loaned 5,661,200 4,969,638
Obligation to return securities received as collateral 1,079,976 1,189,331
Payables:
Clients 7,742,759 6,691,316
Brokers and dealers 295,262 533,621
Dividends and interest 410,196 294,431
Other liabilities and accrued expenses 1,779,984 1,642,682
Accrued compensation and benefits 1,384,512 1,032,838
Long-term borrowings 5,223,826 4,255,802
----------------------------------------------
58,301,369 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 -- 189,815
Stockholders' equity:
Common stock, $1 par value, 400,000,000 shares authorized; issued
193,145,152 shares and 191,047,151 shares in 1999 and 1998, respectively 193,145 191,047
Additional paid-in capital 1,672,085 1,525,938
Retained earnings 2,171,080 1,689,386
Treasury stock, at cost; 47,557,064 shares and 45,527,707 shares in
1999 and 1998, respectively (1,113,736) (962,792)
Accumulated other comprehensive income (5,317) (4,636)
----------------------------------------------
2,917,257 2,438,943
----------------------------------------------
$ 61,612,376 $ 54,175,921
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
PAINEWEBBER / 35
<PAGE> 13
<TABLE>
<CAPTION>
6% Cumulative
Convertible Additional
Redeemable Common Paid-in
Preferred Stock Stock Capital
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 100,000 $ 162,537 $ 792,215
=============================================================================================================================
Net income
Foreign currency translation
Total comprehensive income, year ended December 31, 1997
Dividends declared:
Common stock, $.41 per share
Redeemable Preferred Stock, $9.00 per share
Convertible Preferred Stock, $6.00 per share
Employee stock transactions 3,528 14,164
Restricted stock awards (857) 83,599
Conversion of Convertible Preferred Stock (100,000) (69,443)
Conversion of debentures (14,633)
Tax benefit relating to employee compensation programs 58,738
Other (1,811)
Repurchases of common stock:
Kidder-related repurchase 23,250 542,500
Other
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- $ 188,458 $ 1,405,329
=============================================================================================================================
Net income
Foreign currency translation
Total comprehensive income, year ended December 31, 1998
Dividends declared:
Common stock, $.44 per share
Redeemable Preferred Stock, $9.00 per share
Employee stock transactions 2,954 27,999
Restricted stock awards (368) 31,800
Conversion of debentures (15,757)
Tax benefit relating to employee compensation programs 70,425
Other 3 6,142
Repurchases of common stock
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- $ 191,047 $ 1,525,938
=============================================================================================================================
Net income
Foreign currency translation
Total comprehensive income, year ended December 31, 1999
Dividends declared:
Common stock, $.44 per share
Redeemable Preferred Stock, $9.00 per share
Employee stock transactions 2,330 49,937
Restricted stock awards (235) 50,051
Tax benefit relating to employee compensation programs 45,699
Unamortized discount on redemption of preferred stock
Other 3 460
Repurchases of common stock
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 -- $ 193,145 $ 1,672,085
=============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
PAINEWEBBER / 36
<PAGE> 14
<TABLE>
<CAPTION>
Accumulated
Other
Retained Treasury Comprehensive
Earnings Stock Income
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 1,009,448 $ (331,907) $ (1,868)
==========================================================================================================================
Net income 415,449
Foreign currency translation (3,622)
Total comprehensive income, year ended December 31, 1997
Dividends declared:
Common stock, $.41 per share (54,418)
Redeemable Preferred Stock, $9.00 per share (22,500)
Convertible Preferred Stock, $6.00 per share (6,000)
Employee stock transactions
Restricted stock awards 5,061
Conversion of Convertible Preferred Stock 169,443
Conversion of debentures 34,721
Tax benefit relating to employee compensation programs
Other (1,013) (400)
Repurchases of common stock:
Kidder-related repurchase (784,750)
Other (90,468)
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 1,340,966 $ (998,300) $ (5,490)
==========================================================================================================================
Net income 433,555
Foreign currency translation 854
Total comprehensive income, year ended December 31, 1998
Dividends declared:
Common stock, $.44 per share (61,488)
Redeemable Preferred Stock, $9.00 per share (22,500)
Employee stock transactions
Restricted stock awards 57,534
Conversion of debentures 30,061
Tax benefit relating to employee compensation programs
Other (1,147) 15,526
Repurchases of common stock (67,613)
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 1,689,386 $ (962,792) $ (4,636)
==========================================================================================================================
Net income 628,599
Foreign currency translation (681)
Total comprehensive income, year ended December 31, 1999
Dividends declared:
Common stock, $.44 per share (64,220)
Redeemable Preferred Stock, $9.00 per share (21,562)
Employee stock transactions 32,775
Restricted stock awards 86,546
Tax benefit relating to employee compensation programs
Unamortized discount on redemption of preferred stock (59,883)
Other (1,240) 346
Repurchases of common stock (270,611)
--------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 2,171,080 $(1,113,736) $ (5,317)
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total Number of Shares
Stockholders' Common Treasury
Equity Stock Stock
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 1,730,425 162,537,267 (23,049,351)
========================================================================================================================
Net income 415,449
Foreign currency translation (3,622)
------------
Total comprehensive income, year ended December 31, 1997 411,827
Dividends declared:
Common stock, $.41 per share (54,418)
Redeemable Preferred Stock, $9.00 per share (22,500)
Convertible Preferred Stock, $6.00 per share (6,000)
Employee stock transactions 17,692 3,528,030
Restricted stock awards 87,803 (857,214) 271,716
Conversion of Convertible Preferred Stock -- 8,273,600
Conversion of debentures 20,088 2,224,209
Tax benefit relating to employee compensation programs 58,738
Other (3,224) (312,485)
Repurchases of common stock:
Kidder-related repurchase (219,000) 23,250,000 (32,250,000)
Other (90,468) (3,715,477)
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 1,930,963 188,458,083 (48,557,788)
========================================================================================================================
Net income 433,555
Foreign currency translation 854
------------
Total comprehensive income, year ended December 31, 1998 434,409
Dividends declared:
Common stock, $.44 per share (61,488)
Redeemable Preferred Stock, $9.00 per share (22,500)
Employee stock transactions 30,953 2,953,503
Restricted stock awards 88,966 (367,921) 2,725,525
Conversion of debentures 14,304 1,454,707
Tax benefit relating to employee compensation programs 70,425
Other 20,524 3,486 982,919
Repurchases of common stock (67,613) (2,133,070)
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 2,438,943 191,047,151 (45,527,707)
========================================================================================================================
Net income 628,599
Foreign currency translation (681)
------------
Total comprehensive income, year ended December 31, 1999 627,918
Dividends declared:
Common stock, $.44 per share (64,220)
Redeemable Preferred Stock, $9.00 per share (21,562)
Employee stock transactions 85,042 2,329,596 1,484,938
Restricted stock awards 136,362 (235,081) 3,733,981
Tax benefit relating to employee compensation programs 45,699
Unamortized discount on redemption of preferred stock (59,883)
Other (431) 3,486 15,751
Repurchases of common stock (270,611) (7,264,027)
------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 2,917,257 193,145,152 (47,557,064)
========================================================================================================================
</TABLE>
PAINEWEBBER / 37
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 628,599 $ 433,555 $ 415,449
Adjustments to reconcile net income to cash used for
operating activities:
Noncash items included in net income:
Depreciation and amortization 99,723 74,296 68,700
Deferred income taxes (74,097) (43,118) (119,934)
Amortization of deferred charges 59,138 84,932 105,911
Stock-based compensation 136,362 88,966 87,803
(Increase) decrease in operating receivables:
Clients (2,260,557) (999,221) (1,343,942)
Brokers and dealers (66,672) (139,970) (221,118)
Dividends and interest (69,382) 30,411 13,387
Fees and other (24,250) 135,834 (267,030)
Increase (decrease) in operating payables:
Clients 1,051,443 1,638,800 169,172
Brokers and dealers (238,359) 265,571 62,613
Dividends and interest 115,765 (48,960) 58,050
Other 523,330 408,672 393,127
(Increase) decrease in:
Cash and securities on deposit (191,787) (62,134) (69,377)
Financial instruments owned (1,091,755) (3,041,221) 456,731
Securities purchased under agreements to resell (1,706,886) 7,345,677 (815,908)
Securities borrowed (1,809,162) 855,711 (2,192,813)
Other assets (196,808) 16,726 (165,625)
Increase (decrease) in:
Financial instruments sold, not yet purchased 1,922,109 (1,925,045) 480,253
Securities sold under agreements to repurchase 1,791,324 (5,680,030) 831,626
Securities loaned 691,562 235,677 1,274,101
----------------------------------------------------------
Cash used for operating activities (710,360) (324,871) (778,824)
====================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements (252,186) (181,417) (90,947)
----------------------------------------------------------
Cash used for investing activities (252,186) (181,417) (90,947)
====================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on):
Short-term borrowings 466,467 (248,433) 328,570
Proceeds from:
Long-term borrowings 1,414,997 1,148,860 822,011
Employee stock transactions 85,042 45,257 72,820
Issuances of Preferred Trust Securities -- -- 198,750
Payments for:
Long-term borrowings (449,525) (293,223) (207,863)
Repurchases of common stock (270,611) (67,613) (411,668)
Preferred stock transactions (250,000) -- --
Dividends (85,782) (83,988) (82,918)
----------------------------------------------------------
Cash provided by financing activities 910,588 500,860 719,702
----------------------------------------------------------
Decrease in cash and cash equivalents (51,958) (5,428) (150,069)
Cash and cash equivalents, beginning of year 228,359 233,787 383,856
----------------------------------------------------------
Cash and cash equivalents, end of year $ 176,401 $ 228,359 $ 233,787
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
PAINEWEBBER / 38
<PAGE> 16
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 1 / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Paine Webber Group Inc. ("PWG") is a holding company which, together with its
operating subsidiaries (collectively, the "Company"), forms one of the largest
full-service securities firms in the industry. The Company is engaged in one
principal line of business, that of serving the investment and capital needs of
individual and institutional clients.
