-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RFvIUXxuGo2rL43OKf64PPyV18DC3UoZ3N4ClBQH0a1Lj/aQCoOJetfNhPLCdSy3 qUNcdbj/m5cJZ45ap7Q54A== 0000950123-97-002858.txt : 19970401 0000950123-97-002858.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950123-97-002858 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINE WEBBER GROUP INC CENTRAL INDEX KEY: 0000075754 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 132760086 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07367 FILM NUMBER: 97571070 BUSINESS ADDRESS: STREET 1: 1285 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127132000 FORMER COMPANY: FORMER CONFORMED NAME: PAINE WEBBER INC DATE OF NAME CHANGE: 19840523 10-K405 1 FORM 10-K405 1 ================================================================================ United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-K (x) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 1996 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _________to________ Commission File Number 1-7367 PAINE WEBBER GROUP INC. (Exact name of registrant as specified in its charter) Delaware 13-2760086 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification 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 ---------------------------- SECURITIES REGISTERED PURSUANT TO SECTIOn 12(b) OF THE ACT: Name of each exchange on Title of each class which registered ------------------- ---------------- 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. * Issued by PWG Capital Trust I. 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 $1.87 billion as of March 19, 1997. (See Item 12.) On March 19, 1997, the Registrant had outstanding 91,654,629 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 1996 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 1, 1997. ================================================================================ 2 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 industry. Founded in 1879, the Company employs approximately 15,870 people in 298 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 1996 Annual Report to Stockholders. The Company's business activities are highly integrated and constitute a single industry segment. Financial information for the years ended December 31, 1996, 1995 and 1994, including the amount of total revenue contributed by class of similar products or services contributing 10% or more of consolidated revenue and information on geographic data, is set forth in the Consolidated Financial Statements and the Notes thereto, and the "Five Year Financial Summary," in the 1996 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 for individual and institutional clients in the purchase and sale of 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 all major securities exchanges in the United States in order to provide services to its brokerage clients in the purchase and sale of listed securities. A major portion of the Company's revenues is derived from commissions from individual and institutional clients on brokerage transactions in listed securities and in over-the-counter ("OTC") markets. The largest portion of the Company's commission revenue (59%) is derived from brokerage transactions in listed securities and options. The Company also acts as broker for investors in the purchase and sale of U.S. government and municipal securities. 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. 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 standard dealers' discounts, which are determined by the terms of the selling agreement and the size of the transaction. In addition, the Company distributes shares of proprietary mutual funds for which it serves as investment advisor and administrator. Income from these proprietary mutual funds is also derived from management and distribution fees. 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. 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 and performance measurement. 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. Options The Company's options related services include the purchase and sale of options on behalf of clients, and the delivery and receipt of the underlying securities 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. 3 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, acts as trustee, custodian or investment manager of retirement assets for approximately 1,200 corporate retirement plans. 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 money, mutual funds and annuities. The Company serves its international clients through a trust company located in Guernsey, Channel Islands, and may serve its domestic clients through third party trustees. DEALER TRANSACTIONS The Company regularly makes a market in OTC securities and as a block positioner, acts as market-maker in certain listed securities, U.S. government and agency securities, investment-grade and high-yield corporate debt, and a full range of mortgage-backed securities. Equity The Company effects transactions in large blocks of securities, usually with institutional investors, generally involving 5,000 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. Where possible, the Company seeks to reduce such risks by hedging with option positions. 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. The Company makes markets, buying and selling as principal, in common stocks, convertible preferred 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 multitude of fixed income products including: U.S. government and agency securities; mortgage related securities including those issued through Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corp. ("FHLMC"); corporate investment-grade and high-yield bonds; and options and futures contracts on these products. The Company's capital can be at risk to the extent significant price fluctuations occur. This risk is lessened 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. Profits or losses are recognized from 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. 4 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") and other mortgage related 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. Additionally, the Company serves as principal and financier in the purchase, sale, securitization and resale of first mortgage notes and the related servicing rights. 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 trading gains or losses. The Company also underwrites, makes markets, 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 securities and establishes limits with respect to overall market exposure, industry group 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. Revenues derived from these activities include underwriting and management fees, selling concessions and trading profits. 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 has also engaged 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 other equity and debt-based products. The Company generally hedges positions taken in these structured products based on option and other valuation models. Through the institutional options and futures group, 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 and option purchase and sale agreements. Derivative financial instruments are subject to varying degrees of market and credit risk. 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 31 in the 1996 Annual Report to Stockholders for a discussion of these groups and their functions. The extent to which derivative financial instruments pose credit risk is determined by the market in which they are exchanged, provisions of the agreements regarding termination, collateral and counterparty creditworthiness. Credit risks are minimized for instruments traded on exchanges. The various futures markets are highly regulated and impose strict margin and other financial requirements on the Company and its clients. Transactions in futures and certain option contracts are conducted through regulated exchanges which clear and guarantee performance of counterparties. However, in the event that members of clearinghouses default on material obligations to such clearinghouses, the Company may have financial exposure. The Company is also subject to credit risk on derivatives not traded on formal exchanges, principally forward agreements and OTC options. These risks are controlled by the use of standard documentation whenever possible providing for early termination and collateral calls, and by entering into master netting agreements when feasible. The Company's risk of credit loss is mitigated further by adherence to formal credit control procedures which include approved customer and counterparty credit limits, periodic monitoring of customer and counterparty creditworthiness, and continuous assessment of credit exposure by comparing market value to contract value. Potential credit exposure on equity derivatives is also measured by simulating increases or decreases in each contract's underlying index. The Credit Department independently evaluates call and termination situations and makes recommendations to management. See also "Notes to Consolidated Financial Statements - Note 10: Financial Instruments with Off-Balance-Sheet Risk and Note 11: Risk Management", beginning on page 44 and page 47, respectively, in the 1996 Annual Report to Stockholders. 5 As a principal trader, the Company is exposed to market risk in the event of unfavorable changes in interest rates, volatility, foreign currency exchange rates or the market values of the securities underlying the instruments. The Company monitors its exposure to market risk through a variety of control procedures including market risk modeling, review of trading positions and hedging strategies, and monitoring adherence to established limits by an independent risk management group. Market risk monitoring is based on estimating loss exposure through stress testing. These results are compared to established limits, and exceptions are subject to review and approval by senior management. 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. 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 or 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. and Financial Counselors Inc. The Asset Management group provides investment advisory and portfolio management services to mutual funds, institutions, pension funds, endowment funds, individuals and trusts. Mutual funds, for which MHAM serves as an investment advisor, include both taxable and tax-exempt funds and front-load, reverse-load, and level-load funds. At December 31, 1996, total assets under management were $44.8 billion. MARGIN LENDING Client securities transactions are executed 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. 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. 6 The financing of margin purchases can be 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 short-term 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 a substantial portion of 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 In connection with both its trading and brokerage transactions, the Company borrows and lends securities to and from brokers and dealers and banks, 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 receives only a portion of the interest earned on the cash deposit or pays a fee to the lender, pursuant to an agreement between the parties specifying the terms of the transaction. 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 various international exchanges. The foreign subsidiaries are also active in the sales, trading and underwriting of U.S. dollar denominated and non-U.S. dollar denominated Eurobonds. RESEARCH Research provides investment advice to institutional and individual clients and guidance for investment strategies. More than 770 companies in 53 industries are covered by the division's analysts. In addition to fundamental company and industry research, the Company offers research products and services in the following areas: asset allocation, economics, fixed income and high-yield issues, convertible and closed-end bond funds, country funds and derivatives. OTHER ACTIVITIES The Commercial Real Estate group provides a full range of capital markets services to its real estate clients, including underwriting of debt and equity securities, principal lending activity, equity and partnership investments, debt restructuring, property sales and bulk sales services, and other advisory services. PaineWebber Specialists Inc. ("PWSI") maintains trading posts on the Pacific, Boston and Cincinnati stock exchanges and an affiliation on the Chicago stock exchange. Specialists are responsible for executing transactions and maintaining an orderly market in certain securities. In this function, the specialist firm acts as an agent in executing orders entrusted to it and/or acts as a dealer. PWSI acts as a specialist for approximately 550 equity issues. Correspondent Services Corporation ("CSC"), a registered broker-dealer, provides execution and clearing services of securities to approximately 115 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. 7 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 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, record-keeping, 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 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 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. Securities broker-dealers and FCMs are also required to file with the SEC and CFTC, specified information on a quarterly and annual basis. 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 from discount brokerage firms and commercial banks, increased investor sophistication and an increase in the variety of investment products have resulted, primarily through mergers and acquisitions, in the emergence of a few well capitalized national firms. 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. 8 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 622,000 square feet at 1285 Avenue of the Americas comprising the offices of its investment banking, asset management, institutional sales and trading, and corporate headquarters staff, as well as two branch offices for retail investment executives. The Company leases approximately 950,000 square feet of space at Lincoln Harbor in Weehawken, New Jersey under leases expiring December 31, 2013. The Lincoln Harbor facility houses the Private Client Group headquarters, systems, operations, administrative services, and finance and training divisions. At December 31, 1996, the Company maintained 298 offices worldwide under leases expiring between 1997 and 2015. In addition, the Company leases various furniture and equipment. 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 of $163 million or more appear to be sought, are described below. The Company is also involved in numerous proceedings in which compensatory damages of less than $163 million appear to be sought, or in which punitive or exemplary damages, together with the apparent compensatory damages alleged, appear to exceed $163 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 defend actively each such case. IN RE NASDAQ MARKET-MAKER ANTITRUST LITIGATIONS 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 for pre-trial purposes in the United States District Court for the Southern District of New York under the caption In Re NASDAQ Market-Maker Antitrust and Securities Litigation, MDL Docket No. 1023. The refiled consolidated complaint in these actions alleges that the defendant firms engaged in activities as market makers on the NASDAQ over-the-counter market that violated the federal antitrust laws. The plaintiffs seek declaratory and injunctive relief, damages in an amount to be determined and subject to trebling and additional relief. On December 18, 1995, PaineWebber filed its answer to plaintiffs' refiled consolidated complaint. The parties are presently engaged in pre-trial discovery. On November 26, 1996, the Court conditionally certified a class of retail investors who bought or sold certain NASDAQ securities through defendants (and in limited cases through non-defendants) during certain periods of time. Plaintiffs' motion for certification of a class of institutional investors is pending. 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 complaint, filed in March 1995, alleged that defendants violated federal securities laws in connection with the execution of orders to buy and sell NASDAQ securities. On December 13, 1995, the District Court granted defendants' motion for summary judgment. On January 19, 1996, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. The appeal was heard on October 24, 1996, and the Court has not yet ruled on this appeal. On July 16, 1996, PaineWebber Incorporated entered into a Stipulation and Order resolving a civil complaint filed by the United States Department of Justice, alleging that it and other NASDAQ market makers violated Section 1 of the Sherman Act in connection with certain market making practices. In entering into the Stipulation and Order, without admitting the allegations, the parties agreed that the defendants would not engage in certain types of market making activities and the defendants undertook specified steps to assure compliance with their agreement. The Stipulation and Order is subject to approval by the United States District Court for the Southern District of New York following a public hearing, and if that Court approves the Stipulation and Order, the complaint will be dismissed with prejudice. 9 LIMITED PARTNERSHIP PROCEEDINGS A series of purported class actions concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments have been filed against PaineWebber and Paine Webber Group Inc. (together "PaineWebber") among others, by partnership investors since November 1994. Several such actions (the "Federal Court Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York, one was filed in the United States District Court for the Southern District of Florida and one complaint (the "New York Limited Partnership Action") was filed in the Supreme Court of the State of New York. The time to answer or otherwise move with respect to these complaints has not yet expired. The complaints in all of these cases make substantially similar allegations that, in connection with the sale of interests in approximately 50 limited partnerships between 1980 and 1992, PaineWebber (1) failed to provide adequate disclosure of the risks involved with each partnership; (2) made false and misleading representations about the safety of the investments and the anticipated performance of the partnerships; and (3) marketed the partnerships to investors for whom such investments were not suitable. The plaintiffs, who are suing on behalf of all persons who invested in limited partnerships sold by PaineWebber between 1980 and 1992, also allege that, following the sale of the partnership units, PaineWebber misrepresented financial information about the partnerships' value and performance. The Federal Court Limited Partnership Actions also allege that PaineWebber violated the Racketeer Influenced and Corrupt Organization Act ("RICO"), and certain of them also claim that PaineWebber violated the federal securities laws. The plaintiffs seek unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In the Federal Court Limited Partnership Actions, the plaintiffs also seek treble damages under RICO. In addition, PaineWebber and several of its present or former officers were sued in two other purported class actions (the "Geodyne Limited Partnership Actions") filed in the state court in Harris County, Texas. Those cases, Nedick v. Geodyne Resources, Inc. et al. and Wolff v. Geodyne Resources, Inc. et al., are similar to the other Limited Partnership Actions except that the plaintiffs purport to sue only on behalf of those investors who bought interests in the Geodyne Energy Partnerships, which were a series of oil and gas partnerships that PaineWebber sold over several years. The plaintiffs in Geodyne Limited Partnership Actions allege that PaineWebber committed fraud and misrepresentation, breached its fiduciary obligations to its investors and brokerage customers, and breached certain contractual obligations. The complaints seek unspecified damages, including reimbursement of all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the Geodyne partnerships. PaineWebber has filed an answer denying the allegations in plaintiffs' complaints. On January 18, 1996, PaineWebber signed and filed with the federal court a memorandum of understanding with the plaintiffs in both the Federal Court Limited Partnership Actions and the Geodyne Limited Partnership Actions outlining the terms under which the parties have agreed to settle these actions. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the Federal Court and Geodyne Limited Partnership Actions in accordance with the definitive settlement agreement and plan of allocation which the parties subsequently submitted to the court for its consideration and approval. The court held hearings on the fairness of the settlement in October and November 1996. On March 20, 1997, the court issued an order approving the settlement. In addition, three actions were filed against the Company in the District Court for Brazoria County, Texas, two captioned Mallia v.PaineWebber, Inc. ("Mallia I" and "Mallia II") and one captioned Billy Hamilton v. PaineWebber ("Hamilton"), relating to the Company's sale and sponsorship of various limited partnership investments. Mallia I was originally filed as a class action, but was later amended to assert claims only on behalf of the named plaintiffs. The complaints in Mallia I, Mallia II, and Hamilton, collectively, make allegations on behalf of approximately 65 named plaintiffs that are substantially similar to those in the Federal Court Limited Partnership Actions except that the plaintiffs purport to bring only state law claims, principally for common law fraud, negligent misrepresentation, breach of fiduciary duty, violations of the Texas Securities Act, and violations of the Texas Deceptive Trade Practices Act, on behalf of those 10 investors who bought interests in Pegasus aircraft leasing partnerships and in unspecified other limited partnerships and investments. The plaintiffs seek unspecified damages. All three actions have been removed to federal court and the two Mallia actions have been transferred to the United States District Court for the Southern District of New York. The Hamilton action has been dismissed with the consent of the parties on the grounds that it is duplicative of the two Mallia actions now before the federal court in New York. In April 1995, two investors in the Pegasus limited partnership filed a purported class action in the Circuit Court of the State of Illinois for Cook County entitled Jacobson v. PaineWebber, Inc., making allegations substantially similar to those alleged in the Federal Court Limited Partnership Actions, but limited in subject matter to the sale of the Pegasus partnerships, and without a RICO claim. The complaint sought unspecified damages. The plaintiffs in the Jacobson case simultaneously remained as participants in the Federal Court Limited Partnership Actions, and subsequently dismissed the Illinois action but objected to the proposed settlement of the Federal Court Limited Partnership Actions. As noted above, on March 20, 1997, the court approved the fairness of the settlement. On January 18, 1996, the Securities and Exchange Commission commenced, and PaineWebber Incorporated simultaneously settled, civil and administrative proceedings relating to the firm's sale of public proprietary limited partnerships in the 1980s and early 1990s. Without admitting or denying the SEC's allegations or findings, the firm agreed to the entry of an administrative cease and desist order, created a capped $40 million fund, paid a $5 million civil penalty, and committed to pay $7.5 million of additional investor claims relating to the limited partnerships. As part of the settlement, PaineWebber Incorporated represented that it had previously paid approximately $120 million to resolve investor claims over a period of several years prior to the SEC settlement. Additionally, pursuant to the order an independent consultant has reviewed the firm's policies and procedures concerning retail brokerage operations and the dissemination of sales and marketing materials, and has made certain recommendations which the firm is implementing. On the same date, PaineWebber Incorporated also announced an agreement to settle with the various state securities regulators pursuant to which PaineWebber Incorporated has made payments in excess of $4.5 million. SHORT-TERM U.S. GOVERNMENT INCOME FUND PROCEEDING The United States Securities and Exchange Commission has informed Mitchell Hutchins Asset Management Inc. ("MHAM") that it has authorized the institution of an administrative proceeding against MHAM alleging violations of various provisions of Federal securities laws in connection with the sale of the Paine Webber Short-Term U.S. Government Income Fund in 1993 and 1994. MHAM is engaged in settlement discussions with the SEC to resolve this matter. It expects that any settlement of this matter will not have a material impact on MHAM's operations or financial results. GENERAL DEVELOPMENT CORPORATION SECURITIES LITIGATION On or about June 10, 1991, PaineWebber Incorporated ("PaineWebber") was served with a "First Amended Complaint" in an action captioned Rolo v. City Investing Liquidating Trust, et al., Civ. Action 90-4420 D.N.J., filed on or about May 13, 1991 naming it and other entities and individuals as defendants. The First Amended Complaint alleges conspiracy and aiding and abetting violations of: (1) one or more provisions of the Racketeer Influenced and Corrupt Organization Act ("RICO"); (2) one or more provisions of the Interstate Land Sales Full Disclosure Act; and (3) the common law, on behalf of all persons (excluding defendants) who purchases lots and/or houses from General Development Corporation ("GDC") or one of its affiliates and who are members of an association known as the North Port Out-of-State Lot Owners Association. The secondary liability claims in the First Amended Complaint relating to PaineWebber are premised on allegations that PaineWebber served as (1) the co-lead underwriter in connection with the April 8, 1988 offering by GDC of 12-7/8% senior subordinated notes pursuant to a Registration Statement and Prospectus and (2) the underwriter for a 1989 offering of Adjustable Rate General Development Residential Mortgage Pass-Through Certificates, Series 1989-A, which plaintiffs contend enabled GDC to acquire additional financial resources for the perpetuation of (and/or aided and abetted) an alleged scheme to defraud purchasers of GDC lots and/or houses. The First Amended Complaint requests certain declaratory relief, equitable relief, compensatory damages of not less than $500 million, punitive damages of not less than three times compensatory damages, treble damages with respect to the RICO count, pre- 11 judgment and post-judgment interest on all sums awarded, and attorney's fees, costs, disbursement and expert witness fees. On December 27, 1993, the District Court entered an order dismissing plaintiffs' First Amended Complaint against PaineWebber and the majority of the other defendants for failure to state a claim upon which relief can be granted. On November 8, 1994, the United States Court of Appeals for the Third Circuit affirmed the District Court's order dismissing this action against PaineWebber. On November 18, 1994, plaintiffs filed a Petition for Rehearing and Suggestion for Rehearing En Banc with the Third Circuit. On April 4, 1995, the United States Court of Appeals for the Third Circuit entered an order vacating its order of November 8, 1994, and granted plaintiffs' application for rehearing and remanded the case to the District Court for reconsideration. Following the remand by the Third Circuit Court of Appeals, on August 24, 1995, the District Court entered an order dismissing the action as to all defendants. On February 20, 1996, plaintiffs filed a notice of appeal from the District Court's order dismissing the action. On September 16, 1996, the Third Circuit Court of Appeals heard arguments on plaintiffs' appeal. The court has not yet ruled on the appeal. 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 1, 1997 ("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: Steven P. Baum, 44, is Executive Vice President and Director of the Global Fixed Income and Commercial Real Estate group of PWI, a position he has held since November 1995. From January 1995 to October 1995, he served as Director of the Commercial Real Estate group and co-director of the Global Fixed Income group. Prior to joining the Company in January 1995, 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 1991 to July 1994. Regina Dolan, 42, is Vice President and Chief Financial Officer of PWG, a position she has held since February 3, 1994. Prior thereto, she was the principal financial and accounting officer of PWG from October 1992 to February 3, 1994. Ms. Dolan is also Executive Vice President and has been Chief Financial Officer of PWI since February 3, 1994. From October 1992 to February 3, 1994, she was Director of Finance and Controls of PWI. Prior to joining the Company, Ms. Dolan was with Ernst & Young LLP from September 1975 to September 1992, where she rose to the position of Partner and served as Director of the firm's Securities Industry Practice. Theodore A. Levine, 52, is General Counsel, Vice President and Secretary of PWG, and is an Executive Vice President of PWI, positions he has held since June 15, 1993. 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. 12 Mark B. Sutton, 42, is Executive Vice President and Director of the Private Client Group of PWI, a position he has held since January 1995. Prior to rejoining the Company in 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" in the 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Financial Highlights" in the 1996 Annual Report to Stockholders is incorporated herein by reference. 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 1996 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. 13 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. 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 4, 1987 (incorporated by reference to Exhibit 3.1 of Registrant's Registration Statement No. 33-52695 on Form S-3 filed with the SEC on October 16, 1995). 3.2 - Certificate of Designations for the 6% Cumulative Convertible Redeemable Preferred Stock, Series A, of the Registrant as filed with the Secretary of State of the State of Delaware on December 15, 1994 (incorporated by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated December 27, 1994). 3.3 - Certificate of Designations for the 9% Cumulative Convertible Redeemable Preferred Stock, Series C, of the Registrant as filed with the Secretary of State of the State of Delaware on December 15, 1994 (incorporated by reference to Exhibit 3.2 to Registrant's Current Report on Form 8-K dated December 27, 1994). 3.4 - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant as filed with the office of the Secretary of State of the State of Delaware on June 6, 1994 (incorporated by reference to Registrant's Current Report on Form 8-K dated June 15, 1994). 14 3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant as filed with the Office of the Secretary of State of the State of Delaware on June 3, 1988 (incorporated by reference to Exhibit 3.1 of Registrant's Registration Statement No. 33-52695 on Form S-3 filed with the SEC on October 16, 1995). 3.6 - Certificate of Powers, Designations, Preferences and Rights relating to Registrant's 7.5% Convertible Preferred Stock as filed with the Office of the Secretary of State of Delaware on January 16, 1992 (incorporated by reference to Exhibit 3.1 of Registrant's Form 10-K for the year ended December 31, 1991). 3.7 - Certificate of Powers, Designations, Preferences and Rights relating to Registrant's 7.5% Convertible Preferred Stock, Series B, as filed with the Office of the Secretary of State of Delaware on January 16, 1992 (incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 1991). 3.8 - Certificate of Designation, Preference and Rights relating to Registrant's Cumulative Participating Convertible Voting Preferred Stock, Series A as filed with the Office of the Secretary of State of the State of Delaware on November 5, 1992 (incorporated by reference to Exhibit 3 of Registrant's Form 10-Q for the quarter ended September 30, 1992). 