-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FroTYXEIWGNIrE0oZwenkgPICXas+bVntpTEN57DxWe7pfwis151VXK0lN9e5WCK flcaGlguiewXzR6ap1EATw== 0000950123-95-003329.txt : 19951119 0000950123-95-003329.hdr.sgml : 19951119 ACCESSION NUMBER: 0000950123-95-003329 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINE WEBBER GROUP INC CENTRAL INDEX KEY: 0000075754 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 132760086 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07367 FILM NUMBER: 95591515 BUSINESS ADDRESS: STREET 1: 1285 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127132000 FORMER COMPANY: FORMER CONFORMED NAME: PAINE WEBBER INC DATE OF NAME CHANGE: 19840523 10-Q 1 FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1995 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-7367 PAINE WEBBER GROUP INC. - ------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 13-2760086 - ------------------------------------------ ---------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 1285 Avenue of the Americas, New York, N.Y. 10019 - ------------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 713-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- ----------------------- On November 3, 1995, the Registrant had outstanding 97,437,306 shares of common stock of $1 par value, which is the Registrant's only class of common stock. 2 PAINE WEBBER GROUP INC. FORM 10-Q SEPTEMBER 30, 1995 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page --------------------- ---- Item 1. Financial Statements. Consolidated Statements of Operations (unaudited) for the Three Months and Nine Months Ended September 30, 1995 and 1994. 2 Consolidated Statements of Financial Condition (unaudited) at September 30, 1995 and December 31, 1994. 3 Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 1995 and 1994. 4 Notes to Consolidated Financial Statements (unaudited). 5-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14-18 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings. 19 Item 6. Exhibits and Reports on Form 8-K. 19 Signature 20
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAINE WEBBER GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of dollars except share and per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------ 1995 1994 1995 1994 ------------- ------------ ------------ ------------- REVENUES Commissions $ 333,686 $ 220,677 $ 927,772 $ 742,062 Principal transactions 264,049 110,965 682,026 386,526 Investment banking 93,988 64,864 232,380 221,598 Asset management 104,159 87,084 292,031 268,056 Other 39,587 35,775 118,081 102,814 Interest 544,089 420,684 1,693,423 1,203,790 ----------- ---------- ---------- ---------- Total revenues 1,379,558 940,049 3,945,713 2,924,846 Interest expense 467,533 350,235 1,483,106 1,003,989 ----------- ---------- ---------- ---------- Net revenues 912,025 589,814 2,462,607 1,920,857 ----------- ---------- ---------- ---------- NON-INTEREST EXPENSES Compensation and benefits 537,870 362,284 1,475,637 1,138,727 Office and equipment 67,689 56,620 199,716 168,445 Communications 38,130 32,521 111,459 97,542 Business development 23,364 19,616 68,358 63,167 Brokerage, clearing & exchange fees 24,432 19,499 72,556 61,965 Professional services 24,531 17,976 72,910 58,777 Other 79,307 47,403 438,097 247,350 ----------- ---------- ---------- ---------- Total non-interest expenses 795,323 555,919 2,438,733 1,835,973 ----------- ---------- ---------- ---------- EARNINGS BEFORE TAXES 116,702 33,895 23,874 84,884 ----------- ---------- ---------- ---------- PROVISION (BENEFIT) FOR INCOME TAXES: Federal 24,099 9,262 (11,890) 15,214 State, local and foreign 14,413 4,296 13,812 18,740 ----------- ---------- ---------- ---------- 38,512 13,558 1,922 33,954 ----------- ---------- ---------- ---------- NET EARNINGS $ 78,190 $ 20,337 $ 21,952 $ 50,930 =========== ========== ========== ========== Net earnings (loss) applicable to common shares $ 71,202 $ 20,952 $ (16) $ 53,428 =========== ========== ========== ========== Earnings per common share: Primary $ 0.71 $ 0.27 $ 0.00 $ 0.67 Fully diluted $ 0.67 $ 0.26 $ 0.00 $ 0.67 Weighted average common shares: Primary 100,931,592 78,798,202 92,597,619 79,320,442 Fully diluted 108,158,981 80,203,754 92,597,619 80,725,994 Dividends declared per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36
See notes to consolidated financial statements. 2 4 PAINE WEBBER GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (In thousands of dollars except share and per share amounts)
September 30, December 31, 1995 1994 ------------ ------------ ASSETS Cash and cash equivalents $ 196,111 $ 259,238 Cash and securities segregated and on deposit for federal and other regulations 419,419 369,585 Trading inventories, at fair value 13,274,228 10,784,117 Securities borrowed or purchased under agreements to resell 27,621,675 18,630,656 Receivables: Clients 5,376,274 3,495,670 Brokers and dealers 189,821 432,565 Dividends and interest 268,594 229,462 Fees and other 237,086 233,027 Office equipment and leasehold improvements, net of accumulated depreciation and amortization of $278,838 at September 30, 1995 and $245,225 at December 31, 1994 321,697 272,365 Other assets 1,640,246 1,149,440 ----------- ----------- $49,545,151 $35,856,125 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 1,672,755 $ 1,889,609 Commitments for securities sold but not yet purchased, at fair value 7,251,044 6,034,706 Securities loaned or sold under agreements to repurchase 29,539,571 19,099,766 Payables: Clients 4,470,885 2,899,240 Brokers and dealers 224,739 303,244 Dividends and interest 268,619 218,719 Other liabilities and accrued expenses 1,372,805 933,977 Income taxes 102,652 - Accrued compensation and benefits 466,995 344,981 ----------- ----------- 45,370,065 31,724,242 Long-term borrowings 2,423,001 2,315,415 ----------- ----------- 47,793,066 34,039,657 ----------- ----------- Commitments and contingencies Redeemable Preferred Stock 186,562 185,969 Stockholders' Equity: Convertible Preferred Stock 100,000 100,000 Common stock, $1 par value, 200,000,000 shares authorized; issued 102,083,692 shares at September 30, 1995 and 100,613,737 shares at December 31, 1994 102,084 100,614 Additional paid-in capital 786,841 784,974 Retained earnings 679,414 715,052 ----------- ----------- 1,668,339 1,700,640 Treasury stock, at cost; 3,740,987 shares at September 30, 1995 and 1,297,081 shares at December 31, 1994 (71,717) (21,981) Unamortized cost of restricted stock (36,407) (51,803) Foreign currency translation adjustment 5,308 3,643 ----------- ----------- 1,565,523 1,630,499 ----------- ----------- $49,545,151 $35,856,125 =========== ===========
See notes to consolidated financial statements. 3 5 PAINE WEBBER GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of dollars)
