-----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, DA32/yML0xFSzyI6i0akVVjHsty2L4+xx0VdSbhprhnFoMVc8gcRSYiGir6YSq3z 4+lTE5O4uis9BAsgowWJsA== 0000950123-96-006630.txt : 19961118 0000950123-96-006630.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950123-96-006630 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96665218 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 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, 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 November 8, 1996, the Registrant had outstanding 91,137,968 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, 1996 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, 1996 and 1995. 2 Consolidated Statements of Financial Condition (unaudited) at September 30, 1996 and December 31, 1995. 3 Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 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 Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ REVENUES Commissions $ 306,173 $ 333,686 $ 1,037,053 $ 927,772 Principal transactions 240,261 264,049 788,485 682,026 Asset management 115,614 104,159 334,661 292,031 Investment banking 93,285 93,988 277,217 232,380 Other 42,033 39,587 113,491 118,081 Interest 577,882 544,089 1,685,531 1,693,423 ------------ ------------ ------------ ------------ Total revenues 1,375,248 1,379,558 4,236,438 3,945,713 Interest expense 492,262 467,533 1,441,194 1,483,106 ------------ ------------ ------------ ------------ Net revenues 882,986 912,025 2,795,244 2,462,607 ------------ ------------ ------------ ------------ NON-INTEREST EXPENSES Compensation and benefits 524,612 537,870 1,660,293 1,475,637 Office and equipment 66,781 67,689 200,755 199,716 Communications 37,725 38,130 116,237 111,459 Business development 17,705 23,364 55,221 68,358 Brokerage, clearing & exchange fees 19,134 24,432 65,874 72,556 Professional services 29,436 24,531 78,063 72,910 Other 64,278 79,307 200,544 438,097 ------------ ------------ ------------ ------------ Total non-interest expenses 759,671 795,323 2,376,987 2,438,733 ------------ ------------ ------------ ------------ NET EARNINGS BEFORE TAXES 123,315 116,702 418,257 23,874 ------------ ------------ ------------ ------------ PROVISION (BENEFIT) FOR INCOME TAXES: Federal 33,940 24,099 110,227 (11,890) State, local and foreign 9,220 14,413 35,162 13,812 ------------ ------------ ------------ ------------ 43,160 38,512 145,389 1,922 ------------ ------------ ------------ ------------ NET EARNINGS $ 80,155 $ 78,190 $ 272,868 $ 21,952 ============ ============ ============ ============ Net earnings (loss) applicable to common shares $ 73,695 $ 71,202 $ 254,202 $ (16) ============ ============ ============ ============ Earnings per common share: Primary $ 0.79 $ 0.71 $ 2.67 $ 0.00 Fully diluted $ 0.75 $ 0.67 $ 2.55 $ 0.00 Weighted average common shares: Primary 93,875,777 100,931,592 95,084,609 92,597,619 Fully diluted 100,072,690 108,158,981 101,368,050 92,597,619 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, 1996 1995 ------------ ------------ ASSETS Cash and cash equivalents $ 199,366 $ 222,497 Cash and securities segregated and on deposit for federal and other regulations 415,263 427,068 Trading assets, at fair value 15,674,064 14,095,446 Securities purchased under agreements to resell 22,248,702 16,699,295 Securities borrowed 7,056,283 7,226,515 Receivables: Clients, net of allowance for doubtful accounts of $13,421 and $12,400 at September 30, 1996 and December 31, 1995, respectively 4,137,507 4,070,599 Brokers and dealers 206,482 279,676 Dividends and interest 333,821 263,948 Fees and other 368,041 200,444 Office equipment and leasehold improvements, net of accumulated depreciation and amortization of $329,688 and $288,807 at September 30, 1996 and December 31, 1995, respectively 316,411 322,056 Other assets 1,817,795 1,863,750 ------------ ------------ $ 52,773,735 $ 45,671,294 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 951,186 $ 991,227 Trading liabilities, at fair value 6,992,858 6,233,054 Securities sold under agreements to repurchase 31,133,247 25,199,377 Securities loaned 2,694,971 2,752,429 Payables: Clients 3,839,169 3,698,477 Brokers and dealers 293,672 155,118 Dividends and interest 266,675 256,338 Other liabilities and accrued expenses 1,555,391 1,639,403 Accrued compensation and benefits 618,521 570,786 ------------ ------------ 48,345,690 41,496,209 Long-term borrowings 2,565,440 2,436,037 ------------ ------------ 50,911,130 43,932,246 ------------ ------------ Commitments and contingencies Redeemable Preferred Stock 187,431 186,760 Stockholders' Equity: Convertible Preferred Stock 100,000 100,000 Common stock, $1 par value, 200,000,000 shares authorized; issued 105,435,836 shares and 104,492,091 shares at September 30, 1996 and December 31, 1995, respectively 105,436 104,492 Additional paid-in capital 837,265 831,763 Retained earnings 936,239 719,325 ------------ ------------ 1,978,940 1,755,580 Treasury stock, at cost; 13,115,949 shares at September 30, 1996 and 7,417,845 shares at December 31, 1995, respectively (270,852) (151,616) Unamortized cost of restricted stock (28,998) (55,302) Foreign currency translation adjustment (3,916) 3,626 ------------ ------------ 1,675,174 1,552,288 ------------ ------------ $ 52,773,735 $ 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)
