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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
Commission File No. 1-7410
MELLON FINANCIAL CORPORATION
(formerly Mellon Bank Corporation)
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Mellon Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code -- (412) 234-5000
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class March 31, 2000
----- --------------
Common Stock, $.50 par value 491,209,547
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TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
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Financial Highlights 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Items 2 and 3) 3
Financial Statements (Item 1):
Consolidated Income Statement - Five Quarter Trend 39
Consolidated Balance Sheet 41
Consolidated Statement of Cash Flows 42
Consolidated Statement of Changes in Shareholders' Equity 44
Notes to Financial Statements 45
Part II - Other Information
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Legal Proceedings (Item 1) 51
Changes in Securities and Use of Proceeds (Item 2) 51
Exhibits and Reports on Form 8-K (Item 6) 51
Signature 53
Corporate Information 54
Index to Exhibits 55
Cautionary Statement
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</TABLE>
This Quarterly Report on Form 10-Q contains statements relating to future
results of the Corporation that are considered "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, simulation of changes in
interest rates; litigation results; and anticipated fees and earnings per share
from a long-term contract with a third party. Actual results may differ
materially from those expressed or implied as a result of certain risks and
uncertainties, including, but not limited to, changes in political and economic
conditions; competitive product and pricing pressures within the Corporation's
markets; equity and fixed-income market fluctuations; personal and corporate
customers' bankruptcies; inflation; acquisitions and integrations of acquired
businesses; technological change; changes in law; changes in fiscal, monetary,
regulatory, trade and tax policies and laws; monetary fluctuations; success in
gaining regulatory approvals when required; success in the timely development of
new products and services; interest rate fluctuations; consumer spending and
saving habits; levels of third parties' funds under management; as well as other
risks and uncertainties detailed elsewhere in this quarterly report or from time
to time in the filings of the Corporation with the Securities and Exchange
Commission. Such forward-looking statements speak only as of the date on which
such statements are made, and the Corporation undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events.
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MELLON FINANCIAL CORPORATION (and its subsidiaries)
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<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS Quarter ended
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(dollar amounts in millions, except per share MARCH 31, Dec. 31, March 31,
amounts or unless otherwise noted) 2000 1999 1999
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<S> <C> <C> <C>
FINANCIAL RESULTS
Diluted earnings per share:
Operating (a) $ .50 $ .48 $ .43
Cash operating (a)(b) .56 .53 .49
Reported .50 .47 .48
Net income:
Operating (a) $253 $245 $231
Cash operating (a)(b) 282 274 260
Reported 253 240 254
Return on equity (annualized):
Operating (a) 26.0% 23.5% 20.9%
Cash operating (a)(b) 51.8 45.6 40.4
Reported 26.0 23.1 23.1
Return on assets (annualized):
Operating (a) 2.15% 2.05% 1.84%
Cash operating (a)(b) 2.50 2.38 2.16
Reported 2.15 2.01 2.03
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SELECTED KEY DATA
Fee revenue as a percentage of net interest and fee revenue (FTE) (c) 70% 69% 68%
Trust and investment fee revenue as a percentage of net interest
and fee revenue (FTE) 50% 49% 42%
Efficiency ratio excluding amortization of intangibles (d) 59% 59% 62%
Assets under management at period end (in billions) $ 511 $ 488 $ 447
Assets under administration or custody at period end (in billions) 2,261 2,198 1,928
Dividends paid per common share $ .20 $ .20 $ .18
Dividends paid on common stock 100 102 94
Closing common stock price per share at period end $ 29.50 $ 34.06 $ 35.19
Market capitalization at period end 14,491 17,052 18,335
Average common shares and equivalents outstanding -
diluted (in thousands) 502,082 512,496 531,288
CAPITAL RATIOS AT PERIOD END
Shareholders' equity to assets:
Reported 8.13% 8.38% 9.12%
Tangible (b) 4.80 4.96 5.60
Tier I capital 6.49 6.60 6.89
Total (Tier I plus Tier II) capital 10.61 10.76 11.22
Leverage capital 6.61 6.72 6.60
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</TABLE>
(continued)
2
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MELLON FINANCIAL CORPORATION (and its subsidiaries)
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<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED) Quarter ended
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MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 2000 1999 1999
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<S> <C> <C> <C>
AVERAGE BALANCES FOR THE PERIOD
Loans $29,283 $29,159 $31,467
Total interest-earning assets 37,399 38,073 39,811
Total assets 47,205 47,451 50,677
Total tangible assets (b) 45,419 45,640 48,755
Deposits 32,220 32,540 34,087
Notes and debentures 3,453 3,585 3,351
Trust-preferred securities 991 991 991
Total shareholders' equity 3,905 4,133 4,469
Tangible shareholders' equity (b) 2,190 2,388 2,608
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</TABLE>
(a) Operating results equaled reported results in the first quarter of 2000.
Operating and cash operating results for the fourth quarter of 1999 exclude
a $5 million after-tax net loss from divestitures. The first quarter of
1999 excludes a $49 million after-tax net gain from divestitures and a $26
million after-tax charge for the cumulative effect of a change in
accounting principle.
(b) See page 13 for a definition of amounts and ratios.
(c) See page 14 for the definition of this ratio.
(d) See page 22 for the definition of this ratio.
Note: All calculations are based on unrounded numbers. FTE denotes presentation
on a fully taxable equivalent basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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First quarter 2000 diluted earnings per share totaled $.50, an increase of 16%
compared with $.43 per share, on an operating basis, in the first quarter of
1999. These results were driven in large part by a 17% increase in trust and
investment fee revenue. Net income in the first quarter of 2000 was $253
million, an increase of 10% compared with $231 million, on an operating basis,
in the first quarter of 1999. Annualized return on equity and return on assets
were 26.0% and 2.15%, respectively, for the first quarter of 2000, compared with
20.9% and 1.84%, respectively, on an operating basis for the first quarter of
1999. The first quarter 1999 results included a $49 million after-tax net gain
from divestitures and a $26 million after-tax charge for the cumulative effect
of a change in accounting principle. Including these items, first quarter 1999
diluted earnings per share totaled $.48, net income totaled $254 million, return
on equity was 23.1% and the return on assets was 2.03%. In the fourth quarter of
1999, diluted earnings per share totaled $.47 and net income was $240 million.
Diluted cash earnings per share totaled $.56 in the first quarter of 2000, an
increase of 14%, compared with $.49 per share, on an operating basis, in the
first quarter of 1999. Cash net income was $282 million, an increase of 8%
compared with $260 million, on an operating basis, in the first quarter of 1999.
Annualized cash return on tangible common equity and cash return on tangible
assets were 51.8% and 2.50%, respectively, in the first quarter of 2000,
compared with 40.4% and 2.16%, respectively, on an operating basis in the first
quarter of 1999. In the fourth quarter of 1999, diluted cash earnings per share
totaled $.53 and cash net income was $274 million, on an operating basis.
3
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OVERVIEW (CONTINUED)
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Fee revenue totaled 70% of net interest and fee revenue, on a fully taxable
equivalent basis, in the first quarter of 2000 compared with 68% in the first
quarter of 1999. Trust and investment fee revenue totaled 50% of net interest
and fee revenue, on a fully taxable equivalent basis, in the first quarter of
2000 compared with 42% in the first quarter of 1999. Fee revenue of $798 million
in the first quarter of 2000 was impacted by the 1999 credit card, network
services and mortgage banking divestitures. Excluding the effect of these
divestitures, fee revenue increased 13% compared with the first quarter of 1999,
primarily due to a 17% increase in trust and investment fee revenue. Fee revenue
increased 21%, on an annualized basis, in the first quarter of 2000 compared
with the fourth quarter of 1999, primarily resulting from a 23% increase, on an
annualized basis, in trust and investment fee revenue. At March 31, 2000, assets
under management totaled $511 billion, a 14% increase from March 31, 1999, and
assets under administration or custody totaled $2,261 billion, a 17% increase
from March 31, 1999.
Net interest revenue on a fully taxable equivalent basis for the first quarter
of 2000 was $351 million, down $20 million compared with the first quarter of
1999 and down $2 million from the fourth quarter of 1999. The decrease compared
with the first quarter of 1999 primarily resulted from the divestitures of the
credit card and mortgage businesses. Excluding the net interest revenue
generated by these businesses, net interest revenue increased 1% compared with
the first quarter of 1999, reflecting the positive impact of interest free funds
in a rising rate environment, offset in part by higher funding costs related to
the repurchase of common stock. The decrease compared with the fourth quarter of
1999 reflected a lower level of interest-earnings assets, primarily lower
yielding assets, as well as higher funding costs related to the repurchase of
common stock, and one less day in the first quarter of 2000 compared to the
fourth quarter of 1999.
Operating expense before trust-preferred securities expense and net revenue from
acquired property for the first quarter of 2000 was $719 million compared with
$760 million in the first quarter of 1999. Excluding the effect of divestitures,
operating expense before trust-preferred securities expense and net revenue from
acquired property increased 9% compared with the first quarter of 1999,
reflecting higher incentive expense and other expenses in support of business
growth. Operating expense before trust-preferred securities expense and net
revenue from acquired property increased $20 million compared with the fourth
quarter of 1999, primarily due to higher base salary expense, and incentive
expense in business lines with strong revenue growth.
Credit quality expense was $9 million in the first quarter of 2000, compared
with $15 million in the first quarter of 1999 and $6 million in the fourth
quarter of 1999. The lower expense in the first quarter of 2000 compared with
the prior-year period resulted from a lower provision for credit losses
following the divestiture of the credit card business. Net credit losses were
$11 million in the first quarter of 2000, compared with $17 million in the first
quarter of 1999 and $12 million in the fourth quarter of 1999.
Nonperforming assets totaled $210 million at March 31, 2000, compared with $159
million at Dec. 31, 1999, $169 million at Sept. 30, 1999, and $161 million at
March 31, 1999. The higher level of nonperforming assets, compared with Dec. 31,
1999, primarily resulted from the addition to nonperforming status of commercial
loans to a health care provider and its affiliate companies, offset in part by
credit losses. The Corporation's ratio of nonperforming assets to total loans
and net acquired property was .74% at March 31, 2000, compared with .53% at Dec.
31, 1999, .58% at Sept. 30, 1999, and .53% at March 31, 1999.
4
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SIGNIFICANT FINANCIAL EVENTS
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Common dividend increased 10%
On April 18, 2000, the Corporation announced a 10% increase in its quarterly
common stock dividend to $.22 per share. This cash dividend on the Corporation's
common stock is payable May 15, 2000, to shareholders of record at the close of
business on April 28, 2000. This is the 10th quarterly common dividend increase
that the Corporation has announced since the beginning of 1993, resulting in a
total common dividend per share increase of approximately 275%.
Repurchase of common stock
During the first quarter of 2000, 10.8 million shares of common stock were
repurchased, with an additional 4 million shares available for repurchase under
a 25 million share repurchase program authorized by the board of directors in
September 1999. These repurchased shares had a total purchase price of $336
million for an average share price of $31.07 per share.
Average common stock and stock equivalents used in computation of diluted
earnings per share totaled 502.1 million shares in the first quarter of 2000,
compared with 531.3 million shares in the first quarter of 1999. The
Corporation's average level of treasury stock was $934 million higher in the
first quarter of 2000 compared with the first quarter of 1999. After giving
effect to funding the higher level of treasury stock, valued at a short-term
funding rate, the lower share count increased diluted earnings per share by
approximately 2%, while ongoing business growth increased diluted earnings per
share by approximately 14%, compared to first quarter 1999 operating results.
5
<PAGE> 7
BUSINESS SECTORS
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FOR THE QUARTER ENDED MARCH 31,
<TABLE>
<CAPTION>
Global Global Regional Specialized
Wealth Investment Investment Consumer Commercial
Management Management Services Banking Banking
(dollar amounts in millions, -------------- ---------------- ------------- --------------- -------------
averages in billions) 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net interest revenue (expense) $ 32 $ 27 $ (3) $ (3) $ 23 $ 20 $ 118 $ 126 $ 101 $ 99
Fee and other revenue 78 76 304 236 245 216 37 36 42 32
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Total revenue 110 103 301 233 268 236 155 162 143 131
Credit quality expense (revenue) -- (1) -- -- -- -- (2) 2 3 4
Operating expense:
Intangible amortization 4 4 7 7 3 3 13 13 8 8
Trust-preferred securities 1 1 -- -- -- -- 1 1 3 3
Other 62 59 179 150 195 175 93 100 56 53
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Total operating expense 67 64 186 157 198 178 107 114 67 64
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Income (loss) before taxes and
cumulative effect of accounting
change 43 40 115 76 70 58 50 46 73 63
Income taxes (benefits) 17 15 46 32 26 23 19 18 27 24
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Income (loss) before cumulative
effect of accounting change 26 25 69 44 44 35 31 28 46 39
Cumulative effect of accounting
change (a) -- -- -- -- -- -- -- -- -- --
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Net income (loss) $ 26 $ 25 $ 69 $ 44 $ 44 $ 35 $ 31 $ 28 $ 46 $ 39
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Average assets $4.5 $ 3.7 $ 2.6 $ 1.9 $4.5 $4.0 $14.3 $14.2 $13.1 $11.7
Average common equity $0.3 $ 0.2 $ 0.6 $ 0.5 $0.5 $0.6 $ 0.7 $ 0.7 $ 0.8 $ 0.7
Average Tier I preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 0.2 $ 0.2
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Cash net income (loss) (b) $ 30 $ 29 $ 74 $ 50 $ 47 $ 37 $ 41 $ 38 $ 52 $ 45
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Return on common equity (c) 36% 41% 51% 36% 33% 25% 18% 16% 23% 23%
Return on assets (c) 2.33% 2.66% NM NM NM NM 0.88% 0.81% 1.40% 1.38%
Pretax operating margin 39% 39% 38% 32% 26% 25% 32% 28% 51% 49%
Pretax operating margin (d) 43% 43% 41% 36% 27% 26% 41% 37% 59% 57%
Efficiency ratio (d) 56% 57% 59% 64% 73% 74% 60% 62% 39% 40%
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</TABLE>
(a) The cumulative effect of an accounting change has not been allocated to any
of the Corporation's reportable sectors.
(b) Excludes the after-tax impact of the amortization of goodwill and other
intangibles from purchase acquisitions.
(c) Ratios are annualized.
(d) Excludes amortization of intangibles and trust-preferred securities
expense.
(e) Includes an $83 million pre-tax net gain from divestitures.
(f) Ratios exclude the impact of net divestiture gains.
NM -- Not meaningful
In the second quarter of 1999, the Corporation realigned its business sectors to
better reflect the Corporation's organizational structure, the characteristics
of its products and services, and the customer segments to which those products
and services are delivered. Lines of business that offer similar or related
products and services to common or similar customer segments have been combined
into six major business sectors. The first quarter of 1999 has been restated. In
addition, the effect of Divestitures has been displayed separately, as discussed
further on page 12. The results of the Corporation's major business sectors are
presented and analyzed on an internal management reporting basis. Net interest
revenue, fee revenue and income taxes differ from the amounts shown in the
Consolidated Income Statement because amounts presented in Business sectors are
on a taxable equivalent basis. There is no
6
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<TABLE>
<CAPTION>
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Large Real Estate
Corporate Total Core Workout/Other Consolidated
Banking Sectors Divestitures Activity Results
----------------- ----------------- ------------------- ----------------- ---------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 66 $ 64 $ 337 $ 333 $ -- $ 28 $ 14 $ 10 $ 351 $ 371
69 62 775 658 24 197 (e) 7 27 806 882
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135 126 1,112 991 24 225 21 37 1,157 1,253
10 -- 11 5 -- 10 (2) -- 9 15
-- -- 35 35 1 2 1 -- 37 37
5 5 10 10 -- -- 10 10 20 20
76 78 661 615 1 107 20 1 682 723
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81 83 706 660 2 109 31 11 739 780
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44 43 395 326 22 106 (8) 26 409 458
16 15 151 127 8 49 (3) 2 156 178
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28 28 244 199 14 57 (5) 24 253 280
-- -- -- -- -- -- -- -- -- (26)
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$ 28 $ 28 $ 244 $ 199 $ 14 $ 57 $ (5) $ 24 $ 253 $ 254
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$ 7.9 $ 9.6 $ 46.9 $45.1 $0.2 $4.1 $0.1 $1.5 $ 47.2 $ 50.7
$ 0.9 $ 1.0 $ 3.8 $ 3.7 $ -- $0.3 $0.1 $0.5 $ 3.9 $ 4.5
$ 0.3 $ 0.3 $ 0.5 $ 0.5 $ -- $ -- $0.5 $0.5 $ 1.0 $ 1.0
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$ 28 $ 28 $ 272 $ 227 $ 15 $ 58 $ (5) $ 24 $ 282 $ 283
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13% 11% 26% 22% NM NM NM NM 26% 23%
1.44% 1.15% 2.09% 1.78% NM NM NM NM 2.15% 2.03%
32% 34% 36% 33% NM NM NM NM 35% 32% (f)
36% 39% 40% 37% NM NM NM NM 40% 37% (f)
57% 61% 59% 62% NM NM NM NM 59% 62% (f)
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</TABLE>
intercompany profit or loss on intersector activity. In addition, the accounting
policies of the business sectors are the same as those described in note 1 of
the 1999 Financial Annual Report to Shareholders. Capital is allocated quarterly
using the federal regulatory guidelines, where applicable, as a basis, coupled
with management's judgment regarding the risks inherent in the individual lines
of business. The capital allocations may not be representative of the capital
levels that would be required if these sectors were nonaffiliated business
units.
Following is a discussion of the Corporation's business sectors. In the tables
that follow, the income statement amounts are presented in millions, the assets
under management, administration or custody are period-end market values and are
presented in billions, and the return on common equity is annualized.
7
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BUSINESS SECTORS (CONTINUED)
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<TABLE>
<CAPTION>
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SUMMARY % of Income Average
% of Revenue Before Taxes Return on equity Allocated Equity
--------------- --------------- ---------------- -----------------
1Q00 1Q99 1Q00 1Q99 1Q00 1Q99 1Q00 1Q99
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth sectors 61% 58% 58% 53% 41% 32% $1,412 $1,325
Return sectors 39% 42% 42% 47% 18% 16% $2,829 $2,876
---- ---- ---- ---- ------ ------
Total Core sectors 100% 100% 100% 100% 26% 22% $4,241 $4,201
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</TABLE>
The Corporation manages its business sectors utilizing growth and return
strategies. The sectors managed for growth include businesses which are
predominantly fee-based in nature. The Corporation invests in these businesses
for future growth. The sectors managed for return include the more slowly
growing, traditional banking businesses. These businesses are managed to drive
profitability and return on equity higher, primarily focusing on improving
productivity through continuous re-engineering and effective capital management.
Sectors Managed for Growth
Total revenue for the growth sectors comprised 61% of total core sector revenue
in the first quarter of 2000, compared with 58% in the first quarter of 1999.
Income before taxes represented 58% of core sector pretax income, up from 53% in
the first quarter of 1999.
<TABLE>
<CAPTION>
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1Q 2000 vs. 1Q 1999 Total Revenue Operating Expense Income Before
Growth Growth Taxes Growth
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<S> <C> <C> <C>
Wealth Management 8% 5% 7%
Global Investment Management 29% 18% 52%
Global Investment Services 13% 11% 21%
Total Growth Sectors 19% 13% 31%
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</TABLE>
The growth sectors continued to perform strongly in the first quarter of 2000 as
total revenue for these sectors increased by 19%, and income before taxes
increased by 31%, compared with the prior-year quarter.
Wealth Management
<TABLE>
<CAPTION>
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Growth rates
Quarter ended ------------
------------------------ 1Q 00
MARCH 31, March 31, vs
2000 1999 1Q 99
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<S> <C> <C> <C>
Total revenue $110 $103 8%
Total operating expense $ 67 $ 64 5%
Income before taxes $ 43 $ 40 7%
Return on common equity 36% 41%
Pretax operating margin (a) 43% 43%
Assets under management $ 57 $ 51 11%
Assets under administration or custody $ 37 $ 33 12%
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</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
8
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BUSINESS SECTORS (CONTINUED)
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Wealth Management includes private asset management services, private banking
and origination of jumbo residential mortgages. Income before taxes was $43
million in the first quarter of 2000, up $3 million, or 7%, from the prior-year
period. Revenue increased $7 million, or 8%, as the private asset management
businesses' income before taxes grew by approximately 25% from the prior-year
period, offset in part by lower earnings from jumbo residential mortgage
lending. Earnings from jumbo residential mortgage lending decreased $5 million
compared with the prior-year period primarily due to narrowing spreads and lower
originations. Assets under management increased to $57 billion at March 31, 2000
from $51 billion at March 31, 1999, reflecting a higher level of private assets
under management, due to new business and market appreciation. Operating expense
increased $3 million, or 5%, in support of business growth.
Global Investment Management
<TABLE>
<CAPTION>
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Growth rates
Quarter ended ------------
------------------------ 1Q 00
MARCH 31, March 31, vs
2000 1999 1Q 99
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<S> <C> <C> <C>
Total revenue $301 $233 29%
Total operating expense $186 $157 18%
Income before taxes $115 $ 76 52%
Return on common equity 51% 36%
Pretax operating margin (a) 41% 36%
Assets under management $413 $361 15%
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</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Global Investment Management includes mutual fund management, institutional
asset management and brokerage services. Income before taxes totaled $115
million in the first quarter of 2000, compared with $76 million in the first
quarter of 1999, an increase of $39 million, or 52%. Revenue increased $68
million, or 29%, primarily due to a 16% increase in mutual fund fees, a 31%
increase in institutional asset management fees as well as a 67% increase in
brokerage fees. Assets under management for this sector increased 15% to $413
billion at March 31, 2000, from $361 billion at March 31, 1999, due to new
business and market appreciation. The average net assets of proprietary equity
mutual funds increased $13 billion in the first quarter of 2000 compared to the
first quarter of 1999. Total operating expense increased $29 million, or 18%,
due to higher incentive compensation expense and investments to support business
growth.
Global Investment Services
<TABLE>
<CAPTION>
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Growth rates
Quarter ended ------------
------------------------ 1Q 00
MARCH 31, March 31, vs
2000 1999 1Q 99
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<S> <C> <C> <C>
Total revenue $ 268 $ 236 13%
Total operating expense $ 198 $ 178 11%
Income before taxes $ 70 $ 58 21%
Return on common equity 33% 25%
Pretax operating margin (a) 27% 26%
Assets under management $ 41 $ 35 16%
Assets under administration or custody $2,224 $1,895 17%
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</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
9
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BUSINESS SECTORS (CONTINUED)
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Global Investment Services includes institutional trust and custody, foreign
exchange, securities lending, shareholder services, benefits consulting and
administrative services for employee benefit plans and backoffice outsourcing
for investment managers. This sector also includes substantially all of the
joint ventures, whose results are reported under the equity method of
accounting, which reports the Corporation's share of the results of the joint
ventures on a net basis, rather than reporting the revenues and expenses
separately. Gross fee revenue generated by the joint ventures increased $44
million, or 57%, in the first quarter of 2000 compared with the first quarter of
1999. Income before taxes for this sector totaled $70 million, an increase of
$12 million, or 21%, compared with the prior-year period. The increase was
attributable to a $32 million, or 13%, increase in total revenue due to higher
institutional trust and custody fees, higher foreign exchange fees and improved
securities lending revenue. Partially offsetting this increase was a $20
million, or 11% increase in total operating expenses. Assets under
administration or custody exceeded $2.2 trillion at March 31, 2000, an increase
of 17% from March 31, 1999.
Sectors Managed for Return
<TABLE>
<CAPTION>
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Pretax Operating Return on Average
Margin (a) Common Equity Allocated Equity
----------------- --------------- -----------------
1Q00 1Q99 1Q00 1Q99 1Q00 1Q99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regional Consumer Banking 41% 37% 18% 16% $ 760 $ 759
Specialized Commercial Banking 59% 57% 23% 23% $ 959 $ 852
Large Corporate Banking 36% 39% 13% 11% $1,110 $1,265
------ ------
Total Return Sectors 45% 44% 18% 16% $2,829 $2,876
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</TABLE>
(a) Excluding amortization of intangibles and trust-preferred securities
expense.
