<PAGE> 1
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-7367
PAINE WEBBER GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-2760086
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(Address of principal executive offices) (Zip Code)
(212) 713-2000
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
-----------------------
On May 8, 1998, the Registrant had outstanding 139,911,442 shares of common
stock of $1 par value, which is the Registrant's only class of common stock.
<PAGE> 2
PAINE WEBBER GROUP INC.
FORM 10-Q
March 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C> <C> <C>
Item 1. Financial Statements.
Consolidated Statements of Income
(unaudited) for the Three Months Ended
March 31, 1998 and 1997. 2
Consolidated Statements of Financial
Condition (unaudited) at March 31, 1998
and December 31, 1997. 3
Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended
March 31, 1998 and 1997. 4
Notes to Consolidated Financial Statements
(unaudited). 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 14-18
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings. 19
Item 4. Submissions of Matters to a Vote of
Security Holders. 19
Item 6. Exhibits and Reports on Form 8-K. 20
Signature. 21
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Paine Webber Group Inc.
Consolidated Statements of Income (unaudited)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Commissions $ 408,124 $ 370,386
Principal transactions 276,963 256,536
Asset management 158,736 120,968
Investment banking 124,969 97,774
Interest 802,378 643,953
Other 33,940 38,074
------------ ------------
Total revenues 1,805,110 1,527,691
Interest expense 690,133 542,857
------------ ------------
Net revenues 1,114,977 984,834
------------ ------------
Non-interest expenses
Compensation and benefits 650,575 574,017
Office and equipment 72,540 68,067
Communications 37,756 38,207
Business development 22,079 18,620
Brokerage, clearing & exchange fees 25,496 22,555
Professional services 33,592 27,540
Other 74,744 70,924
------------ ------------
Total non-interest expenses 916,782 819,930
------------ ------------
Income before taxes and minority interest 198,195 164,904
------------ ------------
Provision for income taxes:
Federal 49,385 45,859
State, local and foreign 20,014 13,361
------------ ------------
69,399 59,220
------------ ------------
Income before minority interest 128,796 105,684
Minority interest 8,061 4,849
------------ ------------
Net income $ 120,735 $ 100,835
============ ============
Net income applicable to common shares $ 114,823 $ 93,457
============ ============
Earnings per common share:
Basic $ 0.82 $ 0.72
Diluted $ 0.77 $ 0.62
Weighted-average common shares:
Basic 139,285,622 130,348,040
Diluted 149,493,190 153,156,479
Dividends declared per common share $ 0.11 $ 0.10
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
Paine Webber Group Inc.
Consolidated Statements of Financial Condition (unaudited)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 171,362 $ 233,787
Cash and securities segregated and on deposit for
federal and other regulations 648,336 569,138
Trading assets 19,615,929 16,373,792
Securities received as collateral 1,149,777 --
----------- -----------
Total trading assets, at fair value 20,765,706 16,373,792
Securities purchased under agreements to resell 21,685,090 21,562,739
Securities borrowed 9,053,127 9,573,187
Receivables:
Clients, net of allowance for doubtful accounts of
$21,943 and $21,315 at March 31, 1998 and
December 31, 1997, respectively 6,463,957 5,668,653
Brokers and dealers 267,186 494,855
Dividends and interest 339,222 337,409
Fees and other 187,259 403,575
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $415,907 and $400,346 at
March 31, 1998 and December 31, 1997, respectively 361,239 334,401
Other assets 1,688,435 1,513,497
----------- -----------
$61,630,919 $57,065,033
=========== ===========
Liabilities and Stockholders' Equity
Short-term borrowings $ 2,062,195 $ 1,666,216
Trading liabilities, at fair value 8,615,585 7,102,144
Securities sold under agreements to repurchase 29,217,396 29,628,902
Securities loaned 5,295,745 4,733,961
Obligation to return securities received as collateral 1,149,777 --
Payables:
Clients 5,770,425 5,052,516
Brokers and dealers 968,018 268,050
Dividends and interest 301,129 343,391
Other liabilities and accrued expenses 1,473,903 1,476,260
Accrued compensation and benefits 640,355 882,251
Long-term borrowings 3,538,591 3,397,961
----------- -----------
59,033,119 54,551,652
----------- -----------
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts holding solely Company Guaranteed Related Subordinated Debt 393,750 393,750
Redeemable Preferred Stock 188,955 188,668
Stockholders' Equity:
Commonstock, $1 par value, 200,000,000 shares authorized (1); issued
189,186,799 shares and 188,458,083 shares at
March 31, 1998 and December 31, 1997, respectively 189,187 188,458
Additional paid-in capital 1,434,882 1,405,329
Retained earnings 1,440,443 1,340,966
Treasury stock, at cost; 49,849,441 shares and 48,557,788 shares at
March 31, 1998 and December 31, 1997, respectively (1,044,953) (998,300)
Foreign currency translation adjustment (4,464) (5,490)
----------- -----------
2,015,095 1,930,963
----------- -----------
$61,630,919 $57,065,033
=========== ===========
</TABLE>
(1) On May 7, 1998, the shareholders of the Company approved an amendment to
the Company's charter which increases the number of common shares
authorized for issuance from 200,000,000 to 400,000,000 shares.
See notes to consolidated financial statements.
3
<PAGE> 5
Paine Webber Group Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 120,735 $ 100,835
Adjustments to reconcile net income to cash
used for operating activities:
Noncash items included in net income:
Depreciation and amortization 17,104 17,350
Deferred income taxes 41,149 15,395
Amortization of deferred charges 19,499 43,806
Other 34,598 23,392
(Increase) decrease in operating receivables:
Clients (796,457) (221,971)
Brokers and dealers 227,669 (913)
Dividends and interest (1,813) 2,939
Fees and other 216,316 (1,824)
Increase (decrease) in operating payables:
Clients 717,909 (225,164)
Brokers and dealers 699,968 5,663
Dividends and interest (42,262) (3,081)
Other (257,184) (443,501)
(Increase) decrease in:
Cash and securities on deposit (79,198) (4,630)
Trading assets (3,242,137) (1,171,988)
Securities purchased under agreements to resell (122,351) (2,312,905)
Securities borrowed 520,060 (1,398,526)
Other assets (222,254) (189,472)
Increase (decrease) in:
Trading liabilities 1,513,441 1,657,574
Securities sold under agreements to repurchase (411,506) 2,096,414
Securities loaned 561,784 1,154,792
----------- -----------
Cash used for operating activities (484,930) (855,815)
----------- -----------
Cash flows from investing activities:
Payments for:
Office equipment and leasehold improvements (45,658) (16,290)
----------- -----------
Cash used for investing activities (45,658) (16,290)
----------- -----------
Cash flows from financing activities:
Net proceeds from short-term borrowings 395,979 427,259
Proceeds from:
Long-term borrowings 149,332 261,299
Employee stock transactions 12,539 28,727
Issuance of Preferred Trust Securities -- 198,750
Payments for:
Long-term borrowings (9,250) (66,733)
Repurchases of common stock (59,465) (95,174)
Dividends (20,972) (20,888)
----------- -----------
Cash provided by financing activities 468,163 733,240
----------- -----------
Decrease in cash and cash equivalents (62,425) (138,865)
Cash and cash equivalents, beginning of period 233,787 383,856
----------- -----------
Cash and cash equivalents, end of period $ 171,362 $ 244,991
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
Paine Webber Group Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands of dollars except share and per share amounts)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Paine Webber Group
Inc. ("PWG") and its wholly owned subsidiaries, including its principal
subsidiary PaineWebber Incorporated ("PWI") (collectively, the "Company"). All
material intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to prior year amounts to conform to current
year presentations. The December 31, 1997 Consolidated Statement of Financial
Condition was derived from the audited consolidated financial statements of the
Company. The financial information as of and for the periods ended March 31,
1998 and 1997 is unaudited. All normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation have been made.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
results of operations reported for interim periods are not necessarily
indicative of the results of operations for the entire year.
Stock Split
All 1997 common share and per share data have been retroactively adjusted to
reflect a three-for-two common stock split in the form of a 50% stock dividend
declared and paid during the quarter ended December 31, 1997.
Accounting Changes
On January 1, 1998, Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" became fully effective. Previously, the
Financial Accounting Standards Board had deferred until January 1, 1998 the
implementation of SFAS No. 125 as it related to 1) secured borrowings and
collateral, and 2) the transfer of financial assets that are part of repurchase
agreements, dollar-roll, securities lending and similar transactions. The
adoption of those deferred portions of SFAS No. 125 created the following
additional captions on the Company's Consolidated Statement of Financial
Condition:
o Securities received as collateral; and
o Obligation to return securities received as collateral.
The balances recognized in these captions primarily represent securities
received as collateral in term resale agreements for which the collateral
provider does not have the explicit contractual right to substitute.
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which established standards for the reporting and display
of comprehensive income. Comprehensive income combines net income and certain
items that directly affect stockholders' equity, such as foreign currency
translation adjustments. The adoption of SFAS No. 130 had no impact on the
Company's net income or stockholders' equity. During the first quarter of 1998
and 1997, total comprehensive income amounted to $121,761 and $98,268.
The components of comprehensive income for the three-month periods ended March
31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 120,735 $ 100,835
Foreign currency translation adjustment 1,026 (2,567)
--------- ---------
Comprehensive income $ 121,761 $ 98,268
========= =========
</TABLE>
5
<PAGE> 7
Notes to Consolidated Financial Statements (continued)
Note 2: Fair Value of Financial Instruments
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Assets, including cash and cash
equivalents, cash and securities segregated for regulatory purposes, trading
assets, resale agreements, securities borrowed, and certain receivables, are
carried at fair value or contracted amounts which approximate fair value.
Similarly, liabilities, including short-term borrowings, trading liabilities,
repurchase agreements, securities loaned, and certain payables, are carried at
fair value or contracted amounts approximating fair value.
At March 31, 1998 and December 31, 1997, the fair values of long-term borrowings
were $3,626,726 and $3,469,950, respectively, as compared to the carrying
amounts of $3,538,591 and $3,397,961, respectively. The estimated fair value of
long-term borrowings is based upon quoted market prices for the same or similar
issues and pricing models. However, for substantially all of its fixed rate
debt, the Company enters into interest rate swap agreements to convert its fixed
rate payments into floating rate payments.
The fair value of interest rate swaps used to hedge the Company's fixed rate
debt is based upon the amounts the Company would receive or pay to terminate the
agreements, taking into account current interest rates and creditworthiness of
the counterparties. The fair values of the interest rate swaps were $52,421 and
$50,796 receivable at March 31, 1998 and December 31, 1997, respectively. The
carrying amounts of the interest rate swap agreements included in the Company's
Consolidated Statements of Financial Condition at March 31, 1998 and December
31, 1997 were net receivables of $1,847 and $7,193, respectively. See Note 8 for
further discussion of interest rate swap agreements used for hedging purposes.
Note 3: Trading Assets and Liabilities
At March 31, 1998 and December 31, 1997, trading assets and liabilities,
recorded at fair value and on a trade date basis, consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Trading assets:
U.S. government and agency obligations $ 5,613,311 $ 3,449,159
Mortgages and mortgage-backed securities 7,323,584 6,557,629
Corporate debt securities 3,990,807 3,820,317
Commercial paper and other short-term debt 1,243,850 1,410,726
State and municipal obligations 702,665 482,678
Corporate equity securities 741,712 653,283
----------- -----------
19,615,929 16,373,792
Securities received as collateral(1) 1,149,777 --
----------- -----------
$20,765,706 $16,373,792
=========== ===========
Trading liabilities:
U.S. government and agency obligations $ 6,971,010 $ 5,882,082
Mortgages and mortgage-backed securities 330,270 81,330
Corporate debt securities 911,151 851,413
State and municipal obligations 37,990 14,191
Corporate equity securities 365,164 273,128
----------- -----------
$ 8,615,585 $ 7,102,144
=========== ===========
</TABLE>
(1) This amount relates to the Company's adoption of the deferred portions of
SFAS No. 125.
Note 4: Short-Term Borrowings
The Company meets its short-term financing needs by obtaining bank loans on
either a secured or unsecured basis; by issuing commercial paper and medium-term
notes; by entering into agreements to repurchase, whereby securities are sold
with a commitment to repurchase at a future date; and through securities lending
activity.
6
<PAGE> 8
Notes to Consolidated Financial Statements (continued)
Short-term borrowings at March 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Commercial paper $ 898,197 $ 606,012
Bank loans 941,998 808,204
Medium-Term Notes 222,000 252,000
---------- ----------
$2,062,195 $1,666,216
========== ==========
</TABLE>
Note 5: Long-Term Borrowings
Long-term borrowings at March 31, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Fixed Rate Notes due 1998 - 2014 $1,547,922 $1,547,817
Fixed Rate Subordinated Notes due 2002 174,611 174,588
Medium-Term Senior Notes 1,601,385 1,461,185
Medium-Term Subordinated Notes 186,950 186,950
Other 27,723 27,421
---------- ----------
$3,538,591 $3,397,961
========== ==========
</TABLE>
At March 31, 1998, interest rates on the fixed rate notes and fixed rate
subordinated notes range from 6 1/4% to 9 1/4% and the weighted-average interest
rate on these notes outstanding at March 31, 1998 was 7.52%. Interest on the
notes is payable semi-annually.
At March 31, 1998, the Company had outstanding $1,088,685 of fixed rate
Medium-Term Notes and $699,650 of variable rate Medium-Term Notes. The
Medium-Term Notes outstanding at March 31, 1998 had an average maturity of 5.0
years and a weighted-average interest rate of 6.72%.
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were $732,429
and $545,938 for the three months ended March 31, 1998 and 1997, respectively.
On April 23, 1998, the Company issued $250,000 of 6.55% notes due 2008.
Note 6: Common Stock
On May 7, 1998, the Board of Directors declared a regular quarterly dividend on
the Company's common stock of $0.11 per share payable on July 3, 1998 to
stockholders of record on June 3, 1998. Also on May 7, 1998, the shareholders of
the Company approved an amendment to the Company's charter which increases the
number of PWG common shares authorized for issuance from 200,000,000 to
400,000,000 shares.
Note 7: Capital Requirements
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission Uniform Net Capital Rule and New York Stock Exchange Growth and
Business Reduction capital requirements. Under the method of computing capital
requirements adopted by PWI, minimum net capital shall not be less than 2% of
combined aggregate debit items arising from client transactions, plus excess
margin collected on securities purchased under agreements to resell, as defined.
A reduction of business is required if net capital is less than 4% of such
aggregate debit items. Business may not be expanded if net capital is less than
5% of such aggregate debit items. As of March 31, 1998, PWI's net capital of
$1,113,992 was 14.6% of aggregate debit items and its net capital in excess of
the minimum required was $955,873.
7
<PAGE> 9
Notes to Consolidated Financial Statements (continued)
Note 8: Financial Instruments with Off-Balance-Sheet Risk
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Consolidated
Statements of Financial Condition and are indicative only of the volume of
activity at March 31, 1998 and December 31, 1997. They do not represent amounts
subject to market risks, and in many cases, limit the Company's overall exposure
to market losses by hedging other on- and off-balance-sheet transactions. The
amounts are netted by counterparty only when the criteria of FASB interpretation
No. 39 are met.
<TABLE>
<CAPTION>
Notional or Contract Amount
-----------------------------------------------------
March 31, 1998 December 31, 1997
------------------------- -------------------------
Purchases Sales Purchases Sales
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $43,436,715 $47,085,667 $20,269,175 $22,948,068
Foreign currency forward contracts,
futures contracts, and options
written and purchased 3,203,282 3,182,963 1,517,584 1,317,162
Equity securities contracts including
futures, forwards, and options written
and purchased 148,223 561,808 139,800 517,327
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 6,051,458 10,643,572 3,580,697 7,906,777
Interest rate swaps and caps 529,740 212,992 143,961 140,292
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Fair Value at Fair Value at
March 31, 1998 December 31, 1997
------------------------- -------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $ 339,320 $ 334,055 $ 88,428 $ 84,400
Foreign currency forward contracts,
futures contracts, and options
written and purchased 37,697 35,904 25,749 24,773
Equity securities contracts including
futures, forwards, and options written
and purchased 36,922 47,202 30,561 39,276
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 6,656 18,939 13,080 26,588
Interest rate swaps and caps 17,226 68,944 24,579 3,160
</TABLE>
8
<PAGE> 10
Notes to Consolidated Financial Statements (continued)
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended March 31, 1998
and the twelve months ended December 31, 1997. The average fair value is based
on the average of the month-end balances during the periods indicated.