Nine Months Ended September 30, 1996 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 272,868 $ 21,952 Adjustments to reconcile net earnings to cash (used for) provided by operating activities: Noncash items included in net earnings: Depreciation and amortization 45,343 41,661 Deferred income taxes 73,440 (100,304) Amortization of deferred charges 118,992 119,465 Other 19,529 218,654 (Increase) decrease in operating receivables: Clients (67,929) (1,114,442) Brokers and dealers 73,194 242,744 Dividends and interest (69,873) (38,254) Fees and other (167,597) 484 Increase (decrease) in operating payables: Clients 140,692 1,360,206 Brokers and dealers 138,554 (78,505) Dividends and interest 10,337 49,882 Other (52,434) 436,032 (Increase) decrease in: Trading assets (1,578,618) (2,489,419) Securities purchased under agreements to resell (5,549,407) (9,338,499) Securities borrowed 170,232 422,214 Cash and securities on deposit 11,805 (49,834) Other assets (246,304) (462,240) Increase (decrease) in: Trading liabilities 759,804 1,216,338 Securities sold under agreements to repurchase 5,933,870 10,822,256 Securities loaned (57,458) (422,601) ------------ ------------ Cash (used for) provided by operating activities (20,960) 857,790 ------------ ------------ 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 (36,813) (69,233) ------------ ------------ Cash provided by (used for) investing activities 85,219 (693,323) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on short-term borrowings (40,041) (216,854) Proceeds from: Long-term borrowings 234,064 412,586 Employee stock transactions 23,435 33,818 Payments for: Long-term borrowings (105,895) (306,370) Repurchases of common stock (143,671) (93,184) Dividends (55,282) (57,590) ------------ ------------ Cash used for financing activities (87,390) (227,594) ------------ ------------ Decrease in cash and cash equivalents (23,131) (63,127) Cash and cash equivalents, beginning of period 222,497 259,238 ------------ ------------ Cash and cash equivalents, end of period $ 199,366 $ 196,111 ============ ============
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. The financial information as of and for the periods ended September 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 Reports on Form 10-Q for the quarters ended June 30, and 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 certain types of transactions occurring after December 31, 1996, including securitizations, sales of mortgages and other receivables. In November 1996, the FASB issued an exposure draft which deferred the effective date of accounting for other types of transfers of financial assets, including repurchase and securities lending transactions, until after December 31, 1997. 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. 5 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At September 30, 1996 and December 31, 1995, the fair values of long-term borrowings were $2,556,456 and $2,478,095, respectively, as compared to the carrying amounts of $2,565,440 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. 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 $50,687 payable and $33,756 receivable at September 30, 1996 and December 31, 1995, respectively. The carrying amounts of the interest rate swap agreements at September 30, 1996 and December 31, 1995 were net receivables of $1,177 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:
September 30, December 31, 1996 1995 ----------- ----------- Trading assets: U.S. government and agency obligations $ 5,621,180 $ 4,854,878 Mortgages and mortgage-backed securities 5,422,186 4,240,163 Corporate debt securities 2,746,312 2,364,597 State and municipal obligations 544,467 821,487 Corporate equity securities 371,008 561,669 Commercial paper and other short-term debt 968,911 1,252,652 ----------- ----------- $15,674,064 $14,095,446 =========== =========== Trading liabilities: U.S. government and agency obligations $ 5,609,146 $ 4,570,733 Mortgages and mortgage-backed securities 123,685 127,708 Corporate debt securities 626,815 714,588 State and municipal obligations 33,009 21,467 Corporate equity securities 600,203 798,558 ----------- ----------- $ 6,992,858 $ 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 September 30, 1996 and December 31, 1995 consisted of the following:
September 30, December 31, 1996 1995 -------- -------- Commercial paper $483,865 $547,554 Bank loans and other 467,321 443,673 -------- -------- $951,186 $991,227 ======== ========
6 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5: LONG-TERM BORROWINGS Long-term borrowings at September 30, 1996 and December 31, 1995 consisted of the following :