The consolidated financial statements include the accounts of PWG and its wholly
owned subsidiaries, including its principal subsidiary PaineWebber Incorporated
("PWI"). 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 consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States which require management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments Owned and Sold, Not Yet Purchased
Financial instruments used in the Company's trading activities, including
derivative contracts held or issued for trading purposes, are recorded on a
trade date basis at fair value or amounts approximating fair value. Fair value
is generally based upon quoted market prices. If quoted market prices are not
available, or if liquidating the Company's position is reasonably expected to
impact market prices, fair value is determined based upon other relevant
factors, including dealer price quotations, price activity of similar
instruments and pricing models. Pricing models consider the time value and
volatility factors underlying the financial instruments and other economic
measurements.
Related revenues and expenses are recorded in the accounts on a trade date
basis. Unrealized gains and losses from marking-to-market trading instruments
daily are included in principal transactions revenues. Realized gains and losses
on trading instruments and any related interest amounts are included in
principal transactions revenues and interest revenues and expenses,
respectively.
Equity and debt securities purchased in connection with the Company's principal
investing activities, as well as investments in partnerships and other entities
that invest in financial instruments, in which there are no available market
quotations or may be otherwise restricted, are reported at cost or estimated net
realizable value. Realized and unrealized gains and losses are included in
principal transactions revenues.
Derivative Financial Instruments
A derivative instrument is typically defined as a contractual agreement whose
value is "derived" from an underlying asset, rate or index and includes products
such as forwards, futures, swaps or option contracts and other financial
instruments with similar characteristics. A derivative financial instrument also
includes firm or standby commitments for the purchase of securities. The
derivative definition does not include cash instruments whose values are derived
from changes in the value of some asset or index, such as mortgage-backed
securities and structured notes. Derivative contracts used by the Company
generally represent future commitments to exchange interest payment streams
based on the gross contract or notional amount or to purchase or sell financial
instruments at specified terms and future dates.
In connection with the Company's market risk management and trading activities,
the Company may enter into a derivative contract to manage the risk arising from
other financial instruments or to take a position based upon expected future
market conditions. The Company also takes positions to facilitate client
transactions.
A large portion of the Company's derivative financial instruments are "to be
announced" mortgage securities requiring forward settlement. As a principal in
the mortgage-backed securities business, the Company has outstanding forward
purchase and sale agreements committing the Company to receive or deliver
mortgage-backed securities. These forward contracts are generally short-term
with maturity or settlement dates ranging from 30 to 90 days.
Derivative instruments held or issued for trading purposes are marked-to-market
daily with the resulting unrealized gains and losses recorded on the
Consolidated Statement of Financial Condition in financial instruments owned or
financial instruments sold, not yet purchased, and the related profit or loss
reflected in principal transactions revenues on the Consolidated Statement of
Income. The fair value of an exchange-traded derivative, such as futures and
certain option contracts, is determined by quoted market prices while the fair
value of derivatives negotiated in over-the-counter markets are valued based
upon dealer price quotations or pricing models which consider time value and the
volatility of the underlying instruments, as well as other economic factors.
The Company also enters into interest rate swaps to modify the interest rate
characteristics of its outstanding fixed rate debt. These agreements generally
involve the exchange between the Company and its counterparties of amounts based
on a fixed interest rate for amounts based on a variable interest rate over the
life of the agreement without the exchange of the notional amount upon which the
payments are based. The Company accounts for interest rate swap agreements used
for hedging purposes on the accrual method. The difference to be paid or
received on the swap agreements is accrued as an adjustment to interest expense
as incurred. The related receivable from or payable to counterparties is
PAINEWEBBER / 39
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
reflected as an asset or liability, accordingly. The fair values of the swap
agreements are not recognized in the financial statements. Any gains and losses
on early terminations of swap agreements are deferred as an adjustment to the
carrying amount of the debt and amortized as an adjustment to interest expense
over the remaining term of the original contract life of the hedged item. In the
event of the early extinguishment of debt, any unrealized gain or loss from the
related swap would be recognized in income coincident with the extinguishment.
Collateralized Securities Transactions
Securities purchased under agreements to resell ("resale agreements") and
securities sold under agreements to repurchase ("repurchase agreements"),
principally government and agency securities are, for accounting purposes,
treated as financing transactions and are recorded at their contractual amounts,
plus accrued interest. It is Company policy to obtain possession or control of
securities, which have a fair value in excess of the original principal amount
loaned, in order to collateralize resale agreements. The Company is required to
provide securities to counterparties in order to collateralize repurchase
agreements. The Company monitors the fair value of the securities purchased and
sold under these agreements daily versus the related receivable or payable
balances. Should the fair value of the securities purchased decline or the fair
value of the securities sold increase, additional collateral is requested or
excess collateral is returned when deemed appropriate to maintain contractual
margin protection. When specific conditions are met, including the existence of
a legally enforceable master netting agreement, balances related to resale
agreements and repurchase agreements are netted by counterparty on the
Consolidated Statements of Financial Condition.
Resale agreements and repurchase agreements for which the resale/repurchase date
corresponds to the maturity date of the underlying securities are accounted for
as purchases and sales, respectively.
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received in connection with the transaction. Securities
borrowed transactions require the Company to deposit cash or other collateral
with the lender. With respect to securities loaned, the Company receives
collateral. The initial collateral advanced or received approximates or is
greater than, the fair value of the securities borrowed or loaned. The Company
monitors the fair value of the securities borrowed and loaned on a daily basis
and requests additional collateral or returns excess collateral, as appropriate.
Depreciation and Amortization
The Company depreciates office equipment using the straight-line method over
estimated useful lives of three to ten years. Leasehold improvements are
amortized over the lesser of the estimated useful life of the asset or the
remaining term of the lease.
The excess cost of acquired companies over the fair value of the net assets
acquired is recorded as goodwill and is amortized on a straight-line basis over
periods not exceeding 35 years.
Income Taxes
The Company files a consolidated federal income tax return and uses the asset
and liability method in providing for income tax expense. Under this method,
deferred taxes are provided based upon the net tax effects of temporary
differences between the book and tax bases of assets and liabilities.
Translation of Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated at
year-end rates of exchange, and revenues and expenses are translated at average
rates of exchange during the year. Gains and losses resulting from translation
adjustments are accumulated as a separate component of comprehensive income
within stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in net income.
Stock-Based Compensation
The Company grants stock options to certain employees and non-employee directors
with an exercise price equal to the fair market value of the stock at the date
of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and, accordingly, recognizes no compensation expense related to
such grants.
