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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
For the fiscal year ended December 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 No.)
1285 Avenue of the Americas, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 713-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $1 Par Value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Stock Index Return Securities on the S&P
MidCap 400 Index due June 2, 2000 American Stock Exchange, Inc.
8.30% Preferred Trust Securities* New York Stock Exchange, Inc.
8.08% Preferred Trust Securities* New York Stock Exchange, Inc.
*Issued by PWG Capital Trust I and PWG Capital Trust II,
respectively. Fully and unconditionally guaranteed by Paine Webber Group Inc.
---------------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
--------------------------------
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $3.9 billion as of March 12, 1999. (See Item 12.)
On March 12, 1999, the Registrant had outstanding 145,788,445 shares of
common stock of $1 par value, which is Registrant's only class of common stock.
Documents Incorporated by Reference:
Parts I, II and IV incorporate information by reference from the
Registrant's 1998 Annual Report to Stockholders. Part I and Part III incorporate
information by reference from the Registrant's definitive proxy statement for
the annual meeting to be held on May 6, 1999.
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PART I
Item 1. Business
Paine Webber Group Inc. ("PWG") is a holding Company which, together with its
operating subsidiaries (collectively, the "Company"), forms one of the largest
full-service securities and commodities firms in the United States*. Founded in
1879, the Company employs approximately 17,800 people in 303 offices worldwide.
In addition to the detailed information set forth below, incorporated herein by
reference is the general business description information on the Company, under
the caption "Management's Discussion and Analysis" on page 25 in the 1998 Annual
Report to Stockholders.
The Company offers a wide variety of products and services, consisting of those
of a full service broker-dealer to primarily a domestic market, through its two
operating segments: Individual and Institutional. The Individual segment offers
brokerage services and products, asset management and other investment advisory
and portfolio management products and services, and execution and clearing
services for transactions originated by individual investors. The Institutional
segment principally includes capital market products and services such as
securities dealer activities and investment banking. Certain business activities
described below may comprise both the Individual and Institutional segments.
Financial information for the years ended December 31, 1998, 1997 and 1996,
including the amount of total revenue contributed by class of similar products
or services contributing 10% or more of consolidated revenue, and information on
segment and geographic data, is set forth in the Consolidated Financial
Statements and the Notes thereto, and the "Five Year Financial Summary," on
pages 55, 58 and 59 in the 1998 Annual Report to Stockholders incorporated
herein by reference.
Brokerage Transactions
A portion of the Company's revenues are generated from commissions or fees
earned as a broker, principally on behalf of individual clients, in the purchase
and sale of equity securities (listed and over-the-counter securities), mutual
funds, insurance products, options, fixed income instruments, commodities and
financial futures. The Company also earns commissions or fees for services
provided in the areas of employee benefits, managed accounts and personal
trusts.
Securities transactions The Company holds memberships in the major securities
exchanges in the United States in order to provide services to its brokerage
clients in the purchase and sale of listed securities. The largest portion of
the Company's commission revenue (60%) is derived from brokerage transactions
for clients in listed securities and options. The Company has established
commission rates for brokerage transactions which vary with the size and
complexity of the transaction and with the activity level of the client's
account. The Company may also act as broker for investors in the purchase and
sale of over-the-counter securities and fixed income instruments including U.S.
government and municipal securities.
Mutual funds The Company distributes shares of mutual funds for which it serves
as investment advisor and sponsor as well as shares of funds sponsored by
others. Income from the sale of mutual funds is derived from commissions and
standard dealers' discounts, which are determined by the terms of the selling
agreement and the size of the transaction. Income from proprietary mutual funds
is also derived from management and distribution fees (see "Asset Management"
section). Mutual funds include both taxable and tax-exempt funds and front-load,
reverse-load, and level-load funds.
Insurance Through subsidiaries, PaineWebber Incorporated ("PWI") acts as agent
for several life insurance companies and sells deferred annuities and life
insurance. Additionally, variable annuities are issued by PaineWebber Life
Insurance Company which are sold by PWI as agent.
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* Certain items herein, including (without limitation) certain matters discussed
under "Legal Proceedings" in Part I, Item 3 of this report, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
("MD&A") incorporated by reference in Part II, Item 7 of this report, and
"Quantitative and Qualitative Disclosures about Market Risk" incorporated by
reference in Part II, Item 7a of this report are forward-looking statements. The
matters referred to in such forward-looking statements could be affected by many
factors, including (without limitation) economic and market conditions, the
level and volatility of interest rates, currency and security valuations,
competitive conditions, counterparty risk, transactional volume, market
liquidity, technological changes, the impact of current, pending and future
legislation and regulation and other risks and uncertainties detailed in the
MD&A. The Company disclaims any obligation or undertaking to update publicly or
revise any forward-looking statements.
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Managed accounts The Company acts in a consulting capacity to both individuals
and institutions in the selection of professional money managers. Services
provided in this consulting capacity may include client profiling, asset
allocation, manager selection, performance measurement and financial planning.
Money managers recommended may be either affiliated with the Company or
nonaffiliated managers. Compensation for services is in the form of commissions
or established fees. The Company also provides discretionary portfolio
management services to individuals and institutions through the efforts of
registered representatives trained to offer such services.
Options The Company's options related services include the purchase and sale of
equity, index, and currency options on behalf of clients, and the delivery and
receipt of the underlying instruments upon exercise of the options. In addition,
the Company utilizes its securities research capabilities in the formulation of
options strategies and recommendations for its clients.
Commodities and financial futures The Company provides transaction services for
clients in the purchase and sale of futures contracts, including metals,
currencies, interest rates, stock indexes, agricultural products, in addition to
managed futures and commodity funds. Transactions in futures contracts are on
margin and are subject to individual exchange regulations. The risk to the
Company's clients in futures transactions, and the resulting credit risk to the
Company, is greater than the risk in cash securities transactions, principally
due to the low initial margin requirements relative to the nominal value of the
actual futures contract. Additionally, commodities exchange regulations
governing daily price movements can have the effect of precluding clients from
taking actions to mitigate adverse market conditions. These factors may increase
the Company's risk of loss on collections of amounts due from clients. However,
net worth requirements and other credit standards for customer accounts are
utilized to limit this exposure.
Employee benefit plans PW Trust Company, a wholly owned subsidiary of PWG,
provides trust and investment management services to qualified retirement plans.
PW Trust Company acts as trustee, custodian and investment manager of the plans'
assets and presently services approximately 950 clients.
Personal trust services The Company offers its clients a full range of domestic
and international personal trust services, including self trustee and corporate
trustee options. Investment options include managed accounts, mutual funds and
annuities. The Company serves its international clients through trust companies
located in Guernsey, Channel Islands and the Cayman Islands and serves its
domestic clients through third party trustees.
Unit Investment Trusts The Company is sole sponsor for various Unit Investment
Trusts ("UITs"), co-sponsors UITs with other firms and distributes UITs
sponsored by other dealers. Income is derived from the sales charges paid by
investors who purchase units. UITs are fixed portfolios of municipal, corporate
and government bonds, or equity securities.
Dealer Transactions
The Company regularly makes a market in over-the-counter ("OTC") securities and
as a block positioner, acts as market-maker in certain listed securities, U.S.
and foreign government and agency securities, investment-grade and high-yield
corporate debt, emerging market securities, and mortgage and asset-backed
securities.
Equity The Company effects transactions in large blocks of securities, usually
with institutional investors, generally involving 10,000 or more shares of
listed stocks. Such transactions are handled on an agency basis to the extent
possible, but the Company may take a long or short position as principal to the
extent that no buyer or seller is immediately available. By engaging in block
positioning, the Company places a portion of its capital at risk to facilitate
transactions for clients. Despite the risks involved in block positioning, the
aggregate brokerage commissions generated by the Company's willingness to commit
a portion of its capital in repositioning, including commissions on other orders
from the same clients, justifies such activities.
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The Company makes markets, buying and selling as principal, in common stocks,
warrants and other securities traded on the NASDAQ National Market or in other
OTC markets. The unlisted equity securities in which the Company makes markets
are principally those in which there is substantial continuing client interest
and include securities which the Company has underwritten.
Fixed Income The Company provides clients access to a variety of fixed income
products including: U.S. government and agency securities; mortgage-backed
related securities including those issued through Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corp. ("FHLMC"); asset-backed securities; emerging market
securities; corporate investment-grade and high-yield securities; collateralized
bond obligations ("CBOs") and collateralized loan obligations; and options and
futures contracts on certain of these products. To the extent significant price
fluctuations occur, the Company's capital can be at risk. This risk is mitigated
by hedging inventory positions.
As a "primary dealer" in U.S. government securities, the Company actively
participates in the distribution of United States Treasury securities and
reports its inventory positions and market transactions to the Federal Reserve
Bank on a weekly basis. The Company takes positions in government and government
agency securities to facilitate transactions for its clients on a principal
basis, or for its own account. Profits or losses are recognized from purchases
and sales, and fluctuations in the value of securities in which it maintains
positions. Additionally, trading activities include the purchase of securities
under agreements to resell at future dates (reverse repurchase agreements) and
the sale of the same or similar securities under agreements to repurchase at
future dates (repurchase agreements). Profits and losses on the repurchase
transactions result from the interest rate differentials.
The Company actively participates in the mortgage-backed securities markets
through the purchase or sale of GNMA, FNMA, FHLMC, mortgage pass-through
securities, collateralized mortgage obligations ("CMOs"), CBOs, and other
mortgage related and asset-backed securities, in order to meet client needs on a
principal basis. As a means of financing its trading, the Company enters into
repurchase agreements. The Company also structures and underwrites CMOs and
CBOs. Additionally, the Company serves as principal and financier in the
origination, purchase, sale, securitization and resale of mortgage notes and
other real estate related products.
The Company is an active participant in the corporate bond markets. Through the
fixed income debt syndicate desk and institutional sales force, the Company
distributes and markets new issuances of corporate debt securities. The
corporate bond trading desk supports this effort as a dealer in the secondary
markets by effecting transactions on behalf of clients or for the Company's own
account. Revenues generated from these activities include underwriting fees on
syndicate transactions and principal transaction gains or losses.
The Company underwrites, makes markets in, and facilitates trades for clients in
the high-yield securities markets. High-yield securities refer to companies
whose debt is rated as non-investment grade. The Company continually monitors
its risk positions associated with high-yield debt and establishes limits with
respect to overall market exposure and individual issuer.
The Company may also take positions in emerging market securities to facilitate
transactions for its clients on a principal basis. Emerging market securities
include Latin American, Eastern Europe and Asian instruments denominated in U.S.
dollars and local currency units. The Company continually monitors its risk
positions associated with emerging market securities and establishes limits with
respect to overall market exposure, region and individual issuer.
Municipal securities Through its municipal bond department, the Company is a
dealer in both the primary and secondary markets, buying and selling securities
for its own account and for clients.
Derivatives The Company is engaged in activities, primarily on behalf of
clients, in equity derivative products, including listed and OTC options,
warrants, futures and underlying equity securities. The Company may also engage
in creating structured products, which are sold to retail and institutional
clients, that are based on baskets of securities and currencies, primary foreign
and domestic market indexes and
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other equity and debt-based products. The Company generally hedges positions
taken in these structured products based on option and other valuation models.
The Company engages in interest rate, stock index, commodity options and futures
contract transactions in connection with the Company's principal trading
activities. In addition, the Company's mortgage and foreign currency businesses
enter into forward purchase and sale agreements, and option contracts.
Derivative financial instruments are subject to varying degrees of market and
credit risk, although in many cases derivatives serve to reduce, rather than
increase the Company's exposure to losses from these risks. The Company has
developed a control environment, encompassing both its derivative-based and
other businesses, that involves the interaction of a number of risk management
and control groups. See "Management's Discussion and Analysis - Risk Management"
on page 30 in the 1998 Annual Report to Stockholders for a discussion of these
groups and their functions. See also "Notes to Consolidated Financial Statements
- - Note 1: Summary of Significant Accounting Policies, Note 4: Long-Term
Borrowings, Note 8: Financial Instruments with Off-Balance-Sheet Risk and Note
9: Risk Management", beginning on page 39, page 43, page 45 and page 47,
respectively, in the 1998 Annual Report to Stockholders.
Investment Banking
The Company manages and underwrites public offerings of debt and equity
securities, arranges private placements and provides financial advice in
connection with mergers and acquisitions, restructurings and reorganizations for
domestic and international companies.
The Company manages public offerings of corporate debt and equity securities or
participates as an underwriter in syndicates of public offerings managed by
others. Management of an underwriting account is generally more profitable than
participation as a syndicate member since the managing underwriters receive a
management fee and have more control over the allocation of securities available
for distribution. The Company is invited to participate in many syndicates of
negotiated public offerings managed by others.
The Company is an industry leader in the management of tax-exempt bond
offerings. Through its Municipal Securities Group, the Company provides
financial advice to, and raises capital for, issuers of municipal securities to
finance the construction and maintenance of a broad range of public-related
facilities, including healthcare, housing, education, public power, water and
sewer, airports, highways and other public finance infrastructure needs. The
group also provides a secondary market for these securities. Revenues derived
from these activities include underwriting and remarketing agent fees, and
selling concessions.
Through its Commercial Real Estate group, the Company provides a full range of
capital markets services to its real estate clients, including underwriting of
debt and equity securities, principal lending, debt restructuring, property
sales and bulk sales services, and a broad range of other advisory services.
Significant risks are involved in the underwriting of securities. Underwriting
syndicates agree to purchase securities at a discount from the public offering
price. If the securities are ultimately sold below the cost to the syndicate, an
underwriter will experience losses on the securities which it has purchased. In
addition, losses may be incurred on stabilization activities taken during such
underwriting.
The Company, through certain subsidiaries, may participate from time to time as
an equity investor in partnerships and other entities that invest in fixed
income securities, equity securities and other financial instruments, or may
provide financing commitments or other extensions of credit associated with
merchant banking and other principal investments.
Asset Management
The Asset Management group is comprised of Mitchell Hutchins Asset Management
Inc. ("MHAM"), including Mitchell Hutchins Investment Advisory division,
Mitchell Hutchins Institutional Investors Inc., Financial Counselors Inc. and
NewCrest Advisors Inc. The Asset Management group provides investment advisory
and portfolio management services to mutual funds, institutions, pension funds,
endowment funds,
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individuals and trusts. Mutual funds, for which MHAM serves as an investment
advisor and administrator, include both taxable and tax-exempt funds and
front-load, reverse-load, and level-load funds. At December 31, 1998, total
assets under management were $58.5 billion.
In December 1998, the Company announced a joint venture with Yasuda Mutual Life
Insurance Company ("Yasuda"), which will develop, sponsor and manage mutual
funds in Japan. MHAM will provide its expertise in structuring and
administrating the funds, while Yasuda will distribute the products.
Margin Lending
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. The Company receives income
from interest charged on such extensions of credit. Amounts loaned are limited
by margin requirements which are subject to the Company's credit review and
daily monitoring procedures and are generally more restrictive than the margin
regulations of the Federal Reserve Board and other regulatory authorities. The
Company may lend, to other brokers or use as collateral, a portion of the margin
securities to the extent permitted by applicable margin regulations. The Company
also extends credit to clients for purposes other than to purchase or carry
securities under the same criteria described above.
The extension of margin credit is an important source of revenue to the Company
since the interest rate paid by the client on funds loaned by the Company
exceeds the Company's cost of funds. The amount of the Company's gross interest
revenues is affected not only by prevailing interest rates, but also by the
volume of business conducted on a margin basis. To finance margin loans to
clients, the Company utilizes both interest-bearing and non-interest-bearing
funds generated from a variety of sources in the course of its operations,
including bank loans, free credit balances in client accounts, sale of
securities under agreements to repurchase, the lending of securities and sales
of securities not yet purchased. No interest is paid on clients' free credit
balances.
By permitting a client to purchase on margin, the Company takes the risk that
market declines could reduce the value of the collateral below the principal
amount loaned, plus accrued interest, before the collateral could be sold.
Securities Lending and Prime Brokerage
In connection with both its trading and brokerage transactions, the Company
borrows and lends securities to and from brokers and dealers, banks, and other
counterparties, principally to cover short sales and to complete transactions
where the customer has not delivered securities by the settlement date. The
borrower of securities is generally required to deposit cash or another form of
qualifying collateral with the lender. The borrower pays a fee to the lender or
receives only a portion of the interest earned on the cash deposit, pursuant to
an agreement between the parties specifying the terms of the transaction. The
Company also provides prime brokerage services to its clients.
International
Portions of the Company's core business activities are conducted through
PaineWebber International Inc. and its subsidiaries (collectively, the "foreign
subsidiaries") which also function as introducing broker-dealers to PWI for U.S.
market products and are members of certain international exchanges. The foreign
subsidiaries are active in the sales, trading and underwriting of U.S. dollar
denominated and non-U.S. dollar denominated Eurobonds. In addition, certain of
the foreign subsidiaries provide prime brokerage services to their clients and
are active in the securities lending business.
Research
Research provides investment advice and strategies to institutional and
individual clients, and other business areas of the Company. The Equity Research
analysts, strategists, and economists cover approximately 800 companies in 50
industries and also generate broader investment and economic analyses. The
Company's
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Fixed Income and Municipal Securities groups also maintain dedicated research
teams that cover their respective businesses.
Other Activities
Correspondent Services Corporation ("CSC"), a registered broker-dealer, provides
execution and clearing services through PWI to correspondent broker-dealers to
support transactions for their individual customers. CSC provides execution and
clearing services to approximately 130 broker-dealers on a fully disclosed and
omnibus basis. CSC also provides margin loans to the clients of its
correspondent brokers.
PaineWebber Life Insurance Company ("PW Life") issues variable annuities which
are sold by PWI as agent. PW Life also assumes reinsurance of variable annuities
issued by other insurance companies.
During 1998, the Company discontinued the operations of PaineWebber Specialists
Inc., which operated specialist trading functions on the Pacific, Boston and
Cincinnati stock exchanges.
Regulation
The securities and commodities industry is one of the nation's most extensively
regulated industries. The Securities and Exchange Commission ("SEC") is
responsible for carrying out the federal securities laws and serves as a
supervisory body over all national securities exchanges and associations, while
the Commodity Futures Trading Commission ("CFTC") provides this function over
all national commodities and futures exchanges and associations. The regulation
of broker-dealers has to a large extent been delegated, by the federal
securities laws, to self-regulatory organizations ("SROs"). These SROs include
all the national securities and commodities exchanges, the National Association
of Securities Dealers and the Municipal Securities Rulemaking Board. Subject to
approval by the SEC and the CFTC, these SROs adopt rules that govern the
industry and conduct periodic examinations of the operations of certain
subsidiaries of the Company. The New York Stock Exchange ("NYSE") has been
designated by the SEC as the primary regulator of certain of the Company's
subsidiaries including PWI. In addition, certain of these subsidiaries are
subject to regulation of the laws of the 50 states, the District of Columbia,
Puerto Rico and certain foreign countries or exchanges in which they are
registered to conduct securities, banking, insurance or commodities business.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, recordkeeping, and the conduct of directors,
officers and employees. Violation of applicable regulations can result in the
revocation of broker-dealer licenses, the imposition of censures or fines, and
the suspension or expulsion of a firm.
As a registered broker-dealer and member firm of the NYSE, PWI is subject to the
Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), which also has been adopted through incorporation
by reference in NYSE Rule 325. The Net Capital Rule, which specifies minimum net
capital requirements for registered broker-dealers, is designed to measure the
financial soundness and liquidity of broker-dealers. The Net Capital Rule, as
defined, prohibits registered broker-dealers from making substantial
distributions of capital by means of dividends or similar payments, or unsecured
advances and loans to certain related persons, including stockholders, without
giving at least two business days prior or post notification to the SEC.
Pre-notification requirement applies to any proposed withdrawal of capital if
the aggregate of such withdrawals, on a net basis, within any 30 calendar day
period would exceed 30% of the broker-dealer's excess net capital, as defined.
Post-notification requirement applies if the aggregate of such withdrawals, on a
net basis, would exceed 20% of the broker-dealer's excess net capital, as
defined. The rule permits the SEC, by order to restrict, for up to 20 business
days, withdrawing of equity capital or making unsecured advances or loans to
related persons under certain limited circumstances. Finally, broker-dealers are
prohibited from making any withdrawal of capital that
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would cause the broker-dealer's net capital to be less than 25% of the
deductions from net worth required by the Net Capital Rule as to readily
marketable securities.
Pursuant to SEC and CFTC regulations, registered broker-dealers and futures
commission merchants ("FCMs") must maintain, preserve and report on a quarterly
and annual basis, certain information concerning the organizational structure,
risk management policies and financial condition of any affiliate of the Company
whose activities are reasonably likely to have a material impact on the
financial and operational condition of the Company.
Competition
All aspects of the business of the Company are highly competitive. The Company
competes directly with numerous other brokers and dealers, investment banking
firms, insurance companies, investment companies, banks, commercial banks and
other financial institutions.
In recent years, competitive pressures have increased from discount brokerage
firms, on-line internet trading, and commercial banks that were not
traditionally engaged in the securities business. The Company believes that the
principal factors affecting competition in the securities industry are available
capital, and the quality and prices of services and products offered.
Item 2. Properties
The principal executive offices of the Company are located at 1285 Avenue of the
Americas, New York, New York under leases expiring through December 31, 2015.
The Company is currently leasing approximately 667,000 square feet at 1285
Avenue of the Americas principally comprising the offices of its investment
banking, asset management, capital markets, and corporate headquarters staff, as
well as two branch offices for retail financial advisors.
The Company leases approximately 968,000 square feet of space at Lincoln Harbor
in Weehawken, New Jersey under leases expiring through December 31, 2013. The
Lincoln Harbor facility principally comprises the offices of the Private Client
Group headquarters, systems, operations, administrative services, and finance
divisions.
At December 31, 1998, the Company maintained 303 offices worldwide under leases
expiring between 1999 and 2015. In addition, the Company leases various
furniture and equipment. The information regarding the Company's lease
commitments is set forth in Note 10 in the Notes to Consolidated Financial
Statements on page 49 in the 1998 Annual Report to Stockholders.
Item 3. 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 in excess of $244 million appear to be sought, are
described below. The Company is also involved in numerous proceedings in which
compensatory damages of less than $244 million appear to be sought, or in which
punitive or exemplary damages, together with the apparent compensatory damages
alleged, appear to exceed $244 million. The Company has denied, or believes it
has legitimate defenses and will deny, liability in all significant cases
pending against it, including those described below, and intends to actively
defend each such case.
In Re NASDAQ Market Maker Antitrust Litigation
In July 1994, PaineWebber Incorporated ("PaineWebber"), together with numerous
unrelated firms, were named as defendants in a series of purported class action
complaints that have since been consolidated in the United States District Court
for the Southern District of New York under the caption In Re NASDAQ Market
Maker Antitrust Litigation, MDL Docket No. 1023. The consolidated class
complaint alleged that the defendant firms engaged in activities as market
makers on the NASDAQ over-the-counter market that
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violated the federal antitrust laws. On November 13, 1998, the Court entered
judgment granting final approval to a settlement of the litigation, by which the
defendants, including PaineWebber, were released from all specified claims by
participating class members, and the action was dismissed with prejudice.
PaineWebber's share of the settlement was approximately $50 million.
SEC Administrative Action
In the Matter of Certain Market Making Activities on NASDAQ was an SEC
administrative action instituted and settled without a hearing or an admission
of or denial of findings on January 11, 1999. The administrative action found
that on certain occasions in 1994 PaineWebber traders and a PaineWebber
registered representative engaged in certain improper trading activities in
connection with specified NASDAQ securities, failed to maintain certain required
books and records and failed reasonably to supervise in connection with the
above activities. PaineWebber agreed to pay a civil penalty of $6.3 million and
disgorgement of $381,685; to an administrative cease and desist order
prohibiting the firm from violating certain provisions of the federal securities
laws; and to submit certain of its policies and procedures relating to the
matters alleged in the order to review by an SEC-appointed consultant.
Twenty-seven other market makers and fifty-one traders at the firms settled
related SEC administrative actions at the same time.
Newton v. Merrill Lynch, et al. Securities Litigation
PaineWebber and two other broker-dealers were named as defendants in litigation
brought in November 1994 and subsequently styled In Re Merrill Lynch, et al.,
Securities Litigation, Civ. No. 94-5343 (DRD). The amended class action
complaint, filed in March 1995, purportedly on behalf of a class of persons who
placed market orders with defendants for the purchase or sale of NASDAQ
securities between November 1992 and 1994, alleges that defendants violated the
federal securities laws in connection with the execution of those orders by,
among other things, failing to provide execution of such orders at prices better
than the national best bid or offer available on the NASDAQ market. On December
13, 1995, the District Court granted defendants' motion for summary judgment. On
January 31, 1998, the United States Court of Appeals for the Third Circuit (en
banc) reversed the District Court's grant of summary judgment and remanded the
case to the District Court for further proceedings. On April 30, 1998,
defendants filed petition for a writ of certiorari with the United States
Supreme Court. On October 5, 1998, the petition was denied. On July 21, 1998,
the Magistrate Judge granted plaintiffs' motion to amend the complaint to add
additional plaintiffs and extend the period covered by the complaint through
August 1996. Defendants have appealed to the District Court from the Magistrate
Judge's ruling. The District Court has not yet ruled on class certification.
Askin Litigation*
Kidder, Peabody & Co. Incorporated ("Kidder, Peabody"), a subsidiary of the
Company, together with other unrelated individuals and firms, has been named as
a defendant in certain actions pending in the United States District Court for
the Southern District of New York brought on behalf of individuals and two
purported classes of investors in the three funds (the "Funds") managed by Askin
Capital Management, L.P. and David J. Askin (collectively, the "Askin Parties").
The actions are Primavera Familienstiftung v. David J. Askin, et al., Docket No.
95 Civ. 8905; ABF Capital Management, et al. v. Askin Capital Management, L.P.,
Docket No. 96 Civ. 2978; Montpellier Resources, Limited et al. v. Askin Capital
Management, L.P., et al., Docket No. 97 Civ. 1856; Richard Johnston as Trustee
for the Demeter Trust, et al. v. Askin Capital Management, L.P., et al., Docket
No. 97 Civ. 4335; Bambou, Inc., et al. v. David J. Askin et al., Docket No. 98
Civ. 6178; and AIG Managed Market Neutral Fund et al. v. Askin Capital
Management L.P., et al., Docket No. 98 Civ. 7494. The plaintiffs have alleged,
among other things, that Kidder, Peabody and other brokerage firms aided and
abetted false and misleading representations made to investors in violation of
federal and state securities laws, used the Funds as an outlet for otherwise
unmarketable tranches of collateralized mortgage obligations, and violated
various rules of the New York Stock Exchange and
- ----------
* This item relates to a matter involving Kidder, Peabody & Co. Incorporated
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.
8
<PAGE> 10
National Association of Securities Dealers. As a result of various decisions by
the District Court, the only claim remaining in these cases against Kidder,
Peabody is for aiding and abetting the Askin Parties' alleged fraud on the
investors. In addition, on March 19, 1998, the District Court denied plaintiffs'
motion for class certification in the Primavera and Montpellier Resources
actions. The parties are presently engaged in pre-trial discovery. No trial date
has been set. Collectively in the six lawsuits, the plaintiffs now claim damages
of approximately $320 million, as well as unspecified punitive damages.
In a separate, but related action now pending in the United States Bankruptcy
Court for the Southern District of New York captioned ABF Capital Management, et
al. v. Kidder, Peabody & Co. Incorporated, a group of investors in the Funds
have sought to equitably subordinate, pursuant to Section 510(c) of the
Bankruptcy Code, certain recoveries received by Kidder, Peabody, amounting to
approximately $15.5 million, in connection with the settlement of Kidder,
Peabody's claims in the Funds' bankruptcy proceedings. The Bankruptcy Court has
determined that the relief sought in this action is simply an alternative
equitable remedy to the relief sought in the related District Court actions and
has, in effect, stayed the case pending resolution of the District Court cases.
Keene Litigation*
Kidder, Peabody is a defendant, along with other unrelated individuals and
entities, in Richard A. Lippe, et al., v. Bairnco Corp. et al., 96 Civ. 7600, in
the United States District Court for the Southern District of New York brought
by the Trustees of the Keene Creditors' Trust ("KCT"). This action originally
was filed on June 8, 1995 as Adversary Proceeding No. 95/9393A in the Bankruptcy
Court for the Southern District of New York. On April 10, 1997, the District
Court ordered the withdrawal of the bankruptcy court. KCT was established
pursuant to the Plan of Reorganization approved in connection with the
bankruptcy proceedings related to Keene Corporation ("Keene"). The KCT claims
against Kidder, Peabody arise from fairness opinions rendered by Kidder, Peabody
during the 1980's in connection with the sale of various businesses by Keene.
KCT alleges that Kidder, Peabody's fairness opinions intentionally or recklessly
undervalued the assets being sold. KCT further alleges that such acts
constituted aiding and abetting breaches of fiduciary duties and self-dealing by
Keene's corporate officers and directors, who are also defendants, in violation
of the New York Business Corporation Law and the Racketeer Influenced and
Corrupt Organizations Act. KCT seeks damages from Kidder, Peabody and other
unrelated individuals and firms in excess of $700 million. On September 15,
1997, Kidder, Peabody filed a motion to dismiss the complaint. On February 6,
1998, the District Court granted Kidder, Peabody's motion to dismiss the
complaint as to Kidder, Peabody. The dismissal order is not appealable by the
plaintiff at this time.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Incorporated herein by reference is the Company's definitive proxy statement for
the annual meeting of stockholders to be held on May 6, 1999 ("Proxy Statement")
to be filed with the SEC not later than 120 days after the end of the fiscal
year.
Set forth below, in addition to information contained in the Proxy Statement, is
certain information concerning the executive officers of PWG who do not also
serve as directors of PWG:
Margo Alexander, 52, is Chairman of the Board and Chief Executive Officer of
Mitchell Hutchins Asset Management Inc., a wholly-owned subsidiary of PWI. She
has been Chairman of the Board since March 8, 1999 and Chief Executive Officer
since January 1995. She was President of Mitchell Hutchins Asset
- ----------
* This item relates to a matter involving Kidder, Peabody & Co. Incorporated
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.
9
<PAGE> 11
Management Inc. from January 1995 to February 1999. From 1981 to 1995, Ms.
Alexander held various positions in the Company including Director of Research,
Co-Director of Institutional Equity, and Director of Institutional Equity. In
April 1973, she joined Mitchell Hutchins & Co., a predecessor firm of the
Company, as a security analyst.
Steven P. Baum, 46, is Executive Vice President and Director of Capital Markets
of PWI, a position he has held since October 1997. From November 1995 to October
1997, he was Director of the Global Fixed Income and Commercial Real Estate
groups. Upon joining the Company in February 1995, he served as Director of the
Commercial Real Estate group and co-director of the Global Fixed Income group
until October 1995. Prior to joining the Company, Mr. Baum was with Kidder,
Peabody & Co. from 1985 to 1994 where he served in various capacities in the
Fixed Income group including co-head of the Fixed Income Department from July
1994 to January 1995 and head of the Commercial Real Estate group from 1990 to
July 1994.
Theodore A. Levine, 54, is General Counsel and Secretary of PWG, and is an
Executive Vice President of PWI, positions he has held since June 1993. Mr.
Levine is also a Senior Vice President of PWG, a position he has held since
October 1997. He was Vice President of PWG from June 1993 to September 1997.
Prior to joining the Company, Mr. Levine was a partner at the Washington D.C.-
based law firm of Wilmer, Cutler and Pickering from February 1984 to June 1993.
He was with the Securities and Exchange Commission from 1969 to 1984 where he
rose to the position of Associate Director in the Division of Enforcement.
Robert H. Silver, 43, is Executive Vice President and Director of Operations,
Service and Systems of PWI, a position he has held since July 1995. From 1988 to
1995, Mr. Silver held various positions in the Company including Director of
Retail Products and Marketing, Director of Retail Branch offices, and Director
of Finance and Controls. Prior to joining the Company, Mr. Silver was with
Merrill Lynch & Co., Inc. from 1983 to 1988 and KPMG Peat Marwick from 1977 to
1983.
Mark B. Sutton, 44, is Executive Vice President and President of the Private
Client Group of PWI. He has been an Executive Vice President of PWI since
January 1995 and President of the Private Client Group since April 1998. From
January 1995 to March 1998, he served as Director of the Private Client Group of
PWI. Prior to rejoining the Company in January 1995, Mr. Sutton was with Kidder,
Peabody & Co. from July 1992 to December 1994. He served as Managing Director
and Chief Operating Officer of its brokerage unit until July of 1994 when he
became the Chief Executive Officer of Kidder, Peabody's Investment Services
Division. Mr. Sutton's original tenure with PaineWebber was from 1978 to 1992
where he served in various capacities including Director of Transaction Services
and Managing Director of MHAM.
Executive Officers are elected annually to serve until their successors are
elected and qualify or until they sooner die, retire, resign or are removed.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under the captions "Market for Common Stock" and
"Common Stock Dividend History" on page 57 in the 1998 Annual Report to
Stockholders is incorporated herein by reference.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on page 12 in
the 1998 Annual Report to Stockholders is incorporated herein by reference.
10
<PAGE> 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis" beginning on page 25 in the 1998 Annual Report to Stockholders is
incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The information set forth under the caption "Management's Discussion and
Analysis Risk Management" beginning on page 30 and "Note 1 - Summary of
Significant Accounting Policies - Derivative Financial Instruments" in the
"Notes to the Consolidated Financial Statements" beginning on page 39 in the
1998 Annual Report to Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements, schedules and supplementary financial information
required by this item and included in this report or incorporated herein by
reference are listed in the index appearing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning the age and principal occupation of each director is set
forth under the caption "Information Concerning the Nominees and Directors" in
the Proxy Statement and is incorporated herein by reference. Information
concerning executive officers of the Registrant, who do not serve as directors,
is given at the end of Part I of this report.
Item 11. Executive Compensation
Information concerning compensation of directors and executive officers of the
Registrant is set forth under the captions "Compensation of Directors,"
"Executive Compensation," "Other Benefit Plans and Agreements" and "Certain
Transactions and Arrangements" in the Proxy Statement and is incorporated
herein by reference.
Item 12. Securities Ownership of Certain Beneficial Owners and Management
Security ownership of executive officers, directors and certain beneficial
owners is set forth under the caption "Security Ownership" in the Proxy
Statement and is incorporated herein by reference.
Solely for the purpose of calculating the aggregate market value of the voting
stock held by non-affiliates of the Registrant as set forth on the cover of this
report, it has been assumed that directors and executive officers of the
Registrant are affiliates.
Item 13. Certain Relationships and Related Transactions
The information related to certain transactions with directors of the Registrant
is set forth under the captions "Certain Arrangements with Directors" and
"Certain Transactions and Arrangements" in the Proxy Statement and is
incorporated herein by reference.
11
<PAGE> 13
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Report:
(1) Financial Statements
The financial statements required to be filed hereunder are listed
on page F-1 hereof.
(2) Financial Statement Schedules
The financial statement schedules required to be filed hereunder are
listed on page F-1 hereof.
(3) Exhibits
Certain of the following exhibits, as indicated parenthetically,
were previously filed as exhibits to other reports or registration
statements filed by the Registrant under the Securities Act of 1933 or to
reports or registration statements filed by the Registrant under the
Securities Exchange Act of 1934, respectively, and are incorporated herein
by reference to such reports.
1- Distribution Agreement dated November 30, 1993 between Registrant
and PWI (incorporated by reference to Exhibit 1.2 of Registrant's
Registration Statement No. 33-52695 filed with the SEC on October
16, 1995).
3.1- Restated Certificate of Incorporation of Registrant, as filed with
the Office of the Secretary of State of the State of Delaware on May
15, 1998 (incorporated by reference to Exhibit 3.1 of Registrant's
Form 10-Q for the quarter ended March 31, 1998).
3.2- By-laws of the Registrant as amended February 5, 1998 (incorporated
by reference to Exhibit 3.5 of Registrant's Form 10-K for the year
ended December 31, 1997).
4.1- Amended and Restated Stockholders Agreement, dated as of August 6,
1997 between Paine Webber Group Inc., General Electric Company,
General Electric Capital Corporation, General Electric Capital
Services, Inc. and Kidder Peabody Group Inc. (incorporated by
reference to Exhibit 4.1 of Registrant's Form 8-K dated August 7,
1997).
4.2- Share Purchase Agreement, dated August 6, 1997, by and among General
Electric Company and General Electric Capital Services, Inc. and
Paine Webber Group Inc. (incorporated by reference to Exhibit 4.2 of
Registrant's Form 8-K dated August 7, 1997).
4.3- Copy of form of certificate of common stock to reflect a new
signatory (incorporated by reference to Exhibit 4.1 of Registrant's
Form 10-K for the year ended December 31, 1993).
4.4- Supplemental Indenture dated as of November 30, 1993 between
Registrant and Chase Manhattan Bank Delaware (formerly known as
Chemical Bank (Delaware)), as Trustee, relating to the Subordinated
Debt Securities (incorporated by reference to Exhibit 4.2g of
Registrant's Registration Statement No. 33-52695 on Form S-3 filed
with the SEC on October 16, 1995).
12
<PAGE> 14
4.5- Indenture dated as of March 15, 1988 between Registrant and Chase
Manhattan Bank Delaware (formerly known as Chemical Bank
(Delaware)), as Trustee, relating to Registrant's Subordinated Debt
Securities (incorporated by reference to Exhibit 4.2d of
Registrant's Registration Statement No. 33-52695 on Form S-3 filed
with the SEC on October 16, 1995).
4.6- Supplemental Indenture dated as of September 22, 1989, to the
Indenture dated as of March 15, 1988, between Registrant and Chase
Manhattan Bank Delaware (formerly known as Chemical Bank
(Delaware)), as Trustee, relating to Subordinated Debt Securities
(incorporated by reference to Exhibit 4.2e of Registrant's
Registration Statement No. 33-52695 on Form S-3 filed with the SEC
on October 16, 1995).
4.7- Supplemental Indenture dated as of March 22, 1991 between Registrant
and Chase Manhattan Bank Delaware (formerly known as Chemical Bank
(Delaware)), as Trustee, relating to Subordinated Debt Securities
(incorporated by reference to Exhibit 4.2f of Registrant's
Registration Statement No. 33-52695 on Form S-3 filed with the SEC
on October l6, 1995).
4.8- Indenture dated as of March 15, 1988 between Registrant and The
Chase Manhattan Bank (formerly known as Chemical Bank), as Trustee,
relating to Registrant's Senior Debt Securities, (incorporated by
reference to Exhibit 4.2a of Registrant's Registration Statement No.
33-52695 on Form S-3 filed with the SEC on October 16, 1995).
4.9- Supplemental Indenture dated as of September 22, 1989, to the
Indenture dated as of March 15, 1988 between Registrant and The
Chase Manhattan Bank (formerly known as Chemical Bank), as Trustee,
relating to Senior Debt Securities (incorporated by reference to
Exhibit 4.2b of Registrant's Registration Statement No. 33-52695 on
Form S-3 filed with the SEC on October 16, 1995).
4.10- Supplemental Indenture dated as of March 22, 1991 between Registrant
and The Chase Manhattan Bank (formerly known as Chemical Bank), as
Trustee, relating to Senior Debt Securities (incorporated by
reference to Exhibit 4.2c of Registrant's Registration Statement No.
33-52695 on Form S-3 filed with the SEC on October 16, 1995).
4.11- Proposed Form of Debt Securities (Medium-Term Senior Note, Series C,
Fixed Rate) (incorporated by reference to Exhibit 4.1a to
Registrant's Registration Statement No. 33-52695 on Form S-3 filed
with the SEC on October 16, 1995).
4.12- Proposed Form of Debt Securities (Medium-Term Subordinated Note,
Series D, Fixed Rate) (incorporated by reference to Exhibit 4.1b to
Registrant's Registration Statement No. 33-52695 on Form S-3 filed
with the SEC on October 16, 1995).
4.13- Proposed Form of Debt Securities (Medium-Term Subordinated Note,
Series C, Floating Rate) (incorporated by reference to Exhibit 4.1c
to Registrant's Registration Statement No. 33-52695 on Form S-3
filed with the SEC on October 16, 1995).
4.14- Proposed Form of Debt Securities (Medium-Term Subordinated Note,
Series D, Floating Rate) (incorporated by reference to Exhibit 4.1d
to Registrant's Registration Statement No. 33-52695 on Form S-3
filed with the SEC on October 16, 1995).
4.15- Proposed Form of Debt Securities (Senior Note, Fixed Rate)
(incorporated by reference to Exhibit 4.1c to Registrant's
Registration Statement No. 33-58124 on Form S-3 filed with the SEC
on February 10, 1993).
13
<PAGE> 15
4.16- Proposed Form of Debt Securities (Subordinated Note, Fixed Rate)
(incorporated by reference to Exhibit 4.1f to Registrant's
Registration Statement No. 33-58124 on Form S-3 filed with the SEC
on February 10, 1993).
4.17- Form of Junior Subordinated Debt Indenture dated November 1996
between the Registrant and The Chase Manhattan Bank as Trustee
(incorporated by reference to Exhibit 4.1 of Registrant's
Registration Statement No. 333-13831 on Form S-3 filed with the SEC
on November 22, 1996).
4.18- Certificate of Trust of PWG Capital Trust I (incorporated by
reference to Exhibit 4.4 of Registrant's Registration Statement No.
333-13831 on Form S-3 filed with the SEC on November 22, 1996).
4.19- Certificate of Trust of PWG Capital Trust II (incorporated by
reference to Exhibit 4.5 of Registrant's Registration Statement No.
333-13831 on Form S-3 filed with the SEC on November 22, 1996).
4.20- Form of Amended and Restated Declaration of Trust for PWG Capital
Trust I and II (incorporated by reference to Exhibit 4.11 of
Registrant's Registration Statement No. 333-13831 on Form S-3 filed
with the SEC on November 22, 1996).
4.21- Form of Preferred Security relating to Preferred Trust Securities of
PWG Capital Trust I and II (incorporated by reference to Exhibit
4.12 of Registrant's Registration Statement No. 333-13831 on Form
S-3 filed with the SEC on November 22, 1996).
4.22- Form of Supplemental Indenture to be used in connection with
issuance of Junior Subordinated Debt Securities (incorporated by
reference to Exhibit 4.13 of Registrant's Registration Statement No.
333-13831 on Form S-3 filed with the SEC on November 22, 1996).
4.23- Form of Supplemental Indenture to be used in connection with
issuance of Junior Subordinated Debt Securities (incorporated by
reference to Exhibit 4.11 to Registrant's Registration Statement No.
333-67187 on Form S-3 filed with the SEC on November 12, 1998).
4.24- Form of Junior Subordinated Debt Security (incorporated by reference
to Exhibit 4.14 of Registrant's Registration Statement No. 333-13831
on Form S-3 filed with the SEC on November 22, 1996).
4.25- Form of Guarantee with respect to Preferred Securities relating to
Preferred Trust Securities of PWG Capital Trust I and II
(incorporated by reference to Exhibit 4.15 of Registrant's
Registration Statement No. 333-13831 on Form S-3 filed with the SEC
on November 22, 1996).
The credit agreements listed below have not been registered under the
Securities Act of 1933 or the Securities Exchange Act of 1934, nor does
the indebtedness that they represent exceed, in the aggregate, 10% of the
total assets of Registrant and its subsidiaries on a consolidated basis.
Consequently, these instruments have not been filed as an exhibit with
this report, but copies will be furnished to the SEC upon request.
Credit Agreement dated as of December 7, 1997, as amended, among
Registrant, the Initial Lenders named therein, and The Bank of New York,
Administrative Agent, relating to the $1.2 billion credit facility.
Credit Agreement dated as of August 30, 1996, as amended, among, PWI, the
Initial Lenders named therein, and The Chase Manhattan Bank, as
Administrative Agent, relating to the $750 million secured credit
facility.
14
<PAGE> 16
Credit Agreement dated as of August 30, 1996, as amended, among, Paine
Webber Real Estate Securities Inc., the Initial Lenders named therein, and
The Chase Manhattan Bank, as Administrative Agent, relating to the $750
million secured credit facility.
Credit Agreement dated as of August 30, 1996, as amended, among,
PaineWebber International (U.K.) Ltd., the Initial Lenders named therein,
and The Chase Manhattan Bank, as Administrative Agent, relating to the
$750 million secured credit facility.
10.1- Omnibus Amendment to Grantor Trust Agreement under Registrant's
Senior Officer Deferred Compensation Plan dated as of August 15,
1996 (incorporated by reference to Exhibit 10.8 of Registrant's Form
10-K for the year ended December 31, 1996).
10.2- Asset Purchase Agreement dated as of October 17, 1994 between Paine
Webber Group Inc., General Electric Company and Kidder, Peabody
Group Inc. relating to the purchase of certain assets and businesses
of Kidder, Peabody Group Inc. and its subsidiaries (incorporated by
reference to Exhibit 10.1 of Registrant's Form 10-Q for the quarter
ended September 30, 1994).
10.3- Supplemental Agreement dated as of December 9, 1994 among the
Registrant, General Electric Company and Kidder, Peabody Group Inc.
(incorporated by reference to Exhibit 4.2 to Registrant's Current
Report on Form 8-K dated December 27, 1994).
10.4- Second Supplemental Agreement dated as of December 16, 1994 among
the Registrant, General Electric Company and Kidder, Peabody Group
Inc. (incorporated by reference to Exhibit 4.3 to Registrant's
Current Report on Form 8-K dated December 27, 1994).
10.5- Third Supplemental Agreement dated as of January 27, 1995 among the
Registrant, General Electric Company and Kidder, Peabody Group Inc.
(incorporated by reference to Exhibit 10.3 to Registrant's Form
8-K/A dated February 24, 1995 which amended Registrant's Form 8-K
dated December 27, 1994).
10.6- Fourth Supplemental Agreement dated as of February 10, 1995 among
the Registrant, General Electric Company and Kidder, Peabody Group
Inc. (incorporated by reference to Exhibit 10.3 to Registrant's Form
8-K/A dated February 24, 1995 which amended Registrant's Form 8-K
dated December 27, 1994).
10.7- Second Restated and Amended Agreement of Lease, dated as of May 1,
1996, between 1285 Associates Limited Partnership and PWI relating
to property located at 1285 Avenue of the Americas, New York, New
York (incorporated by reference to Exhibit 10.1 of Registrant's Form
10-Q for the quarter ended March 31, 1996).
10.8- Guarantee dated as of May 1, 1996 between Registrant and 1285
Associates Limited Partnership relating to the lease of property
located at 1285 Avenue of the Americas, New York, New York
(incorporated by reference to Exhibit 10.2 of Registrant's Form 10-Q
for the quarter ended March 31, 1996).
10.9- Amended and Restated Investment Agreement dated as of November 5,
1992 by and between Registrant and The Yasuda Mutual Life Insurance
Company ("Yasuda") (incorporated by reference to Exhibit 10.9 to
Registrant's Form 10-K for the year ended December 31, 1997).
15
<PAGE> 17
10.10- Lease Agreement dated as of April 14, 1986, between PWI (as Tenant)
and Hartz-PW Limited Partnership (as Landlord) relating to the
Lincoln Harbor Project (Operations Center) located in Weehawken, New
Jersey (incorporated by reference to Exhibit 10.37 of Registrant's
Form 10-K for the year ended December 31, 1995).
10.11- Lease Agreement dated as of April 14, 1986, between PWI (as Tenant)
and Hartz-PW Limited Partnership (as Landlord) relating to the
Lincoln Harbor Project (Data Processing Center) located in
Weehawken, New Jersey (incorporated by reference to Exhibit 10.38 of
Registrant's Form 10-K for the year ended December 31, 1995).
10.12- Lease Agreement dated as of April 14, 1986, between PWI (as Tenant)
and Hartz-PW Tower B Limited Partnership, as successor in interest
to Hartz-PW Hotel Limited Partnership relating to the Lincoln Harbor
Project (Tower B/Office Building) located in Weehawken, New Jersey
(incorporated by reference to Exhibit 10.39 of Registrant's Form
10-K for the year ended December 31, 1995).
10.13- Agreement of Limited Partnership of Hartz-PW Limited Partnership
dated April 14, 1986 relating to the Lincoln Harbor Project
(Operation Center and Data Processing Center) located in Weehawken,
New Jersey (incorporated by reference to Exhibit 10.40 of
Registrant's Form 10-K for the year ended December 31, 1995).
10.14- Agreement of Limited Partnership of Hartz-Tower B Limited
Partnership dated April 14, 1986, as amended, relating to the
Lincoln Harbor Project (Tower B/Office Building) located in
Weehawken, New Jersey (incorporated by reference to Exhibit 10.41 of
Registrant's Form 10-K for the year ended December 31, 1995).
10.15- Ground lease between Hartz Mountain Industries and Hartz-PW Limited
Partnership dated April 14, 1986 relating to the Operations Center
at the Lincoln Harbor Project in Weehawken, New Jersey (incorporated
by reference to Exhibit 10.42 of Registrant's Form 10-K for the year
ended December 31, 1995).
10.16- Directors and Officers Liability and Corporation Reimbursement
insurance policy with Fiduciary Liability Rider with National Union
Fire Insurance Company (incorporated by reference to Exhibit 10.51
of Registrant's Form 10-K for the year ended December 31, 1996).
10.17- Letter Agreement dated as of March 9, 1993 between Registrant and
The Yasuda Mutual Life Insurance Company (incorporated by reference
to Exhibit 10.3 of Registrant's Form 10-K for the year ended
December 31, 1992).
10.18+- Limited Partnership Agreement of PW Partners 1993 L.P. dated as of
February 2, 1994 (incorporated by reference to Exhibit 10.2 of
Registrant's Form 10-K for the year ended December 31, 1994).
10.19+- Registrant's 1994 Executive Incentive Compensation Plan
(incorporated by reference to Exhibit 10.3 of Registrant's Form 10-K
for the year ended December 31, 1994).
10.20+- Registrant's 1994 Senior Officer Deferred Compensation Plan
(incorporated by reference to Exhibit 10.4 of Registrant's Form 10-K
for the year ended December 31, 1994).
10.21+- Amendment to the Registrant's Senior Officer Deferred Compensation
Plan dated as of August 15, 1996 (incorporated by reference to
Exhibit 10.5 of Registrant's Form 10-K for the year ended December
31, 1996).
16
<PAGE> 18
10.22+- Amendment to the Registrant's Senior Officer Deferred Compensation
Plan dated as of September 1, 1996 (incorporated by reference to
Exhibit 10.6 of Registrant's Form 10-K for the year ended December
31, 1996).
10.23+- Omnibus Amendment to Grantor Trust Agreement under Registrant's
Senior Officer Deferred Compensation Plan dated as of August 9, 1996
(incorporated by reference to Exhibit 10.7 of Registrant's Form 10-K
for the year ended December 31, 1996).
10.24+- Form of Registrant's 1994 Senior Officer Deferred Compensation
Plan Grantor Trust Agreement (incorporated by reference to Exhibit
10.25 of Registrant's Form 10-K for the year ended December 31,
1997).
10.25+- Registrant's 1994 Stock Award Plan (incorporated by reference to
Exhibit 4.1 of Registrant's Registration Statement No. 33-55457 on
Form S-8 filed with the SEC on September 13, 1994).
10.26+- Registrant's 1994 Executive Stock Award Plan (incorporated by
reference to Exhibit 4.1 of Registrant's Registration Statement No.
33-55451 on Form S-8 filed with the SEC on September 13, 1994).
10.27+- Registrant's 1994 Non-Employee Director Stock Plan (incorporated
by reference to Exhibit 4.1 of Registrant's Registration Statement
No. 33-53489 on Form S-8 filed with the SEC on May 5, 1994).
10.28+- Employment agreement dated as of May 4, 1993 between Registrant,
PWI and Theodore A. Levine (incorporated by reference to Exhibit
10.2 of Registrant's Form 10-K for the year ended December 31,
1993).
10.29+- Letter dated as of October 27, 1995 amending certain provisions of
the Employment Agreement between Registrant, PWI and Theodore A.
Levine (incorporated by reference to Exhibit 10.20 of Registrant's
Form 10-K for the year ended December 31, 1995).
10.30+- Employment Agreement dated as of January 2, 1987 between
Registrant, PWI and Donald B. Marron (incorporated by reference to
Exhibit 10.23 of Registrant's Form 10-K for the year ended December
31, 1995).
10.31+- Deferred Compensation Agreement dated as of August 29, 1988
between Registrant and Donald B. Marron relating to the Supplemental
Employees Retirement Plan (incorporated by reference to Exhibit
10.26 of Registrant's Form 10-K for the year ended December 31,
1995).
10.32+- Agreement and Declaration of Trust for Supplemental Employees
Retirement Plan dated as of January 1, 1990 between Registrant and
Chase Manhattan Bank, N.A. as Trustee (incorporated by reference to
Exhibit 10.36 of Registrant's Form 10-K for the year ended December
31, 1996).
10.33+*- Form of Registrant's Trust Agreement under Registrant's
Supplemental Employee Retirement Plan for Certain Senior Officers
dated as of February 1, 1999.
10.34+*- Form of Registrant's Supplemental Employee Retirement Plan for
Certain Senior Officers dated as of February 1, 1999.
10.35+*- Form of Registrant's Trust Agreement under Registrant's Senior
Officer Deferred Compensation Plan dated as of February 1, 1999.
17
<PAGE> 19
10.36+*- Form of Registrant's Trust Agreement under Registrant's Senior
Officer Deferred Compensation Plan dated as of February 1, 1999.
10.37+*- Registrant's Equity Plus Program.
10.38+- Limited Partnership Agreement of PW Partners 1995 L.P. dated as of
October 31, 1995 (incorporated by reference to Exhibit 10.47 of
Registrant's Form 10-K for the year ended December 31, 1995).
10.39+* Limited Partnership Agreement of PW Partners 1997 L.P. dated as of
March 11, 1998.
11+- Computation of Earnings Per Share- The information set forth under
the caption "Note 17: Earnings per Common Share" on page 55 in the
1997 Annual Report to Stockholders is incorporated herein by
reference.
12.1*- Computation of Ratio of Earnings to Fixed Charges.
12.2*- Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
13*- 1998 Annual Report to Stockholders of the Registrant.
21*- Subsidiaries of the Registrant.
23*- Consent of Independent Auditors.
27*- Financial Data Schedules.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated January 19, 1999 with
the Securities and Exchange Commission reporting under "Item 5 Other
Events" and "Item 7 - Exhibits" relating to the Company's press release
which, among other things, reported financial results for the three months
and twelve months ended December 31, 1998.
- ----------
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
* Filed herewith
18
<PAGE> 20
Paine Webber Group Inc.
Items 8, 14(a)(1) and (2) and 14(d)
Index to Financial Statements and Financial Statement Schedules
Financial Statements
Incorporated herein by reference are the following financial statements included
in the 1998 Annual Report to Stockholders. With the exception of the following
financial statements and the information incorporated by reference on items 1,
5, 6, 7 and 7a, the 1998 Annual Report to Stockholders is not to be deemed filed
as part of this report.
1998 Annual
Report
Description (Page)
----------- -----------
Report of independent auditors 56
Consolidated statements of financial
condition at December 31, 1998 and 1997 35
For the years ended December 31, 1998, 1997 and 1996:
Consolidated statements of income 34
Consolidated statements of changes in
stockholders' equity 36-37
Consolidated statements of cash flows 38
Notes to consolidated financial statements 39-55
Quarterly financial information (unaudited) 57
Schedules
Form 10-K
Description (Page)
----------- ---------
Report of independent auditors F-2
I - Condensed financial information F-3 - F-6
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedules, or because
the information required is included in the respective consolidated financial
statements or notes thereto.
F-1
<PAGE> 21
Report of Independent Auditors
The Board of Directors and Stockholders
Paine Webber Group Inc.