The results in the first quarter of 2000 for the return sectors demonstrates the
Corporation's strategy of driving profitability and return on equity higher,
primarily focusing on improving productivity through continuous re-engineering
and effective capital management. The pretax operating margin in the first
quarter of 2000 was 45%, up from 44% in the first quarter of 1999. The
Corporation also continues to aggressively manage capital levels in the return
sectors. Average allocated equity decreased $47 million due to a $155 million
decrease in the Large Corporate Banking sector, in the first quarter of 2000,
and the return on common equity increased to 18%, up 200 basis points from the
first quarter of 1999.
Regional Consumer Banking
<TABLE>
<CAPTION>
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Growth rates
Quarter ended ------------
------------------------ 1Q 00
MARCH 31, March 31, vs
2000 1999 1Q 99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue $155 $162 (4)%
Total operating expense $107 $114 (6)%
Income before taxes $ 50 $ 46 9 %
Return on common equity 18% 16%
Pretax operating margin (a) 41% 37%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
10
<PAGE> 12
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Regional Consumer Banking includes consumer lending and deposit products, direct
banking and sales of insurance products. Income before taxes totaled $50 million
in the first quarter of 2000, an increase of $4 million, or 9%, compared with
the first quarter of 1999. Total revenue decreased $7 million, or 4%, compared
with the prior-year period primarily due to lower net interest revenue while
total operating expense decreased $7 million, or 6%, compared with the
prior-year period reflecting productivity improvements. In addition, credit
quality expense improved by $4 million in the first quarter of 2000. Return on
equity improved by 200 basis points and pretax operating margin improved by 400
basis points in the first quarter of 2000 compared with the first quarter of
1999.
Specialized Commercial Banking
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended ------------
------------------------ 1Q 00
MARCH 31, March 31, vs
2000 1999 1Q 99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue $143 $131 9%
Total operating expense $ 67 $ 64 5%
Income before taxes $ 73 $ 63 15%
Return on common equity 23% 23%
Pretax operating margin (a) 59% 57%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Specialized Commercial Banking includes middle market lending, business banking,
lease financing, commercial real estate lending, insurance premium financing,
asset-based lending and venture capital. Income before taxes totaled $73 million
in the first quarter of 2000, up $10 million, or 15%, from the first quarter of
1999. Mellon Ventures, Inc., the Corporation's venture capital group, recorded
income before taxes of $13 million in the first quarter of 2000 compared with $4
million in the prior-year period. Revenue in this sector increased $12 million,
or 9%, due to the higher equity investment revenue as well as improved net
interest revenue. Operating expense increased $3 million, or 5%, from the
prior-year period, to support business growth.
Large Corporate Banking
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended ------------
------------------------ 1Q 00
MARCH 31, March 31, vs
2000 1999 1Q 99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue $135 $126 7 %
Total operating expense $ 81 $ 83 (2)%
Income before taxes $ 44 $ 43 2 %
Return on common equity 13% 11%
Pretax operating margin (a) 36% 39%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Large Corporate Banking includes cash management, large corporate and
mid-corporate relationship banking, corporate finance and derivative products,
securities underwriting and trading and international banking. Income before
taxes was $44 million for the first quarter of 2000, an increase of $1 million,
or 2%, from the first quarter of 1999. An increase in credit quality expense was
more than offset by revenue
11
<PAGE> 13
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
growth of 7%, and operating expense decrease of 2%. The revenue growth was
driven primarily by the cash management business line, which improved by $10
million, or 13%, in the first quarter of 2000 compared with the first quarter of
1999.
Total Core Sectors
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended ------------
------------------------ 1Q 00
MARCH 31, March 31, vs
2000 1999 1Q 99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue $1,112 $991 12%
Total operating expense $ 706 $660 7%
Income before taxes $ 395 $326 21%
Return on common equity 26% 22%
Pretax operating margin (a) 40% 37%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Income before taxes for the Corporation's core sectors was $395 million in the
first quarter of 2000, an increase of $69 million, or 21%, compared with the
prior-year period. This increase resulted from positive operating leverage as
revenues increased $121 million, or 12%, while operating expense increased only
$46 million, or 7%, and credit quality expense increased $6 million.
Divestitures
For the first quarter of 2000, Divestitures reflects the results of a mutual
fund administration service provided under a long-term contract with a third
party that expires near the end of May 2000. For the first quarter of 1999,
results also include residential and commercial mortgage loan origination and
servicing, credit card, and network services transaction processing.
Divestitures income before taxes was $22 million in the first quarter of 2000
and $106 million in the first quarter of 1999. The first quarter of 1999
includes an $83 million pretax net gain from divestitures.
Real Estate Workout/Other Activity
Real Estate Workout/Other Activity primarily includes business activities that
are not separate lines of business or have not been allocated, for management
reporting purposes, to the lines of business. The Real Estate Workout/Other
Activity sector's pretax loss for the first quarter of 2000 was $8 million,
compared with income of $26 million in the first quarter of 1999. Revenue
primarily reflects earnings on the use of proceeds from the trust-preferred
securities and earnings on capital above that required for the core sectors, and
gains from the sale of assets. Credit quality revenue primarily reflects loan
recoveries from loans to lesser developed countries and gains from the sale of
acquired property. Operating expense includes trust-preferred securities expense
and various expenses for items not attributable to the operations of a business
sector. Average assets primarily include assets of certain support areas not
identified with the major business sectors. Average common and Tier I preferred
equity represents capital in excess of that required for the core sectors.
12
<PAGE> 14
CASH OPERATING RESULTS
- --------------------------------------------------------------------------------
Except for the merger with Dreyfus in 1994, which was accounted for under the
"pooling of interests" method, the Corporation has been required to account for
business combinations under the "purchase" method of accounting. The purchase
method results in the recording of goodwill and other identified intangibles
that are amortized as noncash charges in future years into operating expense.
The pooling of interests method does not result in the recording of goodwill or
intangibles. Since goodwill and intangible amortization expense does not result
in a cash expense, the economic value to shareholders under either accounting
method is the same assuming a given financing mix. Operating results, excluding
the impact of intangibles, are shown in the table below.
<TABLE>
<CAPTION>
CASH OPERATING RESULTS (a)
- ---------------------------------------------------------------------------------------------------------------------------
Quarter ended
------------------------------------------------------
(dollar amounts in millions, except MARCH 31, Dec. 31, March 31,
per share amounts; ratios annualized) 2000 1999 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating net income $ 253 $ 245 $ 231
After-tax impact of amortization of intangibles from
purchase acquisitions 29 29 29
- --------------------------------------------------------------------------------------------------------------------------
Cash operating net income $ 282 $ 274 $ 260
Increase over prior-year period 8% 9% 13%
Cash operating earnings per share - diluted $ .56 $ .53 $ .49
Increase over prior-year period 14% 13% 12%
Average common equity $ 3,905 $ 4,133 $ 4,469
Less: Average goodwill and other identified intangibles,
net of tax benefit (b) (1,786) (1,811) (1,922)
Plus: Average minority interest (c) 71 66 61
- --------------------------------------------------------------------------------------------------------------------------
Average tangible common equity (b) $ 2,190 $ 2,388 $ 2,608
Cash return on tangible common equity (b) 51.8% 45.6% 40.4%
Average total assets $47,205 $47,451 $50,677
Average total tangible assets (b) $45,419 $45,640 $48,755
Cash return on tangible assets (b) 2.50% 2.38% 2.16%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Cash operating results for the fourth quarter of 1999 exclude a $5 million
after-tax net loss from divestitures. The first quarter of 1999 excludes a
$49 million after-tax net gain from divestitures and a $26 million
after-tax charge for the cumulative effect of a change in accounting
principle.
(b) The amount of goodwill and other identified intangibles subtracted from
common equity and total assets is net of $339 million, $349 million and
$374 million, respectively, of average tax benefits related to tax
deductible goodwill and other intangibles.
(c) Primarily relates to Newton.
13
<PAGE> 15
<TABLE>
<CAPTION>
NONINTEREST REVENUE
- -----------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust and investment fee revenue:
Investment management $324 $313 $278
Administration and custody 173 148 147
Benefits consulting 56 67 56
Brokerage fees 25 18 15
- -----------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 578 546 496
Cash management and deposit transaction charges 74 76 72
Foreign currency and securities trading revenue 51 43 43
Financing-related revenue 39 56 49
Equity investment revenue 36 16 23
Mortgage servicing fees 2 2 52
Other 18 20 54
- -----------------------------------------------------------------------------------------------------------------------------
Total fee and other revenue 798 759 789
Net gain (loss) from divestitures -- (7) 83
Gains on the sale of securities -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $798 $752 $872
- -----------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of net interest and
fee revenue (FTE) 70% 69% 68%
Trust and investment fee revenue as a percentage
of net interest and fee revenue (FTE) 50% 49% 42%
- -----------------------------------------------------------------------------------------------------------------------------
Note: Various items, previously reported in other fee revenue, have been
reclassified to mutual fund administration and custody revenue in trust and
investment fee revenue, cash management and deposit transaction charges,
financing-related revenue and equity investment revenue. Prior periods have been
restated and percentages of trust and investment fee revenue to net interest and
fee revenue have been recalculated. For analytical purposes, the term "fee
revenue", as utilized throughout this Report on Form 10-Q, is defined as total
noninterest revenue less gains on the sales of securities and the net gain
(loss) from divestitures.
Memo:
Gross joint venture fee revenue (a) $134 $129 $ 91
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation accounts for its interest in joint ventures under the
equity method of accounting with the net results primarily recorded as
either trust and investment fee revenue or other fee revenue. The gross
joint venture fee revenue is not included in total noninterest revenue
above.
Fee revenue
Fee revenue of $798 million in the first quarter of 2000 was impacted by the
1999 credit card, network services and mortgage banking divestitures. Excluding
these divestitures, fee revenue increased 13% compared with the prior-year
period, primarily due to a 17% increase in trust and investment fee revenue.
Including the trust and investment fee gross revenue generated by the
Corporation's joint ventures, trust and investment fee revenue increased 21%
compared with the first quarter of 1999.
14
<PAGE> 16
<TABLE>
<CAPTION>
NONINTEREST REVENUE (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
1st Qtr. 2000 1st Qtr. 2000
over over
Fee revenue growth 1st Qtr. 1999 4th Qtr. 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trust and investment fee revenue growth 17% 23% (b)
Total fee revenue growth 13% (a) 21% (b)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding the effect of divestitures.
(b) Presented on an annualized basis.
Investment management fee revenue
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended
-----------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed mutual fund fees (a):
Equity funds $ 83 $ 73 $ 61
Taxable money market funds:
Institutional 26 26 25
Individuals 11 9 9
Tax-exempt bond funds 20 21 23
Fixed-income funds 11 12 12
Tax-exempt money market funds 7 7 8
Nonproprietary 8 9 6
- ---------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund fees 166 157 144
Institutional asset 82 81 63
Private asset 76 75 71
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment management fee revenue $324 $313 $278
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of quarterly mutual fund fees waived and fund expense reimbursements of
$9 million, $9 million and $8 million at March 31, 2000, Dec. 31, 1999, and
March 31, 1999, respectively.
Investment management revenue increased $46 million, or 17%, in the first
quarter of 2000, compared with the prior-year period. This increase resulted
from a $22 million, or 16%, increase in mutual fund management revenue, a $19
million, or 31%, increase in institutional asset management revenue and a $5
million, or 7%, increase in private asset management revenue. These increases
resulted from net new business and an increase in the market value of assets
under management. In addition, the increase in institutional asset management
revenue primarily reflects a higher level of performance fees earned by
investment managers as the investment performance of their products exceeded
various benchmarks. The measurement period is generally annually with revenue
recorded in the fourth and first quarters each year.
Mutual fund management fees are based upon the average net assets of each fund.
The average net assets of proprietary funds managed in the first quarter of 2000
were $137 billion, up $12 billion, or 10%, from $125 billion in the first
quarter of 1999 and up $8 billion, or 6%, from $129 billion in the fourth
quarter of 1999. The increases primarily resulted from increases in average net
assets of equity funds. Proprietary equity funds averaged $55 billion in the
first quarter of 2000, compared with $42 billion in the first quarter of 1999
and $49 billion in the fourth quarter of 1999.
15
<PAGE> 17
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
As shown in the table below, the market value of assets under management was
$511 billion at March 31, 2000, a $23 billion, or 5%, increase from $488 billion
at Dec. 31, 1999, and a $64 billion, or 14%, increase from $447 billion at March
31, 1999. In addition to net new business, the market value of assets under
management was also influenced by favorable equity and bond markets in the first
quarter of 2000. A key equity market benchmark, the Standard and Poor's 500
Index, increased 2.0% in the first quarter of 2000. A key bond market benchmark,
the Lehman Brothers Long-Term Government Bond Index, increased 7.8% in the first
quarter of 2000. At March 31, 2000, the market values of these assets managed by
the Corporation were comprised as follows: approximately 50% equities;
approximately 15% fixed income; approximately 20% money market; approximately
10% securities lending cash collateral; and approximately 5% currency overlay
and global fixed-income products.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in billions) 2000 1999 1999 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual fund assets managed:
Equity funds $ 59 $ 54 $ 45 $ 46 $ 43
Taxable money market funds:
Institutional 41 42 38 39 40
Individuals 11 9 10 9 9
Tax-exempt bond funds 14 14 15 16 16
Fixed-income funds 7 7 7 7 8
Tax-exempt money market funds 8 8 7 8 8
Nonproprietary 31 30 26 26 23
- ---------------------------------------------------------------------------------------------------------------------------------
Total mutual fund assets managed 171 164 148 151 147
Private asset 54 55 53 55 50
Institutional asset (a) 286 269 245 259 250
- ---------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $511 $488 $446 $465 $447
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes assets managed at Pareto Partners of $32 billion at March 31,
2000; $32 billion at Dec. 31, 1999; $28 billion at Sept. 30, 1999; $28
billion at June 30, 1999; and $28 billion at March 31, 1999. The
Corporation has a 30% equity interest in Pareto Partners.
At March 31, 2000, the combined market values of $31 billion of nonproprietary
mutual funds and $286 billion of institutional assets managed, by asset type,
were as follows: equities, $119 billion; balanced, $40 billion; fixed income,
$41 billion; money market, $81 billion; and $36 billion in currency overlay and
global fixed-income products, primarily at Pareto Partners, for a total of $317
billion.
Administration and custody fee revenue
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended
------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional trust $121 $ 96 $100
Mutual fund 48 48 42
Private asset 4 4 5
- ---------------------------------------------------------------------------------------------------------------------------------
Total administration and custody fee revenue $173 $148 $147
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
As shown in the table on the prior page, administration and custody fee revenue
increased $26 million, or 17%, in the first quarter of 2000 compared with the
first quarter of 1999, primarily resulting from a $21 million, or 20%, increase
in institutional trust and custody revenue from net new business and a $6
million increase in securities lending revenue.
Growth of institutional trust and custody revenue was tempered primarily by the
formation of joint ventures and by the contribution of pre-existing business to
joint ventures. The results of joint ventures are accounted for under the equity
method of accounting, which reports the Corporation's share of the results of
the joint ventures on a net basis, rather than reporting the revenues and
expenses separately. The table below shows institutional trust and custody fee
revenue including the gross revenue generated by the Corporation's joint
ventures that provide such services. Including the institutional trust and
custody gross revenue generated by joint ventures, institutional trust and
custody revenue increased $55 million, or 33%, compared with the first quarter
of 1999 and increased $24 million, or 12%, compared with the fourth quarter of
1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Quarter ended
-------------------------------------------------
INSTITUTIONAL TRUST AND CUSTODY FEE REVENUE MARCH 31, Dec. 31, March 31,
(in millions) 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total institutional trust and custody fee revenue - as reported $121 $ 96 $100
Adjustment to reflect joint venture revenue 99 100 65
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted institutional trust and custody fee revenue $220 $196 $165
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mutual fund administration and custody fees will be impacted beginning in the
second quarter of 2000 as a long-term contract with a third party expires near
the end of May 2000. Fees from this contract totaled approximately $24 million
pre-tax, or $.03 per common share, in the first quarter of 2000 and are expected
to total approximately $12 million pre-tax, or approximately $.015 per common
share in the second quarter through May 2000, when the contract expires.
The market value of assets under administration or custody, shown in the table
below, was $2,261 billion at March 31, 2000, an increase of $63 billion, or 3%,
compared with $2,198 billion at Dec. 31, 1999, and an increase of $333 billion,
or 17%, compared with $1,928 billion at March 31, 1999. These increases resulted
from net new business and market appreciation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION OR CUSTODY
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in billions) 2000 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust (a)(b) $2,131 $2,074 $2,046 $1,954 $1,826
Mutual fund 93 87 76 73 69
Private asset 37 37 34 34 33
- ------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration or custody $2,261 $2,198 $2,156 $2,061 $1,928
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $325 billion of assets at March 31, 2000; $324 billion of assets
at Dec. 31, 1999; $350 billion of assets at Sept. 30, 1999; $327 billion of
assets at June 30, 1999; and $218 billion of assets at March 31, 1999,
administered by CIBC Mellon Global Securities Services, a joint venture.
(b) Assets administered by the Corporation under ABN AMRO Mellon, a strategic
alliance of the Corporation and ABN AMRO, were $60 billion at March 31,
2000; $58 billion at Dec. 31, 1999; and $32 billion at Sept. 30, 1999.
17
<PAGE> 19
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Benefits consulting
Benefits consulting fees generated by Buck Consultants were unchanged in the
first quarter of 2000, compared with the first quarter of 1999, and decreased
$11 million compared with the fourth quarter of 1999. Benefits consulting fees
in the first quarter of 2000 compared with the first quarter of 1999 were
negatively impacted by the contribution of pre-existing business to joint
ventures. The decrease compared with the fourth quarter of 1999 primarily
reflects the seasonal nature of many consulting services. The fourth quarter
1999 results reflected the impact of services provided to clients in preparation
for year-end benefit plan needs.
Brokerage fees
The $10 million, or 67%, increase in brokerage fees in the first quarter of 2000
compared to the first quarter of 1999 primarily resulted from higher trading
volumes in the active equities market. Dreyfus Brokerage Services, Inc. averaged
approximately 16,500 trades per day in the first quarter of 2000, compared with
approximately 12,000 trades per day in the fourth quarter of 1999 and
approximately 9,600 trades per day in the first quarter of 1999.
Cash management and deposit transaction charges
The $2 million, or 2%, increase in cash management fees and deposit transaction
charges in the first quarter of 2000, compared with the first quarter of 1999,
primarily resulted from higher volumes of business in cash management,
especially in electronic payment services. Cash management fees in the first
quarter of 2000 were impacted by a higher level of compensating balances on
deposits held in lieu of customers paying fees.
Foreign currency and securities trading revenue
Foreign currency and securities trading revenue increased by 20% to a record $51
million in the first quarter of 2000, compared with the first quarter of 1999,
primarily relating to an increase in foreign exchange customers and favorable
market conditions.
Financing-related and equity investment revenue
Financing-related and equity investment revenue totaled $75 million in the first
quarter of 2000 compared with $72 million in both the fourth and first quarters
of 1999. Financing-related revenue primarily includes loan commitment fees;
letters of credit and acceptance fees; loan securitization revenue; gains or
losses on loan securitizations and sales; and gains or losses on lease
residuals. Financing-related revenue decreased $10 million in the first quarter
of 2000 compared with the first quarter of 1999 in part due to lower gains on
loan securitizations, loan sales and lease residuals. Equity investment revenue,
which includes gains and losses on venture capital investments, increased $13
million in the first quarter of 2000 compared with the first quarter of 1999.
Mortgage servicing fees
The $2 million of mortgage servicing fees in the first quarter of 2000 relates
to the servicing of jumbo mortgages. This service was retained by the
Corporation following the divestiture of the mortgage business.
18
<PAGE> 20
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Other revenue
Other revenue decreased $36 million in the first quarter of 2000 compared with
the first quarter of 1999. The decrease primarily related to the March 1999
divestiture of the credit card business and the June 1999 divestiture of the
network services transaction processing unit. The credit card and network
services businesses generated $18 million and $13 million, respectively, of fee
revenue in the first quarter of 1999. Excluding the effect of the divested
businesses, other revenue decreased $5 million compared with the prior-year
period.
Net gain (loss) from divestitures
In the first quarter of 1999, the Corporation recorded an $83 million pre-tax
net gain from divestitures. The after-tax impact totaled $49 million or $.10 per
common share. The net gain resulted from a gain on the divestiture of the credit
card business, partially offset by a loss on the commercial mortgage servicing
business and a write-down to reflect the estimated sale proceeds to be received
for the residential mortgage business.
In the fourth quarter of 1999, the Corporation recorded a $7 million pre-tax net
loss from divestitures. The after-tax net loss totaled $5 million, or
approximately $.01 per common share. The net loss primarily resulted from an
adjustment to the previous write-downs recorded for the residential mortgage
servicing business, partially offset by an additional gain from the network
services sale as more customers converted to the purchaser.
First quarter 2000 compared with fourth quarter 1999
Fee revenue increased 21%, on an annualized basis, in the first quarter of 2000
compared with the fourth quarter of 1999, primarily resulting from a 23%
increase, on an annualized basis, in trust and investment fee revenue.
NET INTEREST REVENUE
- --------------------------------------------------------------------------------
Net interest revenue on a fully taxable equivalent basis for the first quarter
of 2000 totaled $351 million, compared with $371 million in the first quarter of
1999 and $353 million in the fourth quarter of 1999. The net interest margin was
3.75% in the first quarter of 2000, compared with 3.78% in the first quarter of
1999 and 3.66% in the fourth quarter of 1999. The $20 million decrease in net
interest revenue on a fully taxable equivalent basis in the first quarter of
2000, compared with the first quarter of 1999, primarily resulted from the
divestitures of the credit card and mortgage businesses. Credit card loans
averaged approximately $800 million in the first quarter of 1999 and the
residential mortgage warehouse portfolio averaged approximately $1.25 billion in
the first quarter of 1999. Excluding the net interest revenue generated by these
businesses, net interest revenue increased 1% compared with the first quarter of
1999, reflecting the positive impact of interest-free funds in a rising rate
environment, offset in part by higher funding costs related to the repurchase of
common stock.
First quarter 2000 compared with fourth quarter 1999
Net interest revenue decreased $2 million in the first quarter of 2000 compared
with the fourth quarter of 1999, resulting from a lower level of
interest-earning assets, primarily lower yielding assets, as well as higher
funding costs related to the repurchase of common stock, and one less day in the
first quarter of 2000 compared to the fourth quarter of 1999.
19
<PAGE> 21
<TABLE>
<CAPTION>
NET INTEREST REVENUE (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
------------------------
MARCH 31, 2000
AVERAGE AVERAGE
(dollar amounts in millions) BALANCE YIELDS/RATES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Interest-earning assets:
Interest-bearing deposits with banks $ 757 5.58%
Federal funds sold and securities under resale agreements 888 5.94
Other money market investments 68 5.30
Trading account securities 248 6.56
Securities:
U.S. Treasury and agency securities (a) 6,145 6.52
Obligations of states and political subdivisions (a) 131 6.15
Other (a) 101 8.61
Loans, net of unearned discount (a) 29,280 7.78
-------
Total interest-earning assets 37,618 7.47
Cash and due from banks 2,982
Premises and equipment 566
Customers' acceptance liability 122
Net acquired property 16
Other assets (a) 6,513
Reserve for credit losses (407)
------------------------------------------------------------------------------------------------------------------
Total assets $47,410
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 506 4.29%
shareholders' Money market and other savings accounts 12,569 3.23
equity Retail savings certificates 6,545 4.86
Other time deposits 927 5.50
Deposits in foreign offices 3,051 4.61
-------
Total interest-bearing deposits 23,598 3.97
Federal funds purchased and securities under repurchase agreements 1,705 5.45
Short-term bank notes 903 6.05
U.S. Treasury tax and loan demand notes 450 5.39
Term federal funds purchased 347 5.97
Commercial paper 98 5.93
Other funds borrowed 491 6.79
Notes and debentures (with original maturities over one year) 3,453 6.74
-------
Total interest-bearing liabilities 31,045 4.51
Total noninterest-bearing deposits 8,622
Acceptances outstanding 122
Other liabilities (a) 2,592
------------------------------------------------------------------------------------------------------------------
Total liabilities 42,381
------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991
------------------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 4,038
------------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and shareholders' equity $47,410
- ------------------------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.47%
Cost of funds supporting interest-earning assets 3.72
------------------------------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 3.75%
Without taxable equivalent increments 3.72
------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields exclude adjustments to fair value required by
FAS No. 115.