Nine Months Ended September 30, --------------------------------- 1995 1994 ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 21,952 $ 50,930 Adjustments to reconcile net earnings to cash (used for) provided by operating activities: Noncash items included in net earnings: Depreciation and amortization 41,661 29,978 Deferred income taxes (100,304) (20,785) Amortization of deferred charges 119,465 85,026 Other 218,654 26,560 (Increase) decrease in operating receivables: Clients (1,885,764) (718,757) Brokers and dealers 242,744 436,645 Dividends and interest (39,132) 41,980 Fees and other (4,058) (25,963) Increase (decrease) in operating payables: Clients 1,571,645 783,632 Brokers and dealers (78,505) (326,030) Dividends and interest 49,899 (92,772) Other 453,674 (178,270) (Increase) decrease in: Trading inventories (2,490,111) 6,054,748 Securities borrowed or purchased under agreements to resell (11,344,326) (6,261,608) Cash and securities on deposit (49,834) (2,382) Other assets (483,944) (384,389) Increase (decrease) in: Commitments for securities sold but not yet purchased 1,216,338 (640,698) Securities loaned or sold under agreements to repurchase 10,636,232 4,799,029 ----------- ---------- Cash (used for) provided by operating activities (1,903,714) 3,656,874 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for: Office equipment and leasehold improvements (88,698) (51,076) ----------- ---------- Cash used for investing activities (88,698) (51,076) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (payments on): Short-term borrowings (216,854) (1,513,291) Securities sold under agreements to repurchase, net of securities purchased under agreements to resell 2,156,879 (2,530,625) Proceeds from: Long-term borrowings 412,586 623,030 Employee stock transactions 33,818 10,710 Payments for: Long-term borrowings (306,370) (120,040) Repurchases of common stock (93,184) (39,546) Dividends (57,590) (27,453) ----------- ---------- Cash provided by (used for) financing activities 1,929,285 (3,597,215) ----------- ---------- Increase (decrease) in cash and cash equivalents (63,127) 8,583 Cash and cash equivalents, beginning of period 259,238 241,038 ----------- ---------- Cash and cash equivalents, end of period $ 196,111 $ 249,621 =========== ==========
See notes to consolidated financial statements. 4 6 PAINE WEBBER GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands of dollars except share and per share amounts) NOTE 1: BASIS OF PRESENTATION The consolidated financial statements include the accounts of Paine Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its principal subsidiary, PaineWebber Incorporated ("PWI") (collectively, the "Company"). All material intercompany balances and transactions have been eliminated. The financial information as of and for the periods ended September 30, 1995 and 1994 is unaudited. However, in the opinion of management of the Company, such information includes all adjustments, consisting of normal recurring accruals, necessary for a fair presentation. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and previously issued quarterly reports. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year. Certain reclassifications have been made in prior year amounts to conform to current year presentations. The Company's principal line of business is to serve the investment and capital needs of individual, corporate, institutional and public agency clients. NOTE 2: BUSINESS ACQUISITION The purchase of certain assets and liabilities and specific businesses of Kidder, Peabody Group Inc. ("Kidder") from General Electric Company was completed in the first quarter of 1995 with the closing on the retail and asset management businesses. The following unaudited pro forma condensed results of operations for the three months and nine months ended September 30, 1994 assumes the acquisition of the Kidder businesses occurred at the beginning of the year ended December 31, 1994:
Three Months Ended Nine Months Ended September 30, 1994 September 30, 1994 ------------------ ------------------ Revenues $1,207,108 $3,726,023 Net revenues $ 774,287 $2,474,277 Net earnings $ 40,536 $ 111,527 Earnings per common share: Primary $ 0.34 $ 0.91 Fully diluted $ 0.33 $ 0.90
The unaudited pro forma condensed results of operations for the three months and nine months ended September 30, 1994 are not necessarily indicative of the Company's results of operations that might have occurred had the transaction been executed at the beginning of 1994, or of any future results of operations of the Company. Adjustments to 1995 to develop pro forma results as if the retail and asset management closings had occurred on January 1, 1995 were not material. NOTE 3: LIMITED PARTNERSHIP INVESTMENT CHARGE In the second quarter of 1995, the Company recorded an after-tax charge of $126,000 ($200,000 before income taxes) reflecting the Company's assessment of the total financial cost of resolving Securities and Exchange Commission ("SEC"), individual and class action claims arising out of the sale of limited partnerships that began in the mid-1980's. The Company has reached a stage in its settlement discussions with the SEC staff and in its evaluation of individual and class action claims such that it now has a sound and comprehensive basis for quantifying the total costs of resolving limited partnership investment issues. The charge is included in "Other liabilities" and "Other expenses" in the Company's Consolidated Statement of Financial Condition and Consolidated Statement of Operations, respectively. 5 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts) NOTE 4: 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 inventories, securities borrowed or purchased under agreements to resell, and certain receivables, are carried at fair value or contracted amounts which approximate fair value. Similarly, liabilities, including short-term borrowings, commitments for securities sold but not yet purchased, securities loaned or sold under agreements to repurchase, and certain payables, are carried at fair value or contracted amounts approximating fair value. At September 30, 1995 and December 31, 1994, the fair value of long-term borrowings was $2,429,057 and $2,107,538, respectively, as compared to the carrying amounts of $2,423,001 and $2,315,415, respectively. The estimated fair value of long-term borrowings is based upon quoted market prices for the same or similar issues and pricing models. However, for the majority of its fixed rate debt, the Company enters into interest rate swap agreements to convert its fixed rate payments into floating payments, which partially offset the effect of the changes in interest rates on the fair value of the Company's long-term borrowings. The fair value of interest rate swaps used to hedge the Company's long-term borrowings is based upon the amounts the Company would receive or pay to terminate the agreements, taking into account current interest rates and creditworthiness of the counterparties. The fair value of the interest rate swaps was $16,512 and $172,193 payable at September 30, 1995 and December 31, 1994, respectively. The carrying amounts of the interest rate swap agreements at September 30, 1995 and December 31, 1994 were $317 and $4,480 receivable, respectively, and are included in "Dividends and interest" in the Company's Consolidated Statement of Financial Condition. NOTE 5: TRADING INVENTORIES Trading inventories and commitments for securities sold but not yet purchased, recorded at fair value, consisted of the following:
September 30, December 31, 1995 1994 --------------- -------------- Trading inventories: U.S. government and agency obligations $ 4,293,056 $ 3,560,201 Mortgages and mortgage-backed securities 4,178,201 2,441,940 Corporate debt securities 2,317,574 1,816,747 Commercial paper and other short-term debt 890,006 1,242,988 State and municipal obligations 798,870 1,018,875 Corporate equity securities 796,521 703,366 ------------ ----------- $ 13,274,228 $10,784,117 ============ =========== Commitments for securities sold but not yet purchased: U.S. government and agency obligations $ 5,406,527 $ 4,918,655 Mortgages and mortgage-backed securities 86,101 44,370 Corporate debt securities 662,966 398,913 State and municipal obligations 15,911 57,751 Corporate equity securities 1,079,539 615,017 ------------ ----------- $ 7,251,044 $ 6,034,706 ============ ===========