3.9 - By-laws of the Registrant as amended March 1, 1988 (incorporated by reference to Exhibit 3.2 of Registrant's Registration Statement No. 33-52695 on Form S-3 filed with the SEC on October 16, 1995). 3.10 - Certificate of Stock Designation (elimination) relating to Registrant's 7% Cumulative Convertible Exchangeable Voting Preferred Stock, Series A as filed with the office of the Secretary of State of the State of Delaware on November 5, 1992 (incorporated by reference to Exhibit 3.1 of Registrant's Form 10-K for the year ended December 31, 1992). 3.11 - Certificate of Powers, Designations, Preferences and Rights relating to the Company's 6% Convertible Preferred Stock as filed with the Office of the Secretary of State of the State of Delaware on February 10, 1994 (incorporated by reference to Registrant's Form 8-K dated February 10, 1994). 4.1 - Form of Debt Securities (8-7/8% Notes due 2005) (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1995). 4.2 - Form of Debt Securities (8-1/4% Notes due 2002) (incorporated by reference to Exhibit 4.2 of Registrant's Form 10-K for the year ended December 31, 1995). 4.3 - Form of Debt Securities (6-3/4% Notes due 2006) (incorporated by reference to Exhibit 4.3 of Registrant's Form 10-K for the year ended December 31, 1995). 4.4 - Form of Debt Securities (6-1/4% Notes due 1998) (incorporated by reference to Exhibit 4.4 of Registrant's Form 10-K for the year ended December 31, 1995). 4.5 - Form of Debt Securities (6-1/2% Notes due 2005) (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1994). 4.6 - Form of Debt Securities (7-5/8% Notes due 2014) (incorporated by reference to Exhibit 4.2 of Registrant's Form 10-K for the year ended December 31, 1994). 4.7 - Form of Debt Securities (7-3/4% Notes due 2002) (incorporated by reference to Exhibit 4.3 of Registrant's Form 10-K for the year ended December 31, 1994). 4.8 - Stockholders Agreement dated December 16, 1994 among the Registrant, General Electric Company and Kidder, Peabody Group Inc. (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K dated December 27, 1994). 15 4.9 - 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). 4.10 - 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). 4.11 - 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). 4.12 - 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). 4.13 - 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). 4.14 - 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). 4.15 - 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). 4.16 - 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). 4.17 - Form of Debt Securities (9-1/4% Notes Due 2001) (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1991). 4.18 - Form of 6.5% Convertible Debentures Due 2002 issued in connection with Registrant's Key Executive Equity Program (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1992). 4.19 - Form of Debt Securities (7% Notes Due 2000) (incorporated by reference to Exhibit 4.2 of Registrant's Form 10-K for the year ended December 31, 1992). 4.20 - Form of Debt Securities (7-7/8% Notes Due 2003) (incorporated by reference to Exhibit 4.1f of Registrant's Form 8-K dated February 11, 1993). 4.21 - Form of Book-Entry Global Security relating to Stock Index Return Securities on the S&P MidCap 400 Index due June 2, 2000 (incorporated by reference to Exhibit 4.1g of Registrant's Form 8-K dated May 25, 1993). 16 4.22 - 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). 4.23 - 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). . 4.24 - 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). 4.25 - 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). 4.26 - 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). 4.27 - 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). 4.28 - 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). 4.29 - 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). 4.30 - Form of Amended and Restated Declaration of Trust for PWG Capital Trust I (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). 4.31 - Form of Preferred Security relating to Preferred Trust Securities of PWG Capital Trust I (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). 4.32 - 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). 4.33 - 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). 4.34 - Form of Guarantee with respect to Preferred Securities relating to Preferred Trust Securities of PWG Capital Trust I (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). 17 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 20, 1994 among Registrant, the Initial Lenders named therein, and The Bank of New York and Citibank, N.A., as Co-Administrative Agents, relating to the $1.2 billion credit facility. Credit Agreement dated as of August 30, 1996 among, PWI, 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 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 among, Paine Webber 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 - Limited Partnership Agreement of PW Partners 1993 Dedicated L.P. dated as of January 6, 1994 (incorporated by reference to Exhibit 10.1 of Registrant's Form 10-K for the year ended December 31, 1994). 10.2 - 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). 10.3 - 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). 10.4 - 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). 10.5*- Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. 10.6*- Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of September 1, 1996. 10.7*- Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 9, 1996. 10.8*- Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. 10.9 - Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Donald B. Marron (incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the year ended December 31, 1994). 10.10- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Joseph J. Grano (incorporated by reference to Exhibit 10.7 of Registrant's Form 10-K for the year ended December 31, 1994). - ------------------- * Filed herewith 18 10.11- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Regina A. Dolan (incorporated by reference to Exhibit 10.8 of Registrant's Form 10-K for the year ended December 31, 1994). 10.12*- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Steven Baum. 10.13*- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Mark Sutton. 10.14- Lease dated December 7, 1994 between IBM Credit Corporation and PWI (IBM 9032-003, 9076-303 and 9672-E02) (incorporated by reference to Exhibit 10.9 of Registrant's Form 10-K for the year ended December 31, 1994). 10.15- Lease dated November 23, 1994 between AT&T Capital Corporation and PWI (IBM 9021-962)(incorporated by reference to Exhibit 10.10 of Registrant's Form 10-K for the year ended December 31, 1994). 10.16 - 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 Registrant's Form 10-Q for the quarter ended September 30, 1994). 10.17 - 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). 10.18 - 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). 10.19 - 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). 10.20 - 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). 10.21- 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). 10.22 - 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). 10.23 - 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). 10.24 - Limited Partnership Agreement of PW Partners 1992 Dedicated L.P. dated as of September 2, 1992 (incorporated by reference to Exhibit 10.1 of Registrant's Form 10-K for the year ended December 31, 1993). ------------------- * Filed herewith 19 10.25- 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). 10.26- 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). 10.27- Second Restated and Amended Agreement of Lease, dated as of May 1, 1996, between 1285 Associates Limited Partnership and Paine Webber Incorporated 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). 10.28- 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). 10.29- Amended and Restated Investment Agreement dated as of November 5, 1992 by and between Registrant and The Yasuda Mutual Life Insurance Company ("Yasuda") relating to the repurchase by Registrant of 1,685,394 shares of Registrant's 7% Cumulative Convertible Exchangeable Voting Preferred Stock, Series A ("7% Preferred Shares") and the replacement of the remaining 3,370,786 7% Preferred Shares for 7,758,632 shares of Registrant's Cumulative Participating Convertible Voting Preferred Stock, Series A (incorporated by reference to Exhibit 10 of Registrant's Form 10-Q for the quarter ended September 30, 1992). 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- Employment Agreement dated as of January 2, 1987 between Registrant, PWI and John A. Bult (incorporated by reference to Exhibit 10.24 of Registrant's Form 10-K for the year ended December 31, 1995). 10.32*-Employment Agreement dated as of April 29, 1996 between Registrant, PWI and Joseph J. Grano, Jr. 10.33- Registrant's Supplemental Employee's Retirement Plan For Certain Senior Officers, as amended, dated January 1, 1990 (incorporated by reference to Exhibit 10.25 of Registrant's Form 10-K for the year ended December 31, 1995). 10.34- 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). 10.35- Deferred Compensation Agreement dated as of August 29, 1988 between Registrant and John A. Bult relating to the Supplemental Employees Retirement Plan (incorporated by reference to Exhibit 10.27 of Registrant's Form 10-K for the year ended December 31, 1995). 10.36*-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. - ---------------- * Filed herewith 20 10.37- Registrant's 1983 Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 2-81554 on Form S-8 filed with the SEC on January 28, 1983). 10.38- Registrant's 1984 Stock Award Plan (incorporated by reference to Exhibit 4(a) of Registrant's Registration Statement No. 2-92770 on Form S-8 filed with the SEC on August 15, 1984). 10.39- Registrant's Stock Award Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 33-22265 on Form S-8 filed with the SEC on June 1, 1988). 10.40- Registrant's 1986 Stock Award Plan (incorporated by reference to Registrant's Registration Statement No. 33-2959 on Form S-8 filed with the SEC on February 4, 1986). 10.41- Registrant's 1990 Stock Award and Option Plan (incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement No. 33-40489 on Form S-8 filed with the SEC on May 13, 1991). 10.42- Registrant's Savings Investment Plan (incorporated by reference to Exhibit 4.1 to Registrant's Post-Effective Amendment No. 1 on Form S-8, No. 33-20240, filed with the SEC on October 31, 1990). 10.43*-Master Agreement between PWI and Quotron Systems Inc. dated February 11, 1991. 10.44 -Third-Party Master Lease Agreement between PWI and AT&T Systems Leasing Corporation dated as of October 21, 1991 (incorporated by reference to Exhibit 10.3 of Registrant's Form 10-K for the year ended December 31, 1991). 10.45 -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). 10.46 -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). 10.47 -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). 10.48 -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). 10.49 -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). ---------------- * Filed herewith 21 10.50 - 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). 10.51*- Directors and Officers Liability and Corporation Reimbursement insurance policy with Fiduciary Liability Rider with National Union Fire Insurance Company. 10.52 - 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). 10.53 - Form of License Agreement between Standard and Poor's Corporation and Registrant (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K dated June 1, 1993). 10.54 - 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). 10.55*- Registrant's 1994 Senior Officer Deferred Compensation Plant Grantor Agreement on behalf of Theodore A. Levine EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS o 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). o* Employment Agreement dated as of April 29, 1996 between Registrant, PWI and Joseph J. Grano Jr. o Employment Agreement dated as of January 2, 1987 between Registrant, PWI and John A. Bult (incorporated by reference to Exhibit 10.24 of Registrant's Form 10-K for the year ended December 31, 1995). o 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). o Letter dated as of October 27, 1995 amending 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). o Registrant's Supplemental Employee's Retirement Plan for Certain Senior Officers dated August 4, 1988 (incorporated by reference to Exhibit 10.25 of Registrant's Form 10-K for the year ended December 31, 1995). o 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). o Deferred Compensation Agreement dated as of August 29, 1988 between Registrant and John A. Bult relating to the Supplemental Employees Retirement Plan (incorporated by reference to Exhibit 10.27 of Registrant's Form 10-K for the year ended December 31, 1995). o 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 10.3 of Registrant's Form 10-K for the year ended December 31, 1990). - ------------------- * Filed herewith 22 o Registrant's 1983 Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 2-81554 on Form S-8 filed with the SEC on January 28, 1983). o Registrant's 1984 Stock Award Plan (incorporated by reference to Exhibit 4(a) of Registrant's Registration Statement No. 2-92770 on Form S-8 filed with the SEC on August 15, 1984). o Registrant's Stock Award Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 33-22265 on Form S-8 filed with the SEC on June 1, 1988). o Registrant's 1986 Stock Award Plan (incorporated by reference to Registrant's Registration Statement No. 33-2959 on Form S-8 filed with the SEC on February 4, 1986). o Registrant's 1990 Stock Award and Option Plan (incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement No. 33-40489 on Form S-8 filed with the SEC on May 13, 1991). o Form of 8% Convertible Debentures Due 2000 issued in connection with Registrant's Key Executive Equity Program (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1991). o Form of 6.5% Convertible Debenture Due 2002 issued in connection with Registrant's Key Executive Equity Program (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1992). o Limited Partnership Agreement of PW Partners 1991 Dedicated L.P. dated as of October 7, 1991 (incorporated by reference to Exhibit 10.2 of Registrant's Form 10-K for the year ended December 31, 1992). o Limited Partnership Agreement of PW Partners 1992 Dedicated L.P. dated as of September 2, 1992 (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-K for the year ended December 31, 1993). o Limited Partnership Agreement of PW Partners 1993 Dedicated L.P. dated as of January 6, 1994 (incorporated by reference to Exhibit 10.1 of Registrant's Form 10-K for the year ended December 31, 1994). o 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). o 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). o 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). o 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). o* Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. o* Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of September 1, 1996. o* Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. - ------------------- * Filed herewith 23 o* Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 9, 1996. o Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Donald B. Marron (incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the year ended December 31, 1994). o Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Joseph J. Grano (incorporated by reference to Exhibit 10.7 of Registrant's Form 10-K for the year ended December 31, 1994). o Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Regina A. Dolan (incorporated by reference to Exhibit 10.8 of Registrant's Form 10-K for the year ended December 31, 1994). o* Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Steven Baum. o* Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Mark Sutton o* Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Theodore A. Levine. 11* - Computation of Earnings per Common Share. 12.1*- Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 12.2*- Computation of Ratio of Earnings to Fixed Charges. 13* - 1996 Annual Report to Stockholders of Registrant. 21* - Subsidiaries of the Registrant. 23* - Consent of Independent Auditors. 27* - Financial Data Schedule. (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K dated March 11, 1997 with the SEC reporting under item 5 ("Other Events") providing a press release dated January 20, 1997 related to the Company's financial results for 1996 and quarter ended December 31, 1996. - ------------------- * Filed herewith 24 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 1996 Annual Report to Stockholders. With the exception of the following financial statements and the information incorporated by reference on items 1, 5, 6 and 7, the 1996 Annual Report to Stockholders is not to be deemed filed as part of this report. 1996 Annual Report Description (Page) ----------- ------ Report of independent auditors 55 Consolidated statements of financial condition at December 31, 1996 and 1995 33 For the years ended December 31, 1996, 1995 and 1994: Consolidated statements of income 32 Consolidated statements of changes in stockholders' equity 34-35 Consolidated statements of cash flows 36 Notes to consolidated financial statements 37-54 Quarterly financial information (unaudited) 58 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 25 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, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 3, 1997. 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 3, 1997 F-2 26 Schedule I CONDENSED FINANCIAL INFORMATION OF REGISTRANT PAINE WEBBER GROUP INC. (Parent Company Only) CONDENSED STATEMENTS OF INCOME (In thousands of dollars)
YEARS ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 --------- --------- --------- REVENUES Interest $ 185,772 $ 224,487 $ 192,008 Other 291 628 1,677 --------- --------- --------- Total revenues 186,063 225,115 193,685 Interest expense 229,396 238,172 237,871 --------- --------- --------- Net revenues (43,333) (13,057) (44,186) --------- --------- --------- NON-INTEREST EXPENSES 3,956 6,644 10,350 --------- --------- --------- Loss before income taxes and equity in income of affiliates (47,289) (19,701) (54,536) Benefit for income taxes 21,689 16,511 22,852 --------- --------- --------- Loss before equity in income of affiliates (25,600) (3,190) (31,684) Equity in income of affiliates 389,950 83,940 63,315 --------- --------- --------- NET INCOME $ 364,350 $ 80,750 $ 31,631 ========= ========= =========
See Notes to Condensed Financial Information of Registrant. F-3 27 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 and per share amounts)
December 31, December 31, 1996 1995 ------------ ------------ Assets Cash and cash equivalents $ -- $ 12 Trading assets, at fair value -- 32,575 Loans to and receivables from affiliates 3,818,190 3,272,502 Investments in affiliates 1,971,079 1,550,289 Other assets 181,118 248,445 ----------- ----------- $ 5,970,387 $ 5,103,823 =========== =========== Liabilities and Stockholders' Equity Short-term borrowings $ 913,471 $ 719,608 Trading liabilities, at fair value -- 32,575 Payables to affiliates 242,564 27,812 Other liabilities and accrued expenses 114,578 140,710 ----------- ----------- 1,270,613 920,705 Long-term borrowings 2,781,694 2,444,070 ----------- ----------- 4,052,307 3,364,775 Commitments and contingencies Redeemable Preferred Stock 187,655 186,760 Stockholders' Equity: Convertible Preferred Stock 100,000 100,000 Common stock, $1 par value, 200,000,000 shares authorized; issued 108,358,178 shares and 104,492,091 shares in 1996 and 1995, respectively 108,358 104,492 Additional paid-in capital 913,927 831,763 Retained earnings 1,009,448 719,325 ----------- ----------- 2,131,733 1,755,580 Treasury stock, at cost; 15,366,234 shares and 7,417,845 shares in 1996 and 1995, respectively (331,907) (151,616) Unamortized cost of restricted stock (67,533) (55,302) Foreign currency translation adjustment (1,868) 3,626 ----------- ----------- 1,730,425 1,552,288 ----------- ----------- $ 5,970,387 $ 5,103,823 =========== ===========
See Notes to Condensed Financial Information of Registrant. F-4 28 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT PAINE WEBBER GROUP INC. (Parent Company Only) CONDENSED STATEMENTS OF CASH FLOWS (In thousands of dollars)
YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 364,350 $ 80,750 $ 31,631 Adjustments to reconcile net income to cash (used for) provided by operating activities: Noncash items included in net income: Equity in income of affiliates (389,950) (83,940) (63,315) Depreciation and amortization 2,951 2,925 388 Deferred income taxes (17,050) 16,371 (25,940) Other 2,535 6,299 15,855 (Increase) decrease in assets: Trading assets 32,575 33,587 (6,138) Loans to and receivables from affiliates (485,743) 1,626,049 483,700 Investment in affiliates (12,322) (3,106) (58,300) Other assets 78,810 (36,729) (70,617) Increase (decrease) in liabilities: Payables to affiliates 214,752 3,411 23,887 Trading liabilities (32,575) (33,587) 6,238 Other liabilities and accrued expenses (29,324) 21,744 70,662 Proceeds from: Dividends received from subsidiaries 2,707 -- 19,102 ----------- ----------- ----------- Cash (used for) provided by operating activities (268,284) 1,633,774 427,153 ----------- ----------- ----------- Cash flows from investing activities: Payments for: Net assets acquired in business acquisition -- (624,090) (726,217) Acquisition-related expenditures -- (15,649) -- Office equipment and leasehold improvements (220) (55) (144) ----------- ----------- ----------- Cash used for investing activities (220) (639,794) (726,361) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from (payments on) short-term borrowings 193,863 (887,041) (100,996) Proceeds from: Long-term borrowings 476,752 472,452 637,379 Employee stock transactions 50,103 36,203 11,078 Payments for: Long-term borrowings (141,128) (366,550) (168,505) Repurchases of common stock (237,766) (173,525) (43,133) Dividends (73,332) (75,703) (36,474) ----------- ----------- ----------- Cash provided by (used for) financing activities 268,492 (994,164) 299,349 ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents (12) (184) 141 Cash and cash equivalents, beginning of year 12 196 55 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 0 $ 12 $ 196 =========== =========== ===========
See Notes to Condensed Financial Information of Registrant. F-5 29 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 it's subsidiaries and the notes thereto incorporated by reference in this report. STATEMENT OF CASH FLOWS Interest payments for the years ended December 31, 1996, 1995 and 1994 approximated $232,771, $229,390 and $232,526, respectively. Income tax payments (consolidated) totaled $130,886, $28,248 and $68,455 for the years ended December 31, 1996, 1995 and 1994, respectively. 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 (the "Trust"), a wholly owned subsidiary of the Company, to holders of the 8.30% Trust Securities, on a subordinated basis, to the extent the Company has made principal and interest on 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. F-6 30 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 26, 1997. 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 26, 1997. /s/ Donald B. Marron -------------------------- Donald B. Marron Chairman of the Board, Chief Executive Officer and Director (principal executive officer) /s/ Regina Dolan -------------------------- Regina Dolan Vice President and Chief Financial Officer /s/ T. Stanton Armour -------------------------- T. Stanton Armour Director /s/ E. Garrett Bewkes, Jr. -------------------------- E. Garrett Bewkes, Jr. Director ----------------------------- Reto Braun Director /s/ John A. Bult -------------------------- John A. Bult Director 31 SIGNATURES /s/ Frank P. Doyle -------------------------- Frank P. Doyle Director /s/ Joseph J. Grano, Jr. -------------------------- Joseph J. Grano, Jr. Director /s/ John E. Kilgore, Jr. -------------------------- John E. Kilgore, Jr. Director /s/ James W. Kinnear -------------------------- James W. Kinnear Director /s/ Naoshi Kiyono -------------------------- Naoshi Kiyono Director /s/ Robert M. Loeffler -------------------------- Robert M. Loeffler Director /s/ Edward Randall, III -------------------------- Edward Randall, III Director -------------------------- Henry Rosovsky Director -------------------------- Yoshinao Seki Director 32 EXHIBIT INDEX EXHIBIT NO DESCRIPTION - ---------- ----------- 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 4, 1987 (incorporated by reference to Exhibit 3.1 of Registrant's Registration Statement No. 33-52695 on Form S-3 filed with the SEC on October 16, 1995). 3.2 - Certificate of Designations for the 6% Cumulative Convertible Redeemable Preferred Stock, Series A, of the Registrant as filed with the Secretary of State of the State of Delaware on December 15, 1994 (incorporated by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated December 27, 1994). 3.3 - Certificate of Designations for the 9% Cumulative Convertible Redeemable Preferred Stock, Series C, of the Registrant as filed with the Secretary of State of the State of Delaware on December 15, 1994 (incorporated by reference to Exhibit 3.2 to Registrant's Current Report on Form 8-K dated December 27, 1994). 3.4 - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant as filed with the office of the Secretary of State of the State of Delaware on June 6, 1994 (incorporated by reference to Registrant's Current Report on Form 8-K dated June 15, 1994). 33 3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant as filed with the Office of the Secretary of State of the State of Delaware on June 3, 1988 (incorporated by reference to Exhibit 3.1 of Registrant's Registration Statement No. 33-52695 on Form S-3 filed with the SEC on October 16, 1995). 3.6 - Certificate of Powers, Designations, Preferences and Rights relating to Registrant's 7.5% Convertible Preferred Stock as filed with the Office of the Secretary of State of Delaware on January 16, 1992 (incorporated by reference to Exhibit 3.1 of Registrant's Form 10-K for the year ended December 31, 1991). 3.7 - Certificate of Powers, Designations, Preferences and Rights relating to Registrant's 7.5% Convertible Preferred Stock, Series B, as filed with the Office of the Secretary of State of Delaware on January 16, 1992 (incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 1991). 3.8 - Certificate of Designation, Preference and Rights relating to Registrant's Cumulative Participating Convertible Voting Preferred Stock, Series A as filed with the Office of the Secretary of State of the State of Delaware on November 5, 1992 (incorporated by reference to Exhibit 3 of Registrant's Form 10-Q for the quarter ended September 30, 1992). 3.9 - By-laws of the Registrant as amended March 1, 1988 (incorporated by reference to Exhibit 3.2 of Registrant's Registration Statement No. 33-52695 on Form S-3 filed with the SEC on October 16, 1995). 3.10 - Certificate of Stock Designation (elimination) relating to Registrant's 7% Cumulative Convertible Exchangeable Voting Preferred Stock, Series A as filed with the office of the Secretary of State of the State of Delaware on November 5, 1992 (incorporated by reference to Exhibit 3.1 of Registrant's Form 10-K for the year ended December 31, 1992). 3.11 - Certificate of Powers, Designations, Preferences and Rights relating to the Company's 6% Convertible Preferred Stock as filed with the Office of the Secretary of State of the State of Delaware on February 10, 1994 (incorporated by reference to Registrant's Form 8-K dated February 10, 1994). 4.1 - Form of Debt Securities (8-7/8% Notes due 2005) (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1995). 4.2 - Form of Debt Securities (8-1/4% Notes due 2002) (incorporated by reference to Exhibit 4.2 of Registrant's Form 10-K for the year ended December 31, 1995). 4.3 - Form of Debt Securities (6-3/4% Notes due 2006) (incorporated by reference to Exhibit 4.3 of Registrant's Form 10-K for the year ended December 31, 1995). 4.4 - Form of Debt Securities (6-1/4% Notes due 1998) (incorporated by reference to Exhibit 4.4 of Registrant's Form 10-K for the year ended December 31, 1995). 4.5 - Form of Debt Securities (6-1/2% Notes due 2005) (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1994). 4.6 - Form of Debt Securities (7-5/8% Notes due 2014) (incorporated by reference to Exhibit 4.2 of Registrant's Form 10-K for the year ended December 31, 1994). 4.7 - Form of Debt Securities (7-3/4% Notes due 2002) (incorporated by reference to Exhibit 4.3 of Registrant's Form 10-K for the year ended December 31, 1994). 4.8 - Stockholders Agreement dated December 16, 1994 among the Registrant, General Electric Company and Kidder, Peabody Group Inc. (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K dated December 27, 1994). 34 4.9 - 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). 4.10 - 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). 4.11 - 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). 4.12 - 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). 4.13 - 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). 4.14 - 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). 4.15 - 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). 4.16 - 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). 4.17 - Form of Debt Securities (9-1/4% Notes Due 2001) (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1991). 4.18 - Form of 6.5% Convertible Debentures Due 2002 issued in connection with Registrant's Key Executive Equity Program (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1992). 4.19 - Form of Debt Securities (7% Notes Due 2000) (incorporated by reference to Exhibit 4.2 of Registrant's Form 10-K for the year ended December 31, 1992). 4.20 - Form of Debt Securities (7-7/8% Notes Due 2003) (incorporated by reference to Exhibit 4.1f of Registrant's Form 8-K dated February 11, 1993). 4.21 - Form of Book-Entry Global Security relating to Stock Index Return Securities on the S&P MidCap 400 Index due June 2, 2000 (incorporated by reference to Exhibit 4.1g of Registrant's Form 8-K dated May 25, 1993). 35 4.22 - 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). 4.23 - 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). . 4.24 - 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). 4.25 - 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). 4.26 - 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). 4.27 - 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). 4.28 - 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). 4.29 - 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). 4.30 - Form of Amended and Restated Declaration of Trust for PWG Capital Trust I (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). 4.31 - Form of Preferred Security relating to Preferred Trust Securities of PWG Capital Trust I (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). 4.32 - 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). 4.33 - 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). 4.34 - Form of Guarantee with respect to Preferred Securities relating to Preferred Trust Securities of PWG Capital Trust I (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). 36 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 20, 1994 among Registrant, the Initial Lenders named therein, and The Bank of New York and Citibank, N.A., as Co-Administrative Agents, relating to the $1.2 billion credit facility. Credit Agreement dated as of August 30, 1996 among, PWI, 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 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 among, Paine Webber 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 - Limited Partnership Agreement of PW Partners 1993 Dedicated L.P. dated as of January 6, 1994 (incorporated by reference to Exhibit 10.1 of Registrant's Form 10-K for the year ended December 31, 1994). 10.2 - 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). 10.3 - 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). 10.4 - 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). 10.5*- Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. 10.6*- Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of September 1, 1996. 