-----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, PNg4AWRTXme2qr3XlT7NAOMKNiev6lSI6v1fWY5YqoBg38GqmUapB8rjnJeT787s XtfKE4tzLQVPhepSZioXgw== 0000950123-96-004466.txt : 19960816 0000950123-96-004466.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950123-96-004466 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96613466 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 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 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 August 2, 1996, the Registrant had outstanding 92,801,513 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 JUNE 30, 1996 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page --------------------- ---- Item 1. Financial Statements. Consolidated Statements of Operations (unaudited) for the Three Months and Six Months Ended June 30, 1996 and 1995. 2 Consolidated Statements of Financial Condition (unaudited) at June 30, 1996 and December 31, 1995. 3 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 1996 and 1995. 4 Notes to Consolidated Financial Statements (unaudited). 5-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14-17 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings. 18 Item 6. Exhibits and Reports on Form 8-K. 18 Signature. 19
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 Six Months Ended June 30, June 30, ---------------------------------- ---------------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- REVENUES Commissions $ 362,695 $ 323,824 $ 730,880 $ 594,086 Principal transactions 251,848 204,307 548,224 417,977 Investment banking 102,077 88,592 183,932 138,392 Asset management 111,392 97,985 219,047 187,872 Other 40,962 42,607 71,458 78,494 Interest 562,190 574,930 1,107,649 1,149,334 ------------- ------------- ------------- ------------- Total revenues 1,431,164 1,332,245 2,861,190 2,566,155 Interest expense 481,541 507,447 948,932 1,015,573 ------------- ------------- ------------- ------------- Net revenues 949,623 824,798 1,912,258 1,550,582 ------------- ------------- ------------- ------------- NON-INTEREST EXPENSES Compensation and benefits 568,690 504,810 1,135,681 937,767 Office and equipment 65,233 67,347 133,974 132,027 Communications 39,821 38,172 78,512 73,329 Business development 18,965 23,444 37,516 44,994 Brokerage, clearing & exchange fees 21,248 24,592 46,740 48,124 Professional services 25,052 26,192 48,627 48,379 Other 70,288 285,854 136,266 358,790 ------------- ------------- ------------- ------------- Total non-interest expenses 809,297 970,411 1,617,316 1,643,410 ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) BEFORE TAXES 140,326 (145,613) 294,942 (92,828) ------------- ------------- ------------- ------------- PROVISION (BENEFIT) FOR INCOME TAXES: Federal 38,933 (47,319) 76,286 (35,989) State, local and foreign 9,181 (7,746) 25,943 (601) ------------- ------------- ------------- ------------- 48,114 (55,065) 102,229 (36,590) ------------- ------------- ------------- ------------- NET EARNINGS (LOSS) $ 92,212 $ (90,548) $ 192,713 $ (56,238) ============= ============= ============= ============= Net earnings (loss) applicable to common shares $ 86,088 $ (97,872) $ 180,435 $ (70,882) ============= ============= ============= ============= Earnings (loss) per common share: Primary $ 0.90 $ (1.06) $ 1.87 $ (0.76) Fully diluted $ 0.86 $ (1.06) $ 1.76 $ (0.76) Weighted average common shares: Primary 95,198,040 92,594,748 96,476,520 92,901,835 Fully diluted 102,317,004 92,594,748 103,958,404 92,901,835 Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24
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)
June 30, December 31, 1996 1995 ------------ ------------ ASSETS Cash and cash equivalents $ 150,837 $ 222,497 Cash and securities segregated and on deposit for federal and other regulations 435,042 427,068 Trading assets, at fair value 14,274,463 14,095,446 Securities purchased under agreements to resell 21,047,424 16,699,295 Securities borrowed 6,937,053 7,226,515 Receivables: Clients, net of allowance for doubtful accounts of $13,513 and $12,400 at June 30, 1996 and December 31, 1995, respectively 4,217,801 4,070,599 Brokers and dealers 257,274 279,676 Dividends and interest 322,245 263,948 Fees and other 327,825 200,444 Office equipment and leasehold improvements, net of accumulated depreciation and amortization of $316,283 and $288,807 at June 30, 1996 and December 31, 1995, respectively 318,858 322,056 Other assets 1,795,590 1,863,750 ------------ ------------ $ 50,084,412 $ 45,671,294 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 1,229,472 $ 991,227 Trading liabilities, at fair value 6,025,159 6,233,054 Securities sold under agreements to repurchase 28,720,797 25,199,377 Securities loaned 3,579,275 2,752,429 Payables: Clients 3,623,702 3,698,477 Brokers and dealers 241,201 155,118 Dividends and interest 266,853 256,338 Other liabilities and accrued expenses 1,513,178 1,639,403 Accrued compensation and benefits 520,886 570,786 ------------ ------------ 45,720,523 41,496,209 Long-term borrowings 2,552,306 2,436,037 ------------ ------------ 48,272,829 43,932,246 ------------ ------------ Commitments and contingencies Redeemable Preferred Stock 187,208 186,760 Stockholders' Equity: Convertible Preferred Stock 100,000 100,000 Common stock, $1 par value, 200,000,000 shares authorized; issued 105,420,742 shares and 104,492,091 shares at June 30, 1996 and December 31, 1995, respectively 105,421 104,492 Additional paid-in capital 840,805 831,763 Retained earnings 874,584 719,325 ------------ ------------ 1,920,810 1,755,580 Treasury stock, at cost; 12,376,960 shares at June 30, 1996 and 7,417,845 shares at December 31, 1995, respectively (254,834) (151,616) Unamortized cost of restricted stock (38,788) (55,302) Foreign currency translation adjustment (2,813) 3,626 ------------ ------------ 1,624,375 1,552,288 ------------ ------------ $ 50,084,412 $ 45,671,294 ============ ============