6 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts) NOTE 6: SHORT-TERM BORROWINGS The Company meets its short-term financing needs by obtaining bank loans on either a secured or unsecured basis; by issuing commercial paper and medium-term notes; by entering into agreements to repurchase, whereby securities are sold with a commitment to repurchase at a future date; and through securities lending activity. Short-term borrowings at September 30, 1995 and December 31, 1994 consisted of the following:
September 30, December 31, 1995 1994 ------------ ------------- Bank loans and other $1,151,497 $ 972,959 Commercial paper 521,258 906,650 Medium-Term Notes - 10,000 ---------- ---------- $1,672,755 $1,889,609 ========== ==========
NOTE 7: LONG-TERM BORROWINGS Long-term borrowings at September 30, 1995 and December 31, 1994 consisted of the following :
September 30, December 31, 1995 1994 -------------- ------------ Fixed Rate Notes due 1998-2014 $1,287,690 $1,177,159 Fixed Rate Subordinated Notes due 2002 174,390 174,324 Medium-Term Senior Notes 636,475 618,070 Medium-Term Subordinated Notes 287,150 308,150 Other 37,296 37,712 ---------- ---------- $2,423,001 $2,315,415 ========== ==========
At September 30, 1995, interest rates on the Fixed Rate Notes due 1998-2014 range from 6 1/4% to 9 1/4% and the weighted average interest rate on these notes at September 30, 1995 was 7.53%. The Fixed Rate Subordinated Notes Due 2002 have an interest rate of 7 3/4%. As of September 30, 1995, the Company had $923,625 of Medium-Term Senior and Subordinated Notes outstanding, with an average maturity of 4.1 years and a weighted average interest rate of 7.05%. Total interest payments relating to agreements to repurchase, short-term borrowings, stock loans and long-term borrowings were $1,433,205 and $1,120,250 for the nine months ended September 30, 1995 and 1994, respectively. NOTE 8: PREFERRED STOCK The Company has authorization to issue up to 20,000,000 shares of preferred stock, in one or more series, with a par value of $20.00 per share. Preferred stock outstanding at September 30, 1995 and December 31, 1994 was as follows:
September 30, December 31, 1995 1994 ------------- -------------- 9% Cumulative Redeemable Preferred Stock, Series C, $100.00 liquidation value; 2,500,000 shares authorized, issued and outstanding $186,562 $185,969 6% Cumulative Convertible Redeemable Preferred Stock, Series A, $100.00 liquidation value; 1,000,000 shares authorized, issued and outstanding $100,000 $100,000
7 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts) NOTE 9: COMMON STOCK As of September 30, 1995, the Company had 33,591,234 authorized shares of common stock reserved for issuance in connection with convertible securities and stock option and stock award plans. On November 2, 1995, the Board of Directors declared a regular quarterly dividend on the Company's common stock of $0.12 per share payable on January 4, 1996 to stockholders of record on December 4, 1995. NOTE 10: CAPITAL REQUIREMENTS PWI, a registered broker-dealer, is subject to the Securities and Exchange Commission Uniform Net Capital Rule and New York Stock Exchange Growth and Business Reduction capital requirements. Under the method of computing capital requirements adopted by PWI, minimum net capital shall not be less than 2% of combined aggregate debit items arising from client transactions, plus excess margin collected on securities purchased under agreements to resell, as defined. A reduction of business is required if net capital is less than 4% of such aggregate debit items. Business may not be expanded if net capital is less than 5% of such aggregate debit items. As of September 30, 1995, PWI's net capital of $592,623 was 14% of aggregate debit balances and its net capital in excess of the minimum required was $497,697. NOTE 11: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK Held or Issued for Trading Purposes In the normal course of business, the Company engages in a variety of derivative and non-derivative financial instrument transactions in connection with its market risk management, its principal trading activities and also on behalf of its clients. Derivative financial instruments include forward and futures contracts, options contracts, interest rate swaps and other contracts committing the Company to purchase or deliver other instruments at specified future dates and prices, or to make or receive payments based upon notional amounts and specified rates or indices. As defined by the Financial Accounting Standards Board ("FASB") in Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," a derivative financial instrument also includes unsettled purchase and sale agreements and firm or standby commitments for the purchase of securities. It does not include on-balance-sheet receivables and payables whose value is derived from changes in the value of some underlying asset or index, such as mortgage-backed securities and structured notes. In connection with its market risk management and principal 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 and acts as a market-maker in certain listed and unlisted securities. These contracts are valued at market, and unrealized gains and losses are reflected in the financial statements. 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 securitization business, the Company has outstanding forward purchase and sale agreements committing the Company to deliver participation certificates and mortgage-backed securities. Set forth on the following page are the gross contract or notional amounts of all off-balance-sheet derivative financial instruments held or issued for trading purposes. These amounts are not reflected in the Consolidated Statement of Financial Condition and are indicative only of the volume of activity at September 30, 1995 and December 31, 1994. 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. 8 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts)
Notional or Contract Amount --------------------------- September 30, 1995 December 31, 1994 -------------------------- ------------------------- Purchases Sales Purchases Sales -------------------------- ------------------------- Mortgage-backed forward contracts and options written and purchased $15,476,354 $18,298,816 $8,757,807 $9,256,738 Foreign currency forward contracts, futures contracts, and options written and purchased 2,377,872 2,625,984 2,325,721 1,855,557 Equity securities contracts including futures, forwards, and options written and purchased 2,438,773 2,331,250 1,931,330 2,216,565 Other fixed income securities contracts including futures, forwards, and options written and purchased 3,092,403 4,440,237 5,321,100 5,374,546 Interest rate swaps, caps and floors 104,550 20,000 285,450 230,000
Set forth below are the fair values of derivative financial instruments held or issued for trading purposes as of September 30, 1995 and December 31, 1994. The fair value amounts are determined by quoted market prices and pricing models which consider the time value and volatility of the underlying instruments. Changes in fair value are reflected in trading revenues or net interest as incurred, depending on the nature of the contract. The amounts are netted by counterparty only when the criteria of FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," are met.