10.7*- Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 9, 1996. 10.8*- Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. 10.9 - Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Donald B. Marron (incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the year ended December 31, 1994). 10.10- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Joseph J. Grano (incorporated by reference to Exhibit 10.7 of Registrant's Form 10-K for the year ended December 31, 1994). - ------------------- * Filed herewith 37 10.11- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Regina A. Dolan (incorporated by reference to Exhibit 10.8 of Registrant's Form 10-K for the year ended December 31, 1994). 10.12*- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Steven Baum. 10.13*- Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Mark Sutton. 10.14- Lease dated December 7, 1994 between IBM Credit Corporation and PWI (IBM 9032-003, 9076-303 and 9672-E02) (incorporated by reference to Exhibit 10.9 of Registrant's Form 10-K for the year ended December 31, 1994). 10.15- Lease dated November 23, 1994 between AT&T Capital Corporation and PWI (IBM 9021-962)(incorporated by reference to Exhibit 10.10 of Registrant's Form 10-K for the year ended December 31, 1994). 10.16 - 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 Registrant's Form 10-Q for the quarter ended September 30, 1994). 10.17 - 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). 10.18 - 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). 10.19 - 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). 10.20 - 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). 10.21- 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). 10.22 - 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). 10.23 - 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). 10.24 - Limited Partnership Agreement of PW Partners 1992 Dedicated L.P. dated as of September 2, 1992 (incorporated by reference to Exhibit 10.1 of Registrant's Form 10-K for the year ended December 31, 1993). ------------------- * Filed herewith 38 10.25- 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). 10.26- 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). 10.27- Second Restated and Amended Agreement of Lease, dated as of May 1, 1996, between 1285 Associates Limited Partnership and Paine Webber Incorporated 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). 10.28- 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). 10.29- Amended and Restated Investment Agreement dated as of November 5, 1992 by and between Registrant and The Yasuda Mutual Life Insurance Company ("Yasuda") relating to the repurchase by Registrant of 1,685,394 shares of Registrant's 7% Cumulative Convertible Exchangeable Voting Preferred Stock, Series A ("7% Preferred Shares") and the replacement of the remaining 3,370,786 7% Preferred Shares for 7,758,632 shares of Registrant's Cumulative Participating Convertible Voting Preferred Stock, Series A (incorporated by reference to Exhibit 10 of Registrant's Form 10-Q for the quarter ended September 30, 1992). 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- Employment Agreement dated as of January 2, 1987 between Registrant, PWI and John A. Bult (incorporated by reference to Exhibit 10.24 of Registrant's Form 10-K for the year ended December 31, 1995). 10.32*-Employment Agreement dated as of April 29, 1996 between Registrant, PWI and Joseph J. Grano, Jr. 10.33- Registrant's Supplemental Employee's Retirement Plan For Certain Senior Officers, as amended, dated January 1, 1990 (incorporated by reference to Exhibit 10.25 of Registrant's Form 10-K for the year ended December 31, 1995). 10.34- 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). 10.35- Deferred Compensation Agreement dated as of August 29, 1988 between Registrant and John A. Bult relating to the Supplemental Employees Retirement Plan (incorporated by reference to Exhibit 10.27 of Registrant's Form 10-K for the year ended December 31, 1995). 10.36*-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. - ---------------- * Filed herewith 39 10.37- Registrant's 1983 Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 2-81554 on Form S-8 filed with the SEC on January 28, 1983). 10.38- Registrant's 1984 Stock Award Plan (incorporated by reference to Exhibit 4(a) of Registrant's Registration Statement No. 2-92770 on Form S-8 filed with the SEC on August 15, 1984). 10.39- Registrant's Stock Award Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 33-22265 on Form S-8 filed with the SEC on June 1, 1988). 10.40- Registrant's 1986 Stock Award Plan (incorporated by reference to Registrant's Registration Statement No. 33-2959 on Form S-8 filed with the SEC on February 4, 1986). 10.41- Registrant's 1990 Stock Award and Option Plan (incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement No. 33-40489 on Form S-8 filed with the SEC on May 13, 1991). 10.42- Registrant's Savings Investment Plan (incorporated by reference to Exhibit 4.1 to Registrant's Post-Effective Amendment No. 1 on Form S-8, No. 33-20240, filed with the SEC on October 31, 1990). 10.43*-Master Agreement between PWI and Quotron Systems Inc. dated February 11, 1991. 10.44 -Third-Party Master Lease Agreement between PWI and AT&T Systems Leasing Corporation dated as of October 21, 1991 (incorporated by reference to Exhibit 10.3 of Registrant's Form 10-K for the year ended December 31, 1991). 10.45 -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). 10.46 -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). 10.47 -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). 10.48 -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). 10.49 -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). ---------------- * Filed herewith 40 10.50 - 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). 10.51*- Directors and Officers Liability and Corporation Reimbursement insurance policy with Fiduciary Liability Rider with National Union Fire Insurance Company. 10.52 - 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). 10.53 - Form of License Agreement between Standard and Poor's Corporation and Registrant (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K dated June 1, 1993). 10.54 - 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). 10.55*- Registrant's 1994 Senior Officer Deferred Compensation Plant Grantor Agreement on behalf of Theodore A. Levine EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS o 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). o* Employment Agreement dated as of April 29, 1996 between Registrant, PWI and Joseph J. Grano Jr. o Employment Agreement dated as of January 2, 1987 between Registrant, PWI and John A. Bult (incorporated by reference to Exhibit 10.24 of Registrant's Form 10-K for the year ended December 31, 1995). o 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). o Letter dated as of October 27, 1995 amending 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). o Registrant's Supplemental Employee's Retirement Plan for Certain Senior Officers dated August 4, 1988 (incorporated by reference to Exhibit 10.25 of Registrant's Form 10-K for the year ended December 31, 1995). o 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). o Deferred Compensation Agreement dated as of August 29, 1988 between Registrant and John A. Bult relating to the Supplemental Employees Retirement Plan (incorporated by reference to Exhibit 10.27 of Registrant's Form 10-K for the year ended December 31, 1995). o 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 10.3 of Registrant's Form 10-K for the year ended December 31, 1990). - ------------------- * Filed herewith 41 o Registrant's 1983 Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 2-81554 on Form S-8 filed with the SEC on January 28, 1983). o Registrant's 1984 Stock Award Plan (incorporated by reference to Exhibit 4(a) of Registrant's Registration Statement No. 2-92770 on Form S-8 filed with the SEC on August 15, 1984). o Registrant's Stock Award Plan (incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 33-22265 on Form S-8 filed with the SEC on June 1, 1988). o Registrant's 1986 Stock Award Plan (incorporated by reference to Registrant's Registration Statement No. 33-2959 on Form S-8 filed with the SEC on February 4, 1986). o Registrant's 1990 Stock Award and Option Plan (incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement No. 33-40489 on Form S-8 filed with the SEC on May 13, 1991). o Form of 8% Convertible Debentures Due 2000 issued in connection with Registrant's Key Executive Equity Program (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1991). o Form of 6.5% Convertible Debenture Due 2002 issued in connection with Registrant's Key Executive Equity Program (incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K for the year ended December 31, 1992). o Limited Partnership Agreement of PW Partners 1991 Dedicated L.P. dated as of October 7, 1991 (incorporated by reference to Exhibit 10.2 of Registrant's Form 10-K for the year ended December 31, 1992). o Limited Partnership Agreement of PW Partners 1992 Dedicated L.P. dated as of September 2, 1992 (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-K for the year ended December 31, 1993). o Limited Partnership Agreement of PW Partners 1993 Dedicated L.P. dated as of January 6, 1994 (incorporated by reference to Exhibit 10.1 of Registrant's Form 10-K for the year ended December 31, 1994). o 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). o 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). o 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). o 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). o* Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. o* Amendment to the Registrant's Senior Officer Deferred Compensation Plan dated as of September 1, 1996. o* Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 15, 1996. - ------------------- * Filed herewith 42 o* Omnibus Amendment to Grantor Trust Agreement under Registrant's Senior Officer Deferred Compensation Plan dated as of August 9, 1996. o Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Donald B. Marron (incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the year ended December 31, 1994). o Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Joseph J. Grano (incorporated by reference to Exhibit 10.7 of Registrant's Form 10-K for the year ended December 31, 1994). o Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Regina A. Dolan (incorporated by reference to Exhibit 10.8 of Registrant's Form 10-K for the year ended December 31, 1994). o* Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Steven Baum. o* Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Mark Sutton o* Registrant's 1994 Senior Officer Deferred Compensation Plan Grantor Trust Agreement on behalf of Theodore A. Levine. 11* - Computation of Earnings per Common Share. 12.1*- Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 12.2*- Computation of Ratio of Earnings to Fixed Charges. 13* - 1996 Annual Report to Stockholders of Registrant. 21* - Subsidiaries of the Registrant. 23* - Consent of Independent Auditors. 27* - Financial Data Schedule. - ------------------- * Filed herewith EX-10.5 2 AMENDMENT TO REGISTRANT'S COMPENSATION/ 8/15/96 1 EXHIBIT 10.5 AMENDMENT to the PAINE WEBBER GROUP INC. SENIOR OFFICER DEFERRED COMPENSATION PLAN Pursuant to Section 11 of the Senior Officer Deferred Compensation Plan (the "Plan") of Paine Webber Group Inc., the Compensation Committee of the Board of Directors of PWG hereby amends the Plan as follows: 1. Section 7(c) of the Plan is hereby amended by deleting it in its entirety and replacing it with the following: "(c) Settlement. Subject to Section 8, the Participant shall be entitled to receive, in settlement of such sub-account of the Deferral Account, the following: (i) With respect to any balance in such sub-account resulting from amounts credited to such sub-account prior to August 15, 1996 (including additional amounts credited to such sub-account thereafter as a result of deemed dividend reinvestment or other earnings on such pre-August 15, 1996 balance and on such additional amounts), cash payments in an amount equal to such balance determined by valuing assets of such rabbi trust as of the applicable Valuation Date; provided that the trustee may, at the direction of the Committee or Administrator, distribute assets of the rabbi trust other than PWG common stock to the Participant in settlement of all or part of PaineWebber's obligations to the Participant with respect to such Deferral Account balance. (ii) With respect to any balance in such sub-account not subject to (i) above, cash payment in an amount equal to such balance determined by valuing assets of such rabbi trust as of the applicable Valuation Date; provided that the trustee may, at the direction of the Committee or Administrator, distribute PWG common stock or other assets of the rabbi trust in settlement of 2 2 PaineWebber's obligations to the Participant with respect to such Deferral Account balance." 2. Section 8(a) of the Plan is hereby amended by deleting the phrase "by delivery of other assets other than PWG common stock" and replacing it with the following: "by delivery of PWG common stock or other assets (except that PWG common stock may not be delivered in settlement of that part of a Deferral Account subject to Section 7(c)(i) above)". 3. Section 9(b) of the Plan is hereby amended by inserting before the period (".") at the end thereof the following: "provided, however, that the provisions of this Section 9(b) shall not apply to Notional Stock Units credited to the account of a Section 16 Participant on or after August 15, 1996". 4. Section 9(c) of the Plan is hereby amended by inserting after the phrase "Notional Stock Units" the following: "subject to Section 7(c)(i) above". 5. The effective date of this amendment shall be August 15, 1996. Except as otherwise amended hereby, the terms of the Plan shall remain in full force and effect. EX-10.6 3 AMENDMENT TO REGISTRANT'S COMPENSATION/9/1/96 1 EXHIBIT 10.6 AMENDMENT TO THE PAINE WEBBER GROUP INC. SENIOR OFFICER DEFERRED COMPENSATION PLAN Pursuant to Section 11 of the Senior Officer Deferred Compensation Plan (the "Plan") of Paine Webber Group Inc., the Compensation Committee of the Board of Directors of PWG hereby amends the Plan as follows: 1. Section 2(a) of the Plan is hereby amended by deleting it in its entirety and replacing it with the following: "(a) Valuation Date shall mean the close of the business on the last business day of each calendar quarter, provided that, in the case of termination of employment for reasons other than normal retirement, death, or Disability, the Valuation Date shall be the close of business on the last business day of the month in which employment terminates, and in the case of a Change in Control of PWG, the Valuation Date shall be the date of such Change in Control; and provided that, with respect to payments of a portion of the Deferral Account notionally invested in any investment partnership, the Valuation Date shall mean the date immediately prior to the date of such payment; and provided that, with respect to the reallocation of a portion of the Deferral Account to a notional investment in an investment partnership, the Valuation Date shall be the date of the closing of such investment partnership." 2. The effective date of this amendment shall be effective as of September 1, 1996. Except as otherwise amended hereby, the terms of the Plan shall remain in full force and effect. EX-10.7 4 OMNIBUS AMENDMENT - GRANTOR TRUST AGMT/ 8/9/96 1 EXHIBIT 10.7 OMNIBUS AMENDMENT to the GRANTOR TRUST AGREEMENTS under the PAINE WEBBER GROUP INC. SENIOR OFFICER DEFERRED COMPENSATION PLAN This Amendment (this "Amendment"), made as of the 9th day of August, 1996, by and between PaineWebber Group Inc., a Delaware corporation ("PWG"), and The Chase Manhattan Bank (the "Trustee"). WHEREAS, Paine Webber Group Inc. and The Chase Manhattan Bank are parties to grantor trust agreements executed in connection with the obligation of PWG to pay deferred compensation to Donald Marron, Margo Alexander, Regina Dolan, Joseph Grano and Ronald Schwartz under the terms of the PWG Deferred Compensation Plan (the "Trust Agreements"); and WHEREAS, PWG and the Trustee desire to amend the Trust Agreements in certain respects, as more fully set forth below, to clarify certain issues which have arisen after the original execution thereof. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration the parties hereto agree as follows: 1. Pursuant to Section 12(a) of the Trust Agreements, the parties agree that Section 5(a) of each Trust Agreement is hereby deleted in its entirety and replaced with the following: "(a) The Trustee shall, upon written instructions received from the Administrator or investment manager appointed by PWG, hold, dispose, invest and reinvest the assets of the Trust (including the Shares), without distinction between principal and income, in treasury bills, mutual funds, hedge funds, investment partnerships sponsored by PWG and marketable securities. Notwithstanding the foregoing, in no event may assets of the Trust be invested in Shares except to the extent such Shares have been deposited in the Trust pursuant to Section 1(a). PWG shall have the right at any time, and from time 2 2 to time, in its sole discretion, to substitute assets of equal market value for any asset held by the Trust as provided in Section 2(d). The right of PWG to purchase or substitute assets held in the trust is exercisable by PWG in a nonfiduciary capacity." 2. The effective date of this Amendment shall be August 9, 1996. Except as amended hereby, the terms of the Trust Agreements shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first above written. PAINE WEBBER GROUP INC. ________________________ By:_____________________________________ Notary Public Title: Vice President and Treasurer THE CHASE MANHATTAN BANK _______________________ By:______________________________________ Notary Public Title: Vice President EX-10.8 5 OMNIBUS AMENDMENT -GRANTOR TRUST AGT./ 8/15/96 1 EXHIBIT 10.8 OMNIBUS AMENDMENT to the GRANTOR TRUST AGREEMENTS under the PAINE WEBBER GROUP INC. SENIOR OFFICER DEFERRED COMPENSATION PLAN This AMENDMENT (this "Amendment"), made as of the 15th day of August, 1996, by and between Paine Webber Group Inc., a Delaware corporation ("PWG"), and The Chase Manhattan Bank (the "Trustee"). WHEREAS, PWG and the Trustee are parties to grantor trust agreements (the "Trust Agreements") executed in connection with the obligation of PWG to pay deferred compensation to the individuals listed on Exhibit A attached hereto under the terms of the Paine Webber Group Inc. Senior Officer Deferred Compensation Plan (the "Plan"); and WHEREAS, PWG and the Trustee desire to amend the Trust Agreements in certain respects, as more fully set forth below. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration the parties hereto agree as follows: 1. Pursuant to Section 12(a) of the Trust Agreements, the parties agree that Section 2(b) of each Trust Agreement is hereby deleted in its entirety and replaced with the following: "(b) All payments shall be in cash except that the Trustee may, at the direction of an administrator (the "Administrator") appointed for purposes of this Trust by the Compensation Committee of PWG's Board of Directors (the "Committee"), (1) with respect to any property deposited in the Trust prior to August 15, 1996 (including additional property placed in the Trust thereafter as a result of dividend reinvestment or other earnings on such pre-August 15, 1996 property and on such additional amounts), distribute assets held in the Trust other than Shares to the Participant or Beneficiaries; and 2 (2) with respect to any property in the Trust not subject to (1) above, distribute Shares or other assets held in the Trust to the Participant or Beneficiaries; provided that, in the event of a distribution in kind, the Administrator shall advise the Trustee of the value of the assets distributed and the Trustee may conclusively rely upon such information without further inquiry." 2. The effective date of this Amendment shall be August 15, 1996. Except as amended hereby, the terms of the Trust Agreements shall remain in full force and effect. 3. PWG hereby certifies to the Trustee that the amendment to the Trust Agreements described herein is not in conflict with the terms of the Plan or the Trust Agreements. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first above written. PAINE WEBBER GROUP INC. ___________________ By:_________________________ Notary Public Title: THE CHASE MANHATTAN BANK ___________________ By:_________________________ Notary Public Title: 3 Exhibit A Donald Marron Joseph Grano Margo Alexander Regina Dolan Ronald Schwartz Steven Baum Robert Silver Mark Sutton Theodore Levine Brian Barefoot James MacGilvray Paul Guenther Robert Pangia Timothy Cronin Lee Fensterstock EX-10.12 6 REGISTRANT'S 1994 COMPENSATION AGT/ STEVEN BAUM 1 EXHIBIT 10.12 PAINE WEBBER GROUP INC. Senior Officer Deferred Compensation Plan Grantor Trust Agreement THIS AGREEMENT (this "Trust Agreement"), made as of the 9th day of August, 1996, 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"). WITNESSETH: WHEREAS, PWG or one or more of its direct or indirect subsidiaries is obligated to pay deferred compensation to Steven Baum (the "Participant") and his beneficiaries (the "Beneficiaries") under the PWG Senior Officer Deferred Compensation Plan (the "Plan"); and WHEREAS, PWG wishes to establish a trust (the "Trust") and to contribute assets to the Trust that shall be held therein, subject to the claims of the creditors of PWG or its Material Subsidiaries, as herein defined, in the event of insolvency, as herein defined, until delivered to the Participant or Beneficiaries in such manner and at such times as specified in the Plan; and WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: 1. ESTABLISHMENT OF TRUST (a) The Trust shall consist of such property, as is acceptable to the Trustee, as shall be deposited with the Trustee from time to time by PWG, which shall be the principal of the Trust, to be held and administered as provided herein. (b) Such property may consist of shares of PWG common stock, par value $1.00 ("Shares"). If any Shares are contributed to the Trust, PWG shall, by virtue of such contribution, represent that the Shares are validly issued, nonassessable and transferrable, subject to the requirements of applicable federal and state securities laws. PWG represents 2 the Shares have been registered on Form S-8 filed with the Securities and Exchange Commission. PWG shall advise the Trustee of any limitations on sale of the Shares. PWG shall also use its reasonable effects to register or qualify such Shares covered by Form S-8 under the "blue sky" or securities laws of such jurisdictions within the United States. (c) The Trust hereby established shall be irrevocable. (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 Code and shall be construed accordingly. (e) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other assets of PWG and shall be used exclusively for the uses and purposes of the Participant, Beneficiaries and the general creditors of PWG and its Material Subsidiaries as herein set forth. The Participant and Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Trust Agreement shall be mere unsecured contractual rights of the Participant and Beneficiaries against PWG. Any assets held by the Trust shall be subject to the claims of the general creditors of PWG and its Material Subsidiaries under federal and state law in the event of insolvency, as defined in Section 3(a) herein. 2. PAYMENTS TO THE PARTICIPANT OR BENEFICIARIES (a) PWG shall deliver to the Trustee written schedules (the "Payment Schedules") in a form acceptable to the Trustee that indicate the dates or events on which the assets of the Trust are to be paid out to the Participant or Beneficiaries; provided that it shall be the responsibility of the Administrator (as defined in Section 2(b)) to determine if an event set forth on the schedule has occurred and advise the Trustee of such event. Except as otherwise provided herein, the Trustee shall make payments to the Participant or Beneficiaries in accordance with such Payment Schedules. (b) All payments shall be in cash except that the Trustee may, at the direction of an administrator (the "Administrator") appointed for purposes of this Trust by the Compensation Committee of PWG's Board of Directors (the "Committee"), distribute assets held in the Trust other than Shares to the Participant or Beneficiaries; provided that, in the event of a distribution in kind, the Administrator shall advise the Trustee of the value of the assets distributed and the Trustee may conclusively rely upon such information without further inquiry. (c) The Administrator shall advise the Trustee of the amount of withholding of any federal, state or local taxes that may be required to be withheld with respect to the payments of benefits pursuant to the terms of the Plan. The Trustee shall pay amounts withheld to the appropriate taxing authorities. 2 3 (d) For the purpose of making cash payments or to satisfy various withholding or other obligations hereunder, if all or part of the principal of the Trust shall consist of securities or other property, which do not have a readily ascertainable market value, PWG may purchase from the Trust (or it may substitute new assets for) such assets at its option for the amount it then designates as the market value; provided that the Administrator certifies to the Trustee that such market value has been determined on the same basis utilized for trust reporting purposes pursuant to Section 7(a). The Trustee shall be absolutely protected in relying upon the value determined by PWG and the Administrator. 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS WHEN COMPANY IS INSOLVENT (a) The Trustee shall cease payment of benefits to the Participant or Beneficiaries 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 such Material Subsidiary is unable to pay its debts as they become due, or (ii) PWG or such Material Subsidiary is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the assets of the Trust shall be subject to claims of general creditors of PWG and its Material Subsidiaries under federal and state law as set forth below. (1) The Chief Financial Officer of PWG shall have the duty to inform the Trustee in writing of the insolvency of PWG or any such Material Subsidiary. If a person claiming to be a creditor of PWG or a Material Subsidiary alleges in writing to the Trustee that PWG or such Material Subsidiary has become insolvent, the Trustee shall, within 2 business days of delivery to the person authorized as the Trustee to discontinue payments hereunder, request a certification from the Chief Financial Officer of PWG as to whether or not PWG or such Material Subsidiary is insolvent, and, pending such certification, the Trustee shall discontinue payment of benefits to the Participant or Beneficiaries. The Trustee may conclusively, without further inquiry, rely upon the certification that it receives. (2) Unless the Trust Department of the Trustee has actual direct written knowledge of the insolvency of PWG or any such Material Subsidiary, or has received notice from PWG or a person claiming to be a creditor alleging that PWG is insolvent, the trustee shall have no duty to inquire whether PWG or any such Material Subsidiary is insolvent. The Trustee may in all events rely on the certification concerning the solvency of PWG or any such Material Subsidiary as may be furnished to the Trustee pursuant to Section 3(b)(1) without further inquiry. (3) If at any time the Trustee has determined that PWG or any such Material Subsidiary is insolvent pursuant to Section 3(b)(1) or (b)(2), the Trustee shall 3 4 discontinue payments to the Participant or Beneficiaries and shall hold the assets of the Trust for the benefit of the general creditors of PWG or any such Material Subsidiary. Nothing in this Trust Agreement shall in any way diminish any rights of the Participant or Beneficiaries to pursue their rights as general creditors of PWG with respect to benefits due under the Plan or otherwise. (4) The Trustee shall resume the payment of benefits to the participant or Beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has received a certification that PWG or any such Material Subsidiary is no longer insolvent. The Trustee shall be entitled to rely on such certification without future inquiry. (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payment, the first payment following such discontinuance shall include the aggregate amount of all payments due to the Participant or Beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to the Participant or Beneficiaries by PWG in lieu of the payments provided for hereunder during any such period of discontinuance. PWG shall certify to the Trustee the amount of payments made to the Participant or Beneficiaries by PWG during the discontinuance. (d) As used herein, "Material Subsidiary" shall mean at any time 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. 4. PAYMENTS TO COMPANY Subject to Section 2(a) and Section 5(a), PWG shall have no right or power to direct the Trustee to return to PWG or to divert to any other person any of the Trust assets before all payment of benefits have been made to the Participant or Beneficiaries pursuant to the terms of the Plan. The Administrator shall certify to the Trustee in writing that all payments of benefits under the Trust have been made. The trustee may conclusively rely upon such certification. 5. INVESTMENT AUTHORITY (a) The Trustee shall, upon written instructions received from the Administrator or investment manager appointed by PWG, hold, dispose, invest and reinvest the assets of the Trust (including the Shares), without distinction between principal and income, in treasury bills, mutual funds, hedge funds, investment partnerships sponsored by PWG and marketable securities. Notwithstanding the foregoing, in no event may assets of the Trust be invested in Shares except to the extent such Shares have been deposited in the Trust pursuant to Section 1(a). PWG shall have the right at any time, and from time to time, 4 5 in its sole discretion, to substitute assets of equal market value for any asset held by the Trust as provided in Section 2(d). The right of PWG to purchase or substitute assets held in the trust is exercisable by PWG in a nonfiduciary capacity. (b) Except as provided for in Section 5(d) with respect to Shares, all rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable be or rest with PWG, the Participant or the Beneficiaries. (c) When disposing of assets held in the Trust, nothing shall prevent the Trustee, upon the direction of the Administrator, from selling such assets to the Participant or the Beneficiaries for the amount set forth in the Trust accounting. (d) The Trustee shall have the absolute discretion to vote or abstain from voting the shares with respect to any matters brought before shareholders. The Trustee shall tender or not tender any Shares as directed by the Administrator. (e) The Trustee may hold the assets of the Trust in nominee name. (f) When the Trustee delivers property 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 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 wilful misconduct. All credits to the Trust of the anticipated proceeds of sales and redemptions of property and of anticipated income from property 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 property, it is authorized to accept documents in lieu of such property as long as such documents contain the agreement of the issuer thereof to hold such property 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. 6. DISPOSITION OF INCOME During the term of this Trust, all income received by the Trust shall be accumulated and reinvested in accordance with Section 5 above. 5 6 7. ACCOUNTING BY TRUSTEE (a) (i) The Trustee shall keep accurate and detailed accounts of all its receipts, investments and disbursements under this Trust Agreement. Such person or persons as PWG shall designate shall be allowed to inspect the books of account relating to the trust upon request at any reasonable time during the business hours of the Trustee. With respect to any securities or properties which do not have a readily ascertainable market value, PWG shall provide the Trustee with periodic valuations of such securities or properties. 