Statement of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, cash equivalents are
defined as highly liquid investments not held for resale, with a maturity of
three months or less when purchased. Total interest payments for the years ended
December 31, 1999, 1998 and 1997 were $2,416,813, $2,893,428 and $2,486,500,
respectively.
PAINEWEBBER / 40
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
Fair Value of Financial Instruments
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Assets, including cash and cash
equivalents, cash and securities segregated for regulatory purposes, trading
assets, resale agreements, securities borrowed, and certain receivables, are
carried at fair value or contracted amounts which approximate fair value.
Similarly, liabilities, including short-term borrowings, trading liabilities,
repurchase agreements, securities loaned, obligations to return securities
received as collateral and certain payables, are carried at fair value or
contracted amounts approximating fair value. Fair values of the Company's
long-term borrowings and interest rate swaps used to hedge the Company's
long-term borrowings are discussed in Note 4.
Accounting Changes and Developments
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.
NOTE 2 / FINANCIAL INSTRUMENTS OWNED AND SOLD, NOT YET PURCHASED
At December 31, 1999 and 1998, financial instruments owned and financial
instruments sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL INSTRUMENTS OWNED
U.S. government and agencies $ 5,864,331 $ 4,858,189
Mortgages and mortgage-backed 9,012,415 8,861,944
Corporate debt 1,875,361 2,466,322
Commercial paper and other short-term debt 1,744,036 1,534,913
Equities and other 2,030,986 1,799,804
State and municipals 617,701 500,179
----------- ------------
$21,144,830 $ 20,021,351
================================================================================================
FINANCIAL INSTRUMENTS SOLD, NOT YET PURCHASED
U.S. government and agencies $ 5,804,259 $ 4,031,254
Mortgages and mortgage-backed 123,049 79,521
Corporate debt 785,890 837,099
Equities 348,485 215,991
State and municipals 37,525 13,234
----------- ------------
$ 7,099,208 $ 5,177,099
================================================================================================
</TABLE>
PAINEWEBBER / 41
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
Note 3 / Short-Term Borrowings
The Company meets its short-term financing needs principally by obtaining bank
loans on either a secured or unsecured basis; by issuing commercial paper and
medium-term notes; by entering into agreements to repurchase, whereby securities
are sold with a commitment to repurchase at a future date; and through
securities lending activity.
Short-term borrowings at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 763,909 $ 457,973
Bank loans 708,841 714,810
Medium-Term Notes 411,500 245,000
----------- ------------
$ 1,884,250 $ 1,417,783
======================================================================================
</TABLE>
The interest rate on commercial paper fluctuates throughout the year. The
weighted-average interest rates on commercial paper borrowings outstanding at
December 31, 1999 and 1998 were 6.30 percent and 5.74 percent, respectively, and
during 1999 and 1998 were 5.33 percent and 5.67 percent, respectively.
Bank loans generally bear interest at rates based on either the federal funds
rate or the London Interbank Offered Rate ("LIBOR"). The weighted-average
interest rates on bank loans outstanding at December 31, 1999 and 1998 were 5.53
percent and 5.57 percent, respectively, and during 1999 and 1998 were 5.88
percent and 5.72 percent, respectively.
The Company has a Multiple Currency Medium-Term Note Program under the terms of
which the Company may offer for sale medium-term senior and subordinated notes
(collectively, the "Medium-Term Notes") due from nine months to thirty years
from date of issuance. The Medium-Term Notes may be either fixed or variable
with respect to interest rates. At December 31, 1999, the Company had
outstanding $276,500 and $135,000 of variable rate and fixed rate Medium-Term
Notes, respectively, with maturities of less than one year from the date of
issuance. At December 31, 1998, the Company had $245,000 of variable rate
Medium-Term Notes with maturities of less than one year from the date of
issuance. The weighted-average interest rates on these Medium-Term Notes
outstanding at December 31, 1999 and 1998 were 6.26 percent and 5.46 percent,
respectively, and during 1999 and 1998 were 5.43 percent and 5.78 percent,
respectively.
The Company has a $1,200,000 committed unsecured senior revolving credit
facility with a group of banks which expires in September 2000, with provisions
for renewal through 2001. In addition, certain of the Company's subsidiaries
have entered into a committed secured revolving credit facility which extends
through August 2000. At December 31, 1999, this credit facility provided an
aggregate of up to $1,000,000. Interest on borrowings under the terms of the
revolving credit facilities is computed, at the option of the Company, at a rate
based on LIBOR, a base rate or the federal funds rate. The Company pays a fee on
the commitments. At December 31, 1999, there were no outstanding borrowings
under these credit facilities.
NOTE 4 / LONG-TERM BORROWINGS
Long-term borrowings at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Rate Notes due 2000 - 2014 $ 2,757,851 $ 1,961,340
Fixed Rate Subordinated Notes due 2002 174,765 174,677
Medium-Term Senior Notes 2,143,010 1,936,835
Medium-Term Subordinated Notes 148,200 182,950
----------- ------------
$ 5,223,826 $ 4,255,802
======================================================================================
</TABLE>
The Company issued $525,000 of 6.38 percent senior notes due 2004 and $275,000
of 7.63 percent senior notes due 2009 on May 18, 1999 and December 1, 1999,
respectively.
Interest rates on the fixed rate notes and the fixed rate subordinated notes
outstanding at December 31, 1999 ranged from 6.38 percent to 9.25 percent. The
weighted-average interest rates on these notes outstanding at December 31, 1999
and 1998 were 7.20 percent and 7.35 percent, respectively. Interest on the notes
is payable semi-annually.
PAINEWEBBER / 42
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
At December 31, 1999 and 1998, the Company had outstanding $1,422,210 and
$1,267,135 of fixed rate Medium-Term Notes and $869,000 and $852,650 of variable
rate Medium-Term Notes, respectively. The Medium-Term Notes outstanding at
December 31, 1999 and 1998 had weighted-average interest rates of 6.76 percent
and 6.48 percent, respectively.
At December 31, 1999, the total long-term borrowings of the Company had an
average maturity of 4.96 years. The aggregate amount of principal repayment
requirements on long-term borrowings for each of the five years subsequent to
December 31, 1999, and the total amount due thereafter, was as follows:
<TABLE>
<CAPTION>
<S> <C>
-------------------------------------------------
2000 $ 875,373
2001 357,500
2002 602,465
2003 706,837
2004 850,434
Thereafter 1,831,217
------------
$ 5,223,826
-------------------------------------------------
</TABLE>
The Company has entered into interest rate swap agreements which effectively
convert substantially all of its fixed rate debt into floating rate debt. The
floating interest rates are based on LIBOR and generally adjust semi-annually.
The effective weighted-average interest rates on the long-term borrowings, after
giving effect to the interest rate swap agreements, were 6.94 percent and 6.42
percent at December 31, 1999 and 1998, respectively. The interest rate swap
agreements entered into have had the effect of reducing net interest expense on
the Company's long-term borrowings by $22,593, $15,606 and $10,966 for the years
ended December 31, 1999, 1998 and 1997, respectively. The notional amounts and
maturities of the interest rate swap agreements outstanding at December 31, 1999
were as follows:
<TABLE>
<CAPTION>
<S> <C>
-------------------------------------------------
2000 $ 747,000
2001 284,000
2002 279,500
2003 645,500
2004 690,200
Thereafter 1,559,810
------------
$ 4,206,010
-------------------------------------------------
</TABLE>
At December 31, 1999 and 1998, the fair values of long-term borrowings were
$5,140,331 and $4,325,014, respectively, as compared to the carrying amounts of
$5,223,826 and $4,255,802, respectively. The estimated fair value of long-term
borrowings was based upon quoted market prices for the same or similar issues
and pricing models. The fair values of the interest rate swaps were $127,097
payable and $113,226 receivable at December 31, 1999 and 1998, respectively. The
fair value of interest rate swaps used to hedge the Company's long-term
borrowings was based upon the amounts the Company would receive or pay to
terminate the agreements, taking into account current interest rates. The
carrying amounts of the interest rate swap agreements included in the Company's
Consolidated Statements of Financial Condition at December 31, 1999 and 1998
were net receivables of $12,075 and $8,827, respectively. See Notes 1 and 8 for
a further discussion of interest rate swap agreements used for hedging purposes.