We have audited the consolidated financial statements of Paine Webber Group Inc.
as of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated February 1,
1999. Our audits also included the financial statement schedule listed in the
Index to Financial Statements and Financial Statement Schedules on page F-1.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
New York, New York
February 1, 1999
F-2
<PAGE> 22
Schedule I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAINE WEBBER GROUP INC.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
(In thousands of dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Interest $ 285,554 $ 262,573 $ 185,772
Other 506 379 291
--------- --------- ---------
Total revenues 286,060 262,952 186,063
Interest expense 376,949 320,838 229,396
--------- --------- ---------
Net revenues (90,889) (57,886) (43,333)
--------- --------- ---------
Equity in income of affiliates 482,980 447,529 389,950
Non-interest expenses 651 1,514 3,956
--------- --------- ---------
Income before taxes 391,440 388,129 342,661
Benefit for income taxes 42,115 27,320 21,689
--------- --------- ---------
Net income $ 433,555 $ 415,449 $ 364,350
========= ========= =========
</TABLE>
See Notes to Condensed Financial Information of Registrant.
F-3
<PAGE> 23
Schedule I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAINE WEBBER GROUP INC.
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(In thousands of dollars except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 21 $ 559
Trading assets 158,408 --
Loans to and receivables from affiliates 6,784,882 5,531,860
Investments in affiliates 2,354,821 2,144,787
Other assets 239,258 368,569
----------- -----------
$ 9,537,390 $ 8,045,775
=========== ===========
Liabilities and Stockholders' Equity
Short-term borrowings $ 1,041,973 $ 1,254,127
Trading liabilities 29,597 --
Payables to affiliates 570,140 576,041
Other liabilities and accrued expenses 602,589 282,584
Junior Subordinated Debentures held by Trusts 405,928 405,928
Long-term borrowings 4,258,405 3,407,464
----------- -----------
6,908,632 5,926,144
Commitments and contingencies
Redeemable Preferred Stock 189,815 188,668
Stockholders' Equity:
Common stock, $1 par value, 400,000,000
shares authorized; issued 191,047,151
shares and 188,458,083 shares in 1998
and 1997, respectively 191,047 188,458
Additional paid-in capital 1,525,938 1,405,329
Retained earnings 1,689,386 1,340,966
Treasury stock, at cost; 45,527,707 shares
and 48,557,788 shares in 1998 and 1997,
respectively (962,792) (998,300)
Accumulated other comprehensive income (4,636) (5,490)
----------- -----------
2,438,943 1,930,963
----------- -----------
$ 9,537,390 $ 8,045,775
=========== ===========
</TABLE>
See Notes to Condensed Financial Information of Registrant.
F-4
<PAGE> 24
Schedule I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAINE WEBBER GROUP INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 433,555 $ 415,449 $ 364,350
Adjustments to reconcile net income to cash
used for operating activities:
Noncash items included in net income:
Equity in income of affiliates (482,980) (447,529) (389,950)
Depreciation and amortization (6,989) (1,309) 2,951
Deferred income taxes (12,478) 1,862 (17,050)
Other 6,972 2,809 2,535
(Increase) decrease in assets:
Trading assets (158,408) -- 32,575
Loans to and receivables from affiliates (1,150,593) (1,644,602) (485,743)
Investment in affiliates 18,371 111,389 (12,322)
Other assets 143,172 (117,002) 78,810
Increase (decrease) in liabilities:
Payables to affiliates (5,901) 534,508 13,721
Trading liabilities 29,597 -- (32,575)
Other liabilities and accrued expenses 323,528 172,607 (29,324)
Proceeds from:
Dividends received from subsidiaries 325,000 225,000 2 ,707
----------- ----------- -----------
Cash used for operating activities (537,154) (746,818) (469,315)
----------- ----------- -----------
Cash flows from investing activities:
Payments for:
Office equipment and leasehold improvements (523) (61) (220)
----------- ----------- -----------
Cash used for investing activities (523) (61) (220)
----------- ----------- -----------
Cash flows from financing activities:
Net (payments on) proceeds from:
Short-term borrowings (212,154) 340,656 193,863
Proceeds from:
Junior Subordinated Debentures held by Trusts - -- 204,897 201,031
Long-term borrowings 1,148,860 822,011 476,752
Employee stock transactions 45,257 72,820 50,103
Payments for:
Long-term borrowings (293,223) (198,360) (141,128)
Repurchases of common stock (67,613) (411,668) (237,766)
Dividends (83,988) (82,918) (73,332)
----------- ----------- -----------
Cash provided by financing activities 537,139 747,438 469,523
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (538) 559 (12)
Cash and cash equivalents, beginning of year 559 -- 12
----------- ----------- -----------
Cash and cash equivalents, end of year $ 21 $ 559 $ --
=========== =========== ===========
</TABLE>
See Notes to Condensed Financial Information of Registrant.
F-5
<PAGE> 25
Schedule I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAINE WEBBER GROUP INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In thousands of dollars except share amounts)
General
The condensed financial information of Paine Webber Group Inc. (the "Company")
should be read in conjunction with the consolidated financial statements of
Paine Webber Group Inc. and its subsidiaries and the notes thereto incorporated
by reference in this report. Certain reclassifications and format changes have
been made to prior year amounts to conform to the current year presentation.
Included in non-interest expense in the Condensed Statements of Income is the
amortization of negative goodwill.
Expenses related to compensation plans sponsored by the Company for the benefit
of employees of its subsidiaries are expensed at the subsidiary level.
Common Stock
On May 7, 1998, the shareholders of the Company approved an amendment to the
Company's charter which increased the number of common shares authorized for
issuance from 200,000,000 to 400,000,000 shares.
Statement of Cash Flows
Interest payments for the years ended December 31, 1998, 1997 and 1996
approximated $366,535, $312,509 and $232,771, respectively. Income tax payments
(consolidated) totaled $236,597, $278,553 and $130,886 for the years ended
December 31, 1998, 1997 and 1996, respectively. The income tax provision of
affiliates is reflected on an individual company basis and is included in equity
in income of affiliates.
Commitments and Contingencies
The Company has guaranteed certain of its subsidiaries' unsecured lines of
credit and contractual obligations.
The Company guarantees payments due from PWG Capital Trust I and PWG Capital
Trust II ("Trust I" and "Trust II", respectively), wholly owned subsidiaries of
the Company, to holders of 8.30% Trust I Securities and 8.08% Trust II
Securities, on a subordinated basis, to the extent the Company has made
principal and interest payments on the 8.30% Junior Subordinated Debentures and
8.08% Junior Subordinated Debentures (collectively, the "Junior Subordinated
Debentures"). This guarantee, together with the Company's obligations under the
Junior Subordinated Debentures, provides a full and unconditional guarantee on a
subordinated basis of amounts due on the Preferred Trust Securities.
F-6
<PAGE> 26
SIGNATURES
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 on March 31, 1999.
PAINE WEBBER GROUP INC.
(Registrant)
BY: /s/ Donald B. Marron
-------------------------------
Donald B. Marron
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 31, 1999.
/s/ Donald B. Marron
-------------------------------
Donald B. Marron
Chairman of the Board,
Chief Executive Officer
and Director (principal executive
officer)
/s/ Regina A. Dolan
-------------------------------
Regina A. Dolan
Senior Vice President and
Chief Financial Officer
(principal financial and accounting officer)
/s/ Garrett Bewkes, Jr.
-------------------------------
E. Garrett Bewkes, Jr.
Director
-------------------------------
Reto Braun
Director
/s/ Frank P. Doyle
-------------------------------
Frank P. Doyle
Director
<PAGE> 27
SIGNATURES
/s/ Joseph J. Grano, Jr.
-------------------------------
Joseph J. Grano, Jr.
Director
/s/ James W. Kinnear
-------------------------------
James W. Kinnear
Director
-------------------------------
Naoshi Kiyono
Director
/s/ Robert M. Loeffler
-------------------------------
Robert M. Loeffler
Director
/s/ Edward Randall, III
-------------------------------
Edward Randall, III
Director
/s/ Henry Rosovsky
-------------------------------
Henry Rosovsky
Director
/s/ John R. Torell III
-------------------------------
John R. Torell III
Director
<PAGE> 28
EXHIBIT INDEX
10.33 Form of Registrant's Trust Agreement under Registrant's
Supplemental Employee Retirement Plan for Certain Senior Officers
dated as of February 1, 1999.
10.34 Form of Registrant's Supplemental Employee Retirement Plan for
Certain Senior Officers dated as of February 1, 1999.
10.35 Form of Registrant's Trust Agreement under Registrant's Senior
Officer Deferred Compensation Plan dated as of February 1, 1999.
10.36 Form of Registrant's Trust Agreement under Registrant's Senior
Officer Deferred Compensation Plan dated as of February 1, 1999.
10.37 Registrant's Equity Plus Program.
10.39 Limited Partnership Agreement of PW Partners 1997 L.P. dated as of
March 11, 1998.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
13 1998 Annual Report to Stockholders of the Registrant.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedules.
<PAGE> 1
Exhibit 10.33
Trust Agreement
This Trust Agreement, dated as of this FIRST day of February, 1999
(the "Effective Date"), by and between Paine Webber Group Inc., a Delaware
corporation ("PWG"), and The Chase Manhattan Bank (the "Trustee").
W I T N E S S E T H:
WHEREAS, PWG and the Trustee are currently parties to (i) a Trust
Agreement, dated as of August 29, 1988 (the "First Prior Trust Agreement"), and
(ii) a Trust Agreement, dated as of January 1, 1990 (the "Second Prior Trust
Agreement"), related to the Paine Webber Group Inc. Supplemental Employee's
Retirement Plan for Certain Senior Officers (the "Plan");
WHEREAS, the Plan has been amended and restated by PWG as of the
Effective Date;
WHEREAS, PWG and the Trustee now desire to amend, restate and
consolidate the First Prior Trust Agreement and the Second Prior Trust
Agreement, effective as of the Effective Date, into a single trust agreement
(the "Trust Agreement") that will take into account various changes made to the
Plan in connection with the restatement thereof and to incorporate into the
consolidated trust agreement the provisions of the model trust agreement
promulgated by the Internal Revenue Service (the "IRS") in Revenue Procedure
92-64; and
WHEREAS, PWG and the Trustee now desire, subject to the provisions
of this Trust Agreement, to continue to hold in trust the assets of the trust,
established pursuant to the First Prior Trust Agreement and the Second Prior
Trust Agreement, and to merge and consolidate such assets into a single trust
(the "Trust"), subject to the claims of the creditors of PWG and its Material
Subsidiaries in the event of the Insolvency (as hereinafter defined) of PWG or
any such Material Subsidiaries until paid to the participants in the Plan (the
"Participants") or their Spouses or Beneficiaries in accordance with the terms
of the Plan and this Trust Agreement;
NOW, THEREFORE, the parties do hereby amend and restate the First
Prior Trust Agreement and the Second Prior Trust Agreement in the form of this
Trust Agreement and agree that the Trust shall be comprised, held and disposed
of as follows:
<PAGE> 2
Section 1. Establishment of Trust.
(a) PWG hereby deposits with the Trustee IN TRUST the assets held by
the Trustee under the First Prior Trust Agreement and the Second Prior Trust
Agreement (less any portion of assets which, at the direction of PWG, are
transferred to another trust for the benefit of the Participant pursuant to a
separate deferred compensation arrangement of PWG), which, together with any
amounts provided for in Section 1(f), shall become the principal of the Trust to
be held, administered and disposed of by the Trustee as provided in this Trust
Agreement. In addition, on the date of a Change in Control and on each
anniversary thereof, PWG and its Subsidiaries (collectively, "PaineWebber")
shall contribute to the Trust Fund to be held IN TRUST by the Trustee the amount
required by Section 1(g) below. The Trustee hereby accepts the Trust established
under this Trust Agreement on the terms and subject to the provisions set forth
herein, and it agrees to discharge and perform fully and faithfully all of the
duties and obligations imposed upon it under this Trust Agreement. The Trust
shall be known as the "Paine Webber Group Inc. Supplemental Employee's
Retirement Plan Trust."
(b) Reasonably promptly following the Effective Date, PWG shall
deliver to the Trustee a copy of the Plan. Following the occurrence of a Change
in Control, the Plan and any amendments thereto that have been delivered to the
Trustee in accordance with this Section 1(b) shall constitute a part of this
Trust Agreement. If the Plan is amended, PWG shall promptly deliver a copy of
the Plan to the Trustee within ten days of the date of the amendment. On and
after the date the Trustee is notified by PWG, the Participant or the
Participant's Beneficiary of a Change in Control or otherwise has actual
knowledge of the occurrence of a Change in Control (the "Change in Control
Notice Date"), the Trustee shall have an obligation to determine whether actions
undertaken by the Trustee hereunder are consistent with, and do not violate any
of, the terms of the Plan (including, without limitation, any amendments to the
Plan that have been delivered to the Trustee in accordance with this Section
1(b)), and, in the event of any conflict between any instruction or direction to
the Trustee from PWG and the Plan, the Trustee shall be authorized to rely on
the terms of the Plan as reasonably construed by the Trustee. No amendment to
the Plan shall affect in any material respect the duties and obligations of the
Trustee hereunder without the Trustee's prior written consent.
(c) The Trust established hereby is irrevocable by PWG.
(d) The Trust is intended to be a grantor trust, of which PWG is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and
shall be construed accordingly.
(e) The principal of the Trust, and any earnings thereon, shall be
held separate and apart from other funds of PWG and shall be used exclusively
for the purpose of satisfying PaineWebber's obligations to Participants, Spouses
and Beneficiaries (hereinafter, the "Trust Beneficiaries") under the Plan and
PWG's obligations to its general creditors as hereinafter set forth. The Trust
Beneficiaries shall have no preferred claim on, or any beneficial ownership
interest in, any assets of the Trust. Any rights created under the Plan and this
Trust Agreement shall be mere unsecured contractual rights of the Trust
Beneficiaries against PaineWebber. Any assets held by the Trust will be subject
to the claims of PWG's general creditors under U.S. federal and state law in the
event of Insolvency.
(f) PaineWebber, in its sole discretion, may at any time, or from
time to time, make additional deposits of cash or other property (other than PWG
Securities) to the Trust Fund to be held IN TRUST by the Trustee to augment the
principal to be held, administered and disposed of by the Trustee as
<PAGE> 3
provided in this Trust Agreement. The Trustee shall have no duty or obligation
to compel PaineWebber to make such additional deposits.
(g) On the date of a Change in Control, and on each anniversary
thereof, PaineWebber shall contribute to the Trust Fund to be held IN TRUST by
the Trustee a lump sum cash amount (in same day funds) equal to the amount
required by Section 13(f) of the Plan as in effect on the Effective Date. No
amendment to Section 13(f) of the Plan or any other provision of the Plan or to
this Trust Agreement on or after the date of a Change in Control shall reduce or
limit the obligations of PaineWebber under this Section 1(g).
(h) Except as provided in Section 5(c), the assets of the Trust
shall be held by the Trustee as one account (including, without limitation, the
portions of the Trust Fund previously held pursuant to the First Prior Trust
Agreement and the Second Prior Trust Agreement), without any subaccounting and
without distinction, separation or segregation by virtue of the interest of any
Trust Beneficiary prior to the distribution of Trust assets to a Trust
Beneficiary.
(i) Capitalized words which are not otherwise defined in this
Trust Agreement have the meanings assigned thereto in the Plan. For the purposes
of this Agreement, the following capitalized words shall have the following
meanings:
"Mutual Fund" shall mean an investment company registered under the
Investment Company Act of 1940, as amended.
"PWG Securities" shall mean any Security issued by PWG or any
affiliate, but shall not include an interest in an investment partnership
or an interest in a Mutual Fund managed by PWG or any affiliate thereof.
"Security" or "Securities" shall mean equity and debt securities of
all types, general or limited partnership interests, interests in a Mutual
Fund, interests in a trust, convertible or non-convertible preferred stock
or debt obligations, warrants, rights or options to purchase equity or
debt securities, interests in an investment company, limited liability
company or hedge fund, participations, notes, bonds, debentures,
negotiable and non-negotiable instruments, evidence of indebtedness in any
form, obligations, contract rights, claims and interests (including any
whole or partial interest in, or right to acquire, any of the foregoing).
Section 2. Payments to Participants and Their Beneficiaries.
(a) PWG shall deliver to the Trustee a payment schedule (the
"Payment Schedule") that indicates the amounts payable to each Trust Beneficiary
and the times at which such amounts are payable. The Compensation Committee or
the Plan Administrator shall determine whether an event set forth on the Payment
Schedule has occurred and shall advise the Trustee of such event. The Payment
Schedule shall be consistent with the terms of the Plan and shall be delivered
to the Trustee as soon as practicable after a Participant has elected to begin
receiving benefits under the Plan or after any other event entitling a Trust
Beneficiary to payments under the Plan. Except as otherwise provided herein, the
Trustee shall make payments to each Trust Beneficiary in accordance with such
Payment Schedule and Section 2(b) below. The Trustee shall make provision for
the reporting and withholding of any taxes that may be required to be withheld
with respect to the payment of benefits pursuant to the terms of the Plan and
shall (i) pay amounts withheld to the appropriate taxing authorities or
<PAGE> 4
(ii) remit such withheld amounts to PWG for payment to the applicable taxing
authorities upon written agreement from PWG that PWG shall be responsible for
the applicable tax reporting and payment. If requested by the Trustee,
PaineWebber shall provide the Trustee with the name and address of each Trust
Beneficiary (the "Trust Beneficiary List"). The Trustee hereby agrees to keep
the Trust Beneficiary List confidential and to utilize it solely in connection
with the administration of the Plan and the Trust Agreement.
(b) Subject to the provisions of Sections 2(c), 2(d) and 2(e), on
and after the Change in Control Notice Date, the Trustee shall pay the amounts
due to a Trust Beneficiary in respect of PWG's obligations under the Plan upon
receipt of either (i) a Payment Schedule from PWG authorizing such payment or
(ii) an affidavit from the Trust Beneficiary in substantially the form of
Exhibit A hereto (an "Affidavit"), attesting to the amount of such payment and
setting forth the circumstances giving rise to the obligation to make such
payment under the Plan. The Trustee shall be authorized to rely on the Payment
Schedule, written instructions from PWG or any such Affidavit, and, in the event
of a conflict between the written instructions from PWG or the Payment Schedule
and the Affidavit, the provisions of the Affidavit shall be controlling. The
Affidavit shall be accompanied by a statement from an enrolled actuary
certifying that the benefit payments requested by the Trust Beneficiary are
correct and in reasonable, good faith compliance with the terms of the Plan. The
reasonable fees and expenses of such enrolled actuary in preparing such
statement shall be paid from the assets of the Trust, to the extent not paid
directly by PaineWebber.
(c) To the extent that (i) the Trustee is notified in writing by PWG
that PWG's payment obligations to all Trust Beneficiaries have been paid in full
and (ii) following the Change in Control Notice Date, the notice from PWG is
confirmed in writing by the then remaining Trust Beneficiaries listed on the
Trust Beneficiary List (which confirmation may be waived by the Trustee if the
Trustee determines in good faith after reasonable inquiry that such confirmation
is being unreasonably withheld by a Trust Beneficiary or cannot be obtained
because the Trust Beneficiary is deceased), then the Trustee shall promptly pay
to PWG the then remaining assets of the Trust.
(d) PaineWebber may make payment of benefits directly to the Trust
Beneficiaries as such benefits become due under the terms of the Plan. In the
event any amount referred to in the Payment Schedule is paid by PaineWebber to a
Trust Beneficiary, PWG shall notify the Trustee in writing of such event. Such
notice shall include a Payment Schedule revised in accordance with such notice,
and, following the Change in Control Notice Date, such revised Payment Schedule
shall be confirmed by the applicable Trust Beneficiary listed on the Trust
Beneficiary List (which confirmation may be waived by the Trustee if the Trustee
determines in good faith after reasonable inquiry that such confirmation is
being unreasonably withheld by the Trust Beneficiary or cannot be obtained
because the Trust Beneficiary is deceased). Upon receipt of such notice, the
Trustee shall amend the Payment Schedule to reduce the amount payable thereunder
as set forth in such notice and, if applicable, confirmed by the Trust
Beneficiary and shall distribute to PaineWebber an amount of assets from the
Trust equal to the fair market value of the amount so paid by PaineWebber.
(e) The Trust is established as a means of facilitating the payment
of PWG's obligations under the Plan. If the principal of the Trust and any
earnings thereon are not sufficient to make payments of benefits in accordance
with the terms of the Plan and the Payment Schedule, PaineWebber shall make the
balance of each such payment as it falls due. The Trustee shall notify PWG when
the principal and earnings of the Trust are not sufficient to satisfy the
obligations. Nothing in this Trust Agreement or in the Payment Schedule shall be
construed in any way as relieving PaineWebber of its obligations if such
obligations are not satisfied from the assets of the Trust.
<PAGE> 5
(f) Whenever it is contemplated that PaineWebber shall make a
payment or contribution under this Trust Agreement, such payment or contribution
shall be made by PWG or any Subsidiary thereof designated by PWG, but no such
designation by PWG shall in any way relieve PWG of its obligation to make such
payment.
(g) PWG shall retain the Actuary to perform an annual actuarial
valuation of the Plan and Trust and to report to PWG and the Trustee in
accordance with generally accepted accounting and actuarial principles on the
assets and liabilities of the Plan and Trust. The Actuary shall also calculate
for PWG and the Trustee the amounts payable under the Plan and Trust to each
Trust Beneficiary. The reasonable fees and expenses of the Actuary may be paid
from the assets of the Trust, to the extent not paid directly by PaineWebber. In
addition, prior to a Change in Control, reasonable administration expenses
incurred by the Plan Administrator in connection with the operation of the Trust
(including reasonable fees and expenses of legal counsel) may be paid from the
assets of the Trust, to the extent not otherwise paid directly by PaineWebber.
Anything in this Section 2(h) to the contrary notwithstanding, the aggregate
amount of fees and expenses that may be charged against the Trust Fund under
this Section 2(h) in any calendar year may not exceed $50,000.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiaries when Company is Insolvent.
(a) The Trustee shall cease payment of benefits to the Trust
Beneficiaries if PWG or any Material Subsidiary is Insolvent. PWG or any
Material Subsidary shall be considered "Insolvent" for purposes of this Trust
Agreement if (i) PWG or any Material Subsidiary is unable to pay its debts as
they become due or (ii) PWG or any Material Subsidiary is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code or the comparable
provisions of any other applicable jurisdiction to which PWG is then subject.
(b) At all times during the continuance of the Trust, as provided in
Section 1(e) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of PWG and its Material Subsidiaries under U.S.
federal and state law as set forth below and the laws of any other applicable
jurisdiction to which PWG is then subject.
(1) The Chief Financial Officer of PWG shall have the duty to inform
the Trustee in writing of PWG's or any Material Subsidiary's Insolvency.
If a person claiming to be a creditor of PWG or any Material Subsidiary
alleges in writing to the Trustee that PWG or any Material Subsidiary has
become Insolvent, the Trustee shall promptly determine whether PWG or any
Material Subsidiary is Insolvent and, pending such determination, the
Trustee shall discontinue payment of benefits to the Trust Beneficiaries.
(2) Unless the Trustee has actual knowledge of PWG's or any Material
Subsidiary's Insolvency, or has received notice from PWG or any Material
Subsidiary or a person claiming to be a creditor alleging that PWG or any
Material Subsidiary is Insolvent, the Trustee shall have no duty to
inquire whether PWG or any Material Subsidiary is Insolvent. The Trustee
may in all events rely on such evidence concerning PWG's or any Material
Subsidiary's solvency as may be furnished to the Trustee and that provides
the Trustee with a reasonable basis for making a determination concerning
PWG's or any Material Subsidiary's solvency.
<PAGE> 6
(3) If at any time the Trustee has determined that PWG or any
Material Subsidiary is Insolvent, the Trustee shall discontinue payments
to the Trust Beneficiaries and shall hold the assets of the Trust for the
benefit of PWG's or any Material Subsidiary's general creditors. Nothing
in this Trust Agreement shall in any way diminish any rights of the Trust
Beneficiaries to pursue their rights as general creditors of PWG or any
Material Subsidiary with respect to benefits due under the Plan or
otherwise.
(4) The Trustee shall resume the payment of benefits to the Trust
Beneficiaries in accordance with Section 2 of this Trust Agreement only
after the Trustee has determined that PWG or any Material Subsidiary is
not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient Trust assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b) and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to the
Trust Beneficiaries under the terms of the Plan for the period of such
discontinuance, less the aggregate amount of any payments made to the Trust
Beneficiaries by PaineWebber under the terms of the Plan in lieu of the payments
provided for hereunder during any such period of discontinuance.
(d) As used herein, "Material Subsidiary" shall mean any
significant subsidiary of PWG as determined in accordance with Regulation S-X
under the Securities Exchange Act of 1934. PWG shall from time to time provide
the Trustee with a list of Material Subsidiaries.
Section 4. Payments to PWG. Except as provided in Sections 2 and 3
above, PWG shall have no right or power to direct the Trustee to return to PWG
or to divert any of the assets of the Trust to any purpose other than the
payment of the obligations before all payment of benefits has been made to the
Trust Beneficiaries pursuant to the terms of the Plan. Following a determination
by the Trustee in accordance with Sections 2(c) and 2(d) that the obligations
have been paid in full, the Trustee shall pay to PWG any remaining assets of the
Trust, net of any unpaid Trustee's fees and expenses and a reserve for accrued
but unpaid expenses of the Trust.
Section 5. Investment Authority.
(a) In no event may the Trust invest in PWG Securities, other than
(i) a de minimis amount held in common investment vehicles in which the Trustee
invests or (ii) shares of a Mutual Fund managed by an affiliate of PaineWebber.
Prior to the Change in Control Notice Date, in accordance with Section 5(b), all
rights associated with assets of the Trust shall be exercised by the Trustee at
the direction of an Investment Manager or other person designated by PaineWebber
for this purpose, and (except as otherwise contemplated by Section 5(c)) shall
in no event be exercisable by or rest with the Trust Beneficiaries. The Trustee
shall invest and reinvest the principal and income of the Trust Fund and keep
the Trust Fund invested, without distinction between principal and income, in
accordance with this Section 5.
(b) Subject to Section 5(f), the Trustee shall invest the assets of
the Trust either in the manner directed by PaineWebber or in accordance with the
investment direction of an Investment Manager or Investment Managers selected by
PaineWebber. If more than one Investment Manager is designated by PaineWebber,
the Trustee shall apportion the assets of the Trust into a separate sub-account
for each such Investment Manager and shall invest the assets of the sub-account
in accordance with the
<PAGE> 7
investment directions of the Investment Manager for that sub-account. The
Trustee shall be under no obligation to collect any money or other assets from
PaineWebber but shall merely hold the assets of the Trust as conveyed to the
Trustee by PaineWebber. If no timely investment directions are delivered to the
Trustee by PaineWebber or an Investment Manager designated by PaineWebber or by
a Participant or Investment Manager designated by a Participant in accordance
with Section 5(c), the assets of the Trust shall be invested by the Trustee in
one or more money market funds provided by the Trustee for this purpose so as to
provide for the daily accrual of interest.
(c) If a Participant elects a variable annuity option under the
Plan, the Trustee shall, if directed by the Plan Administrator, allocate a
portion of the assets of the Trust to a separate sub-account to be invested in
the manner directed by an Investment Manager retained by the Participant for
this purpose. The assets of the Trust Account initially allocated to the
sub-account shall be in cash or cash equivalents and shall have a value on the
date of allocation determined in accordance with Section 12 of the Plan. On each
Adjustment Date following the establishment of the sub-account, the Trustee
shall allocate such additional amounts in cash or cash equivalents to the
sub-account as may be directed by the Plan Administrator in accordance with
Section 12 of the Plan. The Trustee shall pay benefits to the Participant (or
Beneficiary thereof) for whom the sub-account is established under this Section
5(c) only from the assets of the sub-account during the period for which the
sub-account is maintained for such Participant hereunder. The Trustee shall be
under no duty or obligation to verify that a Participant has elected a variable
annuity or to determine the amount of assets to be allocated to the sub-account
described in this Section 5(c).
(d) The Trustee shall not follow the investment instructions
received by an Investment Manager retained by a Participant in accordance with
Section 5(c) if the Trustee reasonably determines that such investment
instructions would require the investment of assets in securities of PWG or any
of its Subsidiaries or affiliates (other than a Mutual Fund managed by an
affiliate of PaineWebber).
(e) If directed by the Plan Administrator, the Trustee shall, at the
time that a Trust Beneficiary is first entitled to payments in the form of an
annuity (other than a variable annuity), purchase a commercial annuity contract
or policy from an insurance company designated by the Plan Administrator with a
minimum rating of AA by Standard & Poor's Corporation or the equivalent by
another nationally recognized rating agency. The annuity contract or policy
shall be owned by the Trustee and the Trustee shall be entitled to all annuity
and other payments therefrom, but the life or lives for measuring the period of
payments shall be specified to the Trustee by the Plan Administrator or by the
Actuary at the direction of the Plan Administrator. If the annuity contract is
not sufficient for any reason to satisfy all obligations under the Plan to the
Trust Beneficiaries in respect of whom such contract was purchased, the
remaining obligations to such Trust Beneficiaries shall be paid from the assets
of the Trust, to the extent not otherwise paid by PaineWebber.
(f) On or after the Change in Control Notice Date, (i) the assets of
the Trust (other than a portion of the assets allocated to a separate
sub-account in the manner contemplated by Section 5(c)) shall be invested solely
at the direction of the Trustee or one of its affiliates in a diversified
portfolio of fixed income assets designed to achieve a reasonable rate of return
with minimal risk to principal; and (ii) the Trustee or one of its affiliates
shall purchase, at the time that a Trust Beneficiary is first entitled to
payments in the form of an annuity (other than a variable annuity), an annuity
in the manner contemplated by Section 5(e) without regard to any investment
direction from the Plan Administrator.
(g) When the Trustee delivers Securities against payment, delivery
of the property and receipt of payment may not be simultaneous. The risk of
non-receipt of payment shall be the Trust's, and
<PAGE> 8
the Trustee shall have no liability therefor, unless such non-receipt of payment
is a result of the Trustee's (or its officers', directors', employees',
nominees' or agents') gross negligence or willful misconduct. All credits to the
Trust of the anticipated proceeds of sales and redemptions of Securities shall
be conditional upon receipt by the Trustee of final payment and may be reversed
to the extent final payment is not received. At the discretion of the Trustee,
the Trust may make use of such conditional credits. To the extent such credits
do not become unconditional by receipt of final payment, the Trust shall
reimburse the Trustee upon demand for the amount of such conditional credits so
used. When the Trustee is to receive Securities, it is authorized to accept
documents in lieu of such Securities as long as such documents contain the
agreement of the issuer thereof to hold such Securities subject to the Trustee's
sole order. The Trustee may, in its discretion, advance funds to the Trust to
facilitate the settlement of any trade. In the event of such an advance, the
Trust shall immediately reimburse the Trustee for the amount thereof, together
with interest at the rate then charged by the Trustee to similar accounts for
similar advances.
Section 6. Disposition of Income. During the term of the Trust, all
income received by the Trust, net of expenses, shall be accumulated and
reinvested in accordance with the provisions of Section 5.
Section 7. Accounting by Trustee.
(a) (i) The Trustee shall keep accurate and detailed records
of all investments, receipts, disbursements and all other transactions required
to be made, including such specific records as shall be agreed upon in writing
between PWG and the Trustee. Within ninety days following the close of each
calendar year and within ninety days after the removal or resignation of the
Trustee, the Trustee shall deliver to PWG (and, following the Change in Control
Notice Date, to the Trust Beneficiary) a written account of its administration
of the Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth all
investments, receipts, disbursements and other transactions effected by it,
including a description of all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued interest paid
or receivable being separate), and showing all cash, securities and other
property held in the Trust at the end of such year or as of the date of such
removal or resignation, as the case may be. To the extent that one or more
sub-accounts have been maintained during the calendar year in accordance with
Section 5(c), the Trustee shall provide a separate accounting with respect to
each such sub-account. With respect to any Securities which do not have a
readily ascertainable market value, PWG shall provide the Trustee with periodic
valuations of such Securities. The valuation method of each valuation report
shall be done in a manner consistent with valuations used by PWG on its
inventory of Securities. The Trustee may conclusively rely upon such valuations
of PWG for all purposes hereunder without inquiry.
(ii) Unless PWG, or a Trust Beneficiary shall have notified the
Trustee of exceptions, objections, outstanding claims against the Trustee or
disputed items within 180 days following receipt of an annual statement of
account or final statement of account delivered in accordance with Section
7(a)(i) above, PWG and the Trust Beneficiary, if applicable, shall be deemed to
have approved such statement of account and the Trustee shall be relieved and
discharged from all matters covered therein. This Section 7(a)(ii) shall not
apply to any matter which the Trustee willfully or through gross negligence
misstates, conceals or omits in the preparation of such statement of account or
to any acts of fraud by the Trustee.
(b) Nothing contained in this Trust Agreement or in the Plan shall
deprive the Trustee of the right to have a judicial settlement of its accounts.
In any proceeding for a judicial settlement of the Trustee's account or for
instructions in connection with the Trust, the only other necessary parties
thereto in addition to the Trustee shall be PWG and the Trust Beneficiary. No
person interested in the Trust,
<PAGE> 9
other than PWG and the Trust Beneficiary, shall have a right to compel an
accounting, judicial or otherwise.
Section 8. Responsibility of Trustee.
(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in a like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with a like aim; provided, however, that the
Trustee shall incur no liability to any person for any action taken (i) pursuant
to an Affidavit delivered to the Trustee by a Trust Beneficiary or (ii) pursuant
to any written direction, request or approval given by PaineWebber, the Plan
Administrator or an Investment Manager that is in conformity with the terms of
the Plan and this Trust Agreement.
(b) Subject to Section 9, if the Trustee undertakes or defends any
litigation arising in connection with the Trust, PWG shall indemnify fully the
Trustee against the Trustee's costs, expenses and liabilities (including,
without limitation, attorneys' fees and expenses) relating thereto and shall be
primarily liable for such costs, expenses and liabilities.
(c) The Trustee may consult with legal counsel (who may also be
counsel for PaineWebber generally) with respect to any of its duties or
obligations hereunder. The Trustee may retain and consult with counsel, who may
be counsel for PWG or for the Trustee in its individual capacity, and shall not
be deemed imprudent by reason of its taking or refraining from taking action in
reasonable reliance upon the opinion of such counsel. The Trustee shall not be
required to give any bond or any other security for the faithful performance of
its duties under this Trust Agreement, except as required by law. The Trustee
may also retain one or more consultants to assist it in the performance of its
duties under the last sentence of Section 1(b) of this Trust Agreement. The
Trustee shall not be liable for any acts or omissions of any such consultant,
provided that the Trustee selects and supervises that consultant in accordance
with the standard of care set forth in Section 8(a) of this Trust Agreement.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisers, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred
on Trustees by applicable law, unless expressly provided otherwise herein;
provided, however, that, if an insurance policy is held as an asset of the
Trust, the Trustee shall have no power to name a beneficiary of the policy other
than the Trust, to assign the policy (as distinct from conversion of the policy
to a different form) other than to a Successor Trustee (as defined below) or to
loan to any person the proceeds of any borrowing against such policy.
(f) The Trustee shall periodically inform the Actuary as to the
market value of the assets of the Trust and provide the Actuary with a list of
Trust investments. As of the last business day of each calendar month, the
Trustee shall render a monthly statement which shall show the cash position of
the Trust at the beginning of the month, assets conveyed by PaineWebber to the
Trustee to be held in trust during the month, assets disbursed from the Trust to
pay obligations or expenses, income, gains and losses of the Trust for the month
and a revaluation of assets as of the date of the rendering of the monthly
<PAGE> 10
statement. To the extent that separate sub-accounts are maintained pursuant to
Section 5(c), the monthly statement contemplated by this Section 8(f) shall be
prepared for each such sub-account, for the assets of the Trust not allocated to
such sub-accounts and for all of the assets of the Trust taken as a whole. In
addition, a separate monthly report contemplated hereby shall be prepared with
respect to the portion of the assets of the Trust held in an insurance policy or
annuity in accordance with Section 5(e).
(g) Notwithstanding any powers granted to the Trustee pursuant to
this Trust Agreement or applicable law, the Trustee shall not have any power
that could give the Trust the objective of carrying on a business and dividing
the gains therefrom, within the meaning of Section 301.7701-2 of the Procedures
and Administrative Regulations promulgated pursuant to the Code.
(h) The Trustee shall be responsible for such duties as are
specifically set forth as such in this Trust Agreement or as otherwise agreed to
in writing by the Trustee. The Trustee shall not be compelled to take any action
toward the execution or performance of the Trust created hereunder or to
prosecute or defend any suit or claim in respect thereof, unless indemnified to
its satisfaction against loss, liability, and reasonable costs and expenses. The
Trustee shall be under no liability or obligation to anyone with respect to any
failure on the part of PWG to perform any of its obligations under this Trust
Agreement.
(i) PWG shall act in accordance with the Plan, and, prior to the
Change in Control Notice Date, the Trustee shall not be responsible in any
respect for acting in accordance with the Plan. The Trustee shall not be
responsible for the adequacy of the Trust to meet and discharge all payments and
liabilities under the Plan. Prior to the Change in Control Notice Date, the
Trustee shall be fully protected in relying upon any written notice,
certificate, instruction, direction or other communication of any investment
manager appointed by PWG, the Plan Administrator or other duly authorized
officers of PWG that is not contrary to the express provisions of this Trust
Agreement.
(j) The Trustee shall be entitled conclusively to rely upon any
written notice, instruction, direction, certificate or other communication
reasonably believed by it to be genuine and to be signed by the proper person or
persons, and the Trustee shall be under no duty to make investigation or inquiry
as to the truth or accuracy of any statement contained therein.
(k) In no event shall the Trustee incur liability to any person for
any indirect, consequential or special damages (including, without limitation,
lost profits) of any form, whether or not foreseeable and regardless of the form
of action in which such a claim may be brought, with respect to the Trust or its
role as Trustee, except to the extent that such damages are the result of the
gross negligence or willful misconduct of the Trustee. The foregoing sentence
shall not apply with respect to any such indirect, consequential or special
damages to the extent that such damages are the result of the willful misconduct
or gross negligence of the Trustee to the extent such indirect, consequential or
special damages are otherwise recoverable at law or in equity.
(l) PWG shall pay and shall protect, indemnify and save harmless the
Trustee and its officers, directors or trustees, employees, agents and nominees
from and against any and all losses, liabilities (including liabilities for
penalties), actions, suits, judgments, demands, damages, reasonable costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses) of any nature arising from or relating to any action or failure to act
by the Trustee in connection with the transactions contemplated by this Trust
Agreement, except to the extent that any such loss, liability, action, suit,
<PAGE> 11
demand, damage, cost or expense is the result of the gross negligence or willful
misconduct of the Trustee.
(m) For purposes of this Agreement, acts or omissions of the Trustee
shall include those of its directors, trustees, officers, employees, agents,
appointees, nominees, consultants, advisers and assigns.
Section 9. Compensation and Expenses of the Trustee.
(a) PWG shall pay (or make available to the Trustee to pay) any
federal, state, local or other taxes (including withholding taxes) imposed or
levied with respect to the corpus or income of the Trust or any part thereof
under existing or future laws, and PWG, in its discretion, may contest the
validity or amount of any transaction cost or any tax assessment, claim or
demand respecting the Trust or any part thereof. The Trustee shall maintain such
records and shall deliver such reports to PWG as may be necessary to permit the
proper allocation of taxes among investments and the proper payment of taxes by
PWG.
(b) PWG shall pay directly (and not from the assets of the Trust) to
the Trustee from time to time such reasonable compensation for its services as
trustee as shall be agreed upon by PWG and the Trustee. Prior to the occurrence
of a Change in Control, PWG shall also pay the reasonable and necessary expenses
(including reasonable fees of counsel engaged by the Trustee pursuant to
Sections 8(b) and 8(c) of this Trust Agreement) incurred by the Trustee in the
performance of its duties under this Trust Agreement; provided, however, that
the aggregate amount of any legal expenses incurred in any calendar year by the
Trustee under this Trust shall not exceed $5,000, unless (i) the Trustee has
delivered written notice ("Notice") to PWG at least ten business days prior to
the date on which such legal fees or expenses are to be incurred or such other
time as may be agreeable by the parties and (ii) PWG has not notified the
Trustee in writing of its objection to the Trustee incurring such expenses prior
to the expiration of such ten-business-day period. To constitute Notice for
purposes of the previous sentence, the writing from the Trustee to PWG shall
specify in reasonable detail (i) the expenses to be incurred, (ii) the reason or
reasons why the Trustee believes it is necessary to incur such expenses, (iii)
the anticipated amount of such expenses and (iv) the legal counsel who will be
paid any amounts for which reimbursement will be sought by the Trustee under
this Section 9(b). If PWG notifies the Trustee in writing of its objection to
any expenses described in the Notice prior to the expiration of the
ten-business-day period, such expense shall not be reimbursable to the Trustee
either from the assets of the Trust or from PWG, regardless of whether the
Trustee determines to incur such expense. The ten-business-day notice period
described above shall begin on the date the Notice is received by PWG. Any
compensation and expenses which are otherwise reimbursable under this Section
9(b) and which are not paid by PWG may be deducted by the Trustee from the
assets of the Trust. If the Trustee satisfies such obligations out of the assets
of the Trust, PWG shall immediately, upon demand by the Trustee, deposit into
the Trust a sum equal to the amount paid by the Trust.
(c) After a Change in Control, the reasonable fees and expenses
(including, without limitation, reasonable fees of counsel and consultants
engaged by the Trustee pursuant to Sections 8(b) and 8(c) of this Trust
Agreement) incurred by the Trustee in the performance of its duties under this
Trust Agreement shall be collected directly from the assets of the Trust to the
extent such fees and expenses are not paid by PWG.
Section 10. Resignation and Removal of Trustee.
<PAGE> 12
(a) Subject to Section 11, the Trustee may resign at any time by
written notice to PWG, which shall be effective ninety days after receipt of
such notice by PWG, unless PWG and the Trustee agree in writing to a shorter or
longer period. Until such time as a Successor Trustee is duly appointed and
qualified to serve hereunder, such resignation shall not affect (i) the
Trustee's obligations to hold custody of the assets of the Trust, to make
payments contemplated by Section 2 of this Agreement, or to dispose of
Securities in order to make such payments, (ii) the Trustee's obligations or
responsibilities set forth in this Agreement or (iii) the Trustee's rights under
Section 9 of this Agreement.
(b) Subject to Section 11, the Trustee may be removed at any time by
written notice from PWG, which removal shall be effective ninety days after such
notice of removal is delivered to the Trustee by PWG. Such removal shall not be
effective until such time as a Successor Trustee is duly appointed and qualified
to serve hereunder.
(c) Upon the resignation or removal of the Trustee and appointment
of a Successor Trustee, all assets shall subsequently be transferred to the
Successor Trustee. The transfer shall be completed within thirty days after
receipt of notice of resignation, removal or transfer.
(d) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal. If no such appointment has been made, the Trustee may
apply to a court of competent jurisdiction for appointment of a successor or for
instructions. All expenses of the Trustee in connection with the proceeding
shall be allowed as administrative expenses of the Trust.
Section 11. Appointment of the Successor Trustee.
(a) If the Trustee resigns or is removed in accordance with the
provisions of this Trust Agreement, PWG shall appoint a bank or trust company
unaffiliated with PWG or any successor to all or substantially all of the assets
of PWG that has corporate trustee powers under applicable law and which has
trust assets under management at the time of such appointment of at least $10
billion, as a successor to replace the Trustee upon such resignation or removal
(the "Successor Trustee"). The appointment shall be effective when accepted in
writing by the Successor Trustee, which shall have all of the rights and powers
of the former Trustee, including ownership rights in the Trust assets. The
former Trustee shall execute any instrument necessary or reasonably requested by
PWG or the Successor Trustee to evidence the transfer. Following a Change in
Control, the Trustee may not be removed by PaineWebber unless the then current
Trustee approves the Successor Trustee, which approval shall be granted only if
the Trustee reasonably determines that the appointment of the Successor Trustee
will not impair the rights of any Trust Beneficiary under the Plan and this
Trust Agreement.
(b) The Successor Trustee need not examine the records and acts of
any prior Trustee. The Successor Trustee shall not be responsible for and PWG
shall indemnify and defend the Successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes Successor Trustee.
(c) When this Trust shall have been transferred and delivered to the
successor trustee and the accounts of the Trustee have been settled as provided
in Section 7 hereof, the Trustee shall be released and discharged from all
further accountability or liability for this Trust to the extent contemplated by
Section 7 hereof.
<PAGE> 13
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and PWG. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the Trust
revocable. Following the date of a Change in Control, this Trust Agreement may
not be amended in a manner which is adverse in any respect to the Trust
Beneficiary without the prior written consent of the Trust Beneficiary.
(b) The Trust shall not terminate until the earlier to occur of (i)
the date on which the Trust Beneficiaries are no longer entitled to any benefits
under the Plan and all obligations have been satisfied in full and (ii) the
twenty-first anniversary of the death of the last Trust Beneficiary and Spouse
of a Trust Beneficiary alive on the date of execution of this Trust Agreement.
Upon termination of the Trust, any assets remaining in the Trust shall be
returned to PWG.
(c) The termination of the Trust shall not affect the
respective rights and obligations of PWG and the Trustee under Section 8 of this
Agreement.
Section 13. Trust Effective Date. This Trust Agreement shall be
effective on the Effective Date.
Section 14. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to the Trust Beneficiaries under this Trust
Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) Any notice required or permitted to be given shall be deemed
given if directed to the person to whom addressed at such address and mailed by
regular United States mail, first-class prepaid.
(d) The headings and captions herein are provided for reference and
convenience only, shall not be considered part of the Trust Agreement and shall
not be employed in the construction of the Trust Agreement.
(e) PWG shall provide the Trustee with a written certification with
respect to any persons who may act on behalf of PWG and who are appointed as
Investment Managers, together with specimen signatures of such individuals. The
Trustee shall have no duty to inquire as to the authenticity of such
certification; provided, however, that the Trustee may reasonably require PWG to
provide additional information with regard to the authorized persons and their
specimen signatures.
(f) If a Participant elects a variable annuity option under the Plan
and the Trustee is directed to allocate a portion of the assets of the Trust to
a separate sub-account to be invested in the manner directed by a Participant or
an Investment Manager retained by the Participant for this purpose, PWG shall
provide the Trustee with a specimen signature of such Participant and any
Investment Manger retained by such Participant. The Trustee shall have no duty
to inquire as to the authenticity of such
<PAGE> 14
certification; provided, however, that the Trustee may reasonably require PWG to
provide additional information with regard to such Participant and Investment
Manager (if any) and their specimen signatures.
(g) This Agreement shall be construed and interpreted under, and the
Trust hereby created shall be governed by, the laws of the State of New York
insofar as such laws do not contravene any applicable federal laws, rules or
regulations. The United States District Court of the Southern District of New
York shall have the sole and exclusive jurisdiction over any lawsuit or other
judicial proceeding relating to or arising from this Agreement. If that court
lacks federal subject matter jurisdiction, the Supreme Court of the State of New
York, New York County, shall have sole and exclusive jurisdiction. Either of
these courts shall have proper venue for any such lawsuit or judicial
proceeding, and the parties waive any objection to venue or their convenience as
a forum. The parties agree to submit to the jurisdiction of any of the courts
specified and to accept service of process to vest personal jurisdiction over
them in any of these courts. The parties further hereby knowingly, voluntarily
and intentionally waive, to the fullest extent permitted by applicable law, any
right to a trial by jury with respect to any such lawsuit or judicial proceeding
arising from or relating to this Agreement or the transactions contemplated
hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the Effective Date.
PAINE WEBBER GROUP INC.
By:
------------------------------
Title:
THE CHASE MANHATTAN BANK,
as Trustee
By:
------------------------------
Title:
<PAGE> 15
Exhibit A
Affidavit
I, _________________, under penalties of perjury, do hereby solemnly
swear (i) that I make this affidavit in order to induce The Chase Manhattan
Bank, as Trustee under the Trust Agreement (the "Trust Agreement") with Paine
Webber Group Inc. ("PWG"), to pay me the benefits to which I am entitled under
such Trust Agreement and the Paine Webber Group Inc. Supplemental Employee's
Retirement Plan for Selected Senior Officers (the "Plan"), (ii) that the amount
of the payments to which I am entitled is described in the attached schedule
hereto, (iii) that the first such payment is due on _____ [DATE] and (iv) that
the events giving rise to PWG's obligation to make such payment and the
provisions of the Plan applicable thereto are accurately and fairly described on
the schedule attached hereto. Attached to this Affidavit is a statement from an
enrolled actuary certifying that the benefit payments requested hereunder are
correct and in reasonable, good-faith compliance with the terms of the Plan.
-------------------------
Signature
STATE OF )
: ss.:
COUNTY OF )
On the __ day of _____________, 19__, before me personally came
________________________________, to me known, who, being by me duly sworn, did
depose and say that he resides at ________________________, and that the
statements herein are all true and correct.
-------------------------
Notary Public
<PAGE> 1
Exhibit 10.34
PAINE WEBBER GROUP INC.
SUPPLEMENTAL EMPLOYEE'S RETIREMENT PLAN
FOR
CERTAIN SENIOR OFFICERS
(As amended and restated effective January 1, 1999)
<PAGE> 2
TABLE OF CONTENTS
Page
1. Purpose 1
2. Definitions and Construction 1
(a) Definitions 1
(b) Construction 6
3. Continuity and Eligibility 7
(a) Continuity 7
(b) Participants 7
(c) Reemployment 7
(d) Deferred Compensation Agreement 7
4. Administration 7
(a) General Authority 7
(b) Plan Administrator 7
(c) Actions; Indemnification 8
5. Vesting of Benefits 8
(a) Initial Continuing Participants 8
(b) Other Participants 8
(c) Forfeiture 8
(d) Competing Employment 8
6. Normal Retirement Benefit 9
(a) Eligible Participants 9
(b) Amount of Normal Retirement Benefit 9
7. Early Retirement Benefit 9
(a) Eligible Participants 9
(b) Amount of Early Retirement Benefit 10
(c) Early Retirement Reduction Factor 10
8. Disability Retirement Benefit 10
(a) Eligible Participants 10
(b) Amount of Disability Retirement Benefit 10
(c) Recovery from Disability 11
9. Other Retirement Income 11
(a) From Pension Plan and Any Other Pension Plan 11
(b) From Social Security 12
<PAGE> 3
Page
10. Death Benefit to Surviving Spouse 13
(a) Eligibility for Surviving Spouse Benefit 13
(b) Amount of Surviving Spouse Benefit 13
11. Forms of Payment 13
(a) Benefit Forms 13
(b) Election Procedures 14
12. Variable Annuity Procedures 14
(a) Right to Elect 14
(b) Operational Procedures for the Variable Annuity 15
(c) Variable Annuity Adjustments 16
(d) Mortality Risk; Residual Assets 17
(e) Death of a Participant 17
(f) Special Definitions 17
13. Change in Control 18
(a) Changes to the Vesting Schedule 18
(b) Adjustment to the Service Fraction 19
(c) Elimination of Early Retirement Factors 19
(d) Effect on Section 5(d) 19
(e) Lump-Sum Payment 19
(f) Required Trust Contribution 19
(g) Investment of Trust Fund Assets 20
14. Trust Fund 20
(a) Contributions 20
(b) Assets of the Trust Fund 20
15. Actuarial Equivalent 20
16. Amendment and Termination 21
17. Claims Procedure 21
(a) Initial Claim 21
(b) Appeal to the Compensation Committee 21
(c) Finality 21
<PAGE> 4
Page
18. Miscellaneous 22
(a) No Right to Continued Employment 22
(b) Spendthrift Provision 22
(c) Payment of Expenses 22
(d) Payment of Taxes 22
(e) Unfunded 23
(f) Unsecured Promise to Pay 23
(g) Successors 23
(h) Tax Withholding 23
(i) Headings and Captions 23
(j) Governing Law 24
<PAGE> 5
Paine Webber Group Inc.
Supplemental Employee's Retirement Plan
for Certain Senior Officers
1. Purpose. The Plan is maintained by PWG for the purpose of
providing Participants with a means of supplementing the retirement benefits
provided to them under the other retirement plans and programs sponsored by
PaineWebber. The Plan is intended to be a plan which is unfunded within the
meaning of ERISA and the Code and maintained by PWG primarily for the purpose of
providing deferred compensation to a select group of management or highly
compensated employees within the meaning of Section 201(2) of ERISA.
2. Definitions and Construction.
(a) Definitions. As used in the Plan, the following capitalized
words shall have the meanings set forth below:
"Actuarial Equivalent" has the meaning set forth in Section 15.
"Actuary" means the actuary for the Pension Plan, as selected by the
Plan Administrator from time to time.
"Base Salary" means the highest annual rate of base salary paid to a
Participant, on or before December 31, 1998, by PaineWebber while employed
thereby, exclusive of commissions, draw, bonuses, severance and other
irregular or special compensation, except as may be provided otherwise by
the Compensation Committee, but including employee deferrals of base
salary under (i) the PaineWebber Savings Plus Plan, (ii) any Deferred
Compensation Agreement between PaineWebber and a Participant, (iii) the
PaineWebber PartnerPlus Plan or the PaineWebber PartnerPlus Plan for
Branch Managers or (iv) any other similar PaineWebber pension, welfare,
deferred compensation or other plan designated by the Plan Administrator.
Increases to a Participant's Base Salary on or after December 31, 1998
shall not be taken into account for any purpose under the Plan.
"Beneficiary" means the person or persons designated in writing in a
form prescribed by the Plan Administrator as a beneficiary or contingent
annuitant for purposes of the optional forms of benefit set forth in
Section 11(a). No Beneficiary designation shall be effective unless it is
in writing and received by the Plan Administrator prior to the date that
the payment of the Plan Benefit commences under the Plan. A trust or other
entity may be designated as a Participant's Beneficiary under the ten-year
certain and life option, but not under a contingent annuitant option.
<PAGE> 6
"Board" means the Board of Directors of PWG.
"Cause" means (i) a Participant's conviction or plea of no contest
to a felony involving the business of PaineWebber, (ii) a Participant's
fraud against the business of PaineWebber as determined by the
Compensation Committee, (iii) any intentional act or omission by a
Participant not undertaken in the good faith belief that it was in pursuit
of the business of PaineWebber and which is intended to cause and does
cause material injury to the financial condition of PaineWebber, or (iv) a
Participant's continued and repeated failure to perform the material
duties of the Participant's position with PaineWebber (other than by
reason of approved leave of absence, illness or disability) after the
Participant has received written notice from PaineWebber of such failure.
"Change in Control" shall mean the occurrence of any of the
following events:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act, other than PWG, a Subsidiary,
any trustee or other fiduciary holding securities under an
employee benefit plan of PWG or a Subsidiary, or any
corporation owned, directly or indirectly, by the stockholders
of PWG in substantially the same proportions as their
contemporaneous ownership of voting securities of PWG, is or
becomes a "20% Beneficial Owner."
For purposes of this provision, a "20% Beneficial Owner" means
a person who is or becomes the "beneficial owner" (as defined
in Rule 13d-3 of the Exchange Act), directly or indirectly, of
securities of PWG representing 20% or more of the combined
voting power of PWG's then-outstanding voting securities;
provided that (A) the term "20% Beneficial Owner" shall not
include any beneficial owner who has exceeded such 20%
threshold solely as a result of an acquisition of securities
directly from PWG, or solely as a result of an acquisition by
PWG of PWG securities, until such time thereafter as such
person acquires additional voting securities other than
directly from PWG and, after giving effect to such
acquisition, such person would constitute a 20% Beneficial
Owner; and (B) with respect to any person who is and remains
eligible to file a Schedule 13G pursuant to Rule 13d-1(b)(1)
of the Exchange Act with respect to PWG securities, there
shall be excluded from the number of securities deemed to be
beneficially owned by such person for purposes of determining
whether such person is a 20% Beneficial Owner a number of
securities representing 10% of the combined voting power of
PWG's then-outstanding voting securities;
(ii) during any period of two consecutive years,
individuals who, at the beginning of such period, constitute
the Board, together with any new director (other than a
director designated by a person who has entered into an
agreement with PWG to effect a transaction described in
<PAGE> 7
paragraph (i), (iii), or (iv) hereof) whose election by the
Board or nomination for election by PWG's stockholders was
approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at
the beginning of the period or whose election or nomination
for election was previously so approved (the "Continuing
Directors"), cease for any reason to constitute at least a
majority thereof;
(iii) the stockholders of PWG approve a merger,
consolidation, recapitalization, or reorganization of PWG, or
a reverse stock split of any class of voting securities of
PWG, or the consummation of any such transaction if
stockholder approval is not obtained, other than any such
transaction which would result in at least 80% of the total
voting power represented by the voting securities of PWG or
the surviving entity outstanding immediately after such
transaction being beneficially owned by persons who together
beneficially owned at least 80% of the combined voting power
of the voting securities of PWG outstanding immediately prior
to such transaction, with the relative voting power of each
such continuing holder compared to the voting power of each
other continuing holder not substantially altered as a result
of the transaction; provided that, for purposes of this
paragraph (iii), such continuity of ownership (and
preservation of relative voting power) shall be deemed to be
satisfied if the failure to meet such 80% threshold (or to
substantially preserve such relative voting power) is due
solely to the acquisition of voting securities by an employee
benefit plan of PWG or such surviving entity or of any
subsidiary of PWG or such surviving entity;
(iv) the stockholders of PWG approve a plan of complete
liquidation of PWG or an agreement for the sale or disposition
by PWG of all or substantially all of PWG's assets (or any
transaction having a similar effect); or
(v) any other event which the Board determines shall
constitute a Change in Control for purposes of this Plan.