See notes to consolidated financial statements. 3 5 PAINE WEBBER GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of dollars)
Six Months Ended June 30, ------------------------------ 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 192,713 $ (56,238) Adjustments to reconcile net earnings (loss) to cash provided by (used for) operating activities: Noncash items included in net earnings (loss): Depreciation and amortization 29,891 26,965 Deferred income taxes 89,047 (14,818) Amortization of deferred charges 79,448 78,052 Other 18,992 218,564 (Increase) decrease in operating receivables: Clients (150,640) (962,017) Brokers and dealers 22,402 195,400 Dividends and interest (58,297) (116,394) Fees and other (127,381) 2,746 Increase (decrease) in operating payables: Clients (74,775) 1,621,751 Brokers and dealers 86,083 (140,581) Dividends and interest 10,515 45,847 Other (187,583) 254,836 (Increase) decrease in: Trading assets (179,017) (3,238,538) Securities purchased under agreements to resell (4,348,129) (7,121,551) Securities borrowed 289,462 602,202 Cash and securities on deposit (7,974) (63,637) Other assets (207,782) (403,495) Increase (decrease) in: Trading liabilities (207,895) 1,990,586 Securities sold under agreements to repurchase 3,521,420 8,509,803 Securities loaned 826,846 108,945 ----------- ----------- Cash provided by (used for) operating activities (382,654) 1,538,428 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from (payments for): Net assets acquired in business acquisition -- (624,090) Sales of investments 122,032 -- Office equipment and leasehold improvements (24,812) (56,391) ----------- ----------- Cash provided by (used for) investing activities 97,220 (680,481) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (payments on): Short-term borrowings 238,245 (836,496) Proceeds from: Long-term borrowings 160,126 350,396 Employee stock transactions 19,341 6,631 Payments for: Long-term borrowings (44,840) (195,455) Repurchases of common stock (121,646) (32,299) Dividends (37,452) (38,450) ----------- ----------- Cash provided by (used for) financing activities 213,774 (745,673) ----------- ----------- (Increase) decrease in cash and cash equivalents (71,660) 112,274 Cash and cash equivalents, beginning of period 222,497 259,238 ----------- ----------- Cash and cash equivalents, end of period $ 150,837 $ 371,512 =========== ===========
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: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. Certain reclassifications have been made in prior year amounts to conform to current year presentations. The financial information as of and for the periods ended June 30, 1996 and 1995 is unaudited. All normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation have been made. The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year. The Company's principal line of business is to serve the investment and capital needs of individual, corporate, institutional and public agency clients. Stock Based Compensation The Company grants stock options to employees and non-employee directors with an exercise price not less than the fair market value 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 intends to continue to do so. In accordance with APB No. 25, the Company recognizes no compensation expense related to the granting of such stock options. Accounting Changes In January 1996, the Company adopted Financial Accounting Standards Board ("FASB") Statements of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 121 had no material impact on the Company's consolidated financial statements, taken as a whole. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which is effective for transactions occurring after December 31, 1996. The Company does not expect the adoption of this Statement to have a material impact on its results of operations. The Company has not quantified the impact that adoption of this Statement will have on its Consolidated Statement of Financial Condition. NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash and cash equivalents, cash and securities segregated for regulatory purposes, trading assets, resale agreements, securities borrowed, and certain receivables, are carried at fair value or contracted amounts which approximate fair value. Similarly, liabilities, including short-term borrowings, trading liabilities, repurchase agreements, securities loaned, and certain payables, are carried at fair value or contracted amounts approximating fair value. At June 30, 1996 and December 31, 1995, the fair values of long-term borrowings were $2,553,004 and $2,478,095, respectively, as compared to the carrying amounts of $2,552,306 and $2,436,037, 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. 5 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 values of the interest rate swaps were $49,868 payable and $33,756 receivable at June 30, 1996 and December 31, 1995, respectively. The carrying amounts of the interest rate swap agreements at June 30, 1996 and December 31, 1995 were net receivables of $4,495 and $1,730, respectively, and are included in "Dividends and interest" in the Company's Consolidated Statement of Financial Condition. NOTE 3: TRADING INVENTORIES Trading assets and liabilities, recorded at fair value, consisted of the following:
