-----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, L5AGo/TMIoY+3hp4expbKhX1h6a641Eu1c4vCuSWXzMV0kvlwRlkoDDvDtu9xYGD d3JA60wos9bmw5+O6rB0/Q== 0000950123-00-005109.txt : 20000516 0000950123-00-005109.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950123-00-005109 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: SEC FILE NUMBER: 001-07367 FILM NUMBER: 635402 BUSINESS ADDRESS: STREET 1: 1285 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127132000 MAIL ADDRESS: STREET 1: 1285 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: PAINE WEBBER INC DATE OF NAME CHANGE: 19840523 10-Q 1 PAINE WEBBER GROUP, INC. 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 March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to __________ . COMMISSION FILE NUMBER 1-7367 PAINE WEBBER GROUP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-2760086 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 713-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] On May 5, 2000 the Registrant had outstanding 145,625,835 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 MARCH 31, 2000 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements. Condensed Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2000 and 1999. 2 Condensed Consolidated Statements of Financial Condition (unaudited) at March 31, 2000 and December 31, 1999. 3 Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2000 and 1999. 4 Notes to Condensed Consolidated Financial Statements (unaudited). 5-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14-19 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 20 Item 6. Exhibits and Reports on Form 8-K. 20-21 Signature. 22
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAINE WEBBER GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands of dollars except share and per share amounts)
Three Months Ended March 31, ------------------------------------ 2000 1999 ------------ ------------ REVENUES Commissions $ 676,172 $ 478,873 Principal transactions 309,289 314,208 Asset management 278,288 206,051 Investment banking 122,180 125,953 Interest 981,547 757,160 Other 37,645 41,065 ------------ ------------ Total revenues 2,405,121 1,923,310 Interest expense 808,016 608,419 ------------ ------------ Net revenues 1,597,105 1,314,891 ------------ ------------ NON-INTEREST EXPENSES Compensation and benefits 949,786 768,714 Office and equipment 96,592 81,452 Communications 44,123 42,203 Business development 38,901 23,867 Brokerage, clearing & exchange fees 27,303 24,390 Professional services 49,426 30,452 Other 100,755 78,794 ------------ ------------ Total non-interest expenses 1,306,886 1,049,872 ------------ ------------ INCOME BEFORE TAXES AND MINORITY INTEREST 290,219 265,019 Provision for income taxes 105,809 96,359 ------------ ------------ INCOME BEFORE MINORITY INTEREST 184,410 168,660 Minority interest 8,061 8,061 ------------ ------------ NET INCOME $ 176,349 $ 160,599 ============ ============ Net income applicable to common shares $ 176,349 $ 154,650 ============ ============ Earnings per common share: Basic $ 1.22 $ 1.06 Diluted $ 1.16 $ 1.01 Weighted-average common shares: Basic 145,019,159 145,598,619 Diluted 152,336,445 153,728,711 Dividends declared per common share $ 0.12 $ 0.11
See notes to condensed consolidated financial statements. 2 4 PAINE WEBBER GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (In thousands of dollars except share and per share amounts)
March 31, December 31, 2000 1999 ------------ ------------ ASSETS Cash and cash equivalents $ 286,899 $ 176,401 Cash and securities segregated and on deposit for federal and other regulations 849,756 823,059 Financial instruments owned 22,467,838 21,144,830 Securities received as collateral 809,168 1,079,976 Securities purchased under agreements to resell 15,873,737 15,923,948 Securities borrowed 10,129,834 10,526,638 Receivables, net of allowance for doubtful accounts of $27,413 and $30,039 at March 31, 2000 and December 31, 1999, respectively 11,363,652 10,287,937 Office equipment and leasehold improvements, net of accumulated depreciation and amortization of $561,375 and $527,718 at March 31, 2000 and December 31, 1999, respectively 628,310 579,819 Other assets 1,105,729 1,069,768 ------------ ------------ $ 63,514,923 $ 61,612,376 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 1,855,495 $ 1,884,250 Financial instruments sold, not yet purchased 5,732,661 7,099,208 Securities sold under agreements to repurchase 27,762,648 25,740,196 Securities loaned 7,605,308 5,661,200 Obligation to return securities received as collateral 809,168 1,079,976 Payables 8,239,030 8,448,217 Other liabilities and accrued expenses 2,961,542 3,164,496 Long-term borrowings 5,114,910 5,223,826 ------------ ------------ 60,080,762 58,301,369 ------------ ------------ Commitments and contingencies Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts holding solely Company Guaranteed Related Subordinated Debt 393,750 393,750 Stockholders' Equity: Common stock, $1 par value, 400,000,000 shares authorized, issued 194,530,404 shares and 193,145,152 shares at March 31, 2000 and December 31, 1999, respectively 194,530 193,145 Additional paid-in capital 1,722,842 1,672,085 Retained earnings 2,329,992 2,171,080 Treasury stock, at cost; 49,393,807 shares and 47,557,064 shares at March 31, 2000 and December 31, 1999, respectively (1,200,754) (1,113,736) Accumulated other comprehensive income (6,199) (5,317) ------------ ------------ 3,040,411 2,917,257 ------------ ------------ $ 63,514,923 $ 61,612,376 ============ ============
See notes to condensed consolidated financial statements. 3 5 PAINE WEBBER GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of dollars)
Three Months Ended March 31, 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 176,349 $ 160,599 Adjustments to reconcile net income to cash provided by (used for) operating activities: Noncash items included in net income: Depreciation and amortization 30,118 21,435 Deferred income taxes 31,841 11,198 Amortization of deferred charges 25,332 18,386 Stock-based compensation (1,596) 5,790 (Increase) decrease in operating assets: Cash and securities on deposit (26,697) 32,778 Financial instruments owned (1,302,698) (2,074,670) Securities purchased under agreements to resell 50,211 (1,071,797) Securities borrowed 396,804 (702,443) Receivables (1,073,089) (379,327) Other assets (93,806) (156,608) Increase (decrease) in operating liabilities: Financial instruments sold, not yet purchased (1,366,547) 1,013,811 Securities sold under agreements to repurchase 2,022,452 4,119,870 Securities loaned 1,944,108 545,931 Payables (209,187) (1,576,819) Other (198,042) (211,215) ----------- ----------- Cash provided by (used for) operating activities 405,553 (243,081) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for: Office equipment and leasehold improvements (80,211) (45,492) ----------- ----------- Cash used for investing activities (80,211) (45,492) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments for) proceeds from short-term borrowings (28,755) 195,116 Proceeds from: Long-term borrowings 196,022 147,000 Employee stock transactions 54,447 37,576 Payments for: Long-term borrowings (307,530) (37,600) Repurchases of common stock (111,592) (56,404) Dividends (17,436) (22,067) ----------- ----------- Cash (used for) provided by financing activities (214,844) 263,621 ----------- ----------- Increase (decrease) in cash and cash equivalents 110,498 (24,952) Cash and cash equivalents, beginning of period 176,401 228,359 ----------- ----------- Cash and cash equivalents, end of period $ 286,899 $ 203,407 =========== ===========