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) Within 60 days after the close of each calendar year (subject to the valuations supplied by PWG), the Trustee shall transmit to PWG, and certify the accuracy of, a written statement of the assets and liabilities of the Trust at the close of that year and a written account of all the Trustee's transactions relating to the Trust during the period from the last previous accounting to the close of that year. (For purposes of this paragraph, the date of the Trustee's resignation or removal as provided in Section 10 hereof shall be deemed to be the close of a calendar year.) (iii) Unless PWG shall have filed with the Trustee written exceptions or objections to any such statement and account within 90 days after receipt thereof, PWG shall be deemed to have approved such statement and account, and in such case or upon the written approval by PWG of any such statement and account, the Trustee shall be forever released and discharged with respect to all matters and things embraced in such statement and account as though it had been settled by decree of a court of competent jurisdiction in an action or proceeding to which PWG and all persons having any beneficial interest in the Trust were parties. (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 Participant or Beneficiaries. No person interested in the Trust, other than PWG and the Participant or Beneficiaries, shall have a right to compel an accounting, judicial or otherwise, by the Trustee, and each such person shall be bound by all accounting by the Trustee to PWG, as herein provided, as if the account had been settled by decree of a court of competent jurisdiction in an action or proceeding to which such person was a party. 8. RESPONSIBILITY OF PWG AND TRUSTEE (a) The Trustee shall discharge its duties under this Trust Agreement in a reasonably prudent manner. 6 7 (b) 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 any action in accordance with the opinion of 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. (c) The Trustee shall be under no duties whatsoever, except 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. (d) PWG shall act in accordance with the Plan as provided herein, and the Trustee shall not be responsible in any respect for acting in accordance with the Plan nor shall the Trustee be responsible for the adequacy of the Trust to meet and discharge all payments and liabilities under the Plan. 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 authorized officers of PWG that is not contrary to the express provisions of this Trust Agreement. PWG shall furnish the Trustee with the name and specimen signature of the Administrator or other authorized officers of PWG authorized to act or give directions hereunder and shall promptly notify the Trustee of the termination of the Administrator and the appointment of a successor thereto. Until notified to the contrary, the Trustee shall be fully protected in relying upon the most recent name and specimen signature of the Administrator furnished to it by PWG. (e) Unless other evidence with respect thereto has been specifically prescribed in this Trust Agreement, any action of PWG under any provision of this Trust Agreement, including any approval of or exceptions to the Trustee's accounts, shall be evidenced by a certificate signed by the Administrator, and the Trustee shall be fully protected in relying upon such certificate. The Trustee may accept a certificate signed by the Administrator as proof of any fact or matter that it deems necessary or desirable to have established in the administration of the Trust (unless other evidence of such fact or matter is expressly prescribed herein), and the Trustee shall be fully protected in relying upon the statements in the certificate. (f) 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. 7 8 (g) In no event shall the Trustee be liable for special or consequential or punitive damages. (h) Until notice be given to the contrary, communications to the Trustee shall be sent to it at its office at The Chase Manhattan Bank, 770 Broadway, New York, New York 10003-9598, and to PWG at its offices located at 1285 Avenue of Americas, New York, New York 10019, Attention: Director of Human Resources. (i) PWG shall pay and shall protect, indemnify and save harmless the Trustee and its officers, directors or trustee, 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, its officers, directors or trustee, employees, nominees and agents 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 wilful misconduct of the Trustee, its officers, directors or trustees, employees, nominees or agents. (j) The Trustee shall have, without exclusions, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein. (k) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. 9. TRANSACTION COSTS, TAXES, COMPENSATION AND EXPENSES OF TRUSTEE (a) PWG shall pay (or make available to the Trustee to pay) any transaction costs and any federal, state, local or other taxes (including withholding taxes) imposed or levied with respect to the corpus and/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. Notwithstanding the foregoing, to the extent instructed by the Administrator and to the extent Trust assets are available, the Trustee, solely in its capacity as trustee and not in its individual capacity, shall advance funds to PWG to enable PWG to satisfy any such transaction costs or taxes. Such advances shall be repayable at such date or dates, with or without interest to be set at a reasonable market rate, or shall be forgiven in whole or in part, in each case, as determined by the Administrator in its sole discretion. In the event PWG pays such transaction costs or such taxes directly, the Administrator may require the Trustee to reimburse PWG for the cost of funds incurred by PWG for any transaction costs 8 9 or any tax payments made on behalf of the Trust. The Trustee upon notice from the Administrator that a payment is for the purposes set forth in the preceding sentence may reimburse PWG without further inquiry. (b) PWG shall pay 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. 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 this Trust and any other trust between PWG and the Trustee which is established in whole or in part to fund PWG's obligations under the Plan and which are reimbursable to the Trustee under this section or the corresponding section of each trust agreement entered into by the parties hereto in connection with any such other trust shall not exceed $3,500, unless (i) the Trustee has delivered written notice ("Notice") to PWG at least ten business days prior to the date on which such legal expenses or expenses are to be incurred 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. 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 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. 10. RESIGNATION AND REMOVAL OF TRUSTEE (a) The Trustee may resign at any time by written notice to PWG, which shall be effective 60 days after receipt of such notice unless PWG and the Trustee agree otherwise. (b) The Trustee may be removed by PWG on 60 days' written notice or upon shorter notice accepted by the Trustee. (c) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The 9 10 transfer shall be completed within 60 days after receipt of notice or resignation, removal or transfer, unless PWG extends the time limit. (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 under paragraph (a) or (b) of this Section . 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 described in the previous sentence shall be paid by PWG. 11. APPOINTMENT OF SUCCESSOR TRUSTEE If the Trustee resigns or is removed in accordance with Section 10 hereof, PWG, by action of the Committee, shall appoint a successor trustee reasonably acceptable to the Participant or Beneficiaries to act hereunder after the effective date of such removal or resignation. Each successor trustee shall have the powers and duties conferred upon the Trustee in this Trust Agreement, and the term "Trustee" as used in this Trust Agreement shall be deemed to include any successor trustee. Upon designation or appointment of a successor trustee, the Trustee shall transfer and deliver the Trust to the successor trustee, reserving such sums as the Trustee shall deem necessary to defray its expenses in settling its accounts, to pay any of its compensation due and unpaid and to discharge any obligation of the Trust for which the Trustee may be liable. Any amounts remaining shall be restored to the Trust by PWG with interest at 30-day treasury bill rate. If the sums so reserved are not sufficient for these purposes, the Trustee shall be entitled to recover the amount of any deficiency from PWG. When the 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 the Trust (except for any acts (other than any accounting) resulting from the gross negligence or willful misconduct of the Trustee during the period it was acting hereunder) and shall not be responsible in any way for the further disposition of the Trust or any part thereof. 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. PWG shall certify to the Trustee that any proposed amendment is not in conflict with the terms of the Plan or the Trust. (b) The Trust shall not terminate until the earlier to occur of (i) the date on which the Participant or Beneficiaries are no longer entitled by any benefits pursuant to the Plan or (ii) the twenty-first anniversary of the death of the Participant who is the beneficiary 10 11 of the Trust as of the date of execution of this Trust Agreement. Upon termination of the Trust, any assets remaining in the Trust shall be returned to PWG. 13. MISCELLANEOUS (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such provisions, without invalidating the remaining provisions hereof. (b) Benefits payable to the Participants or Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subject to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of New York. (d) The titles to Sections of this Trust Agreement are placed herein for convenience of reference only, and the Trust Agreement is not to be construed by reference thereto. (e) This Trust Agreement shall bind and inure to the benefit of the successors and assigns of PWG and the Trustee, respectively, and the Participant or Beneficiaries and legal representatives (e.g., executors, administrators, conservators, etc.). (f) This Trust Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one instrument, which may be sufficiently evidenced by a counterpart. 14. EFFECTIVE DATE The effective date of this Trust Agreement shall be August 9, 1996. 11 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first above written. PAINE WEBBER GROUP INC. _____________________ By:_______________________ Notary Public Title: THE CHASE MANHATTAN BANK _____________________ By:_______________________ Notary Public Title: 12 EX-10.13 7 REGISTRANT'S COMPENSATION PLAN/ MARK SUTTON 1 EXHIBIT 10.13 PAINE WEBBER GROUP INC. Senior Officer Deferred Compensation Plan Grantor Trust Agreement THIS AGREEMENT (this "Trust Agreement"), made as of the 9th day of August, 1996, 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"). WITNESSETH: WHEREAS, PWG or one or more of its direct or indirect subsidiaries is obligated to pay deferred compensation to Mark Sutton (the "Participant") and his beneficiaries (the "Beneficiaries") under the PWG Senior Officer Deferred Compensation Plan (the "Plan"); and WHEREAS, PWG wishes to establish a trust (the "Trust") and to contribute assets to the Trust that shall be held therein, subject to the claims of the creditors of PWG or its Material Subsidiaries, as herein defined, in the event of insolvency, as herein defined, until delivered to the Participant or Beneficiaries in such manner and at such times as specified in the Plan; and WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: 1. ESTABLISHMENT OF TRUST (a) The Trust shall consist of such property, as is acceptable to the Trustee, as shall be deposited with the Trustee from time to time by PWG, which shall be the principal of the Trust, to be held and administered as provided herein. (b) Such property may consist of shares of PWG common stock, par value $1.00 ("Shares"). If any Shares are contributed to the Trust, PWG shall, by virtue of such contribution, represent that the Shares are validly issued, nonassessable and transferrable, subject to the requirements of applicable federal and state securities laws. PWG represents 2 the Shares have been registered on Form S-8 filed with the Securities and Exchange Commission. PWG shall advise the Trustee of any limitations on sale of the Shares. PWG shall also use its reasonable effects to register or qualify such Shares covered by Form S-8 under the "blue sky" or securities laws of such jurisdictions within the United States. (c) The Trust hereby established shall be irrevocable. (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 Code and shall be construed accordingly. (e) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other assets of PWG and shall be used exclusively for the uses and purposes of the Participant, Beneficiaries and the general creditors of PWG and its Material Subsidiaries as herein set forth. The Participant and Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Trust Agreement shall be mere unsecured contractual rights of the Participant and Beneficiaries against PWG. Any assets held by the Trust shall be subject to the claims of the general creditors of PWG and its Material Subsidiaries under federal and state law in the event of insolvency, as defined in Section 3(a) herein. 2. PAYMENTS TO THE PARTICIPANT OR BENEFICIARIES (a) PWG shall deliver to the Trustee written schedules (the "Payment Schedules") in a form acceptable to the Trustee that indicate the dates or events on which the assets of the Trust are to be paid out to the Participant or Beneficiaries; provided that it shall be the responsibility of the Administrator (as defined in Section 2(b)) to determine if an event set forth on the schedule has occurred and advise the Trustee of such event. Except as otherwise provided herein, the Trustee shall make payments to the Participant or Beneficiaries in accordance with such Payment Schedules. (b) All payments shall be in cash except that the Trustee may, at the direction of an administrator (the "Administrator") appointed for purposes of this Trust by the Compensation Committee of PWG's Board of Directors (the "Committee"), distribute assets held in the Trust other than Shares to the Participant or Beneficiaries; provided that, in the event of a distribution in kind, the Administrator shall advise the Trustee of the value of the assets distributed and the Trustee may conclusively rely upon such information without further inquiry. (c) The Administrator shall advise the Trustee of the amount of withholding of any federal, state or local taxes that may be required to be withheld with respect to the payments of benefits pursuant to the terms of the Plan. The Trustee shall pay amounts withheld to the appropriate taxing authorities. 2 3 (d) For the purpose of making cash payments or to satisfy various withholding or other obligations hereunder, if all or part of the principal of the Trust shall consist of securities or other property, which do not have a readily ascertainable market value, PWG may purchase from the Trust (or it may substitute new assets for) such assets at its option for the amount it then designates as the market value; provided that the Administrator certifies to the Trustee that such market value has been determined on the same basis utilized for trust reporting purposes pursuant to Section 7(a). The Trustee shall be absolutely protected in relying upon the value determined by PWG and the Administrator. 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS WHEN COMPANY IS INSOLVENT (a) The Trustee shall cease payment of benefits to the Participant or Beneficiaries 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 such Material Subsidiary is unable to pay its debts as they become due, or (ii) PWG or such Material Subsidiary is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the assets of the Trust shall be subject to claims of general creditors of PWG and its Material Subsidiaries under federal and state law as set forth below. (1) The Chief Financial Officer of PWG shall have the duty to inform the Trustee in writing of the insolvency of PWG or any such Material Subsidiary. If a person claiming to be a creditor of PWG or a Material Subsidiary alleges in writing to the Trustee that PWG or such Material Subsidiary has become insolvent, the Trustee shall, within 2 business days of delivery to the person authorized as the Trustee to discontinue payments hereunder, request a certification from the Chief Financial Officer of PWG as to whether or not PWG or such Material Subsidiary is insolvent, and, pending such certification, the Trustee shall discontinue payment of benefits to the Participant or Beneficiaries. The Trustee may conclusively, without further inquiry, rely upon the certification that it receives. (2) Unless the Trust Department of the Trustee has actual direct written knowledge of the insolvency of PWG or any such Material Subsidiary, or has received notice from PWG or a person claiming to be a creditor alleging that PWG is insolvent, the trustee shall have no duty to inquire whether PWG or any such Material Subsidiary is insolvent. The Trustee may in all events rely on the certification concerning the solvency of PWG or any such Material Subsidiary as may be furnished to the Trustee pursuant to Section 3(b)(1) without further inquiry. (3) If at any time the Trustee has determined that PWG or any such Material Subsidiary is insolvent pursuant to Section 3(b)(1) or (b)(2), the Trustee shall 3 4 discontinue payments to the Participant or Beneficiaries and shall hold the assets of the Trust for the benefit of the general creditors of PWG or any such Material Subsidiary. Nothing in this Trust Agreement shall in any way diminish any rights of the Participant or Beneficiaries to pursue their rights as general creditors of PWG with respect to benefits due under the Plan or otherwise. (4) The Trustee shall resume the payment of benefits to the participant or Beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has received a certification that PWG or any such Material Subsidiary is no longer insolvent. The Trustee shall be entitled to rely on such certification without future inquiry. (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payment, the first payment following such discontinuance shall include the aggregate amount of all payments due to the Participant or Beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to the Participant or Beneficiaries by PWG in lieu of the payments provided for hereunder during any such period of discontinuance. PWG shall certify to the Trustee the amount of payments made to the Participant or Beneficiaries by PWG during the discontinuance. (d) As used herein, "Material Subsidiary" shall mean at any time 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. 4. PAYMENTS TO COMPANY Subject to Section 2(a) and Section 5(a), PWG shall have no right or power to direct the Trustee to return to PWG or to divert to any other person any of the Trust assets before all payment of benefits have been made to the Participant or Beneficiaries pursuant to the terms of the Plan. The Administrator shall certify to the Trustee in writing that all payments of benefits under the Trust have been made. The trustee may conclusively rely upon such certification. 5. INVESTMENT AUTHORITY (a) The Trustee shall, upon written instructions received from the Administrator or investment manager appointed by PWG, hold, dispose, invest and reinvest the assets of the Trust (including the Shares), without distinction between principal and income, in treasury bills, mutual funds, hedge funds, investment partnerships sponsored by PWG and marketable securities. Notwithstanding the foregoing, in no event may assets of the Trust be invested in Shares except to the extent such Shares have been deposited in the Trust pursuant to Section 1(a). PWG shall have the right at any time, and from time to time, 4 5 in its sole discretion, to substitute assets of equal market value for any asset held by the Trust as provided in Section 2(d). The right of PWG to purchase or substitute assets held in the trust is exercisable by PWG in a nonfiduciary capacity. (b) Except as provided for in Section 5(d) with respect to Shares, all rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable be or rest with PWG, the Participant or the Beneficiaries. (c) When disposing of assets held in the Trust, nothing shall prevent the Trustee, upon the direction of the Administrator, from selling such assets to the Participant or the Beneficiaries for the amount set forth in the Trust accounting. (d) The Trustee shall have the absolute discretion to vote or abstain from voting the shares with respect to any matters brought before shareholders. The Trustee shall tender or not tender any Shares as directed by the Administrator. (e) The Trustee may hold the assets of the Trust in nominee name. (f) When the Trustee delivers property 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 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 wilful misconduct. All credits to the Trust of the anticipated proceeds of sales and redemptions of property and of anticipated income from property 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 property, it is authorized to accept documents in lieu of such property as long as such documents contain the agreement of the issuer thereof to hold such property 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. 6. DISPOSITION OF INCOME During the term of this Trust, all income received by the Trust shall be accumulated and reinvested in accordance with Section 5 above. 5 6 7. ACCOUNTING BY TRUSTEE (a) (i) The Trustee shall keep accurate and detailed accounts of all its receipts, investments and disbursements under this Trust Agreement. Such person or persons as PWG shall designate shall be allowed to inspect the books of account relating to the trust upon request at any reasonable time during the business hours of the Trustee. With respect to any securities or properties which do not have a readily ascertainable market value, PWG shall provide the Trustee with periodic valuations of such securities or properties. 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) Within 60 days after the close of each calendar year (subject to the valuations supplied by PWG), the Trustee shall transmit to PWG, and certify the accuracy of, a written statement of the assets and liabilities of the Trust at the close of that year and a written account of all the Trustee's transactions relating to the Trust during the period from the last previous accounting to the close of that year. (For purposes of this paragraph, the date of the Trustee's resignation or removal as provided in Section 10 hereof shall be deemed to be the close of a calendar year.) (iii) Unless PWG shall have filed with the Trustee written exceptions or objections to any such statement and account within 90 days after receipt thereof, PWG shall be deemed to have approved such statement and account, and in such case or upon the written approval by PWG of any such statement and account, the Trustee shall be forever released and discharged with respect to all matters and things embraced in such statement and account as though it had been settled by decree of a court of competent jurisdiction in an action or proceeding to which PWG and all persons having any beneficial interest in the Trust were parties. (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 Participant or Beneficiaries. No person interested in the Trust, other than PWG and the Participant or Beneficiaries, shall have a right to compel an accounting, judicial or otherwise, by the Trustee, and each such person shall be bound by all accounting by the Trustee to PWG, as herein provided, as if the account had been settled by decree of a court of competent jurisdiction in an action or proceeding to which such person was a party. 8. RESPONSIBILITY OF PWG AND TRUSTEE (a) The Trustee shall discharge its duties under this Trust Agreement in a reasonably prudent manner. 6 7 (b) 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 any action in accordance with the opinion of 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. (c) The Trustee shall be under no duties whatsoever, except 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. (d) PWG shall act in accordance with the Plan as provided herein, and the Trustee shall not be responsible in any respect for acting in accordance with the Plan nor shall the Trustee be responsible for the adequacy of the Trust to meet and discharge all payments and liabilities under the Plan. 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 authorized officers of PWG that is not contrary to the express provisions of this Trust Agreement. PWG shall furnish the Trustee with the name and specimen signature of the Administrator or other authorized officers of PWG authorized to act or give directions hereunder and shall promptly notify the Trustee of the termination of the Administrator and the appointment of a successor thereto. Until notified to the contrary, the Trustee shall be fully protected in relying upon the most recent name and specimen signature of the Administrator furnished to it by PWG. (e) Unless other evidence with respect thereto has been specifically prescribed in this Trust Agreement, any action of PWG under any provision of this Trust Agreement, including any approval of or exceptions to the Trustee's accounts, shall be evidenced by a certificate signed by the Administrator, and the Trustee shall be fully protected in relying upon such certificate. The Trustee may accept a certificate signed by the Administrator as proof of any fact or matter that it deems necessary or desirable to have established in the administration of the Trust (unless other evidence of such fact or matter is expressly prescribed herein), and the Trustee shall be fully protected in relying upon the statements in the certificate. (f) 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. 7 8 (g) In no event shall the Trustee be liable for special or consequential or punitive damages. (h) Until notice be given to the contrary, communications to the Trustee shall be sent to it at its office at The Chase Manhattan Bank, 770 Broadway, New York, New York 10003-9598, and to PWG at its offices located at 1285 Avenue of Americas, New York, New York 10019, Attention: Director of Human Resources. (i) PWG shall pay and shall protect, indemnify and save harmless the Trustee and its officers, directors or trustee, 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, its officers, directors or trustee, employees, nominees and agents 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 wilful misconduct of the Trustee, its officers, directors or trustees, employees, nominees or agents. (j) The Trustee shall have, without exclusions, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein. (k) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. 9. TRANSACTION COSTS, TAXES, COMPENSATION AND EXPENSES OF TRUSTEE (a) PWG shall pay (or make available to the Trustee to pay) any transaction costs and any federal, state, local or other taxes (including withholding taxes) imposed or levied with respect to the corpus and/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. Notwithstanding the foregoing, to the extent instructed by the Administrator and to the extent Trust assets are available, the Trustee, solely in its capacity as trustee and not in its individual capacity, shall advance funds to PWG to enable PWG to satisfy any such transaction costs or taxes. Such advances shall be repayable at such date or dates, with or without interest to be set at a reasonable market rate, or shall be forgiven in whole or in part, in each case, as determined by the Administrator in its sole discretion. In the event PWG pays such transaction costs or such taxes directly, the Administrator may require the Trustee to reimburse PWG for the cost of funds incurred by PWG for any transaction costs 8 9 or any tax payments made on behalf of the Trust. The Trustee upon notice from the Administrator that a payment is for the purposes set forth in the preceding sentence may reimburse PWG without further inquiry. (b) PWG shall pay 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. 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 this Trust and any other trust between PWG and the Trustee which is established in whole or in part to fund PWG's obligations under the Plan and which are reimbursable to the Trustee under this section or the corresponding section of each trust agreement entered into by the parties hereto in connection with any such other trust shall not exceed $3,500, unless (i) the Trustee has delivered written notice ("Notice") to PWG at least ten business days prior to the date on which such legal expenses or expenses are to be incurred 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. 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 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. 10. RESIGNATION AND REMOVAL OF TRUSTEE (a) The Trustee may resign at any time by written notice to PWG, which shall be effective 60 days after receipt of such notice unless PWG and the Trustee agree otherwise. (b) The Trustee may be removed by PWG on 60 days' written notice or upon shorter notice accepted by the Trustee. (c) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The 9 10 transfer shall be completed within 60 days after receipt of notice or resignation, removal or transfer, unless PWG extends the time limit. (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 under paragraph (a) or (b) of this Section. 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 described in the previous sentence shall be paid by PWG. 11. APPOINTMENT OF SUCCESSOR TRUSTEE If the Trustee resigns or is removed in accordance with Section 10 hereof, PWG, by action of the Committee, shall appoint a successor trustee reasonably acceptable to the Participant or Beneficiaries to act hereunder after the effective date of such removal or resignation. Each successor trustee shall have the powers and duties conferred upon the Trustee in this Trust Agreement, and the term "Trustee" as used in this Trust Agreement shall be deemed to include any successor trustee. Upon designation or appointment of a successor trustee, the Trustee shall transfer and deliver the Trust to the successor trustee, reserving such sums as the Trustee shall deem necessary to defray its expenses in settling its accounts, to pay any of its compensation due and unpaid and to discharge any obligation of the Trust for which the Trustee may be liable. Any amounts remaining shall be restored to the Trust by PWG with interest at 30-day treasury bill rate. If the sums so reserved are not sufficient for these purposes, the Trustee shall be entitled to recover the amount of any deficiency from PWG. When the 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 the Trust (except for any acts (other than any accounting) resulting from the gross negligence or willful misconduct of the Trustee during the period it was acting hereunder) and shall not be responsible in any way for the further disposition of the Trust or any part thereof. 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. PWG shall certify to the Trustee that any proposed amendment is not in conflict with the terms of the Plan or the Trust. (b) The Trust shall not terminate until the earlier to occur of (i) the date on which the Participant or Beneficiaries are no longer entitled by any benefits pursuant to the Plan or (ii) the twenty-first anniversary of the death of the Participant who is the beneficiary 10 11 of the Trust as of the date of execution of this Trust Agreement. Upon termination of the Trust, any assets remaining in the Trust shall be returned to PWG. 13. MISCELLANEOUS (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such provisions, without invalidating the remaining provisions hereof. (b) Benefits payable to the Participants or Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subject to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of New York. (d) The titles to Sections of this Trust Agreement are placed herein for convenience of reference only, and the Trust Agreement is not to be construed by reference thereto. (e) This Trust Agreement shall bind and inure to the benefit of the successors and assigns of PWG and the Trustee, respectively, and the Participant or Beneficiaries and legal representatives (e.g., executors, administrators, conservators, etc.). (f) This Trust Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one instrument, which may be sufficiently evidenced by a counterpart. 