<TABLE>
<CAPTION>
Average Fair Value Average Fair Value
Three Months Ended Twelve Months Ended
March 31, 1998 December 31, 1997
------------------------- -------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts and
options written and purchased $ 184,869 $ 172,533 $ 112,763 $ 111,655
Foreign currency forward contracts,
futures contracts, and options
written and purchased 31,370 31,280 30,875 32,808
Equity securities contracts including
futures, forwards, and options written
and purchased 26,104 41,688 49,112 33,604
Other fixed income securities contracts
including futures, forwards, and options
written and purchased 10,380 20,774 16,251 76,814
Interest rate swaps and caps 13,200 38,933 5,499 5,195
</TABLE>
The Company also enters into agreements to sell securities, at predetermined
prices, which have not yet been purchased. The Company is exposed to market risk
since to satisfy the obligation, the Company must acquire the securities at
market prices, which may exceed the values reflected on the Consolidated
Statements of Financial Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At March 31, 1998 approximately 99% of the off-balance-sheet trading-related
derivative and other financial instruments had remaining maturities of less than
one year.
The Company's risk of loss in the event of counterparty default is limited to
the current fair value or the replacement cost on contracts in which the Company
has recorded an unrealized gain. These amounts are reflected as assets on the
Company's Consolidated Statements of Financial Condition and amounted to
$437,821 and $182,397 at March 31, 1998 and December 31, 1997, respectively.
Options written do not expose the Company to credit risk since they do not
obligate the counterparty to perform. Transactions in futures contracts are
conducted through regulated exchanges which have margin requirements, and are
settled in cash on a daily basis, thereby minimizing credit risk.
The following table summarizes the Company's principal transaction revenues by
business activity for the three months ended March 31, 1998 and 1997. Principal
transaction revenues include realized and unrealized gains and losses on trading
positions, including hedges. In assessing the profitability of its trading
activities, the Company views net interest and principal transactions revenues
in the aggregate.
<TABLE>
<CAPTION>
Principal Transaction Revenue
-----------------------------
Three Months
Ended March 31,
---------------
1998 1997
-------- --------
<S> <C> <C>
Taxable fixed income (includes futures, forwards,
options contracts and other securities) $141,483 $132,591
Equities (includes futures, forwards and options contracts) 104,296 93,285
Municipals 31,184 30,660
-------- --------
$276,963 $256,536
======== ========
</TABLE>
9
<PAGE> 11
Notes to Consolidated Financial Statements (continued)
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to manage the interest
rate characteristics of its assets and liabilities. As of March 31, 1998 and
December 31, 1997, the Company had outstanding interest rate swap agreements
with commercial banks with notional amounts of $2,713,485 and $2,658,485,
respectively. These agreements effectively converted substantially all of the
Company's fixed rate debt at March 31, 1998 into floating rate debt. The
interest rate swap agreements entered into have had the effect of reducing net
interest expense on the Company's fixed rate debt by $2,932 and $3,120 for the
three months ended March 31, 1998 and 1997, respectively. The Company had no
deferred gains or losses related to terminated swap agreements at March 31, 1998
and December 31, 1997. The Company is subject to market risk as interest rates
fluctuate. The interest rate swaps contain credit risk to the extent the Company
is in a receivable or gain position and the counterparty defaults. However, the
counterparties to the agreements are large financial institutions, and the
Company has not experienced defaults in the past, and management does not
anticipate any counterparty defaults in the foreseeable future. See Note 2 for
further discussion of interest rate swap agreements used for hedging purposes.
Note 9: Risk Management
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily basis and through a variety of
financial, security position and credit exposure reporting and control
procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices, and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is responsible for
reviewing trading positions, exposures, profits and losses, and trading
strategies. The Company also has an independent risk management group which
reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks and
regular meetings between the senior management of the business groups and the
risk management group.
Credit Risk in Proprietary Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions, including brokers and
dealers, banks and institutional clients. Credit losses could arise should
counterparties fail to perform and the value of any collateral proves
inadequate. The Company manages credit risk by monitoring net exposure to
individual counterparties on a daily basis, monitoring credit limits and
requiring additional collateral where appropriate.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and government-agency securities, or letters
of credit. The market value of the initial collateral received is, at a minimum,
equal to the contract value. Additional collateral is requested when considered
necessary. The Company may pledge clients' margined securities as collateral in
support of securities loaned and bank loans, as well as to satisfy margin
requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At March 31, 1998, the market value
of client securities loaned to other brokers approximated the amounts due or
collateral obtained.
10
<PAGE> 12
Notes to Consolidated Financial Statements (continued)
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Amounts loaned are limited by
margin regulations of the Federal Reserve Board and other regulatory authorities
and are subject to the Company's credit review and daily monitoring procedures.
Market declines could, however, reduce the value of any collateral below the
principal amount loaned, plus accrued interest, before the collateral can be
sold.
Client transactions include positions in commodities and financial futures,
trading liabilities and written options. The risk to the Company's clients in
these transactions can be substantial, principally due to price volatility which
can reduce the clients' ability to meet their obligations. Margin deposit
requirements pertaining to commodity futures and options transactions are
generally lower than those for exchange-traded securities. To the extent clients
are unable to meet their commitments to the Company and margin deposits are
insufficient to cover outstanding liabilities, the Company may take market
action and credit losses could be realized.
Client trades are recorded on a settlement date basis. Should either the client
or broker fail to perform, the Company may be required to complete the
transaction at prevailing market prices. Trades pending at March 31, 1998 were
settled without material adverse effect on the Company's consolidated financial
statements, taken as a whole.
Concentrations of Credit Risk
Concentrations of credit risk that arise from financial instruments (whether on-
or off-balance-sheet) exist for groups of counterparties when they have similar
economic characteristics that would cause their ability to meet obligations to
be similarly affected by economic, industry or geographic factors. As a major
securities firm, the Company engages in underwriting and other financing
activities with a broad range of customers, including other financial
institutions, municipalities, governments and commercial real estate investors
and operators. These activities could result in concentrations of credit risk
with a particular counterparty, or with groups of counterparties operating in a
particular geographic area or engaged in business in a particular industry. The
Company seeks to control its credit risk and the potential for risk
concentration through a variety of reporting and control procedures described
above.
The Company's most significant industry concentration, which arises within its
normal course of business activities, is financial institutions including banks,
brokers and dealers, investment funds and insurance companies.
Note 10: Commitments and Contingencies
At March 31, 1998 and December 31, 1997, the Company was contingently liable
under unsecured letters of credit totaling $226,369 and $186,279, respectively,
which approximates fair value. At March 31, 1998, certain of the Company's
subsidiaries were contingently liable as issuer of $46,073 of notes payable to
managing general partners of various limited partnerships pursuant to certain
partnership agreements. In addition, as part of the 1995 limited partnership
settlements, the Company has agreed, under certain circumstances, to provide to
class members additional consideration including assignment of any and all fees
the Company is entitled to receive from certain partnerships. In the opinion of
management, these contingencies will not have a material adverse effect on the
Company's consolidated financial statements, taken as a whole.
In February 1996, two limited partnerships, in which a subsidiary of the Company
serves as the general partner and certain key employees serve as the limited
partners, entered into two unsecured credit facilities with a commercial bank
under which the bank agreed to make unsecured loans to the limited partnerships
of up to $77,525 through February 2000. The Company entered into an agreement
with the bank to purchase the loans under certain specific circumstances. At
March 31, 1998, $42,096 had been loaned to the limited partnerships.
In meeting the financing needs of certain of its clients, the Company may also
issue standby letters of credit which are fully collateralized by marginable
securities. At March 31, 1998, the Company had outstanding $62,689 of such
standby letters of credit. At March 31, 1998 and December 31, 1997, securities
with fair value of $78,847 and $48,378, respectively, had been loaned or pledged
as collateral for securities borrowed of approximately equal fair value.
11
<PAGE> 13
Notes to Consolidated Financial Statements (continued)
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, clients may be extended
lines of credit collateralized by mortgages and other real estate interests; the
unused portion of such lines of credit amounted to $959,698 at March 31, 1998.
These commercial real estate commitments are generally entered into at variable
rates of interest based on LIBOR. Settlement of these transactions at March 31,
1998 would not have had a material impact on the Company's consolidated
financial statements, taken as a whole.
The Company has been named as defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
Note 11: Income Taxes
The reconciliation of income taxes, computed at the statutory federal rates, to
the provision for income taxes recorded for the three months ended March 31,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
1998 1997
------ ------
<S> <C> <C>
Tax at statutory federal rate 35.0% 35.0%
State and local income taxes,
net of federal tax benefit 4.0 4.0
Foreign rate differential (0.5) (1.1)
Nontaxable dividends & interest (0.7) (0.8)
Minority interest (1.4) (1.1)
Other, net (1.4) (0.1)
------ ------
35.0% 35.9%
====== ======
</TABLE>
Income taxes paid were $72,118 and $102,598 for the three months ended March 31,
1998 and 1997, respectively.
Note 12: Earnings Per Common Share
The Company adopted SFAS No. 128, "Earnings Per Share," during the quarter ended
December 31, 1997. Basic earnings per share is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities. The 1997 earnings per share amounts have been restated to
conform to the SFAS No. 128 requirements.
Set forth on the following page is the reconciliation of net income applicable
to common shares and weighted-average common and common equivalent shares of the
basic and diluted earnings per common share computations:
12
<PAGE> 14
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Numerator:
Net income $ 120,735 $ 100,835
Preferred stock dividends (5,912) (7,378)
------------- -------------
Net income applicable to common shares
for basic earnings per share 114,823 93,457
Effect of dilutive securities:
Preferred stock dividends -- 1,500
Interest savings on convertible debentures 105 350
------------- -------------
105 1,850
------------- -------------
Net income applicable to common shares
for diluted earnings per share $ 114,928 $ 95,307
============= =============
Denominator:
Weighted-average common shares for basic
earnings per share 139,285,622 130,348,040
Weighted-average effect of dilutive securities:
Employee stock options and awards 8,780,960 11,726,228
Convertible debentures 1,426,608 2,808,611
6% Convertible Preferred Stock -- 8,273,600
------------- -------------
Dilutive potential common shares 10,207,568 22,808,439
------------- -------------
Weighted-average common and common equivalent
shares for diluted earnings per share 149,493,190 153,156,479
============= =============
Earnings per share:
Basic $ 0.82 $ 0.72
============= =============
Diluted $ 0.77 $ 0.62
============= =============
</TABLE>
On December 4, 1997, the Company's 6% Convertible Preferred Stock was converted
into 8,273,600 common shares.
13
<PAGE> 15
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's principal business activities are, by their nature, affected by
many factors, including general economic and financial conditions, the level and
volatility of interest rates, currency and security valuations, competitive
conditions, counterparty risk, transactional volume and market liquidity. As a
result, revenues and profitability have been in the past, and are likely to
continue to be, subject to fluctuations reflecting the impact of these factors.
Market and economic conditions were favorable and relatively stable during the
first quarter of 1998 and compared favorably with the prior year period of 1997.
In the first quarter of 1998, the U.S. economy grew at a 4.2% GDP annual rate.
Despite this strong economic growth, inflation remained relatively constant and
the Federal Reserve did not change short-term interest rates. Market interest
rates fluctuated in a fairly narrow range. The yield on 90-day Treasury bills
slipped from 5.34% to 5.13% during the quarter while the quarter-end yield on
the 30-year Treasury bond was 5.94%, approximately the same level at which it
began the quarter. The Dow Jones Industrial Average increased 11.3% for the
first three months of 1998, as compared to the 2.1% increase for the first
three months of 1997. The S&P 500 stock index appreciated 13.5% for the first
three months of 1998, as compared to the 2.2% increase for the first three
months of 1997. The NASDAQ Composite index advanced 16.9% for the first three
months of 1998, up from the 5.4% decrease for the first three months of 1997.
Stock market volume also increased. Average daily volume on the New York Stock
Exchange was 624.5 million shares for the first three months of 1998, versus
516.7 million shares for the prior year period. The NASDAQ average daily volume
increased from 622.1 million shares for the first three months of 1997 to 740.4
million shares for the first three months of 1998.
Results of Operations
Quarter Ended March 31, 1998 compared to Quarter Ended March 31, 1997
The Company's net income for the quarter ended March 31, 1998 was a record
$120.7 million, or $0.82 per basic share ($0.77 per diluted share) compared to
net income of $100.8 million, or $0.72 per basic share ($0.62 per diluted share)
earned during the first quarter of 1997. During the first quarter of 1998,
revenues, net of interest expense, were a record $1,115.0 million, 13.2% higher
than the first quarter of 1997.
Commission revenues earned during the first quarter of 1998 were a record $408.1
million, slightly higher than the $370.4 million earned during the prior year
quarter. Commissions on the sale of listed securities and options increased
$26.5 million or 12.1%, mutual fund and insurance commissions increased $8.0
million or 7.8%, and commissions from over-the-counter securities and other
commissions increased $3.2 million or 6.6%.
Principal transactions revenues increased $20.4 million, or 8.0%, primarily
reflecting improved trading results in taxable fixed income securities and
equities.
Asset management fees increased 31.2% to a record $158.7 million, due to higher
revenues earned on managed or wrap accounts and trust accounts. Average assets
in wrap and trust accounts during the first quarter of 1998 were approximately
49% higher than during the first quarter of 1997. The increase also reflects
higher advisory fees earned on money market accounts and mutual funds. The
average assets under management in money market, institutional and long-term
mutual funds were approximately $52.3 billion during the first quarter of 1998
and approximately $44.4 billion during the first quarter of 1997.
Investment banking revenues were $125.0 million, 27.8% higher than the $97.8
million earned during the first quarter of 1997. The current year quarter
primarily reflects increases in underwriting fees, management fees and selling
concessions on increased volume of lead-managed and co-managed corporate and
municipal issues.
Net interest increased $11.1 million, or 11.0% primarily due to increased margin
lending to customers and an increased level of fixed income positions offset by
higher interest expense on increased borrowings.
Compensation and benefits for the quarter ended March 31, 1998 were $650.6
million as compared to $574.0 million during the prior year quarter. The number
of employees increased by 918, or 6%, from March 31, 1997 to March 31, 1998,
principally due to an expansion in Private Client Group investment executives,
selective hirings in Capital Markets and technology personnel working on the
millenium and other technology initiatives. Compensation and benefits as a
percent of net revenues were 58.3% during the first quarter of 1998 and 1997.
14
<PAGE> 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
All other operating expenses were $266.2 million, as compared to $245.9 million
for the prior year quarter. Principal drivers of the increase in
non-compensation costs were technology costs associated with preparations for
the millenium and other technology initiatives, and higher brokerage, clearing
and exchange fees associated with increased levels of business. The ratio of
other operating expenses as a percentage of net revenues declined to 23.9% for
the quarter ended March 31, 1998 compared to 25.0% for the prior quarter.
Liquidity and Capital Resources
The primary objectives of the Company's funding policies are to insure ample
liquidity at all times and a strong capital base. These objectives are met by
maximization of self-funded assets, diversification of funding sources,
maintenance of prudent liquidity and capital ratios, and contingency planning.
Liquidity
The Company maintains a highly liquid balance sheet with the majority of assets
consisting of trading assets, securities purchased under agreements to resell,
securities borrowed, and receivables from clients, brokers and dealers, which
are readily convertible into cash. The nature of the Company's business as a
securities dealer results in carrying significant levels of trading assets and
liabilities in order to meet its client and proprietary trading needs. The
Company's total assets may fluctuate from period to period as a result of
changes in the level of trading positions held to facilitate client
transactions, the volume of resale and repurchase transactions, and proprietary
trading strategies. These fluctuations depend significantly upon economic and
market conditions, and transactional volume.