>>PAINEWEBBER / 43
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 5 / PREFERRED STOCK
Preferred Stock Issued by Paine Webber Group Inc.
The Company is authorized to issue up to 20,000,000 shares of preferred stock,
in one or more series.
Redeemable Preferred Stock - In connection with the acquisition of certain net
assets and specific businesses of Kidder, Peabody Group Inc. ("Kidder") in
December 1994, the Company issued 2,500,000 shares of 20-year 9 percent
Cumulative Redeemable Preferred Stock, Series C (the "Redeemable Preferred
Stock"), with a stated value and liquidation preference of $100.00 per share.
The Redeemable Preferred Stock was recorded at its fair value of $185,000 at the
date of issuance, which was increased periodically by charges to retained
earnings, using the interest method, so that the carrying amount would have
equaled the redemption amount of $250,000 at the mandatory redemption date on
December 15, 2014. The Redeemable Preferred Stock was redeemable at any time, in
whole or in part, on or after December 16, 1999 at the option of the Company at
a price of $100.00 per share, plus accrued and unpaid dividends.
At the earliest redemption date of December 16, 1999, the Company redeemed the
Redeemable Preferred Stock which resulted in a charge to stockholders' equity
equal to the difference between the carrying value and par value (unamortized
discount) of $59,883. Dividends on the Redeemable Preferred Stock were
cumulative and payable in quarterly installments. Holders of the Redeemable
Preferred Stock had no voting rights, except in the event of certain dividend
payment defaults.
Preferred Stock Issued by Subsidiary Trusts
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts holding solely Company Guaranteed Related Subordinated Debt - In December
1996, PWG Capital Trust I, a business trust formed under Delaware law and a
wholly owned subsidiary of the Company, issued $195,000 (7,800,000 shares) of
8.30 percent Preferred Trust Securities to the public at $25.00 per security and
$6,031 (241,238 securities) of 8.30 percent Common Trust Securities to the
Company at $25.00 per security. In March 1997, PWG Capital Trust II, a business
trust formed under Delaware law and a wholly owned subsidiary of the Company,
issued $198,750 (7,950,000 securities) of 8.08 percent Preferred Trust
Securities to the public at $25.00 per security and $6,147 (245,877 securities)
of 8.08 percent Common Trust Securities to the Company at $25.00 per security.
The 8.30 percent Preferred Trust Securities and the 8.08 percent Preferred Trust
Securities (collectively, the "Preferred Trust Securities") have a stated
liquidation amount of $25.00 per share.
PWG Capital Trust I and PWG Capital Trust II (collectively, the "Trusts") exist
for the sole purpose of issuing the Preferred Trust Securities and common
securities and investing the proceeds in an equivalent amount of junior
subordinated debentures of the Company. The sole assets of PWG Capital Trust I
at December 31, 1999 were $201,031 of 8.30 percent Junior Subordinated
Debentures due December 1, 2036 issued by the Company. The sole assets of PWG
Capital Trust II at December 31, 1999 were $204,897 of 8.08 percent Junior
Subordinated Debentures due March 1, 2037 issued by the Company. The 8.30
percent Junior Subordinated Debentures and the 8.08 percent Junior Subordinated
Debentures (collectively, the "Junior Subordinated Debentures") held by the
Trusts are redeemable by the Company, in whole or in part, on or after December
1, 2001 and March 1, 2002, respectively. If the Company redeems Junior
Subordinated Debentures, the Trust must redeem Preferred Trust Securities and
common securities having an aggregate liquidation amount equal to the aggregate
principal amount of Junior Subordinated Debentures.
The Company guarantees payment to the holders of the Preferred Trust Securities,
on a subordinated basis, to the extent the Company has made principal and
interest payments on the Junior Subordinated Debentures. This guarantee,
together with the Company's obligations under the Junior Subordinated
Debentures, provides a full and unconditional guarantee on a subordinated basis
of amounts due on the Preferred Trust Securities. Dividends on the Preferred
Trust Securities are cumulative, payable monthly in arrears, and are deferrable
at the Company's option for periods not to exceed sixty consecutive months. The
Company generally cannot pay dividends on its preferred and common stocks during
such deferments. Dividends on the Preferred Trust Securities have been
classified as minority interest in the Company's Consolidated Statements of
Income.
NOTE 6 / COMMON STOCK
In accordance with the repurchase programs, the Company had available to
repurchase at December 31, 1999 a maximum of 18,681,999 shares of its common
stock. Subsequent to December 31, 1999, the Company's Board of Directors
increased the number of shares of common stock authorized for repurchase by
18,000,000.
>>PAINEWEBBER / 44
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 7 / CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission ("SEC") Uniform Net Capital Rule and New York Stock Exchange ("NYSE")
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 December 31, 1999, PWI's net capital of $892,165 was 7.5 percent of
December 29, 1999 aggregate debit items and its net capital in excess of the
minimum required was $649,034.
Advances, dividend payments and other equity distributions by PWI and other
regulated subsidiaries are restricted by the regulations of the SEC, NYSE, and
international securities and banking agencies, as well as by covenants in
various loan agreements. At December 31, 1999, the equity of PWG's subsidiaries
totaled approximately $2,900,000. Of this amount, approximately $453,000 was not
available for payment of cash dividends and advances to PWG.
Under the terms of certain credit agreements, PWG is subject to dividend payment
restrictions and minimum net worth and net capital requirements. At December 31,
1999, these restrictions did not affect PWG's ability to pay dividends to its
shareholders.
NOTE 8 / FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Consolidated
Statements of Financial Condition and are indicative only of the volume of
activity at December 31, 1999 and 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.
<TABLE>
<CAPTION>
Notional or Contract Amount at December 31, 1999 December 31, 1998
----------------------------- -----------------------------
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $14,417,186 $17,540,786 $30,296,601 $35,558,370
Foreign currency forward contracts, futures
contracts, and options written and purchased 1,380,925 1,373,981 2,709,421 2,628,824
Equity securities contracts including stock
index futures, forwards, and options written
and purchased 144,034 239,682 156,519 332,248
Other fixed income securities contracts
including futures, forwards,
and options written and purchased 3,557,193 5,538,887 3,890,619 4,336,300
Interest rate swaps and caps 1,688,762 419,989 1,292,620 282,546
</TABLE>
PAINEWEBBER / 45
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of December 31, 1999 and 1998. The fair value
amounts are netted by counterparty when specific conditions are met.
<TABLE>
<CAPTION>
Fair Value at December 31, 1999 December 31, 1998
----------------------------- -----------------------------
Assets Liabilities Assets Liabilities
----------- ------------ -----------------------------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $ 159,228 $ 114,838 $ 85,995 $ 76,315
Foreign currency forward contracts, futures
contracts, and options written and purchased 20,274 20,158 31,622 31,726
Equity securities contracts including stock
index futures, forwards, and options written
and purchased 152,024 48,835 26,806 46,606
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 29,584 20,177 12,183 55,015
Interest rate swaps and caps 31,569 11,087 34,749 8,096
</TABLE>
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes during the years ended December 31, 1999 and
1998. The average fair value is based on the average of the month-end balances
during the year.
<TABLE>
<CAPTION>
Average Fair Value for the Years Ended December 31, 1999 December 31, 1998
----------------------------- -----------------------------
Assets Liabilities Assets Liabilities
----------- ------------ -----------------------------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $ 171,113 $ 163,954 $ 158,215 $ 146,522
Foreign currency forward contracts,
futures contracts, and options written
and purchased 22,549 22,377 46,222 45,895
Equity securities contracts including stock
index futures, forwards, and options written
and purchased 63,624 40,321 20,836 42,995
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 11,932 49,800 16,547 41,786
Interest rate swaps and caps 18,593 6,754 13,423 40,760
</TABLE>
The Company also sells securities, at predetermined prices, which have not yet
been purchased. The Company is exposed to market risk since to satisfy the
obligation, the Company must acquire the securities at market prices, which may
exceed the values reflected on the Consolidated Statements of Financial
Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At December 31, 1999, substantially all 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 replacement cost on contracts in which the Company has
recorded an unrealized gain. These amounts are reflected as assets on the
Company's Consolidated Statements of Financial Condition and amounted to
$392,679 and $191,355 at December 31, 1999 and 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. See Note 1 for a further discussion
of derivative financial instruments.