See notes to condensed consolidated financial statements. 4 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The condensed consolidated financial statements include the accounts of Paine Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its principal subsidiary PaineWebber Incorporated ("PWI") (collectively, the "Company"). All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior year amounts to conform to current year presentations. The December 31, 1999 Condensed Consolidated Statement of Financial Condition was derived from the audited consolidated financial statements of the Company. The financial information as of and for the periods ended March 31, 2000 and 1999 is unaudited. All normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation have been made. Certain financial information that is normally in annual financial statements but is not required for interim reporting purposes has been condensed or omitted. The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States which require management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year. Statement of Cash Flows Total interest payments, which relate principally to agreements to repurchase, short-term borrowings, securities loaned and long-term borrowings, were $865,029 and $577,797 for the three months ended March 31, 2000 and 1999, respectively. Income taxes paid were $86,657 and $63,680 for the three months ended March 31, 2000 and 1999, respectively. Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes revised accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity measure all derivative instruments at fair value and recognize such instruments as either assets or liabilities in the consolidated statements of financial condition. The accounting for changes in the fair value of a derivative instrument will depend on the intended use of the derivative as either a fair value hedge, a cash flow hedge or a foreign currency hedge. The effect of the changes in fair value of the derivatives and, in certain cases, the hedged items are to be reflected in either the consolidated statements of income or as a component of other comprehensive income, based upon the resulting designation. As issued, SFAS No. 133 was effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 for one year to fiscal years beginning after June 15, 2000. The Company has not yet determined the impact of this statement on the Company's Consolidated Financial Statements, taken as a whole. 5 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2: FINANCIAL INSTRUMENTS OWNED AND SOLD, NOT YET PURCHASED At March 31, 2000 and December 31, 1999, financial instruments owned and financial instruments sold, not yet purchased consisted of the following:
March 31, December 31, 2000 1999 ----------- ----------- Financial instruments owned: U.S. government and agencies $ 6,685,430 $ 5,864,331 Mortgages and mortgage-backed 9,087,219 9,012,415 Corporate debt 1,791,952 1,875,361 Commercial paper and other short-term debt 1,835,741 1,744,036 Equities and other 2,510,595 2,030,986 State and municipals 556,901 617,701 ----------- ----------- $22,467,838 $21,144,830 =========== =========== Financial instruments sold, not yet purchased: U.S. government and agencies $ 3,998,570 $ 5,804,259 Mortgages and mortgage-backed 100,908 123,049 Corporate debt 1,238,058 785,890 Equities 379,992 348,485 State and municipals 15,133 37,525 ----------- ----------- $ 5,732,661 $ 7,099,208 =========== ===========
NOTE 3: LONG-TERM BORROWINGS Long-term borrowings at March 31, 2000 and December 31, 1999 consisted of the following:
March 31, December 31, 2000 1999 ---------- ---------- U.S. Dollar-Denominated: Fixed Rate Notes due 2000 - 2014 $2,624,543 $2,757,851 Fixed Rate Subordinated Notes due 2002 174,787 174,765 Medium-Term Senior Notes 2,142,990 2,143,010 Medium-Term Subordinated Notes 85,200 148,200 Non-U.S. Dollar-Denominated: Medium-Term Note due 2003 87,390 -- ---------- ---------- $5,114,910 $5,223,826 ========== ==========
At March 31, 2000, interest rates on the U.S. dollar-denominated fixed rate notes and fixed rate subordinated notes ranged from 6.25 percent to 9.25 percent and the weighted-average interest rate was 7.19 percent. Interest on the notes is payable semi-annually. The fixed rate notes and fixed rate subordinated notes outstanding at March 31, 2000 had an average maturity of 5.8 years. At March 31, 2000, the Company had outstanding U.S. dollar-denominated fixed rate Medium-Term Notes of $1,324,040 and variable rate Medium-Term Notes of $904,150. The Medium-Term Notes outstanding at March 31, 2000 had an average maturity of 4.1 years and a weighted-average interest rate of 6.73 percent. At March 31, 2000, the interest rate on the Non-U.S. dollar-denominated Medium-Term note was 1.27 percent. At March 31, 2000 and December 31, 1999, the fair values of long-term borrowings were $4,975,067 and $5,140,331, respectively, as compared to the carrying amounts of $5,114,910 and $5,223,826, respectively. The estimated fair value of long-term borrowings is based upon quoted market prices for the same or similar issues and pricing models. However, for substantially all of its fixed rate debt, the Company enters into interest rate swap agreements to convert its fixed rate payments into floating rate payments. 6 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The net fair values of the interest rate swaps were $142,099 and $127,097 payable at March 31, 2000 and December 31, 1999, respectively. The fair value of interest rate swaps used to hedge the Company's fixed rate debt is based upon the amounts the Company would receive or pay to terminate the agreements, taking into account current interest rates. The carrying amounts of the interest rate swap agreements included in the Company's Condensed Consolidated Statements of Financial Condition at March 31, 2000 and December 31, 1999 were net receivables of $12,956 and $12,075, respectively. See Note 5 for further discussion of interest rate swap agreements used for hedging purposes. NOTE 4: CAPITAL REQUIREMENTS PWI, a registered broker-dealer, is subject to the Securities and Exchange Commission Uniform Net Capital Rule and New York Stock Exchange Growth and Business Reduction capital requirements. Under the method of computing capital requirements adopted by PWI, minimum net capital shall not be less than 2 percent of combined aggregate debit items arising from client transactions, plus excess margin collected on securities purchased under agreements to resell, as defined. A reduction of business is required if net capital is less than 4 percent of such aggregate debit items. Business may not be expanded if net capital is less than 5 percent of such aggregate debit items. As of March 31, 2000, PWI's net capital of $1,177,824 was 9.5 percent of aggregate debit items and its net capital in excess of the minimum required was $919,943. NOTE 5: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK Held or Issued for Trading Purposes Set forth below are the gross contract or notional amounts of the Company's outstanding off-balance-sheet derivative and other financial instruments held or issued for trading purposes. These amounts are not reflected in the Condensed Consolidated Statements of Financial Condition and are indicative only of the volume of activity at March 31, 2000 and December 31, 1999. 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 -------------------------------------------------------------------------- March 31, 2000 December 31, 1999 -------------------------------- -------------------------------- Purchases Sales Purchases Sales ----------- ----------- ----------- ----------- Mortgage-backed forward contracts and options written and purchased $15,768,316 $20,472,150 $14,417,186 $17,540,786 Foreign currency forward contracts, futures contracts, and options written and purchased 1,799,585 1,800,063 1,380,925 1,373,981 Equity securities contracts including stock index futures, forwards, and options written and purchased 201,171 470,999 144,034 239,682 Other fixed income securities contracts including futures, forwards, and options written and purchased 6,987,108 5,358,536 3,557,193 5,538,887 Interest rate swaps and caps 1,464,080 2,434,080 1,688,762 419,989
7 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Set forth below are the fair values of derivative financial instruments held or issued for trading purposes as of March 31, 2000 and December 31, 1999. The fair value amounts are netted by counterparty when specific conditions are met.