Note: Average rates are annualized and calculated on a taxable equivalent
basis, at tax rates approximating 35%, using dollar amounts in
thousands and actual number of days in the periods, and
20
<PAGE> 22
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
- ------------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1999 Sept. 30, 1999 June 30, 1999 March 31, 1999
Average Average Average Average Average Average Average Average
balance yields/rates balance yields/rates balance yields/rates balance yields/rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 944 4.81% $ 740 4.85% $ 750 4.71% $ 776 4.85%
1,254 5.64 655 5.20 635 5.47 465 4.84
69 4.80 68 4.26 60 4.22 45 4.63
372 5.79 403 5.27 414 4.87 291 5.25
6,204 6.40 6,297 6.33 6,442 6.40 6,505 6.52
118 5.82 121 5.84 118 6.44 112 6.94
84 8.49 86 8.12 93 7.38 97 7.11
29,158 7.50 30,179 7.31 30,501 7.30 31,465 7.50
------- ------- ------- -------
38,203 7.17 38,549 7.04 39,013 7.05 39,756 7.24
3,010 2,970 3,078 3,148
548 552 570 574
130 132 116 114
17 13 36 36
6,076 7,211 7,365 7,488
(408) (414) (416) (498)
- ------------------------------------------------------------------------------------------------------------------------------------
$47,576 $49,013 $49,762 $50,618
- ------------------------------------------------------------------------------------------------------------------------------------
$ 593 4.00% $ 380 3.33% $ 369 2.07% $ 367 1.57%
12,721 3.05 12,674 2.85 12,477 2.79 12,002 2.75
6,588 4.63 6,612 4.50 6,644 4.47 6,923 4.63
849 5.06 1,106 5.26 1,244 4.90 1,864 5.17
3,108 4.30 3,111 4.40 2,722 4.29 3,268 4.38
------- ------- ------- -------
23,859 3.74 23,883 3.63 23,456 3.54 24,424 3.67
1,533 5.00 1,791 4.92 2,279 4.70 2,901 4.67
1,055 5.77 821 5.33 846 4.98 531 5.07
300 5.32 592 4.73 584 4.58 571 4.60
359 5.67 362 5.34 508 5.04 479 5.04
104 5.46 119 5.51 157 5.35 133 5.25
426 7.52 409 8.88 417 7.23 435 8.26
3,585 6.57 3,372 6.57 3,387 6.55 3,351 6.67
------- ------- ------- -------
31,221 4.29 31,349 4.18 31,634 4.08 32,825 4.19
8,681 9,579 9,902 9,663
130 132 116 114
2,338 2,658 2,705 2,594
- ------------------------------------------------------------------------------------------------------------------------------------
42,370 43,718 44,357 45,196
- ------------------------------------------------------------------------------------------------------------------------------------
991 991 991 991
- ------------------------------------------------------------------------------------------------------------------------------------
4,215 4,304 4,414 4,431
- ------------------------------------------------------------------------------------------------------------------------------------
$47,576 $49,013 $49,762 $50,618
- ------------------------------------------------------------------------------------------------------------------------------------
7.17% 7.04% 7.05% 7.24%
3.51 3.41 3.31 3.46
- ------------------------------------------------------------------------------------------------------------------------------------
3.66% 3.63% 3.74% 3.78%
3.64 3.60 3.71 3.76
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
are before the effect of reserve requirements. Loan fees, as well as nonaccrual
loans and their related income effect, have been included in the calculation of
average interest yields/rates.
21
<PAGE> 23
<TABLE>
<CAPTION>
OPERATING EXPENSE
- -----------------------------------------------------------------------------------------------------------------------------
Quarter ended
----------------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Staff expense $397 $384 $391
Professional, legal and other purchased services 67 73 71
Net occupancy expense 64 57 61
Equipment expense 37 42 41
Amortization of goodwill and other intangible assets 37 37 37
Business development 37 32 33
Communications expense 24 27 29
Amortization of mortgage servicing assets and purchased
credit card relationships 1 1 42
Other expense 55 46 55
- -----------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred securities expense
and net revenue from acquired property 719 699 760
Trust-preferred securities expense 20 20 20
Net revenue from acquired property (1) (4) --
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expense $738 $715 $780
- -----------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 26,000 25,800 29,100
- -----------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 62% 62% 65%
Efficiency ratio excluding amortization of goodwill and
other intangible assets 59% 59% 62%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before trust-preferred securities expense and net revenue
from acquired property, as a percentage of revenue, computed on a taxable
equivalent basis, excluding the net gain (loss) on divestitures and gains
on the sales of securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property totaled $719 million, a decrease of $41 million compared with
the first quarter of 1999, resulting from the 1999 credit card, network services
and mortgage banking divestitures. Excluding the effect of these divestitures,
operating expense before trust-preferred securities expense and net revenue from
acquired property increased 9% compared with the first quarter of 1999,
reflecting higher incentive expense and other expenses in support of business
growth.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1st Qtr. 2000 1st Qtr. 2000
over over
Operating expense growth 1st Qtr. 1999 4th Qtr. 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating expense growth 9% (a) 12% (b)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the effect of divestitures.
(b) Presented on an annualized basis.
First quarter 2000 compared with fourth quarter 1999
Operating expense before trust-preferred securities expense and net revenue from
acquired property increased $20 million compared with the fourth quarter of
1999. This increase was primarily due to higher base salary expense, and
incentive expense in business lines with strong revenue growth.
22
<PAGE> 24
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $145 million in the first quarter of 2000
compared with $166 million in the first quarter of 1999. The Corporation's
effective tax rate for the first quarter 2000 was 36.5%, compared with 36.5% for
the first quarter of 1999 excluding the effect of a change in accounting
principle and the effect of the net gain from divestitures. It is currently
anticipated that the effective tax rate will be approximately the same for the
remainder of 2000.
<TABLE>
<CAPTION>
ASSET/LIABILITY MANAGEMENT
- ---------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------------
MARCH 31, Dec. 31, March 31,
(average balances in millions) 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,713 $ 2,267 $ 1,286
Trading account securities 248 372 291
Securities 6,155 6,275 6,767
Loans 29,283 29,159 31,467
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 37,399 38,073 39,811
Noninterest-earning assets 10,213 9,786 11,364
Reserve for credit losses (407) (408) (498)
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $47,205 $47,451 $50,677
- ---------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $38,171 $38,646 $39,774
Wholesale and purchased funds 9,034 8,805 10,903
- ---------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $47,205 $47,451 $50,677
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $2.4 billion decrease in the Corporation's average interest-earning assets
in the first quarter of 2000, compared with the first quarter of 1999, primarily
reflects a decrease in average loans following the divestitures of the credit
card and mortgage businesses.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as individual money market and other savings deposits,
savings certificates, demand deposits, shareholders' equity, notes and
debentures with original maturities over one year, trust-preferred securities,
and other liabilities. Core funds primarily support core assets, which consist
of loans, net of the reserve, and noninterest-earning assets. Average core
assets decreased $3.2 billion in the first quarter of 2000 from the prior-year
period, primarily reflecting both a lower level of loans and noninterest-earning
assets. Average core funds decreased $1.6 billion in the first quarter of 2000
from the prior-year period, primarily due to a decrease in shareholders' equity,
resulting from common share repurchases, and lower levels of demand deposits and
retail savings certificates. Core funds averaged 98% of core assets in the first
quarter of 2000, compared with 100% in the fourth quarter of 1999 and 94% in the
first quarter of 1999.
Wholesale and purchased funds are defined as deposits in foreign offices,
negotiable certificates of deposit, federal funds purchased and securities under
repurchase agreements, short-term bank notes, U.S. Treasury tax and loan demand
notes, commercial paper, other time deposits and other funds borrowed. As a
percentage of total average assets, average wholesale and purchased funds were
19% in the first quarter of 2000, compared with 19% in the fourth quarter of
1999 and 22% in the first quarter of 1999.
23
<PAGE> 25
COMPOSITION OF LOAN PORTFOLIO
- --------------------------------------------------------------------------------
The loan portfolio decreased $1.963 billion and $2.269 billion, respectively at
March 31, 2000, compared with Dec. 31, 1999, and March 31, 1999. The decrease
from Dec. 31, 1999, reflects a lower level of wholesale loans. The decrease from
March 31, 1999, reflects a lower level of wholesale loans, and the divestiture
of the residential mortgage business in September 1999. The decreases were
partially offset by increases in business banking, margin loans and middle
market lending. At March 31, 2000, the composition of the loan portfolio was 60%
commercial and 40% consumer.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
Domestic loans:
<S> <C> <C> <C> <C>
Commercial and financial $ 9,912 $11,349 $11,296 $11,683
Commercial real estate 2,753 2,651 2,594 2,504
Consumer credit:
Consumer mortgage 6,920 7,122 6,813 8,169
Other consumer credit 4,471 4,693 4,070 3,950
- -----------------------------------------------------------------------------------------------------------------------------
Total consumer credit 11,391 11,815 10,883 12,119
Lease finance assets 3,023 3,127 3,021 2,836
- -----------------------------------------------------------------------------------------------------------------------------
Total domestic loans 27,079 28,942 27,794 29,142
International loans 1,206 1,306 1,362 1,412
- -----------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $28,285 $30,248 $29,156 $30,554
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial and financial
At March 31, 2000, total domestic commercial and financial loans decreased by
$1.437 billion, or 13%, compared with Dec. 31, 1999, and by $1.771 billion, or
15%, compared with March 31, 1999, primarily as a result of a lower level of
wholesale lending. These decreases were partially offset by increases in
business banking and middle market lending. Commercial and financial loans
represented 35% of the total loan portfolio at March 31, 2000, compared with 38%
at both Dec. 31, 1999, and March 31, 1999.
Commercial real estate
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial mortgage and construction loans $1,845 $1,788 $1,740 $1,649
Owner-occupied and other loans (a) 908 863 854 855
- ----------------------------------------------------------------------------------------------------------------------------
Total domestic commercial real estate loans $2,753 $2,651 $2,594 $2,504
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Owner-occupied and other loans are loans that are secured by real estate,
but the commercial property is not being relied upon as the primary source
of repayment.
At March 31, 2000, domestic commercial real estate loans increased by $102
million, or 4%, compared with Dec. 31, 1999, and by $249 million, or 10%,
compared with March 31, 1999, reflecting steady loan growth. Domestic commercial
real estate loans were 10% of total loans at March 31, 2000, up from 9% at Dec.
31, 1999, and 8% at March 31, 1999.
24
<PAGE> 26
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Consumer mortgage
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC CONSUMER MORTGAGE LOANS
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jumbo residential mortgages $3,539 $3,733 $3,435 $3,640
One- to four-family residential mortgages:
Warehouse -- -- -- 1,102
Portfolio 607 620 621 654
Fixed-term home equity loans 1,800 1,835 1,871 1,975
Home equity revolving credit line loans 974 934 886 798
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic consumer mortgage loans $6,920 $7,122 $6,813 $8,169
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 2000, the domestic consumer mortgage portfolio totaled $6.920
billion, a $202 million, or 3%, decrease from Dec. 31, 1999, and a $1.249
billion, or 15%, decrease from March 31, 1999. The decrease from March 31, 1999,
resulted primarily from the sale of the one- to four-family residential
mortgages in the residential warehouse portfolio as part of the divestiture of
the residential mortgage servicing business. Domestic consumer mortgages were
24% of the total loan portfolio at March 31, 2000, compared with 24% at Dec. 31,
1999, and 27% at March 31, 1999.
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans, unsecured personal credit lines and margin loans, was $4.471 billion at
March 31, 2000, a decrease of $222 million, or 5%, from Dec. 31, 1999, and an
increase of $521 million, or 13%, from March 31, 1999. The increase compared to
March 31, 1999, was primarily due to higher levels of secured margin loans at
Dreyfus Brokerage Services, Inc. Other consumer credit loans are both secured
and unsecured and, in the case of student loans, are government guaranteed.
Student loans totaled $1.777 billion, or 40% of this portfolio, at March 31,
2000, compared with $1.777 billion at Dec. 31, 1999, and $1.769 billion at March
31, 1999.
Lease finance assets
Lease finance assets totaled $3.023 billion at March 31, 2000, a decrease of
$104 million, or 3%, compared with Dec. 31, 1999, and an increase of $187
million, or 7%, compared with March 31, 1999. The increase compared to March 31,
1999, was primarily due to growth in the middle market leasing sector. Lease
finance assets represented 11% of the total loan portfolio at March 31, 2000,
compared with 10% at Dec. 31, 1999, and 9% at March 31, 1999.
International loans
Loans to international borrowers totaled $1.206 billion at March 31, 2000, down
$100 million, or 8%, from Dec. 31, 1999, and down $206 million, or 15%, from
March 31, 1999, primarily due to decreased activity with large corporate
customers and foreign banks. There were no nonperforming international loans in
any of the periods presented.
25
<PAGE> 27
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK (a)
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit:
Expire within one year $18,299 $17,505 $15,368 $15,553
Expire within one to five years 15,774 16,054 16,835 17,322
Expire over five years 853 1,071 1,066 1,152
- ------------------------------------------------------------------------------------------------------------------------------------
Total 34,926 34,630 33,269 34,027
Standby letters of credit and foreign and other guarantees 5,098 (b) 4,256 4,229 3,671
Commercial letters of credit 77 96 99 84
Residential mortgage loans serviced with recourse -- -- -- 115
Custodian securities lent with indemnification
against broker default of return of securities 41,391 32,532 30,217 36,340
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For a discussion of off-balance-sheet financial instruments with contract
amounts that represent credit risk, see pages 82 through 84 of the 1999
Financial Annual Report to Shareholders.
(b) Net of participations and cash collateral totaling $467 million.
<TABLE>
<CAPTION>
CAPITAL
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA MARCH 31, Dec. 31, Sept. 30, March 31,
(dollar amounts in millions, except per share amounts) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shareholders' equity $ 3,851 $ 4,016 $ 4,219 $ 4,502
Common shareholders' equity to assets ratio 8.13% 8.38% 9.00% 9.12%
Tangible shareholders' equity (a) $ 2,190 $ 2,288 $ 2,454 $ 2,659
Tangible shareholders' equity to assets ratio (b) 4.80% 4.96% 5.45% 5.60%
Tier I capital ratio (c) 6.49% 6.60% 7.12% 6.89%
Total (Tier I plus Tier II) capital ratio (c) 10.61% 10.76% 11.58% 11.22%
Leverage capital ratio (c) 6.61% 6.72% 6.82% 6.60%
Total Tier I capital $ 3,012 $ 3,074 $ 3,208 $ 3,199
Total (Tier I plus Tier II) capital $ 4,919 $ 5,013 $ 5,217 $ 5,209
Total risk-adjusted assets $ 46,382 $ 46,572 $ 45,032 $ 46,438
Average assets - leverage capital basis $ 45,583 $ 45,730 $ 47,003 $ 48,484
Book value per common share $ 7.84 $ 8.02 $ 8.29 $ 8.64
Tangible book value per common share $ 4.46 $ 4.57 $ 4.83 $ 5.11
Closing common stock price $ 29.50 $ 34.06 $ 33.63 $ 35.19
Market capitalization $ 14,491 $ 17,052 $ 17,103 $ 18,335
Common shares outstanding (000) 491,210 500,623 508,650 521,064
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $74 million, $67 million, $64 million and $62 million,
respectively, of minority interest, primarily related to Newton. In
addition, includes $323 million, $345 million, $353 million and $371
million, respectively, of tax benefits related to tax deductible goodwill
and other intangibles.
(b) Shareholders' equity plus minority interest less goodwill and other
intangibles recorded in connection with purchase acquisitions divided by
total assets less goodwill and other intangibles. The amount of goodwill
and other intangibles subtracted from shareholders' equity and total assets
is net of any tax benefit.
(c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3%, respectively.
26
<PAGE> 28
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
The decrease in shareholders' equity at March 31, 2000, compared with the prior
periods, primarily reflects common stock repurchases partially offset by
earnings retention.
During the first quarter of 2000, 10.8 million shares of common stock were
repurchased. This left an additional 4 million shares available for repurchase
under a 25 million share repurchase program authorized by the board of directors
in September 1999. Common shares outstanding at March 31, 2000 were 6.2% lower
than at Dec. 31, 1998, reflecting a 32.6 million reduction over the last five
quarters, net of shares reissued for employee benefit plan purposes. Common
stock repurchased under the share repurchase program is to be used for general
corporate purposes.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING FIRST QUARTER Full Year
(in millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning shares outstanding 500.6 523.8
Shares issued for stock-based benefit plans and dividend reinvestment plan 1.4 7.0
Shares repurchased (10.8) (a) (30.2) (b)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 491.2 500.6
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $336 million for an average share price of
$31.07 per share.
(b) Purchase price of $1.068 billion for an average share price of
$35.33 per share.
Regulatory capital
For a banking institution to qualify as well capitalized, its Tier I, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of
the Corporation's banking subsidiaries qualified as well capitalized at March
31, 2000. The Corporation intends to maintain the ratios of its banking
subsidiaries above the well-capitalized levels. By maintaining ratios above the
regulatory well-capitalized guidelines, the Corporation's banking subsidiaries
receive the benefit of lower FDIC deposit insurance assessments. Certain capital
ratios were lower at March 31, 2000, compared with the prior periods, reflecting
the impact of the stock repurchases offset in part by earnings retention.
Acquisition-related intangibles
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ACQUISITION-RELATED INTANGIBLES MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $2,002 $2,077 $2,111 $2,191
Purchased core deposit intangibles 42 48 55 68
Other identified intangibles 14 15 16 17
- ------------------------------------------------------------------------------------------------------------------------------------
Total acquisition-related intangibles $2,058 (a) $2,140 $2,182 $2,276
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At March 31, 2000, $900 million is tax deductible and $1.158 billion is
non-tax deductible.
The $218 million decrease in acquisition-related intangibles from March 31,
1999, resulted from recording amortization expense of $148 million, as well as a
$70 million net reduction resulting from the divestitures. Based upon the
current level of acquisition-related intangibles and the amortization schedule,
the annual amortization for the years 2000 through 2005 is expected to be
approximately $129 million, $122 million, $118 million, $115 million, $113
million and $112 million, respectively. For the full-year 2000, using common
shares and equivalents outstanding at March 31, 2000, the after-tax impact of
the annual amortization is expected to be approximately $109 million, or
approximately $.21 per share. The
27
<PAGE> 29
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
after-tax impact of the annual amortization for the years 2001 through 2005 is
expected to be approximately $103 million, $100 million, $97 million, $96
million and $95 million, respectively.
Mortgage servicing assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSETS MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential $17 $16 $17 $1,044
Commercial -- -- -- 54
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets $17 $16 $17 $1,098
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in total mortgage servicing assets at March 31, 2000, compared with
March 31, 1999 resulted from the divestitures of the mortgage servicing
businesses. The remaining $17 million of residential mortgage servicing assets
at March 31, 2000, relate to the retained servicing rights on jumbo residential
mortgages that were not part of the divestiture.
The Corporation capitalized $2 million of jumbo residential mortgage servicing
assets in the first quarter of 2000, compared with $80 million in the first
quarter of 1999 on both the portfolio that was sold and on the jumbo mortgage
portfolio, in connection with both mortgage servicing portfolio purchases and
loan originations. These capitalized mortgage servicing assets were partially
offset by amortization. Mortgage servicing assets are amortized in proportion to
estimated net servicing income over the estimated life of the servicing
portfolio. Net amortization expense totaled $1 million in the first quarter of
2000, compared with $40 million in the first quarter of 1999. The estimated fair
value of capitalized mortgage servicing assets was approximately $20 million at
March 31, 2000.
LIQUIDITY AND DIVIDENDS
- --------------------------------------------------------------------------------
The Corporation's liquidity management objective is to maintain the ability to
meet commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms, including during
periods of market or financial stress. The Corporation's overall approach to
liquidity management is to ensure that sources of liquidity are sufficient in
amount and diversity to accommodate changes in loan demand and core funding
routinely without a material adverse impact on net income. The Corporation's
liquidity position is managed by maintaining adequate levels of liquid assets,
such as money market assets and securities available for sale. Additional
liquidity is available through the Corporation's ability to participate or sell
commercial loans and to securitize selected loan portfolios. The parent
Corporation also has a $300 million revolving credit agreement with
approximately four months remaining until maturity. The parent Corporation is
currently negotiating an amendment and an extension of this revolving credit
agreement.
As shown in the consolidated statement of cash flows, cash and due from banks
decreased by $452 million during the first quarter of 2000 to $2.958 billion.
The decrease resulted from $1.214 billion of net cash used in financing
activities, partially offset by $426 million of net cash provided by operating
activities and $312 million of net cash provided by investing activities. Net
cash used in financing activities primarily reflected decreases in short term
borrowings, and the repurchase of common stock. Net cash provided by investing
activities primarily reflected loan repayments and the sales and securitization
of loans, partially offset by an increase in federal funds sold.
28
<PAGE> 30
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
Contractual maturities of the Corporation's long-term debt totaled $100 million
during the first quarter of 2000. Contractual maturities of long-term debt will
total approximately $210 million in the remainder of 2000, including $205
million related to parent term debt. In March 2000, the Corporation filed a new
$1.5 billion debt shelf registration statement with the Securities and Exchange
Commission (SEC). The registration statement was declared effective by the SEC
in April 2000. The Corporation's and Mellon Bank, N.A.'s senior and subordinated
debt ratings are presented in the table below. There have been no changes to
these ratings since mid-1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SENIOR AND SUBORDINATED DEBT RATINGS
AT MARCH 31, 2000 Standard & Poor's Moody's Duff & Phelps Fitch/IBCA
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mellon Financial Corporation:
Senior debt A+ A2 A+ A+
Subordinated debt A A3 A A
Mellon Bank, N.A.:
Senior debt AA- A1 AA- AA-
Subordinated debt A+ A2 A+ A+
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation paid $100 million in common stock dividends in the first quarter
of 2000, compared with $94 million in the prior-year period. The common dividend
payout ratio was 40% in the first quarter of 2000, compared with 37% in the
first quarter of 1999. On a cash earnings per share basis, the common dividend
payout ratio was 35% in the first quarter of 2000, compared with 33% in the
first quarter of 1999, on an operating basis. Based upon shares outstanding at
March 31, 2000, and the new quarterly common dividend rate of $.22 per share,
announced on April 18, 2000, the annualized common stock dividend cash
requirement is expected to be approximately $430 million.
The parent Corporation's principal sources of cash are interest and dividends
from its subsidiaries. There are, however, certain limitations on the payment of
dividends to the parent Corporation by its national and state member bank
subsidiaries. For a discussion of these limitations, see note 21 in the
Corporation's 1999 Financial Annual Report to Shareholders. Under the more
restrictive limitation, the Corporation's national and state member bank
subsidiaries can, without prior regulatory approval, declare dividends
subsequent to March 31, 2000, of approximately $715 million, less any dividends
declared and plus or minus net profits or losses, as defined, between April 1,
2000, and the date of any such dividend declaration.
INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest revenue and on the net present
value of the Corporation's assets, liabilities and off-balance-sheet
instruments. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. Simulation tools
serve as the primary means to gauge interest rate exposure. The net present
value sensitivity analysis is the means by which the Corporation's long-term
interest rate exposure is evaluated. These analyses provide an understanding of
the range of potential impacts on net interest revenue and portfolio equity
caused by interest rate movements.
29
<PAGE> 31
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
Modeling techniques are used to estimate the impact of changes in interest rates
on the net interest margin. Assumptions regarding the replacement of maturing
assets and liabilities are made to simulate the impact of future changes in
rates and/or changes in balance sheet composition. The effect of changes in
future interest rates on the mix of assets and liabilities may cause actual
results to differ from simulated results. In addition, certain financial
instruments provide customers a certain degree of choice. For instance,
customers may migrate from lower-interest deposit products to higher-interest
products. Also, customers may choose to refinance fixed-rate loans when interest
rates decrease. While the Corporation's simulation analysis considers these
factors, the extent to which customers utilize the ability to exercise their
financial decisions may cause actual results to differ significantly from the
simulation. Guidelines used by the Corporation for assuming interest rate risk
are presented in the "Interest rate sensitivity analysis" section on page 33 of
the 1999 Financial Annual Report to Shareholders.
The measurement of interest rate risk is meaningful only when all related on-
and off-balance-sheet items are aggregated and the net positions are identified.