"Code" means the Internal Revenue Code of 1986, as amended, and the
applicable rulings and regulations thereunder.
"Compensation Committee" means the Compensation Committee of the
Board, as constituted from time to time.
"Continuous Employment" means the period beginning on a
Participant's employment commencement date with PaineWebber and ending on
his severance date from PaineWebber, as determined by the Plan
Administrator in accordance with the rules and procedures for calculating
"continuous employment" under the Pension Plan, but without regard to
whether the Participant is eligible to participate in the Pension Plan.
<PAGE> 8
"Deferred Compensation Agreement" means a written agreement between
a Participant and PWG setting forth a Participant's right to receive
certain deferred compensation benefits from PaineWebber.
"Disability" means any physical or mental injury or disorder of a
Participant which precludes the continued employment of a Participant and
which is evidenced by the Participant's eligibility to receive disability
benefits under the PaineWebber Long-Term Disability Plan (or a
determination by the Plan Administrator that such Participant would be
eligible to receive disability benefits if then participating in such
plan).
"Effective Date" means January 1, 1999.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the applicable rulings and regulations thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the applicable rulings and regulations thereunder.
"FICA and HI Taxes" means the employee portion of Social Security
tax under the Federal Insurance Contribution Act and Medicare tax.
"Initial Continuing Participants" means the individuals designated
as such by the Compensation Committee.
"Investment Manager" means a person appointed to direct the
investment of some or all of the assets of the Trust Fund.
"Normal Retirement Date" means the first day of the month coincident
with or next following the later of (i) the date of the Participant's
sixty-fifth birthday and (ii) the fifth anniversary of the date on which
the Participant's Continuous Employment commenced.
"Other Participants" means the individuals (other than the Initial
Continuing Participants) who were participating in or eligible for
benefits under the Plan immediately prior to the Effective Date.
"Other Pension Plan" means any U.S. or non-U.S. long-term
disability, pension or retirement plan, other than the Pension Plan,
sponsored by PaineWebber or to which PaineWebber contributes or accrues
benefits on behalf of a Participant, including any long-term disability or
retirement program mandated or permitted by a foreign jurisdiction;
provided, however, that Other Pension Plan shall not include the
PaineWebber Savings Investment Plan, the Deferred Compensation Agreement,
the PaineWebber PartnerPlus Plan or the PaineWebber PartnerPlus Plan for
Branch Managers.
<PAGE> 9
"Other Retirement Income" has the meaning set forth in Section 9,
and includes the benefits payable in respect of a Participant pursuant to
the Pension Plan, any Other Pension Plan and the Social Security Act.
"PaineWebber" means PWG and each of its Subsidiaries.
"Participants" means the Initial Continuing Participants and the
Other Participants.
"Pension Plan" means the PaineWebber Pension Plan, as amended from
time to time.
"Plan" means this Paine Webber Group Inc. Supplemental Employee's
Retirement Plan for Certain Senior Officers, as amended and restated as of
the Effective Date.
"Plan Administrator" means the person serving from time to time as
the Director of Human Resources for PWI or such other person designated as
the Plan Administrator by the Compensation Committee.
"Plan Agreement" means a written agreement between a Participant and
PWG setting forth the Participant's rights to benefits under the Plan.
"Plan Benefit" means a monthly benefit of a Participant determined
in accordance with Section 6, Section 7 or Section 8 or a monthly benefit
to a surviving Spouse under Section 10.
"Prior Plan Restatement" means the terms of the Plan in effect prior
to the Effective Date.
"PWG" means Paine Webber Group Inc., a Delaware corporation, and any
successor thereto.
"PWI" means PaineWebber Incorporated, a Delaware corporation, and
any successor thereto.
"Retirement" means the first day of the month on which a Plan
Benefit is paid to a Participant.
"Social Security Act" or "Social Security" means the Social Security
Act of 1935, as amended, and the applicable rulings and regulations
thereunder.
"Spouse" means the spouse of a Participant who has been legally
married to the Participant under the laws of the jurisdiction in which the
marriage was contracted for a period of at least one year immediately
prior to the Participant's death or one year immediately prior to
Retirement.
<PAGE> 10
"Subsidiary" means any corporation of which PWG directly or
indirectly controls 50% or more of the total combined voting power
entitled to vote in the election of directors.
"Trust" means the grantor trust established by written agreement
between PWG and the Trustee for the purpose of accumulating funds to
assist PaineWebber in meeting its obligations under the Plan, of which PWG
is the grantor, within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Code. The establishment of the Trust is not
intended in any way to affect the status of the Plan as "unfunded" for
purposes of ERISA and the Code.
"Trust Agreement" means the written agreement between PWG and the
Trustee, as amended from time to time.
"Trust Fund" means the assets of the Trust.
"Trustee" means any bank or trust company (i) that is not affiliated
with PaineWebber and that has, at the time of appointment, trust assets
under management of at least $10 billion and (ii) with which PWG has
entered into the Trust Agreement pursuant to which such institution has
agreed to administer the Trust and to hold and distribute the assets of
the Trust Fund.
"Year of Continuous Employment" means each completed twelve-month
period of Continuous Employment. For purposes of the Plan, partial Years
of Continuous Employment shall be determined based on completed months of
Continuous Employment.
(b) Construction. When used herein, unless the context clearly
requires otherwise, the masculine pronoun shall be deemed to include the
feminine, and a singular noun or pronoun shall be deemed to include the plural
form.
<PAGE> 11
3. Continuity and Eligibility.
(a) Continuity. As of the Effective Date, the terms and provisions
of the Plan as set forth herein supersede and replace the provisions of the
Prior Plan Restatement for all Participants.
(b) Participants. On and after the Effective Date, subject to
Section 3(d), only individuals who were participating in the Plan prior to the
Effective Date shall be eligible for Plan Benefits.
(c) Reemployment. If a Participant terminates Continuous Employment
without a vested right to receive a benefit under this Plan and subsequently
resumes Continuous Employment, he shall not again become a Participant under the
Plan.
(d) Deferred Compensation Agreement. Anything in the Plan or in the
Prior Plan Restatement to the contrary notwithstanding, no individual who
participated in the Plan prior to the Effective Date and who is a party to a
Deferred Compensation Agreement that provides that such agreement supersedes or
replaces the Plan shall, on or after the Effective Date, be eligible for any
Plan Benefits.
4. Administration.
(a) General Authority. The general supervision of the Plan shall be
the responsibility of the Compensation Committee, which, in addition to such
other powers as it may have as provided herein, shall have the power: (i) to
make and enforce such rules and regulations as it shall deem necessary or proper
for the efficient administration of the Plan; (ii) to interpret and construe the
Plan and the rules and regulations of the Compensation Committee, to resolve
ambiguities, inconsistencies or omissions in the text of the Plan and to take
such other action as may be necessary or advisable for the orderly
administration of the Plan; (iii) to make any and all factual determinations in
connection with the administration and implementation of the Plan; (iv) to
delegate to any person the authority to carry out such administrative duties,
powers and authority relative to the administration of the Plan as the
Compensation Committee may determine; and (v) to review actions taken by the
Plan Administrator or any other person to whom authority is delegated under the
Plan.
(b) Plan Administrator. The Plan Administrator shall be responsible
for the day-to-day operation of the Plan, having the power (except to the extent
such power is reserved to the Compensation Committee) to take all action and to
make all decisions necessary or proper in order to carry out his duties and
responsibilities under the provisions of the Plan. If the Plan Administrator is
a Participant, the Plan Administrator shall not resolve, or participate in the
<PAGE> 12
resolution of, any question which relates directly or indirectly to him and
which, if applied to him, would significantly vary his eligibility for, or the
amount of, any benefit to him under the Plan. The Plan Administrator shall
report to the Compensation Committee at such times as the Compensation Committee
shall request concerning the operation of the Plan.
(c) Actions; Indemnification. The members of the Compensation
Committee, the Plan Administrator and any officer or employee of PaineWebber to
whom responsibilities are delegated by the Compensation Committee or the Plan
Administrator shall not be liable for any actions or failure to act hereunder.
PaineWebber shall indemnify and hold harmless, to the fullest extent permitted
by law, the Compensation Committee (and each member thereof), the Plan
Administrator and any officer or employee of PaineWebber to whom
responsibilities are delegated by the Compensation Committee or the Plan
Administrator from and against any liabilities, damages, costs and expenses
(including attorneys' fees and amounts paid in settlement of any claims approved
by PaineWebber) incurred by or asserted against it or him by reason of its or
his duties performed in connection with the operation or administration of the
Plan.
5. Vesting of Benefits.
(a) Initial Continuing Participants. Subject to Section 5(d), the
Plan Benefit of each Initial Continuing Participant shall be fully vested and
nonforfeitable.
(b) Other Participants. Subject to Section 5(d), the Plan Benefit of
each Other Participant shall be fully vested and nonforfeitable upon the earlier
to occur of (i) the Participant's attaining at least ten Years of Continuous
Employment and at least age fifty while in Continuous Employment and (ii) the
Participant's attaining at least five Years of Continuous Employment and at
least age fifty-five while in Continuous Employment. Both the age and service
requirement must be satisfied while in Continuous Employment in order for an
Other Participant to vest in his Plan Benefit.
(c) Forfeiture. Any Participant who terminates Continuous Employment
prior to vesting in his Plan Benefit shall forfeit all rights to payments and
benefits under the Plan, the Trust or any applicable Plan Agreement.
(d) Competing Employment. Each Participant (i) whose employment with
PaineWebber is terminated prior to attaining age sixty and (ii) who, at any time
during the one-year period following such termination of employment, becomes an
owner, principal, officer, employee, consultant or investor in a financial
services organization which is in substantial and direct competition with the
then core or basic lines of business of PaineWebber (whether or not a
Participant personally participates in any such competitive activities) shall
not be entitled to receive any benefits to which such Participant (or the
Participant's Beneficiary) is otherwise entitled to receive under the Plan and
which have not yet been paid. For purposes of this Section 5(d), (i) any passive
investment which constitutes less than one percent by vote or market value of
the outstanding equity interests of a corporation, partnership or other business
<PAGE> 13
entity, any of whose equity interests are regularly traded on a recognized
securities exchange, shall be disregarded; and (ii) whether or not any financial
services organization is in substantial and direct competition with the then
core or basic lines of business of PaineWebber shall be determined by the
Compensation Committee in its sole judgment. If requested in writing by a
Participant, the Compensation Committee shall inform the Participant within a
reasonable period of time following its receipt of the Participant's written
request as to whether or not any particular organization would be considered a
"financial services organization in substantial and direct competition with
PaineWebber."
6. Normal Retirement Benefit.
(a) Eligible Participants. A Participant who has a vested Plan
Benefit shall be entitled to retire under the Plan on his Normal Retirement Date
and receive a monthly benefit in the form of a single-life annuity commencing on
his Normal Retirement Date.
(b) Amount of Normal Retirement Benefit. The monthly amount payable
under this Section 6 shall be equal to one-twelfth of the annual amount
determined in accordance with the formula ((P x C x F) - R) x E, where
P equals (i) 1.0 for each Initial Participant and (ii)
.75 for each Other Participant;
C equals the Participant's Base Salary;
F equals a fraction (not greater than one), the
numerator of which is the number of Years of Continuous
Employment (not greater than fifteen) credited to the
Participant as of the date of the Participant's termination of
Continuous Employment and the denominator of which is fifteen;
R equals the Participant's Other Retirement Income, as
determined in accordance with Section 9; and
E equals 1.0.
7. Early Retirement Benefit.
(a) Eligible Participants. A Participant who terminates Continuous
Employment with a vested Plan Benefit and prior to attaining age fifty-five
shall be eligible to elect to begin receiving an early retirement benefit
hereunder in the form of a single-life annuity commencing on the first day of
any month following the month in which the Participant attains age fifty-five
and prior to his Normal Retirement Date. A Participant who terminates Continuous
Employment with a vested Plan Benefit after attaining age fifty-five shall be
eligible to elect to begin receiving an early retirement benefit hereunder in
the form of a single-life annuity commencing on the first day of any month
following the month in which the Participant terminates Continuous Employment
and prior to his Normal Retirement Date.
(b) Amount of Early Retirement Benefit. The monthly amount of a
Participant's early retirement benefit payable under this Section 7 shall be
equal to one-twelfth of the amount determined in accordance with the formula ((P
x C x F) - R) x E, where P, C and F are as defined in Section 6, where R is as
determined in Section 9 and where
<PAGE> 14
E equals the early retirement factor as determined in
accordance with Section 7(c).
(c) Early Retirement Reduction Factor. The early retirement factors
applicable to an early retirement benefit payable under this Section 7 shall be
100% less the sum of (i) twenty-five hundredths percent (0.25%) for each month
by which the later of (A) the initial payment date of the early retirement
benefit and (B) the first day of the month coincident with or next following the
Participant's sixtieth birthday precedes the Normal Retirement Date; plus (ii)
one-half percent (0.5%) for each month by which the initial payment date of the
early retirement benefit precedes the first day of the month coincident with or
next following the date that the Participant attains his sixtieth birthday.
8. Disability Retirement Benefit.
(a) Eligible Participants. If a Participant terminates Continuous
Employment by reason of a Disability and if he shall have completed five Years
of Continuous Employment as of the date his employment terminates, the
Participant shall be entitled to elect to receive a monthly Disability
retirement benefit under the Plan. A Participant who retires as a result of a
Disability may elect to begin receiving a Disability retirement benefit in the
form of a single-life annuity on the first day of any month coincident with the
month in which the Participant has satisfied all of the conditions to the
receipt of benefits under the PaineWebber Long-Term Disability Plan (or would
have satisfied all of such conditions if the Participant were covered by such
plan). A Disability retirement benefit shall be in lieu of any other benefit
payable under the Plan.
(b) Amount of Disability Retirement Benefit. The monthly amount of a
Participant's Disability retirement benefit payable under this Section 8 shall
be equal to one-twelfth of the amount determined in accordance with the formula
((P x C x F) - R) x E, where P, C and E are as defined in Section 6, where R is
as determined in Section 9, and where
F equals a fraction (not greater than one), the
numerator of which is the number of Years of Continuous
Employment (not greater than fifteen) that the Participant
would have had upon his attainment of Normal Retirement Date
had he continued in the employ of PaineWebber to such date,
and the denominator of which is fifteen.
(c) Recovery from Disability. Any Participant who (i) terminated his
Continuous Employment with PaineWebber by reason of Disability and (ii) recovers
from such Disability and returns to employment with PaineWebber or any other
employer before his Normal Retirement Date shall receive no further benefits
pursuant to this Section 8. A Participant who resumes employment with
PaineWebber after a Disability will become a Participant in the Plan with
respect to Continuous Employment following the date of such reemployment only if
designated a Participant in the manner contemplated by Section 3(c). A
Participant whose Disability retirement benefit ends by operation of this
Section 8(c) may be eligible to elect to receive a normal retirement benefit
under Section 6 or an early retirement benefit under Section 7; provided that
the Participant has satisfied all of the Plan's eligibility requirements
applicable to the receipt of such a benefit as of the last day of the month for
which a Disability benefit is paid under this Section 8. For purposes of the
previous sentence, a Participant's Continuous Employment shall include each
month for which the Participant received a Disability benefit under this Section
8 plus each month of Continuous Employment otherwise credited under the Plan
(other than by operation of this Section 8), but
<PAGE> 15
shall in no event include any period following the last day of the month for
which a Disability benefit was paid under this Section 8.
9. Other Retirement Income.
(a) From Pension Plan and Any Other Pension Plan. For purposes of
determining the retirement benefits paid under Section 6, Section 7, Section 8
and Section 10, "R" in the retirement income formula in each such section shall
include the aggregate annual amount of the Other Retirement Income a Participant
would be entitled to receive as a single-life annuity under the Pension Plan and
any Other Pension Plan, as follows:
1. Calculations for Early and Normal Retirement. For
purposes of determining the retirement benefits paid under
Section 6, Section 7 or Section 10, the Other Retirement
Income shall be calculated as if retirement income commences
on the date of Retirement and as if no distributions of Other
Retirement Income had been made from the Pension Plan or Other
Pension Plan prior to Retirement.
2. Calculations for Disability Retirement Prior to Attainment of
Normal Retirement Date. For purposes of determining the
retirement benefit paid under Section 8 prior to attainment of
Normal Retirement Date, the Other Retirement Income shall
equal the amount of the Disability retirement income a
Participant is entitled to receive as a single-life annuity
under the Pension Plan or any Other Pension Plan.
3. Calculations for Disability Retirement on and After Attainment
of Normal Retirement Date. For purposes of determining the
retirement benefit paid under Section 8 on and after the
attainment of Normal Retirement Date, the Other Retirement
Income shall be calculated as if the Participant had remained
in employment until the Normal Retirement Date, as if the
Other Retirement Income had commenced at the Normal Retirement
Date, and as if no distributions had been made prior to
Retirement from the Pension Plan or Other Pension Plan.
If any Other Pension Plan does not provide benefits in the form of a single-life
annuity, then the Actuary shall compute the single-life annuity which is the
Actuarial Equivalent of such Other Pension Plan's normal form of benefit. If
amounts determined under this Section 9(a) arise out of more than one plan, the
provisions of this Section 9(a) shall be applied separately with respect to each
such plan.
(b) From Social Security. For purposes of determining the retirement
benefit paid under Section 6, Section 7, Section 8 and Section 10, "R" in the
retirement income formula in each such section shall also include the annual
amount of the Other Retirement Income applicable to a Participant (excluding any
benefit payable on behalf of a spouse or other dependent) under the Social
Security Act as in effect on the date of the Participant's commencement of
payments under the Social Security Act. The Other Retirement Income determined
under this Section 9(b) shall be included in "R" in the applicable retirement
formula only after the commencement date indicated below and shall not be
redetermined subsequent to such commencement date.
1. Use of Participant's Actual Benefit from Social
Security. If a Participant has not delayed his retirement
under Social Security beyond the earlier
<PAGE> 16
of his Social Security normal retirement age or the
commencement of any Social Security disability benefit to such
Participant, the Other Retirement Income shall be the initial
amount actually paid to such Participant at the Participant's
actual Social Security commencement date, if such Participant
provides PaineWebber with a written statement documenting the
amount so paid and the commencement date.
2. Social Security Benefit Calculated by the Actuary. If a
Participant's Social Security benefit is not determined in
accordance with the paragraph 1, the Actuary shall estimate
the amount and specify the commencement date of the Other
Retirement Income on the basis of (A) such Participant's
actual earnings history or (B) if such Participant does not
provide such earnings history to PaineWebber, reasonable
actuarial assumptions as applied to such Participant's
earnings history with PaineWebber. The Actuary shall assume
that the Participant commences his Social Security benefit at
the later of (A) the earliest Social Security retirement date
or (B) the date of Retirement, but (C) in no case later than
the earlier of such Participant's Social Security normal
retirement age or the commencement of any Social Security
disability benefit to such Participant. The determination of
the Actuary with respect thereto shall be final and binding on
all interested persons absent manifest error.
10. Death Benefit to Surviving Spouse.
(a) Eligibility for Surviving Spouse Benefit. If (i) a Participant
dies after having earned a vested Plan Benefit under the Plan and prior to
Retirement and (ii) at the time of such Participant's death, the Participant is
survived by a Spouse, then such Participant's surviving Spouse shall be entitled
to a surviving Spouse's benefit in the amount determined in accordance with
Section 10(b).
(b) Amount of Surviving Spouse Benefit. The monthly amount of a
Spouse's Plan Benefit payable under this Section 10 shall be equal to fifty
percent of one-twelfth of the amount of the retirement benefit which would have
been payable to the Participant as if he had retired on the first day of the
month following the month in which his death occurred in accordance to the
formula ((P x C x F) - R) x E, where P, C and F are as defined in Section 6,
where E is as determined in Section 7(c), and where
R equals the amount determined in accordance with the provisions
of Section 9, with the amount and commencement thereof based
upon the deceased Participant's eligibility for such Other
Retirement Income.
The payment of the Spouse's benefit shall commence on the first day of the month
immediately following the later of (i) the death of the Participant and (ii) the
date on which such Participant would have attained age fifty-five, and
subsequent payments shall be made on the first day of each month thereafter,
with the last payment being made on the first day of the month coinciding with
or preceding the death of the Spouse. A surviving Spouse may not elect an
optional form of benefit under Section 11 or a variable annuity.
<PAGE> 17
11. Forms of Payment.
(a) Benefit Forms. Absent an election by a Participant in accordance
with Section 11(b), the Plan Benefit under Section 6, 7 or 8, as the case may
be, shall be paid monthly in the form of a single-life annuity, which shall be
an annuity for the life of such Participant commencing with the retirement date
selected by such Participant and ending on the first day of the month coincident
with or immediately preceding the date of such Participant's death. In lieu of a
single-life annuity, a Participant may elect at any time prior to the actual
commencement of his Plan Benefit to receive the Actuarial Equivalent of his Plan
Benefit paid in the form of any of the options set forth below:
1. Ten-Year Certain and Life Option. Under this option, a
reduced monthly benefit shall be payable during the
Participant's lifetime, but if the Participant dies before
having received 120 monthly payments, the remaining number of
payments shall be made to the Participant's Beneficiary. If
the Participant and the Beneficiary (including any alternate
Beneficiaries) all die before 120 payments have been made, the
Actuarial Equivalent of the remaining payments shall be paid
in a lump sum to the estate of the last to survive of the
Participant and the Beneficiaries.
2. Contingent Annuitant Option. Under this option, a reduced
monthly retirement benefit shall be payable during the
Participant's lifetime, and upon his death 100%, 75% or 50%,
as elected by the Participant, in writing, of the monthly
benefit that had been payable to the Participant during his
lifetime shall be paid to his designated Beneficiary, if such
person survives the Participant, for the lifetime of such
Beneficiary, with the last such payment being made on the
first day of the month coincident with or immediately
preceding the date of the Beneficiary's death.
When the Plan Benefit is reduced pursuant to Section 9 subsequent to its
original commencement date, then the elected option shall also be reduced at
such date by the same Actuarial Equivalent factor as was applied initially to
the calculation of the optional form of benefit. If a Participant with a
Disability elects an optional form of benefit, the payments following such
Participant's death shall not be adjusted to reflect a redetermination of the
amounts initially determined in Section 9 but shall only reflect the
application, if any, of the percentage elected under Section 2.
(b) Election Procedures. To be effective, all elections and
designations made by Participants shall be (i) in writing, (ii) in a form
satisfactory to the Plan Administrator and (iii) delivered to the Plan
Administrator at least thirty days before the payment of the Participant's Plan
Benefit is to commence. All elections and Beneficiary designations that are so
effective shall revoke all prior elections and designations. A Participant's
election of any optional form under this Section 11 may be made or cancelled and
a new election made on any date which is at least thirty days prior to the date
that the payment of the Plan Benefit is to commence. The election of a
contingent annuitant option shall automatically become void if the designated
Beneficiary dies prior to the Participant's Retirement.
12. Variable Annuity Procedures.
(a) Right to Elect. A Participant may elect to convert the
retirement benefit otherwise payable to such Participant under the single-life
annuity option or the contingent annuitant option to a variable annuity. A
Participant's election of a variable annuity must be made in accordance with the
election procedures specified in Section 11(b) and in accordance with such other
procedures as the Plan Administrator may reasonably require.
<PAGE> 18
(b) Operational Procedures for the Variable Annuity. If a
Participant elects a variable annuity, the Plan Administrator shall cause such
Participant's variable annuity to be administered in any calendar year either
(i) through the actual investment of the Designated Portion of the Trust Fund
("Option A") or (ii) through the establishment of a Notional Account and the
investment of the Notional Account in the manner directed by such Participant
("Option B"). The operational procedures applicable to Options A and B are as
follows:
Option A: If the Plan Administrator directs that the variable
annuity shall be administered in accordance with Option A for a
given calendar year, the Trustee, upon the instruction of the Plan
Administrator, shall establish the Designated Portion of the Trust
Fund and shall invest the assets constituting the Designated Portion
of the Trust Fund in accordance with the investment directions
received from the Participant who has elected the variable annuity
or from an Investment Manager retained by the Participant for this
purpose. The fair market value of the Designated Portion of the
Trust Fund on the Initial Payment Date (or first Adjustment Date to
which Option A applies) shall equal the Fixed Amount and shall
initially consist of cash or cash equivalent assets of the Trust
Fund. For as long as Option A is in effect, the monthly Plan Benefit
payable to the Participant or such Participant's Beneficiary shall
be paid only from the assets of the Designated Portion of the Trust
Fund. If the Plan Administrator elects to continue Option A for a
subsequent calendar year, then, on the Adjustment Date preceding the
start of that calendar year, the Plan Administrator shall direct the
Trustee to allocate sufficient cash or cash equivalent assets to the
Designated Portion of the Trust Fund so that the value of the
Designated Portion of the Trust Fund equals the Participant's Fixed
Amount as of such Adjustment Date.
Option B: If the Plan Administrator directs that the variable
annuity shall be administered in accordance with Option B for a
given calendar year, PaineWebber shall establish on its books a
Notional Account as of the Initial Payment Date or Adjustment Date
preceding the start of such calendar year. The value of the Notional
Account on the Initial Payment Date (or first Adjustment Date to
which Option B applies) shall equal the Fixed Amount. Prior to the
establishment of the Notional Account, the Participant or an
Investment Manager retained by the Participant for this purpose
shall inform the Plan Administrator in writing as to the manner in
which the amounts credited in the Notional Account are to be deemed
invested, and the Notional Account shall be notionally invested in
accordance with such written instructions. If no such written
instructions are received for some or all of the Notional Account,
the portion of the Notional Account for which no such instructions
are received will be deemed invested in the money market funds
available for investment of the assets of the Trust Fund. The
Participant or the Investment Manager may thereafter change the
manner in which the Notional Account is invested as of the last day
of each month (or more frequently if permitted by the Plan
Administrator). Any such change shall be communicated to the Plan
Administrator in writing prior to the date such change is to become
effective. For as long as Option B is in effect, the monthly Plan
Benefit payable to the Participant or the Participant's Beneficiary
shall be charged against the Notional Account as of the first day of
the month for which such amounts are paid. If the Plan Administrator
elects to continue Option B for a subsequent calendar year, then, on
the Adjustment Date preceding the start of that calendar year,
PaineWebber shall credit the Notional Account with a notional cash
amount that is sufficient to cause the amount
<PAGE> 19
credited to the Notional Account as of the applicable Adjustment
Date to equal the Participant's Fixed Amount as of that date.
The Trustee (in the case of Option A) or the Plan Administrator (in the case of
Option B) may refuse to follow the investment directions received by a
Participant or the Investment Manager retained by such Participant if the
Trustee or Plan Administrator reasonably determines that such investment
instructions would require the actual or deemed investment of assets (i) in
securities of PWG or any of its Subsidiaries or affiliates (other than a Mutual
Fund managed by an affiliate of PaineWebber), (ii) in securities or other
property for which there is no readily ascertainable fair market value or that
would require a private valuation or appraisal, or (iii) in securities or other
property that could cause a loss to or impair the assets of the Trust Fund not
allocated to the Designated Portion of the Trust Fund. If Option B applies,
PaineWebber may (but need not) direct the Trustee to invest some or all of the
assets of the Trust Fund in the manner in which the Notional Account is
invested.
(c) Variable Annuity Adjustments. For the period beginning on the
Initial Payment Date and ending on the Initial Adjustment Date, the monthly
retirement income amount paid to a Participant shall be determined without
regard to the election of the variable annuity. On the Initial Adjustment Date
and each Subsequent Adjustment Date thereafter, the monthly retirement income
amount payable to such Participant for the calendar year following the
Adjustment Date shall be determined in accordance with the formula (B/A x C),
where
A equals the Account Balance as of the immediately
preceding Adjustment Date (or, in the case of the Initial
Adjustment Date, as of the Initial Payment Date) compounded
monthly from such date to the Adjustment Date at the Reference
Rate and reduced for the benefit payments, each compounded
monthly from the date of its payment to the Adjustment Date at
the Reference Rate;
B equals the Account Balance on the Adjustment Date,
prior to adjustment in accordance with the last sentence of
the Option A or Option B paragraph above, as the case may be;
C equals the monthly retirement income amount paid to a
Participant or Beneficiary during the calendar year preceding
the applicable Adjustment Date.
The monthly retirement income amount for the calendar year following the
Adjustment Date shall be determined in the manner specified above, and no
further adjustments shall be made to such amount paid to the Participant until
the next Adjustment Date.
(d) Mortality Risk; Residual Assets. Any portion of the Designated
Portion of the Trust Fund remaining after the payment of all benefits to the
Participant and such Participant's Beneficiary shall continue to be held as part
of the Trust Fund and shall be used to pay Plan Benefits to other Participants
or shall revert to PaineWebber in accordance with the provisions of the Trust
Agreement. PaineWebber shall continue to be obligated to pay benefits to the
Participant and the Participant's Beneficiary if the Designated Portion of the
Trust Fund shall not be sufficient to fund the benefits to such Participant or
such Participant's Beneficiary solely as a result of the mortality assumptions
used to calculate the Fixed Amount.
<PAGE> 20
(e) Death of a Participant. Upon the death of a Participant, the
surviving Beneficiary, if any, shall receive monthly payments in accordance with
the distribution option elected by such Participant but shall not be entitled to
direct the investment of the Designated Portion of the Trust Fund or the
Notional Account. The monthly retirement amounts charged against the Designated
Portion of the Trust Fund or debited against the Notional Account shall
thereafter refer to the monthly amount payable to the Beneficiary. On the
Adjustment Date for the calendar year in which the date of such Participant's
death occurs, the monthly amount payable to the Beneficiary shall be adjusted in
the manner contemplated above; provided, however, that the Plan Administrator
may provide that such Adjustment Date may be the last day of any month following
the date of death of such Participant, if the Plan Administrator determines that
such interim Adjustment Date is in the best interests of the Plan, the
Beneficiary or PaineWebber or is necessary or advisable for the orderly
administration of the Plan. The Plan Administrator may exercise such discretion
without the approval of the Beneficiary. Following such adjustment, the monthly
benefit paid to the Beneficiary shall remain fixed and shall not thereafter be
adjusted.
(f) Special Definitions. The following definitions are solely for
the purposes of this Section 12.
"Account Balance" means the fair market value of the Designated
Portion of the Trust Fund or of the value of the Notional Account at any
specified date.
"Adjustment Date" means the Initial Adjustment Date and each
Subsequent Adjustment Date.
"Designated Portion of the Trust Fund" means a portion of the assets
of the Trust Fund allocated to a sub-account in the Trust for purposes of
funding a Participant's variable annuity in accordance with Option A.
"Fixed Amount" means the Actuarial Equivalent of the then remaining
Plan Benefit expressed as a lump sum as of the Initial Payment Date and as
of each Adjustment Date, using the Plan Benefit for the subsequent year as
determined as of the Adjustment Date in accordance with the formula in
Section 12(c).
"Initial Adjustment Date" means the last day of a calendar year in
which the Initial Payment Date occurs or, if the last day of such calendar
year occurs within less than three months following the Initial Payment
Date, the last day of the next succeeding calendar year.
"Initial Payment Date" means the first day of the month in which an
annuity subject to this Section 12 is paid.
"Mutual Fund" means an investment company registered under the
Investment Company Act of 1940, as amended.
"Notional Account" means the bookkeeping account established on the
books and records of PaineWebber to record and administer Option B.
"Reference Rate" means the annualized rate of return for the assets
of the Pension Plan from the immediately preceding Adjustment Date (or, in
the case of the Initial Adjustment Date, as of the Initial Payment Date)
to the applicable Adjustment Date.
<PAGE> 21
"Subsequent Adjustment Date" means the last date of each calendar
year beginning after the Initial Adjustment Date and ending with the
calendar year in which occurs the date of death of the Participant.
13. Change in Control. Anything in the Plan to the contrary
notwithstanding, the provisions of this Section 13 shall apply in the event of a
Change in Control to each Participant who is employed by PaineWebber immediately
prior to the Change in Control.
(a) Changes to the Vesting Schedule. As of the date of a Change in
Control, each Participant shall be fully vested in his Plan Benefit.
(b) Adjustment to the Service Fraction. As of the date of the Change
in Control, each Participant shall be credited for purposes of "F" in the
formula in Section 6(b) with Years of Continuous Employment equal to the sum of
X and Y (but in no event greater than fifteen), where X equals the Years of
Continuous Employment credited to the Participant under the Plan as of the date
of the Change in Control and Y equals the number of Years of Continuous
Employment such Participant would earn if his employment with PaineWebber
continued uninterrupted from the date of the Change in Control to such
Participant's Normal Retirement Date.
(c) Elimination of Early Retirement Factors. If a Participant has at
least five Years of Continuous Employment as of the date of the Change in
Control, the following shall apply: (i) the early retirement factors in Section
7(c) shall not be applied in calculating the monthly retirement benefits payable
to the Participant; and (ii) the Participant shall be eligible to commence
receiving his Plan Benefit under Section 7 regardless of his age as of the first
day of any month following the date his Continuous Employment terminates on or
after the date of the Change in Control.
(d) Effect on Section 5(d). On and after a Change in Control, the
provisions of Section 5(d) shall cease to apply.
(e) Lump-Sum Payment. If a Participant's employment with PaineWebber
is terminated other than for Cause during the two-year period following a Change
in Control, the Actuarial Equivalent of a Participant's Plan Benefit shall be
paid to the Participant in a cash lump-sum within five days following the date
of such termination of employment.
(f) Required Trust Contribution. On the date of a Change in Control,
PaineWebber shall contribute to the Trust a lump sum cash amount that shall be
sufficient to cause the fair market value of the assets of the Trust Fund on the
date of the Change in Control to equal 110% of the amount that would be the
Plan's projected benefit obligation ("PBO") calculated as of such date. For
purposes of the previous sentence, the PBO of the Plan shall be determined by
the Actuary in accordance with the directives of Statement of Financial
Accounting Standards No. 87, and after giving full effect to the provisions of
this Section 13, except that the interest rate assumption used by the Actuary
for purposes of calculating the PBO of the Plan shall be the lesser of (i) the
interest rate utilized for purposes of calculating the PBO in the financial
statements of PWG for the most recently completed fiscal year and (ii) 5%. The
determination of the Actuary shall, absent manifest error, be final and binding
on all interested persons. Thereafter, on each anniversary of the date of the
Change in Control, PaineWebber shall make an additional cash contribution to the
Trust Fund in an amount that shall be sufficient to cause
<PAGE> 22
the fair market value of the assets of the Trust Fund as of such anniversary
date to equal 110% of the PBO calculated as of such date, determined in
accordance with the provisions of this Section 13(f).
(g) Investment of Trust Fund Assets. On and after a Change in
Control, the assets of the Trust Fund shall be invested at the direction of the
Trustee, except that any portion of the Trust Fund allocated to a sub-account in
accordance with Section 12 in connection with a Participant's election of a
variable annuity shall continue to be invested in accordance with the investment
directions received from the Participant or from an Investment Manager retained
by the Participant for this purpose. Following a Change in Control, the Plan
Administrator may not elect to have Option B apply with respect to any
Participant who has elected or who subsequently elects a variable annuity, and
Option A shall commence to apply as of the date of the Change in Control in
respect of any Participant who has elected a variable annuity and for which
Option B applies as of the date of the Change in Control.
14. Trust Fund.
(a) Contributions. Subject to Section 13(f), PaineWebber may from
time to time contribute such cash or other property to the Trust for the purpose
of providing assets to satisfy its obligations under the Plan. To the extent
that the assets of the Trust Fund are not sufficient to satisfy all of
PaineWebber's obligations under the Plan, such obligations shall be satisfied in
full from the general assets of PaineWebber.
(b) Assets of the Trust Fund. The assets of the Trust Fund shall be
held by the Trustee and shall be invested in accordance with the investment
policy communicated to the Trustee by the Compensation Committee or in
accordance with the directions of an Investment Manager appointed by the
Compensation Committee to direct the Trustee with respect to the investment of
some or all of the assets of the Trust Fund. If a portion of the Trust Fund is
allocated to a sub-account in accordance with Section 12 in connection with a
Participant's election of a variable annuity, the assets credited to that
sub-account shall be invested in accordance with the investment directions
received from the Participant or from an Investment Manager retained by the
Participant for this purpose.
15. Actuarial Equivalent. For purposes of the Plan, "Actuarial
Equivalent" forms of benefit shall be determined as follows:
(i) For purposes of calculating optional forms of
benefits (including option payment forms of Other Retirement
Income and the lump-sum payment contemplated by Section 13(e)
above): in accordance with the factors, assumptions and
methodologies applicable to such calculations under the
Pension Plan; and
(ii) For the purpose of calculating the Fixed Amount
under Section 12: in accordance with the interest rate and
other assumptions relevant to a retired participant that are
used for the funding standard account of the Pension Plan in
the plan year of the Pension Plan ending nearest to the
Adjustment Date.
16. Amendment and Termination. The Board or the Compensation
Committee may, at any time and from time to time, amend, modify or terminate the
Plan, in whole or in part, in any manner, whether prospectively or
retroactively; provided, however, that no amendment may reduce the accrued
benefits of any Participant without the Participant's written consent.
<PAGE> 23
17. Claims Procedure.
(a) Initial Claim. All claims for benefits under the Plan shall be
submitted in writing to the Plan Administrator on the form prescribed for that
purpose by the Plan Administrator. Written notice of the Plan Administrator's
decision regarding the application for benefits shall be furnished to the
claimant within ninety days after receipt of the claim; provided, however, that,
if special circumstances require an extension of time for processing the claim,
an additional ninety days from the end of the initial period shall be allowed
for processing the claim, in which event the claimant shall be furnished with a
written notice of the extension prior to the termination of the initial
ninety-day period indicating the special circumstances requiring an extension.
Any written notice denying a claim shall set forth the reasons for the denial,
including specific reference to pertinent provisions of the Plan on which the
denial is based, a description of any additional information necessary to
perfect the claim and information regarding review of the claim and its denial.
(b) Appeal to the Compensation Committee. A claimant may review all
pertinent documents and may request a review by the Compensation Committee of a
decision denying the claim. Such a request shall be made in writing and filed
with the Compensation Committee within sixty days after delivery to the claimant
of written notice of the decision of the Plan Administrator. Such written
request for review shall contain all additional information that the claimant
wishes the Compensation Committee to consider. The Plan Compensation Committee
may hold a hearing or conduct an independent investigation, and the decision on
review shall be made as soon as possible after the Compensation Committee's
receipt of the request for review. Written notice of the decision on review
shall be furnished to the claimant within sixty days after receipt by the
Compensation Committee of a request for review, unless special circumstances
require an extension of time for processing, in which event an additional sixty
days shall be allowed for review, and the claimant shall be so notified in
writing. Written notice of the decision on review shall include specific reasons
for the decision.
(c) Finality. For all purposes under the Plan, such decision by the
Plan Administrator on claims (where no review is requested) and decision by the
Compensation Committee on review (where review is requested) shall be final,
conclusive and binding on all interested persons as to participation and
benefits eligibility, the amount of benefits and any other matter of fact or
interpretation relating to the Plan.
18. Miscellaneous.
(a) No Right to Continued Employment. To the extent of any
retirement benefits or other rights accrued hereunder, the Plan shall be deemed
to constitute a contract between PWG and the Participant, and the Plan (to the
extent of such accrued or other benefits) shall be part of the consideration or
inducement for the employment of such Participant by PaineWebber.
Notwithstanding the foregoing, nothing contained in the Plan shall be deemed (i)
to give any person the right to be retained in the employ of PaineWebber or (ii)
to interfere with the right of PaineWebber to discharge any person at any time
without regard to the effect which such discharge shall have upon his rights or
potential rights, if any, under the Plan. The provisions of the Plan are in
addition to, and not a limitation on, any rights which any Participant may have
against PaineWebber by reason of any employment or other agreement with
PaineWebber.
(b) Spendthrift Provision. To fully protect the benefits hereunder
against claims of all kinds, direct or otherwise, none of the retirement
benefits provided hereunder to any person shall be
<PAGE> 24
assignable or transferable voluntarily, nor shall they be subject to the claims
of any creditor whatsoever, nor subject to attachment, garnishment or other
legal process by any creditor or to the jurisdiction of any bankruptcy court or
insolvency proceedings by operation of law or otherwise, and no person shall
have any right to alienate, anticipate, pledge, commute, or encumber any of such
benefits voluntarily or involuntarily; provided, however, that, as long as no
Change in Control has occurred, such payments may be subject to set off or
counterclaim by, or on behalf of, PaineWebber.
(c) Payment of Expenses. All expenses incurred in connection with
the operation and administration of the Plan or the investment of any assets of
the Trust Fund, including, but not limited to, the compensation of any Trustee,
Investment Advisor, any Actuary, accountant, counsel, other experts or persons
who shall be employed by the Compensation Committee or the Plan Administrator in
connection with the operation or administration of the Plan, shall be paid by
PaineWebber, unless paid from the Trust Fund in accordance with the provisions
of the Trust Agreement.
(d) Payment of Taxes. If any amounts held in the Trust Fund are
found in a "determination," within the meaning of Section 1313(a) of the Code,
to have been includible in the gross income of a Participant or the
Participant's Beneficiary prior to the date such amounts are otherwise payable
to the Participant or the Participant's Beneficiary under the Plan, then PWG
will, as soon as practicable, (i) pay such amounts to the applicable Participant
or Beneficiary or (ii) notify the Trustee to pay such amounts to the Participant
or the Participant's Beneficiary for the assets of the Trust. The provisions of
this Section 18(d) shall not apply to any FICA and HI Taxes owed by the
Participant or the Participant's Beneficiary. Promptly after receipt by the
Participant or the Participant's Beneficiary of written notice of the assertion
of any claim, or the commencement of any suit, action, proceeding, investigation
or audit in respect of which the Participant or the Participant's Beneficiary
could receive a distribution under this Section 18(d), the Participant or the
Participant's Beneficiary shall give written notice to PWG of the assertion or
commencement thereof. PWG shall have the right (at its own expense) to
participate in, assume the defense of and control any such suit, action,
proceeding, investigation or audit. If PWG assumes the defense of such an
action, (a) no compromise or settlement thereof may be effected by PWG without
the Participant's or the Beneficiary's consent (which shall not be unreasonably
withheld) and (b) no compromise or settlement thereof may be effected by the
Participant or the Participant's Beneficiary without the consent of PWG (which
shall not be unreasonably withheld). If PWG elects to assume the defense of such
action, the Participant or the Participant's Beneficiary may employ his own
counsel, at his own expense, to participate in a secondary role in such defense.
If written notice is given to the Participant or Participant's Beneficiary of
the assertion of any claim, or the commencement of any suit, action, proceeding,
investigation or audit, and PWG does not, within ten days after the
Participant's or Beneficiary's written notice to PWG together with reasonably
complete details of the claim, suit, action, proceeding, investigation or audit,
give written notice to the Participant or Participant's Beneficiary of its
election to assume the defense thereof, PWG shall be bound by any determination
made in such claim, suit, action, proceeding, investigation or audit or any
compromise or settlement thereof effected by the Participant or Participant's
Beneficiary.
(e) Unfunded. It is intended that the Plan shall be unfunded for
purposes of the Code and ERISA.
(f) Unsecured Promise to Pay. The Plan shall constitute an unsecured
promise by PaineWebber to make benefit payments in the future pursuant to the
terms hereof, and each Participant's interest in the Plan shall be solely that
of an unsecured general creditor of PWG.
<PAGE> 25
(g) Successors. PWG shall require any successor to all or
substantially all of the business or assets of PaineWebber expressly to assume
the Plan and all of PaineWebber's obligations under the Plan.
(h) Tax Withholding. There shall be deducted and withheld from all
benefit payments (and remitted to the appropriate taxing authority) any taxes
required, in the reasonable judgment of the Plan Administrator, to be deducted
and withheld for payment to any federal, state, local or other taxing authority.
(i) Headings and Captions. The titles to the sections in the Plan
are for convenience of reference only, and, in case of any conflict, the text of
this instrument, rather than such titles or headings, shall control.
(j) Governing Law. This Plan, the Trust Agreement and all provisions
thereof shall be construed and administered according to the laws of the State
of New York without regard to the choice of law principles thereof.
PAINE WEBBER GROUP INC.
By:
-------------------
Name:
Title:
<PAGE> 1
Exhibit 10.35
TRUST I, FORM I
Trust Agreement
This Trust Agreement, dated as of this FIRST day of February, 1999
(the "Effective Date"), by and between PAINE WEBBER GROUP INC., a Delaware
corporation (hereinafter referred to as "PWG"), and THE CHASE MANHATTAN BANK
(hereinafter referred to as the "Trustee").
W I T N E S S E T H:
WHEREAS, PWG has previously established two separate grantor trusts
(respectively, "DCP Trust I" and "DCP Trust II") to fund the obligations of PWG
to [NAME] (the "Executive") under the Paine Webber Group Inc. Senior Officer's
Deferred Compensation Plan, as amended (the "DCP"), and has separately
established a grantor trust (the "SERP Trust") to fund its obligations to the
Executive under the Paine Webber Group Inc. Supplemental Employee's Retirement
Plan, as amended (the "SERP");
WHEREAS, as of the Effective Date, the Deferred Compensation
Agreement, a form of which will be delivered to the Trustee reasonably promptly
following the Effective Date (the "Deferred Compensation Agreement"), will
replace for the Executive the DCP and the SERP;
WHEREAS, PWG now desires to amend and restate DCP Trust I ("Trust
I") to hold the assets previously contributed to the DCP Trust I and the SERP
Trust for the benefit of the Executive and also to hold the periodic
contributions of cash and other assets to Trust I to fund a portion of its
obligations to the Executive under the Deferred Compensation Agreement;
WHEREAS, in order to comply with applicable accounting standards,
PWG established DCP Trust II to hold shares of common stock, par value $1.00 per
share (the "Common Stock"), resulting from the exercise by the Executive of
options granted prior to July 24, 1997 (a "Grandfathered Option") and any cash
or other assets resulting from the subsequent sale of such shares of Common
Stock;
WHEREAS, effective as of the Effective Date, PWG has amended and
restated the terms of DCP Trust II ("Trust II") to hold the assets of DCP Trust
II together with any shares of Common Stock subsequently contributed to Trust II
in connection with the exercise of a Grandfathered Option and the deferral of
the profit shares issued as a result of such exercise, as well as any amounts
received upon the subsequent sale of such shares;
WHEREAS, the combined assets of Trust I and Trust II shall be used
to satisfy PWG's obligations to the Executive and the Executive's Beneficiary
under the Deferred Compensation Agreement (the "DCA Obligation");
<PAGE> 2
WHEREAS, the Deferred Compensation Agreement requires the
establishment by PWG of a deferred compensation account (the "Account") on its
books and records to record the DCA Obligation;
WHEREAS, PWG desires that the investment return on the assets of
Trust I and Trust II shall be utilized for purposes of calculating the
investment return credited on amounts allocated to the Account; and
WHEREAS, the assets of Trust I shall be held in Trust I subject to
the claims of the creditors of PWG and its Material Subsidiaries in the event of
the Insolvency (as hereinafter defined) of PWG or any such Material Subsidiary
until paid to the Executive or the Executive's Beneficiary in accordance with
the terms of the Deferred Compensation Agreement;
NOW, THEREFORE, the parties do hereby establish Trust I and agree
that Trust I shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) As of the Effective Date, PWG hereby deposits with the Trustee
IN TRUST all of the assets of the DCP Trust I and the portion of the assets of
the SERP Trust allocable to the Executive's interest therein which, together,
shall become the principal of Trust I to be held, administered and disposed by
the Trustee as provided in this Trust Agreement. At the time that PWG is
required to credit any additional amounts to the Account in accordance with the
Deferred Compensation Agreement, PWG shall deposit with the Trustee IN TRUST on
the date that such amounts are credited to the Account an additional amount of
cash and other property with a Fair Market Value equal to the value of the
amount so credited; provided, however, that shares of Common Stock used by
PaineWebber to fund a DCA Obligation arising out of the exercise of a
Grandfathered Option and the deferral of the profit shares associated therewith
shall be contributed to Trust II and not this Trust I. The Trustee hereby
accepts Trust I established under this Trust Agreement on the terms and subject
to the provisions set forth herein, and it agrees to discharge and perform fully
and faithfully all of the duties and obligations imposed upon it under this
Trust Agreement. Trust I shall be known as the "[NAME] Deferred Compensation
Agreement Trust I."
(b) The assets of Trust I may consist of shares of Common Stock. If
any shares of Common Stock are contributed to Trust I, PWG shall, by virtue of
such contribution, represent that the shares of Common Stock are validly issued,
nonassessable and transferable, subject to the requirements of applicable
federal and state securities laws. PWG represents that the shares of Common
Stock have been registered on an appropriate form filed with the Securities and
Exchange Commission. PWG shall advise the Trustee of any limitations on sale of
the shares of Common Stock. PWG shall also use its reasonable efforts to
register or qualify such shares of Common Stock covered by such a registration
statement under the "blue sky" or securities laws of jurisdictions within the
United States.
<PAGE> 3
(c) Trust I established hereby is irrevocable by PWG.
(d) Trust I is intended to be a grantor trust, of which PWG is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Code, and shall be construed accordingly.
(e) The principal of Trust I, and any earnings thereon, shall be
held separate and apart from other funds of PWG, shall be held IN TRUST by the
Trustee and shall be used exclusively for the purpose of satisfying the DCA
Obligation and the obligations of PWG and its Material Subsidiaries
(collectively, the "Companies") to their general creditors as hereinafter set
forth. The Executive and the Executive's Beneficiary shall have no preferred
claim on, or any beneficial ownership interest in, any assets of Trust I. Any
rights created under the Deferred Compensation Agreement and this Trust
Agreement shall be mere unsecured contractual rights of the Executive and the
Executive's Beneficiary against PWG. Any assets held by Trust I will be subject
to the claims of PWG's general creditors under U.S. federal and state law in the
event of Insolvency.
(f) Within ten days following the end of each month while Trust I is
in effect (and as of each Valuation Date if required by the terms of the
Deferred Compensation Agreement), the Trustee shall determine the Fair Market
Value of the assets of Trust I and communicate the results of such valuation to
PWG.
(g) Reasonably promptly following the Effective Date, PWG shall
deliver to the Trustee a copy of the Deferred Compensation Agreement. Following
the occurrence of a Change in Control, the Deferred Compensation Agreement and
any amendments thereto that have been delivered to the Trustee in accordance
with this Section 1(g) shall constitute a part of this Trust Agreement. If the
Deferred Compensation Agreement is amended, PWG shall promptly deliver a copy of
the Deferred Compensation Agreement to the Trustee within ten days of the date
of the amendment. On and after the date the Trustee is notified by PWG, the
Executive or the Executive's Beneficiary of a Change in Control or otherwise has
actual knowledge of the occurrence of a Change in Control (the "Change in
Control Notice Date"), the Trustee shall have an obligation to determine whether
actions undertaken by the Trustee hereunder are consistent with, and do not
violate any of, the terms of the Deferred Compensation Agreement (including,
without limitation, any amendments to the Deferred Compensation Agreement that
have been delivered to the Trustee in accordance with this Section 1(g)), and,
in the event of any conflict between any instruction or direction to the Trustee
from PWG and the Deferred Compensation Agreement, the Trustee shall be
authorized to rely on the terms of the Deferred Compensation Agreement as
reasonably construed by the Trustee. No amendment to the Deferred Compensation
Agreement shall affect in any material respect the duties and obligations of the
Trustee hereunder without the Trustee's prior written consent.
(h) Capitalized words which are not otherwise defined in this Trust
Agreement have the meanings assigned thereto in the Deferred Compensation
Agreement.
Section 2. Payments to Executive or The Executive's Beneficiary.
<PAGE> 4
(a) PWG shall deliver to the Trustee a payment schedule (the
"Payment Schedule") that indicates the amounts payable to the Executive and the
times at which such amounts are payable. The Committee or any individual to whom
the Committee delegates its responsibility under the Deferred Compensation
Agreement (together with the Committee, the "Administrator") shall determine
whether an event set forth on the Payment Schedule has occurred and shall advise
the Trustee of such event. The Payment Schedule shall be consistent with the
terms of Section 7 of the Deferred Compensation Agreement and shall be delivered
to the Trustee as soon as practicable after the Executive's termination of
employment with PWG or after any other event entitling the Executive or the
Executive's Beneficiary to a payment of amounts credited to the Account. On and
after the Change in Control Notice Date, in the event of any conflict between
the Payment Schedule and the Deferred Compensation Agreement, the Trustee shall
be authorized to rely on the Deferred Compensation Agreement. Except as
otherwise provided herein, the Trustee shall make payments to the Executive and
the Executive's Beneficiary in accordance with such Payment Schedule and Section
2(b) below. The Trustee shall make provisions for the reporting and withholding
of any taxes that may be required to be withheld with respect to the payment of
benefits pursuant to the terms of the Deferred Compensation Agreement and shall
(i) pay amounts withheld to the appropriate taxing authorities or (ii) remit
such withheld amounts to PWG for payment to the applicable taxing authorities
upon written agreement from PWG that PWG shall be responsible for the applicable
tax reporting and payments.
(b) Subject to the provisions of Sections 2(c), 2(d) and 2(e), on
and after the Change in Control Notice Date, the Trustee shall pay the amounts
due to the Executive and the Executive's Beneficiary in respect of PWG's DCA
Obligation upon receipt of either (i) a Payment Schedule from PWG authorizing
such payment or (ii) an affidavit from the Executive, in substantially the form
of Exhibit A hereto (an "Affidavit"), attesting to the amount of such payment
and setting forth the circumstances giving rise to the obligation to make such
payment under the Deferred Compensation Agreement. The Trustee shall be
authorized to rely on the Payment Schedule, written instructions from PWG or any
such Affidavit, and in the event of a conflict between the written instructions
from PWG and the Affidavit, the provisions of the Affidavit shall be
controlling. Notwithstanding the foregoing, unless the Payment Schedule provides
otherwise, the Trustee shall satisfy payment obligations first from the assets
of Trust I. To the extent the assets of Trust I do not satisfy the payment
obligation, the assets of Trust II shall be used to satisfy such obligation. The
Trustee shall coordinate all payments with the trustee of Trust II to ensure
that no duplicate payments are paid to the Executive or the Executive's
Beneficiary.
(c) To the extent that (i) the Trustee is notified in writing by PWG
that PWG's DCA Obligation has been paid in full and (ii) following the Change in
Control Notice Date, the notice from PWG is confirmed in writing by the
Executive or the Executive's Beneficiary (which confirmation may be waived by
the Trustee if the Trustee determines in good faith after reasonable inquiry
that such confirmation is being unreasonably withheld by the Executive or the
Executive's Beneficiary), then the Trustee shall promptly pay to PWG the then
remaining assets of Trust I.