Fair Value at Fair Value at March 31, 2000 December 31, 1999 ------------------------------ ------------------------------ Assets Liabilities Assets Liabilities -------- -------- -------- -------- Mortgage-backed forward contracts and options written and purchased $ 78,782 $ 86,714 $159,228 $114,838 Foreign currency forward contracts, futures contracts, and options written and purchased 19,365 19,163 20,274 20,158 Equity securities contracts including stock index futures, forwards, and options written and purchased 132,908 58,919 152,024 48,835 Other fixed income securities contracts including futures, forwards, and options written and purchased 28,566 13,008 29,584 20,177 Interest rate swaps and caps 15,624 23,704 31,569 11,087
Set forth below are the average fair values of derivative financial instruments held or issued for trading purposes for the three months ended March 31, 2000 and the twelve months ended December 31, 1999. The average fair value is based on the average of the month-end balances during the periods indicated.
Average Fair Value Average Fair Value Three Months Ended Twelve Months Ended March 31, 2000 December 31, 1999 ------------------------------ ------------------------------ Assets Liabilities Assets Liabilities -------- -------- -------- -------- Mortgage-backed forward contracts and options written and purchased $ 93,071 $ 89,451 $171,113 $163,954 Foreign currency forward contracts, futures contracts, and options written and purchased 33,468 30,338 22,549 22,377 Equity securities contracts including stock index futures, forwards, and options written and purchased 136,105 51,531 63,624 40,321 Other fixed income securities contracts including futures, forwards, and options written and purchased 27,772 13,164 11,932 49,800 Interest rate swaps and caps 26,662 18,052 18,593 6,754
The Company also sells securities, at predetermined prices, which have not yet been purchased. The Company is exposed to market risk since to satisfy the obligation, the Company must acquire the securities at market prices, which may exceed the values reflected on the Condensed Consolidated Statements of Financial Condition. 8 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The off-balance-sheet derivative trading transactions are generally short-term. At March 31, 2000 substantially all of the off-balance-sheet trading-related derivative and other financial instruments had remaining maturities of less than one year. The Company's risk of loss in the event of counterparty default is limited to the current fair value or the replacement cost on contracts in which the Company has recorded an unrealized gain. These amounts are reflected as assets on the Company's Condensed Consolidated Statements of Financial Condition and amounted to $275,245 and $392,679 at March 31, 2000 and December 31, 1999, respectively. Options written do not expose the Company to credit risk since they do not obligate the counterparty to perform. Transactions in futures contracts are conducted through regulated exchanges which have margin requirements, and are settled in cash on a daily basis, thereby minimizing credit risk. The following table summarizes the Company's principal transactions revenues by business activity for the three months ended March 31, 2000 and 1999. Principal transactions revenues include realized and unrealized gains and losses on trading positions and principal investing activities, including hedges. In assessing the profitability of its trading activities, the Company views net interest and principal transactions revenues in the aggregate.
Principal Transactions Revenues ------------------------------ Three Months Ended March 31, ------------------------------ 2000 1999 -------- -------- Taxable fixed income (includes futures, forwards, options contracts and other securities) $ 57,771 $194,404 Equities (includes stock index futures, forwards and options contracts) 206,822 84,907 Municipals (includes futures and options contracts) 44,696 34,897 -------- -------- $309,289 $314,208 ======== ========
Held or Issued for Purposes Other Than Trading The Company enters into interest rate swap agreements to manage the interest rate characteristics of its assets and liabilities. As of March 31, 2000 and December 31, 1999, the Company had outstanding interest rate swap agreements with commercial banks with notional amounts of $3,891,010 and $4,206,010, respectively. These agreements effectively converted substantially all of the Company's fixed rate debt at March 31, 2000 into floating rate debt. The interest rate swap agreements entered into have had the effect of reducing net interest expense on the Company's fixed rate debt by $282 and $5,753 for the three months ended March 31, 2000 and 1999, respectively. The Company had no deferred gains or losses related to terminated swap agreements on the Company's long-term borrowings at March 31, 2000 and December 31, 1999. The Company is subject to market risk as interest rates fluctuate. The interest rate swaps contain credit risk to the extent the Company is in a receivable or gain position and the counterparty defaults. However, the counterparties to the agreements generally are large financial institutions, and the Company has not experienced defaults in the past, and management does not anticipate any counterparty defaults in the foreseeable future. See Note 3 for further discussion of interest rate swap agreements used for hedging purposes. NOTE 6: RISK MANAGEMENT Transactions involving derivative and non-derivative financial instruments involve varying degrees of both market and credit risk. The Company monitors its exposure to market and credit risk on a daily basis and through a variety of financial, security position and credit exposure reporting and control procedures. Market Risk Market risk is the potential change in value of the financial instrument caused by unfavorable changes in interest rates, equity prices, and foreign currency exchange rates. The Company has a variety of methods to monitor its market risk profile. The senior management of each business group is responsible for reviewing trading positions, exposures, profits and losses, and trading strategies. The Company also has an independent risk management group which reviews the Company's risk profile and aids in setting and monitoring risk management policies of the Company, including monitoring adherence to the established limits, performing market risk modeling, and reviewing trading positions and 9 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) hedging strategies. The Asset/Liability Management Committee, comprised of senior corporate and business group managers, is responsible for establishing trading position and exposure limits. Market risk modeling is based on estimating loss exposure through sensitivity testing. These results are compared to established limits, and exceptions are subject to review and approval by senior management. Other market risk control procedures include monitoring inventory agings, reviewing traders' marks and holding regular meetings between the senior management of the business groups and the risk management group. Credit Risk in Proprietary Transactions Counterparties to the Company's proprietary trading, hedging, financing and arbitrage activities are primarily financial institutions, including banks, brokers and dealers, investment funds and insurance companies. Credit losses could arise should counterparties fail to perform and the value of any collateral proves inadequate. The Company manages credit risk by monitoring net exposure to individual counterparties on a daily basis, monitoring credit limits and requiring additional collateral where appropriate. Derivative credit exposures are calculated, aggregated and compared to established limits by the credit department. Credit reserve requirements are determined by senior management in conjunction with the Company's continuous credit monitoring procedures. Historically, reserve requirements arising from instruments with off-balance-sheet risk have not been material. Receivables and payables with brokers and dealers, agreements to resell and repurchase securities, and securities borrowed and loaned are generally collateralized by cash, government and government-agency securities, and letters of credit. The market value of the initial collateral received approximates or is greater than the contract value. Additional collateral is requested when considered necessary. The Company may pledge clients' margined securities as collateral in support of securities loaned and bank loans, as well as to satisfy margin requirements at clearing organizations. The amounts loaned or pledged are limited to the extent permitted by applicable margin regulations. Should the counterparty fail to return the clients' securities, the Company may be required to replace them at prevailing market prices. At March 31, 2000, the market value of client securities loaned to other brokers approximated the amounts due or collateral obtained. Credit Risk in Client Activities Client transactions are entered on either a cash or margin basis. In