Fair Value at Fair Value at September 30, 1995 December 31, 1994 --------------------------- -------------------------- Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Mortgage-backed forward contracts and options written and purchased $86,425 $77,110 $30,606 $25,209 Foreign currency forward contracts, futures contracts, and options written and purchased 72,320 81,039 55,345 44,244 Equity securities contracts including futures, forwards, and options written and purchased 314,758 124,733 204,938 116,973 Other fixed income securities contracts including futures, forwards, and options written and purchased 14,756 19,831 10,150 8,988 Interest rate swaps, caps and floors 2,849 988 1,372 128
Set forth on the following page are the average fair values of derivative financial instruments held or issued for trading purposes for the three months ended September 30, 1995 and the twelve months ended December 31, 1994. Average fair value is based upon the average of the month-end balances during the periods indicated. 9 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts)
Average Fair Value Average Fair Value Three Months Ended Twelve Months Ended September 30, 1995 December 31, 1994 --------------------------- -------------------------- Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Mortgage-backed forward contracts and options written and purchased $120,501 $107,325 $202,484 $191,687 Foreign currency forward contracts, futures contracts, and options written and purchased 56,330 63,349 56,528 53,810 Equity securities contracts including futures, forwards, and options written and purchased 219,624 98,257 162,388 155,422 Other fixed income securities contracts including futures, forwards, and options written and purchased 13,419 17,332 23,527 13,293 Interest rate swaps, caps and floors 2,891 961 1,757 1,147
The Company also enters into agreements to sell securities, at predetermined prices, which have not yet been purchased. The Company is exposed to market risk since to satisfy the obligation, the Company must acquire the securities at market prices, which may exceed the values reflected on the Consolidated Statement of Financial Condition. The Company's risk of loss in the event of counterparty default is limited to the current fair value or the replacement cost on contracts in which the Company has recorded an unrealized gain. These amounts are reflected as assets on the Company's Consolidated Statement of Financial Condition and amounted to $491,108 and $302,411 at September 30, 1995 and December 31, 1994, respectively. Options written do not expose the Company to credit risk since they do not obligate the counterparty to perform. Transactions in futures contracts are conducted through regulated exchanges which have margin requirements, and are settled in cash on a daily basis, thereby minimizing credit risk. The following table summarizes the Company's principal transaction revenue (net trading revenues) by business activity for the three months and nine months ended September 30, 1995.
Three Months Ended Nine Months Ended September 30, 1995 September 30, 1995 ------------------ ------------------ Corporate equities (includes equity securities, equity index futures, equity index options and swaps, and equity options contracts) $124,238 $277,700 Municipals (includes municipal and government securities) 30,515 107,171 U.S. government (includes U.S. government securities, financial futures and options contracts) 32,683 76,979 Mortgage and mortgage-backed (includes mortgage-backed and government securities, mortgage-backed forwards and options contracts) 32,406 73,937 Corporate debt and other (includes debt, foreign currency forwards, futures and options contracts and other securities) 44,207 146,239 -------- -------- $264,049 $682,026 ======== ========
Principal transaction revenues include realized and unrealized gains and losses in the fair value of derivative and other financial instruments. 10 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts) Held or Issued for Purposes Other Than Trading The Company enters into interest rate swap agreements to ensure that the interest rate characteristics of assets and liabilities are matched. As of September 30, 1995 and December 31, 1994, the Company had outstanding interest rate swap agreements with large financial institutions with notional principal amounts of $1,931,200 and $1,836,250, respectively. These agreements effectively converted approximately 79% of the Company's fixed rate debt at September 30, 1995 into floating rate debt. The interest rate swap agreements entered into have had the effect of increasing net interest expense on the Company's long-term borrowings by $2,354 for the nine months ended September 30, 1995 and reducing net interest expense by $25,659 for the nine months ended September 30, 1994. The difference to be received or paid on the swap agreements is included in interest expense as incurred and any related receivable from or payable to counterparties is reflected as an asset or liability, accordingly. The Company had no deferred gains or losses related to terminated swap agreements at September 30, 1995 and December 31, 1994. The Company is subject to market risk as interest rates fluctuate. The interest rate swaps contain credit risk to the extent the Company is in a receivable or gain position and the counterparty defaults. However, the counterparties to the agreements are large financial institutions and the Company has not experienced defaults in the past and management does not anticipate any counterparty defaults in the foreseeable future. NOTE 12: RISK MANAGEMENT Transactions involving derivative and non-derivative financial instruments involve varying degrees of both market and credit risk. The Company monitors its exposure to market and credit risk on a daily basis and through a variety of financial, security position and credit exposure reporting, and control procedures. Market Risk Market risk is the potential change in value of the financial instrument caused by unfavorable changes in interest rates, foreign currency exchange rates or the fair values of the securities underlying the instrument. The Company has a variety of methods to monitor its market risk profile. The senior management of each business group is responsible for reviewing trading positions, exposures, profits and losses, and trading strategies on a daily basis. The Company also has an independent risk management group which aids in setting and monitoring risk management policies of the Company, including monitoring adherence to the established limits, performing market risk modeling, and reviewing trading positions and hedging strategies. The Asset/Liability Management Committee is responsible for establishing trading position and exposure limits and is comprised of senior corporate and business unit managers. Market risk modeling is based on estimating loss exposure through daily stress testing. These results are compared to daily limits and exceptions are subject to review and approval by senior management. Other market risk control procedures include monitoring inventory agings, reviewing traders' marks and regular meetings between the senior management of the business groups and the risk management group. Credit Risk in Proprietary Transactions Counterparties to the Company's proprietary trading, hedging, financing and arbitrage activities are primarily financial institutions, including brokers and dealers, banks and institutional clients. Credit losses could arise should counterparties fail to perform and the value of any collateral proves inadequate. The Company manages credit risk by monitoring net exposure to individual counterparties on a daily basis, monitoring credit limits and requiring additional collateral where appropriate. Derivative credit exposures are calculated, aggregated and compared to established limits by the credit department. Credit reserve requirements are determined by senior management in conjunction with the Company's continuous credit monitoring procedures. Historically, reserve requirements arising from instruments with off-balance-sheet risk have not been material. 