14. EFFECTIVE DATE The effective date of this Trust Agreement shall be August 9, 1996. 11 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first above written. PAINE WEBBER GROUP INC. __________________________ By:_______________________ Notary Public Title: THE CHASE MANHATTAN BANK _________________________ By:______________________ Notary Public Title: 12 EX-10.32 8 EMPLOYMENT AGREEMENT 4/29/96 / PWI & JOSEPH GRANO 1 EXHIBIT 10.32 EMPLOYMENT AGREEMENT AGREEMENT dated as of April 24, 1996, by and between PAINE WEBBER GROUP INC., a Delaware corporation with its principal office at 1285 Avenue of the Americas, New York, New York 10019 ("PWG"), PAINEWEBBER INCORPORATED, a Delaware corporation with its principal office at 1285 Avenue of the Americas, New York, New York 10019 ("PWI'), as the employers, and JOSEPH J. GRANO JR., who resides at Sheepfield Farms Road, New Vernon, New Jersey 07976, as the employee (the "Executive"). WHEREAS, the Executive has been serving as President of PWI, and WHEREAS, PWG and PWI each desire to assure the Executive of his rights to compensation and benefits that are granted to him because of his service in the foregoing capacity, and Executive desires to continue to serve in such capacity in consideration of the terms and conditions hereinafter set forth, NOW THEREFORE, in consideration of the premises and of the mutual covenants set forth herein and for other good and valuable consideration, PWG, PWI and the Executive hereby agree as follows: 1. DEFINITIONS (a) "Cause" shall mean (i) the Executive is convicted of a crime involving moral turpitude, or (ii) the Executive, in carrying out his duties, is guilty of (A) willful gross neglect or (B) willful gross misconduct resulting, in either case, in material harm to PWG or PWI unless such act, or failure to act, was believed by the Executive in good faith to be in the best interests of PWG or PWI. (b) a "Change in Control" shall be deemed to have occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Act"), becomes a beneficial owner, as such term is used in Rule 13d-3 promulgated under the Act, of securities of PWG or PWI representing 20% or more of the combined voting power of the outstanding securities of PWG or PWI, as the case may be, having the right to vote in the election of directors (any such owner being herein referred to as an "Acquiring Person"), (ii) a majority of the Board of Directors of PWG ("PWG Board") at any time consists of individuals elected to membership at a PWG Board meeting or a PWG shareholders' meeting other than individuals nominated or approved by a majority of the Disinterested Directors; (iii) all or substantially all the business of PWI is disposed of pursuant to a merger, consolidation or other transaction (other than a merger, consolidation or other transaction with a company of which 50% or more of the combined voting power of the outstanding securities having a right to vote at the election of directors is owned, directly or indirectly, by PWG both before and immediately after the merger, consolidation or other transaction) in which PWI is not the surviving corporation or PWG is materially or completely liquidated; or 2 2 (iv) PWG or PWI combines with another company and is the surviving corporation (other than a merger, consolidation or other transaction with a company of which 50% or more of the combined voting power of the outstanding securities having a right to vote at the election of directors is owned, directly or indirectly, by PWG both before and immediately after the merger, consolidation or other transaction) but, immediately after the combination, the shareholders of PWG hold, directly or indirectly, less than 50% of the total outstanding securities of the combined company having the right to vote in the election of directors. (c) "Disinterested Director" shall mean any member of the PWG Board (i) who is not an officer or employee of PWG, PWI or any of their subsidiaries, (ii) who is not an Acquiring Person or an affiliate or associate of an Acquiring Person or a nominee or representative of an Acquiring Person or of any such affiliate or associate and (iii) who was a member of the PWG Board prior to the date of this Agreement or was recommended for election or elected by a majority of the Disinterested Directors then on the PWG Board. (d) "Constructive Termination" shall mean that, without the Executive's prior written consent, one or more of the following events occurs and, within six months thereafter, the Executive, on his own initiative, terminates his employment: (i) The Executive is not reelected to or is otherwise removed from the position of President of PWI as described in Section 2(a) for any reason other than his termination of employment under Section 10(a), 10(b) or 10(d). (ii) The Executive is assigned any duties or responsibilities that are inconsistent, in any significant respect, with the scope of duties and responsibilities associated with his position as described in Section 2(a). (iii) The Executive suffers a reduction in the authorities, duties and responsibilities associated with his position as described in Section 2(a) on the basis of which he makes a determination in good faith that he can no longer carry out such position in the manner contemplated at the time this Agreement was entered into. (iv) The Executive's base salary or annual bonus decreases below the minimum level provided in Section 3 or 4, as the case may be, or his benefits under any employee benefit plan or program of PWG or PWI, or his incentive opportunity under any incentive program of PWG or PWI is materially reduced below the level, or opportunity, as the case may be, in effect on the Operative Date, unless PWG or PWI provides the Executive with a comparable plan or program having the economic equivalent thereof. (v) The principal office of PWG or PWI or the Executive's own office location as assigned to him by PWG or PWI is relocated outside an area within ten miles of the headquarters of PWI in Manhattan on the date hereof. (e) "Disability" shall mean the Executive's inability to render for a period of six consecutive months, full and effective services hereunder by reason of permanent disability, whether resulting from illness, accident or otherwise; provided, however, that in no event will the Executive be 3 3 considered disabled for the purposes of this Agreement unless he is deemed disabled pursuant to the PWG Long Term Disability Plan. (f) "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. (g) "Pro Rata Bonus" shall mean an amount equal to the annual bonus otherwise payable with respect to the fiscal year in question multiplied by a fraction, the numerator of which is the number of days in such fiscal year during which the Executive is employed, and the denominator of which is 365. (h) "Term of this Agreement" shall mean the period between the Operative Date and the third anniversary thereof, but only if the Executive is employed by PWG or PWI on the Operative Date. 2. POSITIONS AND DUTIES (a) During the Term of this Agreement, the Executive shall be employed as President of PWI. The Executive shall be during the Term of this Agreement responsible for the duties of the President as set forth in the By-laws of PWI and such other duties as may be assigned to him by the Board of Directors and/or the Chief Executive Officer of PaineWebber Group. He shall recommend during the Term of this Agreement objectives, policies and plans for the areas of his responsibility. During the Term of this Agreement and subject to the provisions of Section 2(b), the Executive shall devote his full business time and attention to the business and affairs of PWG and PWI and shall use his best efforts, skills and abilities to promote their interests. (b) Anything herein to the contrary notwithstanding, nothing shall preclude the Executive from serving on the boards of directors of other companies, engaging in charitable and community affairs and managing his personal investments, provided that such activities do not materially interfere with the performance of his duties or responsibilities hereunder. 3. SALARY During the Term of this Agreement, the Executive shall be paid by PWI a base salary payable no less frequently than in equal semi-monthly installments at an annualized rate of no less than the annual salary being paid to the Executive on the Operative Date. Such base salary shall be reviewed annually for increase in the discretion of the Compensation Committee of the PWG Board (the "Committee"), taking into account such factors as corporate and individual performance, salary increases for other senior officers and increases, if any, in the Consumer Price Index for New York (the "Consumer Price Index"). 4. ANNUAL BONUS For each fiscal year during the Term of this Agreement, PWI shall pay the Executive an annual bonus of not less than the average of the three annual bonuses awarded to him for the three fiscal years of PWI next preceding the Operative Date or such larger amount as the Committee in its discretion shall determine, taking into account such factors as corporate and individual performance, bonuses for other senior officers and increases, if any, in the Consumer Price Index. For 4 4 the period of employment during the last fiscal year in which falls the Term of this Agreement, PWI shall pay the Executive a Pro Rata Bonus. All bonuses shall be paid to the Executive at the same time bonuses are paid to other senior officers of PWI, unless the Executive has elected to defer receipt of all or part of the bonus to which he is entitled in respect of such fiscal year in accordance with the terms of any deferred compensation program as then in affect and available to the Executive. 5. RESTRICTED STOCK During the Term of this Agreement, the Executive shall be entitled to participate in the restricted stock award program under the Paine Webber Group Inc. 1994 Executive Stock Award Plan (the "Stock Award Plan"), or any successor program or programs. Size and frequency of awards shall be determined in accordance with administrative policies consistent with those followed in the past. 6. STOCK OPTION AND STOCK APPRECIATION RIGHTS AWARDS During the Term of this Agreement, the Executive shall be entitled to participate in the stock option and other stock based award programs under the Stock Award Plan, or any successor program or programs. Size and frequency of awards shall be determined in accordance with administrative policies consistent with those followed in the past. 7. PW PARTNERS L.P.; PW PARTNERS DEDICATED L.P. During the Term of this Agreement, the Executive shall be eligible to participate in leveraged investment partnerships such as PW Partners 1995 L.P. and PW stock based partnerships such as PW Partners 1993 Dedicated, L.P. 8. EMPLOYEE BENEFIT PROGRAMS During the Term of this Agreement, the Executive shall be entitled to participate in all employee benefit programs of PWG or PWI now or hereafter made available to PWG or PWI executives or salaried employees generally, as such programs may be in effect from time to time, including, without limitation, pension and other retirement plans, profit sharing plans, group life insurance, accidental death and dismemberment insurance, hospitalization, surgical, major medical coverage, sick leave (including salary continuation arrangements), long-term disability, vacations, holidays and other employee benefit programs sponsored by PWG or PWI. 9. BUSINESS EXPENSE REIMBURSEMENT AND PERGUISITES (a) During the Term of this Agreement, the Executive shall be entitled to receive proper reimbursement by PWG or PWI for all reasonable, out-of-pocket expenses incurred by him (in accordance with the policies and procedures established by PWG or PWI for their senior executives) in performing services under this Agreement, provided that the Executive submits reasonable documentation with respect to such expenses. (b) During the Term of this Agreement, the Executive shall also be entitled to any of the PWG or PWI executive perquisites in accordance with the terms and provisions of such arrangements as are in effect and applicable on the Operative Date. 5 5 10. TERMINATION OF EMPLOYMENT (a) Termination Due to Death or Disability. In the event the Executive's employment terminates during the Term of this Agreement as a result of death or termination by PWG or PWI due to Disability, the Executive or his legal representative, as the case may be, shall be entitled to: (i) base salary as provided in Section 3, at the rate in effect at the time of his termination through the date of termination of employment; (ii) any bonus awarded but not yet paid under Section 4; (iii) a Pro Rata Bonus for the fiscal year in which death or disability occurs; (iv) any deferred bonus as provided in Section 4, including interest or other credits on the deferred amounts; (v) reimbursement for expenses incurred pursuant to Section 9(a) prior to termination; and (vi) such rights to other compensation and benefits as may be provided in applicable plans and programs of PWG or PWI, including without limitation restricted stock as provided in Section 5, stock options and other stock based awards as provided in Section 6 and interests in PW Partners L.P. and PW Partners Dedicated L.P. as provided in Section 7, as well as applicable employee benefit plans and programs as provided in Section 8. (b) Termination by PWG or PWI for Cause. In the event PWG or PWI terminates the Executive's employment during the Term of this Agreement for Cause, he shall be entitled to: (i) base salary as provided in Section 3 at the rate in effect at the time of his termination through the date of termination of employment; (ii) any bonus awarded but not yet paid under Section 4; (iii) any deferred bonus as provided in Section 4, including interest or other credits on the deferred amounts; (iv) reimbursement for expenses incurred pursuant to Section 9(a) prior to termination; and (v) such rights to other compensation and benefits as may be provided in applicable plans and programs of PWG or PWI, including without limitation restricted stock as provided in Section 5, stock options and other stock based awards as provided in Section 6, and interests in PW Partners L.P. and PW Partners Dedicated L.P. as provided in Section 7, as well as applicable employee benefit plans and programs as provided in Section 8. In any case described in this Section 10(b), the Executive shall be given written notice, authorized by a vote of at least a majority of the members of the PWG Board (excluding the Executive), 6 6 that PWG or PWI intends to terminate his employment for Cause under this Section 10(b). Such written notice shall specify the particular acts, or failures to act, on the basis of which the decision to so terminate employment has been made. The Executive shall be given the opportunity within 20 days of the receipt of such notice to meet with the PWG Board to defend such acts, or failures to act, and the Executive shall be given seven days after such meeting to correct such acts or failures to act. Upon failure of the Executive, within seven days, to correct such acts or failures to act, the Executive's employment by PWG and PWI shall automatically be terminated for Cause under this Section 10(b). (c) Termination Without Cause or Constructive Termination. (i) In the event that during the Term of this Agreement (A) either PWG or PWI terminates the Executive's employment without Cause, other than due to Disability, or (B) there is a Constructive Termination, the Executive shall thereupon be entitled to (x) a lump sum payment equal to the present value of: (aa) base salary until the end of the Term of this Agreement at the rate in effect immediately prior to the termination of employment; (bb) a bonus for the year of termination and bonuses for each year until the end of the Term of this Agreement, at an annualized rate equal to the average of the bonuses awarded to him with respect to the three years preceding the year in which termination occurs; and (cc) any bonus awarded but not yet paid (including deferred bonus); and (y) such rights to compensation, benefits and reimbursements as may be provided in applicable plans, programs and policies of PWG or PWI, including without limitation restricted stock as provided in Section 5, stock options and other stock based awards as provided in Section 6 and interests in PW Partners L.P. and PW Partners Dedicated L.P. as provided in Section 7, as well as applicable employee benefit plans and programs as provided in Section 8. To the extent that, because of his termination under this Section 10(c), the Executive is ineligible for continued employee benefit coverage under the employee benefit programs as provided in Section 8, PWI shall provide him with the economic equivalent thereof (ii) Notwithstanding anything herein to the contrary, if (A) any amounts due under Section 10(c)(i) constitute "Parachute Payments" within the meaning of Section 28OG(b)(2) of the Internal Revenue Code (the "Code"), or successor provision, and (B) the amount of the Parachute Payments, reduced by all Federal, state and local taxes applicable with respect thereto, including the excise tax imposed pursuant to Section 4999 of the Code, is less than the amount he would receive, after taxes, if he were paid only 2.99 times his "Base Amount" within the meaning of Section 28OG(b)(3). then, in lieu of the Parachute Payments the Executive shall be paid an amount in cash equal to 2.99 times the Base Amount. The determinations made with respect to this Section 10(c)(ii) shall be made by an independent auditor (the "Auditor") jointly selected by PWG and the Executive, or his legal representatives. The Auditor shall be a nationally recognized United States public accounting firm which has not, during the two years preceding the date of its selection, acted in any way on behalf of PWG or its affiliates. 7 7 (iii) Any payments to which the Executive shall be entitled under this Section 10(c) shall be made as promptly as possible following the termination of the Executive's employment hereunder. (d) Voluntary Termination. A "Voluntary Termination" under this Section 10(d) shall mean a termination of employment, during the Term of this Agreement, by the Executive on his own initiative other than (i) a termination due to disability under Section 10(a) or (ii) a Constructive termination under Section 10(c). Such a termination shall not be deemed a breach of the Agreement and shall entitle the Executive to all of the rights and benefits to which he would be entitled in the event of a termination for Cause as described in Section 10(b). (e) No-Mitigation: No Offset. In the event of any termination under this Section 10, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due the Executive under this Section 10 on account of any remuneration attributable to any subsequent employment that the Executive may obtain. Any amounts due under this Section 10 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 11. INDEMNIFICATION PWG and PWI represent that, while the Executive is employed under this Agreement, he shall be serving as an officer of PWI at the request of PWG for purposes of the provisions of Article VII of the By-laws of PWG and as an officer of PWI for purposes of the provisions of Article IX of the By-laws of PWI as in effect on the date hereof. If either By-law is amended so as to remove or diminish the protection therein accorded to covered officers, PWG and/or PWI will notify the Executive within five days of such removal or diminution. PWG and PWI further agree to maintain the same liability insurance coverage for the Executive with respect to all periods during which the Executive serves or served as an officer of PWG or PWl as is maintained with respect to such periods for other senior executives of PWG and PWI. 12. DISPUTES Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in effect in the State of New York, and judgment upon such award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The arbitration shall be held in Manhattan. The cost of the arbitration including, but not limited to, any reasonable legal fees or other expenses incident thereto, shall be determined by the arbitrator(s) and shall be borne by the parties to the arbitration. To the extent the Executive's position is upheld, any reasonable expenses (including costs of witnesses, evidence, and attorneys) incurred by the Executive in connection with the arbitration shall be reimbursed to the Executive by PWG or PWI. 13. ASSIGNABILITY No rights or obligations under this Agreement may be assigned or transferred by the Executive except (a) the Executive's rights to compensation and benefits hereunder shall, in the event of death, pass to his estate, or to his designated beneficiary, and may be transferred by will or operation of law, and (b) the Executive's rights under PWI and PWG plans, programs and policies as described in Sections 5, 6, 7 and 8 may be assigned or transferred in accordance with such plans, policies or practices. 8 8 No rights or obligations of PWI or PWG under this Agreement may be assigned or transferred except that such rights or obligations may be assigned or transferred by operation of law in situations described in Section 368 of the Code, as amended, or successor provision, in liquidation, in dissolution or otherwise where PWI or PWG is not the continuing entity, provided the assignee or transferee is the successor to all or substantially all the assets of PWI or PWG and such assignee or transferee assumes the rights, duties and liabilities of PWI or PWG, as contained in this Agreement, either contractually or as a matter of law. 14. GOVERNING LAW This agreement shall be governed by the laws of the State of New York without reference to the principles of conflict of laws. 15. ENTIRE AGREEMENT Except as otherwise specifically provided herein, this Agreement contains all the legally binding understandings and representations between PWG, PWI and the Executive pertaining to the subject matter hereof and supersedes all undertakings and agreements, if any, whether oral or in writing, previously entered into by PWG, PWI and the Executive with respect to such subject matter. 16. AMENDMENT OR MODIFICATION; WAIVER No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of PWI or PWG. Except as otherwise specifically provided in this Agreement, no waiver by PWG, PWI or the Executive of any breach by the other of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar provision or condition at the same or any prior or subsequent time. 17. NOTICES Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently give notice of If to PWG or PWI: Paine Webber Group Inc. 1285 Avenue of the Americas New York, N.Y. 10019 Attn: Corporate Secretary If to the Executive: Joseph J. Grano, Jr. Sheepfield Farms Road New Vernon, N.J. 07976 9 9 18. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 19. SURVIVORSHIP. To the extent contemplated by this Agreement, the respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 20. REPRESENTATIONS (a) By the Executive. The Executive represents and warrants that the performance of his duties under this Agreement will not violate any agreement between him and any other person, firm or organization. (b) By PWG and PWI. PWG and PWI represent and warrant that they are fully authorized and empowered to enter into this Agreement. 21. IMPACT OF AGREEMENT ON OTHER BENEFITS. Nothing in this Agreement shall curtail the Executive's entitlement to full participation in the executive compensation, employee benefit and other programs of PWG and PWI in which senior executives of PWG and PWI are eligible to participate. 22. REFERENCES. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive will be deemed, where appropriate, to refer to his legal representative, or, where appropriate, to his beneficiary or beneficiaries. 23. HEADINGS. Headings to the sections in this Agreement are intended solely for convenience and no provision of this Agreement shall be construed by reference to any heading. 24. COUNTERPARTS. This agreement may be executed in one or more counterparts. 10 10 IN WITNESS WHEREOF, the Executive, PWG and PWI have caused this Agreement to be executed as of the day and year first above written. PAINE WEBBER GROUP INC. by: /s/ ------------------------ PAINEWEBBER INCORPORATED by: /s/ Joseph J. Grano, Jr. ------------------------ Joseph J. Grano, Jr. EX-10.36 9 EMPLOYEES RETIREMENT PLAN/ REGISTRANT & CHASE 1 EXHIBIT 10.36 AGREEMENT AND DECLARATION OF TRUST FOR SUPPLEMENTAL EMPLOYEE'S RETIREMENT PLAN FOR CERTAIN SENIOR OFFICERS THIS AGREEMENT, made as of the 1st day of January, 1990 by and between Paine Webber Group Inc. (hereinafter "Paine Webber"), a corporation organized and existing under the laws of the State of Delaware and having its principal place of business at 1285 Avenue of the Americas, New York, New York 10019 and Chase Manhattan Bank, N.A. (hereinafter the "Trustee"), a corporation organized and existing under the laws of the United States of America and having a place of business at 1211 Avenue of the Americas, New York, New York 10036; WITNESSETH WHEREAS, Paine Webber has, in accordance with a Supplemental Employee's Retirement Plan duly adopted by Paine Webber, entered into individual deferred compensation contracts with certain key executives of its subsidiaries and affiliates; and WHEREAS, Paine Webber desires to provide an orderly means of funding the obligations under such 2 2 contracts by means of an inter vivos trust which for income tax purposes shall be a grantor trust within the meaning of Section 677 of the Internal Revenue Code of 1986, as amended; and WHEREAS, in accordance with said funding, Paine Webber desires to provide additional assurance to the aforesaid key executives that Paine Webber's obligation under said deferred compensation contracts will be met when due in accordance with their terms; and WHEREAS, Paine Webber desires to settle a trust for the purposes and in accordance with the terms and conditions herein described; and WHEREAS, Chase Manhattan Bank, N.A. has agreed to act as trustee, holding in trust the contributions and assets herein provided, in accordance with the terms and conditions set forth in this Agreement and Declaration of Trust; NOW, THEREFORE, for the purpose of creating and settling the trust, Paine Webber hereby conveys to the Trustee legal title to the assets and funds hereinafter provided TO BE HELD IN TRUST, NEVERTHELESS, in accordance with the promises and mutual covenants herein contained, in consideration of which Paine Webber and the Trustee do hereby covenant and agree as follows, to wit: 3 3 ARTICLE I DEFINITIONS For the purposes herein, and unless the context clearly requires otherwise, the terms in this Agreement and Declaration of Trust, when capitalized, shall mean as set forth below. 1.1 "Actuary/recordkeeper" shall mean any such person or organization as Paine Webber shall designate, from time to time, to act as such. 1.2 "Bankruptcy" of Paine Webber or an "event of Bankruptcy" with respect to Paine Webber or "Bankrupt" as used with respect to Paine Webber shall mean Paine Webber: (a) voluntarily commences any proceeding or files any petition seeking relief under Title 11 of the United States Code or any other federal or state bankruptcy, insolvency or similar law, (b) consents to the institution of, or fails to controvert in a timely and appropriate manner, any such proceeding or the filing of any such petition, (c) applies for or consents to the appointment of a receiver or trustee for Paine Webber or for a substantial part of the property of Paine Webber, 4 4 (d) makes a general assignment for the benefit of creditors, (e) becomes unable or fails generally to pay its debts as they become due, (f) is the subject of an involuntary proceeding commenced in a court of competent jurisdiction seeking: (i) relief against Paine Webber or all or a substantial part of the property of Paine Webber under Title 11 of the United States Code or any other federal or state bankruptcy, insolvency or similar law, (ii) the appointment of a receiver or trustee for Paine Webber or for a substantial part of the property of Paine Webber, or (iii) the winding-up or liquidation of Paine Webber; and such proceeding or petition continues undismissed for 60 days or an order or decree approving or ordering any of the foregoing is entered. 1.3 "Code" shall mean the Internal Revenue Code of 1986, as amended (Title 26, United States Code). 5 5 1.4 "Investment Manager" shall mean the person or organization appointed from time to time by Paine Webber to manage the assets held in trust by the Trustee or the person or organization appointed from time to time by a cestui que trust pursuant to Section 5.3 hereof to manage the cestui que trust's aliquot share of the trust estate, provided any such person or organization shall be an investment advisor registered with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940. 1.5 "Plan" shall mean the Paine Webber Group, Inc. Supplemental Employee's Retirement Plan for Certain Senior Officers, as amended from time to time. 1.6 "Variable Annuity" means the arrangement, available at the election of the cestui que trust, to self-direct the investment of his aliquot share of the trust estate and have his benefit vary by the investment performance related thereto, in accordance with the Plan. 6 6 ARTICLE II CREATION OF TRUST 2.1 Paine Webber hereby conveys to the Trustee such sums of money and such property (other than money) as shall be delivered to the Trustee simultaneously herewith to be held by the Trustee, in trust nevertheless, together with the increase, earnings and profits thereon, and with such subsequent sums of money and other property subsequently conveyed by Paine Webber to be held by the Trustee, in trust nevertheless, for the purposes herein stated and for no other, in accordance with this Agreement and Declaration of Trust. Any property (other than money) conveyed to the Trustee by Paine Webber pursuant to the Agreement and Declaration of Trust shall only be held in trust if the property is acceptable to the Trustee. All such money and other property, together with the increase, earnings and profits thereon and less any disbursements disbursed free of the trust to the time of reference, shall be and constitute the trust estate. All such assets shall be held without distinction between corpus and earnings thereon and the assets to be held in trust shall be accumulated until distributed in accordance 7 7 with the provisions of this Agreement and Declaration of Trust in such manner that the trust created and existing hereby shall be an accumulation trust. The assets held in trust shall be held by the Trustee as one account, without any subaccounting whatsoever and without distinction, separation or segregation by virtue of the interest of any particular cestui que trust in or to the assets held in trust prior to their distribution free of trust as hereinafter provided. 2.2 The Trustee shall hold, manage, administer and invest the assets held in trust solely for the purposes and in accordance with the terms of this Agreement and Declaration of Trust. The Trustee shall be under no obligation to collect any money or other assets from Paine Webber but shall merely hold in trust such assets as are conveyed by Paine Webber, as aforesaid. ARTICLE III THE ACTUARY 3.1 Paine Webber shall appoint an Actuary/recordkeeper with respect to this Agreement and Declaration of 8 8 Trust and shall, simultaneously with entering into this Agreement and Declaration of Trust, advise the Trustee in writing of the name and address of the Actuary/recordkeeper as appointed and of the authorized signatories on behalf of the Actuary/recordkeeper. The Trustee shall be entitled to rely upon such notification which shall be provided in accordance with Section 16.7 hereof. Any such notification shall continue to be valid until and unless amended, modified or revoked by Paine Webber. Paine Webber reserves the right to so amend, modify or revoke at any time. 3.2 Whenever Paine Webber shall convey title of any assets to the Trustee (whether initially upon the inception of the trust or otherwise), the Actuary/recordkeeper shall record the same on its books and records and shall, on its books and records, cause a separate account to be opened in the name of each cestui que trust. The Actuary/recordkeeper shall, in connection with Paine Webber, determine (solely for the subaccounting records maintained by the Actuary/recordkeeper) the portion of each such conveyance of assets that pertains to each cestui que trust. As of the last 9 9 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 Paine Webber to the Trustee to be held in trust during the month, assets disbursed free of the trust to pay the expenses of the Trust, assets distributed free of the trust to the cestuis que trust, earnings and profits of the trust during the month and a revaluation of the assets held as of the rendering of the statement. All such statements shall be rendered in duplicate to Paine Webber and the Actuary/recordkeeper. 