The Company's total assets at March 31, 1998 were $61.6 billion compared to
$57.1 billion at December 31, 1997, primarily attributable to an increase in
trading assets. The majority of the Company's assets are financed by daily
operations such as securities sold under agreements to repurchase, free credit
balances in client accounts and securities lending activity. Additional
financing sources are available through bank loans and commercial paper,
committed and uncommitted lines of credit, and long-term borrowings.
The Company maintains committed and uncommitted credit facilities from a diverse
group of banks. The Company has a $1.2 billion unsecured revolving credit
agreement which expires in December 1998, with provisions for renewal through
December 2001. In addition, certain of the Company's subsidiaries have a
committed secured revolving credit facility to provide up to an aggregate of
$750.0 million through August 1998, with provisions for renewal through August
2000. The secured borrowings under this facility can be collateralized using a
variety of financial instruments. The facilities are available for general
corporate purposes. At March 31, 1998, there were no outstanding borrowings
under these credit facilities. Additionally, the Company had approximately $5.7
billion in uncommitted lines of credit at March 31, 1998.
The Company maintains a public shelf registration statement with the SEC for the
issuance of debt securities. During the first quarter of 1998, the Company
issued $267.0 million of debt under this registration statement. At March 31,
1998, the Company had approximately $995.6 million in debt securities available
for issuance under this registration statement. On April 23, 1998, the Company
issued $250.0 million of 6.55% notes due 2008 under this shelf registration
statement.
The Company also maintains a shelf registration statement with the SEC for the
issuance of preferred trust securities of PWG Capital Trusts III and IV,
business trusts formed under the Delaware law which are wholly owned
subsidiaries of the Company, and debt securities of the Company. At March 31,
1998, $106.2 million in Preferred Trust Securities and debt securities of the
Company were available for issuance under this registration statement.
Capital Resources and Capital Adequacy
The Company's businesses are capital intensive. In addition to a funding policy
which provides for diversification of funding sources and maximization of
liquidity, the Company maintains a strong capital base. The Company's total
capital base, which includes long-term borrowings, preferred securities and
stockholders' equity, grew to $6.1 billion at March 31, 1998, an increase of
$225.0 million from December 31, 1997. The growth in total capital is primarily
due to the net increase in long-term borrowings of $140.6 million and an
increase in stockholders' equity of $84.1 million.
15
<PAGE> 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The increase in long-term borrowings primarily reflects the net issuance of
medium term notes. The increase in stockholders' equity is primarily the result
of net income for the three months ended March 31, 1998 of $120.7 million and
the issuance of approximately 1,199,000 shares of common stock related to
employee compensation programs. Issuances and tax credits related to these
programs had the effect of increasing equity capital by $41.2 million. These
increases were offset by the repurchase of approximately 1,903,000 shares of
common stock for $59.5 million and dividends accrued of $21.0 million. At March
31, 1998, the remaining number of shares authorized to be repurchased under the
Company's common stock repurchase program was approximately 11.2 million. On May
7, 1998, the shareholders of the Company approved an amendment to the Company's
charter which increases the number of PWG common shares authorized for issuance
from 200,000,000 to 400,000,000 shares.
PWI is subject to the net capital requirements of the Securities and Exchange
Commission, the New York Stock Exchange, Inc. and the Commodity Futures Trading
Commission which are designed to measure the financial soundness and liquidity
of broker-dealers. PWI has consistently maintained net capital in excess of the
minimum requirements imposed by these agencies. In addition, the Company has
other banking and securities subsidiaries, both domestic and foreign, which have
also consistently maintained net regulatory capital in excess of requirements.
Merchant Banking and Highly Leveraged Transactions
In connection with its merchant banking and commercial real estate activities,
the Company has provided financing and made investments in companies, some of
which are involved in highly leveraged transactions. Positions taken or
commitments made by the Company may involve credit or market risk from any one
issuer or industry.
At March 31, 1998, the Company had investments in merchant banking transactions
which were affected by liquidity, reorganization or restructuring issues
amounting to $37.3 million, net of reserves, compared to $31.9 million, net of
reserves, at December 31, 1997. These investments have not had a material effect
on the Company's results of operations.
The Company's activities also include underwriting and market-making
transactions in high-yield corporate debt and non-investment-grade mortgage-
backed securities, and emerging market securities (collectively, "high-yield
securities"). These securities generally involve greater risks than investment-
grade corporate debt securities because these issuers usually have high levels
of indebtedness or lower credit ratings and are, therefore, more vulnerable to
general economic conditions. At March 31, 1998, the Company held $692.0 million
of high-yield securities, with approximately 20% of such securities
attributable to two issuers. The Company continually monitors its risk
positions associated with high-yield securities and establishes limits with
respect to overall market exposure, industry group and individual issuer. The
Company accounts for these positions at fair value, with unrealized gains and
losses reflected in revenues. These high-yield securities have not had a
material effect on the Company's results of operations.
Derivative Financial Instruments
A derivative financial instrument represents a contractual agreement between
counterparties and has value that is derived from changes in the value of some
other underlying asset such as the price of another security, interest rates,
currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P 500),
or the value referenced in the contract. Derivatives, such as futures, certain
option contracts and structured products (e.g. indexed warrants) are traded on
exchanges, while derivatives such as forward contracts, certain option
contracts, interest rate swaps, caps and floors, and other structured products
are negotiated in over-the-counter markets.
In the normal course of business, the Company engages in a variety of derivative
transactions in connection with its proprietary trading activities and asset and
liability management, as well as on behalf of its clients. As a dealer, the
Company regularly makes a market in and trades a variety of securities. The
Company is also engaged in creating structured products which are sold to
clients. In connection with these activities, the Company attempts to reduce its
exposure to market risk by entering into offsetting hedging transactions, which
may include derivative financial instruments. The Company also enters into
interest rate swap contracts to manage the interest rate characteristics of its
assets and liabilities.
16
<PAGE> 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The notional amount of a derivative contract is used to measure the volume of
activity and is not reflected on the Consolidated Statement of Financial
Condition. The Company had off-balance-sheet derivative contracts outstanding
with gross notional amounts of $117.8 billion and $61.1 billion at March 31,
1998 and December 31, 1997, respectively. These amounts included $89.0 billion
and $42.3 billion, respectively, related to "to be announced" mortgage-backed
securities requiring forward settlement. Also included in these amounts was $2.7
billion notional amount of interest rate swap agreements used to change the
interest rate characteristics of the Company's fixed rate debt at March 31, 1998
and December 31, 1997. For further discussion on the Company's derivative
financial instruments, see Note 8 in the Notes to Consolidated Financial
Statements.
The Company records any unrealized gains and losses on its derivative contracts
used in a trading capacity by marking-to-market the contracts on a daily basis.
The unrealized gain or loss is recorded on the Consolidated Statements of
Financial Condition with the related profit or loss reflected in "Principal
transactions" revenues. The Company accrues interest income and expense on
interest rate swap agreements used to change the interest rate characteristics
of the Company's fixed rate debt. The interest rate swap agreements had the
effect of reducing net interest expense on the Company's fixed rate debt by $2.9
million and $3.1 million for the three months ended March 31, 1998 and 1997,
respectively. The Company had no deferred gains or losses recorded at March 31,
1998 and December 31, 1997 related to terminated swap agreements.
The fair value of an exchange-traded derivative financial instrument is
determined by quoted market prices, while over-the-counter derivatives are
valued based upon pricing models which consider time value and volatility, as
well as other economic factors. The fair values of the Company's derivative
financial instruments held for trading purposes at March 31, 1998 were $437.8
million and $505.0 million for assets and liabilities, respectively, and are
reflected on the Consolidated Statements of Financial Condition. The fair values
of these instruments at December 31, 1997 were $182.4 million and $178.2 million
for assets and liabilities, respectively.
The Company's exposure to market risk relates to changes in interest rates,
equity prices, foreign currency exchange rates or the market values of the
assets underlying the financial instruments. The Company's exposure to credit
risk at any point is represented by the fair value or replacement cost on
contracts in which the Company has recorded an unrealized gain. At March 31,
1998 and December 31, 1997, the fair values amounted to $437.8 million and
$182.4 million, respectively. The risks inherent in derivative financial
instruments are managed consistent with the Company's overall risk management
policies. (See Risk Management section below)
Risk Management
Risk is an inherent part of the Company's principal business activities.
Managing risk is critical to the Company's profitability and to reducing the
likelihood of earnings volatility. The Company's risk management policies and
procedures have been established to continually identify, monitor and manage
risk. The Company's principal risks are market, credit, liquidity, legal and
operating risks.
The Company seeks to manage risk and its impact on earnings volatility through
strategic planning and by focusing on the diversification of its business
activities. Through capital allocation, and the establishment of trading by
product and credit limits by counterparty, the Company manages the risk
associated with the various businesses. The Company may reallocate or deploy
capital to the business groups based upon changes in market conditions or
opportunities in the marketplace that are consistent with the Company's
long-term strategy.
The discussion on the Company's principal risks and the estimated amounts of the
Company's market risk exposure generated from the sensitivity analysis performed
by the Company are forward-looking statements assuming certain adverse
conditions occur. Actual results in the future may differ materially from these
projected results due to actual events in the markets in which the Company
operates and other factors. The analysis methods used by the Company to assess
and mitigate risks discussed below should not be considered projections of
future events or losses.
Market Risk
All financial instruments involve market risk. Market risk is the potential
change in value of the financial instrument caused by unfavorable changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
is inherent to both derivative and non-derivative financial instruments.
17
<PAGE> 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The Company actively monitors its market risk profile through a variety of
control procedures including market risk modeling, review of trading positions
and hedging strategies, and monitoring adherence to established limits. Each
department's trading positions, exposures, profits and losses, and trading
strategies are reviewed by the senior management of each business group.
Independent of the trading departments is a risk management group. The Company's
risk management group reviews the Company's risk profile and adherence to
established trading limits, and aids in the development of risk management
policies. In addition the Company has in place committees and management
controls to review inventory positions, other asset accounts and asset agings on
a regular basis.
Trading position and exposure limits are established by the Asset/Liability
Management Committee, which meets regularly and is comprised of senior corporate
and business group managers.
The following is a discussion of the Company's primary market risk exposures at
March 31, 1998 and December 31, 1997 and how those exposures are managed:
Interest Rate Risk
In connection with the Company's dealer activities, the Company is exposed to
interest rate risk due to changes in the level or volatility of interest rates,
changes in the yield curve, mortgage prepayments and credit spreads. The Company
attempts to mitigate its exposure to interest rate risk by entering into hedging
transactions such as U.S. government and Eurodollar forward and future
contracts, options, and interest rate swap and cap agreements. The Company also
issues fixed rate instruments in connection with its nontrading activities,
which expose the Company to interest rate risk. The Company enters into interest
rate swap agreements which are designed to mitigate its exposure by effectively
converting its fixed rate liabilities into floating rate liabilities.
Equity Price Risk
In connection with the Company's dealer activities, the Company buys and sells
equity and equity derivative instruments. The Company is exposed to equity price
risk due to changes in the level or volatility of equity prices. The Company
attempts to mitigate its exposure to equity price risk by entering into hedging
transactions including equity option agreements.
Sensitivity Analysis
For purposes of the Securities and Exchange Commission disclosure requirements,
the Company has elected to use a sensitivity approach to express the potential
loss in future earnings of its financial instruments. In preparing the analysis,
the Company has combined both derivative and non-derivative financial
instruments held for trading purposes with those held for purposes other than
trading because the amounts were not material.
The sensitivity calculation employed to analyze interest rate risk on fixed
income financial instruments was based on a proprietary methodology which
converted substantially all the Company's interest rate sensitive financial
instruments at March 31, 1998 and December 31, 1997, into a uniform benchmark (a
ten year U.S. Treasury note equivalent), and evaluated the impact assuming a 10
basis point change to the ten-year U.S. Treasury note at March 31, 1998 and
December 31, 1997, respectively. The hypothetical 10 basis point change was
derived from a proprietary model which, uses a one-day interval and a 95%
confidence level, and was based on historical data over a one-year period. This
analysis does not consider other factors that may influence these results, such
as credit spread risk, prepayment risk on mortgage-backed securities or changes
in the shape of the yield curve. The sensitivity calculation employed to analyze
equity price risk on its equity financial instruments at March 31, 1998 and
December 31, 1997, was based on a 2% move in the Dow Jones Industrial Average at
March 31, 1998 and December 31, 1997, respectively, using a one-day interval and
a 95% confidence level, and was based on historical data over a one-year period.
Based upon the aforementioned methodologies, the Company's potential daily loss
in future earnings at March 31, 1998 was approximately $8 million and $0.5
million for interest rate risk and equity price risk, respectively, and the
Company's potential daily loss in future earnings at December 31, 1997 was
approximately $4 million and $0.5 million for interest rate risk and equity
price risk, respectively.
18
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is involved in a number of proceedings concerning matters arising in
connection with the conduct of its business. Certain actions in which
compensatory damages of $202 million or more appear to be sought, and in which
there have been material developments during the quarter, are described below.
The Company is also involved in numerous proceedings in which compensatory
damages of less than $202 million appear to be sought, or in which punitive or
exemplary damages, together with the apparent compensatory damages alleged,
appear to exceed $202 million. The Company has denied, or believes it has
legitimate defenses and will deny, liability in all significant cases pending
against it, and intends to defend actively each such case. The following
developments have occurred in the case below, which was previously reported in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Newton v. Merrill Lynch, et al. Securities Litigation
On April 30, 1998, defendants filed a petition for a writ of certiorari with the
United States Supreme Court.
Askin Litigation*
In a decision dated March 19, 1998, the district court denied plaintiffs' motion
for class certification in Primavera Familienstifung v. David J. Askin, et al.,
Docket No. 95 Civ. 8905 and Montpellier Resources, Limited et al. v. Askin
Capital Management, L.P., et al., Docket No. 97 Civ. 1856, the two class
actions.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Proxies for the Annual Meeting of Stockholders held on May 7, 1998 were
solicited by the Company pursuant to Regulation 14A of the Securities Act
of 1934, as amended.
(c) Matters voted upon at the Annual Meeting of Stockholders:
(1) The election of four directors to the Board of Directors to hold
office for a term of three years. There was no solicitation in
opposition of the nominees and all such nominees were elected. There
were no broker non- votes with respect to the election of Directors.
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Regina A. Dolan 113,965,968 1,590,712
Robert M. Loeffler 113,715,678 1,841,002
Henry Rosovsky 113,803,135 1,753,545
John R. Torell III 113,925,288 1,631,392
</TABLE>
(2) The approval to amend the Restated Certificate of Incorporation of
Paine Webber Group Inc. to increase the number of shares of common
stock, par value $1.00 per share, authorized for issuance from
200,000,000 to 400,000,000 shares.
<TABLE>
<S> <C>
Votes for: 112,092,500
Votes against: 3,138,364
Abstentions: 325,816
</TABLE>
(3) The ratification of the selection by the Board of Directors of Ernst
& Young LLP as the Company's independent public accountants for the
1998 fiscal year.
<TABLE>
<S> <C>
Votes for: 115,143,108
Votes against: 245,646
Abstentions: 167,926
</TABLE>
- ------------------------
* This item relates to a matter involving Kidder, Peabody & Co. which was
acquired by the Company in August 1997. In connection with the acquisition, the
seller and its parent General Electric Company agreed to indemnify the Company
for all losses relating to this matter.
19
<PAGE> 21
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit 3.1 - Restated Certificate of Incorporation of Paine
Webber Group Inc., as filed with the Office of the
Secretary of State of Delaware on May 15, 1998
Exhibit 12.1 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
Exhibit 12.2 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
20
<PAGE> 22
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Paine Webber Group Inc.
(Registrant)
Date: May 15, 1998 By: /s/ Regina A. Dolan
------------- -----------------------
Regina A. Dolan
Senior Vice President,
Chief Financial Officer
21
<PAGE> 23
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
Exhibit 3.1 - Restated Certificate of Incorporation of Paine
Webber Group Inc.
Exhibit 12.1 - Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
Exhibit 12.2 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
<PAGE> 1
RESTATED CERTIFICATE OF INCORPORATION
OF
PAINE WEBBER GROUP INC.
Paine Webber Group Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is Paine Webber Group Inc. The date
of the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware was October 30, 1973, under the name Paine Webber
Incorporated.