Financial instruments that the Corporation uses to manage interest rate
sensitivity include: money market assets, U.S. government and federal agency
securities, municipal securities, mortgage-backed securities, corporate bonds,
asset-backed securities, fixed-rate wholesale term funding, interest rate swaps,
caps and floors, financial futures and forwards and financial options. The table
below illustrates the simulation analysis of the impact of a 50, 100 and 200
basis point parallel shift upward or downward in interest rates on net interest
revenue, earnings per share and return on equity. This analysis was prepared
using the levels of all interest-earning assets, supporting funds and
off-balance-sheet instruments used for interest rate risk management at March
31, 2000, assuming that the level of loan fees remains unchanged, and excludes
the impact of interest receipts on nonperforming loans. The impact of the rate
movements was developed by simulating the effect of rates changing in a parallel
fashion over a six-month period from the March 31, 2000, levels and remaining at
those levels thereafter.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from March 31, 2000 rates
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Decrease
Simulated impact in the next 12 months ---------------------------------- --------------------------------
compared with March 31, 2000: +50bp +100bp +200bp -50bp -100bp -200bp
---------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue (decrease) increase (.3)% (.7)% (1.6)% .3% .6% .9%
Earnings per share (decrease) increase $(.01) $(.01) $(.03) $.01 $.01 $.02
Return on equity (decrease) increase (7) bp (15) bp (35) bp 7 bp 13 bp 20 bp
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The anticipated impact on net interest revenue under the 50, 100 and 200 basis
point increase (decrease) scenarios did not exceed the Corporation's guidelines
for assuming interest rate risk under all scenarios at March 31, 2000, as shown
in the table above, and at March 31, 1999. The simulation analysis reflects the
Corporation's efforts to balance the repricing characteristics of its
interest-earning assets and supporting funds.
Managing interest rate risk with off-balance-sheet instruments
By policy, the Corporation will not implement any new off-balance-sheet activity
that, when aggregated into the total corporate interest rate exposure, would
cause the Corporation to exceed its established interest rate risk limits.
Interest rate swaps--including callable and basis swaps--caps and floors,
financial futures and forwards and financial options have been approved by the
board of directors for managing the overall corporate interest rate exposure.
The use of financial futures, forwards and option contracts is permitted
provided that: the transactions occur in a market with a size that ensures
sufficient liquidity; the
30
<PAGE> 32
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
contract is traded on an approved exchange or, in the case of over-the-counter
option contracts, is transacted with a credit-approved counterparty; and the
types of contracts have been authorized for use by the Finance Committee. Use of
off-balance-sheet instruments for speculative purposes is not permitted outside
of those areas designated as trading and controlled with specific authorizations
and limits. These instruments provide the Corporation flexibility in adjusting
its interest rate risk position without exposure to principal risk and funding
requirements. By using off-balance-sheet instruments to manage interest rate
risk, the effect is a smaller, more efficient balance sheet, with a lower
wholesale funding requirement and a higher return on assets and net interest
margin with a comparable level of net interest revenue and return on equity. The
off-balance-sheet instruments used to manage the Corporation's interest rate
risk are shown in the table below. Additional information regarding these
contracts is presented in note 23 on pages 81 through 88 in the Corporation's
1999 Financial Annual Report to Shareholders.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
March 31,
(notional amounts in millions) 2000 2001 2002 2003 2004 2005+ 2000
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps (a):
Notional amount $ 235 $ -- $ -- $ 1,300 $ -- $ 565 $ 2,100
Weighted average rate:
Receive 5.29% -- -- 5.68% -- 6.53% 5.87%
Pay 6.07% -- -- 6.08% -- 6.16% 6.10%
Receive fixed/pay floating
callable swaps (b):
Notional amount $ -- $ -- $ 10 $ -- $ 197 $ 148 $ 355
Weighted average rate:
Receive -- -- 7.84% -- 7.05% 7.77% 7.37%
Pay -- -- 6.26% -- 6.11% 6.06% 6.10%
Pay fixed/receive floating
generic swaps (a):
Notional amount $ 2 $ 2 $ 208 $ 20 $ 2 $ 12 $ 246
Weighted average rate:
Receive 5.36% 5.52% 6.13% 6.07% 5.67% 6.14% 6.11%
Pay 5.52% 5.60% 6.49% 7.15% 5.71% 6.49% 6.53%
Receive floating/pay floating
basis swaps (a):
Notional amount $ 205 $ -- $ -- $ -- $ -- $ -- $ 205
Weighted average rate:
Receive 6.11% -- -- -- -- -- 6.11%
Pay 6.44% -- -- -- -- -- 6.44%
Other products (c) $ 24 $ 7 $ 32 $ -- $ -- $ -- $ 63
- ------------------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 466 $ 9 $ 250 $ 1,320 $ 199 $ 725 $ 2,969
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic and basis swaps' notional amounts and lives are not based upon
interest rate indices.
(b) Callable swaps are generic swaps with a call option at the option of the
counterparty. Call options will be exercised or not exercised on the basis
of market interest rates. Expected maturity dates, based upon interest
rates at March 31, 2000, are shown in this table.
(c) Included $46 million of index amortizing swaps with expected maturities
from 2000 through 2002 and weighted average receive and pay rates of 7.10%
and 6.04%, respectively.
31
<PAGE> 33
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
The table below presents the gross notional amounts of off-balance-sheet
instruments used to manage interest rate risk, identified by the underlying
interest rate-sensitive instruments. The notional amounts shown in the prior
table and the table below should be viewed in the context of the Corporation's
overall interest rate risk management activities to assess the impact on the net
interest margin.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Instruments associated with deposits $ 429 $ 176 $ 181 $ 190
Instruments associated with interest bearing liabilities 1,320 1,305 1,305 1,278
Instruments associated with loans 1,220 1,604 1,444 1,099
- ------------------------------------------------------------------------------------------------------------------------------------
Total notional amount $2,969 $3,085 $2,930 $2,567
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation entered into these off-balance-sheet products to alter the
natural interest rate risk embedded in its assets and liabilities. The interest
received and interest paid are recorded on an accrual basis in the interest
revenue and interest expense accounts associated with the underlying assets and
liabilities. The net differential resulted in interest expense of $3 million in
the first quarter of 2000, compared with interest revenue of $3 million in the
first quarter of 1999.
Unaccreted deferred gains from off-balance-sheet instrument terminations totaled
approximately $12 million while unamortized deferred losses totaled
approximately $11 million at March 31, 2000. Net interest revenue in the first
quarter of 2000 included less than $1 million of accreted deferred net gains.
As a result of the divestiture of the residential mortgage business on Sept. 30,
1999, the Corporation no longer holds off-balance-sheet contracts to manage the
prepayment risk associated with residential mortgage servicing rights (MSRs). At
March 31, 1999, the Corporation had entered into approximately $10.2 billion
notional amount, primarily of interest rate floor and interest rate swap
agreements to manage potential impairment of MSRs. The fair value of these
instruments was $76 million at March 31, 1999.
In addition to the risk management instruments previously discussed, the
Corporation utilizes total return swaps to minimize the market risk related to
the investment in start-up mutual funds. At March 31, 2000, the Corporation had
a notional amount of $164 million, with a negative fair value of $24 million
which included $13 million of deferred losses on terminated swaps. The
Corporation had notional amounts of $148 million at Dec. 31, 1999, $138 million
at Sept. 30, 1999, and $149 million at March 31, 1999, with negative fair values
of $18 million, $9 million and $11 million, respectively. The Corporation also
has entered into contracts to hedge anticipated transactions. The Corporation
has entered into $235 million notional amount of interest rate futures to lock
in the value of certain loans that are anticipated to be sold and/or
securitized. The negative fair value of the contracts related to these
anticipated transactions was approximately $1 million at March 31, 2000.
Deferred realized gains on terminated futures contracts totaled $5 million at
March 31, 2000.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at March 31, 2000, was a negative $68 million,
compared to a negative $72 million at Dec. 31, 1999, a negative $35 million at
Sept. 30, 1999 and a positive $100 million at March 31, 1999. The decrease
compared with March 31, 1999 primarily resulted from a decrease in the fair
value of interest rate swaps used to hedge interest rate risk as well as the
elimination of off-balance-sheet instruments used to hedge MSRs. The improvement
compared with Dec. 31, 1999, primarily resulted from an improvement in the
32
<PAGE> 34
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
fair value of interest rate swaps used to hedge interest rate risk. These values
must be viewed in the context of the overall financial structure of the
Corporation, including the aggregate net position of all on- and
off-balance-sheet instruments.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (a)
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(notional amounts in millions) 2000 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management instruments (b):
Interest rate swaps $2,952 $3,033 $2,930 $2,201
Options, caps and floors purchased (c) -- -- -- 349
Futures and forward contracts 17 52 -- 17
Mortgage servicing rights risk management instruments:
Interest rate floors -- -- -- 9,691
Interest rate swaps -- -- -- 300
Interest rate and spread locks -- -- -- 250
Other products:
Total return swaps 164 148 138 149
Interest rate swaps and futures contracts hedging
anticipated transactions 235 475 410 458
Foreign currency contracts -- 40 -- --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a
counterparty may default. Credit risk associated with these instruments was
$10 million at March 31, 2000, $7 million at Dec. 31, 1999, $7 million at
Sept. 30, 1999, and $118 million at March 31, 1999.
(b) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
(c) There were no options, caps or floors written.
Off-balance-sheet instruments used for trading activities
The Corporation offers various off-balance-sheet financial instruments to enable
customers to meet their financing and investing objectives and to manage their
currency and interest-rate risk. Supplying these instruments provides the
Corporation with fee revenue. The Corporation also uses such instruments in
connection with its proprietary trading activities. All of these instruments are
carried at market value with realized and unrealized gains and losses included
in foreign currency and securities trading revenue.
The financial risk associated with trading positions is managed by assigning
position limits and stop loss guidance amounts to individual activities. The
Corporation uses a value-at-risk methodology to estimate the potential daily
amount that could be lost from adverse market movements. Value at risk measures
the potential gain or loss in a portfolio of trading positions that is
associated with a price movement of given probability over a specified time
frame. Position limits are assigned to each family of financial instruments
eligible for trading such that the aggregate value-at-risk in these activities
at any point in time will not exceed a specified limit given a significant
market movement. The extent of market movement deemed to be significant is based
upon an analysis of the historical volatility of individual instruments that
would cover 95% of likely daily market movements. The loss analysis includes the
off-balance-sheet instruments used for trading activities as well as the
financial assets and liabilities that are classified as trading positions on the
balance sheet. Using the Corporation's methodology, which considers such factors
as changes in currency exchange rates, interest rates, spreads and related
volatility, the aggregate
33
<PAGE> 35
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
value-at-risk for trading activities, primarily related to foreign currency
contracts, was approximately $3 million at March 31, 2000, compared with
approximately $2 million at Dec. 31,1999, Sept. 30, 1999, and March 31, 1999.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(notional amounts in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $15,214 $12,604 $15,331 $19,635
Commitments to sell 16,009 12,778 15,407 20,239
Foreign currency and other option contracts purchased 713 213 297 456
Foreign currency and other option contracts written 712 232 298 458
Interest rate agreements (b):
Interest rate swaps 17,368 17,280 19,619 13,648
Options, caps and floors purchased 827 617 559 922
Options, caps and floors written 1,605 990 1,226 973
Futures and forward contracts 7,828 5,978 8,441 9,620
Other products 559 578 120 31
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a
counterparty may default. Credit risk associated with these instruments,
primarily foreign exchange contracts, was $650 million at March 31, 2000,
$454 million at Dec. 31, 1999, $475 million at Sept. 30, 1999, and $725
million at March 31, 1999.
(b) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
New accounting standard
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." FAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The adoption of this statement may cause volatility in both the income statement
and the equity section of the balance sheet. The effective date of this
statement has been delayed to Jan. 1, 2001, and need not be applied
retroactively to financial statements of prior periods. The Corporation intends
to adopt this statement on Jan. 1, 2001. The Corporation is currently evaluating
the impact that this statement will have on its financial position and results
of operations, but it is not expected to be material.
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES
- --------------------------------------------------------------------------------
Credit quality expense
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY EXPENSE Quarter ended
----------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $10 $10 $15
Net revenue from acquired property (1) (4) --
- -----------------------------------------------------------------------------------------------------------------------------
Credit quality expense $ 9 $ 6 $15
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 36
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
The decrease in credit quality expense in the first quarter of 2000, compared
with the first quarter of 1999, resulted from a lower provision for credit
losses following the divestiture of the credit card business.
Reserve for credit losses and review of net credit losses
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY Quarter ended
-----------------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve at beginning of period $ 403 $ 405 $ 496
Net change in reserve from divestitures -- -- (84)
Credit losses:
Domestic:
Commercial and financial (19) (11) (3)
Commercial real estate -- -- --
Consumer credit:
Credit cards -- -- (11)
Other consumer credit (5) (5) (6)
Lease finance assets (2) (3) (2)
- -----------------------------------------------------------------------------------------------------------
Total domestic (26) (19) (22)
International -- -- --
- -----------------------------------------------------------------------------------------------------------
Total credit losses (26) (19) (22)
- -----------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 1 1 1
Commercial real estate -- 2 --
Consumer credit:
Credit cards -- -- 1
Other consumer credit 2 3 2
Lease finance assets -- 1 1
- -----------------------------------------------------------------------------------------------------------
Total domestic 3 7 5
International 12 -- --
- -----------------------------------------------------------------------------------------------------------
Total recoveries 15 7 5
- -----------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Domestic:
Commercial and financial (18) (10) (2)
Commercial real estate -- 2 --
Consumer credit:
Credit cards -- -- (10)
Other consumer credit (3) (2) (4)
Lease finance assets (2) (2) (1)
- -----------------------------------------------------------------------------------------------------------
Total domestic (23) (12) (17)
International 12 -- --
- -----------------------------------------------------------------------------------------------------------
Total net credit losses (11) (12) (17)
Provision for credit losses 10 10 15
- -----------------------------------------------------------------------------------------------------------
Reserve at end of period $ 402 $ 403 $ 410
- -----------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.42% 1.33% 1.34%
Reserve as a percentage of nonperforming loans 213% 284% 323%
Annualized net credit losses to average loans .15% .16% .22% (a)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized net credit losses to average loans, excluding credit card net
credit losses, was .10%.
35
<PAGE> 37
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
Nonperforming assets is a term used to describe assets on which revenue
recognition has been discontinued or is restricted. Nonperforming assets include
both nonperforming loans and acquired property, primarily other real estate
owned (OREO), acquired in connection with the collection effort on loans.
Additional information regarding the Corporation's practices for placing assets
on nonaccrual status is presented in the "Nonperforming assets" discussion and
in note 1 in the Corporation's 1999 Financial Annual Report to Shareholders.
At March 31, 2000, nonperforming assets totaled $210 million, an increase of $51
million compared with Dec. 31, 1999, and $49 million compared with March 31,
1999. The increase compared with Dec. 31, 1999, primarily resulted from the
addition to nonperforming status of commercial loans to a health care provider
and its affiliate companies, offset in part by credit losses. The loans to this
health care provider and its affiliate companies are collateralized by
substantially all of the assets of the borrowers. The higher level of
nonperforming assets, compared with March 31, 1999, primarily resulted from the
addition of the previously mentioned commercial loans as well as the addition of
another commercial loan in the third quarter of 1999, partially offset by sales
of acquired property and credit losses. The ratio of nonperforming assets to
total loans and net acquired property was .74% at March 31, 2000. This ratio has
been lower than 1% for more than five years, reflecting the effectiveness of the
Corporation's loan underwriting, administration and workout procedures, as well
as a strong economy.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS MARCH 31, Dec. 31, Sept. 30, March 31,
(dollar amounts in millions) 2000 1999 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans:
Commercial and financial $ 131 $ 85 $ 89 $ 66
Commercial real estate 6 6 6 6
Consumer credit:
Consumer mortgage 38 40 47 44
Other consumer credit -- 1 -- 1
Lease finance assets 13 10 12 10
- ----------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 188 142 154 127
Restructured loans -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 188 142 154 127
- ----------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 14 15 15 37
Reserve for real estate acquired (1) (1) (3) (5)
- ----------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 13 14 12 32
Other acquired assets 9 3 3 2
- ----------------------------------------------------------------------------------------------------------------------------
Total acquired property 22 17 15 34
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 210 $ 159 $ 169 $ 161
- ----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of
respective loan portfolio segments:
Commercial and financial loans 1.33% .75% .79% .56%
Commercial real estate loans .23 .24 .23 .25
Consumer mortgage loans .54 .57 .68 .55
Lease finance assets .43 .32 .38 .36
Total loans .67 .47 .53 .41
Nonperforming assets as a percentage
of total loans
and net acquired property .74 .53 .58 .53
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $99 million, $43 million, $58 million, and $48 million,
respectively, of loans with both principal and interest less than 90 days
past due but placed on nonaccrual status by management discretion.
36
<PAGE> 38
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE QUARTER ENDED MARCH 31
Lease Total
Commercial Commercial Consumer finance ------------------
(in millions) & financial real estate credit assets 2000 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of period $ 85 $ 6 $41 $10 $142 $103
Additions 82 1 5 6 94 42
Payments (a) (11) (1) (3) (1) (16) (8)
Return to accrual status -- -- (4) -- (4) (4)
Credit losses (19) -- -- (2) (21) (5)
Transfers to acquired property (6) -- (1) -- (7) (1)
- ----------------------------------------------------------------------------------------------------------------
Nonperforming loans at March 31 $131 $ 6 $38 $13 $188 $127
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
A loan is considered impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when based upon current information and
events, it is probable that the Corporation will be unable to collect all
principal and interest amounts due according to the contractual terms of the
loan agreement. Additional information regarding impairment is presented in note
1 in the Corporation's 1999 Financial Annual Report to Shareholders.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS Quarter ended
----------------------------
MARCH 31, March 31,
(dollar amounts in millions) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans - period end (a) $137 $76
Average impaired loans for the quarter 105 60
Interest revenue recognized on impaired loans (b) 1 1
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $88 million and $53 million of impaired loans with a related
impairment reserve of $6 million and $10 million at March 31, 2000 and
March 31, 1999, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Quarter ended
----------------------------
MARCH 31, March 31,
(in millions) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OREO at beginning of period, net of the OREO reserve $14 $35
Foreclosures 2 1
Sales (3) (5)
Additional investments, write-downs, losses, OREO provision and other -- 1
- ---------------------------------------------------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 13 32
Other acquired assets 9 2
- ---------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $22 $34
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well-secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS MARCH 31, Dec. 31, Sept. 30, March 31,
(dollar amounts in millions) 2000 1999 1999 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer:
Mortgages $ 17 $21 $26 $28
Ratio .24% .30% .39% .35%
Student - government guaranteed $ 63 $63 $54 $49
Ratio 3.57% 3.53% 3.02% 2.74%
Other consumer $ 4 $ 4 $ 3 $ 2
Ratio .15% .12% .13% .11%
- -------------------------------------------------------------------------------------------------------------------
Total consumer $ 84 $88 $83 $79
Ratio .74% .74% .76% .65%
- -------------------------------------------------------------------------------------------------------------------
Commercial (a) $ 24 $11 $13 $ 9
- -------------------------------------------------------------------------------------------------------------------
Total past-due loans $108 $99 $96 $88
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes lease finance assets
Note: Ratios are loans 90 days or more past due as a percentage of quarter-end
loan balances.
38
<PAGE> 40
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions, except per share amounts) 2000 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $14, $14, $14, $15, and $16) $565 $550 $553 $555 $580
Federal funds sold and securities under
resale agreements 13 18 9 5 9
Interest-bearing deposits with banks 10 12 9 9 9
Other money market investments 1 1 1 - 1
Trading account securities 4 5 5 5 4
Securities 103 103 102 106 108
------------------------------------------------------------------------------------------------------------------
Total interest revenue 696 689 679 680 711
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 198 191 184 177 186
Deposits in foreign offices 35 34 34 30 35
Federal funds purchased and securities
under repurchase agreements 23 20 22 23 37
Other short-term borrowings 34 34 34 34 29
Notes and debentures 58 59 56 55 55
------------------------------------------------------------------------------------------------------------------
Total interest expense 348 338 330 319 342
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 348 351 349 361 369
revenue Provision for credit losses 10 10 10 10 15
------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for
credit losses 338 341 339 351 354
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 578 546 517 515 496
revenue Cash management and deposit transaction charges 74 76 78 78 72
Foreign currency and securities trading revenue 51 43 42 45 43
Financing-related revenue 39 56 39 47 49
Equity investment revenue 36 16 17 7 23
Mortgage servicing fees 2 2 48 51 52
Other 18 20 24 44 54
------------------------------------------------------------------------------------------------------------------
Total fee and other revenue 798 759 765 787 789
Net gain (loss) from divestitures -- (7) (8) 59 83
Gains on sales of securities -- -- -- -- --
------------------------------------------------------------------------------------------------------------------
Total noninterest revenue 798 752 757 846 872
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 397 384 387 397 391
expense Professional, legal and other purchased services 67 73 63 73 71
Net occupancy expense 64 57 61 64 61
Equipment expense 37 42 40 63 41
Amortization of goodwill and other
intangible assets 37 37 37 37 37
Business development 37 32 32 64 33
Communications expense 24 27 26 30 29
Amortization of mortgage servicing assets
and purchased credit card relationships 1 1 33 37 42
Other expense 55 46 37 44 55
Trust-preferred securities expense 20 20 20 19 20
Net revenue from acquired property (1) (4) (5) (5) --
------------------------------------------------------------------------------------------------------------------
Total operating expense 738 715 731 823 780
- ------------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes and cumulative
effect of accounting change 398 378 365 374 446
Provision for income taxes 145 138 134 136 166
------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 253 240 231 238 280
Cumulative effect of accounting change -- -- -- -- (26)
------------------------------------------------------------------------------------------------------------------
Net income $253 $240 $231 $238 $254
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
39
<PAGE> 41
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND (CONTINUED)
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions, except per share amounts) 2000 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per common Basic net income per common share:
share
Income before cumulative effect of accounting
change $ .51 $ .47 $ .46 $ .45 $ .54
Cumulative effect of accounting change -- -- -- -- (.05)
------------------------------------------------------------------------------------------------------------
Net income $ .51 $ .47 $ .46 $ .45 $ .49
------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of accounting
change $ .50 $ .47 $ .45 $ .45 $ .53
Cumulative effect of accounting change -- -- -- -- (.05)
------------------------------------------------------------------------------------------------------------
Net income $ .50 $ .47 $ .45 $ .45 $ .48
------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
40
<PAGE> 42
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(dollar amounts in millions) 2000 1999 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets Cash and due from banks $ 2,958 $ 3,410 $ 3,340 $ 3,011
Federal funds sold and securities under
resale agreements 2,179 1,001 698 174
Interest-bearing deposits with banks 613 286 487 723
Other money market investments 78 71 67 42
Trading account securities 139 144 288 242
Securities available for sale 5,055 5,159 5,209 5,451
Investment securities (approximate fair value
of $1,140, $1,183, $1,246 and $1,443) 1,153 1,197 1,251 1,421
Loans, net of unearned discount of $71, $79,
$77 and $57 28,285 30,248 29,156 30,554
Reserve for credit losses (402) (403) (405) (410)
------- ------- ------- -------
Net loans 27,883 29,845 28,751 30,144
Customers' acceptance liability 88 164 87 107
Premises and equipment 572 562 537 561
Goodwill and other intangibles 2,058 2,140 2,182 2,276
Mortgage servicing assets 17 16 17 1,098
Other assets 4,588 3,951 3,947 4,134
------------------------------------------------------------------------------------------------------------
Total assets $47,381 $47,946 $46,861 $49,384
------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 9,828 $ 9,588 $ 8,193 $ 9,151
Interest-bearing deposits in domestic offices 20,907 20,540 20,735 21,268
Interest-bearing deposits in foreign offices 2,611 3,293 3,101 2,929
------------------------------------------------------------------------------------------------------------
Total deposits 33,346 33,421 32,029 33,348
Federal funds purchased and securities under
repurchase agreements 1,091 1,095 1,023 1,567
Short-term bank notes 700 1,055 1,055 724
Other funds borrowed 524 448 376 389
Term federal funds purchased 360 358 361 636
U.S. Treasury tax and loan demand notes 165 606 658 551
Commercial paper 96 88 97 156
Acceptances outstanding 88 164 87 107
Other liabilities 2,729 2,266 2,267 3,010
Notes and debentures (with original maturities
over one year) 3,440 3,438 3,698 3,403
------------------------------------------------------------------------------------------------------------
Total liabilities 42,539 42,939 41,651 43,891
- ----------------------------------------------------------------------------------------------------------------------------
Trust- Guaranteed preferred beneficial interests in
preferred Corporation's junior subordinated deferrable
securities interest debentures 991 991 991 991
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' Common stock - $.50 par value
equity Authorized - 800,000,000 shares
Issued - 588,661,920; 588,661,920;
588,661,920 (a); and 294,330,960 shares 294 294 294 147
Additional paid-in capital 1,793 1,788 1,773 1,907
Retained earnings 3,938 3,808 3,698 3,468
Accumulated unrealized (loss), net of tax (151) (135) (105) (15)
Treasury stock of 97,452,373; 88,038,848;
80,011,896 (a); and 33,798,582 shares, at cost (2,023) (1,739) (1,441) (1,005)
------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,851 4,016 4,219 4,502
------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred
securities and shareholders' equity $47,381 $47,946 $46,861 $49,384
------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one common stock split distributed on May 17, 1999.