3.3 The Actuary/recordkeeper shall, as soon as practicable upon receipt of such information, prepare a subaccounting record monthly with respect to each cestui que trust showing that cestui que trust's subaccounting balance on the books and records of the Actuary/recordkeeper at the beginning of the month, assets conveyed into trust during the month applicable to that cestui que trust, distributions of assets made by the Trustee to the cestui que trust during the month free of trust, the cestui que trust's aliquot share of the earnings and profits of the Trust and the changes in value 10 10 thereof caused by the Trustee's revaluation of the market value of the assets held in trust. A copy of such record for each cestui que trust shall be provided to Paine Webber monthly and Paine Webber shall promptly furnish a copy of such record to the cestui que trust. Within sixty (60) days after receiving such a record a cestui que trust may file written objections thereto with the Actuary/recordkeeper. If no such objections are filed during the sixty (60) day period or any such objections are resolved to the satisfaction of both the cestui que trust and the Actuary/recordkeeper, such record shall be deemed an account stated and shall conclusively bind Paine Webber, the Trustee, the Actuary/recordkeeper and the cestui que trust. 3.4 Subject to the provisions of Article VIII hereof, the trust created hereby is intended to fund and meet the obligations of Paine Webber arising pursuant to the individual deferred compensation agreements entered into in accordance with the Plan and dated subsequent to January 1, 1990. Nevertheless, the assets held in trust shall, until distributed to the cestuis que trust, be considered for tax accounting purposes as part of the assets of 11 11 Paine Webber. The deferred compensation contracts referred to in this paragraph shall be deemed to refer also to deferred compensation contracts within the meaning of paragraphs 6 through 8 of Accounting Principles Board Opinion No. 12, issued in 1967. The assets herein provided shall be held in trust for the sole use, enjoyment and benefit of the cestuis que trust subject to the requirement of Article VIII hereof that no event of Bankruptcy shall have occurred with respect to Paine Webber prior to the distribution of the assets to the cestuis que trust free of trust and subject to forfeiture and reversion to Paine Webber as hereinafter provided. If Paine Webber shall become Bankrupt prior to the assets being distributed to the cestuis que trust free of trust, as hereinafter provided, the assets shall be reverted for the benefit of Paine Webber's creditors free of trust and the trust shall thereupon be discharged, except as otherwise provided in Section 8.2 hereof. Furthermore, if the amount held in trust for the benefit of a cestui que trust shall be forfeited either because of termination of employment before vesting or the application of the forfeiture provision with respect to competitive employment, 12 12 the assets with respect to that cestui que trust shall be reverted to Paine Webber upon receipt by the Trustee of a certificate of the Actuary/ recordkeeper so directing and identifying the amount to be so reverted. 3.5 The beneficial interest of each cestui que trust in the trust estate at any time and from time to time shall be conclusively determined in accordance with the subaccounting books and records maintained by the Actuary/recordkeeper and Paine Webber, the Trustee and each cestui que trust shall be conclusively bound thereby. ARTICLE IV THE TRUST 4.1 The trust established hereby shall be irrevocable prior to the assets being distributed to the cestuis que trust or the earlier occurrence of an event of Bankruptcy with respect to Paine Webber in accordance with Article VIII hereof. 4.2 No part of the assets held in trust, other than for such expenses or taxes as are properly charged to 13 13 the trust, in accordance with the provisions of this Agreement and Declaration of Trust, shall be used for or diverted to purposes other than for the benefit of the cestuis que trust or, if an event of Bankruptcy has occurred with respect to Paine Webber, Paine Webber and its creditors. 4.3 The primary obligation to provide benefits as specified in the Plan and the deferred compensation agreements referred to in Section 3.4 hereof shall be that of Paine Webber. This Agreement and Declaration of Trust shall discharge Paine Webber's obligation to provide benefits under the Plan and such deferred compensation agreements to the extent, and only to the extent, that the Plan participants, or their beneficiaries, actually receive benefits from the trust created by this Agreement and Declaration of Trust. ARTICLE V INVESTMENT AND ADMINISTRATION 5.1 As elected by Paine Webber and communicated to the Trustee from time to time in writing, the Trustee shall either (a) invest and reinvest the assets then 14 14 held in trust in accordance with the specific directions and instructions of Paine Webber in each case; or (b) invest and reinvest the assets held in trust in accordance with the specific directions and instructions of the Investment Manager appointed by Paine Webber for this purpose. However, after commencement of payments to a cestui que trust who elects a Variable Annuity pursuant to Section 4.4(a) of the Plan, the Trustee shall invest and reinvest the assets held in trust in accordance with the specific written directions and instructions of the Actuary/recordkeeper given to the Trustee pursuant to Section 5.3 of this Agreement and Declaration of Trust with respect to the beneficial interest of the cestui que trust. In any event, neither the Trustee nor the Actuary/recordkeeper shall be responsible for making investment decisions with respect to the assets held in trust and, if an investment direction is not timely received by the Trustee, such portion of the assets shall be invested in a money market fund provided by the Trustee for this purpose so as to provide for daily accrual of interest. 5.2 If Paine Webber elects that the investment of the assets held in trust be made pursuant to the 15 15 specific directions and instructions of Paine Webber in each case, then Paine Webber shall certify to the Trustee the authorized signature or signatures of the persons who shall be empowered to provide the specific investment directions to the Trustee. Any such authorized signatory shall continue to be authorized until the Trustee shall be actually advised by Paine Webber of any change thereto. Any person so authorized shall provide a specimen signature to the Trustee and shall provide such additional information as the Trustee shall reasonably require. Investment directions shall be in writing, but if agreed to between the Trustee and the authorized signatory may be oral, telegraphic or telephonic, subject to later written confirmation. 5.3 If a cestui que trust upon commencement of a monthly retirement allowance elects a Variable Annuity in accordance with the Plan and therefore elects to make specific investment directions and instructions with respect to the cestui que trust's aliquot share of the trust estate, then Paine Webber shall so advise the Actuary/recordkeeper and shall certify to the Actuary/recordkeeper the name of such cestui que trust and shall provide to the Actuary/recordkeeper 16 16 a specimen signature of such cestui que trust. Paine Webber and such cestui que trust shall each provide such additional information as the Actuary/recordkeeper shall reasonably require. The cestuis que trust shall each rely conclusively (and be entitled to so rely) upon the last certification of the Actuary/recordkeeper for determining the proportionate aliquot share of the assets held in trust representing that cestui que trust's beneficial interest in the totality of the assets held in trust and the cestui que trust shall be entitled to direct the Actuary/recordkeeper with respect to only that aliquot portion of the trust estate so certified. The cestui que trust may appoint an Investment Manager for this purpose. In such an event, the cestui que trust shall so advise the Actuary/recordkeeper and provide a specimen signature of the person or persons so authorized to act on behalf of the Investment Manager. The cestui que trust and the Investment Manager shall each provide such additional information as the Actuary/recordkeeper shall reasonably require. Notwithstanding the investment direction herein granted to each cestui que trust, it is understood 17 17 that his interest in the assets held in trust is contingent only and subject to the occurrence of an event of Bankruptcy with respect to Paine Webber as provided in Article VIII hereof and that any direction to convey legal title to any assets held in trust to the cestui que trust or any other person free of the trust shall be invalid except to the extent that such cestui que trust or other person is then entitled to a distribution of legal title free of the trust in accordance with Article VII hereof. If due to appreciation or depreciation of the assets of the trust since the last certification by the Actuary/recordkeeper, Paine Webber or any cestui que trust believes that the last allocation by the Actuary/recordkeeper is no longer valid, such person may request a new interim allocation by the Actuary/recordkeeper and no further investment direction may be accepted as valid until such new interim allocation is certified by the Actuary/recordkeeper. The Actuary/recordkeeper shall, in performing the interim allocation, reflect any asset change since the last certification as is, in its opinion, fair and equitable, and any such 18 18 interim allocation and certification shall be binding on all parties hereto. 5.4 If Paine Webber elects that the investment of the trust be made pursuant to the specific directions and instructions of the appointed Investment Manager in each case, then Paine Webber shall certify to the Trustee the name and address of the Investment Manager so designated and the signatories who are authorized to act on behalf of such Investment Manager. Any such Investment Manager shall continue to be authorized until the Trustee shall be actually notified of any change thereto by Paine Webber and any such authorized signatory shall continue to be authorized until the Trustee shall be actually notified of any change thereto by the Investment Manager so authorized. Any person so authorized shall provide a specimen signature to the Trustee and shall provide such additional information as the Trustee shall reasonably require. Investment directions shall be in writing, but if agreed to between the Trustee and the authorized signatory may be oral, telegraphic or telephonic, subject to later written confirmation. 19 19 ARTICLE VI POWERS OF TRUSTEE 6.1 The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the assets held under trust, if it acts in good faith pursuant to the directions of the Investment Manager, Paine Webber or the Actuary/recordkeeper with regard to matters in which, pursuant to the terms of this Agreement and Declaration of Trust, such persons respectively have the power and authority to direct the Trustee. The Trustee shall be required to act strictly in accordance with any such direction. 6.2 Subject to Article V hereof regarding investment direction, the Trustee shall have the power to invest and reinvest the assets held in trust to the same extent as if the assets were owned outright by the Trustee and more specifically: (a) To invest and reinvest in any property, real, personal or mixed, wherever situated and whether or not productive of income or consisting of wasting assets, including without limitation, common and preferred stocks, bonds, 20 20 notes, debentures (including convertible stocks and securities but not including any stock or security of the Trustee), leaseholds, mortgages, certificates of deposit or demand or time deposits (including any such deposits with the Trustee), shares of investment companies and mutual funds, interests in partnerships and trusts, insurance policies and annuity contracts, and oil, mineral or gas properties, royalties, interests or rights, without being limited to the classes of property in which trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the trust estate; provided, further, the Trustee is specifically authorized to receive and hold any stock or security of Paine Webber or the Trustee which is contributed by Paine Webber to be held in trust or to purchase such stock or securities on the open market subject to applicable legal requirements. (b) To invest and reinvest all or any portion of assets held in trust collectively through the medium of any common, collective or commingled 21 21 trust fund that may be established and maintained by the Trustee and which may be authorized to accept such assets, subject to the instrument or instruments establishing such trust fund or funds; (c) To retain any property at any time received by the Trustee; (d) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (e) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (f) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power 22 22 thereto, and to pay part of the expenses and compensation thereof and any assessments levied with respect to any such property so deposited; (g) To extend the time of payment of any obligation held by it; (h) To hold uninvested any moneys received by it, without liability for interest thereon, until such moneys shall be invested, reinvested or disbursed; (i) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (j) For the purposes of the assets held in trust, to borrow money from others including the Trustee, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it; (k) To manage, administer, operate, insure, repair, improve, develop, preserve, mortgage, lease or otherwise deal with, for any period, any real property or any oil, mineral or gas properties, royalties, interests or rights held by it directly or through any corporation, either alone or by joining with others, using other assets held in trust for any such purposes, to 23 23 modify, extend, renew, waive or otherwise adjust any provision of any such mortgage or lease and to make provision for amortization of the investment in or depreciation of the value of such property; (1) To employ suitable agents and counsel, who may be counsel to Paine Webber or the Trustee, and to pay their reasonable expenses and compensation from the assets held in trust to the extent not paid by Paine Webber; (m) To cause any property held by it to be registered and held in the name of one or more nominees, with or without the addition of words indicating that such securities are held in a fiduciary capacity, and to hold securities in bearer form; (n) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or arising from the assets held in trust, respectively, to commence or defend suits or legal proceedings to protect any interest with respect to assets held in trust, and to undertake any and all legal action with respect to the assets held in trust in any court or before any other body or tribunal; provided, 24 24 however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by Paine Webber to its reasonable satisfaction against liability or expenses it might incur therefrom; (o) To organize under the laws of any state a corporation or trust for the purpose of acquiring and holding title to any property which it is authorized to acquire hereunder and to exercise with respect thereto any or all of the powers set forth herein; and (p) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the assets held in trust. 6.3 The powers herein provided shall be exercised by the Trustee only in accordance with, and subject to, Article V hereof. 6.4 No person dealing with the Trustee shall be under any obligation to see to the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee's authority as to any transaction. 25 25 ARTICLE VII DISTRIBUTIONS 7.1 Upon the direction of Paine Webber or upon proper application of a cestui que trust (including a beneficiary of an original deceased cestui que trust), the Actuary/recordkeeper shall determine the cestui que trust's eligibility for benefits and calculate the amount thereof and shall certify the same to the Trustee. Such certification shall include the amount of such benefits, the date of payment, and the manner thereof, and the name, address and social security number of the payee and shall be updated annually and whenever the Actuary/recordkeeper shall determine that any information set forth in a previous such notice needs to be changed. The determination of eligibility and calculation of amount of benefit shall be made by the Actuary/recordkeeper in accordance with the terms and provisions of the Plan and of the deferred compensation agreements issued thereunder. Upon receipt of the aforesaid certified statement from the Actuary/recordkeeper and appropriate federal, 26 26 state and local tax withholding information, the Trustee shall liquidate the assets so specified by Paine Webber or the Investment Manager appointed by Paine Webber (as applicable) and shall convey title to the proceeds thereof to the cestui que trust free of the trust or shall, if so directed by Paine Webber or the Investment Manager appointed by Paine Webber, convey title to those assets held in trust so designated by Paine Webber or such Investment Manager to the cestui que trust free of the trust, provided that in the case of a cestui que trust who has elected a Variable Anuity the assets to be liquidated or conveyed shall be specified by the Actuary/recordkeeper. If the Actuary/recordkeeper shall so indicate, such distributions shall be made periodically at the times and in the frequencies indicated. Nevertheless, all such conveyances shall be subject to the provisions of Article VIII hereof, and in the event Paine Webber becomes Bankrupt (notwithstanding anything to the contrary), the estate shall be disposed of as provided by Article VIII. Copies of the certification by the Actuary/recordkeeper to the Trustee shall be 27 27 provided by the Actuary/recordkeeper to the affected cestui que trust and Paine Webber 7.2 The Trustee shall withhold from such payments to each cestui que trust such amounts as are certified to the Trustee by the Actuary/recordkeeper in accordance with the election by the cestui que trust and applicable legal requirements with respect to federal, state and local taxes. The Trustee shall forward amounts so withheld, together with appropriate documentation, to the Actuary/recordkeeper. The Actuary/recordkeeper shall, on behalf of and as agent for Paine Webber, remit to the taxing authority the amounts so withheld as provided by law, together with such forms and information as shall be required by law with respect thereto. 7.3 Any payments made to a cestui que trust shall only be charged against the account of that cestui que trust on the books and records of the Actuary/ recordkeeper, but no individual accounts shall be maintained on the books and records of the Trustee. 7.4 If a cestui que trust shall be entitled to an annuity (whether measured by one or two lives), the 28 28 Actuary/recordkeeper shall, at the time of eligibility for the first such payment, instruct the Trustee to purchase a commercial annuity contract or policy from a licensed insurance company or annuity company. The annuity contract or policy shall be specifically identified in such direction and shall be owned in trust 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 as designated by the Actuary/recordkeeper. This Section 7.4 shall not be applicable if the cestui que trust shall elect to make investment directions after commencement of the monthly retirement allowance pursuant to Section 5.3 hereof. ARTICLE VIII BANKRUPTCY 8.1 Notwithstanding any provision in this Agreement and Declaration of Trust to the contrary, if at any time while the Trustee still holds assets in trust Paine Webber becomes Bankrupt, the Trustee shall, upon receipt of written notice, court order or written allegations as provided in Section 8.2 hereof, 29 29 suspend the payment of all benefits from the estate and shall thereafter hold the estate in suspense for the benefit of Paine Webber's creditors until it receives a court order directing the disposition of the estate; provided, however, the Trustee may deduct or continue to deduct its fees and expenses and other expenses of the Trustee acting as Trustee, including taxes, pending the receipt of such court order. 8.2 Paine Webber represents and agrees that it shall have the fiduciary duty and responsibility on behalf of Paine Webber's creditors to give to the Trustee prompt written notice in the event of Bankruptcy with respect to Paine Webber and the Trustee shall be entitled to rely thereon to the exclusion of all directions or claims to pay benefits thereafter, other than an order of a court of competent jurisdiction. Absent such notice, the Trustee shall have no responsibility for determining whether or not an event of Bankruptcy has occurred and shall be entitled to rely on there being no event of Bankruptcy unless (a) the Trustee is served with a court order showing that an event of Bankruptcy has occurred or (b) the Trustee receives written 30 30 allegations of an event of Bankruptcy from a third party considered by the Trustee to be reliable and responsible. If after an event of Bankruptcy, Paine Webber later ceases to be Bankrupt without the entry of a court order concerning the disposition of the estate, Paine Webber shall by written notice so inform the Trustee and the Trustee shall thereupon resume all its duties and responsibilities under this Agreement and Declaration of Trust without regard for this Article VIII until and unless Paine Webber again becomes Bankrupt. Distribution pursuant to Article VII hereof shall be suspended during an event of Bankruptcy but shall be paid retroactively (without interest) if Paine Webber later ceases to be Bankrupt without the entry of a court order concerning the disposition of the estate. ARTICLE IX FUNDING 9.1 The Actuary/recordkeeper shall recommend to Paine Webber amounts to be conveyed to the Trustee to be held in trust hereunder so that, on an actuarial basis, such amounts are sufficient to support the benefits under the Plan and the deferred 31 31 compensation agreements referred to in Section 3.4 hereof. Notwithstanding anything to the contrary, however, the Trustee shall be under no obligation to determine the appropriate amounts to be conveyed or enforce any requirement of conveyance hereunder. 9.2 Paine Webber intends that none of the benefit plans and arrangements funded by the assets held in trust by the Trustee be qualified within the meaning of Section 401 of the Code and that they therefore be exempt from all such requirements and further intends that they be exempt from all of the requirements of the Employee Retirement Income Security Act of 1974, as amended (29 USC 1001 et seq), except for part 1 of Title I thereof, and that Paine Webber shall assume all responsibility for complying with part 1 of Title I thereof. ARTICLE X INDEMNIFICATION 10.1 Paine Webber hereby agrees to indemnify and hold harmless the Trustee with regard to the Trustee's acting in accordance with any direction of Paine Webber, the Investment Manager appointed by Paine 32 32 Webber or the Actuary/recordkeeper within the power and authority given to any such person as aforesaid. 10.2 The Trustee hereby agrees to indemnify and hold harmless Paine Webber with regard to the Trustee's failure to act in accordance with any direction of Paine Webber, the Investment Manager appointed by Paine Webber or the Actuary/recordkeeper within the power and authority given to any such person as aforesaid. ARTICLE XI LIQUIDATION OF TRUST 11.1 The Trust established hereby is irrevocable and may not be terminated by Paine Webber or otherwise prior to the satisfaction of all liabilities to the cestuis que trust under the Plan and deferred compensation agreements referred to in Section 3.4 hereof or the occurrence of an event of Bankruptcy with respect to Paine Webber in accordance with Article VIII hereof. The estate shall terminate when all of the assets thereof shall be distributed to the cestuis que trust or reverted to Paine Webber or its creditors. If all of the obligations under 33 33 the Plan and the deferred compensation agreements referred to in Section 3.4 hereof shall be met and a portion of the estate shall remain, then the Actuary/recordkeeper shall certify to the Trustee instructions to distribute that remainder to Paine Webber. The Trustee shall convey such assets free of the trust as certified by the Actuary/recordkeeper and, when all of the assets thereof shall be distributed, the estate shall terminate. 11.2 The estate created in accordance with this Agreement and Declaration of Trust shall continue for such time as may be necessary to accomplish the purposes for which it was created, notwithstanding the rules against perpetuities or accumulations, it being exempt therefrom in accordance with the New York Estates, Powers and Trusts Law Section 9-1.6. ARTICLE XII FEES AND EXPENSES 12.1 Any federal, state or local taxes on the assets held in trust, or any part thereof, or any income thereon shall be paid by the estate, provided that any taxes 34 34 assessed against Paine Webber as grantor shall be paid by Paine Webber. In the event any such taxes payable by the estate are attributable to a particular investment thereof (for example, a transfer tax on the transfer of a particular security), the Trustee shall maintain such records as may be necessary to permit the proper allocation of such taxes. 12.2 Paine Webber shall pay to the Trustee its reasonable expenses for managing and administering the assets held in trust, including without limitation reasonable expenses of counsel and other agents employed by the Trustee and reasonable compensation for its services as Trustee hereunder as shall be agreed to between Paine Webber and the Trustee from time to time. Such expenses, fees and compensation shall be a charge on the estate and shall constitute a lien in favor of the Trustee until paid by Paine Webber. ARTICLE XIII ACCOUNTING 13.1 The Trustee shall maintain true and correct records with respect to the assets held in trust that show 35 35 all its receipts and disbursements hereunder and the market value of the estate on the date of valuation. The records of the Trustee with respect to the assets held in trust shall be open to inspection by Paine Webber, or its representatives, at all reasonable times during normal business hours of the Trustee and may be audited not more frequently than once each calendar year by an independent certified public accountant engaged by Paine Webber; provided, however, the Trustee shall be entitled to additional compensation from Paine Webber in respect of audits or auditors' requests which exceed the ordinary course of the usual scope of such examinations of its records. 13.2 As promptly as practicable following termination of the duties of the Trustee hereunder or the resignation or removal of the Trustee, but in no event later than sixty (60) days after such termination or the notice of resignation or removal pursuant to Article XIV hereof, the Trustee shall prepare and deliver to Paine Webber a statement of transactions reflecting its acts and transactions as Trustee during the last calendar year, or during such period from the close of the last calendar year 36 36 or last statement period to the termination of the Trustee's duties, including a statement of the then current value of the estate. Any such statement shall be deemed an account stated and accepted and approved by Paine Webber, and the Trustee shall be relieved and discharged as if such account had been settled and allowed by a judgment or decree of a court of competent jurisdiction, unless protested by written notice to the Trustee within sixty (60) days of receipt thereof by Paine Webber. The Trustee shall have the right to apply at any time to a court of competent jurisdiction for judicial settlement of any account of the Trustee not previously settled as herein provided or for the determination of any question of construction or for instructions. In any such action or proceeding it shall be necessary to join as parties only the Trustee and Paine Webber (although the Trustee may also join such other parties as it may deem appropriate), and any judgment or decree entered therein shall be conclusive. 37 37 ARTICLE XIV RESIGNATION AND REMOVAL 14.1 The Trustee may resign at any time by delivering written notice thereof to Paine Webber; provided, however, that no such resignation shall take effect until the appointment of a successor trustee. 14.2 The Trustee may be removed at any time by Paine Webber, pursuant to a resolution of the Board of Directors of Paine Webber, upon delivery to the Trustee of a certified copy of such resolution and sixty (60) days' written notice, unless such notice period is waived in whole or in part by the Trustee. 14.3 Upon the resignation or removal of the Trustee, a successor trustee shall be appointed by Paine Webber. Such successor trustee shall be a bank or trust company which is established under the laws of the United States of America or a State within the United States of America. Such appointment shall take effect upon the delivery to the Trustee of (a) a written appointment of such successor trustee, duly executed by Paine Webber, and (b) a written acceptance by such successor trustee, duly executed 38 38 thereby. Any successor trustee shall have all the rights, powers and duties granted the Trustee hereunder. 14.4 If, within sixty (60) days of the delivery of the Trustees written notice of resignation, a successor trustee shall not have been appointed, the Trustee may apply to any court of competent jurisdiction for the appointment of a successor trustee. 14.5 Upon the resignation or removal of the Trustee and the appointment of a successor trustee, and after the acceptance and approval of its account, the Trustee shall transfer and convey title to all of the assets held in trust to such successor and, to the extent the Trustee shall have physical custody of such assets, shall deliver such custody to such successor. Under no circumstances shall the Trustee transfer custody, or deliver custody of any assets held in trust to any successor which is not a bank or trust company as aforesaid. ARTICLE XV AMENDMENT This Agreement and Declaration of Trust may be amended, in 39 39 whole or in part, by written agreement between Paine Webber and the Trustee, provided, however, that no such amendment shall adversely affect the rights of any person to receive the benefits that have accrued under the Plan or such person's deferred compensation agreement prior to the date of such amendment. ARTICLE XVI MISCELLANEOUS 16.1 The Chief Executive Officer of Paine Webber shall provide to the Trustee, in writing, a statement as to the Paine Webber officers who may provide directions, orders and instructions to the Trustee as provided in this Agreement and Declaration of Trust, including any changes in such officers. Any such writing may be relied upon by the Trustee until a new statement is received by the Trustee. 16.2 This Agreement and Declaration of Trust shall be construed and interpreted under, and the trust hereby created shall be governed by, the laws of the State of New York and, to the extent applicable, the laws of the United States of America. 40 40 16.3 Neither the gender nor the use of the singular or the plural of any word shall be construed to exclude another gender or number when a different gender or number would be appropriate. 