11 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts) Receivables and payables with brokers and dealers, and agreements to resell and repurchase securities are generally collateralized by cash, U.S. government and government-agency securities, and letters of credit. The market value of the initial collateral received is, at a minimum, equal to the contract value. Additional collateral is requested when considered necessary. The Company may pledge clients' securities as collateral in support of securities loaned and bank loans as well as to satisfy margin requirements at clearing organizations. The amounts loaned or pledged are limited to the extent permitted by applicable margin regulations. Should the counterparty fail to return the clients' securities, the Company may be required to replace them at prevailing market prices. At September 30, 1995, 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. 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, securities sold but not yet purchased and written options. The risk to the Company's clients in these transactions can be substantial, principally due to price volatility which can reduce the clients' ability to meet their obligations. Margin deposit requirements pertaining to commodity futures and options transactions are generally lower than those for exchange traded securities. To the extent clients are unable to meet their commitments to the Company and margin deposits are insufficient to cover outstanding liabilities, the Company may take market action and credit losses could be realized. Trades are recorded on a settlement date basis. Should either the client or broker fail to perform, the Company may be required to complete the transaction at prevailing market prices. Trades pending at September 30, 1995 were settled without adverse effect on the Company's financial statements, taken as a whole. NOTE 13: CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk that arise from financial instruments (whether on- or off-balance-sheet) exist for groups of counterparties when they have similar economic characteristics that would cause their ability to meet obligations to be similarly affected by economic, industry or geographic factors. As a major securities firm, the Company engages in activities with a broad range of corporations, governments, and institutional and individual investors. The Company has no significant exposure to any individual counterparty. The Company's most significant industry concentration, which arises within its normal course of business activities, is financial institutions including banks, brokers and dealers, mutual funds and insurance companies. The Company seeks to control its credit risk and the potential for risk concentration through a variety of reporting and control procedures. NOTE 14: COMMITMENTS AND CONTINGENCIES At September 30, 1995 and December 31, 1994, the Company was contingently liable under unsecured letters of credit totaling $148,505 and $212,211, respectively, which approximates fair value. In addition, at September 30, 1995, certain of the Company's subsidiaries were contingently liable as issuer of $86,160 of notes payable to managing general partners of various limited partnerships pursuant to Internal Revenue Service guidelines. There is no market for these guarantees, therefore, it is not practicable to estimate their fair value. 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. The Company also had conditional commitments of $15,972 to contribute capital to limited partnerships as of September 30, 1995. 12 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (In thousands of dollars except share and per share amounts) At September 30, 1995 and December 31, 1994, securities with a fair value of $335,074 and $674,669, respectively, had been loaned or pledged as collateral for securities borrowed of approximately equal fair value. In meeting the financing needs of certain of its clients, PWI has issued standby letters of credit which amounted to $23,251 at September 30, 1995. The standby letters of credit are fully collateralized by marginable securities. The Company has been named as defendant in numerous legal actions in the ordinary course of business. While the outcome of such matters cannot be predicted with certainty, in the opinion of management of the Company, after consultation with various counsel handling such matters, these actions will be resolved with no material adverse effect on the Company's consolidated financial statements, taken as a whole. NOTE 15: INCOME TAXES The reconciliation of income taxes, computed at the statutory federal rates, to income taxes recorded is as follows:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 1995 1994 1995 1994 ---- ----- -------- -------- Tax at statutory federal rates 35.0% 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefit 4.3 4.3 (7.7) 5.0 Foreign rate differential 0.7 2.2 0.4 0.7 Nontaxable dividends & interest (2.0) (2.0) (33.3) (3.0) Other, net (5.0) 0.5 13.7 2.3 ----- ------ -------- ----- 33.0% 40.0% 8.1% 40.0% ===== ====== ======== =====
Income taxes paid were $23,072 and $72,332 for the nine months ended September 30, 1995 and 1994, respectively. NOTE 16: EARNINGS PER COMMON SHARE For the three months ended September 30, 1995 and 1994, and the nine months ended September 30, 1994, the Company computed its earnings per common share under the modified treasury stock method in accordance with Accounting Principles Board Opinion No. 15 by dividing net earnings, adjusted for any interest savings, by the weighted average common and common equivalent shares outstanding during the respective periods. Net earnings for the three months ended September 30, 1995 was also adjusted for preferred stock dividends. Common equivalent shares include common shares issuable under the Company's stock option and award plans, the conversion of convertible debentures and restricted stock outstanding. For the nine months ended September 30, 1995, as a result of the net loss applicable to common shares, the Company computed its per share results by dividing the net loss applicable to common shares by the weighted average common shares outstanding, which excludes restricted stock and antidilutive securities. 13 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's principal business activities are, by their nature, affected by many factors, including general economic and financial conditions, the level and volatility of interest rates, currency and security valuations, competitive conditions, counterparty risk, transactional volume and market liquidity. As a result, revenues and profitability have been in the past, and are likely to continue to be, subject to fluctuations reflecting the impact of these factors. The securities industry continued to experience improved conditions through the third quarter of 1995, as compared to the prior year. Increased investor optimism and a declining interest rate environment have contributed to the upturn in activity in both the stock and bond markets. During the third quarter of 1995, the average daily volume on the three primary U.S. equity markets reached record levels. In addition, the resurgence in new equity and debt issues during the second quarter of 1995 continued in the third quarter. RESULTS OF OPERATIONS Quarter Ended September 30, 1995 Compared to Quarter Ended September 30, 1994 The Company's net earnings for the quarter ended September 30, 1995 were $78.2 million or $0.67 per fully diluted share ($0.71 primary), as compared to $20.3 million or $0.26 per fully diluted share ($0.27 primary) for the quarter ended September 30, 1994. Revenues, net of interest expense, were $912.0 million, 54.6% higher than the prior year period, primarily due to increased commission and principal transaction revenues. Commission revenues earned during the third quarter of 1995 were $333.7 million, 51.2% higher than the $220.7 million earned during the third quarter of 1994, due to the increased number of investment executives as a result of the Kidder, Peabody Group Inc. ("Kidder") acquisition and increased market volume. Listed commissions increased $69.7 million or 60.2%, mutual fund commissions increased $18.5 million or 50.1%, over-the-counter commissions increased $16.2 million or 99.1%, and options commissions increased $7.4 million or 45.8%. Principal transaction revenues were $264.0 million, as compared to $111.0 million for the third