a margin transaction, the Company extends credit to a client for the purchase of securities, using the securities purchased and/or other securities in the client's account as collateral for amounts loaned. Receivables from customers are substantially collateralized by customer securities. Amounts loaned are limited by margin regulations of the Federal Reserve Board and other regulatory authorities and are subject to the Company's credit review and daily monitoring procedures. Market declines could, however, reduce the value of any collateral below the principal amount loaned, plus accrued interest, before the collateral can be sold. Client transactions include positions in commodities and financial futures, trading liabilities and written options. The risk to the Company's clients in these transactions can be substantial, principally due to price volatility which can reduce the clients' ability to meet their obligations. Margin deposit requirements pertaining to commodity futures and exchange-traded options transactions are generally lower than those for exchange-traded securities. To the extent clients are unable to meet their commitments to the Company and margin deposits are insufficient to cover outstanding liabilities, the Company may take market action and credit losses could be realized. Client trades are recorded on a settlement date basis. Should either the client or broker fail to perform, the Company may be required to complete the transaction at prevailing market prices. Trades pending at March 31, 2000 were settled without material adverse effect on the Company's consolidated financial statements, taken as a whole. Concentrations of Credit Risk Concentrations of credit risk that arise from financial instruments (whether on- or off-balance-sheet) exist for groups of counterparties when they have similar economic characteristics that would cause their ability to meet obligations to be similarly affected by economic, industry or geographic factors. As a major securities firm, the Company engages in underwriting and other financing activities with a broad range of clients, including other financial institutions, municipalities, governments, financing companies, and commercial real estate investors and operators. These activities could result in concentrations of credit risk with a particular counterparty, or group of counterparties operating in 10 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) a particular geographic area or engaged in business in a particular industry. The Company seeks to control its credit risk and the potential for risk concentration through a variety of reporting and control procedures described above. The Company's most significant industry concentration, which arises within its normal course of business activities, is financial institutions including banks, brokers and dealers, investment funds, and insurance companies. NOTE 7: COMMITMENTS AND CONTINGENCIES At March 31, 2000 and December 31, 1999, the Company was contingently liable under unsecured letters of credit totaling $193,787 and $139,156, respectively, which approximated fair value. At March 31, 2000 and December 31, 1999 certain of the Company's subsidiaries were contingently liable as issuer of approximately $45,000 of notes payable to managing general partners of various limited partnerships pursuant to certain partnership agreements. In addition, as part of the 1995 limited partnership settlements, the Company has agreed, under certain circumstances, to provide to class members additional consideration including assignment of fees the Company is entitled to receive from certain partnerships. In the opinion of management, these contingencies will not have a material adverse effect on the Company's consolidated financial statements, taken as a whole. In meeting the financing needs of certain of its clients, the Company may also issue standby letters of credit which are collateralized by customer margin securities. At March 31, 2000 and December 31, 1999, the Company had outstanding $118,300 and $101,400, respectively, of such standby letters of credit. At March 31, 2000 and December 31, 1999, securities with fair value of $1,791,490 and $2,536,073, respectively, had been loaned or pledged as collateral for securities borrowed of approximately equal fair value. In the normal course of business, the Company enters into when-issued transactions, underwriting and other commitments. Also, at March 31, 2000 and December 31, 1999, the Company had commitments of $1,070,416 and $858,122, respectively, consisting of secured credit lines to real estate operators, mortgage and asset-backed originators, and commitments to investment partnerships, in certain of which key employees are limited partners. Settlement of these transactions at March 31, 2000 would not have had a material impact on the Company's consolidated financial statements, taken as a whole. The Company has been named as defendant in numerous legal actions in the ordinary course of business. While the outcome of such matters cannot be predicted with certainty, in the opinion of management of the Company, after consultation with various counsel handling such matters, these actions will be resolved with no material adverse effect on the Company's consolidated financial statements, taken as a whole. NOTE 8: COMPREHENSIVE INCOME Comprehensive income is calculated in accordance with SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income combines net income and certain items that directly affect stockholders' equity, such as foreign currency translation adjustments. The components of comprehensive income for the three months ended March 31, 2000 and 1999 were as follows:
Three Months Ended March 31, --------------------------------- 2000 1999 --------- --------- Net income $ 176,349 $ 160,599 Foreign currency translation adjustment (882) (1,512) --------- --------- Total comprehensive income $ 175,467 $ 159,087 ========= =========
11 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9: EARNINGS PER COMMON SHARE Earnings per common share are computed in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share excludes the dilutive effects of options and convertible securities and is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects all potentially dilutive securities. Set forth below is the reconciliation of net income applicable to common shares and weighted-average common and common equivalent shares of the basic and diluted earnings per common share computations:
Three Months Ended March 31, ---------------------------------------- 2000 1999 ------------- ------------- NUMERATOR: Net income $ 176,349 $ 160,599 Preferred stock dividends -- (5,949) ------------- ------------- Net income applicable to common shares for basic earnings per share 176,349 154,650 ============= ============= Net income applicable to common shares for diluted earnings per share $ 176,349 $ 154,650 ============= ============= DENOMINATOR: Weighted-average common shares for basic earnings per share 145,019,159 145,598,619 ============= ============= Weighted-average effect of dilutive employee stock options and awards 7,317,286(1) 8,130,092 ------------- ------------- Dilutive potential common shares 7,317,286 8,130,092 ------------- ------------- Weighted-average common and common equivalent shares for diluted earnings per share 152,336,445 153,728,711 ============= ============= EARNINGS PER SHARE: Basic $ 1.22 $ 1.06 ============= ============= Diluted $ 1.16 $ 1.01 ============= =============
NOTE 10: SEGMENT REPORTING DATA The Company offers a wide variety of products and services, primarily those of a full service domestic broker-dealer to a domestic market, through its two operating segments: Individual and Institutional. The Individual segment offers brokerage services and products (such as the purchase and sale of securities, insurance annuity contracts, mutual funds, wrap fee products, and margin and securities lending), asset management and other investment advisory and portfolio management products and services, and execution and clearing services for transactions originated by individual investors. The Institutional segment principally includes capital market products and services (such as the placing of securities and other financial instruments for - and the execution of trades on behalf of - institutional clients, investment banking services such as the underwriting of debt and equity securities, and mergers and acquisitions advisory services). - ------------------ (1) Included in the calculation of employee stock options and awards was the dilutive effect of 1,925,000 instruments related to convertible debentures. 12 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Segment revenues and expenses in the table below consist of those that are directly attributable to the segment under which they are reported, combined with segment amounts based on Company allocation methodologies (for example, allocating a portion of investment banking revenues to the Individual segment; relative utilization of the Company's square footage for certain cost allocations).