PAINEWEBBER / 46
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
The following table summarizes the Company's principal transactions revenues by
business activity for the years ended December 31, 1999 and 1998. Principal
transactions revenues include realized and unrealized gains and losses on
trading positions and principal investing activities, including hedges. In
assessing the profitability of its trading activities, the Company views net
interest and principal transactions revenues in the aggregate.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998
<S> <C> <C>
Taxable fixed income (includes futures, forwards,
options contracts and other securities) $ 501,819 $ 451,668
Equities (includes stock index futures, forwards and options contracts) 446,168 279,720
Municipals (includes futures and options contracts) 162,093 137,419
----------- ------------
$ 1,110,080 $ 868,807
=========== ============
</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 December 31, 1999 and
1998, the Company had outstanding interest rate swap agreements with commercial
banks with notional amounts of $4,206,010 and $3,096,985, respectively. These
agreements effectively converted substantially all of the Company's fixed rate
debt at December 31, 1999 into floating rate debt. The Company had no deferred
gains or losses related to terminated swap agreements on the Company's long-term
borrowings at December 31, 1999 and 1998. 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 Notes 1 and 4 for further discussion of interest rate
swap agreements used for hedging purposes.
NOTE 9 / RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily basis and through a variety of
financial, security position and credit exposure reporting and control
procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is responsible for
reviewing trading positions, exposures, profits and losses, and trading
strategies. The Company also has an independent risk management group which
reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks, and
holding 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 agency securities, and letters of credit.
The market value of the initial collateral received
PAINEWEBBER / 47
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
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 December 31, 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 December 31, 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 clients, 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 group of
counterparties operating in a particular geographic area or engaged in business
in a particular industry. The Company seeks to control its credit risk and the
potential for risk concentration through a variety of reporting and control
procedures described above.
The Company's most significant industry concentration, which arises within its
normal course of business activities, is financial institutions including banks,
brokers and dealers, investment funds, and insurance companies.
Note 10 / Commitments and Contingencies
Leases
The Company leases office space and equipment under noncancelable operating
lease agreements which expire at various dates through 2015. As of December 31,
1999, the aggregate minimum future rental payments required by operating leases
with initial or remaining lease terms exceeding one year were as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 166,168
2001 155,240
2002 146,857
2003 142,583
2004 136,963
Thereafter 897,467
------------
$ 1,645,278
============
</TABLE>
Rentals are subject to periodic escalation charges and do not include amounts
payable for insurance, taxes and maintenance. In addition, minimum payments have
not been reduced by future minimum sublease rental income of $7,859.
PAINEWEBBER / 48
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
For the years ended December 31, 1999, 1998 and 1997, rent expense under
operating leases was $183,967, $168,417 and $160,973, respectively.
Other Commitments and Contingencies
At December 31, 1999 and 1998, the Company was contingently liable under
unsecured letters of credit totaling $139,156 and $159,647, respectively, which
approximated fair value. At December 31, 1999, 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 fully collateralized by customer
margin securities. At December 31, 1999, the Company had outstanding $101,400 of
such standby letters of credit. At December 31, 1999 and 1998, securities with a
fair value of $2,536,073 and $2,008,145, 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 December 31, 1999,
the Company had commitments of $858,122, 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
December 31, 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 a defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 11 / EMPLOYEE INCENTIVE AWARDS
The Company's various Stock Option and Award Plans (the "Plans") provide for the
granting to officers and other key employees nonqualified stock options,
restricted stock awards, stock appreciation rights, restricted stock units,
stock purchase rights, performance units and other stock based awards. At
December 31, 1999 and 1998, there were 10,597,664 and 9,502,661 shares,
respectively, available for future stock option, common stock and restricted
stock awards under these plans. The Company had no stock appreciation rights,
performance units or stock purchase rights outstanding at December 31, 1999.
Nonqualified Stock Options
Officers and other key employees are granted nonqualified stock options to
purchase shares of common stock at a price not less than the fair market value
of the stock on the date the option is granted. Options for the Company's common
stock have also been granted to limited partnerships, in which key employees of
the Company are limited partners, and to non-employee directors. Options are
exercisable in ratable installments or otherwise, generally over a period of one
to five years from the date of grant. The rights generally expire within seven
to ten years after the date of grant.
Beginning in January 1999, the Company established the Equity Plus Program which
allows eligible employees to purchase shares of the Company's common stock at a
price equal to fair market value on the purchase date and receive stock options
based upon the number of shares purchased under the Program. The maximum number
of shares an employee can purchase is 1,000 per year. The nonqualified stock
options have a price equal to the fair market value of the stock on the date the
option is granted. Shares purchased under the Equity Plus Program are restricted
from resale for two years from the time of purchase, and the options that are
granted under the Equity Plus Program have a three year vesting requirement and
expire seven years after the date of grant. The number of common shares
authorized for purchase by eligible employees is 3,000,000 per annum. During
1999, employees of the Company purchased 1,484,983 shares under the Equity Plus
Program and received 3,005,209 options.
>> PAINEWEBBER / 49
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
The activity during the years ended December 31, 1997, 1998 and 1999 is set
forth below. In January 2000, eligible participants were granted nonqualified
stock options for 1,822,500 shares which are not included in the table below.
<TABLE>
<CAPTION>
Number of Exercise price Weighted-average
shares per share exercise price
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1996 (6,351,551 exercisable) 26,330,606 $ 4.37 - 17.71 $11.80
Granted 7,726,325 18.50 - 34.22 27.58
Exercised (4,964,542) 4.37 - 14.08 10.60
Terminated (928,594) 4.37 - 22.50 13.89
------------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 (6,062,722 exercisable) 28,163,795 $ 4.43 - 34.22 $16.27
Granted 5,865,220 30.69 - 42.63 36.19
Exercised (2,953,503) 4.43 - 34.22 10.48
Terminated (826,541) 4.93 - 34.22 22.06
------------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 (8,712,066 exercisable) 30,248,971 $ 4.93 - 42.63 $20.54
Granted 3,594,777 35.78 - 48.03 39.70
Exercised (2,329,596) 4.93 - 36.78 11.43
Terminated (861,589) 6.69 - 46.66 27.30
------------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 (13,072,821 exercisable) 30,652,563 $ 5.00 - 48.03 $23.29
==============================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------------------------
Weighted-
average
remaining
Range of Number of contractual Number of
exercise prices shares Weighted-average life shares Weighted-average
per share outstanding exercise price (years) exercisable exercise price
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.00 - 13.00 7,228,012 $ 10.76 4.2 7,228,012 $ 10.76
13.01 - 21.00 9,795,481 15.15 4.7 5,832,343 14.54
21.01 - 29.00 789,750 22.47 4.3 -- --
29.01 - 37.00 7,481,268 34.68 5.2 11,346 34.41
37.01 - 48.03 5,358,052 39.28 6.2 1,120 44.89
$ 5.00 - 48.03 30,652,563 $ 23.29 5.0 13,072,821 $ 12.47
==============================================================================================================================
</TABLE>
The Company accounts for stock option grants in accordance with APB Opinion No.
25. Accordingly, no compensation cost has been recognized for its stock option
grants. Pro forma information regarding net income and earnings per share is
required under SFAS No. 123 and has been determined as if the Company had
accounted for all post 1994 stock option grants based on the fair value method.
The pro forma information presented below is not representative of the effect
stock options will have on pro forma net income or earnings per share for future
years.
The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: dividend yields of 1.1
percent, 1.2 percent and 1.7 percent; expected lives of 4.0 years, 3.8 years,
and 3.8 years; risk-free interest rates of 5.5 percent, 5.0 percent and 6.2
percent; and expected volatility of 38 percent, 35 percent and 33 percent. The
weighted-average fair values of options granted during 1999, 1998 and 1997 were
$13.64, $11.15 and $8.52, respectively.