September 30, December 31, 1996 1995 ---------- ---------- Fixed Rate Notes due 1998 - 2014 $1,413,265 $1,289,478 Fixed Rate Subordinated Notes due 2002 174,478 174,412 Medium-Term Senior Notes 682,001 651,475 Medium-Term Subordinated Notes 281,150 283,150 Other 14,546 37,522 ---------- ---------- $2,565,440 $2,436,037 ========== ==========
At September 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 September 30, 1996 was 7.51%. Interest on the notes is payable semi-annually. At September 30, 1996, the Company had outstanding $699,001 of fixed rate Medium-Term Notes and $264,150 of variable rate Medium-Term Notes. The Medium-Term Notes outstanding at September 30, 1996 had an average maturity of 3.5 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 $1,430,878 and $1,433,205 for the nine months ended September 30, 1996 and 1995, respectively. NOTE 6: COMMON STOCK On November 7, 1996, the Board of Directors declared a regular quarterly dividend on the Company's common stock of $0.12 per share payable on January 3, 1997 to stockholders of record on December 4, 1996. In addition, the Board authorized an increase of 10 million shares to its share repurchase program bringing the current total amount of shares that can be repurchased to approximately 15 million shares. As of September 30, 1996, the Company had 34,447,584 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 September 30, 1996, PWI's net capital of $940,163 was 18% of aggregate debit balances and its net capital in excess of the minimum required was $832,480. 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 7 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 September 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 ----------------------------------------------------------------- September 30, 1996 December 31, 1995 ----------------------------- ----------------------------- Purchases Sales Purchases Sales ----------- ----------- ----------- ----------- Mortgage-backed forward contracts and options written and purchased $18,663,406 $21,059,813 $13,140,269 $15,861,501 Foreign currency forward contracts, futures contracts, and options written and purchased 654,535 1,335,882 1,894,724 2,040,414 Equity securities contracts including futures, forwards, and options written and purchased 419,603 450,130 993,161 1,220,400 Other fixed income securities contracts including futures, forwards, and options written and purchased 5,674,406 4,485,737 2,647,504 3,148,312 Interest rate swaps, caps and floors 78,750 -- 104,050 --
8 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Set forth below are the fair values of derivative financial instruments held or issued for trading purposes as of September 30, 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 September 30, 1996 December 31, 1995 ------------------------ ------------------------ Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Mortgage-backed forward contracts and options written and purchased $112,750 $122,422 $129,272 $116,536 Foreign currency forward contracts, futures contracts, and options written and purchased 8,409 15,938 83,222 48,710 Equity securities contracts including futures, forwards, and options written and purchased 45,407 27,086 135,977 52,250 Other fixed income securities contracts including futures, forwards, and options written and purchased 24,284 143,759 22,353 58,148 Interest rate swaps, caps and floors 4,408 -- 4,660 --
Set forth below are the average fair values of derivative financial instruments held or issued for trading purposes for the three months ended September 30, 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 September 30, 1996 December 31, 1995 ------------------------ ------------------------ Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Mortgage-backed forward contracts and options written and purchased $137,379 $127,610 $118,784 $108,825 Foreign currency forward contracts, futures contracts, and options written and purchased 20,149 25,554 71,805 89,857 Equity securities contracts including futures, forwards, and options written and purchased 35,352 24,821 217,849 142,507 Other fixed income securities contracts including futures, forwards, and options written and purchased 22,273 117,467 16,620 21,449 Interest rate swaps, caps and floors 4,339 -- 2,132 --
9 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 September 30, 1996 approximately 90% of the off-balance-sheet derivative trading financial instruments were scheduled to mature during the fourth 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 $195,258 and $375,484 at September 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 below summarizes the Company's principal transaction revenue (net trading revenues) by business activity for the three and nine months ended September 30, 1996 and 1995. Principal transaction revenues include realized and unrealized gains and losses in the fair value of derivative and other financial instruments.