June 30, December 31, 1996 1995 ----------- ----------- Trading assets: U.S. government and agency obligations $ 4,220,212 $ 4,854,878 Mortgages and mortgage-backed securities 4,936,524 4,240,163 Corporate debt securities 2,972,280 2,364,597 State and municipal obligations 444,783 821,487 Corporate equity securities 334,303 561,669 Commercial paper and other short-term debt 1,366,361 1,252,652 ----------- ----------- $14,274,463 $14,095,446 =========== =========== Trading liabilities: U.S. government and agency obligations $ 4,633,344 $ 4,570,733 Mortgages and mortgage-backed securities 145,193 127,708 Corporate debt securities 743,865 714,588 State and municipal obligations 22,530 21,467 Corporate equity securities 480,227 798,558 ----------- ----------- $ 6,025,159 $ 6,233,054 =========== ===========
NOTE 4: 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 June 30, 1996 and December 31, 1995 consisted of the following:
June 30, December 31, 1996 1995 ---------- ---------- Commercial paper $ 725,512 $ 547,554 Bank loans and other 503,960 443,673 ---------- ---------- $1,229,472 $ 991,227 ========== ==========
NOTE 5: LONG-TERM BORROWINGS Long-term borrowings at June 30, 1996 and December 31, 1995 consisted of the following :
June 30, December 31, 1996 1995 ---------- ---------- Fixed Rate Notes due 1998-2014 $1,374,934 $1,289,478 Fixed Rate Subordinated Notes due 2002 170,706 174,412 Medium-Term Senior Notes 688,575 651,475 Medium-Term Subordinated Notes 282,150 283,150 Other 35,941 37,522 ---------- ---------- $2,552,306 $2,436,037 ========== ==========
6 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At June 30, 1996, interest rates on the remaining fixed rate notes and subordinated notes due 1998 - 2014 range from 6 1/4% to 9 1/4% and the weighted average interest rate on these notes outstanding at June 30, 1996 was 7.50%. Interest on the notes is payable semi-annually. At June 30, 1996, the Company had outstanding $734,025 of fixed rate Medium-Term Notes and $236,700 of variable rate Medium-Term Notes. The Medium-Term Notes outstanding at June 30, 1996 had an average maturity of 3.43 years and a weighted average interest rate of 6.94%. Total interest payments relating to agreements to repurchase, short-term borrowings, securities loaned and long-term borrowings were $938,439 and $970,068 for the six months ended June 30, 1996 and 1995, respectively. NOTE 6: COMMON STOCK On August 7, 1996, the Board of Directors declared a regular quarterly dividend on the Company's common stock of $0.12 per share payable on October 3, 1996 to stockholders of record on September 4, 1996. As of June 30, 1996, the Company had 34,208,867 authorized shares of common stock reserved for issuance in connection with convertible securities and stock option and stock award plans. NOTE 7: CAPITAL REQUIREMENTS PWI, a registered broker-dealer, is subject to the Securities and Exchange Commission Uniform Net Capital Rule and New York Stock Exchange Growth and Business Reduction capital requirements. Under the method of computing capital requirements adopted by PWI, minimum net capital shall not be less than 2% of combined aggregate debit items arising from client transactions, plus excess margin collected on securities purchased under agreements to resell, as defined. A reduction of business is required if net capital is less than 4% of such aggregate debit items. Business may not be expanded if net capital is less than 5% of such aggregate debit items. As of June 30, 1996, PWI's net capital of $933,453 was 19% of aggregate debit balances and its net capital in excess of the minimum required was $835,464. NOTE 8: 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 FASB in SFAS 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 values are 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. 7 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 below 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 June 30, 1996 and December 31, 1995. 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.
Notional or Contract Amount ----------------------------------------------------------------- June 30, 1996 December 31, 1995 ----------------------------- ----------------------------- Purchases Sales Purchases Sales ----------- ----------- ----------- ----------- Mortgage-backed forward contracts and options written and purchased $17,114,821 $20,137,509 $13,140,269 $15,861,501 Foreign currency forward contracts, futures contracts, and options written and purchased 747,942 1,056,096 1,894,724 2,040,414 Equity securities contracts including futures, forwards, and options written and purchased 168,836 211,561 993,161 1,220,400 Other fixed income securities contracts including futures, forwards, and options written and purchased 2,922,303 3,228,141 2,647,504 3,148,312 Interest rate swaps, caps and floors 66,550 -- 104,050 --
Set forth below are the fair values of derivative financial instruments held or issued for trading purposes as of June 30, 1996 and December 31, 1995. 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 June 30, 1996 December 31, 1995 ------------------------- ------------------------- Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Mortgage-backed forward contracts and options written and purchased $128,426 $139,654 $129,272 $116,536 Foreign currency forward contracts, futures contracts, and options written and purchased 23,815 35,073 83,222 48,710 Equity securities contracts including futures, forwards, and options written and purchased 10,522 4,072 135,977 52,250 Other fixed income securities contracts including futures, forwards, and options written and purchased 23,722 70,788 22,353 58,148 Interest rate swaps, caps and floors 473 -- 4,660 --
8 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Set forth below are the average fair values of derivative financial instruments held or issued for trading purposes for the three months ended June 30, 1996 and the twelve months ended December 31, 1995. The average fair value is based upon the average of the month-end balances during the periods indicated.