Three months ended March 31, 2000 Three months ended March 31, 1999 --------------------------------------------- --------------------------------------------- Individual Institutional Total Individual Institutional Total ------------- -------------- ---------------- -------------- --------------- -------------- Total revenues $1,470,751 $ 934,370 $ 2,405,121 $1,104,409 $818,901 $ 1,923,310 Net revenues 1,251,278 345,827 1,597,105 955,113 359,778 1,314,891 Income before taxes and minority interest 199,194 91,025 290,219 155,483 109,536 265,019
Total assets for the Individual and Institutional segments were $25,175,880 and $38,339,043, respectively, at March 31, 2000 and $21,828,324 and $39,784,052, respectively at December 31, 1999. NOTE 11: SUBSEQUENT EVENTS On April 27, 2000, PWG entered into an agreement and plan of merger (the "Merger Agreement") with J.C. Bradford & Co. L.L.C. ("J.C. Bradford"), a leading privately-held brokerage firm in the Southeast, pursuant to which a subsidiary of PWG will merge with and into J.C. Bradford. The all cash transaction, valued at $620 million, is expected to close in the third quarter of this year. At the May 4, 2000 Annual Meeting of Stockholders, the Company approved to amend the Restated Certificate of Incorporation of PWG to authorize the issuance of up to 150,000,000 shares of Non-Voting Common Stock, par value of $1.00 per share. 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, market liquidity and technological changes. As a result, revenues and profitability have been in the past, and are likely to continue to be, subject to fluctuations reflecting the impact of these factors. Certain statements included in this discussion and in other parts of this report include "forward-looking statements" that involve known and unknown risks and uncertainties including (without limitation) those mentioned above, the impact of current, pending and future legislation and regulation, and other risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company disclaims any obligation or undertaking to update publicly or revise any forward-looking statements. During the first quarter of 2000, economic conditions in the U.S. were generally positive, but the financial markets were volatile. The annualized rate of Real Gross Domestic Product growth in the first quarter was 5.4 percent, versus 7.3 percent in the fourth quarter of 1999 and 3.7 percent in the first quarter a year ago. However, inflation increased during the first quarter of 2000, as the Consumer Price Index rose 4.0 percent, after rising 2.9 percent in the fourth quarter of 1999. The yield on 10-year U.S. Treasury bonds was 6.03 percent on March 31, 2000, a 42 basis point decline from the 6.45 percent at December 31, 1999, and a 78 basis point increase from 5.25 percent on March 31, 1999. However, the yield on the 3-month Treasury bill increased 55 basis points during the first quarter of 2000, from 5.33 percent at the end of 1999 to 5.88 percent on March 31, 2000. The Federal Reserve raised the federal funds rate by a total of 50 basis points during the first quarter of 2000, from 5.50 percent to 6.00 percent. The equity markets were more volatile during the first quarter of 2000 than the prior year quarter. The Dow Jones Industrial Average declined 5.0 percent in the first quarter of 2000, compared to an increase of 6.6 percent during the first quarter of 1999. The S&P 500 stock index appreciated 2.0 percent as compared with 4.6 percent in the 1999 first quarter. The NASDAQ Composite Index advanced 12.4 percent in the first three months of 2000, as compared with 12.3 percent in the first quarter of 1999. Stock market volume was heavy, easily beating the 1999 figures. Average daily volume on the New York Stock Exchange was 1,049 million shares in the first quarter of 2000, as compared with 799 million shares in the first quarter of 1999. NASDAQ volume increased from 967 million average daily shares in the first quarter of 1999 to 1,705 million shares in the first quarter of 2000. RESULTS OF OPERATIONS Quarter Ended March 31, 2000 compared to Quarter Ended March 31, 1999 For the quarter ended March 31, 2000, the Company's net income was a record $176.3 million, or $1.22 per basic share ($1.16 per diluted share) compared to net income of $160.6 million, or $1.06 per basic share ($1.01 per diluted share) earned during the first quarter of 1999. During the first quarter of 2000, revenues, net of interest expense, were a record $1,597.1 million, 21.5 percent higher than the first quarter of 1999. Commission revenues earned during the first quarter of 2000 were a record $676.2 million, 41.2 percent higher than the $478.9 million earned during the prior year quarter, reflecting increases in both individual and institutional businesses. Mutual fund and insurance commissions increased $72.4 million or 58.0 percent, commissions from over-the-counter securities and commodities increased $68.3 million or 100.3 percent and commissions on the sale of listed securities and options increased $56.1 million or 19.6 percent compared to the prior year quarter. Principal transactions revenues declined slightly from the first quarter of 1999 to $309.3 million from $314.2 million, or 1.6 percent. The decline was attributable to lower results in taxable fixed income reflecting reduced customer flow due to a more difficult economic environment. Partially offsetting the decline in fixed income were increases in equities, reflecting increased market activity, and increases in municipals. 14 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Asset management fees increased $72.2 million, or 35.1 percent to a record $278.3 million, reflecting higher revenues earned on managed and fee-based accounts. Average assets in wrap and trust accounts during the first quarter of 2000 were approximately 53 percent higher than during the first quarter of 1999. At March 31, 2000, assets in wrap and trust accounts reached a record $53.9 billion. The increase in revenues also reflects higher investment advisory fees earned on assets managed in long-term and money market funds. The average assets under management in money market, institutional and long-term mutual funds were approximately $71 billion during the first quarter of 2000 and approximately $59 billion during the first quarter of 1999. At March 31, 2000, assets under management reached a record $73.4 billion. Investment banking revenues earned during the first quarter of 2000 were $122.2 million, $3.8 million less than the $126.0 million earned during the first quarter of 1999. The current year quarter reflects decreases in municipal and corporate securities underwriting fees, management fees and selling concessions on lower volume of lead-managed and co-managed issues. Partially offsetting these decreases were increases in private placement and other fees. Net interest increased $24.8 million, or 16.7 percent to $173.5 million primarily due to increased margin interest and an increased level of trading positions during the quarter. Compensation and benefits expenses for the quarter ended March 31, 2000 were $949.8 million, a 23.6 percent increase as compared to $768.7 million during the prior year quarter. The number of employees at March 31, 2000 increased 1,957, or 10.8 percent, as compared to March 31, 1999 reflecting an additional 575 Private Client Group financial advisors, related financial advisor support personnel, and technology specialists hired to implement the Company's technology initiatives. Also, the Company's improved operating results for the first quarter of 2000 versus the prior year quarter resulted in higher production-based compensation to Private Client Group financial advisors, and higher performance-based compensation. The ratio of compensation and benefits as a percent of net revenues increased to 59.5 percent versus 58.5 percent in the prior year quarter. All other operating expenses increased $75.9 million, or 27.0 percent to $357.1 million, as compared to $281.2 million for the prior year quarter. Office and equipment expenses increased $15.1 million, or 18.6 percent principally due to an increase in office space and equipment necessary to support the additional headcount, as well as normal escalation costs. Professional services expenses increased $19.0 million, or 62.3 percent principally due to consultants used in the Company's advanced technology implementation, recruiting fees and other consulting expenses. Business development expenses increased $15.0 million, or 63.0 percent reflecting higher promotional costs associated with PaineWebber EDGE and PaineWebber InsightOne and other expenses associated with increased business activities. The ratio of non-compensation expenses as a percentage of net revenues was 22.4 percent for the quarter ended March 31, 2000 compared to 21.4 percent for the prior year quarter. The effective income tax rate was 36.5 percent for the quarter ended March 31, 2000 which was comparable to the 36.4 percent from the prior year quarter. 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. 