Principal Transaction Revenue ----------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ----------------------- ----------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Corporate equities (includes equity securities, equity index futures, equity index options and swaps, and equity options contracts) $ 94,540 $124,238 $312,906 $277,700 Municipals (includes municipal and government securities) 36,739 30,515 110,877 107,171 U.S. government (includes U.S. government securities, financial futures and options contracts) 20,339 32,683 112,465 76,979 Mortgage and mortgage-backed (includes mortgage-backed and government securities, mortgage-backed forwards and options contracts) 32,119 32,406 98,479 73,937 Corporate debt and other (includes debt, foreign currency forwards, futures and options contracts and other securities) 56,524 44,207 153,758 146,239 -------- -------- -------- -------- $240,261 $264,049 $788,485 $682,026 ======== ======== ======== ========
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, 1996 and December 31, 1995, the Company had outstanding interest rate swap agreements with commercial banks with notional principal amounts of $1,905,725 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 $6,938 for the nine months ended September 30, 1996 and increasing net interest expense by $2,354 for the nine months ended September 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 September 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. 10 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 September 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. 11 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 September 30, 1996 were settled without material 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 September 30, 1996, the unused portion of such lines of credit amounted to $679,122. 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 September 30, 1996 and December 31, 1995, the Company had outstanding $23,762 and $20,322, respectively, of such standby letters of credit. At September 30, 1996 and December 31, 1995, securities with a fair value of $210,530 and $441,612, respectively, had been loaned or pledged as collateral for securities borrowed of approximately equal fair value. 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 September 30, 1996 and December 31, 1995, the Company had outstanding resale agreements and securities borrowed of $6,415,622 and $8,502,505, respectively, with brokers and dealers and $10,531,519 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 September 30, 1996 and December 31, 1995, the Company was contingently liable under unsecured letters of credit totaling $194,722 and $114,090, respectively, which approximates fair value. At September 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 addition, during 1995 the Company recorded charges, as previously disclosed, related to a final and comprehensive resolution of the issues arising from the Company's sale of public proprietary limited partnerships. As part of the settlement of related class action litigation, the Company has agreed, under certain circumstances, to provide to class members additional consideration including assignment of any and all fees the Company is entitled to receive from certain partnerships. In the opinion of management, these contengencies will not have a material adverse effect on the Company's consolidated financial statements, taken as a whole. 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 September 30, 1996, $55,082 had been loaned to the limited partnerships. 12 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In the normal course of business, the Company enters into when-issued transactions and underwriting commitments. Settlement of these transactions at September 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 Nine Months Ended September 30 September 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 3.4 4.3 4.1 (7.7) Foreign rate differential 0.1 0.7 (0.7) 0.4 Nontaxable dividends & interest (1.0) (2.0) (1.3) (33.3) Other, net (2.5) (5.0) (2.3) 13.7 ----- ----- ----- ------ 35.0% 33.0% 34.8% 8.1% ===== ===== ===== =======
Income taxes paid were $60,534 and $23,072 for the nine months ended September 30, 1996 and 1995, respectively. NOTE 12: EARNINGS PER COMMON SHARE For the three months and nine months ended September 30, 1996, and the three months ended September 30, 1995, 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 nine months ended September 30, 1995, as a result of the net loss applicable to common shares, the Company computed per share results by dividing the net loss 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. Business conditions in the securities industry were less favorable in the third quarter of 1996 than the second quarter. Stock prices of large companies, as represented by the S&P 500, rose 2.5% in the quarter, less than the 3.9% gain of the second quarter. Moreover, stock market volatility increased, with