2. This Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the Certificate of
Incorporation of the Corporation as heretofore amended or supplemented and there
is no discrepancy between such provisions and the provisions of this Restated
Certificate of Incorporation, except (i) the Certificates of Designation
relating to series of the Corporation's Preferred Stock have been included in
this Restated Certificate of Incorporation as annexes thereto, and paragraphs
(f) and (g) of Article IV have been added in order to incorporate such annexes
into this Restated Certificate of Incorporation and (ii) the provisions of the
Certificate of Incorporation have been appropriately renumbered.
3. The text of the Restated Certificate of Incorporation is hereby
stated to read as herein set forth in full:
ARTICLE I
Name
The name of the Corporation is:
Paine Webber Group Inc.
<PAGE> 2
2
ARTICLE II
Registered Office and Registered Agent
The registered office of the Corporation in the State of Delaware is
to be located at 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name and address of the Corporation's registered agent is The
Corporation Service Company, 1013 Centre Road, in the City of Wilmington, County
of New Castle, State of Delaware.
ARTICLE III
Corporate Purposes and Powers
The purpose of the Corporation is to engage in any part of the world
in any capacity whether by itself or by or through any other person,
organization, association, partnership, corporation or other entity in which the
Corporation may have an interest in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware, and
the Corporation shall be authorized to exercise and enjoy all powers, rights and
privileges conferred upon corporations by the laws of the State of Delaware as
in force from time to time, including without limitation all powers necessary or
appropriate to carry out all those acts and activities in which it may lawfully
engage.
ARTICLE IV
Capital Stock
SECTION 1. Shares, Classes and Series Authorized. The total number
of shares of capital stock which the Corporation shall have the authority to
issue is 20,000,000 shares of Series Preferred Stock of the par value of $20
<PAGE> 3
3
each and 400,000,000 shares of Common Stock of the par value of $1 each. Such
Series Preferred Stock and Common Stock are sometimes hereinafter collectively
called "capital stock."
SECTION 2. Designations, Powers, Preferences, Rights,
Qualifications, Limitations and Restrictions of Capital Stock. The following is
a statement of the designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect of the classes
of the capital stock, and of the authority with respect thereto expressly vested
in the Board of Directors of the Corporation:
PART I - SERIES PREFERRED STOCK
(a) The Series Preferred Stock may be issued from time to time in
one or more series, the shares of each series to have such powers, designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as are stated and expressed
herein or in a resolution or resolutions providing for the issue of such series,
adopted by the Board of Directors as hereinafter provided.
(b) Authority is hereby expressly granted to the Board of Directors,
subject to the provisions of this Section 2, to authorize the issue of one or
more series of Series Preferred Stock, and with respect to each such series to
fix by resolution or resolutions providing for the issue of such series:
(i) the maximum number of shares to constitute such series and the
distinctive designation thereof;
(ii) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the terms of
such voting rights;
(iii) the dividend rate, if any, on the shares of such series, the
conditions and dates upon which such dividends shall be payable, the
preference or relation which such dividends shall bear to the dividends
<PAGE> 4
4
payable on any other class or classes or on any other series of capital
stock, and whether such dividends shall be cumulative or noncumulative;
(iv) whether the shares of such series shall be subject to
redemption by the Corporation, and, if made subject to redemption, the
times, prices and other terms and conditions of such redemption;
(v) the rights of the holders of shares of such series upon the
liquidation, dissolution or winding up of the Corporation;
(vi) whether or not the shares of such series shall be subject to
the operation of a retirement or sinking fund, and, if so, the extent to
and manner in which any such retirement or sinking fund shall be applied
to the purchase or redemption of the shares of such series for retirement
or to other corporate purposes and the terms and provisions relative to
the operation thereof;
(vii) whether or not the shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or classes,
or of any other series of the same class, and if so convertible or
exchangeable, the price or prices or the rate or rates of conversion or
exchange and the method, if any, of adjusting the same;
(viii) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of
dividends or making of other distributions on, and upon the purchase,
redemption or other acquisition by the Corporation of, Common Stock or any
other class or classes of stock of the Corporation ranking junior to the
shares of such series either as to dividends or upon liquidation;
(ix) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock
(including additional shares of such series or of any other series or of
any other class) ranking on a parity with or prior to the shares of such
series as to dividends or distribution
<PAGE> 5
5
of assets on liquidation, dissolution or winding up; and
(x) any other preference and relative, participating, optional, or
other special rights, and qualifications, limitations or restrictions
thereof as shall not be inconsistent with this Section 2.
(c) All shares of any one series of Series Preferred Stock shall be
identical with each other in all respects, except that shares of any one series
issued at different times may differ as to the dates from which dividends, if
any, thereon shall be cumulative; and all series shall rank equally and be
identical in all respects, except as permitted by the foregoing provisions of
Paragraph (b) hereof; and all shares of Series Preferred Stock shall rank senior
to the Common Stock both as to dividends and upon liquidation.
(d) In the event of any liquidation, dissolution or winding up of
the Corporation, before any payment or distribution of the assets of the
Corporation (whether capital or surplus), shall be made to or set apart for the
holders of any class or classes of stock of the Corporation ranking junior to
the Series Preferred Stock upon liquidation, the holders of the shares of the
Series Preferred Stock shall be entitled to receive payment at the rate fixed
herein or in the resolution or resolutions adopted by the Board of Directors
providing for the issue of such series, plus (if dividends on shares of such
series of Series Preferred Stock shall be cumulative) an amount equal to all
dividends (whether or not earned or declared) accumulated to the date of final
distribution to such holders; but they shall be entitled to no further payment.
If, upon any liquidation, dissolution or winding up of the Corporation, the
assets of the Corporation or proceeds thereof, distributable among the holders
of the shares of the Series Preferred Stock shall be insufficient to pay in full
the preferential amount aforesaid, then such assets, or the proceeds thereof,
shall be distributed among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were paid in full. For the purposes of this Paragraph (d), the voluntary
sale, conveyance, exchange or
<PAGE> 6
6
transfer (for cash, shares of stock, securities, or other consideration) of all
or substantially all the property or assets of the Corporation shall be deemed a
voluntary liquidation, dissolution or winding up of the Corporation, but a
consolidation or merger of the Corporation with one or more other corporations
shall not be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary.
(e) Except as shall be otherwise stated and expressed herein or in
the resolution or resolutions of the Board of Directors providing for the issue
of any series and except as otherwise required by the laws of the State of
Delaware, the holders of shares of Series Preferred Stock shall have, with
respect to such shares, no right or power to vote on any question or in any
proceeding or to be represented at, or to receive notice of, any meeting of
stockholders.
(f) The powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, of the Corporation's 6% Convertible
Preferred Stock not set forth in the body of this Certificate of Incorporation
are set forth in Annex I hereto.
(g) The powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, of the Corporation's 9% Cumulative
Redeemable Preferred Stock, Series C, not set forth in the body of this
Certificate of Incorporation are set forth in Annex II hereto.
PART II - COMMON STOCK
(h) All shares of Common Stock shall be identical with each other in
every respect. The shares of Common Stock shall entitle the holders thereof to
one vote for each share upon all matters upon which stockholders have the right
to vote.
<PAGE> 7
7
(i) The Common Stock is subject to all the powers, rights,
privileges, preferences and priorities of the Series Preferred Stock as are
stated and expressed herein and as shall be stated and expressed in any
resolution or resolutions adopted by the Board of Directors pursuant to
authority expressly granted to and vested in it by the provisions of this
Section 2.
ARTICLE IV(A)
Voting Debentures
The holders of the Corporation's 7% Convertible Subordinated Voting
Debentures Due 2007 ("Exchange Debentures") which may be issued from time to
time pursuant to the Investment Agreement dated as of November 30, 1987, between
the Corporation and The Yasuda Mutual Life Insurance Company, in exchange for
the Corporation's 7% Cumulative Convertible Exchangeable Voting Preferred Stock,
Series A, shall be entitled to vote together with the shares of Common Stock
(and of any other class of series of capital stock which may, now or in the
future, similarly be entitled to vote with shares of Common Stock) as a single
class upon all matters upon which holders of Common Stock are entitled to vote,
as follows: each $1,000 aggregate principal amount of Exchange Debentures shall
be entitled to a number of votes equal to the product of (x) the number of votes
to which each share of the Series A Preferred was entitled on the effective date
of the exchange of such share of Series A Preferred for any Exchange Debenture
times (y) the quotient of $1,000 divided by $44.50.
ARTICLE IV(B)
Preemptive Rights
The Yasuda Mutual Life Insurance Company ("Yasuda") shall be
entitled, subject to the conditions set forth in Section 5.1(c) of the
Investment Agreement dated as of November 30, 1987, between the Corporation and
Yasuda (the "Investment Agreement"), to (1) equity purchase rights
<PAGE> 8
8
that are no less favorable than the preemptive or equity purchase rights, if
any, that might be granted by the Corporation to any other person or (2) if the
Corporation has no class or series of voting securities which is registered
under the Securities Exchange Act of 1934 and broadly held and actively traded
or if permitted by the rules of any national stock exchange on which any such
class or series of voting securities is listed, or the over-the-counter market
in which any such class or series of voting securities is traded if no longer
listed, equity purchase rights which allow Yasuda a preemptive right to purchase
the amount of voting securities of the Corporation or any securities convertible
into or exchangeable for voting securities of the Corporation or any options,
warrants or rights exercisable for voting securities of the Corporation ("Equity
Purchase Shares") equal to the product of (A) the quotient of (x) the number of
voting securities of the Corporation owned by Yasuda immediately prior to the
issuance of Equity Purchase Shares divided by (y) the aggregate number of
outstanding voting securities owned by persons other than Yasuda immediately
prior to the issuance of Equity Purchase Shares (for purposes of this
calculation, treating all securities of the Corporation convertible into voting
securities as though they have been so converted), multiplied by (B) the
aggregate number of Equity Purchase Shares being issued by the Corporation to
persons other than Yasuda, rounded up to the nearest whole Equity Purchase
Share. If, at the time of the determination of the amount of Equity Purchase
Shares which Yasuda shall be entitled to purchase, any other person has
preemptive or other equity purchase rights similar to those granted to Yasuda,
the amount Yasuda is entitled to purchase shall be recalculated to take into
account the amount of voting securities to be sold to such persons, rounding up
the amount of Equity Purchase Shares which Yasuda shall be entitled to purchase
to the nearest whole Equity Purchase Share. The terms upon which, the time or
times at or within which, and the price or prices at which any such preemptive
rights or equity purchase rights may be exercised shall, if applicable, be as
set forth in the Investment Agreement or, if not applicable, as determined by
the Board of Directors.
<PAGE> 9
9
ARTICLE V
Restriction on Dividends
No dividend shall be declared or paid which shall impair the capital
of the Corporation nor shall any distribution of assets be made to any
stockholder unless the value of the assets of the Corporation remaining after
such payment or distribution is at least equal to the aggregate of its debts,
liabilities and capital. A director shall be fully protected in relying in good
faith upon the books of account of the Corporation or statements prepared by any
of its officers or by independent public accountants as to the value and amount
of the assets, liabilities, net profits, capital stock and surplus of the
Corporation, or any other facts pertinent to the existence and amount of surplus
or other funds from which dividends might properly be declared and paid.
ARTICLE VI
Board of Directors
SECTION 1. Powers of the Board of Directors. In furtherance and not
in limitation of the powers conferred by statute, the Board of Directors of the
Corporation is expressly authorized:
(a) To authorize and cause to be executed mortgages and liens upon
the real and personal property of the Corporation.
(b) To determine the use and disposition of any surplus and net
profits of the Corporation, including the determination of the amount of working
capital required, to set apart out of any of the funds of the Corporation,
whether or not available for dividends, a reserve or reserves for any proper
purpose and to abolish any such reserve in the manner in which it was created.
(c) To designate, by resolution passed by a majority of the whole
Board, one or more committees, each
<PAGE> 10
10
committee to consist of one or more directors of the Corporation, which, to the
extent provided in the resolution designating the committee or in the By-Laws of
the Corporation, shall have and may exercise subject to the provisions of the
General Corporation Law of Delaware the powers of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it. Such
committee or committees shall have such name or names as may be provided in the
By-Laws of the Corporation or as may be determined from time to time by
resolution adopted by the Board of Directors.
(d) To grant rights or options entitling the holders thereof to
purchase from the Corporation shares of its capital stock of any class or
series. The terms upon which, the time or times at or within which, and the
price or prices at which any such rights or options may be issued and any such
shares may be purchased from the Corporation upon the exercise of any such right
or option, shall be determined by the Board of Directors. In the absence of
actual fraud in the transaction, the judgment of the Board of Directors as to
the consideration for the issuance of such rights or options and for the
issuance of shares of capital stock upon exercise thereof and the sufficiency of
such consideration shall be conclusive. No such rights or options shall be
invalidated or in any way affected by the fact that any director shall be a
grantee thereof or shall vote for the issuance of such rights or options to
himself or for any plan pursuant to which he may receive any such rights or
options.
(e) To adopt or assume such plans as may from time to time be
approved by it for the purchase by officers or employees of the Corporation of
shares of capital stock of the Corporation of any class or series. The terms
upon which, the time or times at or within which, and the price or prices at
which shares may be purchased from the Corporation pursuant to such a plan shall
be determined by the Board of Directors in the plan. In the absence of actual
fraud in the transaction, the judgment of the Board of Directors as to the
consideration for the issuance of such shares and the sufficiency thereof shall
be conclusive. No such plan which is not at the time of adoption or
<PAGE> 11
11
assumption unreasonable or unfair shall be invalidated or in any way affected
because any director shall be entitled to purchase shares of capital stock of
the Corporation thereunder and shall vote for any such plan.
(f) To adopt or assume and carry out such plans as may from time to
time be approved by it for the distribution among the officers or employees of
the Corporation, or any of them, in addition to their regular salaries or wages,
of part of the earnings of the Corporation in consideration for or in
recognition of the services rendered by such officers or employees or as an
inducement to future efforts. No such plan which is not at the time of adoption
or assumption unreasonable or unfair shall be invalidated or in any way affected
because any director shall be a beneficiary thereunder or shall vote for any
plan under which he may benefit or for any distribution thereunder in which he
may participate.
(g) To adopt or assume and carry out such pension, deferred
compensation, profit-sharing or retirement plans as may from time to time be
approved by it, providing for pensions, deferred compensation, profit-sharing
plan benefits or retirement income for officers or employees of the Corporation,
in consideration for or in recognition of the services rendered by such officers
or employees or as an inducement to future efforts. No such plan which is not at
the time of adoption or assumption unreasonable or unfair shall be invalidated
or in any way affected because any director shall be a beneficiary thereunder or
shall vote for any plan under which he may benefit or for any distribution
thereunder in which he may participate.
(h) To exercise, in addition to the powers and authorities
hereinbefore or by law conferred upon it, any such powers and authorities and do
all such acts and things as may be exercised or done by the Corporation,
subject, nevertheless, to the provisions of the laws of the State of Delaware
and of this Certificate of Incorporation and to the By-Laws of the Corporation.
SECTION 2. Reliance on Books. A director shall be fully protected in
relying in good faith upon the books of account of the Corporation or statements
prepared by any
<PAGE> 12
12
of its officers or by independent public accountants as to the value and amount
of the assets, liabilities and/or net profits of the Corporation or any facts
pertinent to the existence and amount of surplus or other funds with which the
Corporation's capital stock might properly be purchased or redeemed.
SECTION 3. Classification of the Board of Directors.