See accompanying Notes to Financial Statements.
41
<PAGE> 43
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(in millions) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from Net income $ 253 $ 254
operating activities Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of accounting change -- 26
Net gain from divestitures -- (83)
Amortization of goodwill and other intangible assets 37 37
Amortization of mortgage servicing assets and purchased
credit card relationships 1 42
Depreciation and other amortization 23 26
Deferred income tax expense 39 4
Provision for credit losses 10 15
Net gains on dispositions of acquired property (1) (1)
Net decrease in accrued interest receivable 1 14
Net decrease (increase) in trading account securities 8 (48)
Net decrease in accrued interest payable, net of
amounts prepaid (35) (8)
Net decrease in residential mortgages held for sale -- 458
Net decrease in other operating activities 90 182
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities 426 918
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in term deposits and other money
investing activities market investments (334) (153)
Net (increase) decrease in federal funds sold and securities
under resale agreements (1,178) 12
Purchases of securities available for sale (140) (758)
Proceeds from sales of securities available for sale 167 164
Proceeds from maturities of securities available for sale 47 474
Purchases of investment securities -- (2)
Proceeds from maturities of investment securities 44 135
Net decrease in credit card receivables to date of sale -- 85
Proceeds from sale of credit card business -- 1,186
Net principal repayments of (disbursed on) loans to customers 1,133 (336)
Proceeds from the sales and securitizations of loan portfolios 819 632
Purchases of premises and equipment (39) (39)
Proceeds from sales of acquired property 4 7
Increase in mortgage servicing assets and purchased credit
card relationships (2) (35)
Net increase in other investing activities (209) (111)
-------------------------------------------------------------------------------------------------
Net cash provided by investing activities 312 1,261
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
42
<PAGE> 44
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(in millions) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net decrease in transaction and savings deposits (470) (1,025)
financing activities Net increase (decrease) in customer term deposits 395 (10)
Net decrease in federal funds purchased and
securities under repurchase agreements (4) (2,027)
Net (decrease) increase in short-term bank notes (355) 458
Net increase in term federal funds purchased 2 428
Net (decrease) increase in U.S. Treasury tax and loan demand notes (441) 261
Net increase in commercial paper 8 40
Repayments of longer-term debt (103) (4)
Net proceeds from issuance of longer-term debt 103 105
Dividends paid on common stock (100) (94)
Proceeds from issuance of common stock 10 14
Repurchase of common stock (336) (183)
Net increase (decrease) in other financing activities 77 (78)
-------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,214) (2,115)
Effect of foreign currency exchange rates 24 21
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash and Net (decrease) increase in cash and due from banks (452) 85
due from banks Cash and due from banks at beginning of period 3,410 2,926
-------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 2,958 $ 3,011
-------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 383 $ 350
disclosures Net income taxes paid 13 13
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
43
<PAGE> 45
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
QUARTER ENDED Additional unrealized Total
MARCH 31, 2000 Common paid-in Retained (loss) gain, Treasury shareholders'
(in millions) stock capital earnings net of tax stock equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1999 $294 $1,788 $3,808 $(135) $(1,739) $4,016
Comprehensive results:
Net income 253 253
Other comprehensive results, net of tax (16) (16)
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 253 (16) 237
Dividends on common stock at $.20 per share (100) (100)
Common stock issued under Direct Stock
Purchase and Dividend Reinvestment Plan (1) 5 4
Exercise of stock options 5 (20) 32 17
Repurchase of common stock (336) (336)
Other (2) 15 13
- ----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $294 $1,793 $3,938 $(151) $(2,023) $3,851
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
Quarter ended Additional unrealized Total
March 31, 1999 Common paid-in Retained (loss) gain, Treasury shareholders'
(in millions) stock capital earnings net of tax stock equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1998 $147 $1,887 $3,353 $ 25 $ (891) $4,521
Comprehensive results:
Net income 254 254
Other comprehensive results, net of tax (40) (40)
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 254 (40) 214
Dividends on common stock at $.18 per share (94) (94)
Common stock issued under Direct Stock
Purchase and Dividend Reinvestment Plan 4 4
Exercise of stock options 20 (45) 58 33
Repurchase of common stock (183) (183)
Other 7 7
- ----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $147 $1,907 $3,468 $(15) $(1,005) $4,502
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
44
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 -- Basis of presentation
The unaudited consolidated financial statements of the Corporation are prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction with
the Corporation's 1999 Annual Report on Form 10-K. In the opinion of management,
all normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations for the periods have been included.
Note 2 -- Adoption of new accounting principle
Cumulative effect of a change in accounting principle
On Jan. 1, 1999, the Corporation adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position (SOP) No. 98-5
on reporting on the costs of start-up activities. This SOP requires that costs
of start-up activities be expensed as incurred. Initial application of the SOP
was reported as a cumulative effect of a change in accounting principle.
Due to this change in accounting principle, the Corporation recognized a
one-time after-tax charge of $26 million (pre-tax cost of $43 million), or $.05
per share, in the first quarter of 1999. The charge was related to underwriting
fees paid by the Corporation during the successful initial public offering in
the second quarter of 1998 of a $920 million Dreyfus closed-end mutual fund. In
September 1998, the Financial Accounting Standards Board staff concluded that
fees paid by advisors of closed-end funds should be expensed as incurred and
that any fees capitalized prior to July 24, 1998, should be written off upon the
adoption of SOP 98-5 and reported as a cumulative effect of a change in
accounting principle. This accounting change had no impact on a cash-flow basis
in 1999 since the underwriting fees were paid in the first half of 1998.
45
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 3 -- Securities
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- -----------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000 March 31, 1999
------------------------------------------ --------------------------------------------
GROSS UNREALIZED Gross unrealized
AMORTIZED ---------------- FAIR Amortized ---------------- Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 173 $ -- $ 1 $ 172 $ 190 $ -- $ -- $ 190
U.S. agency mortgage-backed 4,955 4 207 4,752 5,000 45 21 5,024
Other U.S. agency 5 -- -- 5 110 -- -- 110
- -----------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 5,133 4 208 4,929 5,300 45 21 5,324
Obligations of states and
political subdivisions 115 -- 8 107 112 1 2 111
Other mortgage-backed 1 -- -- 1 1 -- -- 1
Other securities 18 -- -- 18 15 -- -- 15
- -----------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $5,267 $ 4 $216 $5,055 $5,428 $ 46 $ 23 $5,451
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were less than $1 million in the first quarters of
2000 and 1999. There were no gross realized losses in the first quarters of 2000
or 1999.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000 March 31, 1999
------------------------------------------ --------------------------------------------
GROSS UNREALIZED Gross unrealized
AMORTIZED ---------------- FAIR Amortized ---------------- Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ -- $ -- $ -- $ -- $ 4 $ -- $ -- $ 4
U.S. agency mortgage-backed 1,078 1 14 1,065 1,337 22 -- 1,359
- -----------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 1,078 1 14 1,065 1,341 22 -- 1,363
Obligations of states and
political subdivisions 16 -- -- 16 16 -- -- 16
Other mortgage-backed 8 -- -- 8 14 -- -- 14
Other securities 51 -- -- 51 50 -- -- 50
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,153 $ 1 $ 14 $1,140 $1,421 $ 22 $ -- $1,443
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: In the first quarter of 1999, as part of the divestiture of the credit
card business, the Corporation sold $47 million of zero coupon U.S. Treasury
securities from the investment securities portfolio. These securities were
purchased and held to match fund the long-term interest rebate obligations
associated with the CornerStone(sm) credit card product and were no longer
required following the divestiture of the business. A gain of $7 million was
realized from the sale of the securities and recorded as part of the net gain
from divestitures.
46
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 4 -- Other assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounts and fees receivable $ 645 $ 582 $ 596 $ 709
Interest receivable 218 219 223 248
Prepaid expense:
Pension 584 554 531 490
Other 193 172 157 97
Receivables related to off-balance-sheet instruments 564 451 485 721
Equity and equity fund investments 785 582 545 413
Other 1,599 1,391 1,410 1,456
- -----------------------------------------------------------------------------------------------------------------------------
Total other assets $4,588 $3,951 $3,947 $4,134
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5 -- Deposits
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and other
savings accounts $13,034 $13,276 $13,056 $12,686
Retail savings certificates 6,636 6,482 6,595 6,772
Other time deposits 1,237 782 1,084 1,810
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 20,907 20,540 20,735 21,268
Noninterest-bearing 9,828 9,588 8,193 9,151
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 30,735 30,128 28,928 30,419
Deposits in foreign offices 2,611 3,293 3,101 2,929
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits $33,346 $33,421 $32,029 $33,348
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6 -- Preferred stock
The Corporation has authorized 50 million shares of preferred stock, none of
which was issued at March 31, 2000 or March 31, 1999.
47
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 7 -- Accumulated unrealized (loss) gain, net of tax
These tables include the quarterly changes in the balances of both the
accumulated unrealized (loss) gain, net of tax and its individual components.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment, net of tax
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $ (16) $ (18) $ (19) $(21)
Quarterly change 6 2 1 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (10) $ (16) $ (18) $(24)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized (loss) gain on assets available for sale, net of tax
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning balance $(119) $ (87) $ (71) $ 46
Quarterly change (22) (32) (16) (37)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance $(141) $(119) $ (87) $ 9
- ------------------------------------------------------------------------------------------------------------------------------------
Total accumulated unrealized (loss) gain, net of tax
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, March 31,
(in millions) 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning balance $(135) $(105) $ (90) $ 25
Quarterly change (16) (30) (15) (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance $(151) $(135) $(105) $(15)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 8 -- Foreign currency and securities trading revenue
The results of the Corporation's foreign currency and securities trading
activities are presented, by class of financial instrument, in the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
----------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange contracts $48 $40 $42
Debt instruments -- 1 3
Interest rate agreements 3 2 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $51 $43 $43
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) There was no unrealized gain or loss recorded at March 31, 2000, related to
securities held in the trading portfolio. The Corporation recorded an
unrealized gain of less than $1 million at Dec. 31, 1999, and an unrealized
loss of $4 million at March 31, 1999, related to securities held in the
trading portfolio.
48
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 9 -- Business sectors
Lines of business that offer similar or related products and services to common
or similar customer segments have been combined into six major business sectors:
Wealth Management, Global Investment Management, Global Investment Services,
Regional Consumer Banking, Specialized Commercial Banking and Large Corporate
Banking. Wealth Management includes private asset management services, private
banking and origination of jumbo residential mortgages. Global Investment
Management includes mutual fund management, institutional asset management and
brokerage services. Global Investment Services includes institutional trust and
custody, foreign exchange, securities lending, shareholder services, benefits
consulting and administrative services for employee benefit plans and backoffice
outsourcing for investment managers. This sector also includes substantially all
of the joint ventures, whose results are reported under the equity method of
accounting. Regional Consumer Banking includes consumer lending and deposit
products, direct banking and sales of insurance products. Specialized Commercial
Banking includes middle market lending, business banking, lease financing,
commercial real estate lending, insurance premium financing, asset-based lending
and venture capital. Large Corporate Banking includes cash management, large
corporate and mid-corporate relationship banking, corporate finance and
derivative products, securities underwriting and trading and international
banking.
For details of business sectors, see the table and the first paragraph following
the table on pages 6 and 7, as well as the Divestitures and Real Estate
Workout/Other Activity paragraphs on page 12. The table, through "Average Tier I
preferred equity", and information in those paragraphs are incorporated by
reference into these Notes to Financial Statements.
49
<PAGE> 51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 10 -- Earnings per common share (a)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
----------------------------------------------
(dollar amounts in millions, except per MARCH 31, Dec. 31, March 31,
share amounts; common shares in thousands) 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Income before cumulative effect of accounting change $253 $240 $ 280
Cumulative effect of accounting change -- -- (26)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $253 $240 $ 254
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 496,740 505,891 523,448
Basic earnings per common share:
Income before cumulative effect of accounting change $.51 $.47 $ .54
Cumulative effect of accounting change -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $.51 $.47 $ .49
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Net income (b) $253 $240 $ 254
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 496,740 505,891 523,448
Common stock equivalents:
Stock options 5,342 6,605 7,740
Common shares issuable upon conversion of
7 1/4% Convertible Subordinated Capital Notes -- -- 100
- ------------------------------------------------------------------------------------------------------------------------------------
Total 502,082 512,496 531,288
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Income before cumulative effect of accounting change $.50 $.47 $ .53
Cumulative effect of accounting change -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $.50 $.47 $ .48
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on unrounded numbers.
(b) The after-tax benefit of interest expense on the assumed conversion of the
7 1/4% Convertible Subordinated Capital Notes was less than $1 million for
the quarter ended March 31, 1999.
Note 11 -- Supplemental information to the Consolidated Statement of Cash Flows
Noncash investing and financing transactions that, appropriately, are not
reflected in the Consolidated Statement of Cash Flows are listed in the
following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(in millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net transfers to real estate acquired $ 2 $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 12 -- Legal proceedings
A discussion of legal actions and proceedings against the Corporation and its
subsidiaries is presented in Part II, Item 1, of this Form 10-Q.
50
<PAGE> 52
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.
-----------------
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust,
custody, benefits consulting and other activities. Because of the complex nature
of some of these actions and proceedings, it may be a number of years before
such matters ultimately are resolved. After consultation with legal counsel,
management believes that the aggregate liability, if any, resulting from such
pending and threatened actions and proceedings will not have a material adverse
effect on the Corporation's financial condition.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
(c) On March 15, 2000, the Corporation issued 279,813 shares of common stock to
Wachovia Bank, N.A., as Trustee of the Mellon Financial Corporation
Deferred Share Award Trust. In consideration for the issuance of the
shares, Wachovia Bank, as Trustee assumed the obligation of the Corporation
under its Long-Term Profit Incentive Plan (1996) to deliver shares to
individuals who received Deferred Share Awards under such Plan. This
issuance of shares was exempt from the registration requirements of the
Securities Act of 1933 under section 4(2) as a transaction not involving
any public offering.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.1 Restated Articles of Incorporation of Mellon Financial
Corporation, as amended and restated as of Sept. 17, 1998, and
as amended Oct. 18, 1999.
3.2 By-Laws of Mellon Financial Corporation, as amended, effective Oct. 19, 1999.
4.1 Shareholder Protection Rights Agreement, dated as of Oct. 15, 1996, between
Mellon Financial Corporation and Mellon Bank, N.A., as Rights Agent,
as amended and restated as of Oct. 19, 1999.
10.1 Agreement of Limited Partnership of Mellon Executive Co-Investment 2000 Plan, L.P.,
dated as of Jan. 1, 2000.
12.1 Computation of Ratio of Earnings to Fixed Charges (parent corporation).
12.2 Computation of Ratio of Earnings to Fixed Charges (Mellon Financial
Corporation and its subsidiaries).
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
</TABLE>
51
<PAGE> 53
PART II - OTHER INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K. (continued)
--------------------------------
(b) Reports on Form 8-K
During the first quarter of 2000, the Corporation filed the following
Current Report on Form 8-K:
(1) A report dated Jan. 18, 2000, which included under Items 5 and 7,
the Corporation's press release regarding fourth quarter and
full-year 1999 results of operations.
52
<PAGE> 54
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements 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.
MELLON FINANCIAL CORPORATION
(Registrant)
Date: May 10, 2000 By: /s/ Steven G. Elliott
-----------------------------------
Steven G. Elliott
Senior Vice Chairman and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer
of the Registrant)
53
<PAGE> 55
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Business Mellon Financial Corporation is a global financial services company providing a comprehensive range of
of the financial products and services in domestic and selected international markets. Through its six business sectors
Corporation (Wealth Management, Global Investment Management, Global Investment Services, Regional Consumer Banking,
Specialized Commercial Banking and Large Corporate Banking), the Corporation provides wealth management and
global investment management for individual and institutional investors, global investment services for
businesses and institutions and a variety of banking services for individuals and small, midsize and large
businesses and institutions in selected geographies. The Corporation's asset management companies, which
include The Dreyfus Corporation in the United States and Newton Management Limited in the United Kingdom,
provide investment products in many asset classes and investment styles. Mellon is a global provider of
custody, retirement and benefits consulting services through its Mellon Trust and Buck Consultants
affiliates. Mellon's principal executive office is located at One Mellon Center, 500 Grant Street,
Pittsburgh, PA 15258-0001 (Telephone: (412) 234-5000).
Exchange Mellon's common stock is traded on the New York Stock Exchange under the trading symbol MEL. Our
Listing transfer agent and registrar is ChaseMellon Shareholder Services, P.O. Box 590, Ridgefield Park, NJ
07660-0590. For more information, please call 1 800 205-7699.
Dividend Subject to approval of the board of directors, dividends are paid on Mellon's common stock on or about the
Payments 15th day of February, May, August and November.
Direct Stock The Direct Stock Purchase and Dividend Reinvestment Plan provides a way to purchase shares of common
Purchase and stock directly from the Corporation at the market value for such shares. Nonshareholders may purchase
Dividend their first shares of the Corporation's common stock through the Plan, and shareholders may increase their
Reinvestment shareholding by reinvesting cash dividends and through optional cash investments. Plan details are in a
Plan prospectus, which may be obtained from ChaseMellon Shareholder Services by calling 1 800 842-7629.
Phone Corporate Communications/ (412) 236-1264 Media inquiries
Contacts Media Relations
Direct Stock Purchase and 1 800 842-7629 Plan prospectus and enrollment materials
Dividend Reinvestment Plan
Publication Requests 1 800 205-7699 Requests for the Annual Report or quarterly
information
Securities Transfer Agent 1 800 205-7699 Questions regarding stock holdings, certificate
replacement/transfer, dividends and address
changes
Investor Relations (412) 234-5601 Questions regarding the Corporation's
financial performance
Shareholder Quarterly earnings and other news releases can be obtained by fax by calling Company News on Call at
Publications 1 800 758-5804 and entering a six-digit code (552187). Copies of Mellon's filings with the Securities and
Exchange Commission on Form 10-K, 10-Q and 8-K may be obtained by sending a written request to the Secretary
of the Corporation at One Mellon Center, Room 4826, Pittsburgh, PA 15258-0001.
Internet Mellon: www.mellon.com
Access Buck: www.buckconsultants.com
ChaseMellon Shareholder Services: www.chasemellon.com
Dreyfus: www.dreyfus.com
Dreyfus Brokerage Services: www.edreyfus.com
Dreyfus Investment Services Corporation: www.disc.mellon.com
Dreyfus Retirement Services: www.drs.dreyfus.com
Founders: www.founders.com
Newton: www.newton.co.uk
Russell/Mellon Analytical Services: www.russellmellon.com
</TABLE>
54
<PAGE> 56
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Mellon Previously filed as Exhibit
Financial Corporation, as amended and restated 3.1 to Quarterly Report on
as of Sept. 17, 1998 and as amended Form 10-Q (File No.
Oct. 18, 1999. 1-7410) for the quarter
ended Sept. 30, 1999, and
incorporated herein by
reference.
3.2 By-Laws of Mellon Financial Corporation, as Previously filed as Exhibit
amended, effective Oct. 19, 1999. 3.2 to Quarterly Report on
Form 10-Q (File No.
1-7410) for the quarter
ended Sept. 30, 1999, and
incorporated herein by
reference.
4.1 Shareholder Protection Rights Agreement, Previously filed as Exhibit
dated as of Oct. 15, 1996, between Mellon 1 to Form 8-A/A
Financial Corporation and Mellon Bank, N.A., Registration Statement
as Rights Agent, as amended and restated as (File No. 1-7410) dated
of Oct. 19, 1999. Oct. 19, 1999, and
incorporated herein by
reference.
10.1 Agreement of Limited Partnership of Mellon Filed herewith.
Executive Co-Investment 2000 Plan, L.P.,
dated as of Jan. 1, 2000.
12.1 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges (parent corporation).
12.2 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges (Mellon Financial Corporation and
its subsidiaries).
27.1 Financial Data Schedule, which is submitted Submitted herewith.
electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
55
<PAGE> 1
EXHIBIT 10.1
------------
EXECUTION COPY
================================================================================
MELLON EXECUTIVE CO-INVESTMENT 2000 PLAN, L.P.