prices declining sharply in July before recovering later in the quarter. As for the credit markets, they were comparatively stable, with the yield on the 10-year government bond being virtually flat during the quarter. RESULTS OF OPERATIONS Quarter Ended September 30, 1996 compared to Quarter Ended September 30, 1995 The Company's net earnings for the quarter ended September 30, 1996 were $80.2 million, or $.79 per primary share ($.75 per fully diluted share) compared to net earnings of $78.2 million, or $.71 per primary share ($.67 per fully diluted share) earned during the third quarter of 1995. During the third quarter of 1996, revenues, net of interest expense, were $883.0 million, 3.2% lower than the third quarter of 1995, reflecting lower commissions and principal transactions revenues. Commission revenues earned during the third quarter of 1996 were $306.2 million, 8.3% lower than the $333.7 million earned during the prior year quarter. Commissions on the sale of listed securities decreased $19.8 million or 10.7%, commissions on the sale of options decreased $9.3 million or 39.8% and commissions on the sale of over-the-counter securities decreased $4.5 million or 13.9%. These declines were partially offset by higher mutual fund commissions and insurance annuity commissions. Principal transactions revenues decreased $23.8 million, or 9.0%, reflecting lower results in U.S. government obligations and corporate equity securities. These gains were partially offset by improved results in corporate debt, municipal and mortgage securities. Asset management fees increased 11.0% to $115.6 million, due to higher revenues earned on managed or "wrap" and trust accounts. Average assets in wrap and trust accounts during the third quarter of 1996 were approximately 34% higher than during the third quarter of 1995. The average assets under management in money market, institutional and long-term mutual funds were approximately $43.6 billion during the third quarter of 1996 as compared to $44.1 billion during the third quarter of 1995. Investment banking revenues were $93.3 million, as compared to $94.0 million earned during the third quarter of 1995. The current year quarter reflects a lower level of corporate equity underwritings offset by increased municipal underwritings. Net interest increased $9.1 million, or 11.8% primarily due to increased margin lending to customers and an increased level of fixed income positions. Compensation and benefits for the quarter ended September 30, 1996 were $524.6 million as compared to $537.9 million during the prior year quarter. Compensation costs decreased primarily due to lower revenue-driven compensation paid to retail investment executives. Compensation and benefits as a percent of net revenues were 59.4% during the third quarter of 1996, as compared to 59.0% during the comparable period in 1995. 14 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) All other operating expenses were $235.1 million, as compared to $257.5 million for the prior year quarter. The decrease in other operating expenses reflect the lower costs resulting from renegotiated leases and vendor contracts as well as the consolidation of branch offices. In addition, the current year quarter includes lower settlement-related expenses. These decreases were partially offset by higher legal fees and depreciation. Nine Months Ended September 30, 1996 compared to Nine Months Ended September 30, 1995 Net earnings for the nine months ended September 30, 1996 were $272.9 million, or $2.67 per primary share ($2.55 per fully diluted share) as compared to net earnings of $147.9 million, or $1.27 per primary share ($1.21 per fully diluted share) for the first nine months of 1995, before giving effect to a charge in the year ago period relating to limited partnership investment issues. Including the charge, the net earnings for the first nine months of 1995 were $22.0 million or $0.00 per primary share. During the first nine months of 1996, revenues, net of interest expense, increased 13.5% to $2,795.2 million primarily due to higher commissions and principal transactions revenues. The results for the nine months ended September 30, 1995 were reduced by an after-tax charge of approximately $126.0 million ($200.0 million before taxes), taken in the second quarter, relating to the cost of resolving 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 first nine months of 1996 were $1,037.1 million, 11.8% higher than the $927.8 million earned during the first nine months of 1995. Mutual funds commissions increased $58.4 million, or 41.6%, commissions earned on the sale of listed securities increased $23.9 million, or 4.4%, commissions earned on the sale of over-the-counter securities increased $26.9 million, or 35.1%, and insurance annuity commissions increased $18.0 million, or 25.1%. These increases were partially offset by lower commissions on options and commodities. Principal transactions revenues increased $106.5 million or 15.6% 