<PAGE> 5
(d) PWG may make payment of benefits directly to the Executive or
the Executive's Beneficiary as they become due under the terms of Section 7 of
the Deferred Compensation Agreement. In the event any amount referred to in a
Payment Schedule is paid by PWG to the Executive, PWG shall notify the Trustee
in writing of such event. Such notice shall include a Payment Schedule revised
in accordance with such notice and, following the Change in Control Notice Date,
such revised Payment Schedule shall be confirmed in writing by the Executive or
the Executive's Beneficiary (which confirmation may be waived by the Trustee if
the Trustee determines in good faith after reasonable inquiry that such
confirmation is being unreasonably withheld by the Executive or the Executive's
Beneficiary). Upon receipt of such notice, the Trustee shall amend the Payment
Schedule to reduce the amount payable thereunder as set forth in such notice
and, if applicable, confirmed by the Executive or the Executive's Beneficiary,
and shall distribute to PWG an amount of assets from Trust I equal to the fair
market value of the amount so paid by PWG; provided, however, that no such
payment shall be made to PWG if such payment would cause the assets of Trust I
to be less than the Account Balance as of the date such payment would otherwise
be due hereunder.
(e) Trust I and Trust II are established as a means of facilitating
the payment of PWG's DCA Obligation. If the principal of Trust I and Trust II
and any earnings thereon are not sufficient to make payments of benefits in
accordance with the terms of the Deferred Compensation Agreement and the Payment
Schedule, PWG shall make the balance of each such payment as it falls due. The
Trustee shall, upon reasonable request, provide the trustee of Trust II with
information concerning the assets of Trust I. The Trustee shall notify PWG where
the principal and earnings of Trust I and Trust II are not sufficient to satisfy
the DCA Obligation. Nothing in this Trust Agreement or in the Payment Schedule
shall be construed in any way as relieving PWG of the DCA Obligation if the DCA
Obligation is not satisfied from the assets of Trust I and Trust II.
(f) Whenever it is contemplated that PaineWebber shall make a
payment or contribution under this Trust Agreement, such payment or contribution
shall be made by PWG or any Subsidiary thereof designated by PWG, but no such
designation by PWG shall in any way relieve PWG of its obligation to make such
payment.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary when Company is Insolvent.
(a) The Trustee shall cease payment of benefits to the Executive and
the Executive's Beneficiary if PWG or any Material Subsidiary is Insolvent. PWG
or any Material Subsidiary shall be considered "Insolvent" for purposes of this
Trust Agreement if (i) PWG or any Material Subsidiary is unable to pay its debts
as they become due or (ii) PWG or any Material Subsidiary is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code or the
comparable provisions of any other applicable jurisdiction to which PWG is then
subject.
<PAGE> 6
(b) At all times during the continuance of this Trust I, as provided
in Section 1(e) hereof, the principal and income of Trust I shall be subject to
claims of general creditors of PWG and its Material Subsidiaries under U.S.
federal and state law as set forth below and the laws of any other applicable
jurisdiction to which PWG is then subject.
(1) The Chief Financial Officer of PWG shall have the duty to inform
the Trustee in writing of PWG's or any Material Subsidiary's Insolvency.
If a person claiming to be a creditor of PWG or any Material Subsidiary
alleges in writing to the Trustee that PWG or any Material Subsidiary has
become Insolvent, the Trustee shall promptly determine whether PWG or any
Material Subsidiary is Insolvent and, pending such determination, the
Trustee shall discontinue payment of benefits to the Executive or the
Executive's Beneficiary.
(2) Unless the Trustee has actual knowledge of PWG's or any Material
Subsidiary's Insolvency, or has received notice from PWG or any Material
Subsidiary or a person claiming to be a creditor alleging that PWG or any
Material Subsidiary is Insolvent, the Trustee shall have no duty to
inquire whether PWG or any Material Subsidiary is Insolvent. The Trustee
may in all events rely on such evidence concerning PWG's or any Material
Subsidiary's solvency as may be furnished to the Trustee and that provides
the Trustee with a reasonable basis for making a determination concerning
PWG's or any Material Subsidiary's solvency.
(3) If at any time the Trustee has determined that PWG or any
Material Subsidiary is Insolvent, the Trustee shall discontinue payments
to the Executive or the Executive's Beneficiary and shall hold the assets
of Trust I for the benefit of PWG's or any Material Subsidiary's general
creditors. Nothing in this Trust Agreement shall in any way diminish any
rights of the Executive or the Executive's Beneficiary to pursue their
rights as general creditors of PWG or any Material Subsidiary with respect
to benefits due under the Deferred Compensation Agreement or otherwise.
(4) The Trustee shall resume the payment of benefits to the
Executive or the Executive's Beneficiary in accordance with Section 2 of
this Trust Agreement only after the Trustee has determined that PWG or any
Material Subsidiary is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from Trust I pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to the
Executive or the Executive's Beneficiary under the terms of Section 7 of the
Deferred Compensation Agreement for the period of such discontinuance, less the
aggregate amount of any payments made to the Executive or the Executive's
Beneficiary by PWG under the terms of the Deferred Compensation Agreement in
lieu of the payments provided for hereunder during any such period of
discontinuance.
<PAGE> 7
(d) As used herein, "Material Subsidiary" shall mean any significant
subsidiary of PWG as determined in accordance with Regulation S-X under the
Securities Exchange Act of 1934. PWG shall from time to time provide the Trustee
with a list of Material Subsidiaries.
Section 4. Payments to PWG. Except as provided in Sections 2 and 3
above, PWG shall have no right or power to direct the Trustee to return to PWG
or to divert any of the assets of Trust I to any purpose other than the payment
of the DCA Obligation before all payment of benefits has been made to the
Executive and the Executive's Beneficiary pursuant to the terms of the Deferred
Compensation Agreement. Following a determination by the Trustee in accordance
with Sections 2(c) and 2(d) that PWG's DCA Obligation has been paid in full, the
Trustee shall pay to PWG any remaining assets of Trust I, net of any unpaid
Trustee's fees and expenses and a reserve for accrued but unpaid expenses of
Trust I.
Section 5. Investment Authority.
(a) The Trustee shall, upon written instructions received from an
investment manager appointed by PWG, hold, dispose, invest and reinvest the
assets of Trust I, without distinction between principal and income, in
Securities; provided, however, that with respect to the purchase or sale of
Mutual Funds, the Trustee shall be authorized to purchase or sell such Mutual
Funds at the direction of either the Director of Human Resources of PaineWebber
Incorporated or his designee. Notwithstanding the foregoing, in no event may
assets of Trust I be invested in PWG Securities except to the extent Common
Stock has been deposited in Trust I pursuant to Section 1(a). Common Stock held
in Trust I shall not be sold or otherwise disposed of by the Trustee except as
otherwise provided in this Section 5(a) and in Section 5(d) and, in connection
with any payment to the Executive or the Executive's Beneficiary, shall be
distributed to the Executive or the Executive's Beneficiary in kind in the
manner contemplated by the applicable Payment Schedule, except to the extent
that such Common Stock is withheld for tax purposes in the manner contemplated
by Section 2(a) hereof. Upon the prior approval of the Committee, PWG shall have
the right at any time, and from time to time, in its sole discretion, to
substitute assets of equal market value for any Common Stock held by Trust I.
The right of PWG to substitute assets held in Trust I is exercisable by PWG in a
nonfiduciary capacity.
(b) Subject to Section 5(a), all rights associated with assets of
Trust I shall be exercised by the Trustee or the person designated by the
Trustee, and shall in no event be exercisable by or rest with the Executive or
the Executive's Beneficiary.
(c) On and after the Change in Control Notice Date, the Trustee
shall invest the assets of Trust I solely at the direction of one or more
independent investment managers who are unaffiliated with PWG and who are
appointed by PaineWebber and approved in advance by the Executive in writing.
The fees and expenses of such investment managers shall be paid by PWG and not
from the assets of Trust I.
(d) The Trustee shall have the absolute discretion to vote or
abstain from
<PAGE> 8
voting the Common Stock with respect to any matters brought before shareholders.
The Committee shall direct the Trustee with respect to the tendering of the
Common Stock held in Trust I.
(e) When the Trustee delivers Securities against payment, delivery
of the property and receipt of payment may not be simultaneous. Trust I shall
bear the risk of nonreceipt of payment, and the Trustee shall have no liability
therefor, unless such nonreceipt of payment is a result of the Trustee's (or its
officers', directors', employees', nominees' or agents') gross negligence or
willful misconduct. All credits to Trust I of the anticipated proceeds of sales
and redemptions of Securities shall be conditional upon receipt by the Trustee
of final payment and may be reversed to the extent final payment is not
received. At the discretion of the Trustee, Trust I may make use of such
conditional credits. To the extent such credits do not become unconditional by
receipt of final payment, Trust I shall reimburse the Trustee upon demand for
the amount of such conditional credits so used. When the Trustee is to receive
Securities, it is authorized to accept documents in lieu of such Securities as
long as such documents contain the agreement of the issuer thereof to hold such
Securities subject to the Trustee's sole order. The Trustee may, in its
discretion, advance funds to Trust I to facilitate the settlement of any trade.
In the event of such an advance, Trust I shall immediately reimburse the Trustee
for the amount thereof, together with interest at the rate then charged by the
Trustee to similar accounts for similar advances.
(f) When disposing of assets held in Trust I, nothing shall prevent
the Trustee, upon the direction of the Administrator, from selling such assets
to the Executive or the Executive's Beneficiary for the amount set forth in the
Trust I accounting.
Section 6. Disposition of Income. During the term of Trust I, all
income received by Trust I, net of expenses, shall be accumulated and reinvested
in accordance with the provisions of Section 5.
Section 7. Accounting by Trustee.
(a) (i) The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in writing between
PWG and the Trustee. Within ninety days following the close of each calendar
year and within ninety days after the removal or resignation of the Trustee, the
Trustee shall deliver to PWG (and, following the Change in Control Notice Date,
to the Executive or, in the event of the Executive's death, the Executive's
Beneficiary) a written account of its administration of Trust I during such year
or during the period from the close of the last preceding year to the date of
such removal or resignation, setting forth all investments, receipts,
disbursements and other transactions effected by it, including a description of
all Securities purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being separate), and
showing all cash, Securities and other property held in Trust I at the end of
such year or as of the date of such removal or resignation, as the case may be.
With respect to any Securities which do not have a readily ascertainable market
<PAGE> 9
value, PWG shall provide the Trustee with periodic valuations of such
Securities. The valuation method of each valuation report shall be done in a
manner consistent with valuations used by PWG on its inventory of Securities.
The Trustee may conclusively rely upon such valuations of PWG for all purposes
hereunder without inquiry. Following the Change in Control Notice Date, the
appropriate investment manager referred to in Section 5(c) shall be substituted
for PWG for purposes of the three preceding sentences.
(ii) Unless PWG, the Executive or the Executive's Beneficiary shall
have notified the Trustee of exceptions, objections, outstanding claims against
the Trustee or disputed items within 180 days following receipt of an annual
statement of account or final statement of account delivered in accordance with
Section 7(a)(i) above, PWG and the Executive and the Executive's Beneficiary, if
applicable, shall be deemed to have approved such statement of account and the
Trustee shall be relieved and discharged from all matters covered therein. This
Section 7(a)(ii) shall not apply to any matter which the Trustee willfully or
through gross negligence misstates, conceals or omits in the preparation of such
statement of account or to any acts of fraud by the Trustee.
(b) Nothing contained in this Trust Agreement or in the Deferred
Compensation Agreement shall deprive the Trustee of the right to have a judicial
settlement of its accounts. In any proceeding for a judicial settlement of the
Trustee's account or for instructions in connection with Trust I, the only other
necessary parties thereto in addition to the Trustee shall be PWG and the
Executive or the Executive's Beneficiary. No person interested in the Trust,
other than PWG and the Executive or the Executive's Beneficiary, shall have a
right to compel an accounting, judicial or otherwise.
Section 8. Responsibility of Trustee.
(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matters would use in the conduct of an
enterprise of like character and with like aim; provided, however, that the
Trustee shall incur no liability to any person for any action taken (i) pursuant
to an Affidavit delivered to the Trustee by the Executive in accordance with
Section 2(b) above or (ii) pursuant to any written direction, request or
approval given by PWG, the Administrator or an investment manager that is in
conformity with the terms of the Deferred Compensation Agreement and this Trust
Agreement.
(b) Subject to Section 9, if the Trustee undertakes or defends any
litigation arising in connection with Trust I, PWG shall indemnify fully the
Trustee against the Trustee's costs, expenses and liabilities (including,
without limitation, attorneys' fees and expenses) relating thereto and shall be
primarily liable for such costs, expenses and liabilities.
(c) The Trustee may consult with legal counsel (who may also be
counsel for PWG generally) with respect to any of its duties or obligations
hereunder. The Trustee may retain and consult with counsel, who may be counsel
for PWG or for the Trustee in its individual capacity, and shall not be deemed
imprudent by reason of its taking or refraining from taking
<PAGE> 10
action in reasonable reliance upon the opinion of such counsel. The Trustee
shall not be required to give any bond or any other security for the faithful
performance of its duties under this Trust Agreement, except as required by law.
The Trustee may also retain one or more consultants to assist it in the
performance of its duties under the last sentence of Section 1(g) of this Trust
Agreement. The Trustee shall not be liable for any acts or omissions of any such
consultant, provided that the Trustee selects and supervises that consultant in
accordance with the standard of care set forth in Section 8(a) of this Trust
Agreement.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisers, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred
on Trustees by applicable law, unless expressly provided otherwise herein;
provided, however, that, if an insurance policy is held as an asset of Trust I,
the Trustee shall have no power to name a beneficiary of the policy other than
Trust I, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a Successor Trustee (as defined below) or to loan
to any person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee pursuant to
this Trust Agreement or applicable law, the Trustee shall not have any power
that could give Trust I the objective of carrying on a business and dividing the
gains therefrom, within the meaning of Section 301.7701-2 of the Procedures and
Administrative Regulations promulgated pursuant to the Code.
(g) The Trustee shall be responsible for such duties as are
specifically set forth as such in this Trust Agreement or as otherwise agreed to
in writing by the Trustee. The Trustee shall not be compelled to take any action
toward the execution or performance of Trust I created hereunder or to prosecute
or defend any suit or claim in respect thereof, unless indemnified to its
satisfaction against loss, liability, and reasonable costs and expenses. The
Trustee shall be under no liability or obligation to anyone with respect to any
failure on the part of PWG to perform any of its obligations under this Trust
Agreement.
(h) PWG shall act in accordance with the Deferred Compensation
Agreement, and, prior to the Change in Control Notice Date, the Trustee shall
not be responsible in any respect for acting in accordance with the Deferred
Compensation Agreement. The Trustee shall not be responsible for the adequacy of
Trust I to meet and discharge all payments and liabilities under the Deferred
Compensation Agreement. Prior to the Change in Control Notice Date, the Trustee
shall be fully protected in relying upon any written notice, certificate,
instruction, direction or other communication of any investment manager
appointed by PWG, the Administrator or other duly authorized officers of PWG
that is not contrary to the express provisions of this Trust Agreement.
(i) The Trustee shall be entitled conclusively to rely upon any
written notice, instruction, direction, certificate or other communication
reasonable believed by it to be genuine
<PAGE> 11
and to be signed by the proper person or persons, and the Trustee shall be under
no duty to make investigation or inquiry as to the truth or accuracy of any
statement contained therein.
(j) In no event shall the Trustee incur liability to any person for
any indirect, consequential or special damages (including, without limitation,
lost profits) of any form, whether or not foreseeable and regardless of the form
of action in which such a claim may be brought, with respect to Trust I or its
role as Trustee, except to the extent that such damages are the result of the
gross negligence or willful misconduct of the Trustee. The foregoing sentence
shall not apply with respect to any such indirect, consequential or special
damages to the extent that such damages are the result of the willful misconduct
or gross negligence of the Trustee to the extent such indirect, consequential or
special damages are otherwise recoverable at law or in equity.
(k) PWG shall pay and shall protect, indemnify and save harmless the
Trustee and its officers, directors or trustees, employees, agents and nominees
from and against any and all losses, liabilities (including liabilities for
penalties), actions, suits, judgments, demands, damages, reasonable costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses) of any nature arising from or relating to any action or failure to act
by the Trustee in connection with the transactions contemplated by this Trust
Agreement, except to the extent that any such loss, liability, action, suit,
demand, damage, cost or expense is the result of the gross negligence or willful
misconduct of the Trustee.
(l) For purposes of this Trust Agreement, acts or omissions of the
Trustee shall include those of its directors, trustees, officers, employees,
agents, appointees, nominees, consultants, advisers and assigns.
Section 9. Compensation and Expenses of Trustee.
(a) PWG shall pay (or make available to the Trustee to pay) any
federal, state, local or other taxes (including withholding taxes) imposed or
levied with respect to the corpus or income of Trust I or any part thereof under
existing or future laws, and PWG, in its discretion, may contest the validity or
amount of any transaction cost or any tax assessment, claim or demand respecting
Trust I or any part thereof. The Trustee shall maintain such records and shall
deliver such reports to PWG as may be necessary to permit the proper allocation
of taxes among investments and the proper payment of taxes by PWG.
(b) PWG shall pay directly (and not from the assets of Trust I) to
the Trustee from time to time such reasonable compensation for its services as
trustee as shall be agreed upon by PWG and the Trustee. Prior to the occurrence
of a Change in Control, PWG shall also pay the reasonable and necessary expenses
(including reasonable fees of counsel engaged by the Trustee pursuant to Section
8(b) of this Trust Agreement) incurred by the Trustee in the performance of its
duties under this Trust Agreement; provided, however, that the aggregate amount
of any legal expenses incurred in any calendar year by the Trustee under Trust I
and any other trust between PWG and the Trustee that is established in whole or
in part to fund PWG's obligations under the Deferred Compensation Agreement or
any similar agreement with any
<PAGE> 12
other executive of PaineWebber and that are reimbursable to the Trustee under
this Section 9(b) or the corresponding section of each trust agreement entered
into by the parties hereto in connection with any such other trust shall not
exceed $5,000, unless (i) the Trustee has delivered written notice ("Notice") to
PWG at least ten business days prior to the date on which such legal fees or
expenses are to be incurred or such other time as may be agreeable by the
parties and (ii) PWG has not notified the Trustee in writing of its objection to
the Trustee incurring such expenses prior to the expiration of such
ten-business-day period. To constitute Notice for purposes of the previous
sentence, the writing from the Trustee to PWG shall specify in reasonable detail
(i) the expenses to be incurred, (ii) the reason or reasons why the Trustee
believes it is necessary to incur such expenses, (iii) the anticipated amount of
such expenses and (iv) the legal counsel who will be paid any amounts for which
reimbursement will be sought by the Trustee under this Section 9(b). If PWG
notifies the Trustee in writing of its objection to any expenses described in
the Notice prior to the expiration of the ten-business-day period, such expense
shall not be reimbursable to the Trustee either from the assets of Trust I or
from PWG, regardless of whether the Trustee determines to incur such expense.
The ten-business-day notice period described above shall begin on the date the
Notice is received by PWG. Any compensation and expenses which are otherwise
reimbursable under this Section 9(b) and which are not paid by PWG may be
deducted by the Trustee from the assets of Trust I. If the Trustee satisfies
such obligations out of the assets of Trust I, PWG shall immediately, upon
demand by the Trustee, deposit into Trust I a sum equal to the amount paid by
Trust I.
(c) During the Change in Control Period, PWG shall pay the
reasonable and necessary expenses (including, without limitation, the reasonable
fees and expenses of legal counsel and consultants) incurred by the Trustee in
the performance of its duties under this Trust Agreement.
Section 10. Resignation and Removal of Trustee.
(a) Subject to Section 11, the Trustee may resign at any time by
written notice to PWG, which shall be effective ninety days after receipt of
such notice by PWG, unless PWG and the Trustee agree in writing to a shorter or
longer period. Until such time as a Successor Trustee is duly appointed and
qualified to serve hereunder, such resignation shall not affect (i) the
Trustee's obligations to hold custody of the assets of Trust I, to make payments
contemplated by Section 2 of this Agreement, or to dispose of Securities in
order to make such payments, (ii) the Trustee's obligations or responsibilities
set forth in this Agreement or (iii) the Trustee's rights under Section 9 of
this Agreement.
(b) Subject to Section 11, the Trustee may be removed at any time by
written notice from PWG, which removal shall be effective ninety days after such
notice of removal is delivered to the Trustee by PWG. Such removal shall not be
effective until such time as a Successor Trustee is duly appointed and qualified
to serve hereunder.
(c) Upon the resignation or removal of the Trustee and appointment
of a Successor Trustee, all assets shall subsequently be transferred to the
Successor Trustee. The
<PAGE> 13
transfer shall be completed within thirty days after receipt of notice of
resignation, removal or transfer.
(d) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal. If no such appointment has been made, the Trustee may
apply to a court of competent jurisdiction for appointment of a successor or for
instructions. All expenses of the Trustee in connection with the proceeding
shall be allowed as administrative expenses of Trust I.
(e) The resignation or removal of the Trustee shall not affect its
rights, obligations and privileges under Sections 7 and 8 of this Trust
Agreement.
Section 11. Appointment of Successor.
(a) If the Trustee resigns or is removed in accordance with the
provisions of this Trust Agreement, PWG shall appoint a bank or trust company
unaffiliated with PWG or any successor to all or substantially all of the assets
of PWG that has corporate trustee powers under applicable law and which has
trust assets under management at the time of such appointment of at least $10
billion, as a successor to replace the Trustee upon such resignation or removal
(the "Successor Trustee"). The appointment shall be effective when accepted in
writing by the Successor Trustee, which shall have all of the rights and powers
of the former Trustee, including ownership rights in Trust I assets. The former
Trustee shall execute any instrument necessary or reasonably requested by PWG or
the Successor Trustee to evidence the transfer. Following a Change in Control,
the Trustee may not be removed by PWG unless the then current Trustee approves
the Successor Trustee, which approval shall be granted only if the Trustee
reasonably determines that the appointment of the Successor Trustee will not
impair the rights of any Trust I beneficiary under the Deferred Compensation
Agreement and this Trust Agreement.
(b) The Successor Trustee need not examine the records and acts of
any prior Trustee. The Successor Trustee shall not be responsible for and PWG
shall indemnify and defend the Successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes Successor Trustee.
(c) When this Trust I shall have been transferred and delivered to
the Successor Trustee and the accounts of the Trustee have been settled as
provided in Section 7 hereof, the Trustee shall be released and discharged from
all further accountability or liability for Trust I to the extent contemplated
by Section 7 hereof.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and PWG. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Deferred Compensation Agreement
or shall make Trust I revocable. Following the date of a Change in Control, this
Trust Agreement may not be amended in a manner which is adverse in any respect
to the Executive or, following the date of death of the
<PAGE> 14
Executive, the Executive's Beneficiary without the prior written consent of the
Executive or the Executive's Beneficiary, as the case may be.
(b) Trust I shall not terminate until the earlier to occur of (i)
the date on which the Executive and the Executive's Beneficiary are no longer
entitled to benefits pursuant to the terms of the Deferred Compensation
Agreement and (ii) the twenty-first anniversary of the death of the Executive,
the Executive's Beneficiary and the spouse of any Beneficiary alive on the date
of Execution of Trust Agreement. Upon termination of Trust I, any assets
remaining in Trust I shall be returned to PWG.
(c) The termination of Trust I shall not affect the respective
rights and obligations of PWG and the Trustee under Section 8 of this Trust
Agreement.
Section 13. Trust Effective Date. This Trust Agreement shall be
effective on the Effective Date.
Section 14. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to the Executive and the Executive's
Beneficiary under this Trust Agreement may not be anticipated, assigned (either
at law or in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) Any notice required or permitted to be given shall be deemed
given if directed to the person to whom addressed at such address and mailed by
regular United States mail, first-class postage.
(d) The headings and captions herein are provided for reference and
convenience only, shall not be considered part of this Trust Agreement and shall
not be employed in the construction of this Trust Agreement.
(e) PWG shall provide the Trustee with a written certification with
respect to any persons who may act on behalf of PWG and who are appointed as
investment managers, together with specimen signatures of such individuals. The
Trustee shall have no duty to inquire as to the authenticity of such
certification; provided, however, that the Trustee may reasonably require PWG to
provide additional information with regard to the authorized persons and their
specimen signatures.
(f) This Trust Agreement shall be construed and interpreted under,
and Trust I hereby created shall be governed by, the laws of the State of New
York insofar as such laws do
<PAGE> 15
not contravene any applicable federal laws, rules or regulations. The United
States District Court of the Southern District of New York shall have the sole
and exclusive jurisdiction over any lawsuit or other judicial proceeding
relating to or arising from this Trust Agreement. If that court lacks federal
subject matter jurisdiction, the Supreme Court of the State of New York, New
York County, shall have sole and exclusive jurisdiction. Either of these courts
shall have proper venue for any such lawsuit or judicial proceeding, and the
parties waive any objection to venue or their convenience as a forum. The
parties agree to submit to the jurisdiction of any of the courts specified and
to accept service of process to vest personal jurisdiction over them in any of
these courts. The parties further hereby knowingly, voluntarily and
intentionally waive, to the fullest extent permitted by applicable law, any
right to a trial by jury with respect to any such lawsuit or judicial proceeding
arising from or relating to this Agreement or the transactions contemplated
hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the Effective Date.
PAINE WEBBER GROUP INC.
By:
-------------------------------------
Title:
THE CHASE MANHATTAN BANK,
as Trustee
By:
-------------------------------------
Title:
<PAGE> 16
Exhibit A
Affidavit
I, ___________________, under penalties of perjury, do hereby
solemnly swear (i) that I make this affidavit in order to induce The Chase
Manhattan Bank, as Trustee under the Trust Agreement with Paine Webber Group
Inc.("PWG"), dated as of ______________ (the "Trust Agreement"), to pay me the
benefits to which I am entitled under such Trust Agreement, (ii) that the amount
of the payment to which I am entitled is $________________, (iii) that such
payment is due on ________________ and (iv) that the events giving rise to PWG's
obligation to make such payment and the provisions of the agreement or
arrangements with PWG applicable thereto are accurately and fairly described on
the schedule attached hereto.
--------------------------------
Executive's Signature
STATE OF )
: ss.:
COUNTY OF )
On the __ day of __________, 19__, before me personally came
__________________, to me known, who, being by me duly sworn, did depose and say
that he resides at _________________________________, and that the statements
herein are all true and correct.
--------------------------------
Notary Public
<PAGE> 1
Exhibit 10.36
TRUST II, FORM I
Trust Agreement
This Trust Agreement, dated as of this FIRST day of February, 1999
(the "Effective Date"), by and between PAINE WEBBER GROUP INC., a Delaware
corporation (hereinafter referred to as "PWG"), and THE CHASE MANHATTAN BANK
(hereinafter referred to as the "Trustee").
W I T N E S S E T H:
WHEREAS, PWG has previously established two separate grantor trusts
(respectively, "DCP Trust I" and "DCP Trust II") to fund the obligations of PWG
to [NAME] (the "Executive") under the Paine Webber Group Inc. Senior Officer's
Deferred Compensation Plan, as amended (the "DCP"), and has separately
established a grantor trust (the "SERP Trust") to fund its obligations to the
Executive under the Paine Webber Group Inc. Supplemental Employee's Retirement
Plan, as amended (the "SERP");
WHEREAS, as of the Effective Date, the Deferred Compensation
Agreement, a form of which will be delivered to the Trustee reasonably promptly
following the Effective Date (the "Deferred Compensation Agreement"), will
replace for the Executive the DCP and the SERP;
WHEREAS, in order to comply with applicable accounting
standards, PWG
established DCP Trust II to hold shares of common stock, par value $1.00 per
share (the "Common Stock"), resulting from the exercise by the Executive of
options granted prior to July 24, 1997 (a "Grandfathered Option") and any cash
or other assets resulting from the subsequent sale of such shares of Common
Stock;
WHEREAS, PWG now desires to amend and restate DCP Trust II ("Trust
II") to hold the assets previously contributed to Trust II together with any
shares of Common Stock subsequently contributed to Trust II in connection with
the exercise of a Grandfathered Option and the deferral of the profit shares
issued as a result of such exercise, as well as any amounts received upon the
subsequent sale of such shares;
WHEREAS, PWG wishes to establish and maintain Trust II to
continue the
original purpose of DCP Trust II of segregating the assets of DCP Trust II to
comply with the applicable accounting standards;
WHEREAS, effective as of the Effective Date, PWG has amended and
restated the terms of DCP Trust I ("Trust I") to hold the assets of Trust I and
the SERP Trust for the benefit of the Executive and also to hold the periodic
contributions of cash and other assets to Trust II to fund a portion of its
obligations to the Executive under the Deferred Compensation Agreement;
<PAGE> 2
WHEREAS, the combined assets of Trust I and Trust II shall be used
to satisfy PWG's obligations to the Executive and the Executive's Beneficiary
under the Deferred Compensation Agreement (the "DCA Obligation");
WHEREAS, the Deferred Compensation Agreement requires the
establishment by PWG of a deferred compensation account (the "Account") on its
books and records to record the DCA Obligation;
WHEREAS, PWG desires that the investment return on the assets of
Trust I and Trust II shall be utilized for purposes of calculating the
investment return credited on amounts allocated to the Account; and
WHEREAS, the assets of Trust II shall be held in Trust II subject to
the claims of the creditors of PWG and its Material Subsidiaries in the event of
the Insolvency (as hereinafter defined) of PWG or any such Material Subsidiary
until paid to the Executive or the Executive's Beneficiary in accordance with
the terms of the Deferred Compensation Agreement;
NOW, THEREFORE, the parties do hereby establish Trust II and agree
that Trust II shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) As of the Effective Date, PWG hereby deposits with the Trustee
IN TRUST all of the assets of Trust II, which shall become the principal of
Trust II to be held, administered and disposed by the Trustee as provided in
this Trust Agreement. At the time that PWG is required to credit any additional
amounts to the Account in accordance with the Deferred Compensation Agreement,
PWG shall deposit with the Trustee IN TRUST on the date that such amounts are
credited to the Account an additional amount of cash and other property with a
Fair Market Value equal to the value of the amount so credited. Shares of Common
Stock used by PaineWebber to fund a DCA Obligation arising out of the exercise
of a Grandfathered Option and the deferral of the profit shares associated
therewith shall be contributed to Trust II and not Trust I. If any of the Common
Stock is sold or otherwise disposed of, the assets of Trust II shall also
consist of cash or other property received by Trust II upon such sale or
disposition. The Trustee hereby accepts Trust II established under this Trust
Agreement on the terms and subject to the provisions set forth herein, and it
agrees to discharge and perform fully and faithfully all of the duties and
obligations imposed upon it under this Trust Agreement. Trust II shall be known
as the "[NAME] Deferred Compensation Agreement Trust II."
(b) The assets of Trust II may consist of shares of Common Stock. If
any shares of Common Stock are contributed to Trust II, PWG shall, by virtue of
such contribution, represent that the shares of Common Stock are validly issued,
nonassessable and transferable, subject to the requirements of applicable
<PAGE> 3
federal and state securities laws. PWG represents that the shares of Common
Stock have been registered on an appropriate form filed with the Securities and
Exchange Commission. PWG shall advise the Trustee of any limitations on sale of
the shares of Common Stock. PWG shall also use its reasonable efforts to
register or qualify such shares of Common Stock covered by such a registration
statement under the "blue sky" or securities laws of jurisdictions within the
United States.
(c) Trust II established hereby is irrevocable by PWG.
(d) Trust II is intended to be a grantor trust, of which PWG is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Code, and shall be construed accordingly.
(e) The principal of Trust II, and any earnings thereon, shall be
held separate and apart from other funds of PWG including, but not limited to,
the assets of Trust I, shall be held IN TRUST by the Trustee and shall be used
exclusively for the purpose of satisfying the DCA Obligation and the obligations
of PWG and its Material Subsidiaries (collectively, the "Companies") to their
general creditors as hereinafter set forth. The Executive and the Executive's
Beneficiary shall have no preferred claim on, or any beneficial ownership
interest in, any assets of Trust II. Any rights created under the Deferred
Compensation Agreement and this Trust Agreement shall be mere unsecured
contractual rights of the Executive and the Executive's Beneficiary against PWG.
Any assets held by Trust II will be subject to the claims of PWG's general
creditors under U.S. federal and state law in the event of Insolvency.
(f) Within ten days following the end of each month while Trust II
is in effect (and as of each Valuation Date if required by the terms of the
Deferred Compensation Agreement), the Trustee shall determine the Fair Market
Value of the assets of Trust II and communicate the results of such valuation to
PWG.
(g) Reasonably promptly following the Effective Date, PWG shall
deliver to the Trustee a copy of the Deferred Compensation Agreement. Following
the occurrence of a Change in Control, the Deferred Compensation Agreement and
any amendments thereto that have been delivered to the Trustee in accordance
with this Section 1(g) shall constitute a part of this Trust Agreement. If the
Deferred Compensation Agreement is amended, PWG shall promptly deliver a copy of
the Deferred Compensation Agreement to the Trustee within ten days of the date
of the amendment. On and after the date the Trustee is notified by PWG, the
Executive or the Executive's Beneficiary of a Change in Control or otherwise has
actual knowledge of the occurrence of a Change in Control (the "Change in
Control Notice Date"), the Trustee shall have an obligation to determine whether
actions undertaken by the Trustee hereunder are consistent with, and do not
violate any of, the terms of the Deferred Compensation Agreement (including,
without limitation, any amendments to the Deferred Compensation Agreement that
have been delivered to the Trustee in accordance with this Section 1(g)), and,
in the event of any conflict between any instruction or direction to the Trustee
from PWG and the Deferred Compensation Agreement, the Trustee shall be
authorized to rely on the terms of the Deferred Compensation Agreement as
reasonably construed by the Trustee. No amendment to the Deferred Compensation
Agreement shall affect in any material respect the duties and obligations of the
Trustee hereunder without the Trustee's prior written consent.
<PAGE> 4
(h) Capitalized words which are not otherwise defined in this Trust
Agreement have the meanings assigned thereto in the Deferred Compensation
Agreement.
Section 2. Payments to Executive or The Executive's Beneficiary.
(a) PWG shall deliver to the Trustee a payment schedule (the
"Payment Schedule") that indicates the amounts payable to the Executive and the
times at which such amounts are payable. The Committee or any individual to whom
the Committee delegates its responsibility under the Deferred Compensation
Agreement (together with the Committee, the "Administrator") shall determine
whether an event set forth on the Payment Schedule has occurred and shall advise
the Trustee of such event. The Payment Schedule shall be consistent with the
terms of Section 7 of the Deferred Compensation Agreement and shall be delivered
to the Trustee as soon as practicable after the Executive's termination of
employment with PWG or after any other event entitling the Executive or the
Executive's Beneficiary to a payment of amounts credited to the Account. On and
after the Change in Control Notice Date, in the event of any conflict between
the Payment Schedule and the Deferred Compensation Agreement, the Trustee shall
be authorized to rely on the Deferred Compensation Agreement. Except as
otherwise provided herein, the Trustee shall make payments to the Executive and
the Executive's Beneficiary in accordance with such Payment Schedule and Section
2(b) below. The Trustee shall make provisions for the reporting and withholding
of any taxes that may be required to be withheld with respect to the payment of
benefits pursuant to the terms of the Deferred Compensation Agreement and shall
(i) pay amounts withheld to the appropriate taxing authorities or (ii) remit
such withheld amounts to PWG for payment to the applicable taxing authorities
upon written agreement from PWG that PWG shall be responsible for the applicable
tax reporting and payments.
(b) Subject to the provisions of Sections 2(c), 2(d) and 2(e), on
and after the Change in Control Notice Date, the Trustee shall pay the amounts
due to the Executive and the Executive's Beneficiary in respect of PWG's DCA
Obligation upon receipt of either (i) a Payment Schedule from PWG authorizing
such payment or (ii) an affidavit from the Executive, in substantially the form
of Exhibit A hereto (an "Affidavit"), attesting to the amount of such payment
and setting forth the circumstances giving rise to the obligation to make such
payment under the Deferred Compensation Agreement. The Trustee shall be
authorized to rely on the Payment Schedule, written instructions from PWG or any
such Affidavit, and in the event of a conflict between the written instructions
from PWG and the Affidavit, the provisions of the Affidavit shall be
controlling. Notwithstanding the foregoing, unless the Payment Schedule provides
otherwise, the Trustee shall satisfy payment obligations first from the assets
of Trust I. To the extent the assets of Trust I do not satisfy the payment
obligation, the assets of Trust II shall be used to satisfy such obligation. The
Trustee shall coordinate all payments with the trustee of Trust I to ensure that
no duplicate payments are paid to the Executive or the Executive's Beneficiary.
<PAGE> 5
(c) To the extent that (i) the Trustee is notified in writing by PWG
that PWG's DCA Obligation has been paid in full and (ii) following the Change in
Control Notice Date, the notice from PWG is confirmed in writing by the
Executive or the Executive's Beneficiary (which confirmation may be waived by
the Trustee if the Trustee determines in good faith after reasonable inquiry
that such confirmation is being unreasonably withheld by the Executive or the
Executive's Beneficiary), then the Trustee shall promptly pay to PWG the then
remaining assets of Trust II.
(d) PWG may make payment of benefits directly to the Executive or
the Executive's Beneficiary as they become due under the terms of Section 7 of
the Deferred Compensation Agreement. In the event any amount referred to in a
Payment Schedule is paid by PWG to the Executive, PWG shall notify the Trustee
in writing of such event. Such notice shall include a Payment Schedule revised
in accordance with such notice and, following the Change in Control Notice Date,
such revised Payment Schedule shall be confirmed in writing by the Executive or
the Executive's Beneficiary (which confirmation may be waived by the Trustee if
the Trustee determines in good faith after reasonable inquiry that such
confirmation is being unreasonably withheld by the Executive or the Executive's
Beneficiary). Upon receipt of such notice, the Trustee shall amend the Payment
Schedule to reduce the amount payable thereunder as set forth in such notice
and, if applicable, confirmed by the Executive or the Executive's Beneficiary
and shall distribute to PWG an amount of assets from Trust II equal to the fair
market value of the amount so paid by PWG; provided, however, that no such
payment shall be made to PWG if such payment would cause the assets of Trust II
to be less than the Account Balance as of the date such payment would otherwise
be due hereunder.
(e) Trust I and Trust II are established as a means of facilitating
the payment of PWG's DCA Obligation. If the principal of Trust I and Trust II
and any earnings thereon are not sufficient to make payments of benefits in
accordance with the terms of the Deferred Compensation Agreement and the Payment
Schedule, PWG shall make the balance of each such payment as it falls due. The
Trustee shall, upon reasonable request, provide the trustee of Trust I with
information concerning the assets of Trust II. The Trustee shall notify PWG
where the principal and earnings of Trust I and Trust II are not sufficient to
satisfy the DCA Obligation. Nothing in this Trust Agreement or in the Payment
Schedule shall be construed in any way as relieving PWG of the DCA Obligation if
the DCA Obligation is not satisfied from the assets of Trust I and Trust II.
(f) Whenever it is contemplated that PaineWebber shall make a
payment or contribution under this Trust Agreement, such payment or contribution
shall be made by PWG or any Subsidiary thereof designated by PWG, but no such
designation by PWG shall in any way relieve PWG of its obligation to make such
payment.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary when Company is Insolvent.
(a) The Trustee shall cease payment of benefits to the Executive and
the Executive's Beneficiary if PWG or any Material Subsidiary is Insolvent. PWG
or any Material Subsidiary shall be considered "Insolvent" for purposes of this
Trust Agreement if (i) PWG or any Material Subsidiary is unable to pay its debts
as they become due or (ii) PWG or any Material Subsidiary is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code or the
comparable provisions of any other applicable jurisdiction to which PWG is then
subject.
<PAGE> 6
(b) At all times during the continuance of this Trust II, as
provided in Section 1(e) hereof, the principal and income of Trust II shall be
subject to claims of general creditors of PWG and its Material Subsidiaries
under U.S. federal and state law as set forth below and the laws of any other
applicable jurisdiction to which PWG is then subject.
(1) The Chief Financial Officer of PWG shall have the duty to inform
the Trustee in writing of PWG's or any Material Subsidiary's Insolvency.
If a person claiming to be a creditor of PWG or any Material Subsidiary
alleges in writing to the Trustee that PWG or any Material Subsidiary has
become Insolvent, the Trustee shall promptly determine whether PWG or any
Material Subsidiary is Insolvent and, pending such determination, the
Trustee shall discontinue payment of benefits to the Executive or the
Executive's Beneficiary.
(2) Unless the Trustee has actual knowledge of PWG's or any Material
Subsidiary's Insolvency, or has received notice from PWG or any Material
Subsidiary or a person claiming to be a creditor alleging that PWG or any
Material Subsidiary is Insolvent, the Trustee shall have no duty to
inquire whether PWG or any Material Subsidiary is Insolvent. The Trustee
may in all events rely on such evidence concerning PWG's or any Material
Subsidiary's solvency as may be furnished to the Trustee and that provides
the Trustee with a reasonable basis for making a determination concerning
PWG's or any Material Subsidiary's solvency.
(3) If at any time the Trustee has determined that PWG or any
Material Subsidiary is Insolvent, the Trustee shall discontinue payments
to the Executive or the Executive's Beneficiary and shall hold the assets
of Trust II for the benefit of PWG's or any Material Subsidiary's general
creditors. Nothing in this Trust Agreement shall in any way diminish any
rights of the Executive or the Executive's Beneficiary to pursue their
rights as general creditors of PWG or any Material Subsidiary with respect
to benefits due under the Deferred Compensation Agreement or otherwise.
(4) The Trustee shall resume the payment of benefits to the
Executive or the Executive's Beneficiary in accordance with Section 2 of
this Trust Agreement only after the Trustee has determined that PWG or any
Material Subsidiary is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from Trust II pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to the
Executive or the Executive's Beneficiary under the terms of Section 7 of the
Deferred Compensation Agreement for the period of such discontinuance, less the
aggregate amount of any payments made to the Executive or the Executive's
Beneficiary by PWG under the terms of the Deferred Compensation Agreement in
lieu of the payments provided for hereunder during any such period of
discontinuance.
<PAGE> 7
(d) As used herein, "Material
Subsidiary" shall mean any significant subsidiary of PWG as
determined in accordance with Regulation S-X under the Securities Exchange Act
of 1934. PWG shall from time to time provide the Trustee with a list of Material
Subsidiaries.
Section 4. Payments to PWG. Except as provided in Sections 2 and 3
above, PWG shall have no right or power to direct the Trustee to return to PWG
or to divert any of the assets of Trust II to any purpose other than the payment
of the DCA Obligation before all payment of benefits has been made to the
Executive and the Executive's Beneficiary pursuant to the terms of the Deferred
Compensation Agreement. Following a determination by the Trustee in accordance
with Sections 2(c) and 2(d) that PWG's DCA Obligation has been paid in full, the
Trustee shall pay to PWG any remaining assets of Trust II, net of any unpaid
Trustee's fees and expenses and a reserve for accrued but unpaid expenses of
Trust II.
Section 5. Investment Authority.
(a) The Trustee shall, upon written instructions received from
an investment
manager appointed by PWG, hold, dispose, invest and reinvest the assets of Trust
II (including the Common Stock), without distinction between principal and
income, in Securities; provided, however, that with respect to the purchase or
sale of Mutual Funds, the Trustee shall be authorized to purchase or sell such
Mutual Funds at the direction of either the Director of Human Resources of
PaineWebber Incorporated or his designee. Notwithstanding the foregoing, in no
event may assets of Trust II be invested in PWG Securities except to the extent
Common Stock has been deposited in Trust II pursuant to Section 1(a). Upon the
prior approval of the Committee, PWG shall have the right at any time, and from
time to time, in its sole discretion, to substitute assets of equal market value
for any Common Stock held by Trust II. The right of PWG to substitute assets
held in Trust II is exercisable by PWG in a nonfiduciary capacity.
(b) Subject to Section 5(a), all rights associated with assets of
Trust II shall be
exercised by the Trustee or the person designated by the Trustee, and shall in
no event be exercisable by or rest with the Executive or the Executive's
Beneficiary.
(c) On and after the Change in Control Notice Date, the Trustee
shall invest the assets of Trust II solely at the direction of one or more
independent investment managers who are unaffiliated with PWG and who are
appointed by PaineWebber and approved in advance by the Executive in writing.
The fees and expenses of such investment managers shall be paid by PWG and not
from the assets of Trust II.
(d) The Trustee shall have the absolute discretion to vote or
abstain from voting the Common Stock with respect to any matters brought before
shareholders. The Committee shall direct the Trustee with respect to the
tendering of the Common Stock held in Trust II.
<PAGE> 8
(e) When the Trustee delivers Securities against payment, delivery
of the property and receipt of payment may not be simultaneous. Trust II shall
bear the risk of nonreceipt of payment, and the Trustee shall have no liability
therefor, unless such nonreceipt of payment is a result of the Trustee's (or its
officers', directors', employees', nominees' or agents') gross negligence or
willful misconduct. All credits to Trust II of the anticipated proceeds of sales
and redemptions of Securities shall be conditional upon receipt by the Trustee
of final payment and may be reversed to the extent final payment is not
received. At the discretion of the Trustee, Trust II may make use of such
conditional credits. To the extent such credits do not become unconditional by
receipt of final payment, Trust II shall reimburse the Trustee upon demand for
the amount of such conditional credits so used. When the Trustee is to receive
Securities, it is authorized to accept documents in lieu of such Securities as
long as such documents contain the agreement of the issuer thereof to hold such
Securities subject to the Trustee's sole order. The Trustee may, in its
discretion, advance funds to Trust II to facilitate the settlement of any trade.
In the event of such an advance, Trust II shall immediately reimburse the
Trustee for the amount thereof, together with interest at the rate then charged
by the Trustee to similar accounts for similar advances.
(f) When disposing of assets held in Trust II, nothing shall prevent
the
Trustee, upon the direction of the Administrator, from selling such assets to
the Executive or the Executive's Beneficiary for the amount set forth in the
Trust II accounting.
Section 6. Disposition of Income. During the term of Trust II, all
income received by Trust II, net of expenses, shall be accumulated and
reinvested in accordance with the provisions of Section 5.
Section 7. Accounting by Trustee.
(a) (i) The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in writing between
PWG and the Trustee. Within ninety days following the close of each calendar
year and within ninety days after the removal or resignation of the Trustee, the
Trustee shall deliver to PWG (and, following the Change in Control Notice Date,
to the Executive or, in the event of the Executive's death, the Executive's
Beneficiary) a written account of its administration of Trust II during such
year or during the period from the close of the last preceding year to the date
of such removal or resignation, setting forth all investments, receipts,
disbursements and other transactions effected by it, including a description of
all Securities purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being separate), and
showing all cash, Securities and other property held in Trust II at the end of
such year or as of the date of such removal or resignation, as the case may be.
With respect to any Securities which do not have a readily ascertainable market
value, PWG shall provide the Trustee with periodic valuations of such
<PAGE> 9
Securities. The valuation method of each valuation report shall be done in a
manner consistent with valuations used by PWG on its inventory of Securities.
The Trustee may conclusively rely upon such valuations of PWG for all purposes
hereunder without inquiry. Following the Change in Control Notice Date, the
appropriate investment manager referred to in Section 5(c) shall be substituted
for PWG for purposes of the three preceding sentences.
(ii) Unless PWG, the Executive or the Executive's Beneficiary shall
have notified the Trustee of exceptions, objections, outstanding claims against
the Trustee or disputed items within 180 days following receipt of an annual
statement of account or final statement of account delivered in accordance with
Section 7(a)(i) above, PWG and the Executive and the Executive's Beneficiary, if
applicable, shall be deemed to have approved such statement of account and the
Trustee shall be relieved and discharged from all matters covered therein. This
Section 7(a)(ii) shall not apply to any matter which the Trustee willfully or
through gross negligence misstates, conceals or omits in the preparation of such
statement of account or to any acts of fraud by the Trustee.
(b) Nothing contained in this Trust Agreement or in the Deferred
Compensation Agreement shall deprive the Trustee of the right to have a judicial
settlement of its accounts. In any proceeding for a judicial settlement of the
Trustee's account or for instructions in connection with Trust II, the only
other necessary parties thereto in addition to the Trustee shall be PWG and the
Executive or the Executive's Beneficiary. No person interested in the Trust,
other than PWG and the Executive or the Executive's Beneficiary, shall have a
right to compel an accounting, judicial or otherwise.
Section 8. Responsibility of Trustee.
(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matters would use in the conduct of an
enterprise of like character and with like aim; provided, however, that the
Trustee shall incur no liability to any person for any action taken (i) pursuant
to an Affidavit delivered to the Trustee by the Executive in accordance with
Section 2(b) above or (ii) pursuant to any written direction, request or
approval given by PWG, the Administrator or an investment manager that is in
conformity with the terms of the Deferred Compensation Agreement and this Trust
Agreement.
(b) Subject to Section 9, if the Trustee undertakes or defends any
litigation arising in connection with Trust II, PWG shall indemnify fully the
Trustee against the Trustee's costs, expenses and liabilities (including,
without limitation, attorneys' fees and expenses) relating thereto and shall be
primarily liable for such costs, expenses and liabilities.
(c) The Trustee may consult with legal counsel (who may also be
counsel for PWG generally) with respect to any of its duties or obligations
hereunder. The Trustee may retain and consult with counsel, who may be counsel
for PWG or for the Trustee in its individual capacity, and shall not be deemed
imprudent by reason of its taking or refraining from taking action in reasonable
reliance upon the opinion of such counsel. The Trustee shall not be required to
give any bond or any other security for the faithful performance of its duties
under this Trust Agreement, except as required by law. The Trustee may also
<PAGE> 10
retain one or more consultants to assist it in the performance of its duties
under the last sentence of Section 1(g) of this Trust Agreement. The Trustee
shall not be liable for any acts or omissions of any such consultant, provided
that the Trustee selects and supervises such consultant in accordance with the
standard of care set forth in Section 8(a) of this Trust Agreement.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisers, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred
on Trustees by applicable law, unless expressly provided otherwise herein;
provided, however, that, if an insurance policy is held as an asset of Trust II,
the Trustee shall have no power to name a beneficiary of the policy other than
Trust II, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a Successor Trustee (as defined below) or to loan
to any person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee pursuant to
this Trust Agreement or applicable law, the Trustee shall not have any power
that could give Trust II the objective of carrying on a business and dividing
the gains therefrom, within the meaning of Section 301.7701-2 of the Procedures
and Administrative Regulations promulgated pursuant to the Code.
(g) The Trustee shall be responsible for such duties as are
specifically set forth as such in this Trust Agreement or as otherwise agreed to
in writing by the Trustee. The Trustee shall not be compelled to take any action
toward the execution or performance of Trust II created hereunder or to
prosecute or defend any suit or claim in respect thereof, unless indemnified to
its satisfaction against loss, liability, and reasonable costs and expenses. The
Trustee shall be under no liability or obligation to anyone with respect to any
failure on the part of PWG to perform any of its obligations under this Trust
Agreement.
(h) PWG shall act in accordance with the Deferred Compensation
Agreement, and, prior to the Change in Control Notice Date, the Trustee shall
not be responsible in any respect for acting in accordance with the Deferred
Compensation Agreement. The Trustee shall not be responsible for the adequacy of
Trust II to meet and discharge all payments and liabilities under the Deferred
Compensation Agreement. Prior to the Change in Control Notice Date, the Trustee
shall be fully protected in relying upon any written notice, certificate,
instruction, direction or other communication of any investment manager
appointed by PWG, the Administrator or other duly authorized officers of PWG
that is not contrary to the express provisions of this Trust Agreement.
(i) The Trustee shall be entitled conclusively to rely upon any
written notice, instruction, direction, certificate or other communication
reasonable believed by it to be genuine and to be signed by the proper person or
persons, and the Trustee shall be under no duty to make investigation or inquiry
as to the truth or accuracy of any statement contained therein.
<PAGE> 11
(j) In no event shall the Trustee incur liability to any person for
any indirect, consequential or special damages (including, without limitation,
lost profits) of any form, whether or not foreseeable and regardless of the form
of action in which such a claim may be brought, with respect to Trust II or its
role as Trustee, except to the extent that such damages are the result of the
gross negligence or willful misconduct of the Trustee. The foregoing sentence
shall not apply with respect to any such indirect, consequential or special
damages to the extent that such damages are the result of the willful misconduct
or gross negligence of the Trustee to the extent such indirect, consequential or
special damages are otherwise recoverable at law or in equity.
(k) PWG shall pay and shall protect, indemnify and save harmless the
Trustee and its officers, directors or trustees, employees, agents and nominees
from and against any and all losses, liabilities (including liabilities for
penalties), actions, suits, judgments, demands, damages, reasonable costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses) of any nature arising from or relating to any action or failure to act
by the Trustee in connection with the transactions contemplated by this Trust
Agreement, except to the extent that any such loss, liability, action, suit,
demand, damage, cost or expense is the result of the gross negligence or willful
misconduct of the Trustee.
(l) For purposes of this Trust Agreement, acts or omissions of the
Trustee shall include those of its directors, trustees, officers, employees,
agents, appointees, nominees, consultants, advisers and assigns.
Section 9. Compensation and Expenses of Trustee.
(a) PWG shall pay (or make available to the Trustee to pay) any
federal, state, local or other taxes (including withholding taxes) imposed or
levied with respect to the corpus or income of Trust II or any part thereof
under existing or future laws, and PWG, in its discretion, may contest the
validity or amount of any transaction cost or any tax assessment, claim or
demand respecting Trust II or any part thereof. The Trustee shall maintain such
records and shall deliver such reports to PWG as may be necessary to permit the
proper allocation of taxes among investments and the proper payment of taxes by
PWG.
(b) PWG shall pay directly (and not from the assets of Trust II) to
the Trustee from time to time such reasonable compensation for its services as
trustee as shall be agreed upon by PWG and the Trustee. Prior to the occurrence
of a Change in Control, PWG shall also pay the reasonable and necessary expenses
(including reasonable fees of counsel engaged by the Trustee pursuant to Section
8(b) of this Trust Agreement) incurred by the Trustee in the performance of its
duties under this Trust Agreement; provided, however, that the aggregate amount
of any legal expenses incurred in any calendar year by the Trustee under Trust
II and any other trust between PWG and the Trustee that is established in whole
<PAGE> 12
or in part to fund PWG's obligations under the Deferred Compensation Agreement
or any similar agreement with any other executive of PaineWebber and that are
reimbursable to the Trustee under this Section 9(b) or the corresponding section
of each trust agreement entered into by the parties hereto in connection with
any such other trust shall not exceed $5,000, unless (i) the Trustee has
delivered written notice ("Notice") to PWG at least ten business days prior to
the date on which such legal fees or expenses are to be incurred or such other
time as may be agreeable by the parties and (ii) PWG has not notified the
Trustee in writing of its objection to the Trustee incurring such expenses prior
to the expiration of such ten-business-day period. To constitute Notice for
purposes of the previous sentence, the writing from the Trustee to PWG shall
specify in reasonable detail (i) the expenses to be incurred, (ii) the reason or
reasons why the Trustee believes it is necessary to incur such expenses, (iii)
the anticipated amount of such expenses and (iv) the legal counsel who will be
paid any amounts for which reimbursement will be sought by the Trustee under
this Section 9(b). If PWG notifies the Trustee in writing of its objection to
any expenses described in the Notice prior to the expiration of the
ten-business-day period, such expense shall not be reimbursable to the Trustee
either from the assets of Trust II or from PWG, regardless of whether the
Trustee determines to incur such expense. The ten-business-day notice period
described above shall begin on the date the Notice is received by PWG. Any
compensation and expenses which are otherwise reimbursable under this Section
9(b) and which are not paid by PWG may be deducted by the Trustee from the
assets of Trust II. If the Trustee satisfies such obligations out of the assets
of Trust II, PWG shall immediately, upon demand by the Trustee, deposit into
Trust II a sum equal to the amount paid by Trust II.
(c) During the Change in Control Period, PWG shall pay the
reasonable and necessary expenses (including, without limitation, the reasonable
fees and expenses of legal counsel and consultants) incurred by the Trustee in
the performance of its duties under this Trust Agreement.
Section 10. Resignation and Removal of Trustee.
(a) Subject to Section 11, the Trustee may resign at any time by
written notice to PWG, which shall be effective ninety days after receipt of
such notice by PWG, unless PWG and the Trustee agree in writing to a shorter or
longer period. Until such time as a Successor Trustee is duly appointed and
qualified to serve hereunder, such resignation shall not affect (i) the
Trustee's obligations to hold custody of the assets of Trust I, to make payments
contemplated by Section 2 of this Agreement, or to dispose of Securities in
order to make such payments, (ii) the Trustee's obligations or responsibilities
set forth in this Agreement or (iii) the Trustee's rights under Section 9 of
this Agreement.