15 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity The Company maintains a highly liquid balance sheet with the majority of assets consisting of trading assets, securities purchased under agreements to resell, securities borrowed, and receivables from clients, brokers and dealers, which are readily convertible into cash. The nature of the Company's business as a securities dealer results in carrying significant levels of trading assets and liabilities in order to meet its client and proprietary trading needs. The Company's total assets may fluctuate from period to period as the result of changes in the level of trading positions held to facilitate client transactions, the volume of resale and repurchase transactions, and proprietary trading strategies. These fluctuations depend significantly upon economic and market conditions, and transactional volume. The Company's total assets at March 31, 2000 were $63.5 billion compared to $61.6 billion at December 31, 1999, primarily attributable to an increase in receivables from clients and financial instruments owned partially offset by lower securities borrowed and securities received as collateral. The majority of the Company's assets are financed by daily operations such as securities sold under agreements to repurchase, free credit balances in client accounts and securities lending activity. The Company regularly reviews its mix of assets and liabilities to maximize self-funding. Additional financing sources are available through bank loans and commercial paper, committed and uncommitted lines of credit, and long-term borrowings. The Company maintains committed and uncommitted credit facilities from a diverse group of banks. The Company has a $1.2 billion unsecured revolving credit agreement, which extends through September 2000, with provisions for renewal through 2001. Certain of the Company's subsidiaries also have a secured revolving credit facility to provide up to an aggregate of $1.0 billion through August 2000. The secured borrowings under this facility can be collateralized using a variety of securities. The facilities are available for general corporate purposes and are tested on a regular basis. At March 31, 2000, there were no outstanding borrowings under either facility. Additionally, the Company had $4.9 billion in uncommitted lines of credit at March 31, 2000. The Company maintains public shelf registration statements with the SEC for the issuance of debt securities of the Company and for the issuance of preferred securities of PWG Capital Trusts III, IV and V ("Preferred Trust Securities"), business trusts formed under the Delaware law which are wholly owned subsidiaries of the Company. During the first quarter of 2000, the Company issued $124.4 million of debt under these registration statements. At March 31, 2000, the Company had $914.2 million in debt securities available for issuance under a shelf registration statement and $706.2 million in Preferred Trust Securities and debt securities of the Company available for issuance under another registration statement. Capital Resources and Capital Adequacy The Company's businesses are capital intensive. In addition to a funding policy that provides for diversification of funding sources and maximization of liquidity, the Company maintains a strong capital base. The Company's total capital base, which includes long-term borrowings, Preferred Trust Securities and stockholders' equity, was approximately $8.5 billion at March 31, 2000 and December 31, 1999. The composition of total capital changed due to a net decrease in long-term borrowings of $108.9 million offset by a net increase in stockholders' equity of $123.2 million. The net decrease in long-term borrowings primarily reflected the maturity of $200 million U.S dollar-denominated 7 percent senior notes on March 1, 2000 and net maturities of U.S dollar-denominated medium-term notes of $56.0 million, partially offset by the issuance of $85.5 million non-U.S. dollar-denominated 1.27 percent medium-term notes due on March 13, 2003. The increase in stockholders' equity was primarily the result of net income for the three months ended March 31, 2000 of $176.3 million and the issuance of approximately 2,473,000 shares of common stock related to employee compensation and stock purchase programs. Issuances and tax credits related to these programs had the net effect of increasing equity capital by $76.5 million in the first quarter of 2000. These increases were offset by the repurchase in the first three months of 2000 of approximately 2,930,000 shares of common stock for $111.6 million and dividends paid and accrued of $17.4 million. At March 31, 2000, the remaining number of shares authorized to be repurchased, in the open market or otherwise, under the Company's common stock repurchase program was approximately 34 million. 16 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On May 4, 2000, the Board of Directors declared a regular quarterly cash dividend on the Company's common stock of $0.12 per share payable on July 5, 2000 to stockholders of record on June 5, 2000. PWI is subject to the net capital requirements of the Securities and Exchange Commission, the New York Stock Exchange, Inc. and the Commodity Futures Trading Commission which are designed to measure the financial soundness and liquidity of broker-dealers. PWI has consistently maintained net capital in excess of the minimum requirements imposed by these agencies. In addition, the Company has other banking and securities subsidiaries, both domestic and foreign, which have also consistently maintained net regulatory capital in excess of requirements. Merchant Banking and Highly Leveraged Transactions In connection with its merchant banking, principal investing, commercial real estate, and asset finance activities, the Company has provided financing and made investments in companies and other entities, some of which are involved in highly leveraged transactions. Positions taken or commitments made by the Company may involve credit or market risk from any one issuer or industry. At March 31, 2000, the Company had investments which were affected by liquidity, reorganization or restructuring issues amounting to $171.2 million. These investments have not had a material effect on the Company's results of operations. The Company's activities include underwriting and market-making transactions in high-yield corporate debt and non-investment-grade mortgage-backed securities, and emerging market securities (collectively, "high-yield securities"). These securities generally involve greater risks than investment-grade corporate debt securities because these issuers usually have high levels of indebtedness and lower credit ratings and are, therefore, more vulnerable to general economic conditions. At March 31, 2000, the Company held $468.3 million of high-yield securities, with approximately 21 percent 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 principal transactions revenues. These high-yield securities have not had a material effect on the Company's results of operations. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument is a contractual agreement between counterparties that derives its value from changes in the value of some underlying asset such as the price of another security, interest rates, currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P 500), or other value referenced in the contract. Derivatives, such as futures, certain option contracts and structured products (e.g. indexed warrants) are traded on exchanges, while derivatives such as forward contracts, certain option contracts, interest rate swaps, caps and floors, and other structured products are negotiated in over-the-counter markets. In the normal course of business, the Company engages in a variety of derivative transactions in connection with its proprietary trading activities and asset and liability management, as well as on behalf of its clients. As a dealer, the Company regularly makes a market in and trades a variety of securities. The Company is also engaged in creating structured products that are sold to clients. In connection with these activities, the Company attempts to reduce its exposure to market risk by entering into offsetting hedging transactions, which may include derivative financial instruments. The Company also enters into interest rate swap contracts to manage the interest rate characteristics of its assets and liabilities. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The notional amount of a derivative contract is used to measure the volume of activity and is not reflected on the Condensed Consolidated Statement of Financial Condition. The Company had off-balance-sheet derivative contracts outstanding with gross notional amounts of $60.6 billion and $50.5 billion at March 31, 2000 and December 31, 1999, respectively. These amounts included $35.4 billion and $30.9 billion, respectively, related to "to be announced" mortgage-backed securities requiring forward settlement. Also included in these amounts were $3.9 billion and $4.2 billion notional amounts of interest rate swap agreements used to change the interest rate characteristics of the Company's fixed rate debt at March 31, 2000 and December 31, 1999, respectively. For further discussion on the Company's derivative financial instruments, see Note 5 in the Notes to Condensed Consolidated Financial Statements. The Company records any unrealized gains and losses on its derivative contracts used in a trading capacity by marking-to-market the contracts on a daily basis. The unrealized gain or loss is recorded on the Condensed Consolidated Statements of Financial Condition with the related profit or loss reflected in principal transactions revenues. The Company accrues interest income and expense on interest rate swap agreements used to change the interest rate characteristics of the Company's fixed rate debt. These interest rate swap agreements had the effect of reducing net interest expense on the Company's fixed rate debt by $0.3 million and $5.8 million for the three months ended March 31, 2000 and 1999, respectively. The Company had no deferred gains or losses recorded at March 31, 2000 and December 31, 1999 related to terminated swap agreements on the Company's long-term borrowings. The fair value of an exchange-traded derivative financial instrument is determined by quoted market prices, while over-the-counter derivatives are valued based upon pricing models which consider time value and volatility, as well as other economic factors. The fair values of the Company's derivative financial instruments held for trading purposes at March 31, 2000 were $275.2 million and $201.5 million for assets and liabilities, respectively, and are reflected on the Condensed Consolidated Statements of Financial Condition. The fair values of these instruments at December 31, 1999 were $392.7 million and $215.1 million for assets and liabilities, respectively. The Company's exposure to market risk relates to changes in interest rates, equity prices, foreign currency exchange rates or the market values of the assets underlying the financial instruments. The Company's exposure to credit risk at any point is represented by the fair value or replacement cost on contracts in which the Company has recorded an unrealized gain. At March 31, 2000 and December 31, 1999, the fair values amounted to $275.2 million and $392.7 million, respectively. The risks inherent in derivative financial instruments are managed consistent with the Company's overall risk management policies. (See Risk Management section below) RISK MANAGEMENT Risk is an inherent part of the Company's principal business activities. Managing risk is critical to the Company's profitability and to reducing the likelihood of earnings volatility. The Company's risk management policies and procedures have been established to continually identify, monitor and manage risk. The Company's principal risks are market, credit, liquidity, legal and operating risks. Included below is a discussion on market risk. For further discussion on the Company's principal risks, see the Company's 1999 Annual Report to Stockholders. The Company seeks to manage risk and its impact on earnings volatility through strategic planning and by focusing on the diversification of its business activities. Through capital allocation, and the establishment of trading limits by product and credit limits by counterparty, the Company manages the risk associated with the various businesses. The Company may reallocate or deploy capital to the business groups based upon changes in market conditions or opportunities in the marketplace that are consistent with the Company's long-term strategy. The discussion of the Company's principal risks and the estimated amounts of the Company's market risk exposure generated from the sensitivity analysis performed by the Company are forward-looking statements assuming certain adverse conditions occur. Actual results in the future may differ materially from these projected results due to actual events in the markets in which the Company operates and other factors. The analysis methods used by the Company to assess and mitigate risks discussed below should not be considered projections of future events or losses. Market Risk All financial instruments involve market risk. Market risk is the potential change in value of the financial instrument caused by unfavorable changes in interest rates, equity prices and foreign currency exchange rates. Market risk is inherent to both derivative and non-derivative financial instruments. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company actively monitors its market risk profile through a variety of control procedures including market risk modeling, review of trading positions and hedging strategies, and monitoring adherence to established limits. Each department's trading positions, exposures, profits and losses, and trading strategies are reviewed by the senior management of each business group. Independent of the trading departments is a risk management group. The Company's risk management group reviews the Company's risk profile and adherence to established trading limits, and aids in the development of risk management policies. In addition, the Company has in place committees and management controls to review inventory positions, other asset accounts and asset agings on a regular basis. Trading position and exposure limits are established by the Asset/Liability Management Committee, which meets regularly and is comprised of senior corporate and business group managers. The following is a discussion of the Company's primary market risk exposures at March 31, 2000 and December 31, 1999 and how those exposures are managed: Interest Rate Risk In connection with the Company's dealer activities, the Company is exposed to interest rate risk due to changes in the level or volatility of interest rates, changes in the yield curve, mortgage prepayments and credit spreads. The Company attempts to mitigate its exposure to interest rate risk by entering into hedging transactions such as U.S. government and Eurodollar forwards and futures contracts, options, and interest rate swap and cap agreements. The Company also issues fixed rate instruments in connection with its nontrading activities, which expose the Company to interest rate risk. The Company enters into interest rate swap agreements that are designed to mitigate its exposure by effectively converting its fixed rate liabilities into floating rate liabilities. Equity Price Risk In connection with the Company's dealer activities, the Company buys and sells equity and equity derivative instruments. The Company is exposed to equity price risk due to changes in the level or volatility of equity prices. The Company attempts to mitigate its exposure to equity price risk by entering into hedging transactions including equity option agreements. Sensitivity Analysis For purposes of the SEC disclosure requirements, the Company has elected to use a sensitivity approach to express the potential loss in future earnings of its financial instruments. In preparing the analysis, the Company has combined both derivative and non-derivative financial instruments held for trading purposes with those held for purposes other than trading because the amounts were not material. The sensitivity calculation employed to analyze interest rate risk on its fixed income financial instruments was based on a proprietary methodology which converted substantially all the Company's interest rate sensitive financial instruments at March 31, 2000 and December 31, 1999, into a uniform benchmark (a ten year U.S. Treasury note equivalent), and evaluated the impact assuming an 11 basis point change to the ten-year U.S. Treasury note at March 31, 2000 and December 31, 1999, respectively. The hypothetical basis point change was derived from a proprietary model which uses a one-day interval and a 95 percent confidence level, and was based on historical data over a one-year period. This analysis does not consider other factors that may influence these results, such as credit spread risk, prepayment risk on mortgage-backed securities or changes in the shape of the yield curve. The sensitivity calculation employed to analyze equity price risk on its equity financial instruments was based on a proprietary model which stress tests the firm inventory positions by shocking those positions for a two standard deviation move in the market (95 percent confidence interval) using historical data over a one-year period. Based upon the aforementioned methodologies, the Company's potential daily loss in future earnings at March 31, 2000 was approximately $5 million and $0.3 million for interest rate risk and equity price risk, respectively, and the Company's potential daily loss in future earnings at December 31, 1999 was approximately $3 million and $0.1 million for interest rate risk and equity price risk, respectively. 19 21 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS No significant events have occurred since the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Proxies for the Annual meeting of Stockholders held on May 4, 2000 were solicited by the Company pursuant to Regulation 14A of the Securities Act of 1934, as amended. (c) Matters voted upon at the Annual Meeting of Stockholders: (1) The election of five directors to the Board of Directors to hold office for a term of three years. There was no solicitation in opposition of the nominees and all such nominees were elected. There were no broker non-votes with respect to the election of Directors.