AGREEMENT OF LIMITED PARTNERSHIP
DATED AS OF JANUARY 1, 2000
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I CERTAIN DEFINED TERMS...................................................................................1
ARTICLE II FORMATION, NAME AND PLACE OF BUSINESS; PURPOSE AND LIMITATION ON
OPERATIONS; TERM; CONVERSION TO CORPORATE FORM...........................................................5
2.1 FORMATION................................................................................................5
2.2 NAME.....................................................................................................6
2.3 PLACE OF BUSINESS........................................................................................6
2.4 PURPOSE..................................................................................................6
2.5 TERM.....................................................................................................7
2.6 CONVERSION TO CORPORATE FORM.............................................................................7
ARTICLE III GENERAL PARTNER; RELATIONSHIP WITH MELLON.............................................................7
3.1 GENERAL PARTNER; MANAGEMENT OF GENERAL PARTNER...........................................................7
3.2 NO COMPENSATION OF OFFICERS AND DIRECTORS; EXPENSES......................................................7
3.3 ADMINISTRATIVE SERVICES..................................................................................8
3.4 SERVICES BY MELLON; CHARGES AND EXPENSES.................................................................8
3.5 RELATED PARTNERSHIPS.....................................................................................8
ARTICLE IV LIMITED PARTNERS.......................................................................................8
4.1 LIMITED PARTNERS.........................................................................................8
4.2 LIST OF LIMITED PARTNERS.................................................................................8
4.3 NO MANAGEMENT BY LIMITED PARTNERS........................................................................9
4.4 LIMITATION ON TRANSFER OF LIMITED PARTNERS' UNITS........................................................9
ARTICLE V LIABILITY OF PARTNERS...................................................................................9
5.1 GENERAL PARTNER..........................................................................................9
5.2 LIMITED PARTNERS.........................................................................................9
ARTICLE VI POWERS OF GENERAL PARTNER; PROHIBITED TRANSACTIONS AND
RESTRICTIONS; DUTIES OF GENERAL PARTNER; INDEMNIFICATION AND
CONTRIBUTION.............................................................................................9
6.1 POWERS...................................................................................................9
6.2 RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER....................................................10
6.3 DUTIES..................................................................................................11
6.4 EXCULPATION, INDEMNIFICATION AND CONTRIBUTION...........................................................11
6.5 GENERAL PARTNER LOANS...................................................................................12
ARTICLE VII CAPITAL CONTRIBUTIONS AND ACCOUNTS; NO FURTHER CONTRIBUTIONS
REQUIRED; INTEREST; ACCOUNTING AND VALUATION............................................................12
7.1 CAPITAL CONTRIBUTIONS AND ACCOUNTS......................................................................12
7.2 FURTHER CAPITAL CONTRIBUTIONS...........................................................................13
7.3 INTEREST................................................................................................13
7.4 ACCOUNTING PERIODS AND TAXABLE YEARS....................................................................13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VIII ALLOCATIONS.........................................................................................14
8.1 ALLOCATION OF PROFITS AND LOSSES; OTHER ALLOCATIONS.....................................................14
8.2 SPECIAL ALLOCATION PROVISIONS...........................................................................15
8.3 TAX ALLOCATIONS.........................................................................................16
8.4 ALLOCATION AMONG LIMITED PARTNERS; TRANSFERS............................................................16
8.5 TAX ELECTIONS...........................................................................................16
8.6 OTHER ALLOCATION PROVISIONS.............................................................................16
ARTICLE IX DISTRIBUTIONS; WITHDRAWAL.............................................................................17
9.1 GENERAL PARTNER DISCRETION..............................................................................17
9.2 DISTRIBUTIONS...........................................................................................17
9.3 NON-CASH DISTRIBUTIONS..................................................................................18
9.4 WITHHOLDING.............................................................................................18
9.5 WITHDRAWAL..............................................................................................18
ARTICLE X TRANSFERABILITY OF INTERESTS; VESTING; TERMINATION OF EMPLOYMENT.......................................18
10.1 RESTRICTIONS AND CONDITIONS ON TRANSFERS OF UNITS......................................................18
10.2 ASSIGNEES..............................................................................................19
10.3 SUBSTITUTED LIMITED PARTNERS...........................................................................20
10.4 TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF LIMITED PARTNER......................................20
10.5 DISPOSITION OF GENERAL PARTNER'S INTEREST..............................................................22
ARTICLE XI DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP........................................................22
11.1 EVENTS CAUSING DISSOLUTION.............................................................................22
11.2 LIQUIDATION............................................................................................22
ARTICLE XII BOOKS AND RECORDS; ACCOUNTING; APPRAISAL; TAX MATTERS AND
ELECTIONS..............................................................................................24
12.1 BOOKS AND RECORDS......................................................................................24
12.2 ACCOUNTING BASIS; FISCAL YEAR..........................................................................24
12.3 BANK ACCOUNTS..........................................................................................24
12.4 APPRAISAL..............................................................................................25
12.5 REPORTS................................................................................................25
12.6 TAX MATTERS AND ELECTIONS..............................................................................25
ARTICLE XIII MISCELLANEOUS PROVISIONS............................................................................26
13.1 APPOINTMENT OF THE GENERAL PARTNER AS ATTORNEY-IN-FACT.................................................26
13.2 AMENDMENTS OF THIS AGREEMENT...........................................................................27
13.3 ARBITRATION............................................................................................28
13.4 NOTICES................................................................................................28
13.5 BINDING PROVISIONS.....................................................................................29
13.6 APPLICABLE LAW.........................................................................................29
13.7 COUNTERPARTS...........................................................................................29
13.8 SEPARABILITY OF PROVISION..............................................................................29
13.9 ENTIRE AGREEMENT.......................................................................................29
13.10 PARAGRAPH TITLES.......................................................................................29
13.11 WAIVER OF RIGHT OF PARTITION...........................................................................30
13.12 EFFECTIVENESS..........................................................................................30
</TABLE>
<PAGE> 4
EXHIBITS AND SCHEDULES
----------------------
Exhibits:
- --------
Exhibit A................................................Co-Investment Agreement
Schedules:
- ---------
Schedule A .............................................List of Limited Partners
<PAGE> 5
AGREEMENT OF LIMITED PARTNERSHIP of
MELLON EXECUTIVE CO-INVESTMENT 2000 PLAN,
L.P., dated as of January 1, 2000, by and
among MELLON VENTURES FUND HOLDING
CORPORATION, a Delaware corporation, as
general partner hereunder (the "General
Partner"), and the persons who have signed
this Agreement and have been admitted as
additional limited partners hereunder (the
"Limited Partners") (the General Partner and
the Limited Partners are collectively
referred to as the "Partners").
ARTICLE I
CERTAIN DEFINED TERMS
As used in this Agreement, the following terms shall have the following
meanings:
"Act" - The Delaware Revised Uniform Limited Partnership Act, 6 Del. C.
Sections 17-101 et seq., as amended from time to time and any successor thereto.
"Affiliate" - Any person or entity that controls, is controlled by, or
is under common control with, any other person or entity.
"Agreement" - This Agreement of Limited Partnership, as it may be
amended, modified or supplemented from time to time.
"Board" - Board of Directors of the General Partner appointed from time
to time by Mellon as the sole stockholder of the General Partner.
"Capital Account" - As defined in Section 7.1(d).
"Capital Contributions" - Amounts contributed to the Partnership by the
Partners.
"Carrying Value" - With respect to any Partnership asset, the asset's
adjusted basis for Federal income tax purposes, except that the Carrying Values
of all Partnership assets shall be adjusted to equal their respective fair
market values (as determined by the General Partner), in accordance with the
rules set forth in Treasury Regulations Section 1.704-1(b)(2)(iv)(f), except as
otherwise provided herein, immediately prior to: (a) the date of the
distribution of more than a de minimis amount of Partnership property (other
than a pro rata distribution) to a Partner; or (b) the date of the termination
of the Partnership under Section 708(b)(i)(B) of the Code; provided that
adjustments pursuant to clause (a) above shall be made only if the General
Partner determines in it sole discretion that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Partners. The
Carrying Value of any Partnership asset
<PAGE> 6
distributed to any Partner shall be adjusted immediately prior to such
distribution to equal its Fair Market Value. The Carrying Value of Partnership
assets shall be adjusted by depreciation and amortization as computed for book
purposes as provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(g).
"Cause" - To the maximum extent permitted by applicable law, a
termination of a Limited Partner's employment by a member of the Mellon Group
because the Limited Partner has (A) been convicted of or has entered a plea of
nolo contendere with respect to a felony, or any misdemeanor evidencing moral
turpitude, deceit, dishonesty or fraud, including without limitation a criminal
offense covered by Section 19 of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1829, or any successor provision, (B) engaged in conduct which
constitutes a willful and continued failure to perform his duties hereunder
(other than by reason of disability), after notice to the Limited Partner and
the opportunity to correct the same, (C) materially violated the Mellon Group's
Code of Conduct ( as the same may be modified from time to time) or such other
code(s) of conduct as may be made applicable to employees of the Mellon Group
from time to time, or applicable policies of the Mellon Group (as modified from
time to time), including, without limitation, policies concerning securities
trading, (D) willfully engaged in any misconduct which has the effect of being
injurious to the Mellon Group, provided, however, that the Mellon Group has
given the Limited Partner advance notice of such Cause including the reasons
therefor, together with a reasonable opportunity for the Limited Partner to
reply to such notice.
"Change of Control" - Means any of the following events: (a) the
occurrence with respect to Mellon of a "control transaction", as such term is
defined in Section 2542 of the Pennsylvania Business Corporation Law of 1988, as
of August 15, 1989; or (b) approval by the stockholders of Mellon of (i) any
consolidation or merger of Mellon where either (x) the holders of voting stock
of Mellon immediately before the merger or consolidation will not own more than
50% of the voting shares of the continuing or surviving corporation immediately
after such merger or consolidation or (y) the Incumbent Directors immediately
before the merger or consolidation will not hold at least 50% (rounded to the
next whole person) of the seats on the board of directors of the continuing or
surviving corporation; or (ii) any sale, lease or exchange or other transfer (in
one transaction or a series of related transactions )of all or substantially all
the assets of Mellon; or (c) a change of 25% (rounded to the next whole person)
in the membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period; and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this definition, the term "Incumbent Director" means as of
any time a director of Mellon (x) who has been a member of the Board of
Directors continuously for at least 12 months or (y) whose election or
nomination as a director within such period met the requirements of clauses
(c)(i) and (c)(ii) herein.
"Co-Investment Agreement" - The Co-Investment Agreement (Exhibit A
hereto) among the Partnership and the Investment Partnerships, pursuant to which
the Partnership has agreed to co-invest with the Investment Partnerships.
2
<PAGE> 7
"Code"- The Internal Revenue Code of 1986, as amended.
"Disability" - The total disability of a Limited Partner covered under
a long-term disability plan of the Mellon Group then in effect.
"Eligible Investors" - Either (a) certain key officers and employees of
the Mellon Group designated by Mellon in its sole discretion (each such person,
an "Eligible Investor"); or (b) at the request of an Eligible Investor and at
the discretion of Mellon, Immediate Family Members or trusts or other investment
vehicles established by such Eligible Investor for his or her benefit and/or the
benefit of his or her Immediate Family Members, provided that such Eligible
Investor or Immediate Family Member has (i) and individual net worth or net
worth with his or her spouse that exceeds $1,000,000; or (ii) an individual
income in excess of $200,000 in each of 1997 and 1998 or joint income with his
or her spouse in excess of $300,000 in each of such years and has a reasonable
expectation of reaching the same income level in 1999.
"Excluded Investments" - Investments made by the Investment
Partnerships which are determined to be Excluded Investments in the sole
discretion of Mellon Ventures or Mellon.
"Fixed Return" - Cumulative preferred annual return on the General
Partner's aggregate Preferred Capital Contribution equal to 8%, compounded
annually.
"General Partner" - Mellon Ventures Funds Holding Corporation, a
Delaware corporation, as general partner of the Partnership.
"Immediate Family Member" - With respect to any natural person, such
person's child, stepchild, grandchild, parent, grandparent, spouse, sibling,
niece, nephew, any mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law or sister-in-law (including, as a result of adoptive
relationships), and trusts or other entities in which 100% of the beneficial
interests are owned by such persons.
"Interest" - The rights and obligation of a Partner hereunder.
"Investment Company Act" - The Investment Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder.
"Investment Partnerships" - Mellon Ventures L.P., Mellon Ventures II
L.P. and any other investment partnership formed by Mellon Ventures or its
Affiliates now or in the future, designated by Mellon as an Investment
Partnership.
"Investment Period" - January 1, 2000 to December 31, 2000.
"Limited Partner Payment" - The aggregate amount of the Capital
Contribution of each Limited Partner which is to be paid upon execution and
delivery of the Subscription Agreement.
3
<PAGE> 8
"Limited Partners" - Persons who have been admitted as additional
limited partners to the Partnership.
"Memorandum" - Confidential Private Placement Memorandum dated
December, 1999 relating to the Partnership, as amended or supplemented from time
to time.
"Mellon" - Mellon Financial Corporation.
"Mellon Ventures" - Mellon Ventures Fund Holding Corporation, a
Delaware corporation.
"Mellon Group" - Mellon and its Affiliates.
"Money Fund" - A segregated interest-bearing deposit account
denominated in U.S. dollars.
"Nonrecourse Deductions" - As defined in U.S. Treasury Regulations
Section 1.704-2(b). The amount of Partnership Nonrecourse Deductions for a
fiscal year equals the net increase, if any, in the amount of Partnership
minimum gain during that fiscal year, determined according to the provisions of
Treasury Regulations Section 1.704-2(c).
"Partner Nonrecourse Deductions" - As defined in Treasury Regulations
Section 1.704-2(i)(2).
"Partner Nonrecourse Debt Minimum Gain" - An amount with respect to
each partner nonrecourse debt (as defined in Treasury Regulations Section
1.704-2(b)(4) equal to the Partnership Minimum Gain that would result if such
partner nonrecourse debt were treated as a nonrecourse liability (as defined in
Treasury Regulations Section 1.752-1(a)(2) determined in accordance with
Treasury Regulations Section 1.704-2(i)(3).
"Partners" - Collectively, the General Partner and the Limited
Partners.
"Partnership" - Mellon Executive Co-Investment 2000 Plan, L.P., the
limited partnership formed in accordance with this Agreement and under the laws
of the State of Delaware.
"Partnership Minimum Gain" - As defined in Treasury Regulations Section
1.704-2(b)(2) and 1.704-2(d).
"Preferred Capital Contribution" - As defined in Section 7.1(c).
"Profits and Losses" - For each fiscal year or other period, the
taxable income or loss of the Partnership, or particular items thereof,
determined in accordance with the accounting method used by the Partnership for
federal income tax purposes with the following adjustments:
(a) all items hereof of income, gain, loss or deduction allocated pursuant to
Section 8.2 shall not be taken into account in computing such taxable income or
loss; (b) any income of the Partnership that is exempt from federal income
taxation and not otherwise taken into account in computing Profits and Losses
shall be added to such taxable income or loss; (c) if the Carrying
4
<PAGE> 9
Value of any asset differs from its adjusted tax basis for federal income taxes
purposes, any gain or loss resulting from a disposition of such asset shall be
determined with reference to such Carrying Value; (d) upon an adjustment to the
Carrying Value of any asset pursuant to the definition of Carrying Value, the
amount of the adjustment shall be included as gain or loss in computing such
taxable income or loss; and (e) except for items in (a) above, any expenditures
of the Partnership not deductible in computing taxable income or loss, not
properly capitalizable and not otherwise taken into account in computing Profits
and Losses pursuant to this definition shall be treated as deductible items.
"Representative" - Any executor, administrator, trustee, committee,
guardian, conservator or representative appointed by a court of competent
jurisdiction to act on behalf of a Limited Partner or the estate of a Limited
Partner.
"Retirement" - Retirement pursuant to the Mellon Retirement Plan after
age 55 with at least five years of service.
"Terminated Partner" - As defined in Section 10.4(a).
"Transfer" - As defined in Section 10.1(a).
"Transfer Application" - Written and dated notification of a Transfer
of all or any portion of the Units of a Limited Partner referred to in Section
10.2.
"Transferring Limited Partner" - As defined in Section 10.1(c).
"Units" - Units of limited partnership interests in the Partnership
representing the entire rights owned by a Limited Partner, including the right
to a share of the Profits and Losses of the Partnership.
"Unvested Interest" - The unvested portion of each Limited Partner's
interest in the Partnership, determined in accordance with Section 10.4.
"Vesting Schedule" - The schedule according to which a Limited
Partner's interest in the Partnership generally will vest, as set forth in
Section 10.4.
ARTICLE II
FORMATION, NAME AND PLACE OF BUSINESS;
PURPOSE AND LIMITATION ON OPERATIONS; TERM;
CONVERSION TO CORPORATE FORM
2.1 FORMATION.
The General Partner and the Initial Limited Partner have formed, and
the General Partner and the parties hereto hereby continue, under the Act, a
limited partnership for the purposes hereinafter described. In the event that it
shall be necessary for the Partnership to exist in or qualify to do business
under the laws of any state or states other than, or in addition to, the State
of Delaware, the parties hereby agree that the Partnership shall take such
action as may be
5
<PAGE> 10
necessary to exist or qualify to do business in any state in which such
existence or qualification shall be required, provided that in any such event
the Partnership shall at all times continue to be a limited partnership formed
under and governed by the provisions of the Act. The General Partner may elect,
in its sole discretion, without the consent of the Limited Partners, to qualify
the Partnership as a limited liability partnership pursuant to Title G, Chapter
15 of the Delaware Code Annotated.
2.2 NAME.
The name of the Partnership shall be "Mellon Executive Co-Investment
2000 Plan, L.P." The business of the Partnership may be conducted under any
other name deemed necessary or desirable by the General Partner in order to
comply with local law.
2.3 PLACE OF BUSINESS.
The principal place of business of the Partnership shall be at 919
North Market Street, Wilmington, DE 19801, and or at such other place within or
without the State of Delaware as the General Partner hereafter may designate in
writing to the Limited Partners.
2.4 PURPOSE.
The purpose and character of the business of the Partnership is to
invest the funds of the Partnership in various investments, seeking substantial
capital appreciation. In seeking to achieve its investment objective, the
Partnership, subject to the limitations described herein, may enter into high
risk investment opportunities of all kinds in all markets globally, directly or
indirectly, including without limitation:
(a) investing in equity and debt securities of all types, whether
subordinated or unsubordinated, issued by companies or other issuers, secured or
unsecured, rated or unrated, listed or unlisted, or denominated in U.S. dollars
or other currencies;
(b) participating in venture capital and growth equity activities
and other special situations;
(c) investing in joint ventures, pooled investment vehicles or
similar entities managed or organized by third parties in which Mellon Ventures
Inc. has an active role in such entity's investment activities;
(d) investing in work-outs and special situations; and
(e) making short-term investments in mezzanine equity and debt
securities and bridge loans or other short-term instruments.
The Partnership will co-invest with the Investment Partnerships on a
pro rata basis and will generally receive an interest in all of the investments
committed to during the Investment Period pursuant to the terms of the
Co-Investment Agreement (other than Excluded Investments).
6
<PAGE> 11
2.5 TERM.
(a) The partnership shall continue until the close of business on
December 31, 2025, unless the partnership is dissolved prior to such date or
dates pursuant to the provisions of Article 11 hereof or as otherwise provided
by operation of law.
(b) No Limited Partner's death, incapacity or status as a debtor in
a bankruptcy case, resignation or retirement from the Mellon Group or other
termination of employment with any member of the Mellon Group shall result in
the dissolution or termination of the Partnership as among the remaining
Partners.
2.6 CONVERSION TO CORPORATE FORM.
In the event of changes in the law, regulations or interpretations
applicable to the Partnership or its operations or changes in other
circumstances which, in the sole judgment of the General Partner, render it
desirable or helpful for the business of the Partnership to be conducted in a
corporate or limited liability company, rather than in a partnership form, the
General Partner, without the approval of the Limited Partners, shall have the
power to incorporate or organize the Partnership as a limited liability company
or take such other action as it may deem advisable in light of such changed
conditions, including, without limitation, dissolving the Partnership,
transferring its assets as an entirety to a successor investment vehicle or
causing it to merge with a successor investment vehicle.
ARTICLE III
GENERAL PARTNER; RELATIONSHIP WITH MELLON
3.1 GENERAL PARTNER; MANAGEMENT OF GENERAL PARTNER.
Mellon Ventures Fund Holding Corporation is the sole general partner of
the Partnership. The General Partner will have complete control of the
Partnership's business. Such control shall be exercised by Mellon Ventures Fund
Holding Corporation, in its capacity as general partner of the Partnership, by
the appropriate officers of the General or their designees or agents.
3.2 NO COMPENSATION OF OFFICERS AND DIRECTORS; EXPENSES.
(a) No compensation shall be paid by the Partnership to the General
Partner for its services as General Partner and officers, employees and
directors thereof, respectively.
(b) The costs and expenses incurred on behalf of the Partnership
with respect to the organization of the Partnership, pre-offering activities and
offering activities and the selling of Units including, but not limited to,
travel, telephone, postage, legal and accounting expenses, shall be paid by the
General Partner. Except as otherwise provided herein to the contrary, the
General Partner will bear all other expenses of its operations including fees
and expenses of attorneys, accountants and experts, commitment and investment
banking fees, and interest and all expenses related to investments or potential
investments and to the acquisition, holding and sale or other disposition of
investments.
7
<PAGE> 12
3.3 ADMINISTRATIVE SERVICES.
The day-to-day operations of the Partnership will be managed by Mellon
Ventures, Inc. pursuant to such administrative services arrangements as the
General Partner may enter into.
3.4 SERVICES BY MELLON; CHARGES AND EXPENSES.
In connection with the investment activities of the Partnership, Mellon
Group may be entitled to receive certain fees, brokerage commissions or other
benefits from purchasers, sellers and portfolio companies including other
investment partnerships, funds or pooled investment vehicles) in connection with
services rendered to these companies, including strategic and financial advisory
services, interim acquisition financing and other lending and underwriting or
placement of securities, which fees may be higher or lower than competitive
market rates.
3.5 RELATED PARTNERSHIPS.
The General Partner and any of its Affiliates in the future may serve
as the general partner of other partnerships formed for the benefit of officers
and employees of the Mellon Group, which partnerships may have the same or a
similar purpose and may invest or propose to invest in the same types of
investments as the Partnership.
ARTICLE IV
LIMITED PARTNERS
4.1 LIMITED PARTNERS.
(a) The General Partner is authorized to admit Limited Partners to
the Partnership pursuant to the terms of the Memorandum and this Agreement and
upon execution and delivery by each Limited Partner of a subscription agreement
and such other documents as the General Partner deems necessary or advisable,
each in form satisfactory to the General Partner, relating to the Units. The
manner of the offering of the Units, the terms and conditions under which
subscriptions for such Units will be accepted, and the manner of and conditions
to the sale of Units to subscribers therefor will be as provided in this
Agreement and in the Memorandum and the various subscription agreements between
the Partnership and each Limited Partner, and subject to any provisions of any
of them. A person shall be admitted as a Limited Partner on the day his or her
admission is reflected on the books and records of the Partnership.
(b) Notwithstanding subsections 4.2(a), the General Partner shall
not accept subscriptions after January 14, 2000 or admit additional Limited
Partners to the Partnership whose subscriptions were not submitted prior to such
date.
4.2 LIST OF LIMITED PARTNERS.
The name, residence and business address of each Limited Partner and
the amount of such Limited Partner's Capital Contribution is set forth on
Schedule A hereto, as amended from time to time.
8
<PAGE> 13
4.3 NO MANAGEMENT BY LIMITED PARTNERS.
No Limited Partner as such shall take part in the management of the
Partnership's business, transact any business in the Partnership's name or have
the power to sign documents for or otherwise bind the Partnership. Limited
Partners will not participate in any investment decisions made on behalf of the
Partnership.
4.4 LIMITATION ON TRANSFER OF LIMITED PARTNERS' UNITS.
Except as set forth in Article 10 herein, no Limited Partner shall,
directly or indirectly, Transfer any Units.
ARTICLE V
LIABILITY OF PARTNERS
5.1 GENERAL PARTNER.
Except as provided in Section 11.2 (e), the General Partner shall not
be required to contribute to the capital or, or lend, the Partnership any funds
in excess of 3.1111 times the Limited Partners' aggregate Capital Contributions.
Neither the General Partner nor any of its Affiliates shall have any personal
liability for the return or repayment of the Capital Contributions of any
Limited Partner.
5.2 LIMITED PARTNERS.
Except as otherwise provided under Delaware law, no Limited Partner
shall be liable for the debts, liabilities, contracts or any other obligations
of the Partnership, except to the extent of such Limited Partner's Capital
Contribution, or for the debts or liabilities of any other Partner. No Limited
Partner shall be required to lend the Partnership any funds.
ARTICLE VI
POWERS OF GENERAL PARTNER; PROHIBITED TRANSACTIONS
AND RESTRICTIONS; DUTIES OF GENERAL PARTNER;
INDEMNIFICATION AND CONTRIBUTION.
6.1 POWERS.
(a) In addition to and not in limitation of any rights and powers
conferred by law or other provisions of the Agreement, and except as limited,
restricted or prohibited by the express provisions of this Agreement, the
General Partner shall have and may exercise on behalf of the Partnership all
powers and rights necessary, proper, convenient or advisable to effectuate and
carry out the purpose and business of the Partnership. These powers shall
include, without limitation, the following powers:
(i) to borrow money in the name of the Partnership for use in
the Partnership business, and, if security is required therefor, to
mortgage or subject to any
9
<PAGE> 14
other security device any portion of the assets of the Partnership, to
obtain replacements of any mortgage or other security device, and to
prepay, in whole or in part, refinance, increase, modify, consolidate
or extend any mortgage or other security device;
(ii) to enter into transactions and make investments with or
through Affiliates of the General Partner and to participate in
investment transactions sponsored, managed or underwritten by
Affiliates of General Partner or in entities as to which Affiliates of
the General Partner serve as investment adviser or placement agent;
(iii) to purchase interests in entities sponsored, managed or
underwritten by Affiliates of the General Partner, or in which
Affiliates of the General Partner have an interest, including, but not
limited to, limited partnership interests in limited partnerships in
which such Affiliates serve as general partner;
(iv) to make temporary investments of Partnership capital in
all types of securities, including, without limitation, deposits with
members of the Mellon Group, short-term United States government and
agency securities, certificates of deposit, interest-bearing deposits
in United Stated banks, securities issued by or on behalf of states,
municipalities and their instrumentalities, prime-grade commercial
paper, repurchase agreements with respect to any of the foregoing, and
prime-grade commercial paper issued by other investment companies;
(v) to buy and sell securities and open brokerage and other
accounts with entities including with Affiliates of the General
Partner;
(vi) to enter into the Co-Investment Agreement, the
Administration Agreement (if necessary) and other contracts (including,
without limitation, insurance policies and contracts, of any type and
coverage) and make commitments on behalf of the Partnership and, in
general, to do and perform everything which may be necessary,
advisable, suitable or proper for the conduct of the Partnership's
business and for the carrying out of the purposes and objects herein
before enumerated, including the delegation to any person or persons of
such functions and authority as the General Partner may determine; and
(vii) to employ attorneys and accountants to represent and
audit the books of the Partnership, which attorneys and accounts may
also serve as counsel and auditors to the General Partner and any of
its Affiliates.
(b) Any person not a party to this Agreement dealing with the
Partnership shall be entitled to rely conclusively upon the power and authority
of any officer or director of the General Partner to bind the Partnership in all
respects, and to execute agreements, instruments and other writings on behalf of
and in the name of the Partnership.