(b) Subject to Section 11, the Trustee may be removed at any time by
written notice from PWG, which removal shall be effective ninety days after such
notice of removal is delivered to the Trustee by PWG. Such removal shall not be
effective until such time as a Successor Trustee is duly appointed and qualified
to serve hereunder.
(c) Upon the resignation or removal of the Trustee and appointment
of a Successor Trustee, all assets shall subsequently be transferred to the
Successor Trustee. The transfer shall be completed within thirty days after
receipt of notice of resignation, removal or transfer.
<PAGE> 13
(d) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal. If no such appointment has been made, the Trustee may
apply to a court of competent jurisdiction for appointment of a successor or for
instructions. All expenses of the Trustee in connection with the proceeding
shall be allowed as administrative expenses of Trust II.
(e) The resignation or removal of the Trustee shall not affect its
rights, obligations and privileges under Sections 7 and 8 of this Agreement.
Section 11. Appointment of Successor.
(a) If the Trustee resigns or is removed in accordance with the
provisions of this Trust Agreement, PWG shall appoint a bank or trust company
unaffiliated with PWG or any successor to all or substantially all of the assets
of PWG that has corporate trustee powers under applicable law and which has
trust assets under management at the time of such appointment of at least $10
billion, as a successor to replace the Trustee upon such resignation or removal
(the "Successor Trustee"). The appointment shall be effective when accepted in
writing by the Successor Trustee, which shall have all of the rights and powers
of the former Trustee, including ownership rights in Trust II assets. The former
Trustee shall execute any instrument necessary or reasonably requested by PWG or
the Successor Trustee to evidence the transfer. Following a Change in Control,
the Trustee may not be removed by PWG unless the then current Trustee approves
the Successor Trustee, which approval shall be granted only if the Trustee
reasonably determines that the appointment of the Successor Trustee will not
impair the rights of any Trust II beneficiary under the Deferred Compensation
Agreement and this Trust Agreement.
(b) The Successor Trustee need not examine the records and acts of
any prior Trustee. The Successor Trustee shall not be responsible for and PWG
shall indemnify and defend the Successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes Successor Trustee.
(c) When Trust II shall have been transferred and delivered to the
Successor Trustee and the accounts of the Trustee have been settled as provided
in Section 7 hereof, the Trustee shall be released and discharged from all
further accountability or liability for Trust II to the extent contemplated by
Section 7 hereof.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and PWG. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Deferred Compensation Agreement
or shall make Trust II revocable. Following the date of a Change in Control,
this Trust Agreement may not be amended in a manner which is adverse in any
respect to the Executive or, following the date of death of the Executive, the
<PAGE> 14
Executive's Beneficiary without the prior written consent of the Executive or
the Executive's Beneficiary, as the case may be.
(b) Trust II shall not terminate until the earlier to occur of (i)
the date on which the Executive and the Executive's Beneficiary are no longer
entitled to benefits pursuant to the terms of the Deferred Compensation
Agreement and (ii) the twenty-first anniversary of the death of the Executive,
the Executive's Beneficiary and the spouse of any Beneficiary alive on the date
of Execution of Trust II. Upon termination of Trust II, any assets remaining in
Trust II shall be returned to PWG.
(c) The termination of Trust II shall not affect the respective
rights and obligations of PWG and the Trustee under Section 8 of this Trust
Agreement.
Section 13. Trust Effective Date. This Trust Agreement shall be
effective on the Effective Date.
Section 14. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to the Executive and the Executive's
Beneficiary under this Trust Agreement may not be anticipated, assigned (either
at law or in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) Any notice required or
permitted to be given shall be deemed given if
directed to the person to whom addressed at such address and mailed by regular
United States mail, first-class postage.
(d) The headings and captions herein are provided for reference and
convenience only, shall not be considered part of this Trust Agreement and shall
not be employed in the construction of this Trust Agreement.
(e) PWG shall provide the Trustee with a written certification with
respect to any persons who may act on behalf of PWG and who are appointed as
investment managers, together with specimen signatures of such individuals. The
Trustee shall have no duty to inquire as to the authenticity of such
certification; provided, however, that the Trustee may reasonably require PWG to
provide additional information with regard to the authorized persons and their
specimen signatures.
(f) This Trust Agreement shall be construed and interpreted under,
and Trust II hereby created shall be governed by, the laws of the State of New
York insofar as such laws do not contravene any applicable federal laws, rules
<PAGE> 15
or regulations. The United States District Court of the Southern District of New
York shall have the sole and exclusive jurisdiction over any lawsuit or other
judicial proceeding relating to or arising from this Trust Agreement. If that
court lacks federal subject matter jurisdiction, the Supreme Court of the State
of New York, New York County, shall have sole and exclusive jurisdiction. Either
of these courts shall have proper venue for any such lawsuit or judicial
proceeding, and the parties waive any objection to venue or their convenience as
a forum. The parties agree to submit to the jurisdiction of any of the courts
specified and to accept service of process to vest personal jurisdiction over
them in any of these courts. The parties further hereby knowingly, voluntarily
and intentionally waive, to the fullest extent permitted by applicable law, any
right to a trial by jury with respect to any such lawsuit or judicial proceeding
arising from or relating to this Agreement or the transactions contemplated
hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the Effective Date.
PAINE WEBBER GROUP INC.
By:__________________________
Title:
THE CHASE MANHATTAN BANK,
as Trustee
By:__________________________
Title:
<PAGE> 16
Exhibit A
Affidavit
I, ________________________, under penalties of perjury, do hereby
solemnly swear (i) that I make this affidavit in order to induce The Chase
Manhattan Bank, as Trustee under the Trust Agreement with Paine Webber Group
Inc.("PWG"), dated as of ______________ (the "Trust Agreement"), to pay me the
benefits to which I am entitled under such Trust Agreement, (ii) that the amount
of the payment to which I am entitled is $________________, (iii) that such
payment is due on ________________ and (iv) that the events giving rise to PWG's
obligation to make such payment and the provisions of the agreement or
arrangements with PWG applicable thereto are accurately and fairly described on
the schedule attached hereto.
-------------------------
Executive's Signature
STATE OF )
: ss.:
COUNTY OF )
On the __ day of __________, 19__, before me personally came
____________________, to me known, who, being by me duly sworn, did depose and
say that he resides at _________________________________, and that the
statements herein are all true and correct.
------------------------
Notary Public
<PAGE> 1
Exhibit 10.37
PAINE WEBBER GROUP INC.
EQUITY PLUS PROGRAM
1. Purpose. The purpose of the Program is to assist PaineWebber in
increasing the share ownership of Eligible Employees of PaineWebber and to
enable such Eligible Employees to acquire or increase a proprietary interest in
PaineWebber. Subject to the terms of the Program, Participants will be given the
opportunity under the Program to purchase shares of Common Stock and be granted
a Related Option based on the number of Program Shares they purchase.
2. Definitions and Rules of Construction.
(a) For purposes of the Program, the following capitalized words
shall have the meanings set forth below:
"Account" means an account established by PaineWebber in
accordance with Section 9 to record a Participant's Cash Contributions,
Program Shares and Related Options.
"Account Balance" means, collectively, a Participant's Cash
Account Balance, Program Shares and outstanding Related Options.
"Board" means the Board of Directors of PWG.
"Cash Account Balance" means, as of a given date, the sum of
the Cash Contributions credited to a Participant's Account and not applied
to the purchase of Program Shares.
"Cash Contributions" means the portion of a Participant's
Compensation that the Participant has elected to contribute to the Program
in accordance with Section 6.
"Change in Eligibility Status" has the meaning set forth in
Section 8(c)(i).
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and the rulings and regulations promulgated thereunder.
"Committee" means the Compensation Committee of the Board, or
such other committee of the Board as may be designated by the Board to
administer the Program.
<PAGE> 2
"Common Stock" means the common stock, par value $1.00 per
share, of PWG.
"Compensation" has the same meaning as the definition of
"compensation" under the PaineWebber 401(k) Plus Plan, as amended from
time to time.
"Contribution Percentage" means the percentage of Compensation
that a Participant has elected to contribute to the Program.
"Effective Date" means October 16, 1998.
"Eligible Employee" means any individual who is eligible to
participate in the PaineWebber 401(k) Plus Plan, as amended from time to
time, or such other individuals as may be determined by the Committee who
are employed outside the United States. Eligible Employee shall not
include any individual who is characterized by PaineWebber as an
"independent contractor" regardless of whether or not such classification
is substantially upheld by a court or governmental authority. Eligible
Employee shall not include any individual who is covered by a collective
bargaining agreement. Eligible Employee shall also exclude any individual
whose employment contract, offer letter or similar agreement with
PaineWebber provides that such individual shall not be eligible to
participate in the Program.
"Enrollment Form" means a written form prescribed by the
Committee and meeting the requirements of Section 6(b) which is signed by
an Eligible Employee and pursuant to which an Eligible Employee elects to
participate in the Program, specifies his applicable Contribution
Percentage(s) and authorizes PaineWebber to withhold Cash Contributions
from his Compensation.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and the rulings and regulations promulgated
thereunder.
"Fair Market Value" means, with respect to a share of Common
Stock, the average of the high and low sales prices of Common Stock on the
New York Stock Exchange on the date as of which such value is being
determined.
"Long-Term Disability Status" has the meaning set forth in
Section 8(c)(iii).
"Multiplier" means two, or such other number as may be
approved by the Chairman of PaineWebber (or, in the case of officers of
PWG who are subject to the reporting requirements of Section 16(a) of the
Exchange Act, the Committee) for all Participants or
<PAGE> 3
for a specified class or classes of Participants. More than one Multiplier
may be in effect for different Participants or different classes of
Participants for each Program Year.
"PaineWebber" means PWG and each direct or indirect subsidiary
thereof.
"Participant" means an Eligible Employee of PaineWebber who
has elected to participate in the Program in accordance with Section 6. A
Participant includes any individual who has an Account Balance under the
Program.
"Program" means this Paine Webber Group Inc. Equity Plus
Program.
"Program Administrator" means any agent appointed by the
Committee (i) to maintain Program records and Participant Accounts, (ii)
to hold the shares that remain subject to the Transfer restriction
described in Section 6(d), (iii) to purchase shares on behalf of the
Program in the open market or (iv) to whom authority under the Program is
delegated, including a third-party administrator. Notwithstanding anything
to the contrary, the person appointed pursuant to clause (iii) shall not
be an affiliate of PaineWebber.
"Program Limitations" means the minimum limitation set forth
in Section 6(c)(iii) and the maximum limitation set forth in Section
6(c)(iv).
"Program Shares" means the shares of Common Stock purchased by
a Participant that are subject to the transfer restrictions set forth in
Section 6(e).
"Program Year" means, unless the Committee determines
otherwise, January 1, 1999 through November 30, 1999 and each twelve-month
period commencing on each December 1st thereafter prior to termination of
the Program in accordance with Section 11.
"Purchase Date" means the date as of which the Cash Account
Balances of Participants are applied to the purchase of Program Shares.
Unless the Committee determines otherwise, the Purchase Dates shall be the
last business day in each February, May, August, and November. A Quarterly
Participation Period will end on the occurrence of a Purchase Date.
"PWG" means Paine Webber Group Inc., a Delaware corporation,
and any successor thereto.
"Quarterly Participation Period" means a period of
approximately three months ending on a Purchase Date during any part of
which Cash Contributions are collected by PaineWebber for the purpose of
purchasing Program Shares; provided, however, that the first Quarterly
Participation Period shall commence on January 1, 1999 and end on the next
following Purchase Date.
<PAGE> 4
"Related Option" means the stock options granted to a
Participant under the Stock Option Plans in connection with the
Participant's purchase of Program Shares and which are subject to the
vesting, forfeiture and other provisions of Section 7.
"Share Holding Period" means, with respect to a Program Share,
the period beginning on the Purchase Date related to such share and ending
on the earliest to occur of (i) the second anniversary of such Purchase
Date, (ii) the date of a Change in Control, (iii) the date that a
Participant's employment with PaineWebber ends for any reason and (iv)
such earlier date specified by the Committee.
"Stock Option Plans" means, collectively, the Paine Webber
Group Inc. 1994 Executive Stock Award Plan, the Paine Webber Group Inc.
1994 Stock Award Plan and the Paine Webber Group Inc. Investment Executive
Stock Option Plan, as amended and in effect immediately prior to the
Effective Date, and any other plan designated by the Committee for the
grant of Related Options.
"Transfer" means to sell, assign, transfer, distribute,
pledge, mortgage, encumber, otherwise dispose of or create an interest in
any property.
(b) Rules of Construction. Unless the context requires otherwise,
the masculine form of a word shall be deemed to include the feminine and the
singular form of a word shall be deemed to include the plural. Section
references are, unless otherwise noted, to sections of the Program.
(c) Stock Option Plans. Certain provisions of the Program are to be
read in conjunction with the provisions of the Stock Option Plans. In the event
of any discrepancy between the provisions of the Program concerning the Related
Options and the provisions of the Stock Option Plans, the provisions of the
applicable Stock Option Plan will prevail.
3. Administration.
(a) Authority of the Committee. The Program shall be administered by
the Committee, no member of which shall be eligible to participate in the
Program. The Committee shall have full and final authority, in each case subject
to and consistent with the provisions of the Program, (i) to establish rules and
regulations for the administration of the Program, (ii) to construe and
interpret the Program and the forms of award documents and to correct defects,
supply omissions or reconcile inconsistencies therein, (iii) to make factual
determinations in connection with the administration or interpretation of the
Program, and (iv) to make all other decisions or interpretations as the
Committee may deem necessary or advisable for the administration of the Program.
Any decision of the Committee in the administration of the Program shall be
final and conclusive on all interested persons. Notwithstanding the above, the
grant of Related Options under the Program shall be made in accordance with the
terms and provisions of the applicable Stock Option Plan.
<PAGE> 5
(b) Delegation. The Committee may delegate its responsibility with
respect to the administration of the Program to the Chief Administrative
Officer, to the Director of Human Resources, to one or more members of the
Committee or to one or more members of the Board or to one or more Program
Administrators; provided, however, that the Committee may not delegate its
responsibility (i) with respect to Participants who are subject to Section 16 of
the Exchange Act or Section 162(m) of the Code or (ii) to amend or terminate the
Program in accordance with Section 11. The Committee may also appoint agents to
assist in the day-to-day administration of the Program and may delegate the
authority to execute documents under the Program to one or more members of the
Committee or to one or more officers of PaineWebber.
(c) Reliance and Indemnification. The Committee shall be entitled to
rely in good faith upon any report or other information furnished to it by
PaineWebber or from the financial, accounting, legal or other advisers of
PaineWebber. Each member of the Committee, each individual to whom the Committee
delegates authority hereunder, each individual designated by the Committee to
administer the Program and each other person acting at the direction of or on
behalf of the Committee shall not be liable for any determination or anything
done or omitted to be done by him or by any other member of the Committee or any
other such individual in connection with the Program, except for his own willful
misconduct or as expressly provided by statute, and, to the extent permitted by
law and the by laws of PWG, shall be fully indemnified and protected by
PaineWebber with respect to such determination, act or omission. The provisions
of this Section 3(c) shall not apply to any third-party who is not affiliated
with PaineWebber.
4. Eligibility. Each Eligible Employee of PaineWebber may
participate in the Program by completing and filing with PaineWebber an
Enrollment Form in accordance with Section 6(b). PaineWebber will begin
deducting Cash Contributions beginning with the first payment of Compensation in
the Program Year. A newly hired Eligible Employee may elect to participate in
the Program at any time prior to October 1st of the Program Year in which occurs
their date of hire by completing an Enrollment Form and filing it with
PaineWebber's payroll office. PaineWebber will begin deducting Cash
Contributions beginning as soon as practicable following the date of enrollment.
A newly hired employee who is hired on or after October 1st may participate in
the Program Year following the Program Year in which occurs their date of hire
by completing an Enrollment Form in accordance with Section 6(b).
5. Common Stock Subject to the Program. PaineWebber is authorized to
issue up to three million shares of Common Stock annually as Program Shares
under the Program. Such shares of Common Stock may be newly issued shares of
Common Stock, reacquired shares of Common Stock held in the treasury of PWG, or
shares purchased by the Program Administrator in the open market on behalf of
the Program. Shares of Common Stock issued in connection with the Related
Options shall not be subject to the limit set forth above but shall be subject
to any applicable limit in the Stock Option Plan pursuant to which the Related
Option is granted.
6. Purchases of Program Shares.
<PAGE> 6
(a) Program Years. The Program shall be implemented by consecutive
(but not concurrent) Program Years. The Committee shall have the authority to
delay the start of a Program Year, to curtail, suspend or terminate a Program
Year or to cancel the start of one or more Program Years during the Term of the
Program with respect to some or all of the Participants. In addition, the
Committee may curtail, suspend or terminate one or more Quarterly Participation
Periods or cancel the start of one or more Quarterly Participation Periods
related to a Program Year with respect to some or all of the Participants. If
the Committee suspends or terminates a Program Year or a Quarterly Participation
Period, the Committee may (i) apply the Cash Contributions credited to each
Participant's Account to the purchase of Program Shares as of the next
applicable Purchase Date, (ii) as promptly as practicable, remit to the
Participant the Participant's Cash Account Balance or (iii) undertake a
combination of clauses (i) and (ii) in accordance with procedures established by
the Committee for this purpose.
(b) Elections. An Eligible Employee shall become a Participant by
completing an Enrollment Form which (i) specifies the Eligible Employee's
Contribution Percentage(s) and authorizes PaineWebber to deduct Cash
Contributions from the Eligible Employee's Compensation based on such
Contribution Percentage and to apply these Cash Contributions to the purchase of
Program Shares, (ii) contains an agreement by the Eligible Employee not to
Transfer any Program Shares during the Share Holding Period applicable to such
Program Shares and (iii) sets forth such other terms and conditions as the
Committee deems necessary or advisable. Unless the Committee determines
otherwise, an Enrollment Form will be effective only if filed with PaineWebber
at least thirty days prior to the start of the applicable Program Year or as
otherwise provided in Section 4.
<PAGE> 7
(c) Cash Contributions.
(i) Participants shall specify on their Enrollment Form applicable
to a Program Year the Contribution Percentage(s) that shall be withheld on
an after-tax basis as Cash Contributions. The Contribution Percentage(s)
elected by a Participant shall be in whole percentages from one to ten
percent and, subject to the Program Limitations set forth below, such
Contribution Percentage(s) shall be applied to the pre-tax amount of each
payroll, bonus or other installment of Compensation paid to the
Participant during the Program Year. In accordance with procedures
established by the Committee, if the Committee so elects, a Participant
may be permitted to make different elections of Contribution Percentage(s)
for different components of Compensation; provided, however, that any
Contribution Percentage election regarding bonus compensation is
irrevocable once made; and provided, further, that, after the Purchase
Date in a Program Year during which the Compensation attributable to a
bonus is applied to purchase Program Shares, a Participant may elect to
withdraw and sell such Program Shares due to a Financial Hardship, if the
Participant so qualifies, under the provisions of Section 8(b). The
special procedures established by the Committee under this Section 6(c)(i)
may vary each Program Year.
(ii) Unless the Committee determines otherwise, a Participant must
complete an Enrollment Form no less than thirty days prior to the start of
each Program Year or as otherwise provided in Section 4. The complete
Enrollment Form shall be deemed to be an election to participate in the
Program for the entire Program Year to which it relates, unless the
Participant elects to withdraw from participation in accordance with
Section 8(a) or 8(b).
(iii) Notwithstanding Section 6(c)(i) and any Enrollment Form filed
by the Participant, the minimum amount of Cash Contribution to be withheld
from any payment of Compensation shall not be less than $50 for those
Participants who receive a paycheck on a bi-weekly or semi-monthly basis
and $100 for those Participants who receive a paycheck on a monthly basis,
unless such minimum amount would cause the Participant to exceed the
maximum Program Limitation set forth in Section 6(c)(iv).
(iv) Notwithstanding Section 6(c)(i) and any Enrollment Form filed
by the Participant, in no event may a Participant acquire more than 1,000
Program Shares during any Program Year. In the event a Participant's Cash
Contributions exceed the 1,000 Program Share maximum, any excess Cash
Contributions will be refunded to the Participant as soon as practicable
following the purchase of the 1,000th Program Share and no remaining Cash
Contributions will be withheld from the Participant's Compensation for the
balance of the Program Year.
(d) Purchase of Program Shares.
(i) Cash Contributions shall be credited to a Participant's Account
under the Program and shall be applied on the next Purchase Date to the
purchase of whole
<PAGE> 8
Program Shares; provided, however, that if a Participant's Cash Account
Balance as of a Purchase Date is less than $300, then, unless the
Committee determines otherwise, no portion of the Participant's Cash
Account Balance shall be applied to the purchase of Program Shares on such
Purchase Date but shall continue to be credited to the Participant's
Account until the next Purchase Date on which such Cash Account Balance
equals or exceeds $300; and provided further, that the previous proviso
shall not apply to the first Purchase Date following the Effective Date.
If a Participant elects to participate in successive Program Years, his
Cash Account Balance (regardless of the amount) will be carried forward at
the end of each Program Year and applied to successive Purchase Dates. If
a Participant chooses not to participate in the next Program Year, then
the remainder of the Participant's Cash Account Balance, if any, shall be
refunded to the Participant as soon as practicable following the purchase
of Program Shares on the last Purchase Date in the Program Year in which
he is participating and no further Cash Contributions will be withheld
from the Participant's Compensation following the last day of the Program
Year in which he was participating. No partial shares of Common Stock
shall be purchased or delivered under the Program, and any portion of the
Cash Account Balance that is not sufficient to purchase a whole share
shall remain credited to the Account and shall be applied to the purchase
of Program Shares at a subsequent Purchase Date in accordance with the
provisions of this Section 6.
(ii) The per share purchase price for Program Shares shall be the
Fair Market Value of a share of Common Stock on the Purchase Date.
Anything in the Program to the contrary notwithstanding, unless the
Committee determines otherwise, Program Shares allocated to Participants
who are subject to Section 16(a) of the Exchange Act by virtue of their
status as a director or officer of PWG shall only be purchased from
PaineWebber and not through open-market purchases of Common Stock by the
Program Administrator.
(e) Restrictions and Rights with Respect to Program Shares.
(i) During the Share Holding Period applicable to a Participant's
Program Shares, the Participant shall not be permitted to Transfer the
Program Shares, unless such Transfer is permitted in accordance with the
hardship provisions of Section 8(b). Program Shares held in certificate or
book entry form shall, to the extent the Committee deems advisable,
contain an appropriate legend or notation indicating this Transfer
restriction.
(ii) During the Share Holding Period, Program Shares shall be held
by the Program Administrator for the benefit of the Participant and the
Participant shall have the right to vote such Program Shares and to
receive all dividends and other distributions in respect thereof. In the
event of a stock split, stock dividend or distribution of property other
than cash affecting the Program Shares, the shares of Common Stock
received in connection with such stock dividend or stock split and the
property received in such distribution shall, unless the Committee
determines otherwise, be subject to the Transfer restrictions set forth in
this Section 6(e)(i).
<PAGE> 9
(iii) Following the expiration of the Share Holding Period, all
restrictions on the transfer of Program Shares (other than those
restrictions imposed by applicable securities laws or the policies on
trading of PaineWebber) shall cease and the Program Shares shall be made
available to the Participant.
(iv) Program Shares shall at all times be fully vested and
nonforfeitable.
7. Related Option Grants.
(a) Grant of Related Options. On a Purchase Date, each Participant
who acquires Program Shares on such date shall be granted a Related Option under
the Stock Option Plan applicable to the Participant to purchase Common Stock.
The Related Option shall have a per share exercise price equal to the Fair
Market Value of a share of Common Stock as of the Purchase Date. The number of
shares subject to the Related Option shall equal the number of Program Shares
acquired by the Participant on the Purchase Date multiplied by the approved
Multiplier.
(b) Terms and Vesting of Related Options. Unless the Committee
determines otherwise, Related Options shall have a seven-year term and shall
vest and become exercisable on the third anniversary of the date of grant
thereof, provided that the Participant is in the employ of PaineWebber on such
anniversary date. Related Options shall be nonqualified stock options and not
incentive stock options within the meaning of Section 422 of the Code. The
Related Options shall contain such other terms and conditions as may be required
by the Stock Option Plan pursuant to which the Related Options are granted or
that the Committee determines to be necessary or advisable.
(c) Forfeiture of Related Options. Unless the Committee determines
otherwise, a Related Option shall be immediately forfeited without further
action by PaineWebber if the Participant Transfers the corresponding Program
Shares prior to the expiration of the Share Holding Period, if the Program
Shares are delivered to the Participant prior to the end of the Share Holding
Period, or pursuant to any forfeiture provision of the Stock Option Plans or
related stock option agreements.
8. Withdrawals; Repayments of Cash Contributions; Effect of
Termination of Employment.
(a) Withdrawal of Cash Contributions. Participants shall have the
right to elect once in writing during any Program Year, by the fifteenth day of
the last month of any Quarterly Participation Period, to cease participating in
the Program beginning with the first paycheck of the Quarterly Participation
Period following the Quarterly Participation Period in which the withdrawal
request occurs; provided, however, this Section 8(a) will not apply to Cash
Contributions attributable to bonus compensation. If a Participant chooses to
withdraw from participation and, the Participant's Cash Account Balance as of
the last Quarterly Participation Period in which the Participant is
participating, equals or exceeds $300, then the Participant's Cash Account
Balance shall be used to purchase Program Shares for that Quarterly
Participation Period. If the Participant's Cash Account Balance is less than
$300, then no portion of the
<PAGE> 10
Participant's Cash Account Balance shall be applied to the purchase of Program
Shares, but shall be refunded to the Participant as soon as practicable
following the end of the Quarterly Participation Period in which he was
participating, but in no event later than thirty days following the end of such
Quarterly Participation Period. Anything in the Program to the contrary
notwithstanding, in the event a Participant makes an election to withdraw due to
Financial Hardship in accordance with Section 8(b), Cash Contributions will be
suspended as soon as administratively practicable following the date of the
approval of the Financial Hardship request and no portion of the Participant's
Cash Account Balance shall be applied to purchase Program Shares on the next
Purchase Date, regardless of the amount of the Participant's Cash Account
Balance, but shall be refunded to Participant as soon as practicable following
the date of withdrawal. Any withdrawal election by a Participant shall be
irrevocable once made. A Participant who makes such a withdrawal election shall
be precluded from participating in the Program again until the start of the next
Program Year, provided the Participant files a new Enrollment Form for such
Program Year in accordance with Section 6(b). No withdrawal by a Participant
under this Section 8(a) shall affect any Program Shares purchased on behalf of
the Participant prior to the date the withdrawal election is received by
PaineWebber.
(b) Sale of Program Shares. A Participant may file a written
election with the Committee, in accordance with procedures established by the
Committee for this purpose, to request PaineWebber to sell on his behalf all or
a portion of the Program Shares credited to his Account as a result of a
Financial Hardship (as defined below). If Program Shares are sold as a result of
a Financial Hardship, all Related Options shall be immediately forfeited as of
the date of such sale without further action by PaineWebber. In addition, the
Participant will not be eligible to participate in the Program again until the
next Program Year following the Program Year during which such sale occurs,
provided the Participant files a new Enrollment Form for such Program Year in
accordance with Section 6(b).
If a Participant elects a Financial Hardship sale from his Account,
PaineWebber will stop deducting Cash Contributions and refund the balance of the
Participant's Cash Account Balance to the Participant as soon as
administratively practicable following the date of the approval of the Financial
Hardship request. The additional amounts needed with respect to the Financial
Hardship may be satisfied from the Program Shares purchased in any Quarterly
Participation Period prior to the date of the request. The Participant must
identify, by Purchase Date, the Program Shares to be sold on his behalf and,
anything in the Program to the contrary notwithstanding, in no event may a
Participant have PaineWebber sell less than 100% of the Program Shares credited
to his Account related to a specific Purchase Date. The identified Program
Shares will be sold by PaineWebber on behalf of the Participant and a check
equal to the amount of the proceeds of the sale, minus any costs, will be
remitted to the Participant as soon as practicable following the date of the
approval of the Financial Hardship request. The timing of all sales of Program
Shares sold due to a Financial Hardship will be determined in the sole
discretion of the Program Administrator.
For purposes of this Section 8(b), a "Financial Hardship" means any
of the following: (i) tuition payments for post-secondary education of the
Participant or his spouse or dependents incurred within four months of such
Financial Hardship request; (ii) costs directly
<PAGE> 11
related to the purchase or construction of a Participant's principal residence;
(iii) expenses for medical care previously incurred by a Participant or his
spouse or dependents, or necessary for these persons to obtain such medical
care, that are not reimbursed by the Participant's medical carrier; (iv) amounts
necessary to prevent the eviction of a Participant from his principal residence
or the need to prevent foreclosure on the mortgage of his principal residence;
or (v) any other type of expenses that are deemed by the Committee and the
Commissioner of the Internal Revenue Service through revenue rulings, notices
and other administrative pronouncements of general applicability to constitute
immediate and heavy financial burden for purposes of Section 401(k) of the Code.
The Participant must provide to the Director of Human Resources credible
evidence in writing of the Financial Hardship and the amount necessary to be
withdrawn under the Program to alleviate the Financial Hardship. The Director of
Human Resources shall have sole discretion to determine whether the evidence
presented (i) constitutes a Financial Hardship under the Program and (ii)
demonstrates a need for the dollar amount requested by the Participant.
(c) Termination of Employment.
(i) Anything in the Program to the contrary notwithstanding, unless
the Committee determines otherwise, no Program Shares shall be purchased
on behalf of a Participant, and no Related Option shall be granted to a
Participant, who is not an employee of PaineWebber on the applicable
Purchase Date. Unless the Committee determines otherwise, in the event a
Participant ceases to be an Eligible Employee but is still an employee of
PaineWebber (a "Change in Eligibility Status"), all Cash Contributions
will cease to be collected on the date the Change in Eligibility Status
occurs. In addition, for the purposes of the Participant's Cash Account
Balance, the date of such Change in Eligibility Status shall be treated as
a withdrawal request under Section 8(a). No Change in Eligibility Status
under this Section 8(c)(i) shall affect any Program Shares purchased on
behalf of the Participant prior to the date the Change in Eligibility
Status occurs, unless otherwise determined by the Committee.
(ii) In the event of a Participant's termination of employment for
any reason, PaineWebber shall pay to the Participant, in a lump sum as
soon as practicable following the date of such termination of employment
but in no event later than thirty days following the last day of the
Quarterly Participation Period in which the termination of employment
occurs, the full amount of the Participant's Cash Account Balance. The
Program Shares credited to the Participant's Account shall continue to be
subject to the restrictions on Transfer until the expiration of the
applicable Share Holding Period. Following the expiration of the Share
Holding Period applicable to the Program Shares, such Program Shares shall
be made available to the Participant.
(iii) All Cash Contributions will cease to be deducted from a
Participant's Compensation on the date that the Participant begins
receiving disability benefit payments as a result of the Participant's
long-term disability status under the PaineWebber long-term disability
plan applicable to such Participant ("Long-Term Disability Status"). If
the Participant's Cash Account Balance as of the Quarterly Participation
Period in which the Long-Term Disability Status commences equals or
exceeds $300, then the Participant's Cash Account Balance shall be used to
purchase Program Shares for that Quarterly
<PAGE> 12
Participation Period. If such Participant's Cash Account Balance is less
than $300 on such date, then no portion of the Participant's Cash Account
Balance shall be applied to the purchase of Program Shares, but shall be
refunded to the Participant as soon as practicable following the end of
the Quarterly Participation Period in which the Long-Term Disability
Status commences, but in no event later than thirty days following the end
of such Quarterly Participation Period. Unless otherwise determined by the
Committee, Program Shares purchased on behalf of a Participant on
Long-Term Disability Status will be released to the Participant at the end
of the Share Holding Period.
(iv) The Committee shall have discretion to determine how approved
leaves of absence will be treated under the Program.
(v) The effect of a Participant's termination of employment for any
reason on the Related Options shall be governed by the terms of the
applicable Stock Option Plan and corresponding option agreement.
9. Accounts.
(a) Establishment of Accounts. PaineWebber shall establish and
maintain (or cause to be established and maintained) an Account for each
Participant to record increases and decreases in the Participant's Cash Account
Balance, Program Shares and Related Options.
(b) Account Statements. PaineWebber shall provide Participants with
a statement of their Account no less frequently than annually.
(c) Cash Contributions. PaineWebber shall not be obligated to
segregate the Cash Contributions from its other assets or to establish any trust
or separate fund to hold such Cash Contributions. No interest shall accrue with
respect to the Cash Contributions held in the Participant's Account regardless
of the period of time for which such Cash Contributions are held and regardless
of whether Program Shares are actually purchased with such Cash Contributions.
10. Change in Control.
(a) Effect of a Change in Control. In the event of a Change in
Control of PWG, (i) all Transfer restrictions will immediately lapse on all
Program Shares, (ii) all Cash Contributions will cease to be withheld from
Participant Compensation and all purchases of Program Shares on behalf of a
Participant will terminate and (iii) each Participant's Cash Account Balance
will be paid to the Participant as soon as practicable following the date of the
Change in Control. The effect of a Change in Control on the Related Options will
be governed
<PAGE> 13
by the terms and conditions of the Stock Option Plans and the corresponding
stock option agreements under which each Related Option is granted.
(b) Change in Control Defined. For the purposes of this Program,
"Change in Control" shall mean the occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than PWG, a subsidiary, any trustee or
other fiduciary holding securities under an employee benefit plan of
PaineWebber or a subsidiary, or any corporation owned, directly or
indirectly, by the stockholders of PWG in substantially the same
proportions as their contemporaneous ownership of voting securities of
PWG, is or becomes a "20% Beneficial Owner." For purposes of this
provision, a "20% Beneficial Owner" shall mean a person who is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of PWG representing 20% or more of
the combined voting power of PWG's then-outstanding voting securities;
provided that (A) the term "20% Beneficial Owner" shall not include any
Beneficial Owner who has crossed such 20% percent threshold solely as a
result of an acquisition of securities directly from PWG, or solely as a
result of an acquisition by PWG of PWG securities, until such time
thereafter as such person acquires additional voting securities other than
directly from PWG and, after giving effect to such acquisition, such
person would constitute a 20% Beneficial Owner; and (B) with respect to
any person who is and remains eligible to file a Schedule 13G pursuant to
Rule 13d-1(b)(1) under the Exchange Act with respect to PWG securities,
there shall be excluded from the number of securities deemed to be
beneficially owned by such person for purposes of determining whether such
person is a 20% Beneficial Owner a number of securities representing 10%
of the combined voting power of PWG's then-outstanding voting securities;
(ii) During any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of Directors of
PWG, together with any new director (other than a director designated by a
person who has entered into an agreement with PWG to effect a transaction
described in paragraph (i), (iii), or (iv) hereof) whose election by the
Board or nomination for election by PWG's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office
who either were directors at the beginning of the period or whose election
or nomination for election was previously so approved (the "Continuing
Directors"), cease for any reason to constitute at least a majority
thereof;
(iii) The stockholders of PWG approve a merger, consolidation,
recapitalization or reorganization of PWG, or a reverse stock split of any
class of voting securities of PWG, or the consummation of any such
transaction of stockholder approval is not obtained, other than any such
transaction which would result in at least 80% of the total voting power
represented by the voting securities of PWG or the surviving entity
outstanding immediately after such transaction, with the relative voting
power of each such continuing holder compared to the voting power of each
other continuing holder not substantially altered as a result of the
transaction; provided that, for purposes of this
<PAGE> 14
paragraph (iii), such continuity of ownership (and preservation of
relative voting power) shall be deemed to be satisfied if the failure to
meet such 80% threshold (or to substantially preserve such relative voting
power) is due solely to the acquisition of voting securities by an
employee benefit plan of PWG or its subsidiaries, such surviving entity,
or of any subsidiary of PWG or such surviving entity;
(iv) The stockholders of PWG approve a plan of complete liquidation
of PWG or an agreement for the sale or disposition by PWG of all or
substantially all of PWG's assets (or any transaction having a similar
effect); or
(v) Any other event which the Board of Directors (or the Committee,
if and to the extent that the Committee must exercise sole discretion over
the matter in order to comply with applicable requirements of Rule 16b-3
under the Exchange Act), determines shall constitute a Change in Control
for purposes of this Program.
11. Amendment and Termination. The Board or Committee may at
any time and for any reason suspend, amend or terminate the Program at any
time, except that no such termination will adversely affect Program Shares
previously purchased or Related Options previously granted.
12. Miscellaneous Provisions.
(a) Rights Not Transferable. A Participant's right to
participate in the Program may not be subject to any assignment, transfer,
pledge or other disposition.
(b) No Right to Continued Employment. Neither the creation of
the Program nor the purchase of Program Shares nor the granting of Related
Options hereunder shall be deemed to create a condition of employment or
right to continued employment with PaineWebber or affect an employee's
status as an "employee at will," and each Participant shall be and shall
remain subject to discharge by PaineWebber as though the Program had never
come into existence.
(c) Consent to Program. By filing an Enrollment Form with
PaineWebber and accepting any Program Share or Related Option or other
benefit under the Program, each Participant and each person claiming under
or through him shall be conclusively deemed to have indicated his
acceptance and ratification of, and consent to, any action taken under the
Program by PaineWebber, the Board or the Committee.
(d) Wage and Tax Withholding. Nothing in the Program shall
preclude PaineWebber from withholding from a Participant's Compensation or
from any other remuneration payable to the Participant any amounts that
are required to be withheld under federal, state and local income and
payroll tax withholding laws.
(e) Compliance with Securities Laws. No Program Shares may be
purchased under the Program or delivered to a Participant unless and until
PaineWebber
<PAGE> 15
determines that such purchase and delivery complies with all applicable
securities laws. A Related Option may not be exercised, and no shares of
Common Stock may be issued in connection with such options, unless
PaineWebber determines that the issuance of such shares has been
registered under the Securities Act of 1933, as amended, and qualified
under applicable state "blue sky" laws, or an exemption from registration
and from qualification under such state "blue sky" laws is available.
<PAGE> 16
(f) Capital Changes. In the event of changes in the Common
Stock of PWG due to a stock split, reverse stock split, stock dividend,
combination, reclassification, or like change in PWG's capitalization, or
in the event of any merger, sale or other reorganization, appropriate
adjustments shall be made by the Committee to preserve the original intent
of the Program.
(g) Beneficiary Designation. In the event of the death of a
Participant, PaineWebber shall pay or deliver the Account Balance to the
executor or administrator of the estate of the Participant.
(h) Awards to Individuals Subject to Non-U.S. Jurisdictions.
To the extent that Program Shares or Related Options are purchased or
granted to Participants who are domiciled or resident outside of the
United States or to persons who are domiciled or resident in the United
States but who are subject to the tax laws of a jurisdiction outside of
the United States, the Committee may adjust the terms of the purchases of
the Program Shares and the Related Options to the extent reasonably
necessary (i) to comply with the laws of such jurisdiction and (ii) to
permit the grant of the Related Options and the purchase of the Program
Shares not to be a taxable event to the applicable Participant. The
authority granted under the previous sentence shall include the discretion
for the Committee to adopt, on behalf of PaineWebber, one or more
sub-plans applicable to separate classes of Eligible Employees who are
subject to the laws of jurisdictions outside of the United States.
(i) Expenses. Except as otherwise determined by the Committee,
the costs and expenses of administering and implementing the Program shall
be borne by PaineWebber.
(j) Effective Date. The Program shall become effective on the
Effective Date and shall remain in effect until terminated in accordance
with Section 11.
(k) Governing Law. The validity, construction and effect of
the Program, any rules and regulations relating to the Program, and any
option or share documentation shall be determined in accordance with the
laws of the State of New York applicable to contracts executed and
performed within such state and without giving effect to principles of
conflicts of laws.
<PAGE> 1
Exhibit 10.39
LIMITED PARTNERSHIP AGREEMENT
of
PW PARTNERS 1996 L.P.
Dated as of February 14, 1997
THE LIMITED PARTNERSHIP INTERESTS EVIDENCED BY THIS
PARTNERSHIP AGREEMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAW AND
MUST BE HELD INDEFINITELY.
<PAGE> 2
Table of Contents
Page
ARTICLE I
Definitions and Terms 1
1.01. Definitions 1
1.02. Terms Generally 6
ARTICLE II
The Partnership 6
2.01. Name 6
2.02. Term 6
2.03. Principal Place of Business 7
2.04. Registered Office in Delaware 7
2.05. Names and Addresses of the Partners 7
2.06. Conversion to Corporate Form 7
ARTICLE III
Purpose and Powers 7
3.01. Purpose and Powers 7
ARTICLE IV
Management and Control 8
4.01. Authority of the General Partner 8
4.02. Expenses 9
4.03. Management Fees 9
ARTICLE V
Capital Contributions 9
5.01. Limited Partner Capital Contributions 9
5.02. General Partner Capital Contributions 10
ARTICLE VI
Allocations and Distributions 10
6.01. Allocation of Net Income and Net Loss 10
6.02. Liability of General and Limited Partners 12
6.03. Allocations for Tax Purposes 12
6.04. Valuation 13
6.05. Distributions and Interest Equivalent 13
<PAGE> 3
ARTICLE VII
Partners 14
7.01. Designation of Limited Partners 14
7.02. Vesting of Interests; Purchase of a Limited Partner's
Interest 15
7.03. Transfer of a Limited Partner's Interest 16
7.04. Transfer of General Partner's Interest 16
7.05. Admission or Substitution of New Limited Partners 16
7.06. Withdrawal of a Limited or General Partner 17
7.07. Final Events with Respect to a Partner 17
7.08. Continuation of Partnership 17
7.09. Compliance with Law 17
ARTICLE VIII
Dissolution of the Partnership 18
8.01. Dissolution 18
8.02. Amounts Reserved 19
ARTICLE IX
Reports to Partners 19
9.01. Books of Account 19
9.02. Fiscal Year 20
ARTICLE X
Miscellaneous 20
10.01. Governing Law 20
10.02. Indemnification 20
10.03. Notice 20
10.04. Counterparts 20
10.05. Completeness and Amendments 20
10.06. Power of Attorney 21
<PAGE> 4
Exhibit 10.39
PW PARTNERS 1996 L.P.
LIMITED PARTNERSHIP AGREEMENT, dated as of February 14, 1997 (this
"Agreement"), among PW Partners Inc., a Delaware corporation, as general
partner, and the Persons listed on the signature pages hereof, as limited
partners.
The parties hereto, in consideration of their mutual covenants
herein contained, hereby agree to become partners and to form a limited
partnership (the "Partnership") under the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") upon the filing for record of the
Certificate of Limited Partnership in the office of the Secretary of State as
required by Section 17-201 of the Delaware Act, for the purposes and duration,
and upon the terms and conditions, hereinafter set forth, and further hereby
mutually covenant and agree as follows:
ARTICLE I
Definitions and Terms
1.01. Definitions. For the purposes of this Agreement, the following
terms shall have the corresponding meanings, except as otherwise specifically
provided herein:
"Affiliate" shall mean, with respect to another Person, any Person
directly, or indirectly through one or more intermediaries, controlling,
controlled by or under common control with such other Person.
"Approved Retirement" shall mean retirement of a Limited Partner
approved in advance by the Compensation Committee.
"Bankruptcy" shall mean, with respect to any Person, the occurrence
of any of the following events: (i) the filing of an application by such Person
for, or a consent to, the appointment of a trustee or custodian of its assets;
(ii) the filing by such Person of a voluntary petition in bankruptcy or the
seeking of relief under Title 11 of the United States Code, as now constituted
or hereafter amended, or the filing of a pleading in any court of record
admitting in writing his inability to pay his debts as they become due; (iii)
the failure of such Person to pay his debts as such debts become due; (iv)Ethe
making by such Person of a general assignment for the benefit of creditors; (v)
the filing by such Person of an answer admitting the material allegations of, or
his consenting to or defaulting in answering, a bankruptcy petition filed
against him in any bankruptcy proceeding or petition seeking relief under Title
11 of the United States Code, as now constituted or as hereafter amended; or
(vi) the entry of an order, judgment or decree by any court of competent
jurisdiction adjudicating such Person a bankrupt or insolvent or for relief in
respect of such Person or appointing a trustee or custodian of his assets and
the continuance of such order, judgment or decree unstayed and in effect for a
period of 60 consecutive days.
"Call Period" shall mean the period during which the General Partner
may call upon Limited Partners to make Capital Contributions to the
<PAGE> 5
Partnership pursuant to Article V hereof. The Call Period will commence on the
Initial Contribution Date and will end on the date that is 18 months after the
Initial Contribution Date. The General Partner, in its sole discretion, may
extend the Call Period for up to an additional six months.
"Capital Account" shall mean, with respect to any Partner, an
account maintained for such Partner to which is credited such Partner's Capital
Contributions and any Net Income and specially allocated income items allocated
to such Partner pursuant to Section 6.01 and from which is debited any
distributions to such Partner and any Net Loss and specially allocated
deductions allocated to such Partner pursuant to SectionE6.01. Capital Accounts
shall be maintained in accordance with the Treasury Regulations under
SectionE704(b) of the Code (including the provisions thereof for adjusting
Capital Accounts in the event of any distribution in kind or the admission of a
new partner).
"Capital Call Notice" shall mean a capital call notice distributed
by the General Partner to the Limited Partners pursuant to Section 5.01.
"Capital Commitment" shall mean, with respect to a Limited Partner,
the maximum amount of Capital Contributions that such Limited Partner has agreed
to contribute to the Partnership in connection with his Interests, and, with
respect to the General Partner, the maximum amount of Capital Contributions that
the General Partner has agreed to contribute pursuant to SectionE5.02.
"Capital Contribution" shall mean, with respect to any Partner, a
contribution of capital to the Partnership made by such Partner in accordance
with Article V.
"Cause" shall mean, with respect to any Limited Partner, (i) the
willful and continued failure by the Limited Partner to perform substantially
his or her duties with PaineWebber (other than such failure resulting from the
Limited Partner's incapacity due to physical or mental illness), (ii)Ethe
engaging by the Limited Partner in illegal conduct, including, but not limited
to, the violation, in the sole opinion of PaineWebber, of any state or federal
securities, commodities or insurance statute or regulation, (iii)Ethe engaging
by the Limited Partner in conduct in violation, in the sole opinion of
PaineWebber, of any provision of the constitution, by-laws, or rules or
regulations of any securities or commodities or insurance exchange or
association of which PaineWebber is now or may later become a member or in
violation of the Code of Conduct or published policies of PaineWebber or
(iv)Ethe willful engaging by the Limited Partner in any act of serious
dishonesty which adversely affects or, in the sole opinion of PaineWebber, could
in the future adversely affect, the value, reliability or performance of the
Limited Partner to PaineWebber (including any misrepresentations by the Limited
Partner to PaineWebber of prior production levels or any prior or existing
customer complaint, or regulatory, administrative, civil or criminal matter
affecting the Limited Partner's employment). For purposes of this definition, no
act, or failure to act, on the part of the Limited Partner shall be considered
"willful" unless done, or omitted to be done, by the Limited Partner in bad
faith and without reasonable belief that his or her action or omission was in,
or not opposed to, the best interest of PaineWebber.
<PAGE> 6
"Certificate of Limited Partnership" shall mean the Certificate of
Limited Partnership dated and filed for record in the Office of the Secretary of
State of Delaware on the Closing Date, pursuant to Section 17-201 of the
Delaware Act.
"Change in Control" shall mean the occurrence of any of the
following events:
(a) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than PWG, a subsidiary, any trustee or other
fiduciary holding securities under an employee benefit plan of PWG or a
subsidiary, or any corporation owned, directly or indirectly, by the
stockholders of PWG in substantially the same proportions as their
contemporaneous ownership of voting securities of PWG, is or becomes a 20%
Beneficial Owner. For purposes of this provision, a "20% Beneficial Owner"
shall mean a person who is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of PWG representing 20% or more of the combined voting power of
PWG's then-outstanding voting securities; provided that (i) the term "20%
Beneficial Owner" shall not include any beneficial owner who has crossed
such 20% threshold solely as a result of an acquisition of securities
directly from PWG, or solely as a result of an acquisition by PWG of PWG
securities, until such time thereafter as such person acquires additional
voting securities other than directly from PWG and, after giving effect to
such acquisition, such person would constitute a 20% Beneficial Owner, and
(B) with respect to any person who is and remains eligible to file a
Schedule 13G pursuant to Rule 13d-1(b)(1) under the Exchange Act with
respect to PWG securities, there shall be excluded from the number of
securities deemed to be beneficially owned by such person for purposes of
determining whether such person is a 20% Beneficial Owner a number of
securities representing 10% of the combined voting power of PWG's
then-outstanding voting securities;
(b) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of PWG (the
"PWG Board"), together with any new director (other than a director
designated by a person who has entered into an agreement with PWG to
effect a transaction described in paragraph (a), (c) or (d) hereof) whose
election by the PWG Board or nomination for election by PWG's stockholders
was approved by a vote of at least two-thirds (_) of the directors then
still in office who either were directors at the beginning of the period
or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority thereof;
(c) the stockholders of PWG approve a merger, consolidation,
recapitalization or reorganization of PWG, or a reverse stock split of any
class of voting securities of PWG, or the consummation of any such
transaction if stockholder approval is not obtained, other than any such
transaction which would result in at least 80% of the total voting power
represented by the voting securities of PWG or the surviving entity
outstanding immediately after such transaction being beneficially owned by
persons who together beneficially owned at least 80% of the combined
<PAGE> 7
voting power of the voting securities of PWG outstanding immediately prior
to such transaction, with the relative voting power of each such
continuing holder compared to the voting power of each other continuing
holder not substantially altered as a result of the transaction; provided
that, for purposes of this paragraph (c), such continuity of ownership
(and preservation of relative voting power) shall be deemed to be
satisfied if the failure to meet such 80% threshold (or to substantially
preserve such relative voting power) is due solely to the acquisition of
voting securities by an employee benefit plan of PWG or such surviving
entity or of any subsidiary of PWG or such surviving entity;
(d) the stockholders of PWG approve a plan of complete liquidation
of PWG or an agreement for the sale or disposition by PWG of all or
substantially all of PWG's assets (or any transaction having a similar
effect); or
(e) any other event which the PWG Board determines shall constitute
a Change in Control for purposes of this Agreement.
"Closing Date" shall mean the date of the closing of the
Partnership, which shall be communicated by the General Partner to the Limited
Partners.
"Code" shall mean the Internal Revenue Code of 1986, as from time to
time amended and in effect.
"Compensation Committee" shall mean the Compensation Committee of
the PWG Board.
"Contribution Date" shall mean each date during the Call Period,
fixed by the General Partner in its discretion, on which Capital Contributions
shall be made by the Limited Partners.
"Cost of Funds Rate" shall mean the average daily cost of funds of
PaineWebber determined by its Treasurer's Office.
"Disinterested Director" shall mean any member of the PWG Board (a)
who is not an officer or employee of PWG, PWI or any of their subsidiaries, (b)
who is not a 20% Beneficial Owner or an affiliate or associate of a 20%
Beneficial Owner or a nominee or representative of a 20% Beneficial Owner or of
any such affiliate or associate and (c) who was a member of the PWG Board prior
to the Initial Contribution Date or was recommended for election or elected by a
majority of the Disinterested Directors then on the PWG Board.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Final Event" shall mean the death, adjudication of incompetency,
Bankruptcy, liquidation, dissolution or withdrawal from the Partnership of any
Person who is a Partner.
<PAGE> 8
"Fixed Return" shall mean the cumulative preferred annual return on
the General Partner's aggregate Capital Contributions equal to the Cost of Funds
Rate plus 0.50% or, if higher, an amount determined by the General Partner with
reference to the lowest United States federal rate available for interest on
loans then utilized by the Internal Revenue Service in connection with
below-market loans. For any taxable year, to the extent of the lesser of (i) the
amount by which the cumulative Fixed Return exceeds the income of the
Partnership and (ii) the amount of Capital Contributions of the Limited Partners
recouped by the Partnership and not previously distributed to the Limited
Partners, the Fixed Return shall be considered an expense (the "Interest
Equivalent") of the Partnership for federal income tax purposes, thereby
reducing the Partnership's Net Income or increasing the Partnership's Net Loss
(as the case may be), and shall not be treated as a distribution for purposes
hereof, including for purposes of maintaining Partner Capital Accounts. The
portion of the Fixed Return that exceeds any Interest Equivalent is referred to
as the "Net Fixed Return."
"Formula Price" shall mean, with respect to any Limited Partner, the
sum of such Limited Partner's Capital Contributions less any prior distributions
made to such Limited Partner (including distributions, if any, for the payment
of taxes made in the sole discretion of the General Partner).
"General Partner" shall mean the Person named herein as General
Partner and any Person admitted as an additional or substitute General Partner,
so long as any such Person shall remain a General Partner.
"Initial Contribution" shall mean the Capital Contribution made by
each Limited Partner in cash on the Initial Contribution Date and shall be equal
to at least 25% of the Capital Commitment of each such Limited Partner. Upon at
least five business days' prior written notice from the General Partner, the
Initial Contribution may be increased.
"Initial Contribution Date" shall mean the date of the closing of
the Partnership or, if another date, the date specified by the General Partner
for the making of Initial Contributions.
"Interests" shall mean limited partnership interests in the
Partnership.
"Investments" shall mean an investment made by the Partnership and
may include, but shall not be limited to, common and preferred stock or other
equity interests (including warrants, rights, swaps, put and call options and
other options relating thereto or any combination thereof), partnership
interests, contract rights, trust interests, notes, bonds, debentures, trust
receipts and other obligations, interests in entities organized or controlled by
PaineWebber, instruments or evidences of indebtedness, choses in action, other
property or interests commonly regarded as securities, interests in real
property, whether improved or unimproved, interests in oil and gas properties
and mineral properties, interests in "hedge funds" or similar investment
vehicles, whether or not registered under the Investment Company Act of 1940, as
amended, short-term investments commonly regarded as money market investments,
bank deposits, interests in personal property of all kinds, whether tangible or
intangible, and cash.
<PAGE> 9
"Limited Partner" shall mean any of the Persons named herein as
Limited Partners or any other Person admitted as an additional or substitute
Limited Partner, so long as such Person shall remain a Limited Partner.
"Limited Partnership Percentage" shall mean, with respect to any
Limited Partner, the Capital Contributions of such Limited Partner divided by
the Capital Contributions of all of the Limited Partners.
"Net Income" ("Net Loss") shall mean the net income (net loss)
realized by the Partnership for federal income tax purposes, with the following
adjustments:
(i) any income that is exempt from federal income tax and not
otherwise taken into account in computing Net Income or Net Loss hereunder
shall be added to such income or loss;
(ii) any expenditures described in Section 705(a)(2)(B) of the Code
or treated as Code SectionE705(a)(2)(B) expenditures pursuant to
applicable Treasury Regulations under Section 704 of the Code and not
otherwise taken into account in computing Net Income or Net Loss hereunder
shall be subtracted from such taxable income or Net Loss;
(iii) such income or loss shall be adjusted as otherwise required
under the Treasury Regulations under Section 704 of the Code, including
for the amount of any unrealized appreciation or depreciation in the value
of any property distributed in kind; and
(iv) items required to be specially allocated hereunder shall be
disregarded.
"Net Value" shall mean, with respect to any Investment as of any
date, the value of the Investment on such date, as determined in Section 6.04,
minus the sum of the Partnership's liabilities incurred with respect to such
Investment.
"Operative Date" shall mean the date, if any, following a Change in
Control that has been designated in a resolution adopted by a majority of the
Disinterested Directors, in their sole discretion, as the Operative Date.
"PaineWebber" shall mean PWG or any Affiliate of PWG.
"Partner" shall mean any Person who is a partner in the Partnership,
whether the General Partner or a Limited Partner.
"Person" shall include any individual, corporation, partnership,
association, trust, joint stock company or unincorporated organization.
"PWG" shall mean Paine Webber Group Inc., a Delaware corporation.
"PWI" shall mean PaineWebber Incorporated, a Delaware corporation.