quarter of 1994. This increase is attributable to improved results in mortgages, corporate equity and corporate debt securities. These gains were partially offset by lower results in municipal and U.S. government securities. Investment banking revenues increased 44.9% during the third quarter of 1995 to $94.0 million, reflecting a higher level of corporate offerings and private placements and additional revenues related to acquired Kidder businesses. Asset management fees, which are largely recurring in nature, increased $17.1 million or 19.6%, primarily due to increased fees earned on managed or "wrap" accounts and increased investment advisory fees earned on money market and institutional accounts. Average assets in wrap accounts during the third quarter of 1995 were approximately 50% higher than the third quarter of 1994. Average assets in money market and institutional accounts increased approximately 44% and 26%, respectively. These increases were partially offset by lower investment advisory and distribution fees earned on long-term mutual funds. Net interest increased $6.1 million or 8.7% due to increased margin lending to clients. Other revenues increased $3.8 million or 10.7%, primarily due to higher transaction fees partially offset by lower dividend income. Compensation and benefits were $537.9 million, as compared to $362.3 million for the third quarter of 1994. Increased compensation costs reflect the acquisition of Kidder businesses, higher revenues resulting from increased market activity, higher performance based incentive compensation and normal salary increases. Compensation and benefits as a percentage of net revenues was 59.0% during the third quarter of 1995, as compared to 61.4% during the prior year period. 14 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) All other operating expenses were $257.5 million, as compared to $193.6 million for the third quarter of 1994. Higher office and equipment, communications, business development and brokerage, clearing and exchange fees are primarily attributable to the acquired Kidder businesses. Higher professional services relate principally to increased attorneys' fees. Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1994 Net earnings for the nine months ended September 30, 1995, before giving effect to an after-tax second quarter charge of approximately $126 million related to resolving the Securities and Exchange Commission ("SEC"), individual and class action claims arising out of the sale of limited partnerships, were $147.9 million or $1.21 per fully diluted share ($1.27 primary). This compares to net earnings of $85.1 million or $1.09 per fully diluted share ($1.10 primary) for the nine months ended September 30, 1994, before giving effect to an after-tax charge of approximately $34 million in the second quarter of 1994 related to the PaineWebber Short-Term U.S. Government Income Fund (the "Fund"). Net earnings for the nine months ended September 30, 1995, after giving effect to the one-time charge, were $22.0 million or $0.00 per primary and fully diluted share. This compares to net earnings for the nine months ended September 30, 1994 of $50.9 million or $0.67 per primary and fully diluted share, after giving effect to the non-recurring charge related to the Fund. Revenues for the nine months ended September 30, 1995, net of interest expense, were $2,462.6 million, 28.2% higher than the $1,920.9 million earned during the first nine months of 1994, primarily attributable to the acquired Kidder businesses and improved market conditions. Results for the first nine months of 1995 were reduced by an after-tax charge of $126,000 ($200,000 before income taxes) reflecting the Company's assessment of the total financial cost of resolving SEC, individual and class action claims arising out of the sale of limited partnerships that began in the mid-1980's. The Company reached a stage in its settlement discussions with the SEC staff and in its evaluation of individual and class action claims such that it has a sound and comprehensive basis for quantifying the total costs of resolving limited partnership investment issues. Results for the first nine months of 1994 were reduced by an after-tax charge of approximately $34 million ($57 million before income taxes) related to the reimbursement to certain shareholders of the Fund, a mutual fund managed by the Company's investment subsidiary, Mitchell Hutchins Asset Management Inc., for losses and other expenses attributable to mortgage-derivative securities owned by the Fund. In addition, the Company purchased all interest only and principal only securities held by the Fund, as well as two structured floating rate securities from the Fund, for an aggregate price of approximately $235 million, in order to permit the Fund to maintain an appropriate mix of investments based on its investment objectives and reduced size. Commission revenues earned during the first nine months of 1995 were $927.8 million, $185.7 million or 25.0% higher than the $742.1 million earned during the prior year period. Listed commissions increased $156.9 million or 41.1%, over-the-counter commissions increased $22.3 million or 41.0%, mutual fund commissions increased $15.3 million or 12.2%, and commodities commissions increased $8.4 million or 29.7%. These increases were partially offset by lower insurance commissions as a result of decreased sales of insurance annuities. Principal transaction revenues were $682.0 million as compared to $386.5 million. This increase reflects improved results in mortgages, corporate debt, municipal and corporate equity securities, partially offset by lower results in U.S. government securities. Investment banking revenues were $232.4 million, as compared to $221.6 million earned during the first nine months of 1994. The increased revenues reflect a higher level of private placements and incremental revenues attributable to acquired Kidder businesses. These gains were partially offset by a lower level of corporate debt and equity underwritings. 15 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Asset management fees of $292.0 million were 8.9% higher than the $268.1 million for the first nine months of 1994 primarily, due to higher fees earned on wrap accounts and higher investment advisory fees earned on money market and institutional accounts. Average assets in wrap accounts during the first nine months of 1995 were approximately 42% higher than the first nine months of 1994. Average assets in money market and institutional accounts increased approximately 34% and 19%, respectively. These gains were partially offset by lower investment advisory and distribution fees earned on long-term mutual funds. Net interest increased $10.5 million, primarily due to the expansion of the stock loan business and increased margin lending to clients. Other revenues increased $15.3 million or 14.9%, primarily due to increased transaction fees and higher fees from Individual Retirement Accounts due to an increased number of accounts. These increases were partially offset by lower dividend income. Compensation and benefits were $1,475.6 million, as compared to $1,138.7 million for the first nine months of 1994. Increased compensation costs reflect the acquisition of Kidder businesses, higher revenues resulting from increased market activity, higher performance based incentive compensation and normal salary increases. Compensation and benefits as a percentage of net revenues was 59.9% during the first nine months of 1995, as compared to 59.3% during the prior year period. All other operating expenses were $963.1 million, as compared to $697.2 million for the nine months ended September 30, 1994. In 1995, other expenses include the $200.0 million charge related to the sale of limited partnerships, and, in 1994, other expenses include the charge related to the Fund. Higher professional services relate principally to increased attorneys' fees. Higher office and equipment, communications and brokerage, clearing and exchange fees are primarily attributable to the acquired Kidder businesses. 