(a) Subject to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, the number of the directors of the Corporation shall be fixed from
time to time by or pursuant to the By-Laws of the Corporation. The directors,
other than those who may be elected by the holders of the Preferred Stock or any
other class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation pursuant to the terms of this Certificate of
Incorporation or any resolution or resolutions providing for the issue of such
class or series of stock adopted by the Board of Directors, shall be classified,
with respect to the time for which they severally hold office, into three
classes, as nearly equal in number as possible, as shall be provided in the
By-Laws of the Corporation, one class to be originally elected for a term
expiring at the annual meeting of stockholders to be held in 1988, another class
to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1989, and another class to be originally elected for
a term expiring at the annual meeting of stockholders to be held in 1990, with
each class to hold office until its successors are elected and qualified. At
each annual meeting of the stockholders of the Corporation, the date of which
shall be fixed by or pursuant to the By-Laws of the Corporation, the successors
of the class of directors whose term expires at that meeting shall be elected to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. Unless and except to the
extent that the By-Laws of the Corporation shall so require, the election of
directors need not be by written ballot. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
<PAGE> 13
13
(b) Subject to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, newly created directorships resulting from any increase in the
number of directors may be filled by the Board of Directors, or as otherwise
provided in the By-Laws, and any vacancies on the Board of Directors resulting
from death, resignation, removal or other cause shall only be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors, or by a sole remaining
director, or as otherwise provided in the By-Laws. Any director elected in
accordance with the preceding sentence of this Paragraph (b) shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
(c) Subject to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, any director may be removed from office only for cause, and in such
case, only by the affirmative vote of the holders of a majority of the combined
voting power of the then outstanding shares of stock of all classes and series
of the Corporation entitled to vote generally in the election of directors
("Voting Stock"), voting together as a single class. For purposes of this
Paragraph (c), "cause" shall mean the wilful and continuous failure of a
director substantially to perform such director's duties to the Corporation
(other than any such failure resulting from incapacity due to physical or mental
illness) or the wilful engaging by a director in gross misconduct materially and
demonstrably injurious to the Corporation. Any officer of the Corporation may be
removed at any time in such manner as provided in the ByLaws of the Corporation.
(d) In addition to any requirements of law and any other provisions
of this Certificate of Incorporation or any resolution or resolutions of the
Board of Directors adopted pursuant to Article IV of this Certificate of
Incorporation (and notwithstanding the fact that a lesser percentage may be
specified by law or this Certificate of Incorporation or any such resolution or
resolutions), the
<PAGE> 14
14
affirmative vote of the holders of 80% or more of the combined voting power of
the then outstanding shares of Voting Stock, voting together as a single class,
shall be required to amend, alter or repeal, or adopt any provision inconsistent
with, this Section 3.
ARTICLE VII
Meetings of Stockholders
SECTION 1. Subject to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders. Except as otherwise required by law
and subject to the rights of the holders of the Preferred Stock or any other
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors or as
otherwise provided in the By-Laws of the Corporation.
SECTION 2. In addition to any requirements of law and any other
provisions of this Certificate of Incorporation or any resolution or resolutions
of the Board of Directors adopted pursuant to Article IV of this Certificate of
Incorporation (and notwithstanding the fact that a lesser percentage may be
specified by law or this Certificate of Incorporation or any such resolution or
resolutions), the affirmative vote of the holders of 80% or more of the combined
voting power of the then outstanding shares of Voting Stock, voting together as
a single class, shall be required to amend, alter or repeal, or adopt any
provision inconsistent with, this Article VII.
<PAGE> 15
15
ARTICLE VIII
Transactions with Directors or Officers
No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
(1) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof, or the stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
<PAGE> 16
16
ARTICLE IX
Liability of Directors
(a) To the fullest extent that the General Corporation Law of the
State of Delaware as it exists on the date hereof or as it may hereafter be
amended permits the limitation or elimination of the liability of directors, no
director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. No
amendment to or repeal of this Article shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
(b) In addition to any requirements of law and any other provisions
of this Certificate of Incorporation or any resolution or resolutions of the
Board of Directors adopted pursuant to Article IV of this Certificate of
Incorporation (and notwithstanding the fact that a lesser percentage may be
specified by law or this Certificate of Incorporation or any such resolution or
resolutions), the affirmative vote of the holders of 80% or more of the combined
voting power of the then outstanding shares of Voting Stock, voting together as
a single class, shall be required to amend, alter or repeal, or adopt any
provision inconsistent with, this Article IX.
ARTICLE X
Compromise or Arrangement between Corporation
and its Creditors or Stockholders
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the
<PAGE> 17
17
provisions of Section 291 of Title 8 of the Delaware Code, or on the application
of trustees in dissolution, or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of this Corporation, as the case may be,
to be summoned in such manner as said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders, of this Corporation as the
case may be, agrees to any compromise or arrangement and to any reorganization
of this Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding upon all the
creditors or class of creditors, and/or upon all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE XI
Reservation of Right to Amend
Certificate of Incorporation
The Corporation reserves the right to amend, alter, change or repeal
any provisions contained in this Certificate of Incorporation in the manner now
or hereafter prescribed by law, and all the provisions of this Certificate of
Incorporation and all rights and powers conferred in this Certificate of
Incorporation on stockholders, directors and officers are subject to this
reserve power.
ARTICLE XII
Adopting and Amending the By-Laws
SECTION 1. The Board of Directors may adopt, repeal, alter or amend
the By-Laws of the Corporation by the
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vote of a majority of the entire Board of Directors. Without limiting its
authority to adopt, repeal, alter or amend the By-Laws of the Corporation, the
Board of Directors is expressly authorized to adopt By-Laws which a majority of
the entire Board of Directors may deem necessary or desirable for the efficient
conduct of the affairs of the Corporation, including, without limitation,
provisions governing the conduct of, and the matters which may properly be
brought before, meetings of the stockholders and provisions specifying the
manner and extent to which prior notice shall be given of the submission of
proposals to be considered at any meeting of stockholders or of nominations for
the election of directors to be held at any such meeting.
SECTION 2. In addition to any requirements of law and any other
provisions of this Certificate of Incorporation or any resolution or resolutions
of the Board of Directors adopted pursuant to Article IV of this Certificate of
Incorporation (and notwithstanding the fact that a lesser percentage may be
specified by law, this Certificate of Incorporation or any such resolution or
resolutions), the stockholders may not adopt, amend, alter or repeal any
provision of the By-Laws of the Corporation, except by the affirmative vote of
the holders of 80% or more of the combined voting power of the then outstanding
shares of Voting Stock, voting together as a single class, unless recommended to
the stockholders for their approval by two-thirds of the Disinterested Directors
as such term is defined in Article XIII of this Certificate of Incorporation.
SECTION 3. In addition to any requirements of law and any other
provisions of this Certificate of Incorporation or any resolution or resolutions
of the Board of Directors adopted pursuant to Article IV of this Certificate of
Incorporation (and notwithstanding the fact that a lesser percentage may be
specified by law or this Certificate of Incorporation or any such resolution or
resolutions), the affirmative vote of the holders of 80% or more of the combined
voting power of the then outstanding shares of Voting Stock, voting together as
a single class, shall be required to amend, alter or repeal, or adopt any
provision inconsistent with, this Article XII.
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ARTICLE XIII
Approval of Business Combinations
The vote of stockholders of the Corporation required to approve
Business Combinations (as hereinafter defined) shall be as set forth in this
Article XIII.
SECTION 1. In addition to any affirmative vote required by law or by
this Certificate of Incorporation or any resolution or resolutions of the Board
of Directors adopted pursuant to Article IV of this Certificate of
Incorporation, and except as otherwise expressly provided in Section 3 of this
Article XIII:
(a) any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Stockholder or (ii) any other corporation (whether or
not itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested Stockholder;
or
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of any assets of the Corporation or of any Subsidiary having an
aggregate Fair Market Value equal to 10% or more of the consolidated
stockholders' equity of the Corporation and its subsidiaries as shown in the
most recent audited consolidated balance sheet of the Corporation and its
consolidated subsidiaries; or
(c) the issuance, sale or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) to any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder of any
securities of the Corporation or any Subsidiary in exchange for cash, securities
or other property (or a combination thereof) having an aggregate Fair Market
Value equal to 10% or more of the consolidated stockholders' equity of the
Corporation and its subsidiaries, as shown in the most recent audited
consolidated balance sheet of the Corporation
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and its consolidated subsidiaries, other than the issuance of securities upon
the conversion of convertible securities of the Corporation or any Subsidiary
which were not acquired by such Interested Stockholder (or such Affiliate or
Associate) from the Corporation or a Subsidiary; or
(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder; or
(e) any reclassification of securities (including any reverse stock
split) or recapitalization of the Corporation, or any merger or consolidation of
the Corporation with any of its Subsidiaries, or any other transaction (whether
or not with or into or otherwise involving any Interested Stockholder), which in
any such case has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class or series of stock or
securities convertible into stock of the Corporation or any Subsidiary which is
directly or indirectly beneficially owned by any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder;
shall not be consummated without (i) the affirmative vote of the holders of at
least 80% of the combined voting power of the then outstanding shares of Voting
Stock and (ii) the affirmative vote of a majority of the combined voting power
of the then outstanding shares of Voting Stock held by Disinterested
Stockholders, in each case voting together as a single class. Such affirmative
vote shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage may be specified, by law or by this Certificate of
Incorporation or any resolution or resolutions of the Board of Directors adopted
pursuant to Article IV of this Certificate of Incorporation or in any agreement
with any national securities exchange or otherwise.
SECTION 2. The term "Business Combination" as used in this Article
XIII shall mean any transaction which is referred to in any one or more of
Paragraphs (a) through (e) of Section 1 of this Article XIII.
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SECTION 3. The provisions of Section 1 of this Article XIII shall
not be applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote as is required by law and
any other provision of this Certificate of Incorporation and any resolution or
resolutions of the Board of Directors adopted pursuant to Article IV of this
Certificate of Incorporation, if all the conditions specified in either of the
following Paragraphs (a) or (b) are met:
(a) such Business Combination shall have been approved by a majority
of the Disinterested Directors; or
(b) all the six conditions specified in the following clauses (i)
through (vi) shall have been met:
(i) the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of Common Stock in
exchange for all their shares of Common Stock, and the aggregate amount of
the cash and the Fair Market Value as of the date of the consummation of
the Business Combination of any consideration other than cash to be
received per share by holders of Common Stock in such Business Combination
shall be at least equal to the higher of the following:
(A) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid in order to acquire any shares of Common Stock beneficially
owned by the Interested Stockholder which were acquired (1) within
the two-year period immediately prior to the Announcement Date or
(2) in the transaction in which it became an Interested Stockholder,
whichever is higher; and
(B) the Fair Market Value per share of Common Stock on the
Announcement Date or on the Determination Date, whichever is higher;
and
(ii) if the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any class or
series of outstanding Voting Stock other than Common Stock, the
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aggregate amount of the cash and the Fair Market Value as of the date of
the consummation of the Business Combination of any consideration other
than cash to be received per share by holders of shares of such Voting
Stock shall be at least equal to the highest of the following (it being
intended that the requirements of this clause (ii) shall be required to be
met with respect to every class and series of such outstanding Voting
Stock, whether or not the Interested Stockholder beneficially owns any
shares of a particular class or series of Voting Stock):
(A) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid in order to acquire any shares of such class or
series of Voting Stock beneficially owned by the Interested
Stockholder which were acquired (1) within the two-year period
immediately prior to the Announcement Date or (2) in the transaction
in which it became an Interested Stockholder, whichever is higher;
(B) (if applicable) the highest preferential amount per share
to which the holders of shares of such class or series of Voting
Stock are entitled in the event of the redemption thereof or of any
voluntary or involuntary liquidation, dissolution or winding up of
the Corporation; and
(C) the Fair Market Value per share of such class or series of
Voting Stock on the Announcement Date or on the Determination Date,
whichever is higher; and
(iii) the consideration to be received by holders of a particular
class or series of outstanding Voting Stock (including Common Stock) shall
be in cash or in the same form as was previously paid in order to acquire
shares of such class or series of Voting Stock which are beneficially
owned by the Interested Stockholder and, if the Interested Stockholder
beneficially owns shares of any class or series of Voting Stock which were
acquired with varying forms of
<PAGE> 23
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consideration, the form of consideration to be received by holders of such
class or series of Voting Stock shall be either cash or the form used to
acquire the largest number of shares of such class or series of Voting
Stock beneficially owned by it; and
(iv) after such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(A) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at
the regular dates therefor the full amount of any dividends (whether
or not cumulative) payable on the Preferred Stock or any class or
series of stock having a preference over the Common Stock as to
dividends or upon liquidation;
(B) there shall have been (x) no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to
reflect any subdivision of the Common Stock), except as approved by
a majority of the Disinterested Directors, and (y) an increase in
such annual rate of dividends (as necessary to prevent any such
reduction) in the event of any reclassification (including any
reverse stock split), recapitalization, reorganization or any
similar transaction which has the effect of reducing the number of
outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the
Disinterested Directors; and
(C) such Interested Stockholder shall not have become the
beneficial owner of any additional shares of Voting Stock except as
part of the transaction in which it became an Interested
Stockholder; and
(v) after such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or
<PAGE> 24
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indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance provided by
the Corporation, whether in anticipation of or in connection with such
Business Combination or otherwise; and
(vi) a proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall be
mailed to the stockholders of the Corporation at least 30 calendar days
prior to the consummation of such Business Combination (whether or not
such proxy or information statement is required to be mailed pursuant to
such Act or subsequent provisions).
SECTION 4. For the purposes of this Article XIII:
(a) A "person" shall mean any individual, firm, corporation,
partnership, trust or other entity.
(b) "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(1) is the beneficial owner, directly or indirectly, of 20% or more
of the combined voting power of the then outstanding shares of Voting
Stock; or
(2) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 20% or more of the combined
voting power of the then outstanding shares of Voting Stock; or
(3) is an assignee of or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock which were at any time within the
two-year period immediately prior to the date in question beneficially
owned by any Interested Stockholder, if such assignment or succession,
shall have occurred in the course of a
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transaction or series of transactions not involving a public offering
within the meaning of the Securities Act of 1933.
(c) "Disinterested Stockholder" shall mean a stockholder of the
Corporation (other than the Corporation or a Subsidiary) who is not an
Interested Stockholder or an Affiliate or an Associate of an Interested
Stockholder.
(d) A person shall be a "beneficial owner" of any Voting Stock:
(1) which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly;
or
(2) which such person or any of its Affiliates or Associates has (a)
the right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote or to direct
the vote pursuant to any agreement, arrangement or understanding; or
(3) which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or Associates
has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Voting Stock.
(e) For the purposes of determining whether a person is an
Interested Stockholder pursuant to Paragraph (b) of this Section 4, the number
of shares of Voting Stock deemed to be outstanding shall include shares deemed
owned by such person through application of Paragraph (d) of this Section 4 but
shall not include any other shares of Voting Stock which may be issuable to
other persons pursuant to any agreement, arrangement or understanding or upon
exercise of conversion rights, exchange rights, warrants or options, or
otherwise.
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(f) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on December 16, 1986.
(g) "Subsidiary" shall mean any corporation of which a majority of
the outstanding stock having ordinary voting power for the election of directors
is owned by the Corporation, by a Subsidiary or by the Corporation and one or
more Subsidiaries, provided, however, that for the purposes of the definitions
set forth in Paragraphs (b) and (c) of this Section 4, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned by the Corporation, by a Subsidiary or by the Corporation and
one or more Subsidiaries.
(h) "Disinterested Director" means any member of the Board of
Directors of the Corporation who is unaffiliated with, and not a nominee of, the
Interested Stockholder and was a member of the Board of Directors prior to the
time that the Interested Stockholder became an Interested Stockholder, and any
successor of a Disinterested Director who is unaffiliated with, and not a
nominee of, the Interested Stockholder and who is recommended to succeed a
Disinterested Director by a majority of the Disinterested Directors then on the
Board of Directors.
(i) "Fair Market Value" means: (1) in the case of stock, the highest
closing sale price during the 30 calendar day period immediately preceding the
date in question of a share of such stock on the New York Stock Exchange
Composite Tape, or, if such stock is not quoted on the Composite Tape, on the
New York Stock Exchange, or, if such stock is not listed on such Exchange, on
the principal United States securities exchange registered under the Securities
Exchange Act of 1934 on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing sales price or bid quotation
with respect to a share of such stock during the 30 calendar day period
preceding the date in question on the National Association of Securities
Dealers, Inc., Automated Quotations System or any system then in use, or, if no
such quotations are available, the fair market value on the date in question of
a share of such stock as determined by a
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majority of the Disinterested Directors in good faith; and (2) in the case of
stock of any class or series which is not traded on any securities exchange or
in the over-the-counter market or in the case of property other than cash or
stock, the fair market value of such stock or property, as the case may be, on
the date in question as determined by a majority of the Disinterested Directors
in good faith.
(j) "Announcement Date" means the date of first public announcement
of the proposed Business Combination.