"Reserve Interest" shall mean an Interest purchased by the General
Partner for the purpose of selling such Interest to a new or existing Limited
Partner at a later date, which sale may occur at any time.
<PAGE> 10
"Successor in Interest" shall mean any (a) shareholder of; (b)
trustee, custodian, receiver or other Person acting in any bankruptcy or
reorganization proceeding with respect to; (c) assignee for the benefit of the
creditors of; (d) officer, director or partner of; (e) trustee or receiver, or
former officer, director or partner, or other fiduciary acting for or with
respect to the dissolution, liquidation or termination of; (f)Eexecutor,
administrator, committee, legal representative or other successor or assign of;
or (g) beneficiary of any Partner, whether by operation of law or otherwise.
"Valuation Price" shall mean, with respect to any Limited Partner,
the sum of (a) such Limited Partner's Capital Account (calculated as of the last
business day of the Partnership's fiscal quarter in which such Limited Partner
ceased to be employed by PaineWebber) plus (minus) (b) such Limited Partner's
share of any unrealized appreciation (depreciation) in the Net Value of each
Investment held by the Partnership.
1.02. Terms Generally. The definitions in Section 1.01 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". All the terms
herein that relate to accounting matters shall be interpreted in accordance with
generally accepted accounting principles from time to time in effect. All
references to "Sections" and "Articles" shall refer to Sections and Articles of
this Agreement unless otherwise specified. The words "hereof" and "herein" and
similar terms shall relate to this Agreement.
ARTICLE II
The Partnership
2.01. Name. The Partnership shall conduct its activities under the
name of PW Partners 1996 L.P. The General Partner shall have the power at any
time to change the name of the Partnership. The General Partner shall give
prompt notice of any such change to each Limited Partner.
2.02. Term. The Partnership shall commence upon the filing of the
Certificate of Limited Partnership in the Office of the Secretary of State of
Delaware on the Closing Date, and shall continue through the close of business
on the fifth anniversary of the Closing Date, unless sooner terminated at the
discretion of the General Partner at any time after JanuaryE10, 2000 pursuant to
SectionE8.01(a) or otherwise pursuant to the provisions of SectionE7.02(a) or
7.08 or extended pursuant to this Section 2.02. The General Partner may, at any
time on or prior to the fifth anniversary of the Closing Date, extend the stated
termination date of the Partnership one or more times by up to five additional
years in the aggregate to take advantage of investment opportunities or if the
General Partner determines that such extensions are in the best interests of the
Partnership or that such extensions may permit the General Partner to recover
its capital. Thereafter, the General Partner may extend the term of the
Partnership for any period, in its sole discretion, for the sole purpose of
holding any Investment
<PAGE> 11
that is illiquid and undistributable. Notwithstanding the foregoing, any such
extension shall be subject to earlier termination pursuant to the provisions of
this Section 2.02 and Sections 7.02(a), 7.08 and 8.01(a). No consent of the
Limited Partners is necessary for the General Partner to (i)Eextend the term of
the Partnership or (ii)Eterminate the Partnership at any time after JanuaryE10,
2000.
2.03. Principal Place of Business. The principal place of business
of the Partnership shall be at 1285 Avenue of the Americas, New York, New York
10019, or such other place, either within or without the State of Delaware, as
may be designated by the General Partner from time to time. The General Partner
shall give prompt notice of any change in its principal place of business to
each Limited Partner.
2.04. Registered Office in Delaware. The address of the
Partnership's registered office in Delaware is 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of the Partnership's registered agent
at such address is The Corporation Trust Company.
2.05. Names and Addresses of the Partners. The name and address of
each Partner is set forth on the signature page of each such Partner.
2.06. Conversion to Corporate Form. In the event of changes in the
law, regulations or interpretations applicable to the Partnership or its
operations or changes in other circumstances which, in the sole judgment of the
General Partner, render it desirable or helpful for the business of the
Partnership to be conducted in a corporate rather than in a partnership form
(including, without limitation, a limited liability company), the General
Partner, without the approval of the Limited Partners, shall have the power to
incorporate the Partnership or take such other action as it may deem advisable
in light of such changed conditions, including, without limitation, dissolving
the Partnership, transferring its assets as an entirety to a successor
investment vehicle or causing it to merge with a successor investment vehicle.
ARTICLE III
Purpose and Powers
3.01. Purpose and Powers. The purpose of the Partnership is to
acquire Investments that, in the opinion of the General Partner, present
opportunities for capital appreciation, and to engage in such other businesses
and activities as the General Partner may, in its discretion, determine. In
furtherance of this purpose, the Partnership shall have all powers necessary,
suitable or convenient for the accomplishment of this purpose, alone or with
others, as principal or agent, including the following:
(a) to buy, sell and otherwise acquire Investments, whether such
Investments are readily marketable or not;
(b) to invest and reinvest the cash assets of the Partnership in
money market or other short-term Investments pending (i) the
identification by the General Partner of Investments with suitable capital
gains opportunities or (ii) a distribution permitted under Section 6.05 or
Article VIII;
<PAGE> 12
(c) to hold, receive, mortgage, pledge, lease, transfer, exchange or
otherwise dispose of or grant options with respect to and otherwise deal
in and exercise all rights, powers, privileges and other incidents of
ownership or possession with respect to all property held or owned by the
Partnership;
(d) to borrow or raise money from time to time and to issue
promissory notes, drafts, bills of exchange, warrants, bonds, debentures
and other negotiable and nonnegotiable instruments and evidences of
indebtedness, to secure payment of the principal of any such indebtedness
and the interest thereon by mortgage, pledge, conveyance or assignment in
trust of, or the granting of a security interest in, the whole or any part
of the property of the Partnership, whether at the time owned or
thereafter acquired, to guarantee the obligations of others and to buy,
sell, pledge or otherwise dispose of any such instrument or evidence of
indebtedness;
(e) to lend any of its property or funds, either with or without
security, at any legal rate of interest or without interest;
(f) to have and maintain one or more offices within or without the
State of Delaware, and in connection therewith, to rent or acquire office
space, engage personnel and compensate them, and to do such other acts and
things as may be advisable or necessary in connection with the maintenance
of such office or offices;
(g) to open, maintain and close accounts, including margin accounts,
with brokers;
(h) to open, maintain and close bank accounts and draw checks and
other orders for the payment of money;
(i) to engage accountants, custodians, investment advisers,
attorneys and any and all other agents and assistants, both professional
and nonprofessional, and to compensate them as may be necessary or
advisable;
(j) to form or cause to be formed and to own the stock of one or
more corporations, whether foreign or domestic, and to form or cause to be
formed and to participate in partnerships and joint ventures, whether
foreign or domestic;
(k) to enter into, make and perform all contracts, agreements and
other undertakings as may be necessary or advisable or incident to
carrying out its purpose;
(l) to sue and be sued, to prosecute, settle or compromise all
claims against third parties, to compromise, settle or accept judgment to
claims against the Partnership, and to execute all documents and make all
representations, admissions and waivers in connection therewith; and
(m) to distribute, subject to the limitations hereinafter set forth
in Section 6.05 or otherwise, at any time and from time to time to
<PAGE> 13
all of the Partners cash or Investments or other property of the
Partnership or any combination thereof.
ARTICLE IV
Management and Control
4.01. Authority of the General Partner. (a) The management and
operation of the Partnership and the formulation and execution of investment
policy shall be vested exclusively in the General Partner. The General Partner
shall, in its sole discretion, exercise all powers necessary or convenient for
the purposes of the Partnership, including those enumerated in Section 3.01, on
behalf and in the name of the Partnership. If at any time the Partnership shall
have two or more General Partners, then each such General Partner shall have the
full authority of the General Partner under this Agreement; provided, however,
that any controversy among the General Partners shall be resolved in favor of
the General Partners having the greater interest in the Partnership (based upon
Capital Contributions).
(b) A Limited Partner shall have no right to, and shall not, take
part in the management or control of the Partnership's business or act for or
bind the Partnership, and shall have only the rights and powers granted to
Limited Partners herein.
(c) No provision of this Agreement shall be construed to preclude
any Partner, or any Affiliate of any Partner, from engaging in any activity
whatsoever, including receiving compensation from issuers of Investments for
investment banking services, managing Investments, participating in Investments,
brokerage or consulting arrangements or acting as an adviser to or participant
in any corporation, partnership, trust or other business entity or from
receiving compensation or profit therefor.
4.02. Expenses. The initial organizational expenses of the
Partnership will be paid by the General Partner or PaineWebber. Any such
expenses paid by the General Partner shall not be accounted for as contributions
to the Partnership and shall not affect the Capital Account or Capital
Contributions of any Partner hereunder, other than for purposes of offsetting
the General Partner's specially allocated deduction in respect of amortization
of any corresponding organizational expenses. The Partnership will pay its own
operational and liquidation expenses and will also bear the costs and expenses
directly related to the purchase or sale of Investments by the Partnership
(including brokerage fees and commissions, transfer taxes and costs relating to
the registration or qualification for sale of such Investments). The Fixed
Return shall not constitute an expense of the Partnership for purposes of this
Section 4.02.
4.03. Management Fees. The General Partner shall not receive any
fees or other compensation for serving as such pursuant to this Agreement.
<PAGE> 14
ARTICLE V
Capital Contributions
5.01. Limited Partner Capital Contributions. (a) Subscriptions for
Interests will be accepted and rejected by the General Partner in its sole
discretion. Each Interest represents a Capital Commitment of $50,000. Fractional
Interests may also be permitted in the sole discretion of the General Partner,
but the minimum Capital Commitment of each Limited Partner is one Interest. The
Initial Contributions are unconditionally due and payable on the Initial
Contribution Date. The Initial Contributions will be deposited by the General
Partner in a cash equivalent investment or a similar short-term investment
vehicle until needed to fund an Investment or to pay an expense of the
Partnership.
(b) The balance of the Capital Commitments are due at any time
during the Call Period upon subsequent call dates to be determined by the
General Partner upon not less than five business days' prior written notice to
the Limited Partners by delivery of Capital Call Notices for such date stating
the amount and the due date of the Limited Partners' Capital Contributions.
Unless the General Partner determines otherwise in its sole discretion, the
General Partner will first apply the Initial Contributions to fund Investments
or pay expenses of the Partnership before making subsequent capital calls on the
Limited Partners. All Capital Contributions made to the Partnership by a Limited
Partner, including the Initial Contributions, must be paid in cash. In the event
that any Limited Partner fails to pay in full any Capital Contribution as the
installment becomes due, the General Partner shall send to the Limited Partner a
written notice by certified mail (or its equivalent) or by overnight courier
stating that the installment is overdue. If such Limited Partner fails to pay
the installment in full within five business days following the General
Partner's mailing of the notice, the Limited Partner will be in breach of this
Agreement and the General Partner may, in its sole discretion, do one or more of
the following: (i) prohibit the defaulting Limited Partner from making any
future Capital Contributions and (ii) either (A) repurchase some or all of the
defaulting Limited Partner's Interests at 80% of the lesser of the Valuation
Price and the Formula Price or (B)Ereduce by 20% (as liquidated damages) such
defaulting Limited Partner's Interests, including the positive balance of such
Limited Partner's Capital Account. If the General Partner determines to
repurchase the Interests of a defaulting Limited Partner in accordance with the
previous sentence, the General Partner shall provide the defaulting Limited
Partner with written notice, sent by certified mail (or its equivalent) or by
overnight courier, of the time and location at which such repurchase shall take
place. If the General Partner prohibits such a defaulting Limited Partner from
making any future Capital Contributions pursuant to clause (i), such defaulting
Limited Partner will remain a participant in allocations of gain and loss to the
extent of such defaulting Limited Partner's previous Capital Contributions,
subject to any repurchase or reduction of such defaulting Limited Partner's
Interests pursuant to clause (ii).
(c) The General Partner, in its sole discretion, may purchase
Reserve Interests on the Initial Contribution Date by making an Initial
<PAGE> 15
Contribution and subsequent Capital Contributions with respect to such Reserve
Interests. The General Partner may offer and sell Reserve Interests to
prospective or existing Limited Partners at any time. Any Reserve Interests not
sold by the General Partner shall be retained for the General Partner's account,
and, subject to Sections 8.01(b) and 10.05 hereof, the General Partner shall
have all of the rights and powers of a Limited Partner with respect to such
Reserve Interests. A separate Capital Account shall be created and maintained
for each Reserve Interest capitalized by the General Partner.
5.02. General Partner Capital Contributions. The Capital Commitment
of the General Partner shall be equal to five times the aggregate Capital
Commitments of the Limited Partners (including the Capital Commitments
represented by Reserve Interests held by the General Partner). The General
Partner shall make Capital Contributions to the Partnership in an amount equal
to five times the amount of the Limited Partner Capital Contributions then being
used to make an Investment or pay an expense. In no event will the General
Partner's aggregate Capital Contributions at any time be less than 1% of the
aggregate Capital Contributions of all Partners or greater than five times the
aggregate Capital Contributions of all Limited Partners (including the Capital
Contributions represented by Reserve Interests held by the General Partner). The
General Partner shall receive the Fixed Return on its outstanding Capital
Contributions.
ARTICLE VI
Allocations and Distributions
6.01. Allocation of Net Income and Net Loss. (a) Net Income (or Net
Loss) of the Partnership shall be determined annually at the end of each fiscal
year in accordance with the accounting methods followed by the Partnership for
federal income tax purposes and shall thereafter be allocated among the Partners
and credited to (or debited from) their respective Capital Accounts as follows:
(i) Net Income shall be allocated as follows:
(A) first, if on a cumulative basis the General Partner has
had Net Loss previously allocated to it in excess of Net Income
previously allocated to it, then to the General Partner to the
extent of such excess;
(B) second, to the General Partner up to an amount equal to
the Net Fixed Return;
(C) third, if on a cumulative basis the Limited Partners have
had Net Loss previously allocated to them in excess of Net Income
previously allocated to them, to the Limited Partners to the extent
of such excess; and
(D) fourth, any remaining Net Income shall be allocated 90% to
the Limited Partners and 10% to the General Partner.
<PAGE> 16
(ii) Net Loss of the Partnership shall be allocated as follows:
(A) first, 90% to the Limited Partners and 10% to the General
Partner in an amount equal to the excess, if any, of (x) the
cumulative Net Income previously allocated to the Partners pursuant
to clause (i)(D) above over (y) the cumulative Net Loss previously
allocated to the Partners pursuant to this clause (ii)(A);
(B) second, 100% to the Limited Partners until the Limited
Partners' Capital Accounts are reduced to zero; and
(C) third, 100% to the General Partner.
Net Income and Net Loss allocated to Limited Partners will be apportioned among
the Limited Partners based upon Limited Partnership Percentages.
(b) (i) Notwithstanding anything else contained in this Article VI,
(A) no item of deduction or loss shall be allocated to a
Partner to the extent the allocation would cause a negative balance
in such Partner's Capital Account (after taking into account the
adjustments, allocations and distributions described in Treasury
Regulation 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) except to the
extent of amounts that such Partner is required to reimburse to the
Partnership under Section 17-607(b) of the Delaware Act or any
successor provision or otherwise by law, but rather such item of
deduction or loss shall be allocated, first, to those Limited
Partners with positive Capital Account balances, pro rata in
proportion to such balances, and then to the General Partner; and
(B) if, during any fiscal period of the Partnership, any
Partner unexpectedly receives an adjustment, allocation or
distribution described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) that causes or increases a
deficit in such Partner's Capital Account balance (as defined for
purposes of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and as
determined after all other allocations provided for in this Section
6.01 have been tentatively made as if this Section 6.01(b)(i)(B)
were not in this Agreement), there shall be allocated to such
Partner a pro rata portion of each item of Partnership income,
including gross income, and gain for such year in an amount and
manner sufficient to eliminate such Partner's deficit Capital
Account balance as quickly as possible.
To the extent possible and consistent with the Treasury Regulations under
Section 704 of the Code, any special allocation of items of income or gain
pursuant to this Section 6.01(b)(i) shall be taken into account in computing
subsequent allocations pursuant to this Section 6.01 and offset through
specially allocated items with the objective that the cumulative
<PAGE> 17
net amount of all items allocated to each Partner may be equal to the amount
that would have been allocated to such Partner if there had never been any
allocation pursuant to this paragraph.
(ii)The General Partner shall be specially allocated organizational
expenses to the extent borne by it under Section 4.02 hereof.
(c) No Limited Partner's Capital Account will be credited with
interest.
6.02. Liability of General and Limited Partners. (a) The General
Partner shall have unlimited liability for the satisfaction and discharge of all
losses, liabilities and expenses of the Partnership. The General Partner shall
not have any liability for the return or repayment of the aggregate Capital
Contributions of any Limited Partner.
(b) Each Limited Partner or former Limited Partner shall be liable
for the satisfaction and discharge of all losses, liabilities and expenses of
the Partnership allocable to him, but only to the extent of his Capital
Contributions. In no event shall any Limited Partner or former Limited Partner
be obligated to make any additional Capital Contributions to the Partnership in
excess of his Capital Commitment, or have any liability in excess of his Capital
Contributions for the satisfaction and discharge of the losses, liabilities and
expenses of the Partnership, except as otherwise provided under the Delaware
Act. However, after any Limited Partner or former Limited Partner has received
the return in whole or in part of any Capital Contribution, he shall
nevertheless be liable to the Partnership for the amount of cash, Investments or
other assets (valued as of the date of distribution thereof) so received
necessary to discharge any losses, liabilities and expenses of the Partnership
to any Person who extended credit or whose claims arose before such distribution
was made, to the extent that the assets of the Partnership are not sufficient to
discharge such losses, liabilities and expenses. Notwithstanding the foregoing,
if the General Partner has purchased the Interests of a former Limited Partner
pursuant to Section 7.02, the purchase price received by such former Limited
Partner on such sale shall not be deemed to be a return of any of such former
Limited Partner's Capital Contribution.
(c) A Partner shall not have any obligation to the Partnership or to
any other Partner to restore any negative balance in the Capital Account of such
Partner. Until distribution of any such Partner's interest in the Partnership
upon the dissolution of the Partnership, neither his Capital Account nor any
part thereof shall be subject to withdrawal or redemption except with the
consent of the General Partner. No Partner shall be required to lend the
Partnership any funds.
6.03. Allocations for Tax Purposes. (a) All items of income, gain,
loss, deduction and credit realized by or allowable to the Partnership shall be
determined and allocated among the Partners for federal, state and local income
tax purposes in the same manner as set forth in Section 6.01, except to the
extent otherwise required under SectionE704(c) of the Code or otherwise by law.
<PAGE> 18
(b) The General Partner shall be the "tax matters partner" for all
purposes of the Code and shall have the power and authority to effect the
allocations provided for in this Section 6.03 and to take such actions as the
tax matters partner is required or permitted to take under the Code and to take
all other actions that in the good faith opinion of the General Partner are
necessary or convenient for the Partnership to take to ensure compliance with
the Code or any other applicable law or regulation. Notwithstanding any other
provision of this Agreement to the contrary, if in the good faith opinion of the
General Partner any of the allocations provided for in this Section 6.03 shall
be prohibited by the Code or other applicable law or regulation or shall subject
the Partnership or any Partner to legal penalty or onerous condition, the
General Partner shall have the power and authority to modify any such allocation
to the extent necessary to comply with the Code or other applicable law or
regulation or to avoid such legal penalty or onerous condition.
6.04. Valuation. For the purpose of determining Net Value, the value
of any Investment as of any date (or, in the event such date is not a business
day, as of the next preceding business day) shall be determined as follows:
(a) marketable Investments listed on a national securities exchange
shall be valued at the last sales price on the date of valuation or, in
the absence of a sale on such date, at the last bid price on the date of
valuation;
(b) marketable Investments traded in the over-the-counter market and
reported in the National Association of Securities Dealers' Automated
Quotation System will be valued at the closing bid price as reported by
such system; and
(c) all other Investments shall be valued at fair market value.
All valuation determinations pursuant to this Section 6.04 shall be
made by the General Partner. All such determinations shall be binding on all
Limited Partners, absent manifest error.
6.05. Distributions and Interest Equivalent. (a) The General Partner
will have no obligation to make distributions prior to the end of the
Partnership's term (other than tax distributions described in Section 6.05(c))
and may reinvest the earnings on and proceeds of any Investments in its sole
discretion. The General Partner will determine the time and amount of a
distribution in its sole discretion to the extent it decides to make one. The
General Partner may make distributions in cash or in kind; the General Partner
may also offer the Limited Partners the right to elect the form of their
distributions; provided, however, that such election shall not bind the General
Partner and the General Partner may, in its sole discretion, make distributions
in cash to some Limited Partners and in kind to others. The General Partner in
its sole
<PAGE> 19
discretion will determine the aggregate amount of and payment dates for any cash
and non-cash distributions to Partners after establishing such reasonable
reserves as the General Partner deems appropriate in its sole discretion for
working capital, contingencies or other items and for the satisfaction of
liabilities (including, without limitation, contingent liabilities and the Fixed
Return). Distributions from the Partnership shall be made in the following order
and priority:
(i) first, to the General Partner until it has received first (A) an
amount equal to the Net Fixed Return and then (B) an amount equal to its
aggregate Capital Contributions;
(ii) second, to the Limited Partners until they have received an
aggregate amount equal to their aggregate Capital Contributions; and
(iii) third, 90% to the Limited Partners and 10% to the General
Partner.
Distributions to Limited Partners pursuant to this Section 6.05(a) will be
apportioned based on Limited Partnership Percentages.
(b) Prior to making any distributions (other than tax
distributions), the General Partner shall be paid an amount equal to any unpaid
Interest Equivalent.
(c) To the extent cash is available to the Partnership, the General
Partner shall make annual distributions of cash to the Partners for payment of
applicable federal, state and local taxes on any substantial amount of net
realized taxable income not otherwise distributed to the Partners for any fiscal
year of the Partnership. Such distributions shall be disbursed as soon as
possible after preparation and mailing of the report provided for in Section
9.01. The aggregate amount of any such distribution shall be determined by the
General Partner, subject to the limitation that the minimum aggregate amount of
such distribution be the tax that would be payable if the taxable income of the
Partnership were all allocated to an individual subject to the then-prevailing
maximum combined federal, New York State and New York City tax rates (taking
into account the extent to which the taxable income allocated by the Partnership
was composed of long-term capital gains and the extent to which state and local
income taxes may be deductible for federal income tax purposes, but disregarding
Sections 67 and 68 of the Code). Each such distribution shall be allocated among
the Partners in accordance with the allocation of taxable income to the Partners
pursuant to Section 6.03.
(d) To the extent the Partnership is required by law to withhold or
to make tax payments on behalf of or with respect to any Partner, the General
Partner may withhold such amounts, or make such tax payments ("Tax Advances"),
as so required. All Tax Advances made on behalf of a Partner shall, at the
option of the General Partner, be promptly paid to the Partnership by the
Partner on whose behalf such Tax Advances were made or be repaid by reducing the
amount of the current or next succeeding distribution or distributions which
would otherwise have been made to such Partner or, if such distributions are not
sufficient for that purpose, by so reducing the proceeds of liquidation
otherwise payable to such Partner; provided, however, that if the amount of the
next
<PAGE> 20
succeeding distribution or distributions or proceeds of liquidation is reduced,
such amount shall include an amount to cover interest on the Tax Advance at the
lesser of (i) the Cost of Funds Rate plus 50 basis points and (ii) the maximum
rate permitted by applicable law. If the General Partner makes such a reduction
of the proceeds payable to a Partner pursuant to the preceding sentence for
repayment of a Tax Advance by such Partner, for all other purposes of this
Agreement such Partner shall nevertheless be treated as having received all
distributions (whether before or upon liquidation) unreduced by the amount of
such Tax Advance. Each Partner does hereby agree to indemnify and hold harmless
the Partnership and the General Partner from and against any liability with
respect to withholding and Tax Advances required on behalf of or with respect to
such Partner.
(e) No Partner shall have the right to withdraw its Capital
Contribution or any part thereof from the Partnership or to receive a return of
its Capital Contribution or any part thereof except upon termination and
dissolution of the Partnership, or except as may be permitted by the General
Partner in its sole discretion.
ARTICLE VII
Partners
7.01. Designation of Limited Partners. (a) The General Partner may
at any time invite any Person to become a Limited Partner by delivery of a
private placement memorandum, a subscription agreement, a Capital Call Notice
and any other documents deemed necessary or appropriate by the General Partner
or its counsel. Any Person invited to become a Limited Partner shall not be
deemed to be a Limited Partner until such Person has returned an executed
counterpart of this Agreement and a subscription agreement (and any other
documents that the General Partner or its counsel deems necessary prior to such
Person becoming a Limited Partner) to the General Partner and been admitted to
the Partnership pursuant to Section 7.05. The value of any Interest (whether a
Reserve Interest or otherwise) which is sold to a new Limited partner shall be
determined in the sole discretion of the General Partner.
(b) An individual who is an independent contractor with PaineWebber
may be admitted as a Limited Partner. If an independent contractor is admitted
as a Limited Partner, all references herein to the termination of employment of
a Limited Partner shall refer to the termination of such individual's consulting
arrangement with PaineWebber. Unless the General Partner determines otherwise,
an individual who is an employee of PaineWebber at the time of becoming a
Limited Partner and who subsequently becomes an independent contractor with
PaineWebber following such individual's termination of employment shall not be
deemed employed by PaineWebber after the date of such individual's termination
of employment by virtue of any such independent contractor arrangement.
(c) An individual who is a director of PaineWebber may be admitted
as a Limited Partner. If a director of PaineWebber is admitted as a Limited
Partner, all references herein to the termination of
<PAGE> 21
employment of a Limited Partner shall refer to the termination of such
individual's services as a director of PaineWebber.
(d) The General Partner's right to designate all of the Limited
Partners shall be exercised in its sole discretion and shall not be subject to
challenge by any Limited Partner.
7.02. Vesting of Interests; Purchase of a Limited Partner's
Interest. (a) Prior to JanuaryE10, 2000, the Limited Partners shall be entirely
unvested in their Interests. On and after JanuaryE10, 2000, such Limited
Partners shall be entirely vested in their Interests. Notwithstanding the
foregoing, the Limited Partners shall vest immediately in their Interests upon
the declaration of the Operative Date following a Change in Control. The
Partnership shall terminate and be dissolved in accordance with the provisions
of Article VIII hereof (without regard to Section 8.01(a)) as of any date
declared the Operative Date by the Disinterested Directors.
(b) In the event the employment of a Limited Partner by PaineWebber
shall terminate for any reason (other than death, permanent disability as
determined by the Compensation Committee, Approved Retirement or Cause), the
General Partner shall have the right (the "Repurchase Right"), but not the
obligation, exercisable in its sole discretion and on written notice, sent by
certified mail (or its equivalent) or by overnight courier (the "Repurchase
Notice") and given within the 120-day period beginning on the day following the
date of such termination, to purchase for cash such Limited Partner's Interests
(or the rights of any Successor in Interest, if any, to receive allocations and
distributions with respect to the Interests), on the date set forth in the
Repurchase Notice, at a price determined as follows:
(i) If such termination occurs on or after the date such Limited
Partner's Interests have become entirely vested, an amount equal to the
Valuation Price; and
(ii) If such termination occurs before such Limited Partner's
Interests have become entirely vested, an amount equal to the lesser of
(A) the Valuation Price or (B) the Formula Price.
(c) In the event the employment of a Limited Partner by PaineWebber
shall terminate by reason of death, disability or Approved Retirement, the
Limited Partner (or the estate of the Limited Partner, in the event of death)
shall continue to participate in the Partnership as a Limited Partner unless the
Limited Partner (or the estate of the Limited Partner, in the event of death)
and the General Partner mutually agree to the repurchase of such Limited
Partner's Interests by the General Partner for an amount not to exceed the
Valuation Price.
(d) In the event that PaineWebber terminates the employment of a
Limited Partner for Cause, the General Partner shall have the right, but not the
obligation, exercisable in its sole discretion and, by delivering a Repurchase
Notice to the Limited Partner within the 120-day period beginning on the day
following the date of the termination, to repurchase for cash at the lesser of
the Valuation Price and the Formula Price all of
<PAGE> 22
such Limited Partner's Interests (or the rights of any Successor in Interest, if
any, to receive allocations and distributions with respect to the Interests),
whether vested or unvested.
(e) The General Partner or its assignee will pay for the Interests
to be acquired in cash as soon as practicable but in no event later than 90 days
following the date of the Repurchase Notice. A Limited Partner whose Interests
are repurchased as described above will forfeit the related portion of his or
her interest in the Partnership's income. The determination of the General
Partner of the purchase price for the repurchased Interests shall be made in
good faith and shall be final and binding on the Limited Partner. Any value of
repurchased Interests in excess of the amount paid by the General Partner
therefor pursuant to the provisions of this SectionE7.02 shall be retained by
the General Partner, and the Limited Partners shall have no claim for any such
value. Any such repurchased Interests shall be retained for the account of the
General Partner and, subject to SectionsE8.01(b) and 10.05, the General Partner
shall have all the rights and powers of a Limited Partner with respect to such
repurchased Interests.
7.03. Transfer of a Limited Partner's Interest. Each Limited Partner
shall have the right to sell, assign, mortgage, pledge or otherwise dispose of
or transfer all or any part of his Interests, but only with the prior written
consent of the General Partner. No Person acquiring any Limited Partner's
Interests shall become a Partner, or acquire such Limited Partner's right to
participate in the affairs of the Partnership to the extent permitted herein,
unless such Person shall be admitted as a Limited Partner pursuant to Section
7.05. Such Person, however, shall, to the extent of the transferred Interests,
be entitled to such Limited Partner's share of allocations and distributions
pursuant to Articles VI and VIII (subject to the right of the General Partner to
repurchase such Interests pursuant to Sections 5.01(b) and 7.02).
7.04. Transfer of General Partner's Interest. The General Partner
may not transfer or assign its interest as General Partner of the Partnership to
any Person other than PWG or a wholly owned subsidiary of PWG. No transfer of
the General Partner's interest shall be effective, and the General Partner shall
not cease to be a general partner of the Partnership, unless and until the
transferee thereof is admitted as a General Partner of the Partnership and
agrees in writing to continue the business of the Partnership with itself as
General Partner and to be bound by the provisions of this Agreement.
7.05. Admission or Substitution of New Limited Partners. (a) The
General Partner may admit at any time as an additional Limited Partner any
Person not already a Limited Partner who shall (i) purchase an Interest from the
General Partner and make a Capital Contribution or (ii) purchase a Reserve
Interest from the General Partner. The General Partner also shall have the
right, in its sole discretion, to admit as a substitute or additional Limited
Partner any Person who acquires in accordance with this Agreement the Interests
of a Limited Partner. The admission of any Person as a substitute or additional
Limited Partner shall be in writing signed by the General Partner but shall not
be effective until such Person's written acceptance and adoption of all the
<PAGE> 23
terms and provisions of this Agreement. The General Partner's failure or refusal
to admit a transferee (as to whom the General Partner has given its written
consent pursuant to Section 7.03) as a substitute or additional Limited Partner
shall not affect the right of such transferee to receive allocations and
distributions pursuant to Articles VI and VIII to which his predecessor in
interest was entitled.
(b) A transferee who is admitted as a substitute or additional
Limited Partner pursuant to this Section 7.05 shall reimburse the General
Partner for any expenses incurred by it as a result of such transferee's
admission to the Partnership.
7.06. Withdrawal of a Limited or General Partner. (a) A Limited
Partner may not withdraw from the Partnership without the consent of the General
Partner, which consent may be withheld for any reason whatsoever or for no
reason. In the event that the General Partner consents to the withdrawal of a
Limited Partner from the Partnership, such Limited Partner shall receive
distributions from the Partnership as if such withdrawal had not occurred.
(b) Subject to Section 7.06(c), the General Partner may withdraw
from the Partnership as of the end of any fiscal year by delivery to each of the
Limited Partners of written notice of such withdrawal not less than 50 calendar
days before the effective date thereof.
(c) The withdrawal of any Partner shall be a Final Event with
respect to such Partner, within the meaning of Section 7.07.
7.07. Final Events with Respect to a Partner. Upon the occurrence of
a Final Event with respect to any Partner, such Partner shall thereupon cease to
be a Partner. If such a Final Event shall occur, no Successor in Interest to any
such Partner shall for any purpose hereof become or be deemed to become a
Partner. The sole right, as against the Partnership and the remaining Partners,
acquired hereunder by, or resulting hereunder to, a Successor in Interest to any
Partner shall be to receive any distributions and allocations pursuant to
Articles VI and VIII (subject to the right of the General Partner to purchase
the Interests of such former Partner pursuant to Section 7.02(b)) to the extent,
at the time, in the manner and in the amount otherwise payable to such Partner
had such a Final Event not occurred, and no other right shall be acquired
hereunder by, or shall result hereunder to, a Successor in Interest to such
Partner, whether by operation of law or otherwise. Until distribution of any
such Partner's interest in the Partnership upon the dissolution of the
Partnership as provided in Article VIII, neither his Capital Account nor any
part thereof shall be subject to withdrawal or redemption without the consent of
the General Partner. The Partnership shall be entitled to treat any Successor in
Interest to such Partner as the only Person entitled to receive distributions
and allocations hereunder.
7.08. Continuation of Partnership. If a Final Event shall occur with
respect to one or more Limited Partners, no dissolution or termination of the
Partnership shall be effected thereby, and the remaining Partners shall continue
the Partnership and its business until the dissolution or termination thereof as
provided herein. If a Final Event shall occur with respect to a General Partner
and there is no other General Partner in the Partnership, the Partnership shall
terminate and
<PAGE> 24
shall be dissolved in accordance with Article VIII, unless, within 30 days after
the occurrence of any such Final Event, (i) all of the Limited Partners elect to
continue the business of the Partnership and (ii) all of the obligations of the
General Partner hereunder are assumed by a successor General Partner approved in
writing by all the Limited Partners, in which case the Partnership shall not be
dissolved but shall continue.
7.09. Compliance with Law. Notwithstanding any provision hereof to
the contrary, no sale or other disposition of an Interest may be made except in
compliance with all federal, state and other applicable laws, including federal
and state securities laws.
ARTICLE VIII
Dissolution of the Partnership
8.01. Dissolution. (a) In addition to the dissolution events set
forth in SectionsE2.02, 7.02(a) and 7.08, the General Partner may at any time
after JanuaryE10, 2000 dissolve the Partnership effective as of the end of the
calendar quarter during which written notice of dissolution is given. Such
written notice must be delivered to the Limited Partners not less than 30 days
before the effective date of such dissolution.
(b) At the expiration of the Partnership's term (subject to
extension as provided in SectionE2.02), the business and property of the
Partnership shall be wound up and liquidated by the General Partner or, in the
event of the unavailability of the General Partner or after the declaration of
the Operative Date by the Disinterested Directors, by such Limited Partners or
other Persons as shall be named by a majority in interest of the Limited
Partners (based upon Limited Partnership Percentages). For purposes of this
Section 8.01(b), the General Partner shall not be permitted to participate in
the naming of any such Person on account of any Reserve Interests or other
Interests held by the General Partner, and the General Partner's Capital
Contributions with respect to such Reserve Interests or other Interests shall
not be taken into account in the calculation of the Limited Partnership
Percentage with respect to each Limited Partner. For purposes of
SectionsE8.01(d) and 8.02, references to the General Partner shall be deemed
also to refer to any party or parties selected by the Limited Partners pursuant
to this SectionE8.01(b) to perform the General Partner's duties upon dissolution
of the Partnership.
(c) Within 60 days after the effective date of dissolution of the
Partnership, the Partnership's assets (except, in the case of clause (iii)
below, for amounts reserved pursuant to SectionE8.02) shall be distributed in
the following order and priority:
(i) first, all debts and liabilities to creditors of the Partnership
who are not Partners shall be paid and discharged or provision therefor
shall be made (through establishment of reserve accounts or otherwise);
(ii) second, the claims of all creditors of the Partnership who are
General Partners shall be paid and discharged or provision therefor shall
be made (through establishment of reserve accounts or otherwise);
<PAGE> 25
(iii) third, the claims of all creditors of the Partnership who are
Limited Partners shall be paid and discharged or provision therefor shall
be made (through establishment of a reserve or otherwise);
(iv) fourth, any remaining accrued and unpaid Interest Equivalent
shall be paid to the General Partner; and
(v) fifth, the remaining assets of the Partnership shall be paid to
the Partners in accordance with the distribution provisions described in
SectionE6.05(a).
(d) If payment is made in non-cash assets, the value of such assets
shall be determined by the General Partner in accordance with Section 6.04
hereof. In the event of any distribution of non-cash assets to any Limited
Partner, such Limited Partner agrees, if requested by the General Partner at the
time of such distribution, to deliver to the Partnership a letter in form and
substance satisfactory to the General Partner, or which may be deemed necessary
or desirable by the General Partner, to comply with governmental regulations,
including restrictions on the resale of securities.
8.02. Amounts Reserved. (a) If there are any Investments which, in
the judgment of the General Partner, cannot be sold, or properly distributed in
kind in the case of dissolution, without sacrificing a significant portion of
the value thereof or without violating the terms of any agreement to which the
Partnership is a party with respect to such Investment, the value of a Partner's
interest in each such Investment may be excluded from the amount distributed to
such Partner pursuant to SectionE8.01(c)(v). Any Partner's interest, including
his pro rata interest in any gains, losses or distributions, in Investments so
excluded shall not be paid or distributed until such time as the General Partner
(or any other appropriate party selected pursuant to Section 8.01(b)) shall
determine. Such assets may be placed in a trust by the General Partner or held
by the Partnership (the term of which may be extended for the sole purpose of
holding Investments pending economically reasonable disposition or distribution)
until they can be disposed of or be distributed to the Partners. No consent of
the Limited Partners is needed for the General Partner to extend the term of the
Partnership or to place Investments in a trust pending future distribution.
After the declaration of the Operative Date, the General Partner shall place any
Investment described in this SectionE8.02(a) in a trust, the trustee of which
shall be a financial institution which performs trust services in the normal
course of its business activities and which is not an Affiliate of PaineWebber
(determined after the Change in Control which precipitated the declaration of
the Operative Date). The trustee described in the previous sentence shall
consult with the party or parties selected pursuant to SectionE8.01(b) in
determining the appropriate time or times at which the Investments it holds
shall be liquidated or distributed.
(b) If there is any pending transaction, or claim by or against the
Partnership, as to which the interest or obligation of any Partner therein
cannot, in the judgment of the General Partner, be then ascertained, the value
thereof or probable loss therefrom may be deducted from the amount distributable
to such Partner pursuant to SectionE8.01(c)(v). No amount shall be paid or
charged to any such Partner on account of any such transaction or claim until
its final
<PAGE> 26
settlement or such earlier time as the General Partner shall determine. The
Partnership may meanwhile retain from other sums due such Partner an amount
which the General Partner estimates to be sufficient to cover the share of such
Partner in any probable loss or liability on account of such transaction or
claim.
(c) Upon determination by the General Partner that circumstances no
longer require the exclusion of Investments or retention of sums as provided in
Sections 8.02(a) and (b), the General Partner shall, at the earliest practicable
time, pay such sums or distribute such Investments or the proceeds realized from
the sale of such Investments to each Partner from whom such sums or Investments
have been withheld.
ARTICLE IX
Reports to Partners
9.01. Books of Account. (a) Appropriate books of account shall be
kept at the principal place of business of the Partnership, and each Partner
shall have access to all books, records and accounts and the right to make
copies thereof under such conditions and restrictions as the General Partner may
reasonably prescribe. The books and records of the Partnership shall be reviewed
and reported on as of the end of each fiscal year by accountants selected by the
General Partner for this purpose. Within 120 days after the end of each fiscal
year or, if later, as soon as practicable after receipt of applicable financial
information, the Partnership will cause to be mailed to each Partner a written
report, which shall include a statement prepared by the Partnership setting
forth such Partner's Capital Account and the amount of such Partner's allocable
share of the Partnership's items of income and deduction, capital gain and loss
or credit for such year, in sufficient detail to enable him to prepare his
federal, state, local and other tax returns.
(b) At the same time as financial statements are furnished pursuant
to Section 9.01(a), the Partnership shall cause to be made available, upon
request and under conditions and restrictions as the General
<PAGE> 27
Partner may reasonably prescribe, a balance sheet, a statement of income and
expense and a statement of changes in financial position of the Partnership,
each for such fiscal year.
(c) The General Partner shall also cause to be delivered to each
Limited Partner such other information as such Limited Partner may reasonably
request for the purpose of enabling him to comply with any reporting or filing
requirements imposed by any governmental agency or authority pursuant to any
statute, rule, regulation or otherwise.
9.02. Fiscal Year. The fiscal year of the Partnership shall end on
December 31 of each calendar year unless otherwise determined by the General
Partner.
ARTICLE X
Miscellaneous
10.01. Governing Law. The terms of this Agreement and all rights and
obligations of the Partners hereunder shall be governed by the laws of the State
of Delaware.
10.02. Indemnification. The General Partner shall not be liable to
any Partner for any action taken or not taken by the General Partner or for any
action taken or not taken by any other Partner or other Person with respect to
the Partnership. The Partnership shall indemnify PWG, the General Partner and
each of the General Partner's officers and directors against any losses, claims,
damages or liabilities (including legal or other expenses reasonably incurred in
investigating or defending against any such losses, claims, damages or
liabilities), joint or several, to which PWG may become subject by reason of its
being the sole shareholder of the General Partner, to which the General Partner
may become subject by reason of its being the General Partner or to which such
officers and directors of the General Partner may become subject by reason of
their being officers or directors of the General Partner. Notwithstanding the
above, the General Partner shall not be exculpated or exonerated from liability,
and PWG, the General Partner and each of the General Partner's officers and
directors shall not be indemnified against loss, for violations of federal or
state securities laws or for any other intentional or criminal wrongdoing.
Limited Partners will not be personally obligated with respect to
indemnification pursuant to this Section 10.02.
10.03. Notice. All notices hereunder shall be in writing and shall
be deemed to have been duly given when personally delivered or mailed by
registered or certified mail, return receipt requested, to the Partnership at
1285 Avenue of the Americas, New York, New York 10019, to the attention of the
General Partner, or to such other address or addresses as to which the Partners
shall have been given notice, and to the Partners at the addresses as to which
the Partnership shall have been given notice.
10.04. Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute a single instrument. It
shall not be necessary that any counterpart be signed by all the parties so long
as each counterpart signed by a Limited Partner shall also be signed by the
General Partner.
<PAGE> 28
10.05. Completeness and Amendments. This Agreement sets forth the
entire understanding of all the parties. The provisions of this Agreement shall
not be amended except by an instrument in writing executed (i) by the General
Partner (or, if there is more than one General Partner, by the General Partner
or General Partners entitled to act for the Partnership in accordance with the
proviso to the last sentence of SectionE4.01(a)) and (ii) by a majority in
interest of the Limited Partners (based upon Limited Partnership Percentages),
except that any provision of this Agreement requiring the approval or consent of
greater than a majority in interest of the Limited Partners shall not be amended
except by an instrument in writing executed by the percentage in interest of
Limited Partners whose approval or consent would be required by such provision.
For purposes of clause (ii) of this Section 10.05, the General Partner shall not
be entitled to vote as a Limited Partner on account of any Reserve Interests or
other Interests held by the General Partner, and the General Partner's Capital
Contributions with respect to such Reserve Interests or other Interests shall
not be taken into account in the calculation of the Limited Partnership
Percentage with respect to each Limited Partner.
10.06. Power of Attorney. The Limited Partners hereby appoint the
person who from time to time shall be a General Partner, including a successor
General Partner, as their true and lawful representative and attorney-in-fact,
in their name, place and stead to make, execute, sign and file all instruments,
documents and certificates which, from time to time, may be required by this
Agreement or by the laws of the United States of America, the State of Delaware
or any other state in which the Partnership shall determine to do business, or
any political subdivision or agency thereof, to execute, implement and continue
the valid and subsisting existence of the Partnership. The General Partner, as
representative and attorney-in-fact, however, shall not have any rights, powers
or authority to amend or modify this Agreement when acting in such capacity,
except as expressly provided herein. Such power of attorney is coupled with an
interest and shall continue in full force and effect notwithstanding the
subsequent occurrence of a Final Event with respect to any Limited Partner.
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have hereuntoEexecuted this
Agreement as of the date first above written.
GENERAL PARTNER:
PW Partners Inc.
By:
--------------------------
Name: Ronald M. Schwartz
Title: President
Address of General Partner:
1285 Avenue of the Americas
New York, New York 10019
LIMITED PARTNER:
----------------
Name:
Address of Limited Partner:
=================================
THE LIMITED PARTNERSHIP INTERESTS EVIDENCED BY THIS PARTNERSHIP AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
STATE SECURITIES LAW AND MUST BE HELD INDEFINITELY.
<PAGE> 1
Exhibit 12.1
Paine Webber Group Inc.
Computation of Ratio of Earnings to Fixed Charges
(In thousands of dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1998* 1997* 1996* 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income before taxes $ 682,763 $ 644,075 $ 558,999 $ 102,677 $ 44,385
---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 2,876,712 2,573,582 1,971,788 1,969,811 1,428,653
Interest factor in rents 56,139 53,665 54,537 59,491 51,102
---------- ---------- ---------- ---------- ----------
Total fixed charges 2,932,851 2,627,247 2,026,325 2,029,302 1,479,755
---------- ---------- ---------- ---------- ----------
Income before taxes and
fixed charges $3,615,614 $3,271,322 $2,585,324 $2,131,979 $1,524,140
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.2 1.2 1.3 1.1 1.0
========== ========== ========== ========== ==========
</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.
<PAGE> 1
Exhibit 12.2
Paine Webber Group Inc.
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
(In thousands of dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1998* 1997* 1996* 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income before taxes $ 682,763 $ 644,075 $ 558,999 $ 102,677 $ 44,385
---------- ---------- ---------- ---------- ----------
Preferred stock dividends 35,433 44,186 43,712 36,260 1,710
---------- ---------- ---------- ---------- ----------
Fixed charges:
Interest 2,876,712 2,573,582 1,971,788 1,969,811 1,428,653
Interest factor in rents 56,139 53,665 54,537 59,491 51,102
---------- ---------- ---------- ---------- ----------
Total fixed charges 2,932,851 2,627,247 2,026,325 2,029,302 1,479,755
---------- ---------- ---------- ---------- ----------
Total fixed charges and preferred
stock dividends 2,968,284 2,671,433 2,070,037 2,065,562 1,481,465
---------- ---------- ---------- ---------- ----------
Income before taxes and fixed
charges $3,615,614 $3,271,322 $2,585,324 $2,131,979 $1,524,140
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred stock dividends 1.2 1.2 1.2 1.0 1.0
========== ========== ========== ========== ==========
</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 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS DESCRIPTION
Paine Webber Group Inc. ("PWG") is a holding company which, together with its
operating subsidiaries (collectively, the "Company"), forms one of the largest
full-service securities and commodities firms in the U.S. Founded in 1879, the
Company employs approximately 17,800 people in 303 offices worldwide.
The Company's principal line of business is to serve the investment and
capital needs of individual and institutional clients through its broker-dealer
subsidiary, PaineWebber Incorporated ("PWI"), and other specialized
subsidiaries. The Company's business activities are divided along two operating
segments: one which provides financial products and services to individual
clients, and one which delivers similar products and services to institutional
clients. These activities are conducted through interrelated business groups,
which utilize common operational and administrative personnel and facilities.
The Company holds memberships in the major securities and commodities exchanges
in the United States, and makes a market in many securities traded on the
National Association of Securities Dealers Automated Quotation system ("NASDAQ")
or in other over-the-counter markets.
The Private Client Group consists primarily of a domestic branch office
system and consumer product groups through which PWI and certain other
subsidiaries provide clients with financial services and products, including the
purchase and sale of securities, option contracts, commodity and financial
futures contracts, fixed income instruments, mutual funds, trusts, wrap-fee
products, and selected insurance products. The Company may act as principal or
agent in providing these services. Fees charged vary according to the size and
complexity of a transaction, and the activity level of a client's account. Also
part of the Private Client Group is the Municipal Securities Group, which
structures, underwrites, sells and trades taxable and tax-exempt issues for
municipal and public agency clients.
The Asset Management group is comprised of Mitchell Hutchins Asset Management
Inc., including Mitchell Hutchins Investment Advisory division, Mitchell
Hutchins Institutional Investors Inc., Financial Counselors Inc. and NewCrest
Advisors Inc. The Asset Management group provides investment advisory and
portfolio management services to mutual funds, institutions, pension funds,
endowment funds, individuals and trusts.
The Transaction Services group includes the correspondent services, prime
brokerage and securities lending businesses, as well as floor trading
operations. Through Correspondent Services Corporation [csc], the Company
provides execution and clearing services to correspondent broker-dealers to
support transactions for their individual customers.
Capital Markets is comprised of Research, Global Fixed Income and
Commercial Real Estate, Global Equities and Investment Banking.
The Research group provides investment advice to institutional and individual
investors, and other business areas of the Company, covering approximately 800
companies in 50 industries.
Through the Global Fixed Income and Global Equities groups, the Company
places securities for, and executes trades on behalf of, institutional clients
both domestically and internationally. To facilitate client transactions or for
its own investment, the Company takes positions in fixed income securities,
listed and over-the-counter equity securities and holds direct equity
investments in partnerships and other entities that invest in fixed income
securities, equity securities and other financial instruments.
The Commercial Real Estate group provides a full range of capital market
services to real estate clients, including underwriting of debt and equity
securities, principal lending, debt restructuring, property sales and bulk sales
services, and a broad range of other advisory services.
Through the Investment Banking group, the Company provides financial advice
to, and raises capital for, a broad range of domestic and international
corporate clients. Investment Banking manages and underwrites public and private
offerings, participates as an underwriter in syndicates of public offerings
managed by others, and provides advice in connection with mergers and
acquisitions, restructurings, and recapitalizations.
The Company's businesses operate in some of the nation's most highly
regulated industries. Violations of applicable regulations can result in the
revocation of broker-dealer or futures commission merchant licenses, the
imposition of censures or fines, and the suspension or expulsion of a firm, its
officers or employees. The Company's businesses are regulated by various
agencies, including the Securities and Exchange Commission ("SEC"), the New York
Stock Exchange ("NYSE"), the Commodity Futures Trading Commission ("CFTC"), the
National Association of Securities Dealers, and the Securities and Futures
Authority.
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, trans-
25
<PAGE> 2
PAINEWEBBER 1998 ANNUAL REPORT
actional volume, market liquidity and technological changes. As a result,
revenues and profitability have been in the past, and are likely to continue to
be, subject to fluctuations reflecting the impact of these factors.
Certain statements included in this discussion and in other parts of this
annual report include "forward-looking statements"that involve known and unknown
risks and uncertainties including (without limitation) those mentioned above,
the impact of current, pending and future legislation and regulation and other
risks and uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. The Company disclaims any
obligation or undertaking to update publicly or revise any forward-looking
statements.
GENERAL BUSINESS ENVIRONMENT
The business environment was generally favorable in 1998, but more volatile than
in 1997. The domestic economic background was positive as the U.S. Real Gross
Domestic Product increased 4.3%, and inflation, as measured by the Consumer
Price Index, increased only 1.6%. The S&P 500 Index appreciated 27% in 1998,
versus 31% in 1997, and the NASDAQ Composite Index rose 40% versus 22% in 1997.
The yield on the thirty-year U.S. Treasury bond declined from 5.92% at the end
of 1997 to 5.09% at the end of 1998.
Many indicators of the securities industry's health were positive. Average
daily volume increased 28% on the NYSE and 22% on NASDAQ. The value of U.S.
mergers and acquisitions increased 78%. Total U.S. debt and equity offerings
rose 39% to $1.82 trillion. On a less positive note, the net flow of capital
into U.S. equity mutual funds in 1998 was $158.8 billion, down 30% from $227.1
billion in 1997, owing to weakness in the second half of the year.
The equity markets were erratic in 1998, particularly during the third
quarter. From its July peak to its October low, the value of the S&P 500 Index
declined 19%. One reason for stock market volatility was that, despite solid
economic growth in the U.S., corporate profits were below expectations. Profits
were constrained by several factors, including weakness in most East Asian
economies, the strong dollar, a sharp decline in oil prices, and weakness in the
third quarter earnings of certain financial firms.
The global bond market was also highly volatile in the second half of 1998,
as a flight to quality caused the yield spread between U.S. Treasury securities
and lower-rated issues to expand dramatically. The immediate cause of this
flight to quality was the default of Russia on its external obligations.
Investors also became concerned that portfolios of certain highly leveraged
investors would have to be liquidated at disadvantageous prices, which would
place further pressure on the prices of corporate issues. These concerns led to
a decline in the liquidity of the global bond markets, creating the potential
risk of a credit crunch that would damage economic growth.
Partly to restore confidence in financial markets, the Federal Reserve eased
monetary policy, with the Federal Funds rate declining from 5.50% to 4.75%
between the end of September and mid-November. This easier monetary policy, plus
accumulating evidence that U.S. economic growth continued to be solid, led to a
recovery of financial markets during the fourth quarter of 1998.
RESULTS OF OPERATIONS
1998 Compared with 1997
Net income for the year ended December 31, 1998 was a record $433.6 million, a
4% increase over the previous record of $415.4 million earned during the year
ended December 31, 1997. Earnings per common share were $2.91 per basic share
($2.72 per diluted share) compared to $2.84 per basic share ($2.56 per diluted
share) for the prior year period. Revenues, net of interest expense, were a
record $4,405.1 million for 1998, an increase of 7% from the previous record
$4,112.4 million in 1997.
Commission revenues earned during 1998 were a record $1,641.3 million. This
was 10% higher than the previous record $1,496.8 million earned in 1997,
reflecting increases in both individual and institutional businesses.
Commissions on listed securities and options increased $108.5 million, or 12%,
mutual fund and insurance commissions increased $22.7 million, or 5%, and
commissions from over-the-counter securities and other commissions increased
$13.3 million, or 7%.
Revenues from principal transactions decreased $186.8 million, or 18% from
the 1997 record of $1,055.6 million. The decline was principally due to the
market volatility experienced during the second half of 1998. During 1998,
trading revenues from equities and taxable fixed income declined 31.6% and 12.3%
for the year, respectively, from the records established in the previous year,
while results were relatively constant for municipal securities. For financial
reporting purposes, principal transactions 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.
Asset management fees increased 31% to a record $713.6 million, primarily due
to higher revenues earned on managed accounts and proprietary mutual funds.
Average assets in wrap and trust accounts during 1998 were 40% higher than
during 1997. Average assets under management in money market, institutional and
long-term mutual funds increased to $54 billion during 1998 compared to $47
billion in 1997. Contributing to the increase was the introduction of several
new Mitchell Hutchins Asset Management funds including the Managed High Yield
Fund and the LIR Select Fund.
26
<PAGE> 3
Management's Discussion and Analysis
Investment banking revenues were a record $531.0 million, 15% higher than the
previous record $460.0 million earned during the prior year period, reflecting
increases in private placement and other fees, and underwriting fees, management
fees and selling concessions. Benefiting from the increased levels of activity
industry-wide, the Company increased its volume of lead-managed and co-managed
municipal issues, as well as increased mergers and acquisitions during the year.
Net interest increased $89.7 million, or 21% to a record $508.2 million.
Interest revenue was $3,352.7 million, 13% higher than the $2,963.1 million
earned in the prior year period due to an increased level of trading positions
and margin lending to clients during the year. Interest expense increased 12% to
$2,844.5 million principally due to higher levels of securities sold under
agreements to repurchase, securities loaned and short-term borrowings during the
year.
Compensation and benefit expenses for 1998 increased $181.1 million, or 7%,
versus 1997. The number of employees increased by 1,140 or 7%, during 1998,
reflecting an additional 702 Private Client Group financial advisors, as well as
related financial advisor support personnel and technology support personnel. In
addition, the Company's improved operating results for the year resulted in
higher production-based compensation to Private Client Group financial advisors,
and higher performance-based compensation. The ratio of compensation and
benefits as a percentage of net revenues remained relatively constant at 59.1%
in 1998 versus 58.9% in 1997.
All other operating expenses increased $69.7 million, or 7%, from 1997.