Average Fair Value Average Fair Value Three Months Ended Twelve Months Ended June 30, 1996 December 31, 1995 -------------------------- -------------------------- Assets Liabilities Assets Liabilities ----------- ----------- ----------- ----------- Mortgage-backed forward contracts and options written and purchased $ 140,599 $ 144,474 $ 118,784 $ 108,825 Foreign currency forward contracts, futures contracts, and options written and purchased 47,169 58,983 71,805 89,857 Equity securities contracts including futures, forwards, and options written and purchased 10,613 2,349 217,849 142,507 Other fixed income securities contracts including futures, forwards, and options written and purchased 23,463 51,264 16,620 21,449 Interest rate swaps, caps and floors 515 -- 2,132 --
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 off-balance-sheet derivative trading transactions are generally short-term. At June 30, 1996 approximately 90% of the off-balance-sheet derivative trading financial instruments were scheduled to mature during the third quarter of 1996. 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 $186,958 and $375,484 at June 30, 1996 and December 31, 1995, 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 table on the following page summarizes the Company's principal transaction revenue (net trading revenues) by business activity for the three and six months ended June 30, 1996 and 1995. Principal transaction revenues include realized and unrealized gains and losses in the fair value of derivative and other financial instruments. 9 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Principal Transaction Revenue ----------------------------------------------------- Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 -------- -------- -------- -------- Corporate equities (includes equity securities, equity index futures, equity index options and swaps, and equity options contracts) $104,258 $ 71,407 $218,366 $153,462 Municipals (includes municipal and government securities) 41,267 34,099 74,138 76,656 U.S. government (includes U.S. government securities, financial futures and options contracts) 35,678 18,099 92,126 44,296 Mortgage and mortgage-backed (includes mortgage-backed and government securities, mortgage-backed forwards and options contracts) 24,685 24,326 66,360 41,531 Corporate debt and other (includes debt, foreign currency forwards, futures and options contracts and other securities) 45,960 56,376 97,234 102,032 -------- -------- -------- -------- $251,848 $204,307 $548,224 $417,977 ======== ======== ======== ========
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 June 30, 1996 and December 31, 1995, the Company had outstanding interest rate swap agreements with commercial banks with notional principal amounts of $1,950,725 and $1,938,700, respectively, which effectively converted the majority of the Company's fixed rate debt into floating rate debt. The interest rate swap agreements entered into have had the effect of reducing net interest expense on the Company's long-term borrowings by $4,870 for the six months ended June 30, 1996 and increasing net interest expense by $1,466 for the six months ended June 30, 1995. 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 June 30, 1996 and December 31, 1995. The Company is subject to market risk as interest rates fluctuate. The interest rate swaps contain credit risk to the extent the Company is in a receivable or gain position and the counterparty defaults. However, the counterparties to the agreements are large financial institutions and the Company has not experienced defaults in the past and management does not anticipate any counterparty defaults in the foreseeable future. See Note 2 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, 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, comprised of senior corporate and business unit managers, is responsible for establishing trading position and exposure limits. 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. 10 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Credit Risk in Proprietary Transactions Counterparties to the Company's proprietary trading, hedging, financing and arbitrage activities are primarily financial institutions, including brokers and dealers, banks and institutional clients. Credit losses could arise should counterparties fail to perform and the value of any collateral proves inadequate. The Company manages credit risk by monitoring net exposure to individual counterparties on a daily basis, monitoring credit limits and requiring additional collateral where appropriate. Derivative credit exposures are calculated, aggregated and compared to established limits by the credit department. Credit reserve requirements are determined by senior management in conjunction with the Company's continuous credit monitoring procedures. Historically, reserve requirements arising from instruments with off-balance-sheet risk have not been material. Receivables and payables with brokers and dealers, 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' margined securities as collateral in support of securities loaned and bank loans, to deliver against firm and clients' short positions, as well as to satisfy margin requirements at clearing organizations. The amounts loaned or pledged are limited to the extent permitted by applicable margin regulations. Should the counterparty fail to return the clients' securities, the Company may be required to replace them at prevailing market prices. At June 30, 1996, the market value of client securities loaned to other brokers approximated the amounts due or collateral obtained. Credit Risk in Client and Other Activities Client transactions are entered on either a cash or margin basis. In a margin transaction, the Company extends credit to a client for the purchase of securities, using the securities purchased and/or other securities in the client's account as collateral for amounts loaned. Amounts loaned are limited by margin regulations of the Federal Reserve Board and other regulatory authorities and are subject to the Company's credit review and daily monitoring procedures. Market declines could, however, reduce the value of any collateral below the principal amount loaned, plus accrued interest, before the collateral can be sold. Client transactions include positions in commodities and financial futures, trading liabilities and written options. The risk to the Company's clients in these transactions can be substantial, principally due to price volatility which can reduce the clients' ability to meet their obligations. Margin deposit requirements pertaining to commodity futures and options transactions are generally lower than those for exchange traded securities. To the extent clients are unable to meet their commitments to the Company and margin deposits are insufficient to cover