(k) "Determination Date" means the date on which the Interested
Stockholder became an Interested Stockholder.
SECTION 5. A majority of the Disinterested Directors of the
Corporation shall have the power and duty to determine, on the basis of
information known to them after reasonable inquiry, all facts necessary to
determine compliance with this Article XIII, including, without limitation, (a)
whether a person is an Interested Stockholder, (b) the number of shares of
Voting Stock beneficially owned by any person, (c) whether a person is an
Affiliate or Associate of another person, (d) whether the requirements of
Section 3 of this Article XIII have been met with respect to any Business
Combination and, (e) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value equal to or in excess of 10% of
the consolidated stockholders' equity of the Corporation and its subsidiaries
reflected in the Corporation's most recent audited consolidated balance sheet;
and the good faith determination of a majority of the Disinterested Directors on
such matters shall be conclusive and binding for all purposes of this Article
XIII.
SECTION 6. Nothing contained in this Article XIII shall be construed
to relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
SECTION 7. In addition to any requirements of law and any other
provisions of this Certificate of Incorporation or any resolution or resolutions
of the Board
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of Directors adopted pursuant to Article IV of this Certificate of Incorporation
(and notwithstanding the fact that a lesser percentage may be specified by law,
this Certificate of Incorporation or any such resolution or resolutions), the
affirmative vote of the holders of 80% or more of the combined voting power of
the then outstanding shares of Voting Stock, voting together as a single class,
shall be required to amend, alter or repeal, or adopt any provision inconsistent
with, this Article XIII; provided, however, that the affirmative vote of a
majority of the combined voting power of the then outstanding shares of Voting
Stock held by the Disinterested Stockholders (as defined in Section 4 of this
Article XIII) voting together as a single class, shall also be required to
amend, alter or repeal, or adopt any provision inconsistent with, this Article
XIII.
4. This Restated Certificate of Incorporation was duly adopted by
the Board of Directors of the Corporation on
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May 7, 1998, in accordance with Section 245 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, Paine Webber Group Inc. has caused this
certificate to be signed by Donald B. Marron, its Chairman of the Board,
President and Chief Executive Officer, and attested by Theodore A. Levine, its
Secretary, on this ____ day of May, 1998.
----------------------------------
Donald B. Marron,
Chairman of the Board
and Chief Executive Officer
[Seal]
Attest:
- -----------------------------
Theodore A. Levine, Secretary
<PAGE> 30
ANNEX I
6% CONVERTIBLE PREFERRED STOCK
($20 Par Value)
The designation of this series of the Series Preferred Stock shall
be the 6% Convertible Preferred Stock (the "Convertible Preferred Stock"). The
number of shares of Convertible Preferred Stock shall be 2,200,000.
(i) Holders of shares of Convertible Preferred Stock will be
entitled to receive, when and as declared by the Board of Directors (the
"Board") of Paine Webber Group Inc. (the "Corporation") out of assets of the
Corporation legally available for payment, an annual cash dividend of $1.50 per
share, payable in semi-annual installments on June 30 and December 31,
commencing December 31, 1992. Dividends on the Convertible Preferred Stock will
be cumulative from the date of initial issuance of any shares of Convertible
Preferred Stock. Dividends will be payable to holders of record as they appear
on the stock books of the Corporation on such record dates, not more than 60
days nor less than 10 days preceding the payment dates thereof, as shall be
fixed by the Board. When dividends are not paid in full upon the Convertible
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Convertible Preferred Stock (such other preferred stock and
the Convertible Preferred Stock hereinafter being collectively referred to as
"Parity Preferred Stock"), all dividends declared upon shares of Parity
Preferred Stock will be declared pro rata so that in all cases the amount of
dividends declared per share on the Convertible Preferred Stock and such other
Parity Preferred Stock shall bear to each other the same ratio that accumulated
and unpaid dividends per share on the shares of Convertible Preferred Stock and
such other Parity Preferred Stock bear to each other. Except as set forth in the
preceding sentence, unless full cumulative dividends on the Convertible
Preferred Stock have been paid, no dividends (other than in Common Stock of the
Corporation (as defined in paragraph (iii)(I) below) or any other stock of the
Corporation ranking junior to the Convertible Preferred Stock as to dividends)
may be paid or declared and set aside for payment or other distribution made
upon the Common Stock or on any other stock of the Corporation ranking junior to
or on a parity with the Convertible Preferred Stock as to dividends, nor may any
Common Stock or any other stock of the Corporation ranking junior to or on a
parity with the Convertible Preferred Stock as to dividends be redeemed,
purchased or otherwise acquired for any consideration (or
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2
any payment made to or available for a sinking fund for the redemption of any
shares of such stock) by the Corporation (except by conversion into or exchange
for stock of the Corporation ranking junior to the Convertible Preferred Stock
as to dividends). Dividends payable for any partial dividend period shall be
calculated on the basis of a 360-day year of 12 30-day months.
(ii) The shares of Convertible Preferred Stock shall rank prior to
the shares of Common Stock and of any other class of stock of the Corporation
ranking junior to the Series Preferred Stock upon liquidation, so that in the
event of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Convertible Preferred Stock shall
be entitled to receive out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
before any distribution is made to holders of shares of Common Stock or any
other such junior stock, an amount equal to $25 per share (the "Liquidation
Preference" of a share of Convertible Preferred Stock) plus an amount equal to
all dividends (whether or not earned or declared) accumulated and unpaid on the
shares of Convertible Preferred Stock to the date of final distribution. If,
upon any liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation, or proceeds thereof, distributable among the holders of
shares of Parity Preferred Stock shall be insufficient to pay in full the
liquidation preference amounts of the Parity Preferred Stock and all dividends
(whether or not earned or declared) accumulated and unpaid thereon, then such
assets, or the proceeds thereof, shall be distributable among such holders
ratably in accordance with the respective amounts which would be payable on such
shares if all amounts payable thereon were paid in full. For the purposes
hereof, the voluntary sale, conveyance, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all the
property or assets of the Corporation shall be deemed a voluntary liquidation,
dissolution or winding up of the Corporation, but a consolidation or merger of
the Corporation with one or more other corporations shall not be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary.
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(iii) (I) Subject to and upon compliance with the provisions of this
paragraph (iii), the holder of a share of Convertible Preferred Stock
shall have the right, at his option, at any time, except that, if such
share is called for redemption, not after the close of business on the
fifth day next preceding the date fixed for such redemption, to convert
such share into that number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) obtained by dividing the Liquidation Preference of such share being
converted by the Conversion Price (as defined below), upon surrender of
such share so to be converted, such surrender to be made in the manner
provided in subsection (II) of this paragraph (iii).
The term "Common Stock" shall mean the Common Stock, $1 par value,
of the Corporation as the same exists at the date of this Certificate or
as such stock may be constituted from time to time, except that for the
purpose of subsection (V) of this paragraph (iii) the term "Common Stock"
shall also mean and include stock of the Corporation of any class, whether
now or hereafter authorized, which shall have the right to participate in
the distribution of either earnings or assets of the Corporation without
limit as to amount or percentage.
The term "Conversion Price" shall mean $22.125 as adjusted in
accordance with the provisions of this paragraph (iii).
(II) In order to exercise the conversion privilege, the holder of
each share of Convertible Preferred Stock to be converted shall surrender
the certificate representing such share at the office of the conversion
agent for the Convertible Preferred Stock in the Borough of Manhattan,
City of New York, appointed for such purpose by the Corporation, with the
Notice of Election to Convert on the back of said certificate completed
and signed. Unless the shares issuable on conversion are to be issued in
the same name as the name in which such share of Convertible Preferred
Stock is registered, each share surrendered for conversion shall be
accompanied by instruments of
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transfer, in form satisfactory to the Corporation and duly executed by the
holder or his duly authorized attorney, and an amount sufficient to pay
any transfer or similar tax. No payment or adjustment shall be made on
conversion for dividends accumulated on the Convertible Preferred Stock
surrendered for conversion or for dividends on Common Stock delivered on
such conversion. As promptly as practicable after the surrender of the
certificates for shares of Convertible Preferred Stock as aforesaid, the
Corporation shall issue and shall deliver at such office to such holder,
or on his written order, a certificate or certificates for the number of
full shares of Common Stock issuable upon the conversion of such shares in
accordance with the provisions of this paragraph (iii), and any fractional
interest in respect of a share of Common Stock arising upon such
conversion shall be settled as provided in subsection (III) of this
paragraph (iii).
Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for
shares of Convertible Preferred Stock shall have been surrendered and such
notice received by the Corporation as aforesaid, and the person or persons
in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented
thereby at such time on such date and such conversion shall be at the
Conversion Price in effect at such time on such date, unless the stock
transfer books of the Corporation shall be closed on that date, in which
event such person or persons shall be deemed to have become such holder or
holders of record at the close of business on the next succeeding day on
which such stock transfer books are open, but such conversion shall be at
the Conversion Price in effect on the date upon which such shares shall
have been surrendered and such notice received by the Corporation. All
shares of Common Stock delivered upon conversions of the Convertible
Preferred Stock will upon delivery be duly and validly issued and fully
paid and nonassessable, free of all liens and charges and not subject to
any preemptive rights.
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(III) No fractional shares or scrip representing fractions of shares
of Common Stock shall be issued upon conversion of the Convertible
Preferred Stock. Instead of any fractional interest in a share of Common
Stock which would otherwise be deliverable upon the conversion of a share
of Convertible Preferred Stock, the Corporation shall pay to the holder of
such share an amount in cash (computed to the nearest cent) equal to the
current market price (as defined in subsection (IV)(d) of this paragraph
(iii)) thereof at the close of business on the business day next preceding
the day of conversion. If more than one share shall be surrendered for
conversion at one time by the same holder, the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the
basis of the aggregate Liquidation Preference of the shares of Convertible
Preferred Stock so surrendered.
(IV) The Conversion Price shall be adjusted from time to time as
follows:
(a) In case the Corporation shall hereafter (i) pay a dividend
or make a distribution on the Common Stock in shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares, or (iv) issue by
reclassification of the Common Stock any shares of capital stock of
the Corporation, the Conversion Price in effect immediately prior to
such action shall be adjusted so that the holder of any share of
Convertible Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock or
other capital stock of the Corporation which he would have owned or
been entitled to receive immediately following such action had such
share been converted immediately prior thereto. An adjustment made
pursuant to this subdivision (a) shall become effective immediately
after the record date, in the case of a dividend or distribution, or
immediately after the effective date, in the case of a subdivision,
<PAGE> 35
6
combination or reclassification. If, as a result of an adjustment
made pursuant to this subdivision (a), the holder of any share of
Convertible Preferred Stock thereafter surrendered for conversion
shall become entitled to receive shares of two or more classes of
capital stock or shares of Common Stock and other capital stock of
the Corporation, the Board (whose determination shall be conclusive
and shall be described in a statement filed with the conversion
agent by the Corporation as soon as practicable) shall determine the
allocation of the adjusted Conversion Price between or among shares
of such classes of capital stock or shares of Common Stock and other
capital stock.
(b) In case the Corporation shall hereafter issue rights or
warrants to holders of its outstanding shares of Common Stock
generally entitling them (for a period expiring within 45 days after
the record date mentioned below) to subscribe for or purchase shares
of Common Stock at a price per share less than the current market
price per share (as determined pursuant to subdivision (d) of this
subsection (IV)) of the Common Stock on the record date mentioned in
the next sentence (other than pursuant to an automatic dividend
reinvestment plan of the Corporation or any substantially similar
plan), the Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of issuance of such rights or
warrants by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding on the date of issuance of such
rights or warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered would
purchase at such current market price, and of which the denominator
shall be the number of shares of Common Stock outstanding on the
date of issuance of such rights or warrants plus the number of
additional shares of Common Stock offered for subscription or
purchase. Such adjustment shall become effective immediately
<PAGE> 36
7
after the record date for the determination of stockholders entitled
to receive such rights or warrants.
(c) In case the Corporation shall hereafter distribute to
holders of its outstanding shares of Common Stock generally
evidences of its indebtedness or assets (excluding any cash dividend
paid from retained earnings of the Corporation and dividends or
distributions payable in stock for which adjustment is made pursuant
to subdivision (a) of this subsection (IV)) or rights or warrants to
subscribe to securities of the Corporation (excluding those referred
to in subdivision (b) of this subsection (IV)), then in each such
case the Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of such distribution by a
fraction of which the numerator shall be the current market price
per share (determined as provided in subdivision (d) of this
subsection (IV)) of the Common Stock on the record date mentioned in
the next sentence less the then fair market value (as determined by
the Board, whose determination shall be conclusive and shall be
described in a statement filed with the conversion agent by the
Corporation as soon as practicable) of the portion of the evidences
of indebtedness or assets so distributed to the holder of one share
of Common Stock or of such subscription rights or warrants
applicable to one share of Common Stock, and of which the
denominator shall be such current market price per share of Common
Stock. Such adjustment shall become effective immediately after the
record date for the determination of stockholders entitled to
receive such distribution.
(d) For the purpose of subsection (III) and subdivisions (b)
and (c) of this subsection (IV), the current market price per share
of Common Stock on any date shall mean the price of a share of
Common Stock on the relevant date, determined on the basis of the
last reported sale price regular
<PAGE> 37
8
way of the Common Stock as reported on the composite tape, or
similar reporting system, for issues listed on the New York Stock
Exchange (or if the Common Stock is not then listed on that
Exchange, for issues listed on such other national securities
exchange upon which the Common Stock is listed as may be designated
by the Board for the purposes hereof) or, if there is no such
reported sale on the day in question, on the basis of the average of
the closing bid and asked quotations as so reported, or, if the
Common Stock is not then listed on any national securities exchange,
on the basis of the closing price, if the Common Stock is a national
market issue, or the average of the high bid and low asked
quotations on the day in question in the over-the-counter market as
reported by the National Association of Securities Dealers'
Automated Quotations System, or if not so quoted, as reported by
National Quotation Bureau, Incorporated, or a similar organization.
(e) In any case in which this paragraph (iii) shall require
that an adjustment be made immediately following a record date or an
effective date, the Corporation may elect to defer (but only until
five business days following the filing by the Corporation with the
conversion agent of the certificate of independent public
accountants required by subdivision (g) of this subsection (IV))
issuing to the holder of any share of Convertible Preferred Stock
converted after such record date or effective date the additional
shares of Common Stock or other capital stock issuable upon such
conversion over and above the shares of Common Stock or other
capital stock issuable upon such conversion on the basis of the
Conversion Price prior to adjustment, and paying to such holder any
amount of cash in lieu of a fractional share.
(f) No adjustment in the Conversion Price shall be required to
be made unless such adjustment would require an increase or decrease
of at least 1% of such price; provided, however, that any
adjustments which by reason of this
<PAGE> 38
9
subdivision (f) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All
calculations under this paragraph (iii) shall be made to the nearest
cent or to the nearest 1/100th of a share, as the case may be.
Anything in this paragraph (iii) to the contrary notwithstanding,
the Corporation shall be entitled to make such reduction in the
Conversion Price, in addition to those required by this paragraph
(iii), as it in its discretion shall determine to be advisable in
order that any stock dividend, subdivision of shares, distribution
of rights to purchase stock or securities, or distribution of
securities convertible into or exchangeable for stock hereafter made
by the Corporation to its stockholders shall not be taxable to the
recipients.
(g) Whenever the Conversion Price is adjusted as herein
provided, (i) the Corporation shall promptly file with the
conversion agent a certificate of a firm of independent public
accountants (who may be the regular accountants employed by the
Corporation) setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts
requiring such adjustment and the manner of computing the same,
which certificate shall be conclusive evidence of the correctness of
such adjustment, and (ii) a notice stating that the Conversion Price
has been adjusted and setting forth the adjusted Conversion Price
shall forthwith be mailed by the Corporation to the holders of the
Convertible Preferred Stock at their addresses as shown on the stock
books of the Corporation.
(h) In the event that at any time as a result of an adjustment
made pursuant to subdivision (a) of this subsection (IV), the holder
of any share of Convertible Preferred Stock thereafter surrendered
for conversion shall become entitled to receive any shares of the
Corporation other than shares of Common Stock, thereafter the
Conversion Price of such other shares so
<PAGE> 39
10
receivable upon conversion of any share shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common
Stock contained in this paragraph (iii).