6.2 RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER.
Without the approval of a majority in interest of the Limited Partners,
the General Partner shall not have the authority to alter the purpose of the
Partnership.
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<PAGE> 15
6.3 DUTIES.
(a) Other than with respect to temporary investments, and after
setting aside suitable reserves, the General Partner shall invest the Capital
Contributions of the Partners and reinvest the revenues of the Partnership in
accordance with the purposes of the Partnership, monitor the investments of the
Partnership and manage the related affairs of the Partnership.
(b) Except as otherwise expressly provided herein, the General
Partner shall take all action that may be necessary or appropriate for the
continuation of the Partnership's valid existence as limited partnership under
the laws of the State of Delaware, and for the acquisition, holding and
disposition, in accordance with the provisions of this Agreement and applicable
laws and regulations, of the investments of the Partnership.
(c) The General Partner shall prepare or cause to be prepared and
shall file on or before the due date for any extension thereof) any United
States federal, state or local tax returns required to be filed by the
Partnership. The General Partner shall cause the Partnership to pay from
Partnership funds any taxes payable by the Partnership.
(d) The General Partner shall be under a fiduciary duty and
obligation to conduct the affairs of the Partnership in the best interest (or
not opposed to the best interest) of the Partnership, including the safekeeping
and use of all Partnership funds and assets (whether or not in the immediate
possession or control of the General Partner) for the benefit of the
Partnership. The General Partner shall at all times act with integrity and good
faith and exercise due diligence in all activities relating to the conduct of
the business of the Partnership and in resolving conflicts of interest.
(e) The General Partner may delegate or assign any action which may
be or is required to be taken by the General Partner to any third party,
including without limitation, an Affiliate of the General Partner.
6.4 EXCULPATION, INDEMNIFICATION AND CONTRIBUTION.
Neither the General Partner, any of its officers, employees, directors
or, agents (including any partners or principals, of Mellon Ventures and its
Affiliates) nor any person who controls the General Partner (a "control person")
within the meaning of Section 15 of the Securities Act of 1933, as amended,
shall be liable to the Partnership or the Limited Partners for any act or
failure to act relating in any way to the Partnership, its assets, business or
affairs so long as such act or failure to act does not (a) have a material
adverse effect of the Partnership; and (b) constitute such person's willful
misconduct bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the Partnership or such person's office. The General
Partner and its officers, employees, directors, agents, representatives and
control persons shall be indemnified by the Partnership to the fullest extent
permitted by law for any and all losses, claims, damages and expenses arising
our of or incurred in connection with any claim, action or demand against the
General Partner, the Partnership or any such indemnified person relating to the
Partnership, its assets, business or affairs (including, without limitation,
attorneys' fees and expenses and any amounts paid in settlement or compromise of
any such claim, action or demand); provided, however, that the foregoing
indemnification shall not apply if a court of competent jurisdiction
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<PAGE> 16
makes a final decision that such claim, action or demand resulted directly from
such indemnified person's willful misconduct, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the Partnership or
such person's office.
6.5 GENERAL PARTNER LOANS.
Notwithstanding the provisions of Section 3.4, in the event that the
Partnership at any time lacks sufficient funds to meet its financial obligation,
the General Partner shall have the right to, but shall not be required to, lend
money to the Partnership on terms, including interest rates, that are fair and
reasonable to the Partnership (but in no event less than the rate required under
United States tax law to avoid compensation income to the Limited Partners)
without any approval of the Limited Partners. The General Partner may execute
written agreements governing any such loans on behalf of the Partnership.
ARTICLE VII
CAPITAL CONTRIBUTIONS AND ACCOUNTS; NO FURTHER
CONTRIBUTIONS REQUIRED; INTEREST; ACCOUNTING AND VALUATION
7.1 CAPITAL CONTRIBUTIONS AND ACCOUNTS.
(a) Subscriptions for Units shall be accepted or rejected by the
General Partner as it determines in its sole discretion. Each Unit represents a
Capital Commitment of $37,500. The Capital Contribution of each Limited Partner
is one Unit ($37,500). The payment for each Unit is due and payable 50% on
February 18, 2000 and 50% on August 18, 2000. The General Partner may invest
such Capital Contributions in temporary investments until needed to fund one or
more Partnership investments. Any Capital Contributions made to the Partnership
by a Limited Partner must be paid in cash. The obligation of a Limited Partner
to pay the purchase price for such Limited Partner's Units in full shall be
limited by the provisions of this Section 7.1(a) and Section 10.4. The Partner's
Capital Contributions will be used to fund the Partnership's share of
investments other than Excluded Investments made by or on behalf of the
Investment Partnerships by Mellon Ventures and which are (i) acquired by one or
more of such Investment Partnerships during the Investment Period; or (ii) made
out of reserves which were created for follow-on investments to investments made
during the Investment Period. The General Partner may decide not to make or
participate in any further investments at any time in its sole discretion.
(b) Pending the making of investments for which the Partnership
requires capital, payments for the purchase price of each Limited Partner's
Units may be invested in temporary investments as the General Partner
determines. Amounts invested in temporary investments may not be subject to
redemption by Limited Partners, although income earned from temporary
investments may be distributed to the Limited Partners in the General Partner's
sole discretion. The General Partner will dispose of temporary investments from
time to time as needed to fund specific Partnership investments or otherwise
fund Partnership expenses. Amounts held at the end of the Investment Period that
have not been used for Partnership purposes and which the Partnership has not
committed for future use shall be distributed to the Limited Partners in
proportion to their allocable share of amounts originally contributed to the
Partnership.
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<PAGE> 17
(c) The General Partner shall contribute to the capital of the
Partnership an amount equal to 3.1111 the aggregate amount contributed by the
Limited Partners. The General Partner shall make its Capital Contributions at
the time the Partnership funds its investments. A portion of the General
Partner's Capital Contribution equal to three times the aggregate amount of the
Limited Partner's Capital Contribution (the "Preferred Capital Contribution")
will receive the benefit of a preferred return (the "Fixed Return"), at the rate
of 8% per annum, compounded annually.
(d) A separate capital account ( the "Capital Account") shall be
established and maintained for each Partner. The Capital Account of each Partner
shall be credited with such Partner's Capital Contributions, all Profits
allocated to such Partner pursuant to Section 8.1 and any items of income or
gain which are specifically allocated pursuant to Section 8.2 and shall be
debited with all Losses allocated to such Partner pursuant to Section 8.1 any
items of loss or deduction of the Partnership specially allocated to such
Partner pursuant to Section 8.2, and all cash and the Carrying Value of any
property (net of liabilities assumed by such Partner and the liabilities to
which such property is subject) distributed by the Partnership to such Partner.
To the extent not provided for in the preceding sentence, the Capital Accounts
of the Partners shall be adjusted and maintained in accordance with the rules of
Treasury Regulations Section 1.704-1 (b)(2)(iv), as the same may be amended or
revised; provided that such adjustment and maintenance does not have a material
adverse effect on the economic interests of the Partners. Any references in any
section of this Agreement to the Capital Account of a Partner shall be deemed to
refer to such Capital Account as the same may be credited or debited from time
to time as set forth above. In the event of any Transfer of any interest in the
Partnership in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest.
7.2 FURTHER CAPITAL CONTRIBUTIONS.
No Limited Partner shall be required to purchase additional Units or
make any Capital Contribution to the Partnership in excess of such Limited
Partner's initial Capital Contributions.
7.3 INTEREST.
No Limited Partner shall receive interest on amounts credited to such
Limited Partner's Capital Account
7.4 ACCOUNTING PERIODS AND TAXABLE YEARS.
An accounting period and taxable year shall mean the calendar year,
except that the last accounting period and taxable year shall mean the period
ending with the termination of the Partnership.
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ARTICLE VIII
ALLOCATIONS
8.1 ALLOCATION OF PROFITS AND LOSSES; OTHER ALLOCATIONS.
(a) Except as otherwise provided in this Agreement, Profit or Loss
of the Partnership for each taxable year shall be allocated annually at the end
of the Partnership's fiscal year in the following order and priority:
(i) Profits of the Partnership generally will be allocated as
follows:
(A) first, to the General Partner to the extent the Losses
previously allocated to it pursuant to clause (ii)(C) of this
Section 8.1 are in excess of Profits previously allocated to it
pursuant to this clause (i)(A);
(B) then, 90% to the Limited Partners and 10% to the
General Partner to the extent that losses previously allocated
pursuant to paragraph (ii)(C) below are in excess of profits
previously allocated to, then pursuant to this paragraph (i)(B);
(C) then, 100% to the General Partner until the cumulative
Profits allocated to the General Partner pursuant to this paragraph
(i)(C) equals an amount equal to the Fixed Return; and
(D) thereafter, any remaining Profits shall be allocated
90% to the Limited Partners and 10% to the General Partner.
(ii) Losses of the Partnership generally will be allocated as
follows:
(A) first, 90% to the Limited Partners and 10% to the
General Partner in an amount equal to the excess, if any, of (x)
the cumulative Profits previously allocated to the Partners
pursuant to clause (i)(D) above over (y) the cumulative Losses
previously allocated to the Partners pursuant to this clause
(ii)(A);
(B) then, 90% to the Limited Partners until the Limited
Partners' Capital Accounts are reduced to zero and 10% to the
General Partner; and
(C) thereafter, 100% to the General Partner;
provided, however, that in no event shall Losses be allocated to the
Limited Partners if the effect of such allocation would reduce their
Capital Accounts to below zero.
(b) As provided further in Section 10.4(a), allocations of Profits
and Losses which would otherwise be made to a Limited Partner pursuant to the
foregoing may instead be made to the General Partner with respect to the
Unvested Interest of such Limited Partner whose
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<PAGE> 19
employment with a member of the Mellon Group has terminated other than due to
such Limited Partner's death or Disability.
8.2 SPECIAL ALLOCATION PROVISIONS.
Notwithstanding anything to the contrary in this Agreement, the
following special allocations shall be made:
(a) Minimum Gain Chargeback. Notwithstanding any other provision in
this Article 8, if there is a net decrease in Partnership minimum gain or
partner nonrecourse debt minimum gain (determined in accordance with the
principles of Treasury Regulations Sections 1.704-2(d) and 1.704-2(i)) during
any Partnership taxable year, the Partners shall be specially allocated items of
Partnership income and gain for such year (and, if necessary, subsequent years)
in an amount equal to their respective shares of such net decrease during such
year, determined pursuant to Treasury Regulations Sections 1.704-2(g) and
1.704-2(i)(5). The items to be so allocated shall be determined in accordance
with Treasury Regulations Section 1.704-2(f). this Section 8.2(a) is intended to
comply with the minimum gain chargeback requirements in such Treasury
Regulations Sections and shall be interpreted consistently therewith, including
that no chargeback shall be required to the extent of the exceptions provided in
Treasury Regulations Sections 1.704-2(f) and 1.704-2(i)(4).
(b) Qualified Income Offset. In the event any Limited Partner
unexpectedly receives any adjustments, allocations, or distributions described
in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of
Partnership income and gain shall be specially allocated to such Limited Partner
in an amount and manner sufficient to eliminate the deficit balance in his or
her Capital Account created by such adjustments, allocations or distributions as
promptly as possible.
(c) Gross Income Allocation. In the event any Limited Partner has a
deficit Capital Account at the end of any Fiscal Year which is in excess of the
amounts such Partner is deemed to be obligated to restore pursuant to the
penultimate sentences of Treasury Regulations Section 1.704-2(g)(1) and
1.704-2(i)(5), each such Limited Partner shall be specially allocated items of
Partnership income and gain in the amount of such excess as quickly as possible,
provided that an allocation pursuant to this Section 8.2(c) shall be made only
if and to the extent that a Limited Partner would have a deficit Capital Account
in excess of such amount after all other allocations provided for in this
Article 8 have been tentatively made as if Section 8.2(a) and this Section
8.2(c) were not in this Agreement.
(d) Nonrecourse Deductions. Nonrecourse Deductions shall be
allocated 10% to the General Partner and 90% among the Limited Partners in
accordance with their respective Capital Account balances.
(e) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated to the Partner who bears the economic
risk of loss with respect to the liability to which such Partner Nonrecourse
Deductions are attributable in accordance with U.S. Treasury Regulations Section
1.704-2(j).
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8.3 TAX ALLOCATIONS.
For income tax purposes only, each item of income, gain, loss and
deduction of the Partnership shall be allocated among the Partners in the same
manner as the corresponding items of Profits and Losses and specially allocated
items are allocated for Capital Account purposes: provided that in the case of
any Partnership asset, the Carrying Value of which differs from its adjusted tax
basis for United States federal income tax purposes, income, gain, loss and
deduction with respect to such asset shall be allocated solely for income tax
purposes in accordance with the principles of Sections 704(b) and (c) of the
Code (in any manner determined by the General Partner) so as to take account of
the difference between Carrying Value and adjusted basis of such asset.
8.4 ALLOCATION AMONG LIMITED PARTNERS; TRANSFERS.
(a) Profits and Losses allocated to Limited Partners will be
apportioned among each Limited Partner based upon a fraction, the numerator of
which is the Capital Contributions by such Limited Partner (or his or her
predecessor in interest) and the denominator of which is the aggregate Capital
Contributions of all Limited Partners, taking into account any change in such
ratio during the period.
(b) In the event of a permitted Transfer of a Unit or the
termination or reduction of a Partner's interest in the Partnership during a
taxable year of the Partnership, allocations of income, gain, loss, deductions
and credits of the Partnership will be based on an interim closing of the
Partnership's books.
8.5 TAX ELECTIONS.
The General Partner is hereby authorized and empowered to make on
behalf and in the name of the Partnership any election, and to prepare or have
prepared, to execute or have executed and to file, on behalf and in the name of
the Partnership, any returns, applications and other instruments and documents,
under the Code and the regulations thereunder, as in effect from time to time,
which the General Partner determines in its sole discretion are desirable or
advisable in connection with determining such allocations.
8.6 OTHER ALLOCATION PROVISIONS.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulations Section 1.704-1(b) and shall be interpreted and applied in
a manner consistent with such regulations. Sections 8.1 to 8.6 may be amended at
any time by the General Partner, if necessary, in the opinion of the General
Partner, to comply with such regulations.
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ARTICLE IX
DISTRIBUTIONS; WITHDRAWAL
9.1 GENERAL PARTNER DISCRETION.
Distributions may be made in cash or in kind in the General partner's
sole discretion. The General Partner may in its sole discretion offer Limited
Partners the right to elect whether to receive cash or in kind distributions in
connection with any distribution and, following any such election, may (but
shall not be required to) make a distribution to some Limited Partners in cash
and to others in kind. The General Partner shall have no obligation to make cash
or non-cash distributions to the Limited Partners prior to termination of the
Partnership, and may invest the earnings on and proceeds of any of the
Partnership's investments in temporary investments in its sole discretion. The
General Partner in its sole discretion will determine the aggregate amount of
and payment dates for any cash and non-cash distributions to Partners after
establishing such reasonable reserves as the General Partner deems appropriate
in its sole discretion for working capital contingencies or other items and for
the satisfaction of liabilities (including, without limitation, contingent
liabilities and the Fixed Return) as they come due or may come due.
9.2 DISTRIBUTIONS.
(a) Distributions from the Partnership generally will be made in
the following order and priority:
(i) first, to each Partner to the extent of available cash in
an amount equal to 28% of the taxable income allocated by the
Partnership to each such Partner for the current taxable year; provided
that the General Partner in its sole discretion may adjust such
percentage to take into account changes in income tax rates applicable
to individuals and/or the tax rates applicable to Profits or for any
other reason;
(ii) second, 100% to the General Partner until the amount
received by the General Partner pursuant to this clause (ii) is equal
to (x) the Fixed Return and (y) its aggregate Preferred Capital
Contributions; and
(iii) thereafter, 90% to the Limited Partners and 10% to the
General Partner;
provided, that amounts distributed pursuant to clause (i) shall be
taken into account in determining the amounts distributable under
clauses (ii) and (iii).
(b) Distributions to Limited Partners will be apportioned among
each Limited Partner based upon a fraction, the numerator of which is the
Capital Contributions by such Limited Partner (or his or her predecessor in
interest) and the denominator of which is the aggregate Capital Contributions of
all Limited Partners, taking into account any change in such ratio during the
period.
(c) As provided further in Section 10.4(a), distributions which
would otherwise be made to a Limited Partner pursuant to the foregoing may
instead be made to the General Partner
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<PAGE> 22
with respect to the Unvested Interest of such Limited Partner whose employment
with a member of the Mellon Group has terminated other than due to such Limited
Partner's death or Disability.
9.3 NON-CASH DISTRIBUTIONS.
Whenever possible, non-cash distributions, including distributions
under Section 11.2(c), shall be made pro rata among the Partners in accordance
with the terms of Section 9.2. The value of any non-cash assets that are
distributed shall be determined by the General Partner in accordance with
Section 12.4 hereof.
9.4 WITHHOLDING.
The Partnership shall withhold from any amounts otherwise distributable
to any Partner the amounts required by law to be withheld for income tax or
other purposes; any amounts so withheld shall be treated as having been
distributed to such Partner for all purposes of this Agreement.
9.5 WITHDRAWAL.
No Partner shall have the right to withdraw such Partner's Capital
Contribution or any part thereof from the Partnership or to receive a return of
such Partner's Capital Contribution or any part thereof except upon termination
and dissolution of the Partnership, except as may be permitted by the General
Partner in its sole discretion.
ARTICLE X
TRANSFERABILITY OF INTERESTS; VESTING;
TERMINATION OF EMPLOYMENT
10.1 RESTRICTIONS AND CONDITIONS ON TRANSFERS OF UNITS.
(a) No direct or indirect sale, exchange, transfer, assignment,
pledge, creation of a security interest in, or encumbrance on, or other
disposition by a Limited Partner of all or any portion of such Limited Partner's
Units or any economic interest therein (including without limitation by means of
any participation or swap transaction (each, a "Transfer")) shall be made except
with the prior written consent of the General Partner (which consent may be
withheld in the sole discretion of the General Partner), and then only to
Immediate Family Members of the transferor Limited Partner, trusts or to other
investment vehicles established for the benefit of the Limited Partner or his or
her Immediate Family Members or to the General Partner. The General Partner may
transfer its interest in the Partnership to Mellon or its Affiliates.
(b) Any Transfer otherwise permitted under this Article 10 may only
be made if:
(i) such Transfer, when added to the total of all other
Transfers of Units within the preceding twelve months, would not result
in the Partnership being considered to have terminated within the
meaning of Section 708 of the Code;
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(ii) such Transfer would not violate any United States
securities laws or any state securities or "blue sky" laws (including
any investor suitability standards or the laws of any jurisdiction
outside the United States) applicable to the Partnership or the Units
to be Transferred; and
(iii) such Transfer would not cause the Partnership to lose
its status as a partnership for United States federal income tax
purposes.
(c) The General Partner, each Limited Partner, the Partnership and
their respective officers, directors, agents and control persons shall be
indemnified by a Limited Partner (the "Transferring Limited Partner") to the
fullest extent permitted by law for any and all losses, claims, damages and
expenses arising out of or reasonably incurred in connection with any claim,
action or demand against the General Partner, the Partnership or any such
indemnified person relating to the Partnership, its properties, business or
affairs (including, without limitation, attorneys' fees and expenses and any
amounts paid in settlement or compromise of any such claim, action or demand)
against expenses for which the Partnership, the General Partner or such other
person has not otherwise been reimbursed (including attorneys' fees, judgments,
fines and amounts paid in settlement) actually and reasonably incurred by them
in connection with such action, suit or proceeding and arising out of, relating
to, or in connection with, any Transfer of all or any portion of such
Transferring Limited Partner's Units, or in connection with the admission of a
substituted Limited Partner to the Partnership; provided, however, that the
foregoing indemnification shall not apply if a court of competent jurisdiction
makes a final decision that such claim, action or demand resulted primarily from
such indemnified person's willful misconduct, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the Partnership or
such person's office.
(d) Subject to Section 10.4, no Unit may be subdivided into
fractional Units.
10.2 ASSIGNEES.
(a) The Partnerships shall not recognize for any purpose any
purported Transfer of all or any portion of the Units of a Limited Partner
unless the provisions of Section 10.1 shall have been complied with and there
shall have been filed with the Partnership a Transfer Application, in form
satisfactory to the General Partner, executed and acknowledged by both the
seller, transferor or assignor and the purchaser, transferee or assignee and
such Transfer Application (i) contains the acceptance by the purchaser,
transferee or assignee of all of the terms and provisions of this Agreement;
(ii) represents that such Transfer was made in accordance with all applicable
laws and regulations; and (iii) contains the purchaser's, transferee's or
assignee's power of attorney identical to that provided in Section 13.1 and, in
addition, appoints the General Partner his or her attorney-in-fact to execute
this Agreement on behalf of such purchaser, transferee or assignee. Any Transfer
shall be recognized by the Partnership as effective as of the date on which such
Transfer Application is filed with the Partnership.
(b) Any Limited Partner who shall assign all of his or her Units
shall not cease to be a Limited Partner unless and until a substituted Limited
Partner is admitted in his or her stead.
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<PAGE> 24
(c) A person who is the assignee of all or any portion of the Units
of a Limited Partner, but does not become a substituted Limited Partner and
desires to make a further assignment of such Units, shall be subject to all the
provisions of this Article 10 to the same extent and in the same manner as any
Limited Partner desiring to effect a Transfer of his or her Units.
10.3 SUBSTITUTED LIMITED PARTNERS.
(a) No Limited Partner shall have the right to substitute a
purchaser, assignee, transferee, donee, heir, legatee, distributee or other
recipient of all or any portion of such Limited Partner's Units as a Limited
Partner in his or her place. Any such purchaser, assignee, transferee, donee,
heir, legatee, distributee other recipient of Units shall be admitted to the
Partnership as a substituted Limited Partner only (i) with the consent of the
General Partner, which consent shall be granted or withheld in the sole and
absolute discretion of the General Partner and may be arbitrarily withheld; and
(ii) by an amendment to Schedule A to this Agreement executed by all necessary
parties and recorded, as and to the extent required by law, in the proper
records of each jurisdiction in which such recordation is necessary to qualify
the Partnership to conduct business or to preserve the limited liability of the
Limited Partners. The Limited Partners hereby consent to the submission of a
substituted Limited Partner who admission has been consented to by the General
Partner. Any such consent by the General Partner and the Limited Partners may be
evidenced by the execution by the General Partner of an amendment to this
Agreement on its behalf and on behalf of all Limited Partners evidencing the
admission of such person as a Limited Partner and the making of any filing
required by law.
(b) To the extent required by law, the General Partner shall file
an amended certificate of limited partnership with the appropriate authorities
of each state in which the Partnership transacts business for the purpose of
adding as substituted Limited Partners all assignees of Units previously
approved by the General Partner for admission as substituted Limited Partners
and deleting any person who is no longer a Limited Partner or reflecting
accurately Capital Contributions of the Limited Partners or to receive any
interest thereon.
(c) No person shall become a substituted Limited Partner until such
person shall have delivered a Transfer Application as provided in Section
10.2(a) and become a party to this Agreement. For the purpose of allocating
profits, losses and distributable cash, a person shall be treated as having
become and as appearing in the records of the Partnership as a Limited Partner
on such date as the Transfer to such person was recognized by the Partnership
pursuant to Section 10.2(a).
10.4 TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF LIMITED PARTNER.
(a) Generally. If prior to January 1, 2005, a Limited Partner's
employment with a member of the Mellon Group is terminated for any reason (other
than termination of employment for Cause, or due to such Limited Partner's death
or Retirement) (a "Terminated Partner"), then the General Partner will have the
right, exercisable in its sole discretion by written notice sent by certified
mail (or its equivalent) or via overnight courier to such Limited Partner (or
his or her Representative) within 60 days following such termination of
employment, to allocate and distribute Profits and Losses that are realized
after the date of termination in respect of the
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<PAGE> 25
unvested portion of such Limited Partner's interest in the Partnership (the
"Unvested Interest"), including allocations pursuant to Article 8 and
distributions pursuant to Article 9, to the General Partner. Unvested Interest
shall be determined according to the following schedule (the "Vesting
Schedule"):
If such Termination or Determination occurs -
<TABLE>
<CAPTION>
PERCENTAGE OF PROFITS PERCENTAGE OF
INTEREST THAT IS UNVESTED PROFITS
ON OR AFTER BUT ON OR PRIOR TO VESTED INTEREST
----------- ------------------ ------- --------
<S> <C> <C> <C>
Immediately December 31, 2002 25% 75%
January 1, 2003 December 31, 2003 62.50% 37.50%
January 1, 2004 December 31, 2004 81.25% 18.75%
January 1, 2005 100% 0%
</TABLE>
provided that upon a Limited Partner's termination of employment prior to
January 1, 2005 due to such Limited Partner's death, or Retirement such Limited
Partner's Units will immediately become fully vested, and provided further that
the General Partner shall have authority to accelerate (but not otherwise
modify) the Vesting Schedule at any time, for any and all of the Limited
Partners, in its sole discretion.