outstanding liabilities, the Company may take market action and credit losses could be realized. Client trades are recorded on a settlement date basis. Should either the client or broker fail to perform, the Company may be required to complete the transaction at prevailing market prices. Trades pending at June 30, 1996 were settled without adverse effect on the Company's financial statements, taken as a whole. In the normal course of business, clients may be extended lines of credit collateralized by mortgages and other real estate interests. These commitments are generally entered into at variable rates of interest based on LIBOR. At June 30, 1996, the unused portion of such lines of credit amounted to $456,895. The majority of the commitments terminate within one year. In meeting the financing needs of certain of its clients, the Company may also issue standby letters of credit which are fully collateralized by marginable securities. At June 30, 1996 and December 31, 1995, the Company had outstanding $24,156 and $20,322, respectively, of such standby letters of credit. At June 30, 1996 and December 31, 1995, securities with a fair value of $399,387 and $441,612, respectively, had been loaned or pledged as collateral for securities borrowed of approximately equal fair value. 11 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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, mutual funds and insurance companies. At June 30, 1996 and December 31, 1995, the Company had outstanding resale agreements and securities borrowed of $6,966,205 and $8,502,505, respectively, with brokers and dealers and $9,693,708 and $7,032,233, respectively, with commercial banks which were collateralized by cash and securities of approximately equal fair value. NOTE 10: COMMITMENTS AND CONTINGENCIES At June 30, 1996 and December 31, 1995, the Company was contingently liable under unsecured letters of credit totaling $108,461 and $114,090, respectively, which approximates fair value. In addition, at June 30, 1996, 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 commitments to invest up to $20,209 in certain investment funds as of June 30, 1996. In February 1996, two limited partnerships, in which a subsidiary of the Company serves as the general partner and certain key employees serve as the limited partners, entered into two unsecured credit facilities with a commercial bank under which the bank agreed to make unsecured loans to the limited partnerships of up to $77,525. The Company entered into an agreement with the bank to purchase the loans under specific circumstances. At June 30, 1996, $37,932 had been loaned to the limited partnerships. In the normal course of business, the Company enters into when-issued transactions and underwriting commitments. Settlement of these transactions at June 30, 1996 would not have had a material impact on the Company's consolidated financial statements, taken as a whole. The Company has been named as defendant in numerous legal actions in the ordinary course of business. While the outcome of such matters cannot be predicted with certainty, in the opinion of management of the Company, after consultation with various counsel handling such matters, these actions will be resolved with no material adverse effect on the Company's consolidated financial statements, taken as a whole. NOTE 11: INCOME TAXES The reconciliation of income taxes, computed at the statutory federal rates, to the provision for income taxes recorded is as follows:
Three Months Ended Six Months Ended June 30 June 30 ------------------------ ---------------------- 1996 1995 1996 1995 ----------- ----------- ----------- --------- Tax at statutory federal rates 35.0% 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefit 4.6 6.3 4.4 7.4 Foreign rate differential (1.2) 1.3 (1.0) 0.8 Nontaxable dividends & interest (2.0) 2.9 (1.5) 6.0 Other, net (2.2) (7.7) (2.3) (9.8) ----- ----- ----- ----- 34.2% 37.8% 34.6% 39.4% ===== ===== ===== =====
Income taxes paid were $66,195 and $1,805 for the three months ended June 30, 1996 and 1995, respectively. 12 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12: EARNINGS PER COMMON SHARE For the three months and six months ended June 30, 1996, 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 income, adjusted for preferred stock dividends and any interest savings, by the weighted average common and common equivalent shares outstanding during each period presented. Common equivalent shares include common shares issuable under the Company's stock option and award plans, the conversion of convertible debentures and preferred stock, and restricted stock outstanding. For the three months and six months ended June 30, 1995, as a result of the net losses reported, the Company computed its loss per common share by dividing the net loss by the weighted average common shares outstanding, which excludes restricted stock and antidilutive securities, during the respective periods. 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. In the second quarter of 1996, business conditions in the securities industry continued to be favorable. Stock prices of large companies, as represented by the S&P 500, rose 3.9% during the quarter, versus 4.8% during the first quarter of 1996. The corporate finance market was also very strong in the second quarter. Due to surprisingly strong economic growth, which raised the possibility of a tighter monetary policy, the bond market was decidedly weaker than the stock market during the second quarter of 1996. RESULTS OF OPERATIONS Quarter Ended June 30, 1996 compared to Quarter Ended June 30, 1995 The Company's net earnings for the quarter ended June 30, 1996 were $92.2 million, or $0.90 per primary share ($0.86 per fully diluted share) compared to net earnings of $35.4 million, or $0.28 per primary and fully diluted share earned during the second quarter of 1995, before giving effect to a charge in the year-ago quarter relating to limited partnership investment issues. The net loss for the second quarter of 1995, after giving effect to this charge, was $90.5 million, or $1.06 per primary and fully diluted share. During the second quarter of 1996, revenues, net of interest expense, increased 15.1% to $949.6 million, primarily due to higher commissions and principal transactions revenues. The results for the quarter ended June 30, 1995 were reduced by an after-tax charge of approximately $126 million ($200.0 million before income taxes) relating to the resolution of the Securities and Exchange Commission ("SEC"), individual, and class action claims arising out of the sale of public proprietary limited partnerships in the 1980's and early 1990's. The charges are included in other expenses in the Consolidated Statement of Operations. Commission revenues earned during the second quarter of 1996 were $362.7 million, 12.0% higher than the $323.8 million earned during the prior year quarter. Mutual funds commissions increased $20.7 million, or 42.7%, commissions from over-the-counter securities increased $18.4 million, or 72.7%, and insurance annuity commissions increased $9.3 million, or 41.6%. These increases were partially offset by lower commissions from listed securities, options and commodities. Principal transactions revenues increased $47.5 million, or 23.3%, reflecting improved results in U.S. government obligations and corporate equity securities. These gains were partially offset by lower results in mortgages and corporate debt securities. Investment banking revenues were $102.1 million, as compared to $88.6 million earned during the second quarter of 1995, reflecting a higher level of financial advisory activity and an increased level of corporate equity and municipal underwriting. Asset management fees increased 13.7% to $111.4 million, due to higher revenues earned on managed or "wrap" and trust accounts. Average assets in wrap and trust accounts during the second quarter of 1996 were approximately 42% higher than during the second quarter of 1995. The increase also includes higher advisory fees earned on money market accounts. These gains were partially offset by lower advisory and distribution fees on long term and institutional funds. The average assets under management in money market, institutional and long-term mutual funds were approximately $43.9 billion during the second quarter of 1996 as compared to $42.0 billion during the second quarter of 1995. Net interest increased $13.2 million, or 19.5% primarily due to increased margin lending to customers and an increased level of fixed income positions. 14 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Compensation and benefits for the quarter ended June 30, 1996 were $568.7 million as compared to $504.8 million during the prior year quarter. Compensation costs increased primarily due to higher revenue-driven compensation paid to retail investment executives and higher performance-based incentive compensation. Compensation and benefits for the second quarter of 1996 also includes costs related to the closure of the Tokyo-based Japanese equities business. Compensation and benefits as a percent of net revenues were 59.9% during the second quarter of 1996, as compared to 61.2% during the comparable period in 1995. All other operating expenses were $240.6 million, as compared to $465.6 million for the prior year quarter. In the second quarter of 1995, other expenses include the $200 million charge related to the limited partnership issue. Lower litigation-related costs are reflected in other expenses and professional fees. Lower occupancy costs are reflected in office and equipment. Six Months Ended June 30, 1996 compared to Six Months Ended June 30, 1995 Net earnings for the six months ended June 30, 1996 was $192.7 million, or $1.87 per primary share ($1.76 per fully diluted share) as compared to net earnings of $69.7 million, or $0.56 per primary share ($0.54 per fully diluted share) for the first six months of 1995, before giving effect to the limited partnership charge. Including the charge, the net loss for the first six months of 1995 was $56.2 million or $0.76 per primary and fully diluted share. During the first six months of 1996, revenues, net of interest expense, increased 23.3% to $1,912.3 million primarily due to higher commissions and principal transactions revenues. Commission revenues earned during the first six months of 1996 were $730.9 million, 23.0% higher than the $594.1 million earned during the first six months of 1995. Mutual funds commissions increased $54.8 million, or 64.5%, commissions on listed securities increased $43.7 million, or 12.4%, commissions on over-the-counter securities increased $31.4 million, or 71.1%, and insurance annuity commissions increased $14.7 million, or 31.9%. These increases were partially offset by lower options and commodity commissions. Principal transactions revenues increased $130.2 million or 31.2% reflecting improved results in U.S. government obligations and corporate equity securities. These gains were partially offset by lower results in mortgages, corporate debt and municipal securities. Investment banking revenues were $183.9 million, as compared to $138.4 million earned during the first six months of 1995, reflecting a higher level of financial advisory activity and an increased level of corporate equity and municipal underwriting. Asset management fees increased 16.6% to $219.0 million, primarily due to higher revenues earned on wrap and trust accounts and increased advisory fees earned on money market and institutional accounts. These increases were partially offset by lower advisory and distribution fees earned on long-term mutual funds. Net interest increased $25.0 million, or 18.7% primarily due to increased margin lending to clients and higher levels of fixed income positions. Compensation and benefit related expenses for the six months ended June 30, 1996 were $1,135.7 million as compared to $937.8 million during the same period of 1995. Compensation costs increased primarily due to higher revenue-driven compensation paid to retail investment executives and higher performance-based incentive compensation. Compensation and benefits as a percent of net revenues were 59.4% for the six months ended June 30, 1996, as compared to 60.5% during the comparable period in 1995. All other operating expenses were $481.6 million, as compared to $705.6 million for the first six months of 1995. For the six months ended June 30, 1995, other expenses include the $200 million charge related to the limited partnership issue. Other expenses also reflect lower litigation-related expenses in the current year period. Higher communication costs reflect increased business activity. 