16.4 No right or interest of any cestui que trust in or to the estate or any income of the estate shall be transferable or assignable or shall be subject to alienation, anticipation or encumbrance, and no right or interest of any cestui que trust shall be subject to any garnishment, attachment or execution. Notwithstanding the foregoing, the estate shall at all times remain subject to claims of creditors of Paine Webber in the event Paine Webber becomes Bankrupt as provided herein, and in that event, except to the extent otherwise provided in Section 8.2 hereof, the cestuis que trust shall have no claims to the assets held in trust superior to that of any other unsecured creditor. 16.5 This Agreement and Declaration of Trust shall be binding upon and inure to the benefit of any successor to Paine Webber or its business as the result of merger, consolidation, reorganization, transfer of assets or otherwise and any subsequent 41 41 successor thereto. In the event of any such merger, consolidation, reorganization, transfer of assets or other similar transaction, the successor to Paine Webber or its business or any subsequent successor thereto shall promptly notify the Trustee in writing of its successorship and furnish the Trustee with the information specified in Section 16.1 of this Agreement and Declaration of Trust. In no event shall any such transaction described herein suspend or delay the rights of any cestui que trust to receive benefits hereunder. 16.6 This Agreement and Declaration of Trust may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall together constitute only one indenture. 16.7 Communications to the Trustee shall be sent to: Chase Manhattan Bank, N.A., Trust and Estates Management Division, 1211 Avenue of the Americas, 34th Floor, New York, New York 10036, or to such other address as the Trustee may specify in writing. Communications to Paine Webber shall be sent to: 42 42 Mr. Ronald M. Schwartz Director, Human Resources and Executive Vice President 1285 Avenue of the Americas, 14th Floor New York, New York 10019, or to such other address as Paine Webber may specify in writing. No communication shall be binding upon a party until it is received by that party. 16.8 In the event any cestui que trust is determined to be subject to federal income tax on any amount to his credit then held in trust under this Agreement and Declaration of Trust prior to the time of payment hereunder, the entire amount determined to be so taxable shall be immediately distributed by the Trustee to such cestui que trust, subject to withholding with respect to federal, state and local taxes in accordance with the provisions of Section 7.2 hereof. Such distribution shall be at the direction of the Actuary/recordkeeper. Any such amount shall be deemed to be subject to federal income tax upon the earliest of: (a) a final determination by the United States Internal Revenue Service addressed to the cestui que trust which is not appealed to the courts; (b) a final determination by the United States Tax Court or any other Federal Court affirming any such determination by the Internal Revenue Service; or (c) an opinion 43 43 by an attorney for Paine Webber, addressed to Paine Webber, the Trustee and the Actuary/recordkeeper, that, by reason of Treasury Regulations, provisions of the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts to the credit of cestuis que trust hereunder are subject to federal income tax prior to payment. IN WITNESS WHEREOF, the parties hereto have set their hands and seals this 20th day of December, 1990. Attest: Paine Webber Group Inc. /s/ James C. Treadway, Jr. /s/ Donald B. Marron - -------------------------- -------------------------- James C. Treadway, Jr. Donald B. Marron Secretary Chairman of the Board of Directors and Chief Executive Officer Attest: Chase Manhattan Bank, N.A. /s/ John W. Koenig By: /s/ William P. Barbeoson - -------------------------- ------------------------ John W. Koenig Title: Vice President Title: VICE PRESIDENT BLE/251 EX-10.43 10 MASTER AGREEMENT /PWI & QUOTRON SYSTEMS INC. 1 Exhibit 10.43 MASTER AGREEMENT BETWEEN PAINEWEBBER INCORPORATED AND QUOTRON SYSTEMS, INC. FEBRUARY 11, 1991 2 TABLE OF CONTENTS PAGE ---- ARTICLE I -- DEFINITIONS............................................... 2 ARTICLE II -- PURPOSE AND TERM......................................... 5 ARTICLE III -- ORDERING SERVICES AND INSTALLATION OF OFFICES........... 7 ARTICLE IV -- SERVICES AND UPGRADES.................................... 10 ARTICLE V -- PRICE AND PAYMENT......................................... 14 ARTICLE VI -- OFFICE CLOSINGS.......................................... 22 ARTICLE VII -- MAINTENANCE............................................. 23 ARTICLE VIII -- PERFORMANCE CRITERIA................................... 27 ARTICLE IX -- SERVICE STANDARDS........................................ 34 ARTICLE X -- PURCHASE OPTION........................................... 38 ARTICLE XI -- SOFTWARE DEVELOPMENT AND SUPPORT; TRAINING............... 38 ARTICLE XII -- PROPRIETARY INFORMATION................................. 39 ARTICLE XIII -- DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY; INDEMNIFICATION........................................ 40 ARTICLE XIV -- TERMINATION............................................. 44 ARTICLE XV -- MISCELLANEOUS PROVISIONS................................. 48 i 3 TABLE OF CONTENTS APPENDIX A -- PRICE LIST APPENDIX B -- SERVICE AGREEMENTS APPENDIX B1 -- EQUIPMENT LEASE AGREEMENT APPENDIX C -- EQUIPMENT AND SERVICE SCHEDULE APPENDIX D -- LIST OF PAINEWEBBER OFFICES APPENDIX E -- CUSTOMER ENGINEERING MAINTENANCE SERVICE OFFERING APPENDIX F -- SOFTWARE DEVELOPMENT APPENDIX G -- TRAINING APPENDIX H -- NON-DISCLOSURE AGREEMENT APPENDIX I -- TRAVEL TIME SCHEDULE APPENDIX J -- CATALOG OF SERVICES APPENDIX K -- INTERNATIONAL SERVICE AGREEMENT ii 4 THIS MASTER AGREEMENT ("Agreement") is made this ___ day of _____________, 1991 by and between PaineWebber Incorporated, a Delaware corporation, with its principal place of business at 1285 Avenue of the Americas, New York, NY 10019 ("PWI") and Quotron Systems, Inc., a Delaware corporation, with its principal place of business at 12731 West Jefferson Blvd., Los Angeles, CA 90066 ("QSI"). WITNESSETH: WHEREAS, QSI and PWI are Parties to a National Agreement dated February 5, 1988 pursuant to which QSI provides financial information services to PWI. WHEREAS, PWI and QSI desire to enter into a new Master Agreement for the continued provision of financial information services to PWI, including upgrades of existing services. NOW, THEREFORE, in consideration of the premises contained herein and other good and valuable consideration, receipt of which is hereby acknowledged, QSI and PWI agree as follows: 1 5 ARTICLE I DEFINITIONS When used in this Agreement, 1.1 "ALTERNATIVE PLATFORM OR ALTERNATIVE EQUIPMENT" means Equipment other than Q800 or Q1000 Equipment that may be made available by QSI to PWI. 1.2 "BUSINESS DAY" means any day on which the New York Stock Exchange is open for trading. 1.3 "CABLING" means standard quad cabling utilized by QSI for installation of Equipment. 1.4 "CE" means Customer Engineering personnel provided by QSI or its designees. 1.5 "CPU" means a central processor unit. 1.6 "CSR" means a QSI Customer Service Request. 1.7 "EFFECTIVE DATE" means August 1, 1990. 1.8 "FIRST EXTENSION" has the meaning set forth in Section 2.2(b) hereof. 1.9 "SECOND EXTENSION" has the meaning set forth in Section 2.2(c) hereof. 2 6 1.10 "EQUIPMENT" means the hardware provided to PWI by QSI used for the delivery to PWI of Quotron financial information services. 1.11 "EXISTING OFFICE" means an Office installed with Services as of the Effective Date. 1.12 "EXPIRATION DATE" has the meaning set forth in Section 2.2(a) hereof. 1.13 "EXPEDITED BASIS" means anytime outside of the standard QSI lead times for tasks referred to in Article IX. 1.14 "FUTURE OFFICE" means an Office in which Services are installed after the Effective Date and which do not receive any Services on the Effective Date. 1.15 "INTERNATIONAL OFFICE" means a location outside the fifty (50) United States and Puerto Rico where PWI, its parent, subsidiaries or affiliates conduct its business and which is subject to an International Service Agreement. 1.16 "MDS" means Quotron Market Data Services. 1.17 "OFFICE" means a location where PWI, its parent, subsidiaries or affiliates conduct business in the fifty (50) United States and Puerto Rico and which is subject to a Service Agreement executed by PWI. 1.18 "PARTY" means PWI or QSI, and "PARTIES" means both PWI and QSI. 1.19 "Q800" means a Quotron 800 Computer. 1.20 "Q1000" means a Quotron 1000 Computer. 3 7 1.21 "RS/6000" means an IBM RS/6000 Model 320 server. 1.22 "RETAIL OFFICE" means a PWI branch Office engaged in the buying and selling of securities for the general public and excludes PWI Capital Markets. 1.23 "SERVICES" means one or more of those QSI Information Services (formerly known as Quotron Financial Information and Offices Services) categorized as MDS, Trading and Decision Support Services, and Branch Office Services made available on QSI provided Equipment. Classification of Services into each such category is set forth in Appendix "J" hereto. "SERVICES" may also refer to Services made available through a QSI provided Alternative Platform, Quotron QUOTDIAL Service, personal computers, and Remote Information Services ("Remote Services") formerly known as "Quotron Satellite Office Terminal Service". 1.24 "SERVICE AGREEMENT" means the written agreements including Service Orders between QSI and PWI pursuant to which QSI provides Services to an Office. "SERVICE AGREEMENT" also includes the Equipment Rental Agreement. "EQUIPMENT RENTAL AGREEMENT" means an agreement whereby the Equipment is rented by PWI from QSI on a month-to-month basis. Service Agreements include the Information Services Agreement, Equipment Rental Agreement, Equipment Maintenance Agreement, PC Service Agreement, Remote Information Services Agreement, Agreement for QuotChart, QuotData and QuotTerm. Forms of the Service Order and Service Agreements are attached hereto in Appendix "B". 1.25 "EQUIPMENT LEASE AGREEMENT" means an Agreement whereby the Equipment is leased by PWI and QSI or a third party for a fixed term. A form of the Quotron Equipment Lease Agreement is attached hereto in Appendix "B1". 4 8 1.26 "EQUIPMENT RENTAL AGREEMENT" - see definition of Service Agreement. 1.27 "UPGRADE" means replacing Equipment installed in an Office with different Equipment that makes possible the delivery to PWI of improved or additional Services. Examples of an Upgrade would be replacing the Q800 with the Q1000 or replacing the Q1000 with an Alternative Platform. ARTICLE II PURPOSE AND TERM 2.1 PURPOSE. The Parties agree that the purpose of this Agreement is to set forth the terms and conditions that together with the terms and conditions contained in the Service Agreements, shall govern the provision of Services to Offices. All such Service Agreements shall have full force and effect, provided that in the event of a conflict of terms between a Service Agreement and this Agreement, this Agreement shall prevail. The National Agreement between the Parties dated February 5, 1988 is hereby superseded in whole by this Agreement as of the Effective Date. 2.2 TERM. (a) MASTER AGREEMENT. This Agreement shall be in effect until August 1, 1995 (the "Expiration Date"), unless sooner terminated by the Parties in accordance with Article XIV hereof or extended by PWI pursuant to and in accordance with Subsection (b) and/or (c) of this Section 2.2. 5 9 (b) FIRST EXTENSION OF MASTER AGREEMENT. Unless either Party gives written notice of termination to the other Party at least sixty (60) days prior to the Expiration Date, PWI may exercise an option to extend the term of this Agreement for a period of three (3) years ("First Extension") by furnishing to Quotron written notice at least sixty (60) days prior to the Expiration Date, of PWI's intent to exercise its option to extend pursuant to this Section. (c) SECOND EXTENSION OF MASTER AGREEMENT. Unless either Party gives written notice of termination to the other Party at least sixty (60) days prior to the expiration date of the term of the First Extension, PWI may exercise an additional option to extend the term of this Agreement for a period of three (3) years ("Second Extension") beyond the expiration of the term of the First Extension by furnishing to Quotron written notice at least sixty (60) days prior to the expiration of term of the First Extension, of PWI's intent to exercise its option to extend pursuant to this Section. (d) TERM OF SERVICE AGREEMENT FOR OFFICES LISTED IN APPENDIX "D". Commencing on the Effective Date, the terms of the Service Agreements for all Existing Offices including Offices listed in Appendix "D" shall be extended to the Expiration Date, and shall be further extended to the end of the First Extension (if the option under Section 2.2(b) is exercised) and further extended to the end of this Second Extension (if the option under Section 2.2(c) is exercised). (e) TERM OF FUTURE SERVICE AGREEMENTS. The term of each Service Agreement for Future Offices shall be, at PWI's option, either (i) co-terminus with the Expiration Date (provided the term of such Service Agreement is at least 12 months) or (ii) not co-terminus, in which case PWI will specify for each such Service Agreement a term of 12, 24, 36, 48 or 60 months. With less than twelve (12) months remaining in the Agreement, PWI shall have the option to select a term co- 6 10 terminus with the Expiration Date at month-to-month pricing described in Appendix "A". (f) MONTH-TO-MONTH EXTENSION. Upon the expiration date of the fixed term (which excludes any First Extension or Second Extension) of a Service Agreement, such Service Agreement shall continue to be extended one full month at a time, subject to termination by either Party on at least sixty (60) days prior written notice furnished to the other. ARTICLE III ORDERING SERVICE AND INSTALLATION OF OFFICES 3.1 ORDERS. QSI agrees to consult with PWI as QSI defines and implements improvements in the process and procedures to be used in ordering QSI Services and/or Equipment. 3.2 SERVICE AGREEMENTS. Upon execution of this Agreement, the Service Agreements, to include the Information Service Agreement, the Equipment Maintenance Agreement, and the Equipment Rental Agreement shall be deemed to have been executed by both Parties and shall be in effect for each Existing Office and for each new installation of Future Offices. The Service Agreements executed or deemed to have been executed pursuant to this Article shall supersede all prior Service Agreements between the Parties. 3.3 INSTALLATION OF FUTURE OFFICES. To order Q1000 Service for any Future Office during the term of this Agreement, PWI shall notify QSI that it wishes to order Service and PWI shall execute for that Office an Equipment and Service Schedule, per Appendix "C" attached 7 11 hereto and incorporated by reference. QSI shall install Services in a Future Office within sixty (60) days of receipt by QSI of a completed Service Order and an executed Equipment and Service Schedule for that Office. When requested by PWI in writing, QSI shall install Services in an Office on a expedited basis, subject to payment by PWI of QSI and third party expedite fees. The foregoing shall be subject in each case to PWI supplying to QSI all necessary Service and communication line-ordering information at the time the order is placed, and subject to the availability of communication lines and facilities. 3.4 ACQUISITION OF A COMPETITIVE FIRM'S OFFICES. When requested by PWI in writing, QSI shall install Services in an office of a firm which has been acquired by PWI in order to replace a competitive vendor's system with Services provided by QSI. QSI shall exert its best efforts to install Services in such offices on an expedited basis subject in each case to PWI supplying to QSI all necessary Service and communication line-ordering information at the time the order is placed, and subject to the availability of communication lines and facilities. QSI shall not charge PWI for the QSI expedite fees when installation is to replace a competitive vendor's system pursuant to this Section. PWI shall pay all applicable third party (telco, air freight) expedite fees. 3.5 INSTALLATION OF INTERNATIONAL OFFICES. International Offices installed with Services as of the Effective Date shall continue to be subject to the terms and conditions, including pricing and discounts, which are currently in effect for International Offices. To order Service for any future International Offices during the term of this Agreement, PWI shall notify the appropriate QSI International office that it wishes to order Service and PWI 8 12 shall execute for that International Office a separate International Service Agreement per Appendix "K" for the applicable foreign country. 3.6 OFFICE RELOCATIONS. Relocation costs (including but not limited to all applicable removal and installation costs) for any Office that is relocated (and not designated a Temporary Office, as provided in Section 3.8 hereof) shall be paid by PWI. At PWI's option ("Relocation Option"), QSI agrees to pay and amortize over the term of the Service Agreement the costs associated with a relocation of an Office (to include applicable removal and installation costs) provided PWI extends the term of the Service Agreement for the new location by five (5) years. PWI shall provide QSI with thirty (30) days notice, prior to the relocation, that PWI elects to relocate pursuant to this Relocation Option. The exercise by PWI of this Relocation Option shall automatically cause the term of the Service Agreement for the Office to be relocated to be extended for a period of five (5) years calculated from the first of the month following the month in which the relocation occurred. If PWI terminates Services to an Office after the relocation and prior to the end of the five (5) year term, the term of twenty (20) months specified in Article VI shall apply and PWI shall pay (i) unamortized costs of the initial installation, if any, and (ii) unamortized installation costs incurred as a result of the relocation. 3.7 CABLING OF FUTURE DESK UNITS. QSI shall install and pay for standard quad cabling, as ordered, for projected desk units at the time QSI installs cables for then current requirements. If the cabling for projected desk units is not utilized in a Future Office within twenty-four (24) months from the date of initial installation, PWI shall pay the pro rata cost of the unused cabling. PWI will be charged and PWI shall pay the price differential between standard quad cabling and other type of cabling installed hereunder. 9 13 3.8 TEMPORARY OFFICES. At the time a Service Agreement is executed for a Future Office, PWI may specify on the Service Order that the location of the Future Office is temporary ("Temporary Office") and is to be relocated at a later date during the initial term of the Service Agreement to a permanent Office located within 50 miles of this Temporary Office or located in the same metropolitan area. Installation and actual removal costs for any Temporary Office shall be the responsibility of PWI, and costs of installation in the permanent Office of the Equipment located in the Temporary Office shall be paid for by the Parties in accordance with Section 5.1(g) hereof. ARTICLE IV SERVICES AND UPGRADES 4.1 AVAILABILITY OF SERVICE. QSI will provide Services specified by PWI in the Service Agreement for any Office for which Services are ordered. QSI will give notice and make available to PWI throughout the term of this Agreement services and equipment on terms and conditions as favorable as any made available to other QSI Customers (defined as any brokerage firm, bank or financial service provider) that are subject to similar terms and conditions and that have similar billing volume. 4.2 UPGRADING OF OFFICES. (a) UPGRADING OF RETAIL OFFICES FROM Q800 TO Q1000. QSI will complete the Upgrade of Retail Offices (including Lincoln Harbor - Weehawken C/Ns 4750-139, 4750-223 and 4750-280, 120 Broadway and the 1285 Retail Branch Offices) from MDS provided by Q800 Computers to MDS plus Branch Office Services and Trading and 10 14 Decision Support Services provided by Q1000 Equipment by January 1, 1991. QSI shall pay the QSI incurred installation costs associated with such an Upgrade. QSI shall also pay the QSI incurred installation charges for four (4) Offices to be relocated and Upgraded to Q1000 Equipment after January 1, 1991. The four (4) Offices are Akron, OH C/N 4750-665, Bellevue, WA C/N 4750-022, Medford, OR C/N 4750-635 and Rochester, MN C/N 4750-715. (b) UPGRADING OF RETAIL OFFICES, PWI CAPITAL MARKERS, AND SOFT DOLLAR LOCATIONS FROM Q800 TO Q1000. PWI shall pay the QSI incurred installation costs associated with the Upgrade from Q800 to Q1000 for (i) all PWI Capital Market and Soft Dollar Locations, at any time, and (ii) for Retail Offices upgrading after January 1, 1991 (excluding the four (4) Offices and associated Soft Dollar Locations referenced in Section (a) above). (c) UPGRADE OF PWI OFFICES TO AN ALTERNATIVE PLATFORM. PWI may Upgrade any Office from Q800/Q1000 to a QSI provided Alternative Platform pursuant to a mutually agreed to installation schedule. Such Upgrades are subject to the following terms and conditions: (i) PWI shall pay actual costs of removal of the Equipment being replaced including but not limited to labor, freight and telco charges. (ii) Notwithstanding anything to the contrary contained in the Agreement, PWI shall sign a fixed term Equipment Lease Agreement for each Office to be installed with the Alternative Equipment supplied by QSI. 11 15 (iii) If PWI acquires an Alternative Platform other than from QSI, PWI will pay to QSI all costs associated with the installation of software in the Alternative Platform and all software licenses. (iv) PWI shall not be required to pay any further Services charges with regard to the Q800/Q1000 Equipment which is removed from an Office as a result of an Upgrade to an Alternative Platform. 4.3 SERVICE CHANGES. (a) STANDARD. To order any additional Services or any change in Services (including entitlement changes), PWI shall deliver a written or electronic Customer Service Request ("CSR") to QSI's Los Angeles Order Processing Department. Installation of, or reduction in, equipment, keyboards, displays, expansion hardware or Services shall be completed within standard lead time (as reflected in Article IX below) days of receipt by QSI of a properly completed CSR, subject to PWI supplying to QSI all necessary Service and communication line-ordering information at the time the order is placed, and to the availability of hardware, communication lines and facilities. Service changes will be priced in accordance with Appendix "A" hereto. (b) ENTITLEMENT CHANGES. Software only entitlement changes not requiring a visit to an Office by a CE shall be accomplished at no charge to PWI. (c) DESK UNIT ADDITIONS. Upon prior written or electronic notice, PWI may add desk units. QSI shall install additional desk units at no charge to PWI for the installation. QSI acknowledges that from time to time PWI will have a need to have a desk unit added on an expedited basis to accommodate a new broker. On an exception basis QSI will exert its best efforts to exceed the standard lead times 12 16 described in Article IX below in order to accommodate PWT's requested install date. No QSI expedite fee will be charged for this accommodation. QSI will maintain on an ongoing basis twelve 12" cluster terminals with 80-key Qwerty keyboards, and a sufficient number of C.I. boards and cable connectors, as determined by QSI, for the exclusive use of PWI on an expedite basis. (d) DESK UNIT REMOVALS AND RELOCATIONS. Upon prior written or electronic notice, and at PWI's expense, PWI may remove desk units, or relocate desk units at the same or different locations. The billing for reductions in desk units and/or costs of relocation will appear on a supplemental invoice retroactive to the date of removal and/or relocation, provided, however, that monthly billing shall not be reduced below the Firm-Wide Minimum Monthly Subscription Requirement. 4.4 TECHNICAL COMPETITIVENESS. If PWI determines that for competitive reasons it requires a feature or service added to Services then available and if PWI provides QSI with a description and specifications for the required feature or service, then in the event, within 60 calendar days, QSI shall provide a proposal to develop and implement the new feature or service, together with a proposed schedule. If PWI accepts QSI's proposal, QSI shall develop and install the new feature or service in accordance with the accepted proposal and schedule. If PWI does not accept QSI's proposal for any reason, the Parties will submit PWI's specifications and QSI's proposal to a mutually acceptable expert in the financial information services field who shall determine whether QSI's proposal adequately and reasonably meets reasonable competitive requirements of PWI or, if not, how QSI's proposal should be modified. In the event the Parties cannot agree on an expert the Parties agree that each Party will choose an expert and the two experts will choose a third expert and the three experts shall perform the evaluation of QSI's proposal. The cost of the expert(s) shall be borne equally by the Parties. PWI may then either accept QSI's proposal in its original form or as modified pursuant to the expert's determination, or PWI may abandon 13 17 its quest for the new feature or service. If PWI does accept QSI proposal in either form, QSI shall develop and install the new feature or service in accordance with the accepted proposal and schedule. If QSI meets the accepted schedule for development and installation of the new feature or service, or is not more than 30 calendar days delayed for reasons within QSI's control, PWI shall either (i) subscribe and pay for the new feature or service for the mutually agreed to minimum period and minimum number of Orders or terminals reasonably deemed necessary to recoup QSI's development costs for the new feature or service, or (ii) reimburse QSI for its development costs for the new feature or service that were agreed to by PWI pursuant to the QSI proposal. QSI agrees that the failure to deliver on schedule the QSI proposal and have PWI approve the new feature or service will subject QSI to penalties as provided in Article 8.4. ARTICLE V PRICE AND PAYMENT 5.1 PRICES FOR SERVICES. (a) EXISTING OFFICES. Commencing on the Effective Date, the prices applicable to Services in Existing Offices shall be as set forth on the Price List attached hereto as Appendix "A". Effective with the first recurring monthly billing following the execution of this Agreement, (QSI shall be permitted to use an estimated amount on the first monthly billing following execution of this Agreement provided it is approximately 90% of the credit that would be due with the second recurring monthly billing generating the remaining credit based on active calculations), PWI will receive, as a credit against future bills, an amount equal to the difference 14 18 between actual Office billings and Office billings as calculated using the prices and discounts as detailed in Appendix "A" for all monthly billings from the Effective Date through the implementation of the pricing and discounts of Appendix "A". QSI guarantees that the annual recurring billing (excluding exchange fees, royalties, taxes and surcharge) shall be no more than $17,491,938 based on 6878 retail terminals and 1676 non-retail terminals with existing Office, Equipment and Services defined as PWA on Page 2-3 of Appendix "A" located in PWI Offices and correspondent offices installed with Services as of August 1, 1990. In the event that any of the stock, commodity, futures or any other exchanges extend their hours beyond those in effect as of the Effective Date, QSI may charge PWI for QSI's increased costs of providing operation and (at PWI's request) maintenance during the lengthened market day. The charge for QSI's providing operation (but not maintenance) during such extended hours shall be as mutually agreed upon by the Parties, but in no event shall such charge be greater than the published list prices charged to other customers. Such charge shall be discountable and subject to the terms and conditions of Section 4.1 herein. (b) FUTURE OFFICES AND RENEWALS. The prices applicable to Services in Future Offices installed or renewed after the Effective Date during the initial five (5) year term of this Agreement shall be those set forth on the Price List attached thereto as Appendix "A". (c) PRICE ADJUSTMENT DURING FIRST EXTENSION. On or after the commencement date of the three (3) year term of the First Extension (in the event the First Extension option is exercised by PWI), QSI may raise any price set forth in Appendix "A" (exclusive of Equipment) by an aggregate of eight percent (8%). (d) PRICE ADJUSTMENT DURING SECOND EXTENSION. On or after the commencement date 15 19 of the three (3) year term of the Second Extensions (in the event the Second Extension option is exercised by PWI), QSI may raise any price set forth in Appendix "A" (exclusive of Equipment) by an aggregate of an additional eight percent (8%) over the level to which it was adjusted during the First Extension. (e) EQUIPMENT PRICING DURING FIRST EXTENSION. On the commencement date of the three (3) year term of the First Extension (in the event the Plant Extension option is exercised by PWI) the prices applicable to five (5) year tests Equipment rental shall be reduced by thirty percent (30%). The prices applicable to Leased Equipment during the First Extension shall be adjusted subject to negotiation by the Parties. (f) MONTH-TO-MONTH EXTENSIONS. If PWI extends a Service Agreement on a month-to-month basis for reasons other than a competitive replacement or replacement with services provided by PWI, then in that event, the prices applicable to Offices that are covered by Service Agreements extended on a month-to-month basis shall be one hundred ten percent (110%) of the prices before discount being charged to PWI immediately prior to conversion to the month to month terms. Notwithstanding anything contained herein to the contrary, Offices extended on a month-to-month term basis following a fixed term are eligible for continuation of discounts. If at the end of the initial five (5) year term of this Agreement, the Parties are in good faith contract negotiations, PWI shall be subject to payment of one hundred percent (100%) of PWI's prevailing prices and discount which will remain in effect for six (6) months. If the Parties are not in good faith contract negotiations, then PWI shall be subject to QSI's then current published list prices at no discount. (g) INSTALLATION COSTS FOR Q800 AND Q1000 SYSTEMS. QSI shall pay and amortize over a period of 20 months, installation costs for Q800 or Q1000 systems for all Offices 16 20 covered under a 12 month or longer term Service Agreement. PWI shall pay installation costs for all Offices installed with a term less than 12 months. (h) INSTALLATION COSTS FOR UPGRADE TO ALTERNATIVE PLATFORM. For Upgrades From Q800 or Q1000 Systems PWI will select one of the following options: (i) Pay the installation charges with a one-time payment. (ii) PWI will arrange to include the installation charges as part of the Equipment Lease for Alternative Platforms. (iii) Commit to at least a 36 month extension of the Services Agreement with QSI in which case QSI will pay the installation charges and amortize them over the term of the extension. If PWI closes the Office prior to the end of the 36 month extension PWI shall pay to QSI the unamortized portion of the installation charges. (i) INSTALLATION COSTS - ALTERNATIVE PLATFORMS FOR NEW OFFICES. For new Offices PWI will select one of the following options: (i) Pay the installation charges with a one-time payment. (ii) PWI will arrange to include the installation charges as part of the Equipment Lease for Alternative Platforms. (iii) Commit to at least a 36 month term of the Service Agreement with QSI in which case QSI will pay the installation charges and amortize them over the term. If PWI closes the Office prior to the end of the 36 month 17 21 term PWI shall pay to QSI the unamortized portion of the installation charges. (j) MAINTENANCE CHARGES AND LABOR RATES. The charges applicable to maintenance during the initial five (5) year term of this Agreement shall be those set forth in Appendix "A". Labor rates during the initial two (2) years of the Agreement shall be those set forth in Appendix A. On August 1, 1992 QSI shall have the right to increase labor rates specified in Appendix A by up to a percentage by which the Federal Bureau of Labor Statistics All Urban Consumers Figure (the "CPI") has increased from the Effective Date to August 1, 1992. On each succeeding anniversary date (twelve (12) month increments), QSI shall have the right to increase labor rates by up to the percentage which the CPI has risen from the immediately prior anniversary date. 5.2 DISCOUNTS. Commencing on the Effective Date, Offices covered under this Agreement shall receive a twenty-seven percent (27%) discount off discountable prices contained in Appendix "A". Exchange and News Fees, Communication Charges, taxes, surcharge, data base services, installation and removal costs, maintenance, Equipment Rental, Equipment Lease and any billing for other than recurring monthly charges for Services are not discountable. Discounted rates shall not survive termination of this Agreement except as provided in Section 5.1 (f) above. 