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 liquid balance sheet with the majority of assets consisting of inventories, securities borrowed or purchased under agreements to resell, 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 inventories in order to meet its client and proprietary trading needs. The Company's total assets may fluctuate from period to period as a result of changes in the level of trading positions held to facilitate client transactions, the volume of resale and repurchase transactions, and proprietary trading strategies. These fluctuations depend significantly upon economic and market conditions, and transactional volume. The Company's total assets at September 30, 1995 were $49.5 billion compared to $35.9 billion at December 31, 1994, reflecting an increase primarily in 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. Additional financing sources are available through bank loans and commercial paper, committed and uncommitted lines of credit, and the issuance of long-term debt. 16 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Company maintains committed and uncommitted credit facilities from a diverse group of banks. The Company has two unsecured revolving credit agreements to provide up to $2.0 billion, including $1.2 billion, which expires in December 1995 with provisions for renewal through December 1997, and $800.0 million, which expires in December 1997. At September 30, 1995, there were no outstanding borrowings under these credit facilities. Additionally, the Company had more than $5 billion in uncommitted lines of credit at September 30, 1995. The Company maintains public shelf registration statements for the issuance of debt securities with the SEC. The Company issued $413.0 million in notes during the nine months ended September 30, 1995 under these registration statements. At September 30, 1995, the Company had $444.6 million in debt securities available for issuance. Capital Resources and Capital Adequacy The Company's businesses are capital intensive. In addition to a funding policy which provides for diversification of funding sources and maximization of liquidity, the Company maintains a strong capital base. At September 30, 1995, the Company's total capital base, which includes long-term borrowings, redeemable preferred stock and stockholders' equity, was $4.2 billion, an increase of $43.2 million from December 31, 1994. The additions to capital primarily reflect a net increase in long-term borrowings of $107.6 million offset by a decrease in stockholders' equity of $65.0 million. The increase in long-term borrowing reflects the issuances of $125.0 million of 8 7/8 % Notes in March 1995, $125.0 million of 8 1/4% Notes in May 1995, and $163.0 million of Medium-Term Notes. These increases were offset by the maturities of $150.0 million of 9 5/8% Notes in May 1995 and $160.0 million of Medium-Term Notes. The decrease in stockholders' equity is primarily the result of the repurchase of approximately 4,939,000 shares of common stock for $93.2 million and dividends accrued and paid of $57.6 million. These decreases were offset by the issuance of approximately 3,211,000 shares of common stock related to employee compensation programs for $33.8 million, net amortization of restricted stock awards of $26.8 million, and net earnings for the nine months ended September 30, 1995 of $22.0 million. At September 30, 1995, the remaining number of shares of common stock authorized to be repurchased by the Company's Board of Directors was 3,942,353 shares. On November 2, 1995, the Company's Board of Directors increased the number of shares of common stock authorized for repurchase by 7,500,000 shares. PWI is subject to the net capital requirements of the SEC, the New York Stock Exchange and the Commodities Futures Trading Commission, which are designed to measure the financial soundness and liquidity of broker-dealers. PWI has consistently maintained net capital in excess of the minimum requirements as 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 activities, the Company has provided financing and made investments in companies, some of which are involved in highly leveraged transactions. Positions taken or commitments made by the Company may involve credit or market risk from any one issuer or industry. At September 30, 1995, the Company had investments in merchant banking transactions which were affected by liquidity, reorganization or restructuring issues amounting to $85.6 million, net of reserves, compared to $56.9 million, net of reserves, at December 31, 1994. These investments have not had a material effect on the Company's results of operations. Included in the portfolio at September 30, 1995 was an investment of $52.2 million in a limited partnership which specializes in investments in corporate restructurings and special situations. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company's trading and investment banking activities include market-making and underwriting transactions in high-yield debt 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 September 30, 1995, the Company held in long inventory or was committed to acquire $241.1 million of high-yield securities. At September 30, 1995, the Company held in short inventory $29.7 million of high-yield debt securities. The Company continually monitors its risk positions associated with high-yield debt securities and establishes limits with respect to overall market exposure, industry group and individual issuer. The Company accounts for these positions at fair value, with unrealized gains and losses reflected in revenues. For the nine months ended September 30, 1995, the Company recorded pre-tax trading revenues on transactions in high-yield debt securities of $12.9 million. For the nine months ended September 30, 1994, the Company recorded pre-tax trading losses of $10.1 million on transactions in high-yield debt securities. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument represents a contractual agreement between counterparties whose value is derived from changes in the value of some other underlying asset such as the price of another security, interest rates, currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P 500), or the value referenced in the contract. Derivatives may be traded on exchanges such as futures, certain options contracts and structured products (e.g. indexed warrants) or negotiated in over-the-counter markets such as forward contracts, interest rate swaps, caps and floors, and other structured products. In the normal course of business, the Company engages in a variety of derivative transactions in connection with its proprietary trading activities and asset and liability management, as well as on behalf of its clients. As a dealer, the Company regularly makes a market in and trades a variety of securities. The Company is also engaged in creating structured products which are sold to clients. In connection with these activities, the Company attempts to reduce its exposure to market risk by entering into offsetting hedging transactions which may include derivative financial instruments. The Company also enters into interest rate swap contracts to hedge its fixed rate borrowings and reduce overall borrowing costs. The notional amount of a derivative contract is used to measure the volume of activity and is not reflected on the statement of financial condition. The Company had off-balance-sheet derivative contracts outstanding with gross notional amounts of $53.1 billion and $39.4 billion at September 30, 1995 and December 31, 1994, respectively, which included $30.1 billion and $16.3 billion, respectively, related to "to be announced" mortgage securities requiring forward settlement. Also included in these amounts at September 30, 1995 and December 31, 1994 was $1.9 billion and $1.8 billion, respectively, of interest rate swap agreements used to hedge the Company's long-term borrowings. For a more detailed discussion and disclosure on derivative financial instruments, see "Financial Instruments with Off-Balance-Sheet Risk", "Risk Management" and "Concentrations of Credit Risk" in the Notes to Consolidated Financial Statements. 