>> PAINEWEBBER / 50
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
For purposes of the pro forma information, the fair values of the 1999, 1998 and
1997 stock option grants are amortized over the vesting period. The pro forma
information for the years ended 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
<S> <C> <C> <C>
NET INCOME As reported $ 628,599 $ 433,555 $ 415,449
Pro forma $ 592,684 $ 406,967 $ 397,131
EARNINGS PER COMMON SHARE
Basic As reported $ 3.77(1) $ 2.91 $ 2.84
Pro forma $ 3.52(1) $ 2.72 $ 2.70
Diluted As reported $ 3.56(1) $ 2.72 $ 2.56
Pro forma $ 3.33(1) $ 2.55 $ 2.44
</TABLE>
(1) Reflects the effect of the unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
Restricted Stock Awards
Restricted stock awards are granted to key employees, whereby shares of the
Company's common stock are awarded in the name of the employee, who has all
rights of a stockholder, subject to certain sale and transfer restrictions. The
awards generally contain restrictions on sales and transfers ranging from one to
three years. The restricted stock awards are subject to forfeiture if the
employee terminates prior to the prescribed restriction period.
During the years ended December 31, 1999, 1998 and 1997, the Company awarded
3,498,900, 2,357,604 and 2,174,502 shares, respectively, of restricted stock,
net of forfeitures. Restricted stock awards are expensed in the service year to
which the grant relates at the value of the stock on grant date. The charge to
compensation expense, net of forfeitures, amounted to $136,362, $88,966 and
$87,803 in the years ended December 31, 1999, 1998 and 1997, respectively.
Other Deferred Compensation Awards
Eligible employees in the Company's Private Client Group participate in the
PaineWebber PartnerPlus Plan (the "PartnerPlus Plan"), a nonqualified deferred
compensation plan. Under the PartnerPlus Plan, the Company makes annual
contributions and the employee may elect to make voluntary pre-tax
contributions, subject to a maximum percent of the Company contribution. The
Company and employee contributions earn tax-deferred interest for ten years.
Company contributions made beginning January 1, 1999 and the interest thereon
generally vest 20 percent per year beginning the sixth year from the date of
contribution, through year ten. Company contributions made prior to January 1,
1999, vest after four years, and the related interest vests after ten years from
the date of contribution. Voluntary contributions vest immediately and the
interest thereon vests on the same terms as interest on Company contributions.
The Company expenses these costs over the service period.
NOTE 12 / EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
In 1998, the Company adopted SFAS No. 132 "Employers' Disclosure about Pension
and Other Postretirement Benefits" which revised and standardized disclosure
requirements. Prior year disclosures have been restated to comply with SFAS No.
132.
The Company has a non-contributory defined benefit pension plan (the "Plan"),
which provides benefits to eligible employees. As of December 31, 1998, the
Company amended its Plan to freeze future accruals except as related to
employees meeting certain age and years of service eligibility requirements.
Pension expense for the years ended 1999, 1998 and 1997 for the Plan
included the following components:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
<S> <C> <C> <C>
Service cost $ 15,900 $ 23,729 $ 19,373
Interest cost 27,860 27,016 23,576
Expected return on Plan assets (35,394) (37,085) (28,991)
Amortization of transition asset (840) (840) (840)
Amortization of prior service cost -- 1,742 2,037
Recognized actuarial loss 2,748 6,289 5,783
--------- --------- ---------
Net periodic pension cost $ 10,274 $ 20,851 $ 20,938
========= ========= =========
</TABLE>
PAINEWEBBER / 51
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
The following table provides a reconciliation of the Plan's benefit obligation
and fair value of Plan assets, as well as a summarization of the Plan's funded
status and prepaid pension asset which is included in other assets on the
Company's Consolidated Statements of Financial Condition at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 406,458 $ 394,583
Service cost 15,900 23,729
Interest cost 27,860 27,016
Actuarial gain (49,113) (3,731)
Effect of curtailment -- (18,003)
Benefits paid (20,597) (17,136)
----------- ------------
Benefit obligation at end of year 380,508 406,458
----------- ------------
Change in Plan Assets:
Fair value of Plan assets at beginning of year 424,874 399,010
Actual return on assets 25,453 33,000
Employer contribution -- 10,000
Benefits paid (20,597) (17,136)
----------- ------------
Fair value of Plan assets at end of year 429,730 424,874
----------- ------------
Funded status 49,222 18,416
Unrecognized transition asset (2,005) (2,845)
Unrecognized net loss 21,212 63,132
----------- ------------
Prepaid pension asset at year-end $ 68,429 $ 78,703
=========== ============
</TABLE>
The benefit obligation for the Plan was determined using an assumed discount
rate of 8.0 percent for 1999 and 7.0 percent for 1998, and an assumed rate of
compensation increase of 4 percent for 1999 and 5 percent for 1998. The
weighted-average assumed rate of return on Plan assets was 8.5 percent for 1999
and 9.5 percent for 1998 and 1997. The Company's funding policy is to contribute
to the Plan amounts that can be deducted for federal income tax purposes. Plan
assets consist primarily of equity securities and U.S. government and agency
obligations.
Defined Contribution Pension Plan
Effective January 1, 1999, the Company established the PaineWebber 401(k) Plus
Plan (the "Plus Plan") which was developed for eligible employees of the Company
to modify the PaineWebber Savings Investment Plan and replace the benefits that
employees would have accrued under the frozen defined benefit pension plan. The
Plus Plan is a defined contribution pension plan that includes two retirement
benefit features: an employee savings investment plan (401(k)) and an annual
retirement contribution that the Company will make to the Plus Plan on the
employee's behalf. Employee contributions vest immediately while Company
contributions are subject to certain vesting provisions.
Under the new Plus Plan, a portion of the employee's 401(k) contributions are
matched by the Company on a graduated scale based on the Company's pre-tax
earnings. The provision for Company contributions for amounts contributed or to
be contributed in cash and/or stock of the Company to the 401(k) and invested in
the PaineWebber Common Stock Fund amounted to approximately $22,900, $14,100 and
$13,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The annual retirement contribution feature provides a Company contribution equal
to a percentage based on the employee's eligible compensation and the employee's
number of years of service with the Company. The provision for the Company's
annual retirement contribution to be contributed in cash for the year ended
December 31, 1999 is $24,300.
Other Benefit Plans
The Company also provides certain life insurance and healthcare benefits to
employees. The costs of such benefits for the years ended December 31, 1999,
1998 and 1997 were $72,500, $57,600 and $55,400, respectively.
PAINEWEBBER / 52
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 13 / INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, net deferred tax assets are included in other assets in the
Consolidated Statements of Financial Condition. Deferred tax assets are
reflected without reduction for a valuation allowance. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1999, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Employee benefits $395,326 $276,367 $229,449
Accelerated income and deferred deductions 117,978 92,724 91,263
Acquired tax benefits 730 25,472 46,000
Other 29,509 20,554 23,627
----------------------------------------
Total deferred tax assets 543,543 415,117 390,339
-------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Tax over book depreciation 8,947 6,792 16,450
Accelerated deductions and deferred income 70,076 41,414 36,753
Safe harbor leases 3,198 4,385 5,282
Valuation of trading assets and investments 70,412 45,662 57,781
Other 3,203 3,254 3,581
----------------------------------------
Total deferred tax liabilities 155,836 101,507 119,847
-------------------------------------------------------------------------------------------
Net deferred tax asset $387,707 $313,610 $270,492
===========================================================================================
</TABLE>
The significant components of the provision for income taxes for the years ended
December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT
Federal $ 360,596 $ 262,733 $ 235,349
State 45,970 14,501 56,476
Foreign 41,490 15,092 10,735
---------------------------------------------
Total current 448,056 292,326 302,560
---------------------------------------------------------------------------
DEFERRED
Federal (67,871) (59,732) (56,373)
State (7,298) 14,562 (17,348)
Foreign 1,072 2,052 (213)
---------------------------------------------
Total deferred (74,097) (43,118) (73,934)
---------------------------------------------------------------------------
$ 373,959 $ 249,208 $ 228,626
===========================================================================
</TABLE>
The reconciliation of income taxes, computed at the statutory federal rate, to
the provision for income taxes recorded for the years ended December 31, 1999,
1998 and 1997, was as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory federal rate $ 362,181 35.0 $ 250,252 35.0 $ 235,587 35.0
State and local income taxes, net of federal tax benefit 25,137 2.4 18,891 2.6 25,433 3.8
Foreign rate differential (3,709) (0.4) 902 0.1 (1,926) (0.3)
Nontaxable dividends and interest (6,657) (0.6) (6,264) (0.8) (6,936) (1.0)
Nondeductible expenses 6,757 0.7 3,261 0.5 3,251 0.5
Minority interest (11,285) (1.1) (11,285) (1.6) (10,161) (1.5)
Other, net 1,535 0.1 (6,549) (0.9) (16,622) (2.5)
---------------------------------------------------------------------
$ 373,959 36.1 $ 249,208 34.9 $ 228,626 34.0
==================================================================================================================================
</TABLE>
>> PAINEWEBBER / 53
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
Income taxes paid for the years ended December 31, 1999, 1998 and 1997 were
$379,194, $236,597 and $278,553, respectively.