(V) In case:
(a) the Corporation shall take any action which would require
any adjustment in the Conversion Price pursuant to subsection
(IV)(c); or
(b) the Corporation shall authorize the granting to the
holders of the Common Stock of rights or warrants to subscribe for
or purchase any shares of stock of any class or of any other rights;
or
(c) there shall be any capital stock reorganization or
reclassification of the Common Stock (other than a subdivision or
combination of the outstanding Common Stock and other than a change
in the par value of the Common Stock), or any consolidation or
merger to which the Corporation is a party or any statutory exchange
of securities with another corporation and for which approval of any
stockholders of the Corporation is required, or any sale or transfer
of all or substantially all the assets of the Corporation; or
(d) there shall be a voluntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed with the conversion agent,
and shall cause to be mailed to the holders of shares of the Convertible
Preferred Stock at their addresses as shown on the stock books of the
Corporation, at least 10 days prior to the applicable date hereinafter
specified, a notice stating (i) the date on which a record is to be taken
for the purpose of such distribution or rights, or, if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such distribution or
<PAGE> 40
11
rights are to be determined, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, statutory
exchange, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, statutory
exchange, sale, transfer, dissolution, liquidation or winding up. Failure
to give such notice or any defect therein shall not affect the legality or
validity of the proceedings described in subdivision (a), (b), (c) or (d)
of this subsection (V).
(VI) The Corporation covenants that it will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued shares of Common Stock or its issued shares of
Common Stock held in its treasury, or both, for the purpose of effecting
conversions of the Convertible Preferred Stock, the full number of shares
of Common Stock deliverable upon the conversion of all shares of
Convertible Preferred Stock then outstanding and not theretofore converted
or then deliverable upon conversion of the Corporation's 6.5% Convertible
Debentures Due 2002 (the "2002 Debentures"). For purposes of this
subsection (VI), the number of shares of Common Stock which shall be
deliverable upon the conversion of all such shares of Convertible
Preferred Stock shall be computed as if at the time of computation all
such shares were held by a single holder.
Before taking any action which would cause an adjustment reducing
the Conversion Price below the then par value (if any) of the shares of
Common Stock deliverable upon conversion of the Convertible Preferred
Stock, the Corporation will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may
validly and legally issue fully paid and nonassessable shares of Common
Stock at such adjusted Conversion Price.
<PAGE> 41
12
To the extent not already listed, the Corporation will endeavor to
list the shares of Common Stock required to be delivered upon conversion
of the Convertible Preferred Stock prior to such delivery upon each
national securities exchange, if any, upon which the outstanding Common
Stock is listed at the time of such delivery.
Prior to the delivery of any securities which the Corporation shall
be obligated to deliver upon conversion of the Convertible Preferred
Stock, the Corporation will endeavor to comply with all Federal and state
laws and regulations thereunder requiring the registration of such
securities with, or any approval of or consent to the delivery thereof by,
any governmental authority.
(VII) The Corporation will pay any and all documentary stamp or
similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock on conversions of the Convertible
Preferred Stock pursuant hereto; provided, however, that the Corporation
shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issue or delivery of shares of Common Stock
in a name other than that of the holder of the Convertible Preferred Stock
to be converted and no such issue or delivery shall be made unless and
until the person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(VIII) Notwithstanding any other provision herein to the contrary,
in case of any consolidation or merger to which the Corporation is a party
(other than a merger or consolidation in which the Corporation is the
continuing corporation), or in case of any statutory exchange of
securities with another corporation (including any exchange effected in
connection with a merger of a third corporation into the Corporation), the
holder of each share of Convertible Preferred Stock then outstanding shall
have the right thereafter to convert such share into the kind and amount
of securities, cash or other property receivable upon such
<PAGE> 42
13
consolidation, merger or statutory exchange by a holder of the number of
shares of Common Stock into which such share of Convertible Preferred
Stock might have been converted immediately prior to such consolidation,
merger or statutory exchange, assuming such holder of Common Stock failed
to exercise his rights of election, if any, as to the kind or amount of
securities, cash or other property receivable upon such consolidation,
merger or statutory exchange (provided that if the kind or amount of
securities, cash or other property receivable upon such consolidation,
merger or statutory exchange is not the same for each share of Common
Stock in respect of which such rights of election shall not have been
exercised ("non-electing share"), then for the purpose of this subsection
(VIII) the kind and amount of securities, cash or other property
receivable upon such consolidation, merger or statutory exchange for each
non-electing share shall be deemed to be the kind and amount so receivable
per share by a plurality of the non-electing shares). Thereafter, the
holders of the Convertible Preferred Stock shall be entitled to
appropriate adjustments with respect to their conversion rights to the end
that the provisions set forth in this paragraph (iii) shall
correspondingly be made applicable, as nearly as may reasonably be, in
relation to any shares of stock or other securities or property thereafter
deliverable on the conversion of the Convertible Preferred Stock. Any such
adjustment shall be approved by a firm of independent public accountants,
evidenced by a certificate to that effect delivered to the conversion
agent; and any adjustment so approved shall for all purposes hereof
conclusively be deemed to be an appropriate adjustment.
The above provisions of this subsection (VIII) shall similarly apply
to successive consolidations, mergers or statutory exchanges.
(iv) Upon any conversion or redemption of shares of Convertible
Preferred Stock, the shares of Convertible Preferred Stock so converted or
redeemed shall have the status of authorized and unissued shares of Series
Preferred Stock, and the number of shares of Series Preferred Stock which the
Corporation shall have the authority to issue
<PAGE> 43
14
shall not be decreased by the conversion or redemption of shares of Convertible
Preferred Stock.
(v) The holders of shares of Convertible Preferred Stock shall have
no voting rights whatsoever, except for any voting rights to which they may be
entitled under the laws of the State of Delaware, and except as follows:
(I) If and whenever at any time or times dividends payable on the
Convertible Preferred Stock or on any other Parity Preferred Stock shall
have been in arrears and unpaid in an aggregate amount equal to or
exceeding the amount of dividends payable thereon for six quarterly
periods or three semi-annual periods, as the case may be, then the holders
of Parity Preferred Stock shall have, in addition to the other voting
rights set forth herein, the exclusive right, voting separately as a
class, to elect two directors of the Corporation, such directors to be in
addition to the number of directors constituting the Board of Directors
immediately prior to the accrual of such right, the remaining directors to
be elected by the other class or classes of stock entitled to vote
therefor at each meeting of stockholders held for the purpose of electing
directors. Such voting right shall continue until such time as all
cumulative dividends accumulated on all the Parity Preferred Stock having
cumulative dividends shall have been paid in full and until any
noncumulative dividends payable on all the Parity Preferred Stock having
noncumulative dividends shall have been paid regularly for at least one
year, at which time such voting right of the holders of the Parity
Preferred Stock shall terminate, subject to revesting in the event of each
and every subsequent event of default of the character indicated above.
Whenever such voting right shall have vested, such right may be
exercised initially either at a special meeting of the holders of the
Parity Preferred Stock, called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors, and
thereafter at each successive annual meeting.
<PAGE> 44
15
At any time when such voting right shall have vested in the holders
of the Parity Preferred Stock, and if such right shall not already have
been initially exercised, a proper officer of the Corporation shall, upon
the written request of the holders of record of 10% in number of shares of
the Parity Preferred Stock then outstanding, addressed to the Secretary of
the Corporation, call a special meeting of the holders of the Parity
Preferred Stock and of any other class or classes of stock having voting
power with respect thereto for the purpose of electing directors. Such
meeting shall be held at the earliest practicable date upon the notice
required for annual meetings of stockholders at the place for holding of
annual meetings of stockholders of the Corporation, or, if none, at a
place designated by the Secretary of the Corporation. If such meeting
shall not be called by the proper officers of the Corporation within 30
days after the personal service of such written request upon the Secretary
of the Corporation, or within 30 days after mailing the same within the
United States of America, by registered mail, addressed to the Secretary
of the Corporation at its principal office (such mailing to be evidenced
by the registry receipt issued by the postal authorities), then the
holders of record of 10% in number of shares of the Parity Preferred Stock
then outstanding may designate in writing one of their number to call such
meeting at the expense of the Corporation, and such meeting may be called
by such person so designated upon the notice required for annual meetings
of stockholders and shall be held at the same place as is elsewhere
provided for in this subsection (I). Any holder of the Parity Preferred
Stock shall have access to the stock books of the Corporation for the
purpose of causing a meeting of stockholders to be called pursuant to the
provisions of this paragraph. Notwithstanding the provisions of this
paragraph, however, no such special meeting shall be called during a
period within 90 days immediately preceding the date fixed for the next
annual meeting of stockholders.
At any meeting held for the purpose of electing directors at which
the holders of the Parity Preferred Stock shall have the right to elect
directors as
<PAGE> 45
16
provided herein, the presence in person or by proxy of the holders of
33-1/3% of the then outstanding shares of the Parity Preferred Stock shall
be required and be sufficient to constitute a quorum of the Parity
Preferred Stock for the election of directors by the holders of the Parity
Preferred Stock. At any such meeting or adjournment thereof (A) the
absence of a quorum of the holders of the Parity Preferred Stock shall not
prevent the election of directors other than those to be elected by the
holders of the Parity Preferred Stock and the absence of a quorum or
quorums of the holders of other classes of capital stock entitled to elect
such other directors shall not prevent the election of directors to be
elected by the holders of the Parity Preferred Stock and (B) in the
absence of a quorum of the holders of any class of stock entitled to vote
for the election of directors, a majority of the holders present in person
or by proxy of such class shall have the power to adjourn the meeting for
the election of directors which the holders of such class are entitled to
elect, from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
The directors elected pursuant to this subsection (I) shall serve
until the next annual meeting or until their respective successors shall
be elected and shall qualify; provided, however, that when the right of
the holders of the Parity Preferred Stock to elect directors as herein
provided shall terminate, the terms of office of all persons so elected by
the holders of the Parity Preferred Stock shall terminate, and the number
of directors of the Corporation shall thereupon be such number as may be
provided in the By-Laws of the Corporation irrespective of any increase
made pursuant to this subsection (I).
(II) So long as any shares of the Convertible Preferred Stock remain
outstanding, the Corporation will not, either directly or indirectly or
through merger or consolidation with any other corporation:
(a) without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of at least 66-2/3%
in number of
<PAGE> 46
17
shares of the Series Preferred Stock of all series then outstanding,
(A) create any class or classes of stock ranking equal or prior to
the Series Preferred Stock either as to dividends or upon
liquidation or increase the authorized number of shares of any class
or classes of stock ranking equal or prior to the Series Preferred
Stock either as to dividends or upon liquidation, (B) amend, alter
or repeal any of the provisions of the Certificate of Incorporation
so as to affect adversely the preferences, special rights or powers
of the Series Preferred Stock or (C) authorize any reclassification
of the Series Preferred Stock;
(b) without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of at least 66-2/3%
in number of shares of the Convertible Preferred Stock then
outstanding, amend, alter or repeal any of the provisions hereof so
as to affect adversely the preferences, special rights or powers of
the Convertible Preferred Stock; or
(c) without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of at least a
majority in number of shares of the Series Preferred Stock of all
series then outstanding, increase the authorized number of shares of
the Series Preferred Stock.
(vi) The shares of the Convertible Preferred Stock may be redeemed
at the option of the Corporation as a whole at any time, upon not less than 25
nor more than 60 days' prior notice mailed to the holders of the shares to be
redeemed at their addresses as shown on the stock books of the Corporation, at a
redemption price of $25.00 per share, together with an amount equal to all
dividends (whether or not earned or declared) accumulated and unpaid to the date
fixed for redemption. Upon such redemption date, all holders of shares of
Convertible Preferred Stock shall cease to be stockholders with respect to such
shares and thereafter such shares shall no longer be transferable on the books
of the Corporation and such holders shall have no interest or claim against the
Corporation with respect to
<PAGE> 47
18
such shares except the right to receive payment of the redemption price upon
surrender of their certificates.
If full cumulative dividends on the Convertible Preferred Stock have
not been paid, the Corporation may not purchase or acquire any shares of the
Convertible Preferred Stock otherwise than pursuant to a purchase or exchange
offer made on the same terms to all holders of the Convertible Preferred Stock.
(vii) No consent of the holders of the Convertible Preferred Stock
shall be required for (i) the creation of any indebtedness of any kind of the
Corporation, (ii) the creation of any class of stock of the Corporation ranking
junior as to dividends or upon liquidation to the Series Preferred Stock or
(iii) any increase or decrease in the amount of authorized Common Stock or any
increase, decrease or change in the par value thereof or in any other terms
thereof.
(viii) The Board reserves the right by subsequent amendment from
time to time to increase (subject to the provisions of paragraph (v)(II)(c)) or
decrease the number of shares which constitute the Convertible Preferred Stock
(but not below the aggregate number of shares thereof then outstanding or then
deliverable upon conversion of the 2002 Debentures) and in other respects to
amend the terms of the Convertible Preferred Stock within the limitations
provided by law, resolutions of the Board and the Certificate of Incorporation.
<PAGE> 48
ANNEX II
9% CUMULATIVE REDEEMABLE
PREFERRED STOCK, SERIES C
($100 Stated Value)
PAINE WEBBER GROUP INC.
(1) Number and Designation. 2,500,000 shares of the Preferred Stock
of the Corporation shall be designated as 9% Cumulative Redeemable Preferred
Stock, Series C (the "Series C Preferred Stock").
(2) Rank. The shares of Series C Preferred Stock shall rank prior to
the shares of the Corporation's common stock, $1 par value (the "Common Stock"),
and any other class of stock of the Corporation ranking junior to the Series C
Preferred Stock (whether with respect to dividends or upon liquidation,
dissolution, winding up or otherwise). All equity securities of the Corporation
to which the Series C Preferred Stock ranks prior (whether with respect to
dividends or upon liquidation, dissolution, winding up or otherwise), including
the Common Stock, are collectively referred to herein as the "Junior
Securities." All equity securities of the Corporation with which the Series C
Preferred Stock ranks on a parity (whether with respect to dividends or upon
liquidation, dissolution, winding up or otherwise), including the Corporation's
6% Convertible Preferred Stock, are collectively referred to herein as the
"Parity Securities." The respective definitions of Junior Securities and Parity
Securities shall also include any rights or options exercisable for or
convertible into any of the Junior Securities and Parity Securities, as the case
may be.
(3) Dividends. (a) The holders of shares of Series C Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available for the payment of dividends, cash
dividends at the annual rate of $9 per share. Such dividends shall be payable in
arrears in equal amounts quarterly on March 15, June 15, September 15 and
December 15 of each year (unless such day is not a Business Day, in which event
on the next succeeding Business Day) (each of such dates being a "Dividend
Payment Date" and each such quarterly period being a "Dividend Period")
commencing on the Dividend Payment Date which next follows the issuance of
<PAGE> 49
2
such shares of Series C Preferred Stock. Such dividends (i) shall be cumulative
from the date of issue, whether or not declared and whether or not in any
Dividend Period or Periods there shall be funds of the Corporation legally
available for the payment of such dividends and (ii) shall compound quarterly,
to the extent they are unpaid, at the rate of 9% per annum computed on the basis
of a 360-day year and twelve 30-day months. Each such dividend shall be payable
to the holders of record of shares of the Series C Preferred Stock, as they
appear on the stock records of the Corporation at the close of business on such
record dates, not more than 60 days, or less than 10 days, preceding the payment
dates thereof, as shall be fixed by the Board of Directors or a duly authorized
committee thereof. Accrued and unpaid dividends for any past Dividend Periods
may be declared and paid at any time, without reference to any Dividend Payment
Date, to holders of record on such date, not more than 45 days preceding the
payment date thereof, as may be fixed by the Board of Directors. As used herein,
the term "Business Day" shall mean any day other than a Saturday, Sunday, a day
on which the New York Stock Exchange does not conduct regular trading or a day
on which is or is declared a national or New York State holiday.