Votes for Votes Withheld --------- -------------- E. Garrett Bewkes, Jr. 131,827,835 4,429,256 Frank P. Doyle 132,455,496 3,801,595 Naoshi Kiyono 115,297,428 20,959,663 Edward Randall, III 133,010,855 3,246,236 Ken-ichi Sekiguchi 132,969,423 3,287,668
(2) The approval to amend the Restated Certificate of Incorporation of Paine Webber Group Inc. to authorize the issuance of up to 150,000,000 shares of Non-Voting Common Stock, par value $1.00 per share. Votes for: 110,256,096 Votes against: 6,688,277 Abstentions: 671,390 (3) The ratification of the selection by the Board of Directors of Ernst & Young LLP as the Company's independent public accountants for the 2000 fiscal year. Votes for: 135,524,877 Votes against: 373,208 Abstentions: 359,006 20 22 PART II - OTHER INFORMATION (continued) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 12.1 - Computation of Ratio of Earnings to Fixed Charges Exhibit 12.2 - Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K dated April 25, 2000 with the Securities and Exchange Commission reporting under "Item 5 - Other Events" and "Item 7 - Exhibits" relating to the Company's press release which, among other things, reported financial results for the three month period ending March 31, 2000. The Company filed a Current Report on Form 8-K dated May 5, 2000 with the Securities and Exchange Commission reporting under "Item 5 - Other Events" and "Item 7 - Exhibits" relating to the Company's press release which reported that the Company entered into an agreement and plan of merger with J.C. Bradford & Co., L.L.C. pursuant to which a subsidiary of the Registrant will merge with and into J.C. Bradford. 21 23 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: May 15, 2000 By: /s/ Jerome T. Fadden Jerome T. Fadden Senior Vice President and Chief Financial Officer (principal financial and accounting officer) 22 EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 PAINE WEBBER GROUP INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands of dollars)
Three Months Years Ended December 31, Ended March 31, ------------------------------------------------------------------------- 2000 (1) 1999 (1) 1998 (1) 1997 (1) 1996 (1) 1995 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes $ 282,158 $1,002,558 $ 682,763 $ 644,075 $ 558,999 $ 102,677 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 816,077 2,564,822 2,876,712 2,573,582 1,971,788 1,969,811 Interest factor in rents 16,225 61,322 56,139 53,665 54,537 59,491 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 832,302 2,626,144 2,932,851 2,627,247 2,026,325 2,029,302 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $1,114,460 $3,628,702 $3,615,614 $3,271,322 $2,585,324 $2,131,979 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.3 1.4 1.2 1.2 1.3 1.1 ========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before taxes and fixed charges. "Fixed charges" consist principally of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings, preferred trust securities and that portion of rental expense estimated to be representative of the interest factor. (1) Income before taxes includes minority interest in wholly owned subsidiary trusts. EX-12.2 3 RATIO OF EARNINGS TO COMBINED FIXED CHARGES 1 EXHIBIT 12.2 PAINE WEBBER GROUP INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (In thousands of dollars)
Three Months Years Ended December 31, Ended March 31, ------------------------------------------------------------------------ 2000 (1) 1999 (1) 1998 (1) 1997 (1) 1996 (1) 1995 ---------- ---------- ---------- ---------- ---------- --------- Income before taxes $ 282,158 $1,002,558 $ 682,763 $ 644,075 $ 558,999 $ 102,677 ---------- ---------- ---------- ---------- ---------- ---------- Preferred stock dividends -- 129,689(2) 35,433 44,186 43,712 36,260 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 816,077 2,564,822 2,876,712 2,573,582 1,971,788 1,969,811 Interest factor in rents 16,225 61,322 56,139 53,665 54,537 59,491 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 832,302 2,626,144 2,932,851 2,627,247 2,026,325 2,029,302 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends 832,302 2,755,833 2,968,284 2,671,433 2,070,037 2,065,562 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $1,114,460 $3,628,702 $3,615,614 $3,271,322 $2,585,324 $2,131,979 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges and preferred stock dividends 1.3 1.3 1.2 1.2 1.2 1.0 ========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to combined fixed charges and preferred stock dividends (tax effected), "earnings" consist of income before taxes and fixed charges. "Fixed charges" consist principally of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings, preferred trust securities and that portion of rental expense estimated to be representative of the interest factor. (1) Income before taxes includes minority interest in wholly owned subsidiary trusts (2) Amount includes a charge to equity of $59,883 resulting from the redemption of preferred stock on December 16, 1999. EX-27 4 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF PAINE WEBBER GROUP INC. FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 MAR-31-2000 1,136,655 11,363,652 15,873,737 10,129,834 22,467,838 628,310 63,514,923 1,855,495 8,239,030 27,762,648 7,605,308 5,732,661 5,114,910 393,750 0 194,530 2,845,881 63,514,923 309,289 981,547 676,172 122,180 278,288 808,016 949,786 290,219 290,219 0 0 176,349 1.22 1.16
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