Undistributed earnings of the Company's foreign subsidiaries are considered to
be permanently reinvested and, accordingly, no provision for U.S. income taxes
is required on such earnings. As of December 31, 1999, such earnings were
estimated to be $293,000. The estimated U.S. income taxes that would be payable
upon the repatriation of such earnings were not material.
NOTE 14 / 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 share computations:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR
Net income $ 628,599 $ 433,555 $ 415,449
Preferred stock dividends (22,802) (23,647) (29,513)
Unamortized discount charged to equity on
redemption of preferred stock (59,883) -- --
--------------------------------------------------------------
Net income applicable to common
shares for basic earnings per share 545,914 409,908 385,936
--------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends -- -- 6,000
Interest savings on convertible debentures -- 279 1,030
--------------------------------------------------------------
-- 279 7,030
--------------------------------------------------------------
Net income applicable to common
shares for diluted earnings per share $ 545,914 $ 410,187 $ 392,966
---------------------------------------------------------------------------------------------------------------------------------
DENOMINATOR
Weighted-average common shares for basic earnings per share 144,931,042 140,863,761 135,943,063
Weighted-average effect of dilutive securities:
Employee stock options and awards 8,283,402 8,870,423 7,759,013
Convertible debentures -- 877,241 1,984,328
6% Convertible Preferred Stock -- -- 7,661,580(1)
--------------------------------------------------------------
Dilutive potential common shares 8,283,402 9,747,664 17,404,921
Weighted-average common and common equivalent
shares for diluted earnings per share 153,214,444 150,611,425 153,347,984
---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Basic $ 3.77(2) $ 2.91 $ 2.84
Diluted $ 3.56(2) $ 2.72 $ 2.56
=================================================================================================================================
</TABLE>
(1) The 6% Convertible Preferred Stock was converted into 8,273,600 common
shares on December 4, 1997.
(2) Reflects the effect of the unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16,1999.
>> PAINEWEBBER / 54
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 15 / SEGMENT REPORTING DATA
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company offers a wide variety of
products and services, primarily those of a full service 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, insurance annuity contracts,
mutual funds, wrap fee products, and margin and securities lending), 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
markets 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).
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>
1999 1998
---------------------------------------------------------------- ------------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL Individual Institutional Total
---------------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 4,676,467 $ 3,146,286 $ 7,822,753 $ 3,978,301 $ 3,271,281 $ 7,249,582
Net interest
revenues 368,853 222,009 590,862 314,078 194,162 508,240
Net revenues 4,014,049 1,276,126 5,290,175 3,373,456 1,031,658 4,405,114
Depreciation and
amortization 78,868 20,855 99,723 49,639 24,657 74,296
Income
before taxes
and minority
interest 641,870 392,932 1,034,802 494,666 220,341 715,007
Total assets 21,828,324 39,784,052 61,612,376 18,330,427 35,845,494 54,175,921
Expenditures
for long-
lived assets 145,531 106,655 252,186 89,460 91,957 181,417
================================================================= ==========================================
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Individual Institutional Total
----------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $ 3,556,246 $ 3,100,706 $ 6,656,952
Net interest
revenues 274,762 143,812 418,574
Net revenues 3,082,359 1,030,043 4,112,402
Depreciation and
amortization 37,637 31,063 68,700
Income
before taxes
and minority
interest 443,376 229,731 673,107
Total assets 14,736,069 42,328,964 57,065,033
Expenditures
for long-
lived assets 45,950 44,997 90,947
================================================================
</TABLE>
The following presents information about the Company's operations by geographic
area:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------- ---------------------------------------------
United States Non-U.S.(1) Total United States Non-U.S.(1) Total
-------------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 7,531,898 $ 290,855 $ 7,822,753 $ 7,001,967 $ 247,615 $ 7,249,582
Net revenues 5,022,697 267,478 5,290,175 4,239,413 165,701 4,405,114
Income before
taxes and
minority
interest 907,253 127,549 1,034,802 677,646 37,361 715,007
Total assets 53,921,208 7,691,168 61,612,376 44,691,427 9,484,494 54,175,921
============================================================== =============================================
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
United States Non-U.S.(1) Total
--------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $ 6,461,976 $ 194,976 $ 6,656,952
Net revenues 3,965,289 147,113 4,112,402
Income before
taxes and
minority
interest 647,268 25,839 673,107
Total assets 46,610,462 10,454,571 57,065,033
==============================================================
</TABLE>
(1) Predominantly the United Kingdom.
>> PAINEWEBBER / 55
<PAGE> 33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Paine Webber Group Inc.
We have audited the accompanying consolidated statements of financial condition
of Paine Webber Group Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Paine
Webber Group Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
New York, New York
January 31, 2000
>> PAINEWEBBER / 56
<PAGE> 34
COMMON STOCK AND QUARTERLY INFORMATION
COMMON STOCK DIVIDEND HISTORY
During 1999, Paine Webber Group Inc. continued its policy of paying quarterly
common stock dividends. Dividends declared during the last twelve quarters were
as follows:
<TABLE>
<CAPTION>
Calendar Quarter 4th 3rd 2nd 1st
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $ .11 $ .11 $ .11 $ .11
1998 .11 .11 .11 .11
1997 .11 .10 .10 .10
===================================================================
</TABLE>
On February 3, 2000, Paine Webber Group Inc. declared a 2000 first quarter
dividend of $.12 per share, an increase of 9 percent over the fourth quarter of
1999. However, there is no assurance that dividends will continue to be paid in
the future, since they are dependent upon income, financial condition and other
factors, including the restrictions described in Note 7 in the Notes to
Consolidated Financial Statements.
MARKET FOR COMMON STOCK
The common stock of Paine Webber Group Inc. is listed on the New York Stock
Exchange ("NYSE") and the Pacific Stock Exchange. The following table summarizes
the high and low sales prices per share of the common stock as reported on the
Composite Tape for the periods indicated:
<TABLE>
<CAPTION>
High Low
---------------------------------------------------------------------------
<S> <C> <C> <C>
CALENDAR 1999 4th Quarter $ 44.00 $ 31.75
3rd Quarter 46.38 34.00
2nd Quarter 49.75 38.00
1st Quarter 42.06 32.63
---------------------------------------------------------------------------
Calendar 1998 4th Quarter $ 44.50 $ 20.38
3rd Quarter 53.38 29.25
2nd Quarter 49.44 39.44
1st Quarter 43.13 28.69
===========================================================================
</TABLE>
On February 11, 2000 the last reported sale price per share of Paine Webber
Group, Inc. common stock on the NYSE was $37.56. The approximate number of
holders of record of Paine Webber Group Inc. common stock as of the close of
business on February 11, 2000 was 6,077.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Income before Earnings per
(In thousands of dollars Total Net taxes and Net common share
except per share amounts) Revenues Revenues minority interest Income Basic/Diluted
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALENDAR 1999 4th Quarter $ 2,068,273 $ 1,390,210 $ 274,131 $ 166,294 $ .71/.67(1)
3rd Quarter 1,860,192 1,237,167 225,985 138,202 .91/.86
2nd Quarter 1,970,978 1,347,907 269,667 163,504 1.08/1.02
1st Quarter 1,923,310 1,314,891 265,019 160,599 1.06/1.01
--------------------------------------------------------------------------------------------------------------------
Calendar 1998 4th Quarter $ 1,735,041 $ 1,096,493 $ 166,214 $ 100,427 $ .66/.63
3rd Quarter 1,809,148 1,031,476 138,599 82,892 .54/.51
2nd Quarter 1,900,283 1,162,168 211,999 129,501 .88/.82
1st Quarter 1,805,110 1,114,977 198,195 120,735 .82/.77
====================================================================================================================
</TABLE>
(1) Reflects the effect of unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
The sum of the quarterly earnings per share amounts does not equal the annual
amount reported, as per share amounts are computed independently for each
quarter and the full year based on respective weighted-average common and common
equivalent shares outstanding during each period.