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. Asset management fees increased 14.6% to $334.7 million, primarily due to higher revenues earned on wrap and trust accounts and increased advisory fees earned on money market accounts. Investment banking revenues were $277.2 million, as compared to $232.4 million earned during the first nine months of 1995, reflecting a higher level of financial advisory activity and an increased level of corporate equity and municipal underwriting. Net interest increased $34.0 million, or 16.2% primarily due to increased margin lending to clients and higher levels of fixed income positions. Compensation and benefit-related expenses for the nine months ended September 30, 1996 were $1,660.3 million as compared to $1,475.6 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 nine months ended September 30, 1996, as compared to 59.9% during the comparable period in 1995. All other operating expenses were $716.7 million, as compared to $963.1 million for the first nine months of 1995. For the nine months ended September 30, 1995, other expenses include the aforementioned $200.0 million charge related to the limited partnership issue. The current year expenses reflect lower litigation-related costs. 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 September 30, 1996 were $52.8 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. The Company has given notice to renew this credit agreement. During the third quarter of 1996, certain of the Company's subsidiaries entered into new secured revolving credit agreements to provide up to an aggregate of $750.0 million, which expires in August 1997 with provisions for renewal through August 2000. At September 30, 1996, there were no outstanding borrowings under these credit facilities. Additionally, the Company had more than $4.5 billion in uncommitted lines of credit at September 30, 1996. The Company maintains public shelf registration statements for the issuance of debt securities with the SEC. During the third quarter of 1996, the Company issued $59.5 million of Medium-Term Senior Notes under these registration statements. At September 30, 1996, the Company had $564.6 million in debt securities available for issuance. On October 11, 1996, the Company issued $150.0 million of 7 5/8% notes due 2008. 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, 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 $253.0 million from December 31, 1995. The additions to capital primarily reflect net increases in both long-term borrowings and stockholders' equity of $129.4 million and $122.9 million, respectively. The increase in long-term borrowings primarily reflects the issuance of $100.0 million of 6 3/4% notes in January 1996. The increase in stockholders' equity is primarily the result of net income for the nine months ended September 30, 1996 of $272.9 million, the issuance of approximately 2,334,000 shares of common stock related to employee compensation programs for $23.4 million, and net amortization of restricted stock awards of $26.3 million. These increases were offset by the repurchase of approximately 6,898,000 shares of common stock for $143.7 million and dividends accrued of $55.3 million. At September 30, 1996, the remaining number of shares authorized to be repurchased under the Company's common stock repurchase program was approximately 7.8 million. In November 1996, the Company's Board of Directors increased the number of common shares authorized to be repurchased by 10 million shares, bringing the total amount of shares that can be repurchased under this plan to approximately 15 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 September 30, 1996, the Company had investments in merchant banking transactions which were affected by liquidity, reorganization or restructuring issues amounting to $54.7 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 September 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 September 30, 1996, the Company held $229.0 million of high-yield securities, with approximately 69% of such securities attributable to three 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 nine months ended September 30, 1996 and 1995, the Company recorded pre-tax trading revenues on transactions in high-yield securities of $7.5 million and $12.9 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 $54.7 billion and $43.0 billion at September 30, 1996 and December 31, 1995, respectively, which included $35.3 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 $158 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 $158 million appear to be sought, or in which punitive or exemplary damages, together with the apparent compensatory damages alleged, appear to exceed $158 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 case below, which was previously reported in the Company's Annual Report on Form 10K for the year ended December 31, 1995 and in its Quarterly Report on Form 10Q for the quarter ended June 30, 1996. Limited