Office and equipment expenses increased $26.3 million, or 10%, due to an
increase in office space and equipment necessary to support the additional
headcount, as well as normal escalation charges. Business development expenses
increased $21.2 million, or 26%, reflecting higher advertising and promotional
expenditures, including the Company's new advertising campaign. Brokerage,
clearing and exchange fees and other expenses also increased primarily due to
increased levels of business. Offsetting these increases was a reduction in
professional services reflecting lower consulting expenses. Communication
expenses remained relatively flat compared to last year, reflecting the firm's
ongoing cost containment efforts (such as the review of market data usage),
which served to largely offset the effect of the increase in headcount. The
ratio of other operating expenses as a percentage of net revenues remained
relatively constant at 24.7% for 1998 versus 24.8% in 1997.
1997 Compared with 1996
Net income for the year ended December 31, 1997 was $415.4 million, a 14%
increase over the $364.4 million earned during the year ended December 31, 1996.
Earnings per common share were $2.84 per basic share ($2.56 per diluted share)
compared to $2.55 per basic share ($2.24 per diluted share) for the prior year
period. Revenues, net of interest expense, were $4,112.4 million for 1997, an
increase of 10% from the $3,735.2 million in 1996.
Commission revenues earned during 1997 were $1,496.8 million, an increase of
8% from the $1,381.5 million earned in the prior year. Commissions on listed
securities and options increased $62.8 million, or 8%, mutual fund and insurance
commissions increased $34.9 million, or 9%, and commissions from
over-the-counter securities and other commissions increased $17.6 million, or
10%, reflecting higher levels of investor activity.
Revenues from principal transactions set a new record, increasing $32.0
million, or 3% from 1996. The increase from the prior year reflected overall
improved trading results in both equity and taxable fixed income trading
activities, partially offset by lower results in municipal securities. These
increases reflected the favorable market environment and increased customer
demand.
Asset management fees increased 20% to $542.8 million, primarily due to
higher fees earned on managed or wrap accounts and trust accounts. Average
assets in wrap and trust accounts during 1997 were 42% higher than during 1996.
The increase also reflected higher advisory fees earned on money market accounts
and closed-end mutual funds. The average assets under management in money
market, institutional and long-term mutual funds were approximately $47 billion
during 1997 compared to $45 billion in 1996.
Investment banking revenues were $460.0 million, 18% higher than the $391.2
million earned during the prior year period, reflecting increases in private
placement and other fees, and underwriting fees, management fees and selling
concessions on increased volume of lead-managed and co-managed municipal issues
and in the commercial real estate business.
Net interest increased $79.6 million, or 23% to $418.6 million. Interest
revenue was $2,963.1 million, 28% higher than the $2,309.7 million earned in the
prior year period, reflecting an increased level of securities purchased under
agreements to resell and securities borrowed, and increased margin lending to
clients. Interest expense increased 29% to $2,544.6 million due principally to
higher levels of securities sold under agreements to repurchase and securities
loaned.
27
<PAGE> 4
PAINEWEBBER 1998 ANNUAL REPORT
Compensation and benefit expenses for 1997 increased $201.2 million, or 9%,
versus 1996. The number of employees increased by 730, or 5%, during 1997,
principally due to an expansion in Private Client Group financial advisors,
selective hirings in Capital Markets and technology personnel working on the
millennium and other technology initiatives. In addition, the Company's
aforementioned improved 1997 operating results resulted in higher
production-based compensation to Private Client Group financial advisors, and
higher performance-based compensation. The ratio of compensation and benefits as
a percentage of net revenues declined to 58.9% in 1997 versus 59.4% in 1996, as
growth in net revenues exceeded the growth in these expenses.
All other operating expenses increased $62.9 million, or 7%, from 1996. The
principal items accounting for this increase were higher technology-associated
expenses (principally related to the millennium and other technology
initiatives), higher promotional costs and increased litigation-related
expenses. The ratio of other operating expenses as a percentage of net revenues
declined to 24.8% for 1997 versus 25.6% in 1996, as the growth in net revenues
exceeded the growth in these expenses.
In December 1997, the Company, along with 29 other NASDAQ market-makers,
entered into an agreement to settle the class actions in In Re NASDAQ
Market-Makers Antitrust Litigation. The Company's contribution to the settlement
was approximately $50 million. In anticipation of the settlement, the Company
had set aside sufficient legal reserves and at December 31, 1997 was fully
reserved for its portion of the settlement.
Income Taxes
The effective income tax rates for the years ended December 31, 1998, 1997 and
1996, were comparable at 34.9%, 34.0% and 34.8%, respectively.
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 the
assets consisting of trading assets, securities purchased under agreements to
resell, securities borrowed, and receivables from clients, brokers and dealers,
which are readily convertible into cash. The nature of the Company's business as
a securities dealer results in carrying significant levels of trading assets and
liabilities in order to meet its client and proprietary trading needs. The
Company's total assets may fluctuate from period to period as the result of
changes in the level of trading positions held to facilitate client
transactions, the volume of resale and repurchase transactions, and proprietary
trading strategies. These fluctuations depend significantly upon economic and
market conditions, and transactional volume.
The Company's total assets at December 31, 1998 were $54.2 billion compared
to $57.1 billion at December 31, 1997. The decline is primarily attributable to
a $7.3 billion reduction in securities purchased under agreements to resell
partially offset by a $4.1 billion increase in trading assets, including $1.2
billion related to securities received as collateral under the Statement of
Financial Accounting Standards ("SFAS") No. 125 guidance. The majority of the
Company's assets are financed by daily operations such as securities sold under
agreements to repurchase, free credit balances in client accounts and securities
lending activity. The Company regularly reviews its mix of assets and
liabilities to maximize self-funding. Additional financing sources are available
through bank loans and commercial paper, committed and uncommitted lines of
credit, and long-term borrowings.
The Company maintains committed and uncommitted credit facilities from a
diverse group of banks. The Company has a $1.2 billion unsecured revolving
credit agreement which extends through November 1999, with provisions for
renewal through 2001. Certain of the Company's subsidiaries also have a secured
revolving credit facility to provide up to an aggregate of $750.0 million
through August 1999, with provisions for renewal through August 2000. The
secured borrowings under this facility can be collateralized using a variety of
securities. The facilities are available for general corporate purposes. At
December 31, 1998, there were no outstanding borrowings under either facility.
Additionally, the Company had more than $5.2 billion in uncommitted lines of
credit at December 31, 1998.
The Company maintains public shelf registration statements with the SEC for
the issuance of debt securities of the Company and for the issuance of preferred
securities of PWG Capital Trusts III and IV ("Preferred Trust Securities"),
business trusts formed under Delaware law which are wholly owned subsidiaries of
the Company. At December 31, 1998, the Company had $2,868.1 million in debt
securities available for issuance under a shelf registration statement and
$106.2 million in Preferred Trust Securities and debt securities of the Company
available for issuance under another registration statement. In February 1999,
an additional $600.0 million of preferred securities of PWG Capital Trusts III,
IV and V and debt securities of the Company were available for issuance. (For
further discussion on the Preferred Trust Securities, see Note 5 in the
Company's Notes to Consolidated Financial Statements.)
28
<PAGE> 5
Management's Discussion and Analysis
Long-term borrowings at December 31, 1998 grew to $4,255.8 million from
$3,398.0 million at December 31, 1997. This increase reflects the issuances of
$250.0 million of 6.55% Notes in April 1998, $340.0 million of 6.45% Notes in
December 1998 and $559.5 million of Medium-Term Notes offset by the maturities
of $200.0 million of 6.25% Notes in June 1998 and $96.3 million of Medium-Term
Notes. At December 31, 1998, $439.5 million of long-term borrowings had maturity
dates in 1999.
The weighted-average maturity on all outstanding long-term borrowings,
Preferred Trust Securities, and Redeemable Preferred Stock at December 31, 1998
and 1997 was 8.8 years and 9.6 years, respectively.
Capital Resources and Capital Adequacy
The Company's businesses are capital intensive. In addition to a funding policy
that provides for diversification of funding sources and maximization of
liquidity, the Company maintains a strong capital base.
The Company's total capital base, which includes long-term borrowings,
preferred securities and stockholders' equity, grew to a record $7.3 billion at
December 31, 1998, an increase of $1.4 billion from the prior year. The growth
in total capital is due to the net increase in long-term borrowings of $857.8
million and a net increase in stockholders' equity of $508.0 million.
During 1998, the Company issued a net 6,765,814 shares of its common stock
related to employee compensation programs. Issuances and tax credits related to
these programs had the effect of increasing equity capital by $204.6 million.
Partially offsetting these net issuances was the repurchase of 2,133,070 shares
of common stock at an aggregate cost of $67.6 million. During 1998, the
Company's Board of Directors authorized for repurchase, in the open market or
otherwise, an additional 15,000,000 shares of its common stock. At December 31,
1998, the remaining number of shares of common stock authorized to be
repurchased by the Company's Board of Directors under the common stock
repurchase program was 25,946,026.
The Board of Directors declared quarterly cash dividends of $0.11 per share
on the Company's common stock during 1998. On February 4, 1999, the Board of
Directors declared a 1999 first quarter dividend of $0.11 per share payable on
April 1, 1999. Dividends were also declared during the year on preferred stock.
PWI is subject to the net capital requirements of the SEC, the NYSE and the
CFTC 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, commercial real estate, and asset
finance 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 December 31, 1998, the Company had investments in merchant banking
transactions which were affected by liquidity, reorganization or restructuring
issues amounting to $19.4 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 include underwriting and market-making transactions
in high-yield corporate debt and non-investment-grade mortgage-backed
securities, and emerging market securities (collectively, "high-yield
securities"). These securities generally involve greater risks than
investment-grade corporate debt securities because these issuers usually have
high levels of indebtedness and lower credit ratings and are, therefore, more
vulnerable to general economic conditions. At December 31, 1998, the Company
held $395.8 million of high-yield securities, with approximately 30% of such
securities attributable to four issuers. The Company continually monitors its
risk positions associated with high-yield securities and establishes limits with
respect to overall market exposure, industry group and individual issuer. The
Company accounts for these positions at fair value, with unrealized gains and
losses reflected in "Principal transactions" revenues. These high-yield
securities have not had a material effect on the Company's results of
operations.
CASH FLOWS
The Company's cash and cash equivalents at December 31, 1998 totaled $228.4
million, down $5.4 million from year-end 1997. Cash used for operating
activities was $324.9 million in 1998 primarily to fund the increase in net
trading assets at December 31, 1998. Cash used for investing activities in 1998
was $181.4 million principally reflecting capital expenditures on the Company's
new broker workstations, Private Client Group branch office expansions and
renovations, and corporate office renovations including the new fixed income
trading floor and new data center. Cash provided by financing activities was
$500.9 million in 1998 primarily due to increased long-term borrowings.
Cash and cash equivalents at December 31, 1997 totaled $233.8 million, down
$150.1 million from year-end 1996. Cash used for operating and investing
activities was $778.8 million and $90.9 million, respectively and cash provided
by financing activities was $719.7 million.
29
<PAGE> 6
PAINEWEBBER 1998 ANNUAL REPORT
Cash and cash equivalents at December 31, 1996 totaled $383.9 million, up
$161.4 million from year-end 1995. Cash used for operating activities was $529.3
million and cash provided by investing and financing activities was $66.6
million and $624.1 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument is a contractual agreement between
counterparties that derives its value from changes in the value of some
underlying asset such as the price of another security, interest rates, currency
exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P 500), or other
value referenced in the contract. Derivatives such as futures, certain options
contracts and structured products (e.g. indexed warrants) are traded on
exchanges, while derivatives such as forward contracts, certain options
contracts, interest rate swaps, caps and floors, and other structured products
are renegotiated in over-the-counter markets.
In the normal course of business, the Company engages in a variety of
derivative transactions in connection with its proprietary trading activities
and asset and liability management, as well as on behalf of its clients. As a
dealer, the Company regularly makes a market in and trades a variety of
securities. The Company is also engaged in creating structured products that are
sold to clients. In connection with these activities, the Company attempts to
reduce its exposure to market risk by entering into offsetting hedging
transactions, which may include derivative financial instruments. The Company
also enters into interest rate swap contracts to manage the interest rate
characteristics of its assets and liabilities.
The notional amount of a derivative contract is used to measure the volume of
activity and is not reflected on the Consolidated Statements of Financial
Condition. The Company had off-balance-sheet derivative contracts outstanding
with gross notional amounts of $84.6 billion and $61.1 billion at December 31,
1998 and 1997, respectively. These amounts included $64.3 billion and $42.3
billion, respectively, related to "to be announced" mortgage-backed securities
requiring forward settlement. Also included in these amounts were $3.1 billion
and $2.7 billion notional amounts of interest rate swap agreements used to
change the interest rate characteristics of the Company's fixed rate debt at
December 31, 1998 and 1997, respectively. (For further discussion on the
Company's derivative financial instruments, see Notes 1, 4 and 8 in the
Company's 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. These interest rate swap
agreements had the effect of reducing net interest expense on the Company's
fixed rate debt by $15.6 million, $11.0 million and $7.9 million for the years
ended December 31, 1998, 1997 and 1996, respectively. The Company had no
deferred gains or losses recorded at December 31, 1998 and 1997 related to
terminated swap agreements on the Company's long-term borrowings.
The fair value of an exchange-traded derivative financial instrument is
determined by quoted market prices, while over-the-counter derivatives are
valued based upon pricing models which consider time value and volatility, as
well as other economic factors. The fair values of the Company's derivative
financial instruments held for trading purposes at December 31, 1998 were $191.4
million and $217.8 million of 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
of 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 December 31,
1998 and 1997, the fair values amounted to $191.4 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, which are discussed below, except for liquidity risk which is
discussed in the Liquidity and Capital Resources section of the Management's
Discussion and Analysis.
The Company seeks to manage risk and its impact on earnings volatility
through strategic planning and by focusing on the diversification of its
business activities. Through capital allocation, and the establishment of
trading limits by product and credit limits by counterparty, the Company manages
the risk associated with the various businesses. The Company may reallocate or
deploy capital to the business groups based
30
<PAGE> 7
Management's Discussion and Analysis
upon changes in market conditions or opportunities in the marketplace that are
consistent with the Company's long-term strategy.
The discussion of the Company's principal risks and the estimated amounts of
the Company's market risk exposure generated from the sensitivity analysis
performed by the Company are forward-looking statements assuming certain adverse
conditions occur. Actual results in the future may differ materially from these
projected results due to actual events in the markets in which the Company
operates and other factors. The analysis methods used by the Company to assess
and mitigate risks discussed below should not be considered projections of
future events or losses.
Market Risk
All financial instruments involve market risk. Market risk is the potential
change in value of the financial instrument caused by unfavorable changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
is inherent to both derivative and non-derivative financial instruments.
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 December 31, 1998 and 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 futures
contracts, options, and interest rate swap and cap agreements. The Company also
issues fixed rate instruments in connection with its nontrading activities,
which expose the Company to interest rate risk. The Company enters into interest
rate swap agreements that are designed to mitigate its exposure by effectively
converting its fixed rate liabilities into floating rate liabilities.
Equity Price Risk
In connection with the Company's dealer activities, the Company buys and sells
equity and equity derivative instruments. The Company is exposed to equity price
risk due to changes in the level or volatility of equity prices. The Company
attempts to mitigate its exposure to equity price risk by entering into hedging
transactions including equity option agreements.
Sensitivity Analysis
For purposes of the SEC disclosure requirements, the Company has elected to use
a sensitivity approach to express the potential loss in future earnings of its
financial instruments. In preparing the analysis, the Company has combined both
derivative and non-derivative financial instruments held for trading purposes
with those held for purposes other than trading because the amounts were not
material.
The sensitivity calculation employed to analyze interest rate risk on its
fixed income financial instruments was based on a proprietary methodology which
converted substantially all the Company's interest rate sensitive financial
instruments at December 31, 1998 and 1997, into a uniform benchmark (a ten-year
U.S. Treasury note equivalent), and evaluated the impact assuming a 13 basis
point and a 10 basis point change to the ten-year U.S. Treasury note at December
31, 1998 and 1997, respectively. The hypothetical 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 was based on a 2% move in the Dow
Jones Industrial Average at December 31, 1998 and 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 December 31, 1998 was
approximately $9 million and $0.1 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.
31
<PAGE> 8
PAINEWEBBER 1998 ANNUAL REPORT
Credit Risk
Credit risk represents the amount of accounting loss the Company would incur
should counterparties to its proprietary transactions fail to perform and the
value of any collateral prove inadequate. Credit risk is substantially reduced
by the industry practice of obtaining and maintaining adequate collateral until
commitments are settled. The Company also manages the credit exposure relating
to its trading activities by entering into master netting agreements when
feasible. The Company monitors its exposure to counterparty risk on a daily
basis through use of credit exposure information and monitoring of collateral
values.
The Credit department establishes and reviews credit limits for clients and
other counterparties seeking margin, resale and repurchase agreement facilities,
securities borrowed and securities loaned arrangements, and various other
products. Although the Company closely monitors the creditworthiness of its
clients, the debtors' ability to discharge amounts owed is dependent upon, among
other things, general market conditions. The Company has no material
concentration of credit risk with any individual counterparty.
Legal Risk
Legal risk focuses on the Company's non-compliance with legal and regulatory
requirements, and counterparty non-performance based upon non-credit related
conditions, such as legal authority or capacity. As a securities broker-dealer,
the Company is subject to regulations which cover all aspects of the securities
business, including sales methods, trade practices among broker-dealers, use and
safekeeping of customers' funds and securities, capital structure of securities
firms, recordkeeping, and the conduct of directors, officers and employees. The
Company has established procedures in accordance with legal and regulatory
requirements that are designed to reasonably ensure compliance in these matters.
The Company has also established procedures reasonably designed to mitigate
counterparty non-performance including adequacy of legal documentation and
consideration of counterparty legal authority and capacity.
Operating Risk
Operating risk focuses on the Company's ability to accumulate, process and
communicate information necessary to conduct its daily operations. Deficiencies
in technology, financial systems and controls, and losses attributable to
operational problems all pose potential operating risks. In order to mitigate
these risks, the Company has established and maintains an effective internal
control environment that incorporates various control mechanisms throughout the
organization and involves various independent oversight groups.
YEAR 2000
The Company uses a wide variety of computer programs and devices, some of which
use only the last two digits of each year to represent the calendar year portion
of dates. As a result, calculations performed with these abbreviated date fields
may misinterpret the year 2000 as 1900, resulting in erroneous calculations or
program failures that could cause significant disruptions in the Company's
operations.
The Company is now executing a comprehensive plan in an attempt to achieve
Year 2000 compliance. The plan consists of tens of thousands of component tasks
organized into five phases: Awareness, Inventory/Assessment, Remediation,
Implementation and Testing.
The Company has completed the Awareness and Inventory/Assessment phases,
covering both information technology ("IT") hardware and software, and other
non-IT assets. The Inventory/Assessment phase involved more than 3,800 types of
assets grouped into the following eight broad classes: Business Relationships,
Systems (Software), External Interfaces, Hardware (including mainframe,
distributed and desktop hardware), Market Data Services, Office Equipment,
Facilities and Telecommunications.
The Remediation and Implementation phases of the Company's plan specify a
strategy for each asset type and assign remediation tasks to either third party
resources, Company personnel or in some cases, original manufacturers. Certain
assets may be replaced or retired. Remediation of the Company's application
software is complete and all changes have been implemented. Remediation of
Hardware, Office Equipment and Facilities assets, including desktop computers
and servers, and implementation of necessary changes is substantially complete
and will be completed in the second quarter of 1999.
The remaining asset categories -- Business Relationships, External
Interfaces, Market Data Services and Telecommunications -- are part of an
extensive network of business partners and external providers of products and
services that include the major securities and commodities exchanges,
self-regulatory organizations, industry clearing and depository institutions,
other broker-dealers, commercial banks with which the Company has multiple-user
business relationships, and hardware and software technology providers. The
Company has inquired whether they have made the necessary efforts to meet their
own Year 2000 objectives and has received oral and written responses. The
Company's assessment of these responses is in progress. For crucial
relationships, the Company's procedures may include joint testing of systems and
site visits.
The Testing phase of the plan is substantially complete and all Company
developed software has been returned to production in preparation for
integrated, system-wide internal testing scheduled
32
<PAGE> 9
Management's Discussion and Analysis
to be completed in the second quarter of 1999. Testing of external interfaces
will be completed in the second quarter of 1999, and will include additional
securities industry-wide testing scheduled for March 1999.
Nearly every aspect of the Company's business depends on the accurate
processing of date-related information. As a result, failure by the Company or
one or more of its third-party relationships to successfully remediate systems
for Year 2000 issues poses the risk of material disruption to operations and
material financial loss. A failure on the part of the Company to identify and
implement solutions to all Year 2000 issues could result in systems failures or
outages, inaccuracies in processing trades or other transactions affecting
customer or proprietary accounts, an inability to reconcile to and settle with
counterparties and other business disruptions. In addition, third parties with
whom the Company has a relationship could fail in some element of their Year
2000 efforts. The Company's operations are highly dependent on the services of
the securities and commodities exchanges, depositories, certain banking
relationships, electric utilities and telecommunications networks, and a failure
by one of these institutions could disrupt the operations of the Company as well
as the securities and commodities industries as a whole. The scope of the
Company's relationship with individual customers, broker-dealer counterparties
and vendors varies widely as does the resulting risk should any one of them fail
to achieve Year 2000 compliance. The Company has ongoing communications with
important third party relationships regarding third party Year 2000 risks. The
success of such third parties achieving Year 2000 compliance can not be
adequately gauged at this time.
The Company is in the process of developing contingency plans to be executed
should a Year 2000 failure affect the Company's own operations or those of a
significant third party. The contingency planning effort is scheduled to be
completed by the end of the second quarter of 1999. There can be no assurance
that alternative arrangements will be identified for all material risks or
contingencies, or that these contingency plans will be effective.
The Company estimates the incremental cost of achieving Year 2000 compliance
to be approximately $65 million, of which approximately $46 million has been
incurred through December 31, 1998. Costs relating to the Year 2000 conversion
are expensed as incurred. The estimated cost to resolve the Year 2000 issue and
the timing of achieving compliance are management's best estimates based on
current assessments of the scope of efforts required, the availability and cost
of trained personnel and of third party resources. Factors that could cause
actual results to differ materially from management estimates of future costs
and timing of remediation include, but are not limited to: the successful
identification of Company system-wide two-digit year codes; the adequacy of
labor rate and consulting fee estimates; the success of suppliers and
counterparties in achieving Year 2000 compliance or delivering compliant
products to the Company; and the success of securities and commodities
exchanges, self-regulatory organizations, industry clearing and depository
institutions, other broker-dealers, and commercial banks in achieving Year 2000
compliance. There can be no guarantee that future results will not differ
materially from the plan, resulting in changes to actual costs incurred and the
timing of compliance.
INFLATION
Because the Company's assets are to a large extent liquid in nature, they are
not significantly affected by inflation. However, inflation may result in
increases in the Company's expenses that may not be readily recoverable in the
price of services offered. To the extent inflation results in rising interest
rates and has other negative effects upon the securities markets, it may
adversely affect the Company's financial condition and results of operations.
SEGMENT INFORMATION
The Company offers a wide range of highly integrated products and services,
primarily those of a full-service securities broker-dealer, to both its
individual and institutional clients, which are considered separate reporting
segments for purposes of SFAS No. 131,"Disclosures about Segments of an
Enterprise and Related Information." For information on segment reporting and
geographic data, see Note 15 in the Company's Notes to Consolidated Financial
Statements.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 in the Company's Notes to Consolidated Financial Statements for a
discussion of new accounting pronouncements.
33
<PAGE> 10
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Commissions $1,641,283 $1,496,791 $1,381,475
Principal transactions 868,807 1,055,648 1,023,615
Asset management 713,570 542,755 453,267
Investment banking 530,972 460,001 391,164
Interest 3,352,708 2,963,124 2,309,737
Other 142,242 138,633 146,708
------------------------------------------
Total revenues 7,249,582 6,656,952 5,705,966
Interest expense 2,844,468 2,544,550 1,970,754
------------------------------------------
Net revenues 4,405,114 4,112,402 3,735,212
------------------------------------------
NON-INTEREST EXPENSES
Compensation and benefits 2,601,364 2,420,296 2,219,129
Office and equipment 301,845 275,532 267,006
Communications 154,272 153,285 153,301
Business development 103,287 82,099 75,981
Brokerage, clearing and exchange fees 97,430 86,808 87,839
Professional services 123,265 129,066 108,123
Other 308,644 292,209 263,800
------------------------------------------
Total non-interest expenses 3,690,107 3,439,295 3,175,179
------------------------------------------
Income before taxes and minority interest 715,007 673,107 560,033
Provision for income taxes 249,208 228,626 194,649
------------------------------------------
Income before minority interest 465,799 444,481 365,384
Minority interest 32,244 29,032 1,034
------------------------------------------
Net income $ 433,555 $ 415,449 $ 364,350
==============================================================================================
Net income applicable to common shares $ 409,908 $ 385,936 $ 334,955
==============================================================================================
EARNINGS PER COMMON SHARE
Basic $ 2.91 $ 2.84 $ 2.55
Diluted $ 2.72 $ 2.56 $ 2.24
==============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE> 11
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
December 31, 1998 1997
====================================================================================================================
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 228,359 $ 233,787
Cash and securities segregated and on deposit for federal and other regulations 631,272 569,138
Trading assets 19,299,869 16,373,792
Securities received as collateral 1,189,331 --
-------------------------------
Total trading assets, at fair value 20,489,200 16,373,792
Securities purchased under agreements to resell 14,217,062 21,562,739
Securities borrowed 8,717,476 9,573,187
Receivables:
Clients, net of allowance for doubtful accounts of $20,496 and $21,315
in 1998 and 1997, respectively 6,667,055 5,668,653
Brokers and dealers 634,825 494,855
Dividends and interest 306,998 337,409
Fees and other 267,741 403,575
Office equipment and leasehold improvements, net of accumulated depreciation
and amortization of $431,460 and $400,346 in 1998 and 1997, respectively 434,895 334,401
Other assets 1,581,038 1,513,497
-------------------------------
$ 54,175,921 $ 57,065,033
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 1,417,783 $ 1,666,216
Trading liabilities, at fair value 5,177,099 7,102,144
Securities sold under agreements to repurchase 23,948,872 29,628,902
Securities loaned 4,969,638 4,733,961
Obligation to return securities received as collateral 1,189,331 --
Payables:
Clients 6,691,316 5,052,516
Brokers and dealers 533,621 268,050
Dividends and interest 294,431 343,391
Other liabilities and accrued expenses 1,642,682 1,476,260
Accrued compensation and benefits 1,032,838 882,251
Long-term borrowings 4,255,802 3,397,961
-------------------------------
51,153,413 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 189,815 188,668
Stockholders' equity:
Common stock, $1 par value, 400,000,000 shares authorized; issued
191,047,151 shares and 188,458,083 shares in 1998 and 1997, respectively 191,047 188,458
Additional paid-in capital 1,525,938 1,405,329
Retained earnings 1,689,386 1,340,966
Treasury stock, at cost; 45,527,707 shares and 48,557,788 shares in
1998 and 1997, respectively (962,792) (998,300)
Accumulated other comprehensive income (4,636) (5,490)
-------------------------------
2,438,943 1,930,963
-------------------------------
$ 54,175,921 $ 57,065,033
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
35
<PAGE> 12
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
6% Cumulative
Convertible
Redeemable Common
Preferred Stock Stock
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 $100,000 $156,738
===========================================================================================================================
Net income
Foreign currency translation
Total comprehensive income, year ended December 31, 1996
Dividends declared:
Commonstock, $.32 per share
Redeemable Preferred Stock, $9.00 per share
Convertible Preferred Stock, $6.00 per share
Exercises of stock options 2,116
Restricted stock awards 3,683
Conversion of debentures
Tax benefit relating to employee compensation programs
Other
Repurchases of common stock
-------------------------
Balance at December 31, 1996 $100,000 $162,537
===========================================================================================================================
Net income
Foreign currency translation
Total comprehensive income, year ended December 31, 1997
Dividends declared:
Common stock, $.41 per share
Redeemable Preferred Stock, $9.00 per share
Convertible Preferred Stock, $6.00 per share
Exercises of stock options 3,528
Restricted stock awards (857)
Conversion of Convertible Preferred Stock (100,000)
Conversion of debentures
Tax benefit relating to employee compensation programs
Other
Repurchases of common stock:
Kidder-related repurchase 23,250
Other
-------------------------
Balance at December 31, 1997 -- $188,458
===========================================================================================================================
Net income
Foreign currency translation
Total comprehensive income, year ended December 31, 1998
Dividends declared:
Common stock, $.44 per share
Redeemable Preferred Stock, $9.00 per share
Exercises of stock options 2,954
Restricted stock awards (368)
Conversion of debentures
Tax benefit relating to employee compensation programs
Other 3
Repurchases of common stock
-------------------------
BALANCE AT DECEMBER 31, 1998 -- $191,047
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 13
<TABLE>
<CAPTION>
Accumulated
Additional Other Total Number of Shares
Paid-in Retained Treasury Comprehensive Stockholders' Common Treasury
Capital Earnings Stock Income Equity Stock Stock
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 724,215 $ 719,325 $(151,616) $ 3,626 $1,552,288 156,738,137 (11,126,767)
==================================================================================================================================
364,350 364,350
(5,494) (5,494)
---------
358,856
(44,832) (44,832)
(22,500) (22,500)
(6,000) (6,000)
726 32,699 35,541 2,116,227 2,386,165
56,262 59,945 3,682,903
(10,214) 24,776 14,562 1,811,025
21,226 21,226
(895) (895)
(237,766) (237,766) (16,119,774)
- ----------------------------------------------------------------------------------------------------------------------------------
$ 792,215 $1,009,448 $(331,907) $(1,868) $1,730,425 162,537,267 (23,049,351)
==================================================================================================================================
415,449 415,449
(3,622) (3,622)
---------
411,827
(54,418) (54,418)
(22,500) (22,500)
(6,000) (6,000)
14,164 17,692 3,528,030
83,599 5,061 87,803 (857,214) 271,716
(69,443) 169,443 -- 8,273,600
(14,633) 34,721 20,088 2,224,209
58,738 58,738
(1,811) (1,013) (400) (3,224) (312,485)
542,500 (784,750) (219,000) 23,250,000 (32,250,000)
(90,468) (90,468) (3,715,477)
- ----------------------------------------------------------------------------------------------------------------------------------
$1,405,329 $1,340,966 $(998,300) $(5,490) $1,930,963 188,458,083 (48,557,788)
==================================================================================================================================
433,555 433,555
854 854
---------
434,409
(61,488) (61,488)
(22,500) (22,500)
27,999 30,953 2,953,503
31,800 57,534 88,966 (367,921) 2,725,525
(15,757) 30,061 14,304 1,454,707
70,425 70,425
6,142 (1,147) 15,526 20,524 3,486 982,919
(67,613) (67,613) (2,133,070)
- ----------------------------------------------------------------------------------------------------------------------------------
$1,525,938 $1,689,386 $(962,792) $(4,636) $2,438,943 191,047,151 (45,527,707)
==================================================================================================================================
</TABLE>
37
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
=========================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 433,555 $ 415,449 $ 364,350
Adjustments to reconcile net income to cash used for
operating activities:
Noncash items included in net income:
Depreciation and amortization 74,296 68,700 64,116
Deferred income taxes (43,118) (119,934) 27,134
Other 261,555 252,325 235,723
(Increase) decrease in operating receivables:
Clients (999,221) (1,343,942) (262,538)
Brokers and dealers (139,970) (221,118) 5,939
Dividends and interest 30,411 13,387 (86,848)
Fees and other 135,834 (267,030) 63,899
Increase (decrease) in operating payables:
Clients 1,638,800 169,172 1,184,867
Brokers and dealers 265,571 62,613 50,319
Dividends and interest (48,960) 58,050 29,003
Other 321,015 334,516 (203,565)
(Increase) decrease in:
Cash and securities on deposit (62,134) (69,377) (72,693)
Trading assets (2,846,240) 449,515 (2,727,861)
Securities purchased under agreements to resell 7,345,677 (815,908) (4,047,536)
Securities borrowed 855,711 (2,192,813) (153,859)
Other assets (178,255) (158,409) 306,054
Increase (decrease) in:
Trading liabilities (1,925,045) 480,253 388,837
Securities sold under agreements to repurchase (5,680,030) 831,626 3,597,899
Securities loaned 235,677 1,274,101 707,431
----------------------------------------------
Cash used for operating activities (324,871) (778,824) (529,329)
=========================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
(Payments for) proceeds from:
Acquisition-related expenditures -- -- (3,843)
Sales of investments -- -- 122,032
Office equipment and leasehold improvements (181,417) (90,947) (51,583)
----------------------------------------------
Cash (used for) provided by investing activities (181,417) (90,947) 66,606
=========================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments on) proceeds from:
Short-term borrowings (248,433) 328,570 346,419
Proceeds from:
Long-term borrowings 1,148,860 822,011 484,786
Employee stock transactions 45,257 72,820 50,103
Issuances of Preferred Trust Securities -- 198,750 195,000
Payments for:
Long-term borrowings (293,223) (207,863) (141,128)
Repurchases of common stock (67,613) (411,668) (237,766)
Dividends (83,988) (82,918) (73,332)
----------------------------------------------
Cash provided by financing activities 500,860 719,702 624,082
----------------------------------------------
Increase (decrease) in cash and cash equivalents (5,428) (150,069) 161,359
Cash and cash equivalents, beginning of year 233,787 383,856 222,497
----------------------------------------------
Cash and cash equivalents, end of year $ 228,359 $ 233,787 $ 383,856
=========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
38
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Paine Webber Group Inc. ("PWG") is a holding company which, together with its
operating subsidiaries (collectively, the "Company"), forms one of the largest
full-service securities and commodities firms in the industry. The Company is
engaged in one principal line of business, that of serving the investment and
capital needs of individual and institutional clients.
The consolidated financial statements include the accounts of PWG and its
wholly owned subsidiaries, including its principal subsidiary PaineWebber
Incorporated ("PWI"). 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 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.
Trading Assets and Liabilities
Trading assets and liabilities, including derivative contracts held or issued
for trading purposes, are recorded on a trade date basis at fair value or
amounts approximating fair value. Fair value is generally based upon quoted
market prices. If quoted market prices are not available, or if liquidating the
Company's position is reasonably expected to impact market prices, fair value is
determined based upon other relevant factors, including dealer price quotations,
price activity of similar instruments and pricing models. Pricing models
consider the time value and volatility factors underlying the financial
instruments and other economic measurements.
Related revenues and expenses are recorded in the accounts on a trade date
basis. Unrealized gains and losses from marking-to-market trading instruments
daily are included in principal transactions revenues. Realized gains and losses
on trading instruments and any related interest amounts are included in
principal transactions revenues and interest revenues and expenses,
respectively.
Derivative Financial Instruments
A derivative instrument is typically defined as a contractual agreement whose
value is "derived" from an underlying asset, rate or index and includes products
such as forwards, futures, swaps or option contracts and other financial
instruments with similar characteristics. A derivative financial instrument also
includes firm or standby commitments for the purchase of securities. The
derivative definition does not include cash instruments whose values are derived
from changes in the value of some asset or index, such as mortgage-backed
securities and structured notes. Derivative contracts used by the Company
generally represent future commitments to exchange interest payment streams
based on the gross contract or notional amount or to purchase or sell financial
instruments at specified terms and future dates.
In connection with the Company's market risk management and trading
activities, the Company may enter into a derivative contract to manage the risk
arising from other financial instruments or to take a position based upon
expected future market conditions. The Company also takes positions to
facilitate client transactions.
A large portion of the Company's derivative financial instruments are "to be
announced" mortgage securities requiring forward settlement. As a principal in
the mortgage-backed securities business, the Company has outstanding forward
purchase and sale agreements committing the Company to receive or deliver
mortgage-backed securities. These forward contracts are generally short-term
with maturity or settlement dates ranging from 30 to 90 days.
Derivative instruments held or issued for trading purposes are
marked-to-market daily with the resulting unrealized gains and losses recorded
on the Consolidated Statement of Financial Condition in trading assets or
liabilities and the related profit or loss reflected in principal transactions
revenues on the Consolidated Statement of Income. The fair value of an
exchange-traded derivative, such as futures and certain option contracts, is
determined by quoted market prices while the fair value of derivatives
negotiated in over-the-counter markets are valued based upon dealer price
quotations or pricing models which consider time value and the volatility of the
underlying instruments, as well as other economic factors.
The Company also enters into interest rate swaps to modify the interest rate
characteristics of its outstanding fixed rate debt. These agreements generally
involve the exchange between the Company and its counterparties of amounts based
on a fixed interest rate for amounts based
39
<PAGE> 16
PAINEWEBBER 1998 ANNUAL REPORT
on a variable interest rate over the life of the agreement without the exchange
of the notional amount upon which the payments are based. The Company accounts
for interest rate swap agreements used for hedging purposes on the accrual
method. The difference to be paid or received on the swap agreements is accrued
as an adjustment to interest expense as incurred. The related receivable from or
payable to counterparties is reflected as an asset or liability, accordingly.
The fair value of the swap agreements are not recognized in the financial
statements. Any gains and losses on early terminations of swap agreements are
deferred as an adjustment to the carrying amount of the debt and amortized as an
adjustment to interest expense over the remaining term of the original contract
life of the hedged item. In the event of the early extinguishment of debt, any
unrealized gain or loss from the related swap would be recognized in income
coincident with the extinguishment.
Collateralized Securities Transactions
Securities purchased under agreements to resell ("resale agreements") and
securities sold under agreements to repurchase ("repurchase agreements"),
principally government and agency securities are, for accounting purposes,
treated as financing transactions and are recorded at their contractual amounts,
plus accrued interest. It is Company policy to obtain possession or control of
securities, which have a fair value in excess of the original principal amount
loaned, in order to collateralize resale agreements. The Company is required to
provide securities to counterparties in order to collateralize repurchase
agreements. The Company monitors the fair value of the securities purchased and
sold under these agreements daily versus the related receivable or payable
balances. Should the fair value of the securities purchased decline or the fair
value of the securities sold increase, additional collateral is requested or
excess collateral is returned when deemed appropriate to maintain contractual
margin protection. When specific conditions are met, including the existence of
a legally enforceable master netting agreement, balances related to resale
agreements and repurchase agreements are netted by counterparty on the
Consolidated Statements of Financial Condition.
Resale agreements and repurchase agreements for which the resale/repurchase
date corresponds to the maturity date of the underlying securities are accounted
for as purchases and sales, respectively.
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received in connection with the transaction. Securities
borrowed transactions require the Company to deposit cash or other collateral
with the lender. With respect to securities loaned, the Company receives
collateral. The initial collateral advanced or received approximates or is
greater than, the fair value of the securities borrowed or loaned. The Company
monitors the fair value of the securities borrowed and loaned on a daily basis
and requests additional collateral or returns excess collateral, as appropriate.
Depreciation and Amortization
The Company depreciates office equipment using the straight-line method over
estimated useful lives of three to ten years. Leasehold improvements are
amortized over the lesser of the estimated useful life of the asset or the
remaining term of the lease.
The excess cost of acquired companies over the fair value of the net assets
acquired is recorded as goodwill and is amortized on a straight-line basis over
periods not exceeding 35 years.
Income Taxes
The Company files a consolidated federal income tax return and uses the asset
and liability method in providing for income tax expense. Under this method,
deferred taxes are provided based upon the net tax effects of temporary
differences between the book and tax bases of assets and liabilities.
Translation of Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated at
year-end rates of exchange, and revenues and expenses are translated at average
rates of exchange during the year. Gains and losses resulting from translation
adjustments are accumulated as a separate component of comprehensive income
within stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in net income.
Stock-Based Compensation
The Company grants stock options to certain employees and non-employee directors
with an exercise price equal to the fair market value at the date of grant. The
Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense related to such
grants.
40
<PAGE> 17
Notes to Consolidated Financial Statements
Statement of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, cash equivalents are
defined as highly liquid investments not held for resale, with a maturity of
three months or less when purchased. Total interest payments for the years ended
December 31, 1998, 1997 and 1996 were $2,893,428, $2,486,500 and $1,941,751,
respectively.
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. Fair values of the
Company's long-term borrowings and interest rate swaps used to hedge the
Company's long-term borrowings are discussed in Note 4.
Accounting Changes and Developments
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
became fully effective on January 1, 1998. SFAS No. 125 introduced the
financial-components approach which focused on the recognition of financial
assets an entity controls and the derecognition of financial assets for which
control has been transferred. The Financial Accounting Standards Board ("FASB")
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
SFAS No. 125," which delayed 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 these
deferred portions on January 1, 1998 created the following additional captions
on the Company's Consolidated Statement of Financial Condition:
- - Securities received as collateral; and
- - Obligation to return securities received as collateral
The balances recognized in these captions are carried at the fair market
value of the securities received and represent securities received as collateral
in term resale agreements for which the collateral provider does not have the
explicit contractual right to substitute.
In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," which replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. All earnings per
share amounts for all periods presented prior to adoption have been restated to
conform to the SFAS No. 128 requirements (see Note 14).
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 established standards for the reporting and display of a new
reporting item, termed comprehensive income, which combined net income and
certain items that directly affect stockholders' equity, such as foreign
currency translation adjustments. The components of comprehensive income are
reflected on the Company's Consolidated Statements of Changes in Stockholders'
Equity. The adoption had no impact on net income or total stockholders' equity.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 131 established new
standards for defining how operating segments are determined and required more
comprehensive disclosures about the Company's reportable operating segments (see
Note 15) and SFAS No. 132 revised and standardized disclosures on pensions and
other postretirement benefit plans (see Note 12).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes revised accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity measure all derivative instruments at fair value and
recognize such instruments as either assets or liabilities in the consolidated
statements of financial condition. The accounting for changes in the fair value
of a derivative instrument will depend on the intended use of the derivative as
either a fair value hedge, a cash flow hedge or a foreign currency hedge. The
effect of the changes in fair value of the derivatives and, in certain cases,
the hedged items are to be reflected in either the consolidated statements of
income or as a component of other comprehensive income, based upon the resulting
designation. The Company has not yet determined the impact of this statement on
the Company's Consolidated Financial Statements, taken as a whole.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use."
41
<PAGE> 18
PAINEWEBBER 1998 ANNUAL REPORT
SOP 98-1 required the capitalization of certain costs incurred from developing
or obtaining software for internal use. The Company early adopted SOP 98-1 in
1998, which did not have a material impact on the Company's consolidated
financial statements, taken as a whole.
In September 1998, the AcSEC of the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-up Activities." SOP 98-5 required the costs of certain start-up
activities, which includes organizational costs, to be expensed as incurred. The
Company early adopted SOP 98-5 in 1998, which did not have a material impact on
the Company's consolidated financial statements, taken as a whole.
NOTE 2 TRADING ASSETS AND LIABILITIES
At December 31, 1998 and 1997, trading assets and liabilities, recorded at fair
value or amounts approximating fair value, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
============================================================================
<S> <C> <C>
TRADING ASSETS
U.S. government and agencies $ 4,858,189 $ 3,449,159
Mortgages and mortgage-backed 8,861,944 6,557,629
Corporate debt 2,466,322 3,820,317
Commercial paper and other short-term debt 1,534,913 1,410,726
Equities 1,078,322 653,283
State and municipals 500,179 482,678
----------------------------
19,299,869 16,373,792
Securities received as collateral(1) 1,189,331 --
----------------------------
$20,489,200 $16,373,792
============================================================================
TRADING LIABILITIES
U.S. government and agencies $ 4,031,254 $ 5,882,082
Mortgages and mortgage-backed 79,521 81,330
Corporate debt 837,099 851,413
Equities 215,991 273,128
State and municipals 13,234 14,191
----------------------------
$ 5,177,099 $ 7,102,144
============================================================================
</TABLE>
(1) This amount relates to the Company's adoption of the deferred portions of
SFAS No. 125.
NOTE 3 SHORT-TERM BORROWINGS
The Company meets its short-term financing needs principally by obtaining bank
loans on either a secured or unsecured basis; by issuing commercial paper and
medium-term notes; by entering into agreements to repurchase, whereby securities
are sold with a commitment to repurchase at a future date; and through
securities lending activity.
Short-term borrowings at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
===================================================================
<S> <C> <C>
Commercial paper $ 457,973 $ 606,012
Bank loans 714,810 808,204
Medium-Term Notes 245,000 252,000
--------------------------
$1,417,783 $1,666,216
===================================================================
</TABLE>
The interest rate on commercial paper fluctuates throughout the year. The
weighted-average interest rate on commercial paper borrowings outstanding at
December 31, 1998 and 1997 were 5.74% and 5.94%, respectively, and during 1998
and 1997 were 5.67% and 5.62%, respectively.
Bank loans generally bear interest at rates based on either the federal funds
rate or the London Interbank Offered Rate ("LIBOR"). The weighted-average
interest rates on bank loans outstanding at December 31, 1998 and 1997 were
5.57% and 5.83%, respectively, and during 1998 and 1997 were 5.72% and 5.56%,
respectively.
The Company has a Multiple Currency Medium-Term Note Program under the terms
of which the Company may offer for sale medium-term senior and subordinated
notes (collectively, the "Medium-Term Notes") due from nine months to thirty
years from date of issuance.
42
<PAGE> 19
Notes to Consolidated Financial Statements
The Medium-Term Notes may be either fixed or variable with respect to interest
rates. At December 31, 1998 and 1997, the Company had outstanding $245,000 and
$202,000 of variable rate Medium-Term notes, respectively, with maturities less
than one year from the date of issuance. The weighted-average interest rates on
these Medium-Term Notes outstanding at December 31, 1998 and 1997 were 5.46% and
6.05%, respectively, and during 1998 and 1997 were 5.78% and 6.23%,
respectively.
The Company has a $1,200,000 committed unsecured senior revolving credit
facility with a group of banks which expires in November 1999, with provisions
for renewal through 2001. In addition, certain of the Company's subsidiaries
have entered into a committed secured revolving credit facility, which provides
up to an aggregate of $750,000 through August 1999, with provisions for renewal
through August 2000. Interest on borrowings under the terms of the revolving
credit facilities is computed, at the option of the Company, at a rate based on
LIBOR, a base rate or the federal funds rate. The Company pays a fee on the
commitments. At December 31, 1998 and 1997, there were no outstanding borrowings
under these credit facilities.
NOTE 4 LONG-TERM BORROWINGS
Long-term borrowings at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
======================================================================
<S> <C> <C>
Fixed Rate Notes due 2000 - 2014 $1,961,340 $1,575,238
Fixed Rate Subordinated Notes due 2002 174,677 174,588
Medium-Term Senior Notes 1,936,835 1,461,185
Medium-Term Subordinated Notes 182,950 186,950
--------------------------
$4,255,802 $3,397,961
======================================================================
</TABLE>
The Company issued $340,000 of 6.45% senior notes due 2003 and $250,000 of
6.55% senior notes due 2008 on December 2, 1998 and April 23, 1998,
respectively. On June 15, 1998, $200,000 of 6.25% senior notes matured.
Interest rates on the fixed rate notes and the fixed rate subordinated notes
outstanding at December 31, 1998 ranged from 6.45% to 9.25%. The
weighted-average interest rates on these notes outstanding at December 31, 1998
and 1997 were 7.35% and 7.52%, respectively. Interest on the notes is payable
semi-annually.
At December 31, 1998 and 1997, the Company had outstanding $1,267,135 and
$989,485 of fixed rate Medium-Term Notes and $852,650 and $658,650 of variable
rate Medium-Term Notes, respectively. The Medium-Term Notes outstanding at
December 31, 1998 and 1997 had weighted-average interest rates of 6.48% and
6.81%, respectively. At December 31, 1998, these notes had an average maturity
of 4.61 years.
Pursuant to an employee benefit plan, the Company issued 6.5% Convertible
Debentures due December 2002 (the "Debentures"). At December 31, 1997, the
Debentures were fully convertible, at the employees' option, into shares of 6%
Convertible Preferred Stock, which in turn were convertible into shares of the
Company's common stock. In August 1998, the Company called for redemption of the
remaining Debentures which were subsequently converted or redeemed. During 1998,
$14,304 principal amount of the Debentures was converted into 1,454,707 shares
of the Company's common stock. At December 31, 1998 there were no outstanding
Debentures. At December 31, 1997, the Debentures were shown net of receivables,
representing loans by the Company to employees to finance a portion of the
Debentures. A portion of the principal amount of the employee loans was forgiven
at the end of the calendar year in which certain specified pre-tax earnings were
achieved by the Company.
The aggregate amount of principal repayment requirements on long-term
borrowings for each of the five years subsequent to December 31, 1998, and the
total amount due thereafter, was as follows:
<TABLE>
=============================================================================
<S> <C>
1999 $ 439,475
2000 644,435
2001 312,500
2002 486,377
2003 706,832
Thereafter 1,666,183
----------
$4,255,802
=============================================================================
</TABLE>
43
<PAGE> 20
PAINEWEBBER 1998 ANNUAL REPORT
The Company has entered into interest rate swap agreements which effectively
convert substantially all of its fixed rate debt into floating rate debt. The
floating interest rates are based on LIBOR and generally adjust semi-annually.
The effective weighted-average interest rates on the long-term borrowings, after
giving effect to the interest rate swap agreements, were 6.42% and 6.88% at
December 31, 1998 and 1997, respectively. The interest rate swap agreements
entered into have had the effect of reducing net interest expense on the
Company's long-term borrowings by $15,606, $10,966 and $7,890 for the years
ended December 31, 1998, 1997 and 1996, respectively. The notional amounts and
maturities of the interest rate swap agreements outstanding at December 31, 1998
were as follows:
<TABLE>
=========================================================================
<S> <C>
1999 $ 339,975
2000 378,000
2001 104,000
2002 214,500
2003 645,500
Thereafter 1,415,010
----------
$3,096,985
=========================================================================
</TABLE>
At December 31, 1998 and 1997, the fair values of long-term borrowings were
$4,325,014 and $3,469,950, respectively, as compared to the carrying amounts of
$4,255,802 and $3,397,961, respectively. The estimated fair value of long-term
borrowings was based upon quoted market prices for the same or similar issues
and pricing models. The fair values of the interest rate swaps were $122,053 and
$50,796 receivable at December 31, 1998 and 1997, respectively. The fair value
of interest rate swaps used to hedge the Company's long-term borrowings was
based upon the amounts the Company would receive or pay to terminate the
agreements, taking into account current interest rates. The carrying amounts of
the interest rate swap agreements included in the Company's Consolidated
Statements of Financial Condition at December 31, 1998 and 1997 were net
receivables of $8,827 and $7,193, respectively. See Notes 1 and 8 for a further
discussion of interest rate swap agreements used for hedging purposes.
NOTE 5 PREFERRED STOCK
Preferred Stock Issued by Paine Webber Group Inc.
The Company is authorized to issue up to 20,000,000 shares of preferred stock,
in one or more series.
Redeemable Preferred Stock -- In connection with the acquisition of certain net
assets and specific businesses of Kidder, Peabody Group Inc. ("Kidder") in
December 1994, the Company issued 2,500,000 shares of 20 year 9% Cumulative
Redeemable Preferred Stock, Series C (the "Redeemable Preferred Stock"), with a
stated value and liquidation preference of $100.00 per share. The Redeemable
Preferred Stock was recorded at its fair value of $185,000 at the date of
issuance, which is increased periodically by charges to retained earnings, using
the interest method, so that the carrying amount equals the redemption amount of
$250,000 at the mandatory redemption date on December 15, 2014. The Redeemable
Preferred Stock is redeemable at any time, in whole or in part, on or after
December 16, 1999 at the option of the Company at a price of $100.00 per share,
plus accrued and unpaid dividends. Dividends on the Redeemable Preferred Stock
are cumulative and payable in quarterly installments. Holders of the Redeemable
Preferred Stock have no voting rights, except in the event of certain dividend
payment defaults.
Preferred Stock Issued by Subsidiary Trusts
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts holding solely Company Guaranteed Related Subordinated Debt -- In
December 1996, PWG Capital Trust I, a business trust formed under Delaware law
and a wholly owned subsidiary of the Company, issued $195,000 (7,800,000 shares)
of 8.30% Preferred Trust Securities to the public at $25.00 per security and
$6,031 (241,238 securities) of 8.30% Common Trust Securities to the Company at
$25.00 per security. In March 1997, PWG Capital Trust II, a business trust
formed under Delaware law and a wholly owned subsidiary of the Company, issued
$198,750 (7,950,000 securities) of 8.08% Preferred Trust Securities to the
public at $25.00 per security and $6,147 (245,877 securities) of 8.08% Common
Trust Securities to the Company at $25.00 per security. The 8.30% Preferred
Trust Securities and the 8.08% Preferred Trust Securities (collectively, the
"Preferred Trust Securities") have a stated liquidation amount of $25.00 per
share.
PWG Capital Trust I and PWG Capital Trust II (collectively, the "Trusts")
exist for the sole purpose of issuing the Preferred Trust Securities and common
securities and investing the proceeds in an equivalent amount of junior
subordinated debentures of the Company. The sole assets
44
<PAGE> 21
Notes to Consolidated Financial Statements
of PWG Capital Trust I at December 31, 1998 were $201,031 of 8.30% Junior
Subordinated Debentures due December 1, 2036 issued by the Company. The sole
assets of PWG Capital Trust II at December 31, 1998 were $204,897 of 8.08%
Junior Subordinated Debentures due March 1, 2037 issued by the Company. The
8.30% Junior Subordinated Debentures and the 8.08% Junior Subordinated
Debentures (collectively, the "Junior Subordinated Debentures") held by the
Trusts are redeemable by the Company, in whole or in part, on or after December
1, 2001 and March 1, 2002, respectively. If the Company redeems Junior
Subordinated Debentures, the Trust must redeem Preferred Trust Securities and
common securities having an aggregate liquidation amount equal to the aggregate
principal amount of Junior Subordinated Debentures.
The Company guarantees payment to the holders of the Preferred Trust
Securities, on a subordinated basis, to the extent the Company has made
principal and interest payments on the Junior Subordinated Debentures. This
guarantee, together with the Company's obligations under the Junior Subordinated
Debentures, provides a full and unconditional guarantee on a subordinated basis
of amounts due on the Preferred Trust Securities. Dividends on the Preferred
Trust Securities are cumulative, payable monthly in arrears, and are deferrable
at the Company's option for periods not to exceed sixty consecutive months. The
Company generally cannot pay dividends on its preferred and common stocks during
such deferments. Dividends on the Preferred Trust Securities have been
classified as minority interest in the Company's Consolidated Statement of
Income.
NOTE 6 COMMON STOCK
On November 5, 1998, the Company's Board of Directors authorized for repurchase
an additional 15,000,000 shares of its common stock. In accordance with the
repurchase programs, the Company had available to repurchase at December 31,
1998 a maximum of 25,946,026 shares of its common stock. On May 7, 1998, the
shareholders of the Company approved an amendment to the Company's charter which
increased 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 ("SEC") Uniform Net Capital Rule and New York Stock Exchange ("NYSE")
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 December 31, 1998, PWI's net
capital of $1,015,165 was 11.4% of aggregate debit items and its net capital in
excess of the minimum required was $830,870.
Advances, dividend payments and other equity withdrawals by PWI and other
regulated subsidiaries are restricted by the regulations of the SEC, NYSE, and
international securities and banking agencies, as well as by covenants in
various loan agreements. At December 31, 1998, the equity of PWG's subsidiaries
totaled approximately $2,355,000. Of this amount, approximately $426,000 was not
available for payment of cash dividends and advances to PWG.
Under the terms of certain credit agreements, PWG is subject to dividend
payment restrictions and minimum net worth and net capital requirements. At
December 31, 1998, these restrictions did not affect PWG's ability to pay
dividends to its shareholders.
NOTE 8 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth on the following page 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 December 31, 1998 and 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 when specific conditions
are met.