15 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The primary objectives of the Company's funding policies are to insure ample liquidity at all times and a strong capital base. These objectives are met by maximization of self-funded assets, diversification of funding sources, maintenance of prudent liquidity and capital ratios, and contingency planning. Liquidity The Company maintains a liquid balance sheet with the majority of assets consisting of trading assets, securities borrowed, securities 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 June 30, 1996 were $50.1 billion compared to $45.7 billion at December 31, 1995, 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 senior and subordinated debt. The Company maintains committed and uncommitted credit facilities from a diverse group of banks. The Company has an unsecured senior revolving credit agreement to provide up to $1.2 billion, which expires in December 1996 with provisions for renewal through December 1997. At June 30, 1996, there were no outstanding borrowings under this credit facility. Additionally, the Company had more than $4.5 billion in uncommitted lines of credit at June 30, 1996. The Company maintains public shelf registration statements for the issuance of debt securities with the Securities and Exchange Commission ("SEC"). During the second quarter of 1996, the Company issued $60.5 million of Medium-Term Senior Notes under these registration statements. At June 30, 1996, the Company had $624.1 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 June 30, 1996, the Company's total capital base, which includes long-term borrowings, redeemable preferred stock and stockholders' equity, was $4.4 billion, an increase of $188.8 million from December 31, 1995. The additions to capital primarily reflect net increases in both long-term borrowings and stockholders' equity of $116.3 million and $72.1 million, respectively. The increase in long-term borrowings primarily reflects the issuance of $100.0 million of 6 3/4% Notes in January 1996 and $60.5 million of Medium-Term Senior Notes during the second quarter of 1996. The increase in stockholders' equity is primarily the result of net income for the six months ended June 30, 1996 of $192.7 million, the issuance of approximately 1,892,000 shares of common stock related to employee compensation programs for $19.3 million, and net amortization of restricted stock awards of $16.6 million. These increases were offset by the repurchase of approximately 5,869,000 shares of common stock for $121.6 million and dividends accrued of $37.5 million. In April 1996, the Company's Board of Directors increased the number of common shares authorized to be repurchased by 7 million shares. At June 30, 1996, the remaining number of shares authorized to be purchased under this plan was approximately 8.9 million. 16 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PWI is subject to the net capital requirements of the SEC, the New York Stock Exchange, Inc. and the Commodity Futures Trading Commission, which are designed to measure the financial soundness and liquidity of broker-dealers. PWI has consistently maintained net capital in excess of the minimum requirements 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 June 30, 1996, the Company had investments in merchant banking transactions which were affected by liquidity, reorganization or restructuring issues amounting to $53.1 million, net of reserves, compared to $85.5 million, net of reserves, at December 31, 1995. These investments have not had a material effect on the Company's results of operations. Included in the portfolio at June 30, 1996 was an investment of $27.6 million in a limited partnership which specializes in investments in corporate restructurings and special situations. The Company's activities include underwriting and market-making transactions in 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 June 30, 1996, the Company held $249.4 million of high-yield securities, with approximately 64% of such securities attributable to two issuers. The Company continually monitors its risk positions associated with high-yield securities and establishes limits with respect to overall market exposure, industry group and individual issuer. The Company accounts for these positions at fair value, with unrealized gains and losses reflected in revenues. For the six months ended June 30, 1996 and 1995, the Company recorded pre-tax trading revenues on transactions in high-yield securities of $4.8 million and $10.5 million, respectively. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument represents a contractual agreement between counterparties and has value that is derived from changes in the value of some other underlying asset such as the price of another security, interest rates, currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P 500), or the value referenced in the contract. Derivatives, such as futures, certain options contracts and structured products (e.g. indexed warrants) are traded on exchanges, while derivatives such as forward contracts, interest rate swaps, caps and floors, and other structured products are negotiated in over-the-counter markets. In the normal course of business, the Company engages in a variety of derivative transactions in connection with its proprietary trading activities and asset and liability management, as well as on behalf of its clients. As a dealer, the Company regularly makes a market in and trades a variety of securities. The Company is also engaged in creating structured products which are sold to clients. In connection with these activities, the Company attempts to reduce its exposure to market risk by entering into offsetting hedging transactions which may include derivative financial instruments. The Company also enters into interest rate swap contracts to 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 Consolidated Statement of Financial Condition. The Company had off-balance-sheet derivative contracts outstanding with gross notional amounts of $47.7 billion and $43.0 billion at June 30, 1996 and December 31, 1995, respectively, which included $37.3 billion and $26.7 billion, respectively, related to "to be announced" mortgage securities requiring forward settlement. For a more detailed discussion and disclosure on derivative financial instruments, see Note 8 "Financial Instruments with Off-Balance-Sheet Risk" and Note 9 "Risk Management" in the Notes to Consolidated Financial Statements. 17 19 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 $152 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 $152 million appear to be sought, or in which punitive or exemplary damages, together with the apparent compensatory damages alleged, appear to exceed $152 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 cases below, which were previously reported in the Company's Annual Report on Form 10k for the year ended December 31, 1995. In Re NASDAQ Market-Maker Antitrust Litigation On July 16, 1996, PaineWebber Incorporated entered into a Stipulation and Order resolving a civil complaint filed by the United States Department of Justice, alleging that it and other NASDAQ market makers violated Section 1 of the Sherman Act in connection with certain market making practices. In entering into the Stipulation and Order, without admitting the allegations, the parties agreed that the defendants would not engage in certain types of market making activities and the defendants undertook specified steps to assure compliance with their agreement. The Stipulation and Order are subject to approval by the United States District Court of the Southern District of New York following a public hearing, and if that Court approves the Stipulation and Order, the complaint will be dismissed with prejudice. Limited Partnership Class Actions On July 17, 1996, the United States District