Partnership Class Actions A final hearing on the proposed settlement, preliminarily approved by the United States District Court for the Southern District of New York on July 17, 1996, commenced on October 25, 1996, and is to continue in November 1996. The purported class action filed in the Circuit Court of the State of Illinois for Cook County by two Pegasus limited partnership investors, entitled Jacobson v. PaineWebber, Inc., has been dismissed. The Jacobsons, as class members in the New York Limited Partnership Actions, have objected to the proposed settlement. As noted above, the Court is currently conducting a hearing on the fairness of the proposed settlement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 11 - Computation of Earnings 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: November 13, 1996 By: /s/ Regina A. Dolan ----------------------- Regina A. Dolan Vice President, Chief Financial Officer 19 EX-11 2 COMPUTATION OF EARNINGS 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, -------------------------------- ------------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- PRIMARY: Weighted average common shares outstanding 86,784,047 91,984,316 87,992,879 92,597,619 Incremental stock options and awards 7,091,730 8,947,276 7,091,730 -- ------------- ------------- ------------- ------------- Weighted average common and common equivalent shares 93,875,777 100,931,592 95,084,609 92,597,619 ============= ============= ============= ============= Net earnings $ 80,155 $ 78,190 $ 272,868 $ 21,952 Interest savings on convertible debentures and short-term borrowings 889 336 3,380 -- Preferred dividend requirements (7,349) (7,324) (22,046) (21,968) ------------- ------------- ------------- ------------- Net earnings (loss) applicable to common shares $ 73,695 $ 71,202 $ 254,202 $ (16) ============= ============= ============= ============= Primary earnings per common share $ 0.79 $ 0.71 $ 2.67 $ 0.00 ============= ============= ============= ============= FULLY DILUTED: Weighted average common shares outstanding 86,784,047 91,984,316 87,992,879 92,597,619 Incremental stock options and awards 7,091,730 9,207,329 7,091,730 -- Weighted average common shares issuable assuming conversion of 8% Convertible Debentures and 6% Cumulative Convertible Redeemable Preferred Stock 6,196,913 6,967,336 6,283,441 -- ------------- ------------- ------------- ------------- Weighted average common and common equivalent shares 100,072,690 108,158,981 101,368,050 92,597,619 ============= ============= ============= ============= Net earnings $ 80,155 $ 78,190 $ 272,868 $ 21,952 Interest savings on convertible debentures and short-term borrowings 924 554 3,290 -- Preferred dividend requirements (5,849) (5,825) (17,546) (21,968) ------------- ------------- ------------- ------------- Net earnings (loss) applicable to common shares $ 75,230 $ 72,919 $ 258,612 $ (16) ============= ============= ============= ============= Fully diluted earnings per common share $ 0.75 $ 0.67 $ 2.55 $ 0.00 ============= ============= ============= =============
EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS TO 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 Ended September 30, Years Ended December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes $ 418,257 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247 ---------- ---------- ---------- ---------- ---------- ---------- Preferred stock dividends 32,784 36,260 1,710 5,828 27,789 34,732 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 1,441,194 1,969,811 1,428,653 1,130,712 879,242 1,056,124 Interest factor in rents 43,291 59,491 51,102 50,133 45,962 43,804 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 1,484,485 2,029,302 1,479,755 1,180,845 925,204 1,099,928 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends 1,517,269 2,065,562 1,481,465 1,186,673 952,993 1,134,660 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $1,902,742 $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)
Nine Months Ended September 30, Years Ended December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes $ 418,257 $ 102,677 $ 44,385 $ 407,576 $ 339,115 $ 226,247 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 1,441,194 1,969,811 1,428,653 1,130,712 879,242 1,056,124 Interest factor in rents 43,291 59,491 51,102 50,133 45,962 43,804 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 1,484,485 2,029,302 1,479,755 1,180,845 925,204 1,099,928 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $1,902,742 $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 nine months ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 SEP-30-1996 614,646 6,863,646 22,248,702 7,056,283 15,674,064 316,411 52,773,735 951,186 6,573,428 31,133,247 2,694,971 6,992,858 2,565,440 187,431 100,000 105,436 1,469,738 52,773,735 788,485 1,685,531 1,037,053 277,217 334,661 1,441,194 1,660,293 418,257 272,868 0 0 272,868 2.67 2.55
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