45
<PAGE> 22
PAINEWEBBER 1998 ANNUAL REPORT
<TABLE>
<CAPTION>
Notional or Contract Amount at DECEMBER 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
Purchases Sales Purchases Sales
==============================================================================================================================
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $30,296,601 $35,558,370 $20,269,175 $22,948,068
Foreign currency forward contracts, futures
contracts, and options written and purchased 2,709,421 2,628,824 1,517,584 1,317,162
Equity securities contracts including stock index futures,
forwards, and options written and purchased 156,519 332,248 139,800 517,327
Other fixed income securities contracts including futures,
forwards, and options written and purchased 3,890,619 4,336,300 3,580,697 7,906,777
Interest rate swaps and caps 1,292,620 282,546 143,961 140,292
==============================================================================================================================
</TABLE>
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Fair Value at DECEMBER 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
===============================================================================================================
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $85,995 $76,315 $88,428 $84,400
Foreign currency forward contracts, futures contracts,
and options written and purchased 31,622 31,726 25,749 24,773
Equity securities contracts including stock index futures,
forwards, and options written and purchased 26,806 46,606 30,561 39,276
Other fixed income securities contracts including futures,
forwards, and options written and purchased 12,183 55,015 13,080 26,588
Interest rate swaps and caps 34,749 8,096 24,579 3,160
===============================================================================================================
</TABLE>
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes during the years ended December 31, 1998 and
1997. The average fair value is based on the average of the month-end balances
during the year.
<TABLE>
<CAPTION>
Average Fair Value for the Years Ended DECEMBER 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
===================================================================================================================
<S> <C> <C> <C> <C>
Mortgage-backed forward contracts
and options written and purchased $158,215 $146,522 $112,763 $111,655
Foreign currency forward contracts, futures
contracts, and options written and purchased 46,222 45,895 30,875 32,808
Equity securities contracts including stock index futures,
forwards, and options written and purchased 20,836 42,995 49,112 33,604
Other fixed income securities contracts including futures,
forwards, and options written and purchased 16,547 41,786 16,251 76,814
Interest rate swaps and caps 13,423 40,760 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
Statement of Financial Condition.
The off-balance-sheet derivative trading transactions are generally
short-term. At December 31, 1998, more than 98% 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 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
$191,355 and $182,397 at December 31, 1998 and 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
46
<PAGE> 23
Notes to Consolidated Financial Statements
which have margin requirements, and are settled in cash on a daily basis,
thereby minimizing credit risk. See Note 1 for a further discussion of
derivative financial instruments.
The following table summarizes the Company's principal transactions revenues
by business activity for the years ended December 31, 1998 and 1997. Principal
transactions 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>
Years Ended December 31, 1998 1997
=======================================================================================================
<S> <C> <C>
Taxable fixed income (includes futures, forwards,
options contracts and other securities) $ 451,668 $ 514,976
Equities (includes stock index futures, forwards and options contracts) 279,720 408,969
Municipals 137,419 131,703
--------------------------
$ 868,807 $1,055,648
=======================================================================================================
</TABLE>
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 December 31, 1998 and
1997, the Company had outstanding interest rate swap agreements with commercial
banks with notional amounts of $3,096,985 and $2,658,485, respectively. These
agreements effectively converted substantially all of the Company's fixed rate
debt at December 31, 1998 into floating rate debt. The Company had no deferred
gains or losses related to terminated swap agreements at December 31, 1998 and
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 generally are large financial institutions, and
the Company has not experienced defaults in the past, and management does not
anticipate any counterparty defaults in the foreseeable future. See Notes 1 and
4 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 banks,
brokers and dealers, investment funds, and insurance companies. Credit losses
could arise should counterparties fail to perform and the value of any
collateral proves inadequate. The Company manages credit risk by monitoring net
exposure to individual counterparties on a daily basis, monitoring credit limits
and requiring additional collateral where appropriate.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
47
<PAGE> 24
PAINEWEBBER 1998 ANNUAL REPORT
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and government agency securities, and letters
of credit. The market value of the initial collateral received approximates or
is greater than the contract value. Additional collateral is requested when
considered necessary. The Company may pledge clients' margined securities as
collateral in support of securities loaned and bank loans, as well as to satisfy
margin requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At December 31, 1998, the market
value of client securities loaned to other brokers approximated the amounts due
or collateral obtained.
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Receivables from customers
are substantially collateralized by customer securities. Amounts loaned are
limited by margin regulations of the Federal Reserve Board and other regulatory
authorities and are subject to the Company's credit review and daily monitoring
procedures. Market declines could, however, reduce the value of any collateral
below the principal amount loaned, plus accrued interest, before the collateral
can be sold.
Client transactions include positions in commodities and financial futures,
trading liabilities, and written options. The risk to the Company's clients in
these transactions can be substantial, principally due to price volatility which
can reduce the clients' ability to meet their obligations. Margin deposit
requirements pertaining to commodity futures and exchange-traded options
transactions are generally lower than those for exchange-traded securities. To
the extent clients are unable to meet their commitments to the Company and
margin deposits are insufficient to cover outstanding liabilities, the Company
may take market action and credit losses could be realized.
Client trades are recorded on a settlement date basis. Should either the
client or broker fail to perform, the Company may be required to complete the
transaction at prevailing market prices. Trades pending at December 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 clients, including other financial
institutions, municipalities, governments, financing companies, and commercial
real estate investors and operators. These activities could result in
concentrations of credit risk with a particular counterparty, or group of
counterparties operating in 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.
48
<PAGE> 25
Notes to Consolidated Financial Statements
NOTE 10 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under noncancelable operating
lease agreements which expire at various dates through 2015. As of December 31,
1998, the aggregate minimum future rental payments required by operating leases
with initial or remaining lease terms exceeding one year were as follows:
<TABLE>
==========================================================================
<S> <C>
1999 $ 158,302
2000 136,240
2001 119,927
2002 109,741
2003 104,858
Thereafter 752,030
----------
$1,381,098
==========================================================================
</TABLE>
Rentals are subject to periodic escalation charges and do not include amounts
payable for insurance, taxes and maintenance. In addition, minimum payments have
not been reduced by future minimum sublease rental income of $14,266.
For the years ended December 31, 1998, 1997 and 1996, rent expense under
operating leases was $168,417, $160,973 and $163,612, respectively.
Other Commitments and Contingencies
At December 31, 1998 and 1997, the Company was contingently liable under
unsecured letters of credit totaling $159,647 and $186,279, respectively, which
approximated fair value. At December 31, 1998, certain of the Company's
subsidiaries were contingently liable as issuer of $45,073 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 fees the Company
is entitled to receive from certain partnerships. In the opinion of management,
these contingencies will not have a material adverse effect on the Company's
consolidated financial statements, taken as a whole.
In meeting the financing needs of certain of its clients, the Company may
also issue standby letters of credit which are fully collateralized by customer
margin securities. At December 31, 1998, the Company had outstanding $78,787 of
such standby letters of credit. At December 31, 1998 and 1997, securities with a
fair value of $139,445 and $48,378, respectively, had been loaned or pledged as
collateral for securities borrowed of approximately equal fair value.
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, at December 31, 1998,
the Company had commitments of $929,713, consisting of secured credit lines to
real estate operators, mortgage and asset-backed originators, and other
commitments to investment partnerships. Settlement of these transactions at
December 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 a 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.
49
<PAGE> 26
PAINEWEBBER 1998 ANNUAL REPORT
NOTE 11 EMPLOYEE INCENTIVE AWARDS
The Company's various Stock Option and Award Plans (the "Plans") provide for the
granting to officers and other key employees nonqualified stock options, cash
and restricted stock awards, stock appreciation rights, restricted stock units,
stock purchase rights, performance units and other stock based awards. At
December 31, 1998 and 1997, there were 9,502,661 and 6,774,933 shares,
respectively, available for future stock option, common stock and restricted
stock awards under these plans. The Company had no stock appreciation rights,
restricted stock units, performance units or stock purchase rights outstanding
at December 31, 1998.
Nonqualified Stock Options
Officers and other key employees are granted nonqualified stock options to
purchase shares of common stock at a price not less than the fair market value
of the stock on the date the option is granted. Options for the Company's common
stock have also been granted to limited partnerships, in which key employees of
the Company are limited partners, and to non-employee directors. Options are
exercisable at either the date of grant, in ratable installments or otherwise,
generally over a period of one to five years from the date of grant. The rights
generally expire within seven to ten years after the date of grant.
The activity during the years ended December 31, 1996, 1997 and 1998 is set
forth below. Included in the options granted amount were certain options awarded
in 1998 and 1999 that related to the 1997 and 1998 performance years,
respectively.
<TABLE>
<CAPTION>
Number of Exercise price Weighted-average
shares per share exercise price
=========================================================================================================================
<S> <C> <C> <C>
Options outstanding at December 31, 1995 (4,782,998 exercisable) 25,418,135 $4.37 - 13.61 $ 10.39
Granted 7,186,146 12.63 - 17.71 14.41
Exercised (4,499,580) 4.37 - 13.42 7.89
Terminated (1,774,095) 4.76 - 14.08 12.13
========================================================================================================================
Options outstanding at December 31, 1996 (6,351,551 exercisable) 26,330,606 $4.37 - 17.71 $ 11.80
Granted 7,726,325 18.50 - 34.22 27.58
Exercised (4,964,542) 4.37 - 14.08 10.60
Terminated (928,594) 4.37 - 22.50 13.89
========================================================================================================================
Options outstanding at December 31, 1997 (6,062,722 exercisable) 28,163,795 $4.43 - 34.22 $ 16.27
Granted 5,865,220 30.69 - 42.63 36.19
Exercised (2,953,503) 4.43 - 34.22 10.48
Terminated (826,541) 4.93 - 34.22 22.06
========================================================================================================================
Options outstanding at December 31, 1998 (8,712,066 exercisable) 30,248,971 $4.93 - 42.63 $ 20.54
========================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
============================================================================================================================
Weighted-average
Range of Number of remaining Number of
exercise prices shares Weighted-average contractual life shares Weighted-average
per share outstanding exercise price (years) exercisable exercise price
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 4.93 - 10.00 1,659,049 $ 8.01 3.9 1,659,049 $ 8.01
10.01 - 15.00 14,800,952 12.52 5.7 6,984,267 12.00
15.01 - 20.00 3,153,000 18.04 5.0 11,250 18.08
20.01 - 25.00 832,500 22.47 5.3 -- --
25.01 - 42.63 9,803,470 35.40 6.3 57,500 34.22
=========================================================================================================================
$ 4.93 - 42.63 30,248,971 $ 20.54 5.7 8,712,066 $ 11.40
=========================================================================================================================
</TABLE>
The Company accounts for stock option grants in accordance with APB Opinion
No. 25. Accordingly, no compensation cost has been recognized for its stock
option grants. Pro forma information regarding net income and earnings per share
is required under SFAS No. 123 and has been determined as if the Company had
accounted for all post 1994 stock option grants based on the fair value method.
The pro forma information presented below is not representative of the effect
stock options will have on pro forma net income or earnings per share for future
years.
50
<PAGE> 27
Notes to Consolidated Financial Statements
The fair value of each option grant was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: dividend yields of 1.2%, 1.7%
and 2.2%; expected lives of 3.8 years, 3.8 years, and 4.2 years; risk-free
interest rates of 5.0%, 6.2% and 5.9%; and expected volatility of 35%, 33% and
28%. The weighted-average fair values of options granted during 1998, 1997 and
1996 were $11.15, $8.52 and $3.69, respectively.
For purposes of the pro forma information, the fair values of the 1998, 1997
and 1996 stock option grants are amortized over the vesting period. The pro
forma information for the years ended 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
=========================================================================================================
<S> <C> <C> <C> <C>
Net Income As reported $433,555 $415,449 $364,350
Pro forma $406,967 $397,131 $356,475
Earnings per common share
Basic As reported $ 2.91 $ 2.84 $ 2.55
Pro forma $ 2.72 $ 2.70 $ 2.49
Diluted As reported $ 2.72 $ 2.56 $ 2.24
Pro forma $ 2.55 $ 2.44 $ 2.19
========================================================================================================
</TABLE>
Beginning in January 1999, the Company established an Equity Plus Program
which allows eligible employees to purchase shares of the Company's common stock
at a price equal to fair market value on the purchase date and receive stock
options based upon the number of shares purchased under the Program. The maximum
number of shares an employee can purchase is 1,000 per year. The nonqualifled
stock options will have a price equal to the fair market value of the stock on
the date the option is granted. Shares purchased under the Equity Plus Program
are restricted from resale for two years from the time of purchase, and the
options that are granted under the Equity Plus Program have a three year vesting
requirement and expire seven years after the date of grant. The number of common
shares authorized for purchase by eligible employees is 3,000,000 per annum.
Restricted Stock Awards
Restricted stock awards are granted to key employees, whereby shares of the
Company's common stock are awarded in the name of the employee, who has all
rights of a stockholder, subject to certain sale and transfer restrictions. The
awards generally contain restrictions on sales and transfers ranging from one to
three years. The restricted stock awards are subject to forfeiture if the
employee terminates prior to the prescribed restriction period.
During the years ended December 31, 1998, 1997 and 1996, the Company awarded
2,357,604, 2,174,502 and 3,682,903 shares, respectively, of restricted stock,
net of forfeitures. The charge to compensation expense, net of forfeitures,
amounted to $88,966, $87,803 and $59,945 in the years ended December 31, 1998,
1997 and 1996, respectively.
Other Deferred Compensation Awards
Eligible employees in the Company's Private Client Group participate in the
PaineWebber PartnerPlus Plan (the "PartnerPlus Plan"), a nonqualifled deferred
compensation plan. Under the PartnerPlus Plan, the Company makes annual
contributions and the employee may elect to make voluntary pre-tax
contributions, subject to a maximum percent of the Company contribution. The
Company and employee contributions earn tax-deferred interest for ten years.
Company contributions made beginning January 1, 1999 and the interest thereon
generally will vest 20% per year beginning the sixth year from the date of
contribution, through year ten. Company contributions made prior to January 1,
1999, and the related interest, vest generally after ten years from the date of
contribution. Voluntary contributions vest immediately and the interest thereon
vests on the same terms as interest on Company contributions. The Company
expenses these costs over the service period.
51
<PAGE> 28
PAINEWEBBER 1998 ANNUAL REPORT
NOTE 12 EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
In 1998, the Company adopted SFAS No. 132 "Employers' Disclosure about Pension
and Other Postretirement Benefits" which revised and standardized disclosure
requirements. Prior year disclosures have been restated to comply with SFAS No.
132.
The Company has a non-contributory defined benefit pension plan (the "Plan"),
which provides benefits to eligible employees. As of December 31, 1998, the
Company amended its Plan to freeze future accruals except as related to
employees meeting certain age and years of service eligibility requirements.
Pension expense for the years ended 1998, 1997 and 1996 for the Plan included
the following components:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Service cost $ 23,729 $ 19,373 $ 19,191
Interest cost 27,016 23,576 20,225
Expected return on Plan assets (37,085) (28,991) (25,753)
Amortization of transition asset (840) (840) (840)
Amortization of prior service cost 1,742 2,037 2,037
Recognized actuarial loss 6,289 5,783 8,085
================================================================================
Net periodic pension cost $ 20,851 $ 20,938 $ 22,945
================================================================================
</TABLE>
The following table provides a reconciliation of the Plan's benefit
obligation and fair value of Plan assets, as well as a summarization of the
Plan's funded status and prepaid pension asset which is included in "Other
assets" on the Company's Consolidated Statements of Financial Condition at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
==============================================================================
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 394,583 $ 302,208
Service cost 23,729 19,373
Interest cost 27,016 23,576
Actuarial (gain)/loss (3,731) 66,709
Effect of curtailment (18,003) --
Benefits paid (17,136) (17,283)
------------------------
Benefit obligation at end of year 406,458 394,583
==============================================================================
CHANGE IN PLAN ASSETS:
Fair value of Plan assets at beginning of year 399,010 311,171
Actual return on assets 33,000 60,122
Employer contribution 10,000 45,000
Benefits paid (17,136) (17,283)
------------------------
Fair value of Plan assets at end of year 424,874 399,010
==============================================================================
Funded status 18,416 4,427
Unrecognized transition asset (2,845) (3,685)
Unrecognized prior service cost -- 1,742
Unrecognized net loss 63,132 87,070
------------------------
Prepaid pension asset at year end $ 78,703 $ 89,554
==============================================================================
</TABLE>
The benefit obligation for the Plan was determined using an assumed discount
rate of 7.0% for 1998 and 1997 and 7.5% for 1996, and an assumed rate of
compensation increase of 5%. The weighted-average assumed rate of return on Plan
assets was 9.5% for 1998, 1997 and 1996. The Company's funding policy is to
contribute to the Plan amounts that can be deducted for federal income tax
purposes. Plan assets consist primarily of equity securities and U.S. government
and agency obligations.
Defined Contribution Pension Plan
The PaineWebber Savings Investment Plan ("SIP") is a defined contribution
(401(k)) plan for eligible employees of the Company. Under SIP, employee
contributions are matched by the Company on a graduated scale, which is based in
part on the Company's pre-tax earnings and the compensation of eligible
employees. The provision for Company contributions for amounts contributed or to
be contributed in cash and/or
52
<PAGE> 29
Notes to Consolidated Financial Statements
stock of the Company to the SIP and invested in the PaineWebber Common Stock
Fund amounted to approximately $14,100, $13,000 and $12,100 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1999, the Company established the PaineWebber 401(k)
Plus Plan (the "Plus Plan") which was developed for eligible employees of the
Company to modify the SIP and replace the benefits that employees would have
accrued under the frozen defined benefit pension plan. The Plus Plan is a
defined contribution plan that includes two retirement benefit features: an
employee savings investment plan and an annual retirement contribution that the
Company will make to the Plus Plan on the employee's behalf. Under the new Plus
Plan, the employee contributions are matched by the Company on a graduated
scale, which is based in part on the Company's pre-tax earnings and the
compensation of eligible employees. In addition, the Company will provide an
annual retirement contribution equal to a percentage of the employee's eligible
compensation and the employee's number of years of service with the Company.
Other Benefit Plans
The Company also provides certain life insurance and health care benefits to
employees. The costs of such benefits for the years ended December 31, 1998,
1997 and 1996 were $57,600, $55,400 and $55,700, respectively.
NOTE 13 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, net deferred tax assets are included in "Other assets" in the
Consolidated Statements of Financial Condition. Deferred tax assets are
reflected without reduction for a valuation allowance. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1998, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
=====================================================================================
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Employee benefits $276,367 $229,449 $141,929
Accelerated income and deferred deductions 92,724 91,263 40,767
Acquired tax benefits 25,472 46,000 --
Other 20,554 23,627 39,065
------------------------------------
Total deferred tax assets 415,117 390,339 221,761
=====================================================================================
DEFERRED TAX LIABILITIES
Tax over book depreciation 6,792 16,450 16,520
Accelerated deductions and deferred income 41,414 36,753 11,864
Safe harbor leases 4,385 5,282 4,976
Valuation of trading assets and investments 45,662 57,781 31,827
Other 3,254 3,581 6,016
------------------------------------
Total deferred tax liabilities 101,507 119,847 71,203
=====================================================================================
NET DEFERRED TAX ASSET $313,610 $270,492 $150,558
=====================================================================================
</TABLE>
The significant components of the provision for income taxes for the years ended
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
=========================================================================
<S> <C> <C> <C>
CURRENT
Federal $ 262,733 $ 235,349 $ 134,940
State 14,501 56,476 11,436
Foreign 15,092 10,735 21,139
-----------------------------------------------
Total current 292,326 302,560 167,515
=========================================================================
DEFERRED
Federal (59,732) (56,373) 11,978
State 14,562 (17,348) 23,984
Foreign 2,052 (213) (8,828)
-----------------------------------------------
Total deferred (43,118) (73,934) 27,134
=========================================================================
$ 249,208 $ 228,626 $ 194,649
=========================================================================
</TABLE>
53
<PAGE> 30
PAINEWEBBER 1998 ANNUAL REPORT
The reconciliation of income taxes, computed at the statutory federal rate,
to the provision for income taxes recorded for the years ended December 31,
1998, 1997 and 1996, was as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory federal rate $ 250,252 35.0 $ 235,587 35.0 $ 196,012 35.0
State and local income taxes,
net of federal tax benefit 18,891 2.6 25,433 3.8 23,023 4.1
Foreign rate differential 902 0.1 (1,926) (0.3) (9,227) (1.7)
Nontaxable dividends and interest (6,264) (0.8) (6,936) (1.0) (6,695) (1.2)
Nondeductible expenses 3,261 0.5 3,251 0.5 2,514 0.4
Minority interest (11,285) (1.6) (10,161) (1.5) (362) (0.1)
Other, net (6,549) (0.9) (16,622) (2.5) (10,616) (1.7)
===================================================================================================================
$ 249,208 34.9 $ 228,626 34.0 $ 194,649 34.8
===================================================================================================================
</TABLE>
Income taxes paid for the years ended December 31, 1998, 1997 and 1996 were
$236,597, $278,553 and $130,886, respectively.
Undistributed earnings of the Company's foreign subsidiaries are considered
to be permanently reinvested and, accordingly, no provision for U.S. income
taxes is required on such earnings. As of December 31, 1998, such earnings were
estimated to be $215,000. The estimated U.S. income taxes that would be payable
upon the repatriation of such earnings were not material.
NOTE 14 EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes the dilutive effects of
options and convertible securities and is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities.
Set forth below is the reconciliation of net income applicable to common
shares and weighted-average common and common equivalent shares of the basic and
diluted earnings per share computations:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
======================================================================================================================
<S> <C> <C> <C>
NUMERATOR
Net income $ 433,555 $ 415,449 $ 364,350
Preferred stock dividends (23,647) (29,513) (29,395)
-----------------------------------------------------
Net income applicable to common
shares for basic earnings per share 409,908 385,936 334,955
-----------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends -- 6,000 6,000
Interest savings on convertible debentures 279 1,030 3,865
-----------------------------------------------------
279 7,030 9,865
Net income applicable to common
shares for diluted earnings per share $ 410,187 $ 392,966 $ 344,820
======================================================================================================================
DENOMINATOR
Weighted-average common shares for basic earnings per share 140,863,761 135,943,063 131,547,207
Weighted-average effect of dilutive securities:
Employee stock options and awards 8,870,423 7,759,013 9,519,680
Convertible debentures 877,241 1,984,328 4,489,175
6% Convertible Preferred Stock(1) -- 7,661,580 8,273,600
-----------------------------------------------------
Dilutive potential common shares 9,747,664 17,404,921 22,282,455
Weighted-average common and common equivalent
shares for diluted earnings per share 150,611,425 153,347,984 153,829,662
======================================================================================================================
EARNINGS PER COMMON SHARE
Basic $ 2.91 $ 2.84 $ 2.55
Diluted $ 2.72 $ 2.56 $ 2.24
======================================================================================================================
</TABLE>
(1) The 6% Convertible Preferred Stock was converted into 8,273,600 common
shares on December 4, 1997.
54
<PAGE> 31
Notes to Consolidated Financial Statements
NOTE 15 SEGMENT REPORTING DATA
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company offers a wide variety of
products and services, primarily those of a full service broker-dealer to a
domestic market, through its two operating segments: Individual and
Institutional. The Individual segment offers brokerage services and products
(such as the purchase and sale of securities, margin and securities lending,
insurance annuity contracts, mutual funds, and wrap fee products), asset
management and other investment advisory and portfolio management products and
services, and execution and clearing services for transactions originated by
individual investors. The Institutional segment principally includes capital
market products and services (such as the placing of securities and other
financial instruments for -- and the execution of trades on behalf of --
institutional clients, investment banking services such as the underwriting of
debt and equity securities, and mergers and acquisitions advisory services).
Segment revenues and expenses in the table below consist of those that are
directly attributable, combined with segment amounts based on Company allocation
methodologies (for example, allocating a portion of investment banking revenues
to the individual segment; relative utilization of the Company's square footage
for certain cost allocations).
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------
Individual Institutional Total Individual Institutional Total
====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 3,978,301 $ 3,271,281 $ 7,249,582 $ 3,556,246 $ 3,100,706 $ 6,656,952
Net interest
revenues 314,078 194,162 508,240 274,762 143,812 418,574
Net revenues 3,373,456 1,031,658 4,405,114 3,082,359 1,030,043 4,112,402
Depreciation and
amortization 49,639 24,657 74,296 37,637 31,063 68,700
Income before
taxes and
minority
interest 494,666 220,341 715,007 443,376 229,731 673,107
Total assets 18,330,427 35,845,494 54,175,921 14,736,069 42,328,964 57,065,033
Expenditures
for long-
lived assets 89,460 91,957 181,417 45,950 44,997 90,947
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------
Individual Institutional Total
============================================================
<S> <C> <C> <C>
Total revenues $ 3,123,568 $ 2,582,398 $ 5,705,966
Net interest
revenues 214,581 124,402 338,983
Net revenues 2,765,401 969,811 3,735,212
Depreciation and
amortization 26,898 37,218 64,116
Income before
taxes and
minority
interest 345,986 214,047 560,033
Total assets 12,485,301 40,028,199 52,513,500
Expenditures
for long-
lived assets 36,150 15,433 51,583
============================================================
</TABLE>
The following presents information about the Company's operations by geographic
area:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------
United States Non-U.S.(1) Total United States Non-U.S.(1) Total
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 7,001,967 $ 247,615 $ 7,249,582 $ 6,461,976 $ 194,976 $ 6,656,952
Net revenues 4,239,413 165,701 4,405,114 3,965,289 147,113 4,112,402
Income before
taxes and
minority
interest 677,646 37,361 715,007 647,268 25,839 673,107
Total assets 44,691,427 9,484,494 54,175,921 46,610,462 10,454,571 57,065,033
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
- ---------------------------------------------------------
United States Non-U.S.(1) Total
=========================================================
<S> <C> <C> <C>
Total revenues $ 5,516,443 $ 189,523 $ 5,705,966
Net revenues 3,576,442 158,770 3,735,212
Income before
taxes and
minority
interest 526,422 33,611 560,033
Total assets 39,549,604 12,963,896 52,513,500
=========================================================
</TABLE>
(1) Predominantly the United Kingdom
55
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF PAINE WEBBER GROUP INC.
We have audited the accompanying consolidated statements of financial condition
of Paine Webber Group Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Paine Webber Group Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
February 1, 1999
56
<PAGE> 33
COMMON STOCK AND QUARTERLY INFORMATION
COMMON STOCK DIVIDEND HISTORY
During 1998, Paine Webber Group Inc. continued its policy of paying quarterly
common stock dividends. Dividends declared during the last twelve quarters were
as follows:
<TABLE>
<CAPTION>
Calendar Quarter 4th 3rd 2nd 1st
=================================================================
<S> <C> <C> <C> <C>
1998 $.11 $.11 $.11 $.11
1997 .11 .10 .10 .10
1996 .08 .08 .08 .08
=================================================================
</TABLE>
On February 4, 1999, Paine Webber Group Inc. declared a 1999 first quarter
dividend of $.11 per share. However, there is no assurance that dividends will
continue to be paid in the future, since they are dependent upon income,
financial condition and other factors, including the restrictions described in
Note 7 in the Notes to Consolidated Financial Statements.
MARKET FOR COMMON STOCK
The common stock of Paine Webber Group Inc. is listed on the New York Stock
Exchange ("NYSE") and the Pacific Stock Exchange. The following table summarizes
the high and low sales prices per share of the common stock as reported on the
Composite Tape for the periods indicated:
<TABLE>
<CAPTION>
High Low
===========================================================================
<S> <C> <C>
CALENDAR 1998
4th Quarter $44.50 $20.38
3rd Quarter 53.38 29.25
2nd Quarter 49.44 39.44
1st Quarter 43.13 28.69
===========================================================================
CALENDAR 1997
4th Quarter $37.38 $26.33
3rd Quarter 32.67 23.50
2nd Quarter 25.25 18.58
1st Quarter 26.00 18.17
===========================================================================
</TABLE>
On February 12, 1999, the last reported sale price per share of Paine Webber
Group common stock on the NYSE was $34.38. The approximate number of holders of
record of Paine Webber Group Inc. common stock as of the close of business on
February 12, 1999 was 6,378.
QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
Income before Earnings per
(In thousands of dollars Total Net taxes and Net common share
except per share amounts) Revenues Revenues minority interest Income Basic/Diluted
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
CALENDAR 1998
4th Quarter $1,735,041 $1,096,493 $166,214 $100,427 $.66/.63
3rd Quarter 1,809,148 1,031,476 138,599 82,892 .54/.51
2nd Quarter 1,900,283 1,162,168 211,999 129,501 .88/.82
1st Quarter 1,805,110 1,114,977 198,195 120,735 .82/.77
===========================================================================================================================
CALENDAR 1997
4th Quarter $1,745,036 $1,069,685 $175,304 $108,708 $.75/.68
3rd Quarter 1,764,456 1,081,943 181,572 112,782 .78/.70
2nd Quarter 1,619,769 975,940 151,327 93,124 .66/.58
1st Quarter 1,527,691 984,834 164,904 100,835 .72/.62
===========================================================================================================================
</TABLE>
The sum of the quarterly earnings per share amounts does not equal the annual
amount reported, as per share amounts are computed independently for each
quarter and the full year based on respective weighted-average common and common
equivalent shares outstanding during each period.
57
<PAGE> 34
FIVE-YEAR FINANCIAL SUMMARY
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996 1995(1) 1994(2)
- --------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
COMMISSIONS
Listed securities
and options $ 992,816 22.5 $ 884,341 21.5 $ 821,499 22.0 $ 816,517 24.4 $ 580,323 22.9
Mutual funds and
insurance 438,598 10.0 415,855 10.1 380,982 10.2 302,654 9.0 279,688 11.0
Over-the-counter
securities and other 209,869 4.8 196,595 4.8 178,994 4.8 153,595 4.6 110,283 4.4
------------------------------------------------------------------------------------------------------
1,641,283 37.3 1,496,791 36.4 1,381,475 37.0 1,272,766 38.0 970,294 38.3
------------------------------------------------------------------------------------------------------
PRINCIPAL TRANSACTIONS
Taxable fixed income 451,668 10.3 514,976 12.5 500,391 13.4 396,787 11.8 56,221 2.2
Equities 279,720 6.3 408,969 9.9 379,446 10.2 377,650 11.3 324,178 12.8
Municipals 137,419 3.1 131,703 3.2 143,778 3.8 139,764 4.2 139,039 5.5
------------------------------------------------------------------------------------------------------
868,807 19.7 1,055,648 25.6 1,023,615 27.4 914,201 27.3 519,438 20.5
------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT 713,570 16.2 542,755 13.2 453,267 12.1 399,540 11.9 356,368 14.1
------------------------------------------------------------------------------------------------------
INVESTMENT BANKING
Underwriting fees,
management fees and
selling concessions:
Corporate securities 265,721 6.0 249,777 6.1 226,063 6.1 207,499 6.2 181,086 7.1
Municipal obligations 117,978 2.7 76,964 1.9 53,914 1.4 43,578 1.3 39,641 1.6
Private placement
and other fees 147,273 3.3 133,260 3.2 111,187 3.0 75,700 2.2 63,776 2.5
------------------------------------------------------------------------------------------------------
530,972 12.0 460,001 11.2 391,164 10.5 326,777 9.7 284,503 11.2
------------------------------------------------------------------------------------------------------
OTHER 142,242 3.2 138,633 3.4 146,708 3.9 150,056 4.5 138,902 5.5
------------------------------------------------------------------------------------------------------
INTEREST 3,352,708 76.1 2,963,124 72.1 2,309,737 61.9 2,256,750 67.4 1,694,572 66.8
------------------------------------------------------------------------------------------------------
TOTAL REVENUES 7,249,582 164.5 6,656,952 161.9 5,705,966 152.8 5,320,090 158.8 3,964,077 156.4
=================================================================================================================================
INTEREST EXPENSE 2,844,468 (64.5) 2,544,550 (61.9) 1,970,754 (52.8) 1,969,811 (58.8) 1,428,653 (56.4)
------------------------------------------------------------------------------------------------------
NET REVENUES $4,405,114 100.0 $4,112,402 100.0 $3,735,212 100.0 $3,350,279 100.0 $2,535,424 100.0
=================================================================================================================================
</TABLE>
58
<PAGE> 35
FIVE-YEAR FINANCIAL SUMMARY
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
NON-INTEREST EXPENSES
Compensation
and benefits $ 2,601,364 59.1 $ 2,420,296 58.9 $ 2,219,129 59.4
Office and equipment 301,845 6.9 275,532 6.7 267,006 7.1
Communications 154,272 3.5 153,285 3.7 153,301 4.1
Business development 103,287 2.3 82,099 2.0 75,981 2.0
Brokerage, clearing and
exchange fees 97,430 2.2 86,808 2.1 87,839 2.4
Professional services 123,265 2.8 129,066 3.1 108,123 2.9
Other 308,644 7.0 292,209 7.1 263,800 7.1
------------------------------------------------------------------------------
TOTAL NON-INTEREST
EXPENSES 3,690,107 83.8 3,439,295 83.6 3,175,179 85.0
------------------------------------------------------------------------------
Income before taxes
and minority interest 715,007 16.2 673,107 16.4 560,033 15.0
Provision for income taxes 249,208 5.7 228,626 5.6 194,649 5.2
------------------------------------------------------------------------------
Income before minority interest 465,799 10.5 444,481 10.8 365,384 9.8
Minority interest 32,244 0.7 29,032 0.7 1,034 0.0
------------------------------------------------------------------------------
NET INCOME $ 433,555 9.8 $ 415,449 10.1 $ 364,350 9.8
================================================================================================================
EARNINGS PER
COMMON SHARE(3)
Basic $ 2.91 $ 2.84 $ 2.55
Diluted $ 2.72 $ 2.56 $ 2.24
------------------------------------------------------------------------------
WEIGHTED-AVERAGE
COMMON SHARES(3)
Basic 140,863,761 135,943,063 131,547,207
Diluted 150,611,425 153,347,984 153,829,662
------------------------------------------------------------------------------
DIVIDENDS DECLARED
PER SHARE:
Common stock(3) $ .44 $ .41 $ .32
Preferred stock:
Redeemable
Preferred Stock $ 9.00 $ 9.00 $ 9.00
Convertible
Preferred Stock $ -- $ 6.00 $ 6.00
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1995(1) 1994(2)
- ----------------------------------------------------------------------------------
Amount % Amount %
==================================================================================
<S> <C> <C> <C> <C>
NON-INTEREST EXPENSES
Compensation
and benefits $ 2,004,585 59.8 $ 1,546,467 61.0
Office and equipment 266,291 7.9 225,375 8.9
Communications 149,047 4.5 130,095 5.1
Business development 90,752 2.7 85,430 3.4
Brokerage, clearing and
exchange fees 93,657 2.8 82,577 3.2
Professional services 101,911 3.0 78,856 3.1
Other 541,359 16.2 342,239 13.5
-------------------------------------------------
TOTAL NON-INTEREST
EXPENSES 3,247,602 96.9 2,491,039 98.2
-------------------------------------------------
Income before taxes
and minority interest 102,677 3.1 44,385 1.8
Provision for income taxes 21,927 0.7 12,754 0.5
-------------------------------------------------
Income before minority interest 80,750 2.4 31,631 1.3
Minority interest -- 0.0 -- 0.0
-------------------------------------------------
NET INCOME $ 80,750 2.4 $ 31,631 1.3
==================================================================================
EARNINGS PER
COMMON SHARE(3)
Basic $ 0.37 $ 0.28
Diluted $ 0.35 $ 0.26
-------------------------------------------------
WEIGHTED-AVERAGE
COMMON SHARES(3)
Basic 138,045,626 107,539,530
Diluted 152,268,070 123,955,127
-------------------------------------------------
DIVIDENDS DECLARED
PER SHARE:
Common stock(3) $ .32 $ .32
Preferred stock:
Redeemable
Preferred Stock $ 9.00 $ --
Convertible
Preferred Stock $ 6.00 $ --
==================================================================================
</TABLE>
(1) The 1995 results include after-tax charges of $146 million ($230 million
before income taxes) related to the resolution of the issues arising from
the Company's sale of public proprietary limited partnerships.
(2) The 1994 results include after-tax costs of $36 million ($50 million before
income taxes) and $34 million ($57 million before income taxes) related to
the purchase of certain net assets and specific businesses of Kidder,
Peabody Group Inc. and a non-recurring mutual fund charge, respectively.
(3) All share and per share data reflect a three-for-two common stock split in
November 1997 and March 1994.
59
<PAGE> 36
CORPORATE INFORMATION
PAINE WEBBER GROUP INC.
1285 Avenue of the Americas
New York, NY 10019-6028
212-713-2000
PAINE WEBBER GROUP INC. OFFICERS
DONALD B. MARRON
Chairman and Chief Executive officer
THEODORE A. LEVINE
Senior Vice President,
General Counsel and Secretary
REGINA A. DOLAN
Senior Vice President and
Chief Financial officer
F. DANIEL CORKERY
Vice President
FRANK A. LENTI
Vice President
WILLIAM J. NOLAN
Treasurer
GERALDINE L. BANYAI
Assistant Secretary
PAINE WEBBER GROUP INC. BOARD OF DIRECTORS
E. GARRETT BEWKES, JR.
Private Investor
RETO BRAUN
Chief Executive officer
SWISS POST
REGINA A. DOLAN
Senior Vice President,
Chief Financial officer
PAINE WEBBER GROUP INC.
FRANK P. DOYLE
Executive Vice President (retired)
GENERAL ELECTRIC COMPANY
JOSEPH J. GRANO, JR.
President,
PAINEWEBBER INCORPORATED
JAMES W. KINNEAR
Retired President and
Chief Executive Officer
TEXACO INC.
NAOSHI KIYONO
Managing Director
THE YASUDA MUTUAL LIFE INSURANCE COMPANY
ROBERT M. LOEFFLER
Retired Attorney, Formerly Of Counsel
WYMAN, BAUTZER, KUCHEL & SILBERT
(law firm)
DONALD B. MARRON
Chairman of the Board and
Chief Executive officer
PAINE WEBBER GROUP INC.
EDWARD RANDALL III
Private Investor
HENRY ROSOVSKY
Professor Emeritus
HARVARD UNIVERSITY
YOSHINAO SEKI
Senior Managing Director and
Chief Investment officer
THE YASUDA MUTUAL LIFE INSURANCE COMPANY
JOHN R. TORELL III
Chairman of the Board
TORELL MANAGEMENT, INC.
PAINEWEBBER INCORPORATED BOARD OF DIRECTORS
DONALD B. MARRON
Chairman
MARGO N. ALEXANDER
TERRY L. ATKINSON
BRIAN M. BAREFOOT
STEVEN P. BAUM
MICHAEL CULP
REGINA A. DOLAN
JOSEPH J. GRANO, JR.
EDWARD M. KERSCHNER
JAMES P. MACGILVRAY
ROBERT H. SILVER
MARK B. SUTTON
60
<PAGE> 37
CORPORATE INFORMATION
PAINEWEBBER INCORPORATED OPERATING COMMITTEE
SCOTT G. ABBEY
Executive Vice President
MARGO N. ALEXANDER
Executive Vice President
MARK D. ALTMAN
Managing Director
TERRY L. ATKINSON
Managing Director
BRIAN M. BAREFOOT
Executive Vice President
JONATHAN R. BAUM
Managing Director
STEVEN P. BAUM
Executive Vice President
GERALD A. BLITSTEIN
Managing Director
BRENDAN D. BOYLE
Senior Vice President
JOHN BRANIFF
Managing Director
DONALD C. CACCIAPAGLIA
Managing Director
DANIEL J. CALLAHAN
Managing Director
ARTHUR D. CASHIN
Managing Director
ROBERT C. CLARK
Senior Vice President
J. SCOTT COBURN
Managing Director
JOHN COUGHLIN
Managing Director
MICHAEL B. CULP
Managing Director
ROGER J. CURYLO
Senior Vice President
PATRICK O. DAVIS
Managing Director
RICHARD P. DEL BELLO
Managing Director
REGINA A. DOLAN
Executive Vice President
TERRENCE E. FANCHER
Managing Director
LEE FEINBERG
Senior Vice President
DIANE FRIMMEL
Executive Vice President
LEE C. GATEWOOD
Managing Director
MARTEN S. HOEKSTRA
Executive Vice President
GREGORY JEDDIS
Managing Director
WILLIAM B. KEENA
Managing Director
I. B. KRIM
Senior Vice President
GUSTAVO A. LARRAMENDI
Managing Director
MATTHEW LEVITAN
Executive Vice President
JAMES P. MACGILVRAY
Executive Vice President
JOEL J. MCKOAN
Managing Director
JOSEPH L. MOREA
Managing Director
THOMAS C. NARATIL
Senior Vice President
CHARLES H. NOBS
Senior Vice President
WILLIAM J. NOLAN
Executive Vice President
DONGWOOK PARK
Managing Director
DONNA C. PETERMAN
Senior Vice President
JOSEPH A. PISCINA
Managing Director
MICHAEL G. RICCIARDI
Managing Director
STEVEN A. SCHWIMMER
Senior Vice President
KATHLEEN M. SHANAHAN
Vice President
ROBERT H. SILVER
Executive Vice President
RAMESH SINGH
Managing Director
J. RICHARD SIPES
Executive Vice President
JULIAN SLUYTERS
Senior Vice President
MARK B. SUTTON
Executive Vice President
JOHN A. TAYLOR
Managing Director
ROBERT E. WEEDEN
Managing Director
61
<PAGE> 38
SUBSIDIARIES AND AFFILIATED COMPANIES
PAINEWEBBER INTERNATIONAL OFFICES
GENEVA
13 Cours de Rive
1211 Geneva 3
Switzerland
41-22-849-0707
LONDON
1 Finsbury Avenue
London EC2M 2PA
England
44-171-422-2000
MAYAGUEZ
45 Andalucia Street, Suite 202
Mayaguez
Puerto Rico 00680
787-805-0300
PONCE
35 Isabel Street
Ponce
Puerto Rico 00731
787-843-8905
SAN Juan
American International Plaza
Penthouse
250 Munoz Rivera Avenue
Hato Rey
Puerto Rico 00918-1918
787-250-3600
SINGAPORE
80 Raffles Place
#13-20 UOB Plaza 2
Singapore 0104
65-323-0188
TOKYO
Asahi Seimei Hibiya
Building 3F
1-5-1 Yuraku-Cho
Chiyoda-Ku, Tokyo 100-0006
Japan
813-3593-5200
ZURICH
Talacker 41
8001 Zurich
Switzerland
411-226-3344
===============================================
PAINEWEBBER INTERNATIONAL BANK LTD
1 Finsbury Avenue
London EC2M 2PA
England
44-171-422-2000
PAINEWEBBER INTERNATIONAL (UK) LTD
1 Finsbury Avenue
London EC2M 2PA
England
44-171-422-2000
===============================================
PAINE WEBBER REAL ESTATE SECURITIES INC.
1285 Avenue of the Americas
New York, NY 10019-6028
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 Avenue of the Americas
New York, NY 10019-6028
MITCHELL HUTCHINS INSTITUTIONAL INVESTORS INC.
1285 Avenue of the Americas
New York, NY 10019-6028
PAINEWEBBER CAPITAL INC.
1285 Avenue of the Americas
New York, NY 10019-6028
PAINE WEBBER DEVELOPMENT CORPORATION
1285 Avenue of the Americas
New York, NY 10019-6028
PAINE WEBBER PROPERTIES INCORPORATED
1285 Avenue of the Americas
New York, NY 10019-6028
PW TRUST COMPANY
1200 Harbor Boulevard
Weehawken, NJ 07087-6725
CORRESPONDENT SERVICES CORPORATION
120 Broadway
New York, NY 10271-0002
PAINEWEBBER SERVICES INCORPORATED
1000 Harbor Boulevard
Weehawken, NJ 07087-6725
PAINEWEBBER LIFE INSURANCE COMPANY
601 6th Avenue
Des Moines, IA 50309-1605
62
<PAGE> 39
BRANCH LOCATIONS
NORTHEAST
BARRY BUCHSBAUM
E.V.P., Division Manager
Albany, N.Y.
Andover, Mass.
Bangor, Maine
Bedford, N.H.
Boston, Mass.
Buffalo, N.Y.
Burlington, Vt.
Chatham, Mass.
Cherry Hill, N.J.
Concord, N.H.
Darien, Conn.
East Hampton, N.Y.
Florham Park, N.J.
Flushing, N.Y.
Garden City, N.Y.
Glens Falls, N.Y.
Greenwich, Conn.
Hackensack, N.J.
Hartford, Conn.
Hingham, Mass.
Huntington, N.Y.
Hyannis, Mass.
Manalapan, N.J.
Manhasset, N.Y.
Marblehead, Mass.
Melville, N.Y.
Metro Park, N.J.
Middlebury, Conn.
Morristown, N.J.
New Haven, Conn.
New London, Conn.
New York, N.Y.
Newtown, Pa.
Northfield, N.J.
Norwich, Conn.
Paramus, N.J.
Peabody, Mass.
Pearl River, N.Y.
Pittsfield, Mass.
Plattsburgh, N.Y.
Port Jefferson, N.Y.
Portland, Maine
Portsmouth, N.H.
Princeton, N.J.
Providence, R.I.
Red Bank, N.J.
Rochester, N.Y.
Rockland, Maine
Smithtown, N.Y.
Southampton, N.Y.
Springfield, Mass.
Stamford, Conn.
Syracuse, N.Y.
Tarrytown, N.Y.
Wellesley, Mass.
Westfield, N.J.
Westport, Conn.
White Plains, N.Y.
Worcester, Mass.
SOUTHERN
WILLIAM KENNEDY
E.V.P., Division Manager
Akron, Ohio
Altoona, Pa.
Atlanta, Ga.
Aventura, Fla.
Baltimore, Md.
Beachwood, Ohio
Bethesda, Md.
Bethlehem, Pa.
Birmingham, Ala.
Boca Raton, Fla.
Bradford, Pa.
Bristol, Tenn.
Charlotte, N.C.
Charlottesville, Va.
Cincinnati, Ohio
Clearwater, Fla.
Cleveland, Ohio
Columbus, Ohio
Coral Gables, Fla.
Corry, Pa.
Dayton, Ohio
Daytona Beach, Fla.
Destin, Fla.
Durham, N.C.
Erie, Pa.
Fayetteville, N.C.
Fort Lauderdale, Fla.
Fort Myers, Fla.
Gainesville, Fla.
Greensboro, N.C.
Greensburg, Pa.
Greenville, S.C.
Hendersonville, N.C.
Hunt Valley, Md.
Hurstbourne, Ky.
Jackson, Miss.
Jackson, Tenn.
Jacksonville, Fla.
Jamestown, N.Y.
Jenkintown, Pa.
Johnstown, Pa.
Kenwood, Ohio
Knoxville, Tenn.
Lexington, Ky.
Little Rock, Ark.
Louisville, Ky.
Maryville, Tenn.
McLean, Va.
Melbourne, Fla.
Memphis, Tenn.
Miami, Fla.
Naples, Fla.
Nashville, Tenn.
New Albany, Ky.
New Kensington, Pa.
Norfolk, Va.
North Palm Beach, Fla.
Oak Ridge, Tenn.
Ocala, Fla.
Orlando, Fla.
Paducah, Ky.
Palm Beach, Fla.
Pensacola, Fla.
Philadelphia, Pa.
Pittsburgh, Pa.
Ponte Vedra, Fla.
Radnor, Pa.
Raleigh, N.C.
Richmond, Va.
Roanoke, Va.
Rockville, Md.
St. Petersburg, Fla.
St. Simons Island, Ga.
Salem, S.C.
Sarasota, Fla.
Stuart, Fla.
Tampa, Fla.
Toledo, Ohio
Troy, Ohio
Upper Arlington, Ohio
Venice, Fla.
Vero Beach, Fla.
Virginia Beach, Va.
Washington, D.C.
West Palm Beach, Fla.
Wilkes-Barre, Pa.
Winston-Salem, N.C.
Youngstown, Ohio
CENTRAL
HUGH O'HARE
E.V.P., Division Manager
Albuquerque, N.M.
Anderson, Ind.
Aspen, Colo.
Atlantic, Iowa
Austin, Texas
Baton Rouge, La.
Beaumont, Texas
Birmingham, Mich.
Boulder, Colo.
Bryan/College
Station, Texas
Chesterfield, Mo.
Chicago, Ill.
Clayton, Mo.
Colorado Springs, Colo.
Corpus Christi, Texas
Dallas, Texas
Denver, Colo.
Des Moines, Iowa
Detroit, Mich.
Duluth, Minn.
Farmington Hills, Mich.
Flint, Mich.
Fort Collins, Colo.
Fort Wayne, Ind.
Fort Worth, Texas
Grand Forks, N.D.
Grand Rapids, Mich.
Greeley, Colo.
Hibbing, Minn.
Hinsdale, Ill.
Houston, Texas
Hurst, Texas
Indianapolis, Ind.
Kansas City, Mo.
Kingwood, Texas
Lafayette, La.
Lansing, Mich.
Lincoln, Neb.
Livonia, Mich.
Longview, Texas
Madison, Wis.
McAllen, Texas
Midland, Texas
Milwaukee, Wis.
Minneapolis, Minn.
Minnetonka, Minn.
Muskegon, Mich.
Muskogee, Okla.
New Orleans, La.
Northbrook, Ill.
Oakbrook Terrace, Ill.
Oklahoma City, Okla.
Omaha, Neb.
Overland Park, Kan.
Rochester, Mich.
St. Louis, Mo.
St. Paul, Minn.
San Angelo, Texas
San Antonio, Texas
Santa Fe, N.M.
Schaumburg, Ill.
Sioux Falls, S.D.
Sugarland, Texas
Topeka, Kan.
Traverse City, Mich.
Troy, Mich.
Tulsa, Okla.
Tyler, Texas
Vail, Colo.
Virginia, Minn.
Waco, Texas
Wauwatosa, Wis.
Wayzata, Minn.
West Beaumont, Texas
Wichita, Kan.
WESTERN
MICHAEL DAVIS
E.V.P., Division Manager
Alameda, Calif.
Anchorage, Alaska
Bakersfield, Calif.
Bellevue, Wash.
Bend, Ore.
Beverly Hills, Calif.
Billings, Mont.
Bozeman, Mont.
Brea, Calif.
Carlsbad, Calif.
Carmel, Calif.
Century City, Calif.
Chico, Calif.
Encino, Calif.
Fresno, Calif.
Grass Valley, Calif.
Hemet, Calif.
Hilo, Hawaii
Honolulu, Hawaii
Kennewick, Wash.
La Jolla, Calif.
Las Vegas, Nev.
Long Beach, Calif.
Los Angeles, Calif.
Medford, Ore.
Menlo Park, Calif.
Merced, Calif.
Mission Viejo, Calif.
Napa, Calif.
Newport Beach, Calif.
Newport Center, Calif.
Orange, Calif.
Palm Desert, Calif.
Palo Alto, Calif.
Pasadena, Calif.
Phoenix, Ariz.
Portland, Ore.
Rancho Bernardo, Calif.
Redlands, Calif.
Reno, Nev.
Riverside, Calif.
Roseville, Calif.
Sacramento, Calif.
Salinas, Calif.
Salt Lake City, Utah
San Diego, Calif.
San Francisco, Calif.
San Jose, Calif.
San Mateo, Calif.
Santa Barbara, Calif.
Santa Rosa, Calif.
Scottsdale, Ariz.
Seattle, Wash.
Sedona, Ariz.
Spokane, Wash.
Stockton, Calif.
Sun City, Ariz.
Sun Valley, Idaho
Tuscon, Ariz.
Ventura, Calif.
Wailuku, Hawaii
Walnut Creek, Calif.
Whitefish, Mont.
Woodland Hills, Calif.
63
<PAGE> 40
CORPORATE DATA
HEADQUARTERS
The PaineWebber Building
1285 Avenue of the Americas
New York, NY 10019-6028
212-713-2000
Lincoln Harbor Facility
1000-1200 Harbor Boulevard
Weehawken, NJ 07087-6725
201-902-3000
Internet address:
www.painewebber.com
SHAREHOLDER INQUIRIES
For information regarding your shares of Paine Webber Group Inc. Common Stock,
please contact:
Assistant Secretary
212-713-3224
FINANCIAL INFORMATION
Investors, securities analysts and others desiring financial information
should contact:
Investor Relations
212-713-3641
TRANSFER AGENT AND REGISTRAR
Chase Mellon
Shareholder Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefleld Park, NJ 07660
Domestic Holders 1-800-851-9677
Foreign Holders 201-329-8660
Hearing Impaired 1-800-231-5469
www.chasemellon.com
AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, NY 10019-6013
STOCK, DEBT AND TRUST SECURITIES LISTINGS
Paine Webber Group Inc. Common Stock (trading symbol PWJ) is listed on the New
York Stock Exchange and the Pacific Stock Exchange. The Stock Index Return
Securities on the Standard and Poor's MidCap 400 Index due June 2, 2000 are
listed on the American Stock Exchange. The 8.30% Preferred Trust Securities of
PWG Capital Trust I and the 8.08% Preferred Trust Securities of PWG Capital
Trust II are listed on the New York Stock Exchange.
10-K
The annual report to the Securities and Exchange Commission on Form 10-K will be
available in March 1999. A copy may be obtained upon request in writing or by
telephone to Assistant Secretary, Paine Webber Group Inc.
64
<PAGE> 1
Exhibit 21
Paine Webber Group Inc.
Subsidiaries of the Registrant
A list of significant direct and indirect subsidiaries, all of which are
consolidated, of Paine Webber Group Inc. (the "Company") as of December 31, 1998
and the state or jurisdiction in which organized follows. In each case, 100% of
the voting securities are owned directly or indirectly by the Company. Certain
subsidiaries have been omitted because, in the aggregate, they do not constitute
a significant subsidiary.
<TABLE>
<CAPTION>
State or
jurisdiction of
incorporation or
Name organization
---- ----------------
<S> <C>
PaineWebber Incorporated Delaware
Mitchell Hutchins Asset Management Inc. Delaware
PaineWebber International (U.K.) Ltd. United Kingdom
Paine Webber Real Estate Securities Inc. Delaware
</TABLE>
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report on Form 10-K
of Paine Webber Group Inc. of our report dated February 1, 1999, included in the
1998 Annual Report to Stockholders of Paine Webber Group Inc.
We also consent to the incorporation by reference in the registration
statements on Form S-8 (Registration Nos. 2-56284, 2-64984, 2-74819, 2-78627,
2-81554, 2-87418, 2-92770, 33-2959, 33-20240, 33-22265, 33-39539, 33-40489,
33-45583, 33-65296, 33-65298, 33-53489, 33-55451, 33-55457, 333-05269,
333-53037, 333-56021, 333-66249, 333-66251 and 333-66713) and on Form S-3
(Registration Nos. 2-99979, 33-7738, 33-29253, 33-33613, 33-38960, 33-39818,
33-47267, 33-58124, 33-53776, 33-51149, 33-52695, 333-13831, 333-13831-01,
333-13831-02, 333-13831-03, 333-13831-04, 333-17913, 333-43585, 333-47223,
333-63107, 333-67187, 333-67187-01, 333-67187-02 and 333-67187-03) of Paine
Webber Group Inc. and in the related prospectuses, of our reports dated
February 1, 1999 with respect to the consolidated financial statements and
financial statement schedule of Paine Webber Group Inc. included and/or
incorporated by reference in this 1998 Annual Report on Form 10-K for the year
ended December 31, 1998.
ERNST & YOUNG LLP
New York, New York
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Paine Webber Group, Inc. for the period ended December
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 859,631
<RECEIVABLES> 7,876,619
<SECURITIES-RESALE> 14,217,062
<SECURITIES-BORROWED> 8,717,476
<INSTRUMENTS-OWNED> 20,489,200
<PP&E> 434,895
<TOTAL-ASSETS> 54,175,921
<SHORT-TERM> 1,417,783
<PAYABLES> 9,162,050
<REPOS-SOLD> 23,948,872
<SECURITIES-LOANED> 4,969,638
<INSTRUMENTS-SOLD> 5,177,099
<LONG-TERM> 4,255,802
393,750
189,815
<COMMON> 191,047
<OTHER-SE> 2,247,896
<TOTAL-LIABILITY-AND-EQUITY> 54,175,921
<TRADING-REVENUE> 868,807
<INTEREST-DIVIDENDS> 3,352,708
<COMMISSIONS> 1,641,283
<INVESTMENT-BANKING-REVENUES> 530,972
<FEE-REVENUE> 713,570
<INTEREST-EXPENSE> 2,844,468
<COMPENSATION> 2,601,364
<INCOME-PRETAX> 715,007
<INCOME-PRE-EXTRAORDINARY> 433,555
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,555
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.72
</TABLE>