Court for the Southern District of New York granted preliminary approval of the proposed settlement of the class action litigation. As part of the class action settlement, PaineWebber agreed to pay $125 million and additional consideration to class members. The order entered by the District Court provides for notice to be mailed to class members and schedules a final hearing on the proposed settlement for October 25, 1996. On January 18, 1996, the Securities and Exchange Commission commenced, and PaineWebber Incorporated simultaneously settled, civil and administrative proceedings relating to the firm's sale of public proprietary limited partnerships in the 1980s and early 1990s. Without admitting or denying the SEC's allegations or findings, the firm agreed to the entry of an administrative cease and desist order, created a capped $40 million fund, paid a $5 million civil penalty, and committed to pay $7.5 million of additional investor claims relating to the limited partnerships. As part of the settlement, PaineWebber Incorporated represented that it had previously paid approximately $120 million to resolved investor claims over a period of several years prior to the SEC settlement. Additionally, the order requires the retention of an independent consultant to review the firm's policies and procedures concerning retail brokerage operations and the dissemination of sales and marketing materials, and oversight of the firm's compliance policies by a committee of PaineWebber Incorporated's Board of Directors. On the same date, PaineWebber Incorporated also announced an agreement to settle with the various state securities regulators pursuant to which PaineWebber Incorporated is required to make payments aggregating $5 million. 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 Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K: None 18 20 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Paine Webber Group Inc. ----------------------- (Registrant) Date: August 12, 1996 By: /s/ Regina A. Dolan ---------------- ----------------------- Regina A. Dolan Vice President, Chief Financial Officer 19 21 EXHIBIT INDEX 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) COMMON SHARE 1 EXHIBIT 11 PAINE WEBBER GROUP INC. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (In thousands of dollars except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30, ------------------------------ ------------------------------ 1996 1995 1996 1995 ------------- ------------- ------------- ------------- PRIMARY: Weighted average common shares outstanding 87,315,131 92,594,748 88,593,710 92,901,835 Incremental stock options and awards 7,882,909 -- 7,882,810 -- ------------- ------------- Weighted average common and common equivalent shares 95,198,040 92,594,748 96,476,520 92,901,835 ============= ============= ============= ============= Net earnings (loss) $ 92,212 $ (90,548) $ 192,713 $ (56,238) Interest savings on convertible debentures and short-term borrowings 1,225 -- 2,578 -- Preferred dividend requirements (7,349) (7,324) (14,856) (14,644) ------------- ------------- ------------- ------------- Net earnings (loss) applicable to common shares $ 86,088 $ (97,872) $ 180,435 $ (70,882) ============= ============= ============= ============= Primary earnings (loss) per common share $ 0.90 $ (1.06) $ 1.87 $ (0.76) ============= ============= ============= ============= FULLY DILUTED: Weighted average common shares outstanding 87,315,131 92,594,748 88,593,710 92,901,835 Incremental stock options and awards 8,804,960 -- 9,037,513 -- Weighted average common shares issuable assuming conversion of 8% Convertible Debentures and 6% Cumulative Convertible Redeemable Preferred Stock 6,196,913 -- 6,327,181 -- ------------- ------------- Weighted average common and common equivalent shares 102,317,004 92,594,748 103,958,404 92,901,835 ============= ============= ============= ============= Net earnings (loss) $ 92,212 $ (90,548) $ 192,713 $ (56,238) Interest savings on convertible debentures and short-term borrowings 1,140 -- 2,262 -- Preferred dividend requirements (5,849) (7,324) (11,823) (14,644) ------------- ------------- ------------- ------------- Net earnings (loss) applicable to common shares $ 87,503 $ (97,872) $ 183,152 $ (70,882) ============= ============= ============= ============= Fully diluted earnings (loss) per common share $ 0.86 $ (1.06) $ 1.76 $ (0.76) ============= ============= ============= =============
EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS 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)
Six Months Ended June 30, Years Ended December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes $ 294,942 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247 ---------- ---------- ---------- ---------- ---------- ---------- Preferred stock dividends 21,789 36,260 1,710 5,828 27,789 34,732 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 948,932 1,969,811 1,428,653 1,130,712 879,242 1,056,124 Interest factor in rents 29,408 59,491 51,102 50,133 45,962 43,804 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 978,340 2,029,302 1,479,755 1,180,845 925,204 1,099,928 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends 1,000,129 2,065,562 1,481,465 1,186,673 952,993 1,134,660 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $1,273,282 $2,131,979 $1,524,140 $1,588,421 $1,264,319 $1,326,175 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges and preferred stock dividends 1.3 1.0 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 income 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. EX-12.2 4 COMPUTATION OF 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)
Six Months Ended June 30, Years Ended December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes $ 294,942 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 948,932 1,969,811 1,428,653 1,130,712 879,242 1,056,124 Interest factor in rents 29,408 59,491 51,102 50,133 45,962 43,804 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 978,340 2,029,302 1,479,755 1,180,845 925,204 1,099,928 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $1,273,282 $2,131,979 $1,524,140 $1,588,421 $1,264,319 $1,326,175 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.3 1.1 1.0 1.3 1.4 1.2 ========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income 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. EX-27 5 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF PAINE WEBBER GROUP INC. FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JUN-30-1996 585,879 6,920,735 21,047,424 6,937,053 14,274,463 318,858 50,084,412 1,229,472 6,165,820 28,720,797 3,579,275 6,025,159 2,552,306 105,421 187,208 100,000 1,418,954 50,084,412 548,224 1,107,649 730,880 183,932 219,047 948,932 1,135,681 294,942 192,713 0 0 192,713 1.87 1.76
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