If the General Partner does not exercise its right to allocate the
Unvested Interest, the Unvested Interest will remain subject to, and continue to
vest in accordance with the Vesting Schedule. To the extent a Limited Partner's
interest in the Partnership has vested, such Limited Partner will be entitled to
continue to share in distributions and allocations of Partnership income, gain,
loss, expense or deduction; a Limited Partner whose Unvested Interest is
reallocated as described above will forfeit the related portion of his or her
interests in such items.
The General Partner in its sole discretion may assign all or any part
of its right to allocate to itself any Unvested Interest to any of its
Affiliates or any Eligible Investor (including, without limitation, any Limited
Partner).
(b) Termination for Cause. In the case of a termination of a
Limited Partner's employment for Cause, the General Partner shall have the
right, exercisable in its sole discretion, to allocate and distribute all
Profits and Losses relating to such terminated Limited Partner's Units (except
the initial 25% of such Profits and Losses that vest immediately) to the General
Partner, including all profits and losses (except such initial 25% Interest)
allocated to such terminated Limited Partner prior to the date of termination
and to make appropriate reallocations of the Capital Account of such terminated
Limited Partner to reflect any previous allocations that have not been
distributed. The terminated Partner will continue to receive allocations and
distributions of 25% of the Partnership Profits and Losses applicable to such
Limited Partner's Units. In such event of termination, the Limited Partner will
not be required to return to the Partnership any cash or assets that were
distributed prior to the date of termination.
(c) Acceleration of Vesting. Upon a Limited Partner's termination
of employment due to such Limited Partner's death or Retirement or upon a Change
of Control or in the event of Disability, such Limited Partner's Units will
immediately become fully vested.
21
<PAGE> 26
(d) Death, Incompetency, Bankruptcy. If a Limited Partner dies or
becomes an adjudicated incompetent (or equivalent under the laws of any
jurisdiction other than the United States) or bankrupt, as the case may be, then
for purposes of this Agreement the Representative shall have all the rights of a
Limited Partner for the purpose of settling or managing the Units of such
Limited Partner, and such power as such Limited Partner possessed to assign all
or any part of such Limited Partner's Units and to join with such assignee in
satisfying conditions precedent to such assignee becoming a substituted Limited
Partner as provided in Section 10.3; provided that the Representative may not
become a Limited Partner.
10.5 DISPOSITION OF GENERAL PARTNER'S INTEREST.
The General Partner shall not dispose of its interest in the
Partnership as a general partner. No disposition of the General Partner's
interest shall be effective, and the General Partner shall not cease to be a
general partner of the Partnership.
ARTICLE XI
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
11.1 EVENTS CAUSING DISSOLUTION.
The Partnership shall be dissolved upon the expiration of its term as
set forth in Section 2.5 hereof, or sooner upon the happening of any of the
following events:
(a) the resignation, withdrawal, dissolution or bankruptcy of the
General Partner or the occurrence of any other event that causes the General
Partner to cease to be a general partner of the Partnership under the Act:
provided that the Partnership shall not be dissolved or required to be wound up
upon the happening of such event if (i) at the time of such event there is at
least one remaining general partner of the Partnership and such remaining
general partner carries on the business of the Partnership or (ii) within 90
days after such event, all remaining Partners agree in writing to continue the
business of the Partnership and to the appointment, effective as of the date of
such event of one or more additional general partners;
(b) the insolvency or bankruptcy of the Partnership; or
(c) the conversion of the Partnership to corporate form pursuant to
Section 2.6 hereof.
Dissolution of the Partnership shall be effective on the date on which
the event giving rise to the dissolution occurs, but the Partnership shall not
terminate until the Partnership's certificate of limited partnership has been
canceled and the assets of the Partnership have been distributed as provided in
Section 11.2.
11.2 LIQUIDATION.
(a) Upon dissolution of the Partnership, its liabilities shall be
paid in the order provided herein. The General Partner shall cause Partnership
assets to be sold in such manner as
22
<PAGE> 27
the General Partner shall determine in its sole discretion and as permitted by
applicable law, purchase from the Partnership any Partnership investments upon
which there are significant restrictions or for which another purchaser willing
to pay fair market value is not readily obtainable. Payment of the fair market
value of any such investment at the time of the transfer determined by the
General Partner in accordance with this Section 11.2 shall be deemed fair and
reasonable and not a violation of the General Partner's fiduciary duty to the
Partnership. Pending sale of Partnership assets, the General Partner shall have
the right to continue to operate and otherwise to deal with Partnership assets.
In the event that the General Partner has resigned, withdrawn, dissolved or is
bankrupt, or has otherwise ceased to be a general partner of the Partnership,
the majority in interest of the Limited Partners shall elect a person (the
"liquidating trustee") who is hereby authorized to perform the functions of the
General Partner in liquidating the assets of the Partnership and in winding up
its affairs.
(b) Profits and Losses arising from sales upon liquidation shall be
allocated in the manner set forth in Article 8. If, over the term of the
Partnership, the amounts distributed to the General Partner in respect of the
Fixed Return pursuant to Section 9.2(a)(ii)(x) exceed the Profits allocated to
the General Partner in respect of the Fixed Return pursuant to Section
8.1(i)(B), then the amount of such excess shall be treated as a guaranteed
payment and the Partners' Capital Accounts shall be adjusted accordingly
(c) Proceeds received upon the liquidation of Partnership assets
shall be applied and distributed in the following order:
(i) to the payment of debts and liabilities of the Partnership
(whether by payment or establishment of reasonable reserves), including
those to Partners who are creditors, to the extent required by law, in
the order of priority as provided by law, and to the payment of the
expenses of liquidation.
(ii) if not paid pursuant to clause 11.2(c)(i), to the payment
of the General Partner of the unpaid balance and interest on its loans,
if any, to the Partnership.
(iii) if not paid pursuant to clause 11.2(c)(i), to the
payment to the General Partner of the Fixed Return which payment shall
be treated as a guaranteed payment to the extent it exceeds Profits
allocated to the General Partner pursuant to Section 8.1(a)(B).
(iv) to the payment to the General Partner of its unreturned
Preferred Capital Contributions, and
(v) to the Partners any cash and non-cash assets pro rata in
accordance with their positive Capital Account balances to the extent
thereof (after giving effect to any allocation of Profits or Losses
arising from sales upon liquidation).
Any reserves established by the General Partner or any liquidating
trustee pursuant to clause (i) above shall be paid over by the General Partner
or the liquidating trustee, as the case may be, to an escrow agent who is not an
Affiliate of any Partner, with instructions to discharge any of the liabilities
and obligations referred to in such clause (i) and at the expiration of such
23
<PAGE> 28
period as the General Partner or the liquidating trustee, as the case may be,
shall provide to distribute any balance then remaining in the manner provided in
clauses (ii) through (v) above.
(d) In the sole discretion of the General Partner, payments in
liquidation may be made either in cash or in non-cash assets designated by the
General Partner, or partly in cash and partly in non-cash assets. If payment is
made in non-cash assets, the value of such assets shall be determined by the
General Partner in accordance with Section 12.4 hereof. In the event of any
distribution of non-cash assets to any Limited Partner, such Limited Partner
agrees, if requested by the General Partner at the time of such distribution, to
deliver to the Partnership a letter in form and substance satisfactory to the
General Partner, or which may be deemed necessary or desirable by the General
Partner, to comply with governmental regulations, including restrictions on the
resale of securities.
(e) In the event that following the final distribution under
Section 11.2(c) above, the General Partner has a deficit balance in its capital
account balance, the General Partner shall contribute cash to the Partnership in
an amount equal to the deficit balance.
ARTICLE XII
BOOKS AND RECORDS; ACCOUNTING;
APPRAISAL; TAX MATTERS AND ELECTIONS
12.1 BOOKS AND RECORDS.
The books and records of the Partnership, including information
relating to the sale by the General Partner or any of its Affiliates of
securities, property, goods or services to the Partnership, and a list of the
name, residence or business address and Units of each Limited Partner, shall be
maintained by the General Partner at the office of the Partnership or of the
General Partner and shall be available for examination there by any Limited
Partner or his or her duly authorized Representative at any and all reasonable
times for any purpose reasonably related to the Limited Partner's interest as a
limited partner of the Partnership, subject to certain reasonable limitations,
to address concerns with respect to, among other things, the confidentiality of
certain information. Such information shall be used only for a purpose
reasonably related to the Limited Partner's interest as a limited partner of the
Partnership. The Partnership may maintain such other books and records and may
provide such financial or other statements as the General Partner in its sole
discretion deems advisable. In addition, the General Partner shall cause the
Partnership to comply with Section 6.2.
12.2 ACCOUNTING BASIS; FISCAL YEAR.
The books and records and the financial statements and reports of the
Partnership shall be kept on such basis as the General Partner shall determine.
The fiscal year of the Partnership shall be the calendar year.
12.3 BANK ACCOUNTS.
The General Partner shall maintain the Partnership bank account and
brokerage accounts, and withdrawals shall be made only in the regular course of
the Partnership business on such
24
<PAGE> 29
signature or signatures as the General Partner may determine. Temporary
investments are deemed activities in the ordinary course of the Partnership
business.
12.4 APPRAISAL.
If at any time the value of one or more non-cash assets of the
Partnership is required to be determined under this Agreement, the General
Partner shall value such assets, taking into account all relevant factors,
including without limitation restrictions on transfer, other legal or
contractual restrictions and the costs and expenses of disposition of such
assets. In the sole discretion of the General Partner, the valuation of any
non-cash assets may be made by independent third parties appointed by the
General Partner and deemed qualified by the General Partner to render an opinion
as to the value of Partnership assets, using such methods and considering such
information relating to such assets as such persons may deem appropriate. The
valuation of Partnership assets reflected in an appraisal made in good faith by
the General Partner or any adviser or consultant retrained for such purpose
shall be conclusive and binding on the Limited Partners.
12.5 REPORTS.
Within 180 days after the end of each fiscal year, or as soon as
practicable thereafter, the General Partner shall send to each person who was a
Limited Partner at any time during the fiscal year then ended (i) such tax
information as shall be necessary for the preparation by such Limited Partner of
his or her United States federal and state income tax returns; (ii) a report of
the investment activities of the Partnership during such year; and (iii)
financial statements of the Partnership audited by its accountants.
12.6 TAX MATTERS AND ELECTIONS.
(a) Each Limited Partner hereby appoints and designates the General
Partner as tax matters partner of the Partnership, as such term is defined under
the Code, and hereby agrees that any action taken by the General Partner in
connection with audits of the Partnership under the Code will be binding upon
the Limited Partners. Each Limited Partner further agrees that he or she will
not treat any Partnership item on his or her individual income tax return in a
manner inconsistent with the treatment of the item on the Partnership's tax
return and that he will not act independently with respect to tax audits or tax
litigation affecting the Partnership, unless, in either case, previously
authorized to do so in writing by the General Partner, which authorization may
be withheld in the sole discretion of the General Partner.
(b) As such tax matters partner, the General Partner may cause the
Partnership to make all elections required or permitted to be made by the
Partnership under the Code (including an election under Section 754 thereof
permitting the adjustment in basis of Partnership assets upon the occurrence of
certain events such as a sale of Units or the death of a Limited Partner) and
not otherwise expressly provided for in this Agreement.
25
<PAGE> 30
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 APPOINTMENT OF THE GENERAL PARTNER AS ATTORNEY-IN-FACT.
(a) Each Limited Partner by his or her execution of this Agreement
(which execution may be by his or her attorney-in-fact pursuant to a power of
attorney contained in a subscription agreement or Transfer Application), hereby
makes, constitutes and appoints the General Partner, acting by any of its
officers or their designees, his or her true and lawful agent and
attorney-in-fact, with full power of substitution and full power and authority
in his or her name, place and stead to make, execute, sign, acknowledge, swear
to, record and file on her or her behalf and on behalf of the Partnership, such
documents, instruments and conveyances that may be necessary or appropriate to
carry out the provisions or purposes of this Agreement, including without
limitation:
(i) the original certificate of limited partnership of the
Partnership and all amendments thereto required or permitted by law or
the provisions of this Agreement including, without limitation, the
admission to the Partnership of additional Limited Partners and
substituted Limited Partners, and any certificate of cancellation with
respect thereto and modifications of Schedule A hereto and all other
instruments that the General Partner deems appropriate to reflect a
change or modification or amendment of this Agreement in accordance
with this Agreement;
(ii) all certificates and other instruments deemed advisable
by the General Partner to carry out the provisions of this Agreement or
to permit the Partnership to become or to continue in the jurisdictions
where the Partnership may be doing business as a limited partnership or
partnership wherein the Limited Partners have limited liability;
(iii) all conveyances and other instruments or papers deemed
advisable by the General Partner to effect the dissolution and
termination of the Partnership;
(iv) all fictitious or assumed name certificates required or
permitted to be filed on behalf of the Partnership; and
(v) all other instruments, documents, undertakings,
certificates, agreements or papers which may be required or permitted
by law to be filed on behalf of the Partnership.
(b) The foregoing power of attorney:
(i) is coupled with an interest, shall be irrevocable, shall
not be affected by and shall survive the subsequent death, disability,
incapacity or incompetence of each Limited Partner;
(ii) may be exercised by the General Partner either by signing
separately as attorney-in-fact for each Limited Partner or by a single
signature of the General Partner acting as attorney-in-fact for all of
them or by any other legally acceptable means; and
26
<PAGE> 31
(iii) shall survive the delivery of an assignment by a Limited
Partner of the whole or any portion of his or her Units, except that,
where the assignee of the whole such Limited Partner's Units has been
approved by the General Partner for admission to the Partnership as a
substituted Limited Partner, the power of attorney of the assignor
shall survive the delivery of such assignment for the sole purpose of
enabling the General Partner to execute, swear to, acknowledge and file
any instrument necessary on appropriate to effect such substitution.
(c) Each Limited Partner shall execute and deliver to the General
Partner within five days after receipt of the General Partner's request therefor
such further designations, powers-of-attorney and other instruments as the
General Partner deems necessary or appropriate to carry out the terms of this
Agreement.
13.2 AMENDMENTS OF THIS AGREEMENT.
(a) Except for any amendment to this Agreement made pursuant to
Section 13.2(c), an amendment to this Agreement may be proposed by the General
Partner by submitting to all Limited Partners (i) the text of such amendment and
(ii) a statement of the purpose of such amendment. Subject to paragraph (c)
below, the proposed amendment shall be deemed adopted 15 days after the General
Partner submits such notice, unless Limited Partners holding two-thirds of the
outstanding Units have, by the end of such notice period, delivered their
written disapproval thereof to the General Partner.
(b) Notwithstanding any other provision of this Section to the
contrary, no amendment may:
(i) expand the obligations of any Partner under this Agreement
or convert the Units of any Limited Partner into the interest of a
General Partner or adversely affect the limited liability of any
Limited Partner, in each case without the approval of such Partner;
(ii) amend Section 6.2 or this Section 13.2 without the
approval of all Partners; or
(iii) modify the method provided in Article 8 or 9 of
determining and allocating or distributing, as the case may be, Profits
and Losses and distributable cash,
without the approval of the General Partner and Limited Partners holding a
majority of the outstanding Units that are adversely affected by such
modification.
(c) In addition to any amendments otherwise authorized hereby, this
Agreement may be amended from time to time by the General Partner without the
consent of any of the Limited Partners:
(i) to add to the representations, duties or obligations of
the General Partner or surrender any right or power granted to the
General Partner herein;
27
<PAGE> 32
(ii) to cure any ambiguity or correct or supplement any
provisions hereof which may be inconsistent with any other provision
hereof, or correct any printing, stenographic or clerical errors or
omissions; and
(iii) amend Schedule A hereto to provide any necessary
information regarding any Partner, and additional or successor General
Partner or any additional or substituted Limited Partner; provided that
no amendment shall be adopted pursuant to this subsection (c) unless
(x) in the case of any amendment referred to in clause (i) or (ii) of
this subsection, such amendment would not adversely alter the Interest
of a Limited Partner in connection with the allocation of any income,
gains or losses or distributions or the timing thereof without the
consent of such Partner and such amendment is otherwise for the benefit
of, or not adverse to, the Interests of the Limited Partners and (y)
such amendment would not, in the opinion of counsel for the Partnership
(which opinion the Limited Partners are legally entitled to rely on),
alter, or result in the alteration of, the limited liability of the
Limited Partners or the status of the Partnership as a partnership for
federal income tax purposes. The General Partner shall send each
Limited Partner a copy of any amendment adopted pursuant to this
paragraph (c).
(d) Upon the adoption of any amendment to this Agreement, such
amendment or an amended restated Agreement) shall be executed by the General
Partner for itself and on behalf of the Limited Partners pursuant to the power
of attorney granted in Section 13.1 and, if such amendment affects the
certificate of limited partnership of the Partnership under the Act, or any
other filing made in any other state, the General Partner, pursuant to the power
of attorney granted in Section 13.1, shall execute and file proper amendments
and filings in the State of Delaware and in each jurisdiction in which such
action is necessary for the Partnership to conduct business or to preserve the
limited liability of the Limited Partners.
13.3 ARBITRATION.
Any dispute, controversy or claim arising out of or in connection with
or relating to this Agreement or any breach or alleged breach hereof shall (to
the extent not prohibited by governing law) be determined and settled by
arbitration in Pittsburgh, Pennsylvania pursuant to the rules then in effect of
the American Arbitration Association. Any award rendered shall be final and
conclusive upon the parties and a judgment thereon may be entered in the highest
court of the forum, state or federal, having jurisdiction.
13.4 NOTICES.
(a) Except as otherwise specifically provided herein, all notices,
requests, demands and other communications hereunder shall be in writing and
shall be deemed to have been duly given if (i) delivered or mailed, certified or
registered mail, first-class postage paid or via overnight courier or (ii)
transmitted via facsimile, if to any Limited Partner, at such Limited Partner's
business address, or to such Limited Partner's facsimile number, set forth in
the Partnership's records, and if to the Partnership, to the General Partner at
the General Partner's address, or to the General Partner's facsimile number, set
forth on Schedule A, with a copy to Ronald J. Coombs at the address set forth on
Schedule A, or to such other person or address as
28
<PAGE> 33
any Partner shall have last designated by notice to the Partnership, and in the
case of a change in address by the General Partner, by notice to the Limited
Partners.
(b) Any notice shall be deemed to have been duly given if
personally delivered or sent by mail or by facsimile and will be deemed
received, unless earlier received, (i) if sent by certified or registered mail,
return receipt requested, or via overnight courier, one business day after
mailing, (ii) if sent by overnight mail or courier, when actually received,
(iii) if sent by facsimile transmission, on the date sent, provided confirmatory
notice is sent by first-class mail, postage prepaid, and (iv) if delivered by
hand on the date of receipt.
13.5 BINDING PROVISIONS.
The covenants and agreements contained herein shall be binding upon and
inure to the benefit of the heirs, executors, administrators, successors and
assign of the respective parties hereto.
13.6 APPLICABLE LAW.
This Agreement shall be construed and enforced in accordance with the
laws of the State of Delaware.
13.7 COUNTERPARTS.
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto,
notwithstanding that not all the parties have signed the same counterpart. The
General Partner may execute any documents by facsimile signature of a duly
authorized officer.
13.8 SEPARABILITY OF PROVISION.
If for any reason any provision or provisions hereof that are not
material to the purposes or business of the Partnership or the Limited Partners'
Units are determined to be invalid and contrary to any existing or future law,
such invalidity shall not impair the operation of or affect those portions of
this Agreement that are valid.
13.9 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement among the parties. This
Agreement supersedes any prior agreement or understanding among the parties and
may not be modified or amended in any manner other than as set forth herein.
13.10 PARAGRAPH TITLES.
Article, section and paragraph titles are for descriptive purposes only
and shall not control or alter the meaning of this Agreement as set forth in the
text.
29
<PAGE> 34
13.11 WAIVER OF RIGHT OF PARTITION.
Each Partner hereby waives its right of partition.
13.12 EFFECTIVENESS.
This Agreement shall become as of the day and year first above written
upon execution hereof by the General Partner and the Initial Limited Partner and
as to each additional Limited Partner, when the prescribed subscription hereto
by such party has been accepted by the General Partner.
* * * * *
30
<PAGE> 35
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
GENERAL PARTNER
MELLON VENTURES FUND HOLDING
CORPORATION
By:__________________________________________
Name:
Title:
LIMITED PARTNERS
All Limited Partners now and hereafter
admitted as limited partners of the
Partnership pursuant to powers of attorney
now and hereafter executed in favor of and
delivered to the General Partner.
By: GENERAL PARTNER, as Attorney-in-Fact
MELLON VENTURES FUND HOLDING
CORPORATION
By:______________________________________
Name:
Title:
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Mellon Financial Corporation (parent corporation) (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(dollar amounts in millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before income taxes and equity in undistributed net income (loss)
of subsidiaries $163 $ 73
Fixed charges: interest expense, trust-preferred securities expense and
amortization of debt issuance costs 58 54
- ------------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $221 $127
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 3.81 2.35
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The parent Corporation ratios include the accounts of Mellon Financial
Corporation (the "Corporation") and Mellon Funding Corporation, a wholly
owned subsidiary of the Corporation that functions as a financing entity
for the Corporation and its subsidiaries by issuing commercial paper and
other debt guaranteed by the Corporation, and Mellon Capital I and Mellon
Capital II, special-purpose business trusts formed by the Corporation, that
exist solely to issue capital securities. Because these ratios exclude from
earnings the equity in undistributed net income (loss) of subsidiaries,
these ratios vary with the payment of dividends by such subsidiaries.
<PAGE> 1
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Mellon Financial Corporation (and its subsidiaries)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(dollar amounts in millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before income taxes and impact of accounting change $398 $363 (a)
Fixed charges: interest expense (excluding interest on deposits), one-third of
rental expense net of income from subleases, trust-preferred securities expense
and amortization of debt issuance costs 148 155
- ------------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding interest on deposits 546 518
Interest on deposits 233 221
- ------------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $779 $739
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.69 3.34 (a)
Including interest on deposits 2.04 1.97 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The ratio of earnings (as defined) to fixed charges for the quarter ended
March 31, 1999, exclude from earnings (as defined) an $83 million pre-tax
net gain from divestitures. Had these computations included the net gain
from divestitures, the ratio of earnings (as defined) to fixed charges
would have been 3.88 excluding interest on deposits and 2.19 including
interest on deposits.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 2,958
<INT-BEARING-DEPOSITS> 613
<FED-FUNDS-SOLD> 2,179
<TRADING-ASSETS> 139
<INVESTMENTS-HELD-FOR-SALE> 5,055
<INVESTMENTS-CARRYING> 1,153
<INVESTMENTS-MARKET> 1,140
<LOANS> 28,285
<ALLOWANCE> 402
<TOTAL-ASSETS> 47,381
<DEPOSITS> 33,346
<SHORT-TERM> 2,936
<LIABILITIES-OTHER> 2,817
<LONG-TERM> 3,440
991<F1>
0
<COMMON> 294
<OTHER-SE> 3,557
<TOTAL-LIABILITIES-AND-EQUITY> 47,381<F1>
<INTEREST-LOAN> 565
<INTEREST-INVEST> 103
<INTEREST-OTHER> 24
<INTEREST-TOTAL> 696
<INTEREST-DEPOSIT> 233
<INTEREST-EXPENSE> 348
<INTEREST-INCOME-NET> 348
<LOAN-LOSSES> 10
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 738
<INCOME-PRETAX> 398
<INCOME-PRE-EXTRAORDINARY> 253
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 3.72
<LOANS-NON> 188
<LOANS-PAST> 108
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 403
<CHARGE-OFFS> 26
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 402
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes $991 million of guaranteed preferred beneficial interests in the
Corporation's junior subordinated deferrable interest debentures.
</FN>
</TABLE>