>> PAINEWEBBER / 57
<PAGE> 35
FIVE-YEAR FINANCIAL SUMMARY
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
COMMISSIONS
Listed securities
and options $1,115,508 21.1 $ 992,816 22.5 $ 884,341 21.5
Mutual funds and
insurance 545,125 10.3 438,598 10.0 415,855 10.1
Over-the-counter
securities and other 288,326 5.5 209,869 4.8 196,595 4.8
-------------------------------------------------------------------------
1,948,959 36.9 1,641,283 37.3 1,496,791 36.4
-------------------------------------------------------------------------
PRINCIPAL
TRANSACTIONS
Taxable fixed income 501,819 9.5 451,668 10.3 514,976 12.5
Equities 446,168 8.4 279,720 6.3 408,969 9.9
Municipals 162,093 3.1 137,419 3.1 131,703 3.2
-------------------------------------------------------------------------
1,110,080 21.0 868,807 19.7 1,055,648 25.6
-------------------------------------------------------------------------
ASSET MANAGEMENT 911,099 17.2 713,570 16.2 542,755 13.2
-------------------------------------------------------------------------
INVESTMENT BANKING
Underwriting fees,
management fees and
selling concessions:
Corporate securities 248,407 4.7 265,721 6.0 249,777 6.1
Municipal obligations 89,098 1.7 117,978 2.7 76,964 1.9
Private placement
and other fees 220,719 4.2 147,273 3.3 133,260 3.2
-------------------------------------------------------------------------
558,224 10.6 530,972 12.0 460,001 11.2
-------------------------------------------------------------------------
OTHER 170,951 3.2 142,242 3.2 138,633 3.4
-------------------------------------------------------------------------
INTEREST 3,123,440 59.0 3,352,708 76.1 2,963,124 72.1
-------------------------------------------------------------------------
TOTAL REVENUES 7,822,753 147.9 7,249,582 164.5 6,656,952 161.9
======================================================================================================
INTEREST EXPENSE 2,532,578 (47.9) 2,844,468 (64.5) 2,544,550 (61.9)
-------------------------------------------------------------------------
NET REVENUES $5,290,175 100.0 $4,405,114 100.0 $4,112,402 100.0
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995(1)
----------------------------------------------------------------------------
Amount % Amount %
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
COMMISSIONS
Listed securities
and options $ 821,499 22.0 $ 816,517 24.4
Mutual funds and
insurance 380,982 10.2 302,654 9.0
Over-the-counter
securities and other 178,994 4.8 153,595 4.6
-----------------------------------------------
1,381,475 37.0 1,272,766 38.0
-----------------------------------------------
PRINCIPAL
TRANSACTIONS
Taxable fixed income 500,391 13.4 396,787 11.8
Equities 379,446 10.2 377,650 11.3
Municipals 143,778 3.8 139,764 4.2
-----------------------------------------------
1,023,615 27.4 914,201 27.3
-----------------------------------------------
ASSET MANAGEMENT 453,267 12.1 399,540 11.9
-----------------------------------------------
INVESTMENT BANKING
Underwriting fees,
management fees and
selling concessions:
Corporate securities 226,063 6.1 207,499 6.2
Municipal obligations 53,914 1.4 43,578 1.3
Private placement
and other fees 111,187 3.0 75,700 2.2
-----------------------------------------------
391,164 10.5 326,777 9.7
-----------------------------------------------
OTHER 146,708 3.9 150,056 4.5
-----------------------------------------------
INTEREST 2,309,737 61.9 2,256,750 67.4
-----------------------------------------------
TOTAL REVENUES 5,705,966 152.8 5,320,090 158.8
============================================================================
INTEREST EXPENSE 1,970,754 (52.8) 1,969,811 (58.8)
-----------------------------------------------
NET REVENUES $3,735,212 100.0 $3,350,279 100.0
============================================================================
</TABLE>
>> PAINEWEBBER / 58
<PAGE> 36
FIVE-YEAR FINANCIAL SUMMARY
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NON-INTEREST EXPENSES
Compensation
and benefits $ 3,049,568 57.6 $ 2,601,364 59.1 $ 2,420,296 58.9
Office and equipment 352,712 6.7 301,845 6.9 275,532 6.7
Communications 168,071 3.2 154,272 3.5 153,285 3.7
Business development 122,678 2.3 103,287 2.3 82,099 2.0
Brokerage, clearing
and exchange fees 95,211 1.8 97,430 2.2 86,808 2.1
Professional services 136,758 2.6 123,265 2.8 129,066 3.1
Other 330,375 6.2 308,644 7.0 292,209 7.1
-----------------------------------------------------------------------
TOTAL NON-INTEREST
EXPENSES 4,255,373 80.4 3,690,107 83.8 3,439,295 83.6
-----------------------------------------------------------------------
Income before taxes
and minority interest 1,034,802 19.6 715,007 16.2 673,107 16.4
Provision for
income taxes 373,959 7.1 249,208 5.7 228,626 5.6
Income before
minority interest 660,843 12.5 465,799 10.5 444,481 10.8
Minority interest 32,244 0.6 32,244 0.7 29,032 0.7
-----------------------------------------------------------------------
Net income $ 628,599 11.9 $ 433,555 9.8 $ 415,449 10.1
===================================================================================================
EARNINGS PER
COMMON SHARE(2)
Basic $ 3.77(3) $ 2.91 $ 2.84
Diluted $ 3.56(3) $ 2.72 $ 2.56
-----------------------------------------------------------------------
WEIGHTED-AVERAGE
COMMON SHARES(2)
Basic 144,931,042 140,863,761 135,943,063
Diluted 153,214,444 150,611,425 153,347,984
-----------------------------------------------------------------------
DIVIDENDS DECLARED
PER SHARE
Common stock(2) $ .44 $ .44 $ .41
Preferred stock:
Redeemable
Preferred Stock $ 9.00 $ 9.00 $ 9.00
Convertible
Preferred Stock $ -- $ -- $ 6.00
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995(1)
------------------------------------------------------------------------
Amount % Amount %
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NON-INTEREST EXPENSES
Compensation
and benefits $ 2,219,129 59.4 $ 2,004,585 59.8
Office and equipment 267,006 7.1 266,291 7.9
Communications 153,301 4.1 149,047 4.5
Business development 75,981 2.0 90,752 2.7
Brokerage, clearing
and exchange fees 87,839 2.4 93,657 2.8
Professional services 108,123 2.9 101,911 3.0
Other 263,800 7.1 541,359 16.2
--------------------------------------------
TOTAL NON-INTEREST
EXPENSES 3,175,179 85.0 3,247,602 96.9
--------------------------------------------
Income before taxes
and minority interest 560,033 15.0 102,677 3.1
Provision for
income taxes 194,649 5.2 21,927 0.7
Income before
minority interest 365,384 9.8 80,750 2.4
Minority interest 1,034 0.0 -- 0.0
--------------------------------------------
NET INCOME $ 364,350 9.8 $ 80,750 2.4
========================================================================
EARNINGS PER
COMMON SHARE(2)
Basic $ 2.55 $ 0.37
Diluted $ 2.24 $ 0.35
--------------------------------------------
WEIGHTED-AVERAGE
COMMON SHARES(2)
Basic 131,547,207 138,045,626
Diluted 153,829,662 152,268,070
--------------------------------------------
DIVIDENDS DECLARED
PER SHARE
Common stock(2) $ .32 $ .32
Preferred stock:
Redeemable
Preferred Stock $ 9.00 $ 9.00
Convertible
Preferred Stock $ 6.00 $ 6.00
========================================================================
</TABLE>
(1) The 1995 results include after-tax charges of $146 million ($230 million
before income taxes) related to the resolution of the issues arising from
the Company's sale of public proprietary limited partnerships.
(2) All share and per share data reflect a three-for-two common stock split in
November 1997.
(3) Reflects the effect of the unamortized discount of $59.9 million charged
to stockholders' equity resulting from the redemption of preferred stock
on December 16, 1999.
>> PAINEWEBBER / 59