(b) The amount of dividends payable for each full Dividend Period
for the Series C Preferred Stock shall be computed by dividing the annual
dividend rate by four. The amount of dividends payable for the initial Dividend
Period, or any other period shorter or longer than a full Dividend Period, on
the Series C Preferred Stock shall be computed on the basis of twelve 30-day
months and a 360-day year. Holders of shares of Series C Preferred Stock shall
not be entitled to any dividends, whether payable in cash, property or stock, in
excess of cumulative dividends, as herein provided, on the Series C Preferred
Stock.
(c) So long as any shares of the Series C Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Parity Securities, for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a
<PAGE> 50
3
sum sufficient for the payment thereof set apart for such payment on the Series
C Preferred Stock for all Dividend Periods terminating on or prior to the date
of payment of the dividend on such class or series of parity stock. When
dividends are not paid in full or a sum sufficient for such payment is not set
apart, as aforesaid, all dividends declared upon shares of the Series C
Preferred Stock and all dividends declared upon any other Parity Security shall
be declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Series C Preferred Stock and accumulated and
unpaid on such Parity Security.
(d) So long as any shares of the Series C Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Junior Securities) shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (all such dividends,
distributions, redemptions or purchases being hereinafter referred to as a
"Junior Securities Distribution") for any consideration (or any moneys be paid
to or made available for a sinking fund for the redemption of any shares of any
such stock) by the Corporation, directly or indirectly (except by conversion
into or exchange for Junior Securities), unless in each case (i) the full
cumulative dividends on all outstanding shares of the Series C Preferred Stock
and any other Parity Securities shall have been paid or set apart for payment
for all past Dividend Periods with respect to the Series C Preferred Stock and
all past dividend periods with respect to such Parity Securities and (ii)
sufficient funds shall have been paid or set apart for the payment of the
dividend for the current Dividend Period with respect to the Series C Preferred
Stock and the current dividend period with respect to such Parity Securities.
(4) Liquidation Preference. (a) In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any payment or distribution of the assets of the Corporation
<PAGE> 51
4
(whether capital or surplus) shall be made to or set apart for the holders of
Junior Securities, the holders of the shares of Series C Preferred Stock shall
be entitled to receive $100 per share of Series C Preferred Stock plus an amount
equal to all dividends (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution to such holders; but such holders
shall not be entitled to any further payment. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of the shares of Series C
Preferred Stock shall be insufficient to pay in full the preferential amount
aforesaid and liquidating payments on any Parity Securities, then such assets,
or the proceeds thereof, shall be distributed among the holders of shares of
Series C Preferred Stock and any such other Parity Securities ratably in
accordance with the respective amounts that would be payable on such shares of
Series C Preferred Stock and any such other stock if all amounts payable thereon
were paid in full. For the purposes of this paragraph (4), a sale or transfer of
all or substantially all of the Corporation's assets, shall be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary, of the
Corporation, but a consolidation or merger of the Corporation with one or more
corporations shall not be deemed to be a liquidation, dissolution or winding up,
voluntary or involuntary, of the Corporation.
(b) Subject to the rights of the holders of any Parity Securities,
after payment shall have been made in full to the holders of the Series C
Preferred Stock, as provided in this paragraph (4), any other series or class or
classes of Junior Securities shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the holders of the Series C Preferred
Stock shall not be entitled to share therein.
(5) Redemption. (a) To the extent the Corporation shall have funds
legally available for such payment, the Corporation may redeem at its option at
any time on or after December 16, 1999 or from time to time
<PAGE> 52
5
thereafter, in whole or in part, the shares of Series C Preferred Stock, at a
redemption price of $100 per share in cash, together with accrued and unpaid
dividends thereon to the date fixed for redemption.
(b) To the extent the Corporation shall have funds legally available
for such payment, on December 15, 2014, if any shares of the Series C Preferred
Stock shall be outstanding, the Corporation shall redeem all outstanding shares
of the Series C Preferred Stock, at a redemption price of $100 per share in
cash, together with accrued and unpaid dividends thereon to such date.
(c) Immediately prior to authorizing or making any redemption
pursuant to this paragraph (5) the Corporation, by resolution of its Board of
Directors, shall, to the extent of any funds legally available therefor, declare
a dividend on the Series C Preferred Stock payable on the redemption date in an
amount equal to any accrued and unpaid dividends on the Series C Preferred Stock
as of such redemption date.
(d) If the Corporation is unable or shall fail to discharge its
obligation to redeem all outstanding shares of Series C Preferred Stock pursuant
to paragraph (5)(b) (the "Mandatory Redemption Obligation"), the Mandatory
Redemption Obligation shall be discharged as soon as the Corporation is able to
discharge such Mandatory Redemption Obligation. If and so long as any Mandatory
Redemption Obligation with respect to the Series C Preferred Stock shall not be
fully discharged, the Corporation shall not (i) directly or indirectly, redeem,
purchase, or otherwise acquire any Parity Security or discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of any
Parity Securities (except in connection with a redemption, sinking fund or other
similar obligation to be satisfied pro rata with the Series C Preferred Stock)
or (ii) in accordance with paragraph (3)(d), declare or make any Junior
Securities Distribution, or, directly or indirectly, discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of the
Junior Securities.
<PAGE> 53
6
(e) Shares of Series C Preferred Stock which have been issued and
reacquired in any manner, including shares purchased or redeemed, shall (upon
compliance with any applicable provisions of the laws of the State of Delaware)
have the status of authorized and unissued shares of the class of Preferred
Stock undesignated as to series and may be redesignated and reissued as part of
any series of the Preferred Stock; provided that no such issued and reacquired
shares of Series C Preferred Stock shall be reissued or sold as Series C
Preferred Stock.
(6) Procedure for Redemption. (a) In the event that fewer than all
the outstanding shares of Series C Preferred Stock are to be redeemed, the
number of shares to be redeemed shall be determined by the Board of Directors
and the shares to be redeemed shall be selected pro rata (with any fractional
shares being rounded to the nearest whole share) as nearly as practicable or by
lot, or by such other method as the Board of Directors may determine to be
equitable.
(b) In the event the Corporation shall redeem shares of Series C
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 days nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed at such
holder's address as the same appears on the stock register of the Corporation;
provided that neither the failure to give such notice nor any defect therein
shall affect the validity of the giving of notice for the redemption of any
share of Series C Preferred Stock to be redeemed except as to the holder to whom
the Corporation has failed to give said notice or except as to the holder whose
notice was defective. Each such notice shall state: (i) the redemption date;
(ii) the number of shares of Series C Preferred Stock to be redeemed and, if
fewer than all the shares held by such holder are to be redeemed, the number of
shares to be redeemed from such holder; (iii) the redemption price; (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends on
<PAGE> 54
7
the shares to be redeemed will cease to accrue on such redemption date.
(c) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in providing
money for the payment of the redemption price of the shares called for
redemption), dividends on the shares of Series C Preferred Stock so called for
redemption shall cease to accrue, and all rights of the holders thereof as
stockholders of the Corporation (except the right to receive from the
Corporation the redemption price) shall cease. Upon surrender in accordance with
said notice of the certificates for the shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall so
require and the notice shall so state), such shares shall be redeemed by the
Corporation at the redemption price aforesaid. In case fewer than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares without cost to the holder thereof.
(7) Voting Rights. (a) The holders of record of shares of Series C
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this paragraph (7) or as otherwise provided by law.
(b) If and whenever six quarterly dividends (whether or not
consecutive) payable on the Series C Preferred Stock have not been paid in full
or if the Corporation shall have failed to discharge its Mandatory Redemption
Obligation, the number of directors then constituting the Board of Directors
shall be increased by two and the holders of shares of Series C Preferred Stock,
together with the holders of shares of every other series of preferred stock
upon which like rights to vote for the election of two additional directors have
been conferred and are exercisable (resulting from either the failure to pay
dividends or the failure to redeem) (any such other series is referred to as the
"Preferred Shares"), voting as a single class regardless of series, shall be
entitled to elect the two additional directors to serve on the Board of
<PAGE> 55
8
Directors at any annual meeting of stockholders or special meeting held in place
thereof, or at a special meeting of the holders of the Series C Preferred Stock
and the Preferred Shares called as hereinafter provided. Whenever all arrears in
dividends on the Series C Preferred Stock and the Preferred Shares then
outstanding shall have been paid and dividends thereon shall have been paid
regularly for at least one year, or the Corporation shall have fulfilled its
Mandatory Redemption Obligation, as the case may be, then the right of the
holders of the Series C Preferred Stock and the Preferred Shares to elect such
additional two directors shall cease (but subject always to the same provisions
for the vesting of such voting rights in the case of any similar future
arrearages in six quarterly dividends or failure to fulfill any Mandatory
Redemption Obligation), and the terms of office of all persons elected as
directors by the holders of the Series C Preferred Stock and the Preferred
Shares shall forthwith terminate and the number of the Board of Directors shall
be reduced accordingly. At any time after such voting power shall have been so
vested in the holders of shares of Series C Preferred Stock and the Preferred
Shares, the secretary of the Corporation may, and upon the written request of
any holder of Series C Preferred Stock (addressed to the secretary at the
principal office of the Corporation) shall, call a special meeting of the
holders of the Series C Preferred Stock and of the Preferred Shares for the
election of the two directors to be elected by them as herein provided, such
call to be made by notice similar to that provided in the Bylaws of the
Corporation for a special meeting of the stockholders or as required by law. If
any such special meeting required to be called as above provided shall not be
called by the secretary within 20 days after receipt of any such request, then
any holder of shares of Series C Preferred Stock may call such meeting, upon the
notice above provided, and for that purpose shall have access to the stock books
of the Corporation. The directors elected at any such special meeting shall hold
office until the next annual meeting of the stockholders or special meeting held
in lieu thereof if such office shall not have previously terminated as above
provided. If any vacancy shall occur among the directors elected by the holders
of the Series C Preferred Stock and the Preferred Shares, a
<PAGE> 56
9
successor shall be elected by the Board of Directors, upon the nomination of the
then-remaining director elected by the holders of the Series C Preferred Stock
and the Preferred Shares or the successor of such remaining director, to serve
until the next annual meeting of the stockholders or special meeting held in
place thereof if such office shall not have previously terminated as provided
above.
(c) Without the written consent of a majority of the outstanding
shares of Series C Preferred Stock or the vote of holders of a majority of the
outstanding shares of Series C Preferred Stock at a meeting of the holders of
Series C Preferred Stock called for such purpose, the Corporation will not (i)
amend, alter or repeal any provision hereof or of the Certificate of
Incorporation (by merger or otherwise) so as to affect the preferences, rights
or powers of the Series C Preferred Stock; provided that any such amendment that
changes the dividend payable on or the liquidation preference of the Series C
Preferred Stock shall require the affirmative vote at a meeting of holders of
Series C Preferred Stock called for such purpose or written consent of the
holder of each share of Series C Preferred Stock; or (ii) create any class or
classes of stock ranking equal or prior to the Series C Preferred Stock either
as to dividends or upon liquidation, dissolution or winding up or increase the
number of authorized number of shares of any class or classes of stock ranking
equal or prior to the Series C Preferred Stock either as to dividends or upon
liquidation, dissolution or winding up. Notwithstanding the foregoing, no
consent of the holders of the Series C Preferred Stock shall be required for (i)
the creation of any indebtedness of any kind of the Corporation, (ii) the
creation of any class of Junior Securities or (iii) any increase or decrease in
the amount of authorized Common Stock or any increase, decrease or change in the
par value thereof or in any other terms thereof.
(d) In exercising the voting rights set forth in this paragraph (7),
each share of Series C Preferred Stock shall have one vote per share, except
that when any other series of preferred stock shall have the right to vote with
the Series C Preferred Stock as a single class on any
<PAGE> 57
10
matter, then the Series C Preferred Stock and such other series shall have with
respect to such matters one vote per $100 of stated liquidation preference.
Except as set forth herein, the shares of Series C Preferred Stock shall not
have any relative, participating, optional or other special voting rights and
powers and the consent of the holders thereof shall not be required for the
taking of any corporate action.
(8) Stockholders Agreement. The Series C Preferred Stock shall be
subject to the provisions of the Stockholders Agreement among the Corporation,
Kidder, Peabody Group Inc. and General Electric Company dated December 16, 1994.
(9) General Provisions. (a) The term "Person" as used herein means
any corporation, limited liability company, partnership, trust, organization,
association, other entity or individual.
(b) The term "outstanding", when used with reference to shares of
stock, shall mean issued shares, excluding shares held by the Corporation or a
subsidiary.
(c) The headings of the paragraphs of this Annex II are for
convenience of reference only and shall not define, limit or affect any of the
provisions hereof.
<PAGE> 1
Exhibit 12.1
Paine Webber Group Inc.
Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Years Ended December 31,
Ended March 31, --------------------------------------------------------------
1998 * 1997 * 1996 * 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 190,134 $ 644,075 $ 558,999 $ 102,677 $ 44,385 $ 407,576
---------- ---------- ---------- ---------- ---------- ----------
Preferred stock dividends 8,844 44,186 43,712 36,260 1,710 5,828
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 690,133 2,573,582 1,971,788 1,969,811 1,428,653 1,130,712
Interest factor in rents 14,762 53,665 54,537 59,491 51,102 50,133
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 704,895 2,627,247 2,026,325 2,029,302 1,479,755 1,180,845
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 713,739 2,671,433 2,070,037 2,065,562 1,481,465 1,186,673
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and fixed charges $ 895,029 $3,271,322 $2,585,324 $2,131,979 $1,524,140 $1,588,421
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred stock dividends 1.3 1.2 1.2 1.0 1.0 1.3
========== ========== ========== ========== ========== ==========
</TABLE>
For purposes of computing the ratio of earnings to combined fixed charges and
preferred stock dividends (tax effected), "earnings" consist of income before
taxes and fixed charges. "Fixed charges" consist principally of interest expense
incurred on securities sold under agreements to repurchase, short-term
borrowings, long-term borrowings, preferred trust securities and that portion of
rental expense estimated to be representative of the interest factor.
* Income before taxes includes minority interest in wholly owned subsidiary
trusts.
<PAGE> 1
Exhibit 12.2
Paine Webber Group Inc.
Computation of Ratio of Earnings to Fixed Charges
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Years Ended December 31,
Ended March 31, --------------------------------------------------------------
1998 * 1997 * 1996 * 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 190,134 $ 644,075 $ 558,999 $ 102,677 $ 44,385 $ 407,576
---------- ---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 690,133 2,573,582 1,971,788 1,969,811 1,428,653 1,130,712
Interest factor in rents 14,762 53,665 54,537 59,491 51,102 50,133
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 704,895 2,627,247 2,026,325 2,029,302 1,479,755 1,180,845
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
fixed charges $ 895,029 $3,271,322 $2,585,324 $2,131,979 $1,524,140 $1,588,421
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.3 1.2 1.3 1.1 1.0 1.3
========== ========== ========== ========== ========== ==========
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of income before taxes and fixed charges. "Fixed charges" consist
principally of interest expense incurred on securities sold under agreements to
repurchase, short-term borrowings, long-term borrowings, preferred trust
securities and that portion of rental expense estimated to be representative of
the interest factor.
* Income before taxes includes minority interest in wholly owned subsidiary
trusts.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Paine Webber Group Inc. for the three months ended March
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 819,698
<RECEIVABLES> 7,257,624
<SECURITIES-RESALE> 21,685,090
<SECURITIES-BORROWED> 9,053,127
<INSTRUMENTS-OWNED> 20,765,706
<PP&E> 361,239
<TOTAL-ASSETS> 61,630,919
<SHORT-TERM> 2,062,195
<PAYABLES> 8,513,475
<REPOS-SOLD> 29,217,396
<SECURITIES-LOANED> 5,295,745
<INSTRUMENTS-SOLD> 8,615,585
<LONG-TERM> 3,538,591
<COMMON> 189,187
582,705
0
<OTHER-SE> 1,825,908
<TOTAL-LIABILITY-AND-EQUITY> 61,630,919
<TRADING-REVENUE> 276,963
<INTEREST-DIVIDENDS> 802,378
<COMMISSIONS> 408,124
<INVESTMENT-BANKING-REVENUES> 124,969
<FEE-REVENUE> 158,736
<INTEREST-EXPENSE> 690,133
<COMPENSATION> 650,575
<INCOME-PRETAX> 198,195
<INCOME-PRE-EXTRAORDINARY> 120,735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,735
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.77
</TABLE>