18 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in a number of proceedings concerning matters arising in connection with the conduct of its business. Certain actions in which compensatory damages of $147 million or more appear to be sought, and in which there have been material developments during the quarter, are described below. The Company is also involved in numerous proceedings in which compensatory damages of less than $147 million appear to be sought, or in which punitive or exemplary damages, together with the apparent compensatory damages alleged, appear to exceed $147 million. The Company has denied, or believes it has legitimate defenses and will deny, liability in all significant cases pending against it, and intends to defend actively each such case. The following developments have occurred in the indicated cases, each of which was previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1994 or in its Quarterly Reports on Form 10-Q. General Development Corporation Securities Litigation Following the remand by the Third Circuit Court of Appeals, on August 24, 1995, the district court entered an order in Rolo v. City Liquidating Trust et. al. dismissing the action as to all defendants. In Re NASDAQ Market Maker Antitrust Litigation On August 22, 1995, plaintiffs in the NASDAQ litigation filed a Refiled Consolidated Complaint. Pursuant to court order, defendant's time to answer the Refiled Consolidated Complaint has been extended to November 17, 1995. Limited Partnership Class Actions In the action that was filed in Brazoria County, Texas on behalf of investors in the Pegasus aircraft leasing partnership, plaintiffs filed an amended complaint in which they have elected to proceed individually and have dropped class action allegations. The case has been transferred to the United States District Court for the Southern District of New York for coordination with the Federal Court Limited Partnership Actions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 11 - Computation of Earnings (Loss) per Common Share Exhibit 12.1 - Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 12.2 - Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K: None 19 21 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Paine Webber Group Inc. ------------------------ (Registrant) Date: November 14, 1995 By: /s/ Regina A. Dolan ----------------- ------------------------- Regina A. Dolan Vice President, Chief Financial Officer 20 22 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- Exhibit 11 Computation of Earnings (Loss) per Common Share Exhibit 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 12.2 Computation of Ratio of Earnings to Fixed Charges Exhibit 27 Financial Data Schedule
EX-11 2 COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE 1 EXHIBIT 11 PAINE WEBBER GROUP INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands of dollars except share and per share amounts)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1995 1994 1995 1994 ------------ ------------ ------------ ------------ PRIMARY: Weighted average common shares outstanding 91,984,316 70,473,606 92,597,619 70,995,846 Incremental stock options and awards 8,947,276 8,324,596 - 8,324,596 ----------- ---------- ---------- ---------- Average common and common equivalent shares 100,931,592 78,798,202 92,597,619 79,320,442 =========== ========== ========== ========== Net earnings $ 78,190 $ 20,337 $ 21,952 $ 50,930 Interest savings on convertible debentures and short-term borrowings 336 615 - 2,498 Preferred dividend requirements (7,324) - (21,968) - ----------- ---------- ---------- ---------- Net earnings (loss) applicable to common shares $ 71,202 $ 20,952 $ (16) $ 53,428 =========== ========== ========== ========== Earnings per common share $ 0.71 $ 0.27 $ 0.00 $ 0.67 =========== ========== ========== ========== FULLY DILUTED: Weighted average common shares outstanding 91,984,316 70,473,606 92,597,619 70,995,846 Incremental stock options and awards 9,207,329 8,324,596 - 8,324,596 Weighted average common shares issuable assuming conversion of 8% Convertible Debentures and 6% Cumulative Convertible Redeemable Preferred Stock 6,967,336 1,405,552 - 1,405,552 ----------- ---------- ---------- ---------- Average common and common equivalent shares 108,158,981 80,203,754 92,597,619 80,725,994 =========== ========== ========== ========== Net earnings $ 78,190 $ 20,337 $ 21,952 $ 50,930 Interest savings on convertible debentures and short-term borrowings 554 820 - 2,935 Preferred dividend requirements (5,825) - (21,968) - ----------- ---------- ---------- ---------- Net earnings (loss) applicable to common shares $ 72,919 $ 21,157 $ (16) $ 53,865 =========== ========== ========== ========== Earnings per common share $ 0.67 $ 0.26 $ 0.00 $ 0.67 =========== ========== ========== ==========
EX-12.1 3 RATIO OF EARNINGS TO COMBINED FIXED CHARGES 1 EXHIBIT 12.1 PAINE WEBBER GROUP INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (In thousands of dollars)
Nine Months Years Ended December 31, Ended September 30, -------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ------------------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before taxes $ 23,874 $ 44,385 $ 407,576 $ 339,115 $ 226,247 $ (102,633) ---------- ---------- ---------- ---------- ---------- ---------- Preferred stock dividends 23,904 1,710 5,828 27,789 34,732 23,174 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 1,483,106 1,428,653 1,130,712 879,242 1,056,124 1,242,151 Interest factor in rents 44,240 51,102 50,133 45,962 43,804 42,223 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 1,527,346 1,479,755 1,180,845 925,204 1,099,928 1,284,374 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends 1,551,250 1,481,465 1,186,673 952,993 1,134,660 1,307,548 ---------- ---------- ---------- ---------- ---------- ---------- Earnings before taxes and fixed charges $1,551,220 $1,524,140 $1,588,421 $1,264,319 $1,326,175 $1,181,741 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges and preferred stock dividends ** 1.0 1.3 1.3 1.2 * ========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to combined fixed charges and preferred stock dividends (tax effected), "earnings" consist of earnings (loss) before taxes and fixed charges. "Fixed charges" consist of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings and that portion of rental expense estimated to be representative of the interest factor. * Earnings were inadequate to cover fixed charges and would have had to increase $125,807 in order to cover the deficiency. ** Earnings were inadequate to cover fixed charges and would have had to increase $30 in order to cover the deficiency. EX-12.2 4 RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.2 PAINE WEBBER GROUP INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands of dollars)
Nine Months Years Ended December 31, Ended September 30, ------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ------------------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before taxes $ 23,874 $ 44,385 $ 407,576 $ 339,115 $ 226,247 $ (102,633) ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 1,483,106 1,428,653 1,130,712 879,242 1,056,124 1,242,151 Interest factor in rents 44,240 51,102 50,133 45,962 43,804 42,223 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 1,527,346 1,479,755 1,180,845 925,204 1,099,928 1,284,374 ---------- ---------- ---------- ---------- ---------- ---------- Earnings before taxes and fixed charges $1,551,220 $1,524,140 $1,588,421 $1,264,319 $1,326,175 $1,181,741 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.0 1.0 1.3 1.4 1.2 * ========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings (loss) before taxes and fixed charges. "Fixed charges" consist of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings and that portion of rental expense estimated to be representative of the interest factor. * Earnings were inadequate to cover fixed charges and would have had to increase $102,633 in order to cover the deficiency. EX-27 5 FINANCIAL DATA SCHEDULE -- 9 MONTHS
BD This schedule contains summary financial information extracted from the financial statements of Paine Webber Group Inc. for the nine months ended September 30, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1995 SEP-30-1995 615,530 7,712,021 20,217,678 7,403,997 13,274,228 321,697 49,545,151 1,672,755 6,906,695 27,736,254 1,803,317 7,251,044 2,423,001 102,084 186,562 100,000 1,363,439 49,545,151 682,026 1,693,423 927,772 232,380 292,031 1,483,106 1,475,637 23,874 21,952 0 0 21,952 0.00 0.00
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