5.3 FIRM-WIDE MINIMUM MONTHLY SUBSCRIPTION REQUIREMENT. Notwithstanding anything to the contrary contained in this Agreement and the individual Service Agreements, PWI shall, during the term of this Agreement, pay to QSI a Firm-Wide Minimum Subscription Charge in an amount equal to $500,000 per month for all Offices provided with Service (including for this purpose, the Offices covered by the Agency Agreement between QSI and Correspondent Services Corporation, a PWI wholly-owned subsidiary), after discount and 18 22 exclusive of taxes, surcharge, Exchange fees, Financial Data Base Service, installation and removal charges, maintenance, Equipment Rental and Equipment Lease charges, and any charges other than recurring monthly charges for the Service makes a reduction below $500,000 results from QSI's failure to meet the performance criteria reflected in Article VIII and the exercise of PWI's rights thereunder. 5.4 TAXES. All sales, use, gross receipts, excise, transaction, telecommunications consumption, Value Added (VAT), Goods and Services (GST), utility, manage, personal property, intangible tax and any other federal, state and local taxes, fees and charges, including interest and other charges not due to any fault on the part of QSI thereon chargeable by the taxing authorities, shall be paid by PWI. The foregoing provision shall be construed such that PWI shall pay all taxes, fees and charges applicable to the Service, Equipment, software and any other pass-through charges provided by QSI to PWI, other than taxes imposed upon the net income of QSI. 5.5 PAYMENT. Payment is due on receipt of invoice ("Due Date"). Monthly charges will be computed from the first day that Service is provided, and will be invoiced each calendar month in advance. PWI's failure to pay any amount within sixty (60) days after the Due Date, (subject to satisfactory completion and acceptance by PWI of Phases I, II and III of the billing projects described in Appendix "F" at which time invoices will be due within thirty (30) days after the Due Date) shall constitute a default and entitle QSI to terminate the Service and exercise its rights pursuant to provisions hereof. If PWI fails to pay any amount on or before thirty (30) days after the Due Date, PWI shall pay a late charge at the rate of 1-1/2% per month (or the maximum lawful rate, whichever is lower) on each such delinquent amount from the applicable Due Date for such amount to the date of receipt of payment thereof by QSI. 5.6 INTERNATIONAL OFFICES. International Offices shall be billed on an office-by-office basis in local currency. All International Office invoices shall be paid by PWI in local currency. 19 23 5.7 GENERATION OF INVOICES. QSI will generate invoices by the month following completion of installation of Service and change management activities such as commitment changes, relocations and reductions of Services. The Parties acknowledge and agree that in order to generate invoices in a timely manner QSI shall provide PWI with estimated billing for third party invoiced activities such as charges incurred from taxes, connectors, freight. 5.8 CONTESTED BILLING. (a) RESOLUTION OF CONTESTED BILLING. QSI and PWI agree that negligible effort will be made by both Parties to resolve any billing disputes within ninety (90) days after receipt by QSI of written notification from PWI which specifies the items contested. PWI shall pay all uncontested amounts upon receipt of invoice in accordance with Section 5.5 hereof. That portion of PWI's balance which is contained will not incur a late charge from the date of PWI's written notification until such time as PWI's claim is rejected in full or in part by QSI. At that time, the items contested shall become due and payable. If payment is not received on or before thirty (30) days after the claim has been rejected, QSI retains the right to assess late charges on all or part of PWI's rejected claim effective the date PWI has been notified that the claim was rejected ("Rejection Date"). The notification shall contain the reason the claim was rejected and any relevant documentation and shall be forwarded to PWI's Chief Information Officer ("CIO"). If PWI's CIO does not agree with QSI's rejection of the claim, the CIO may escalate such claim to QSI's Chief Financial Officer ("CFO"). QSI's CFO and PWI's CIO shall have a thirty (30) day period in which to determine the validity of such claim. If the determination is made that the charges are valid, PWI shall be invoiced and shall pay all late charges commencing as of the Rejection Date. If the determination is made that the claim is not valid then PWI shall not be obliged to pay any late charges (if invoiced). 20 24 The Parties agree to assist each other in their investigation and to provide appropriate documentation as requested by either Party. (b) FUTURE BILLING MATTERS. Any QSI invoice which PWI does not notify QSI (as being in dispute) within six months of its receipt thereof shall irrevocably be deemed correct and PWI waives its right to challenge the convection of same. Similarly, any QSI invoice which QSI does not notify PWI (as being incorrect) within six months of its effective date shall irrevocably be deemed correct and QSI waives its right to challenge or change same. This section shall not apply to the pass through of taxes referenced in Section 5.4 herein. This clause shall not become effective until administrative projects Phase I, II and III of Appendix F are completed and functioning at PWI. 21 25 ARTICLE VI OFFICE CLOSINGS 6.1 OFFICE CLOSINGS. PWI at any time after the Effective Date, may close any Office, provided such closing is not for the purpose of replacing the Service with similar services provided by PWI or a third party. For purposes of this Article an Office shall be deemed closed when all business at that location is terminated and no new Office or Offices are opened in the same general geographic area under circumstances that indicate an Office relocation. The following provisions shall apply to the termination of Service to an Office as a result of the closing of that Office. (a) THIRTY DAYS NOTICE. PWI shall furnish QSI with thirty (30) days written notice of each Office closing. PWI shall pay full monthly billing for the Service during the notice period. (b) UNAMORTIZED INSTALLATION COSTS. PWI shall pay in a lump sum upon termination, unamortized installation costs for any Office installed with Service for less than 20 months. (c) EQUIPMENT RENTAL AGREEMENT. PWI shall pay Equipment rental charges to the conclusion of the thirty (30) day written notice period or any extension requested in writing by PWI. (d) EQUIPMENT LEASE AGREEMENT. PWI shall continue to pay full lease charges for the duration of the lease or the net present value of the remaining lease 22 26 payment and title remains with the lessor covering Equipment installed under an Equipment Lease Agreement. (e) MAINTENANCE AGREEMENT. PWI's obligations under the Equipment Maintenance Agreement for a specific Office shall extend to the date of removal or to the completion of the thirty (30) days written notice period, whichever is later. (f) ACTUAL COST OF REMOVAL. PWI shall pay actual costs of removal including but not limited to labor, freight and telco charges. (g) FIRM-WIDE MINIMUM MONTHLY SUBSCRIPTION REQUIREMENT. Nothing in this Article shall relieve PWI of its Firm-Wide Minimum Monthly Subscription Requirement as described in Section 5.3. ARTICLE VII MAINTENANCE 7.1 MAINTENANCE. QSI or a third party designated by QSI shall perform maintenance on the Equipment. Normal hours of maintenance are during Business Days as shown below ("Business Hours"): 8:00 AM - 5:00 PM Eastern Time 7:00 AM - 4:00 PM Central and Mountain Time 6:00 AM - 3:00 PM Pacific Time 23 27 QSI and/or representatives designated by QSI shall have access to the Equipment at all reasonable times for the purposes of installation, maintenance, repair and removal thereof. Maintenance requested by PWI shall be as set forth in the Equipment Maintenance Agreement attached hereto in Appendix "B". If a call-repair maintenance action is in progress as a result of a service request made by PWI during Business Hours, then such a service request action will be completed beyond Business Hours. Such a service action shall be at no charge to PWI. If PWI requests that maintenance start after Business hours, PWI will pay for service billable at the QSI standard hourly overtime rate then in effect. Such deferred service actions shall be excluded from performance criteria calculations. PWI shall have the option to have such service action commence the following Business Day. QSI shall provide a normal level of maintenance and performance for terminals covered by the Equipment Maintenance Agreement, provided that PWI complies with QSI's then current site planning and installation requirements. Normal level of maintenance means "the same level of maintenance QSI provides to other similarly situated commercial customers who subscribe to the Service." Any support activities and/or maintenance required because of problems caused by PWI-provided software as identified by QSI and agreed to by PWI, shall be paid by PWI at QSI's standard hourly rates then in effect. The cost of maintenance requested by PWI to be accomplished after Business Hours or on weekends or holidays will be paid by PWI at QSI's hourly rates then in effect, subject to availability of CEs. 7.2 DEDICATED CE MAINTENANCE. QSI or its designee will provide dedicated CE maintenance coverage at PWI's designated site, currently 1285 Avenue of the Americas Office, during Business Hours on Business Days, excluding lunch periods and breaks. QSI will select and assign a qualified technician to remain at the Office and provide all necessary maintenance functions. PWI reserves the right to request the replacement of the assigned CE. QSI shall not unreasonably withhold its consent to such request. During periods of vacation, training, sickness or for other business reasons, QSI will assign other qualified personnel. It is QSI's 24 28 intentions to keep such personnel changes to a minimum. In the event of an unplanned employee absence, QSI will exert its reasonable efforts to supply on site replacement coverage by 9:00 a.m. of the day affected. Each morning the assigned CE will report directly to the Office and verify the operation of the Equipment. Any malfunctions will be responded to immediately. In order to maintain records and ensure system performance, QSI requires that all trouble reports made by PWI's staff be reported to the QSI Call-in Center. Installation work will continue to be coordinated and performed by QSI's Installation Department and billed accordingly. The cost for this dedicated CE maintenance service is based upon a formula that attempts to recover only the excess cost of dedicated personnel who would normally be available to service other accounts. The monthly charges shall be the greater of (i) a minimum monthly charge, as specified in the following sentence, or (ii) six percent of the difference between $140,000 and regular monthly site billing. The minimum monthly charge during the initial twelve (12) months following the Effective Date of this Agreement shall be $500 per month, and may be increased thereafter up to a maximum amount of $1,000 per month. Maintenance charges are not eligible for discounts. 7.3 SERVICE REQUEST AVERAGE RESPONSE TIME. PWI's Help Desk shall request maintenance for an Office by telephoning QSI's Call-In Center or the designated QSI representative (within the time frames then set in QSI's service policies). QSI shall guarantee response time to service requests under all conditions subject to the provisions of Section 14.3. Travel time shall be calculated by city in accordance with QSI's Travel Time Schedule per Appendix "I" attached hereto and incorporated by reference. Appendix "I" will remain in effect for the term of the Agreement. A written or electronic Service Report describing the details of the outage is forwarded to QSI, Los Angeles for purposes of verification, record keeping and monitoring. To provide PWI with a maximum effort of support, the CE will call for additional support after working on the problem unsuccessfully for approximately one hour, and must notify PWI before loading file systems or replacing a disc drive. QSI current 25 29 service policy per Appendix "E" entitled "Quotron Systems, Inc. Customer Engineering Maintenance Service Offering" is attached hereto and incorporated by reference. In the event QSI selects another maintenance provider, the Parties agree to review and as mutually agreed to modify or supplement the existing Appendix "I". 7.4 MAINTENANCE PROVIDERS. The Parties acknowledge that QSI or a third party designated by QSI ("Designee") shall perform maintenance on the Equipment. QSI shall have sole discretion in the selection of any Designee organization which shall perform maintenance on the Equipment. QSI agrees to consider, and review written input from PWI as to the selection of such a Designee. QSI's commitment to consider, and review PWI's input is intended to be a good faith expression of QSI's intent to reasonably and diligently give weight to PWI's concerns in the Designee selection process. PWI shall have the right to renegotiate the Maintenance Section of this Agreement, including any Equipment Maintenance Agreements hereunder two years from the Effective Date of this Agreement. QSI agrees to renegotiate in good faith if PWI exercises its right to renegotiate. The Parties shall negotiate terms and conditions applicable to the providing of maintenance on Alternative Equipment. 26 30 ARTICLE VIII PERFORMANCE CRITERIA 8.1 DEFINITIONS. As of the Effective Date, QSI shall provide MDS to PWI in accordance with the performance criteria set forth in this Article for all Offices located in the contiguous forty-eight (48) United States, Hawaii, and Puerto Rico. Offices outside of the contiguous forty-eight (48) United States and Hawaii will be maintained on a best effort basis with response no later than 24 hours after receipt of service call from PWI. Offices located in Puerto Rico will be maintained with response no later than six (6) hours after receipt of a service call from PWI. (a) DEFINITIONS. For purposes of this Article VIII, outages mean, when calculating performance for QSI provided terminals, terminal hardware failure and/or the total inability to obtain quotes on the Quoteline ("Outages"). Optional and customized services and PWI developed software shall be excluded. For purposes of this Section "Optional Services" mean Services other than Market Data Services such as Trading and Decision Support Services, Branch Office Services and Network Services. Optional Services are listed in Appendix "J" attached hereto and incorporated by reference. "Customized Services' means services developed at the request of PWI by QSI for use in conjunction with the Service or with PWI application software. Outages which are caused in whole or in part, by PWI non-compliance with QSI-provided environmental criteria or policies regarding the connection of devices not approved by QSI to the systems, PWI provided software, PWI provided hardware, communications circuits and/or modems, communications circuits provided by a telephone company or communications carrier and/or any telephone company or communications carrier problem, or by force majeure as 27 31 described in Section 14.3 herein, shall be excluded from performance criteria calculations pursuant to this Article. Additionally, Outages caused by failure of data vendor feeds such as News, Exchanges, Database vendors, and other third party providers of services, shall be excluded. "Downtime" starts when PWI's notification of an Outage is received and logged at PWI's Help Desk by the QSI person assigned to the Help Desk, or in his absence or non-availability, logged in at QSI's Call-In Center. "Uptime" is any other time. QSI agrees to have a person manning PWI's Help Desk on Business days during Business Hours. Business Hours are defined in Section 7.1. (b) CALCULATION OF PERFORMANCE. On Business Days, the QSI provided terminals shall be subject to, and QSI obligates itself to meet, the performance levels stated in this Section. Uptime shall be calculated by multiplying the number of QSI provided terminals installed by 9 hours, and multiplying the result by the number of Business Days in that month. The resulting answer shall be divided into the number of QSI provided terminals are available for operation use during that same period of time. The answer to these calculations equals actual performance. As an example, if ten (10) terminals worked a nine (9) hour day and there were twenty (20) Business Days in that month, and there were no failures that month, then the calculation would be: 10 x 9 x 20 = 1800 Available Hours 10 x 9 x 20 = 1800 Performance Hours 1800 ---- 1800 = 100% up-time performance 28 32 If, using the above example, there had been eighty-one (81) hours of Outages during the month, the result would be: 1719 ---- 1800 = 95.5% Performance For the average to fall below 99% Uptime, a minimum of twenty (20) terminal hours would have to be lost because of Downtime as shown below. 1780 ---- 1800 = 98.9% up-time performance (c) UPTIME PERFORMANCE REQUIREMENT. On Business days during Business Hours ("Business Hours" are defined in Article VII herein), each Office shall be subject to and QSI obligates itself to meet the Uptime performance figure of ninety-nine percent (99%). (d) PERFORMANCE DEFAULTS; PENALTIES. If the performance as defined and calculated above, falls below the 99% level described above, for two (2) consecutive months, and it is not due to PWI failing to meet any of its obligations, then PWI shall have the option to give QSI written notice that QSI is in default of its performance level. Upon receipt of such notice from PWI, QSI shall have a period of thirty (30) days in which to bring the performance to an acceptable level. If at the end of the thirty (30) day period the performance equals or exceeds the 99% performance level, as calculated above, then QSI will no longer be considered in default of the performance criteria. At this time a new two (2) month period of calculation of performance shall commence. However, at the end of such thirty (30) day period 29 33 QSI will provide PWI a retroactive credit for the two (2) months QSI missed the 99% performance level. PWI shall be entitled to receive a credit for that Office in an amount equal to double the percentage difference between the performance level QSI is obligated to meet and the performance level actually attained off monthly discountable Service billings retroactive to the commencement of the two (2) month period when QSI was first in default. If the performance level falls below 90%, PWI shall receive a credit equal to four (4) times the percentage difference rather than the doubling referred to above. For example, if the applicable performance level QSI is obligated to meet is 99% and the QSI level of performance actually attained is 95%, PWI shall be entitled to receive a monthly credit of eight percent (8%) off monthly discountable Service billings at the affected Office retroactive to the commencement of the two (2) month period when QSI was first in default and continuing until the relevant performance standard is met. In addition if, within a twelve (12) month period, PWI receives credits during three (3) or more months due to QSI's failure to meet the relevant performance levels at a particular Office, then upon ten (10) calendar days' prior written notice, PWI may terminate the Service Agreement for that Office, without penalties or removal costs to PWI. Nothing in this Article shall relieve PWI of its obligations under an Equipment Lease Agreement for Alternative Platforms. (e) PERFORMANCE MONITORING. All calculation pursuant to this Article shall be based on information logged in and recorded at QSI's Call-In Center, ("Records") and PWI's Reports ("Reports") of Outages. In the event of a difference between QSI's Records and PWI's Reports for a particular Office, an attempt shall be made by the Parties to resolve those differences before performance is calculated for that Office. PWI shall have the right to check QSI's Records in order to reconcile any differences in calculations of performance. QSI shall have the right to check PWI's Reports after PWI gives notice of default to QSI, and the Parties shall attempt in 30 34 good faith to reconcile any differences. QSI will provide PWI with a monthly management report showing Uptime performance detailed by Office. 8.2 SYSTEM RESPONSE TIME. QSI and PWI will initiate a joint effort by 9/30/91 to establish a base line of QSI Services, PWI services and the Q1000 hardware configuration including the number of desk units ("Mutually Agreed Upon Configuration") which will ensure the following response times ("Acceptable Response Time") can be met: Quote Response Less than 2 Seconds 3270 Recognition of Request Less than 1 Second Q1000 BOS Load Time Less than 10 Seconds Q1000 BOS Recognition of Request 1 Second Q1000 BSS Load Less than 15 Seconds QSI will complete an investigation of methodologies to reduce BSS Load Time by approximately 50% no later than the end of first quarter of 1991. In the same time frame QSI will determine the feasibility of modifying the BSS Load in such a manner that Response Time can be measured by Recognition of Request. For the purpose of determining any such Acceptable Response Time, in the Mutually Agreed Upon Configuration, no more than 32 host connections including terminals, printers and programmatic interfaces shall have terminal emulation. By way of explanation, "Response Time" means the length of time a terminal inquiry transaction takes from proper key entry until the first line of data appears on the screen. "Recognition of Request Time" means the length of time screen response indicating CPU action takes when a key is depressed. Acceptable Response Time shall be maintained while any mutually agreed upon combination of available Services identified in Appendix "J" hereof are operating on the Q1000. QSI shall demonstrate the attainability of the Acceptable Response Time through testing of the Mutually Agreed Upon Configuration at QSI's SIT lab and at a PWI Office, such testing 31 35 to be monitored by PWI. The attainability of the Acceptable Response Time shall be further demonstrated through trial at three Offices among the first several to be upgraded which have the Mutually Agreed Upon Configuration. Response Time shall be monitored manually through mutual observation of PWI and QSI. If a Q1000 cannot maintain an Acceptable Response Time during any three (3) Business Day test period and after a fourteen (14) Business Day cure period and such failure is not due to Equipment or communications circuits outside the affected Office, QSI shall increase capacity of the affected CPU or provide additional CPU's, at QSI's expense, including the cost of additional CPU base charges, until an Acceptable Response Time is maintained. Any additional Equipment installed by QSI pursuant to the preceding sentence shall be for a term equal to the longest term remaining of the equipment where capacity is to be expanded, and PWI shall have no obligation to extend the term of Service Agreement therefor. If the failure to maintain an Acceptable Response Time is determined to be due to PWI applications used in excess of the defined capacity limits, or if PWI adds new applications, PWI shall reimburse QSI for the additional costs of maintaining a Response Time acceptable to PWI (including QSI's expenses incurred in determining the impact of either of the foregoing on Response Time), and shall pay the installation costs of any additional Equipment required to maintained such Response Time. If such Equipment is installed in connection with additional applications desired by PWI. PWI shall be required to extend the term of Service Agreement in respect of such Equipment for at least the minimum term required for such application. 32 36 8.3 FOREIGN DEVICES. PWI agrees that linking or attaching non-Quotron Equipment to Quotron Equipment shall be subject to compliance with QSI's "Policy for Connecting Foreign Devices to Quotron User Computers." Exceptions to the policy will be mutually agreed upon. Non-Quotron equipment shall be construed to mean any equipment not bearing QSI's name or which is not marketed by or on behalf of QSI or connected without QSI approval. Both Parties are in agreement that and all non-QSI approved foreign devices connected with and to the Q1000 shall be excluded from performance criteria calculations in Article VIII. 8.4 SOFTWARE COMMITMENTS; PENALTIES. In the event QSI shall fail in any material respect to meet the software development deliverable dates as specified in Appendix F and subsequent software development projects that are mutually agreed upon by QSI and PWI, QSI shall be subject to penalties as outlined in this Section subject to the following terms and conditions. QSI shall not be subject to penalties to the extent such failure is due to reasons beyond QSI's control or to the extent such failure is caused by PWI. Examples or failures caused by PWI include but are not limited to (i) PWI requests a delay in completion of a schedule date, (ii) PWI fails to provide requirements, deliverables or sign off on the specifications, and/or (iii) PWI changes in deliverables or delivery dates. (a) PWI RESPONSIBILITIES. The schedules applicable to the deliverables in Appendix F are subject to PWI satisfying the commitments reflected or required by Appendix F or as mutually agreed upon in connection with future projects. PWI shall provide to QSI written documentation evidencing QSI's failure to meet a deliverable date. Upon receipt of such notice. QSI shall have a period of 30 days in which to provide the deliverable. If at the end of the 30 days QSI is unable to provide the deliverable, QSI shall be deemed to be in default 33 37 hereunder and shall be subject to the penalties listed below. The penalties shall commence at the conclusion of the 30 days notice period. PENALTIES PER DELIVERABLE MISSED
DELIVERABLE PERIOD MONTHLY PENALTY - ------------------ --------------- 0-6 months 2.0 x $7000 x VT 7-12 months 1.5 x $7000 x VT Greater than 12 months 1.1 x $7000 x VT
"VT" shall mean variable term. If the deliverable period missed is 2 months then VT equals 1. The VT will increase by .5 for each additional month missed. The penalty is cumulative. ARTICLE IX SERVICE STANDARDS 9.1 SERVICE STANDARDS. To order additional Services or changes in Service, PWI shall deliver to QSI's Los Angeles Order Processing Department a written/electronic QSI Change request form or PC Order Form ("Change Order") (a form of which is attached hereto in Appendix "B") detailing the action requested. Service changes shall be subject to the Service Standards set forth below. QSI shall exert its reasonable efforts to ensure that ninety- 34 38 seven point seventy-five percent (97.75%) of all Service requests will meet these Service Standards (excluding travel time) and subject to the following terms and conditions: (a) Individual Change Orders must be written for each CPU. (b) Service Standards shall commence after receipt of a valid written/electronic Change Order at QSI's Los Angeles, Order Processing Department. (c) Service Standards are subject to PWI providing all necessary Service and communication line-ordering information at the time the Change Order is placed. (d) Standards are subject to the availability of non-QSI hardware, communication lines and facilities. SERVICE ACTIVITY SERVICE STANDARDS - ---------------- ----------------- RCC Entitlements One (1) Business Day (Quoteline entitlements) Software Only Two (2) Business Days (i.e. Monitor Line) Inside Moves Five (5) Business Days (terminal) 35 39 SERVICE ACTIVITY SERVICE STANDARDS ---------------- ----------------- Hardware Only or Hardware Fourteen (14) Business Days with Software (terminal (See Section 4.3(c) for special additions, etc.) situations). NEW INSTALLATION/RELOCATIONS: ----------------------------- SIT/SOT OR PC Orders Twenty-five (25) Business Days (Remote) CPU Installation Thirty-five (35) Business Days Ten (10) Business Days shall be added to performance Service Standards involving such non-standard Change Order requests as CPU relocations, rewires and major reconfigurations. QSI hardware availability will be subject to quarterly forecasts (subject to modification by PWI once within the quarter) from PWI of hardware requirements as defined by PWI. QSI will honor such forecast. If, due to normal growth conditions (normal growth conditions exclude PWI requirements as a result of an acquisition of another firm), Q1000 Equipment is not available within the Standards outlined above, QSI will provide equivalent Equipment at no additional cost to PWI including installation in accordance with Section 5.1(g). 9.2 PERFORMANCE MONITORING OF SERVICE STANDARDS. QSI agrees to provide PWI with a monthly work completion report. In the event that PWI believes that QSI has failed to meet the standard delivery times on more than 2.25% of the orders for a calendar month PWI will notify QSI in writing that QSI is in default of the Service Standards. Based upon mutual agreement as to the correctness of the claim, QSI will issue to PWI credits equal in value to the supplemental billings for the orders requesting the addition of hardware and/or Services that were not completed to Standard within that calendar month. In the case of 36 40 orders for removal of hardware and/or Services QSI will ensure that billing ceases as of the date determined by the Service Standards. 9.3 ENVIRONMENTAL CRITERIA. PWI shall meet the power, environmental and space specifications for the Q1000 set forth in the "QUOTRON 1000 System Site Preparation Guide," QSI Document Number SY-0002-04-00, for every Office installed or to be installed with Q1000 Services. PWI shall meet the power, environmental and space specifications for each Office installed with QSI provided Alternative Equipment as set forth in the applicable Quotron Systems Site Preparation Guide. 9.4 QSI ACCESS TO PWI OFFICES. Any person or persons designated in writing by QSI shall have access to such Equipment at all reasonable hours on a non-disruptive basis for the purpose of installation, inspection, maintenance, repair, removal and replacement thereof. PWI shall safekeep QSI's Equipment and software using the same degree of care as its uses to safekeep its own equipment and software and shall permit access thereto only by persons authorized in writing by QSI. QSI shall give PWI reasonable notice by telephone of the date and time of which QSI personnel will arrive at any Office to perform maintenance, and PWI shall not unreasonably deny access to QSI personnel at the requested time and place. 37 41 ARTICLE X PURCHASE OPTION 10.1 The Parties Agree that PWI will have the following options when acquiring QSI provided Alternative Platforms: a) Make an outright purchase, b) Lease the Alternative Platform through QSI, c) Lease the Alternative Platform from a third party. ARTICLE XI SOFTWARE DEVELOPMENT, SUPPORT, TRAINING AND DOCUMENTATION 11.1 SOFTWARE DEVELOPMENT AND SUPPORT. QSI shall provide software development support to PWI in accordance with, and subject to charges set forth in Appendix "F" hereto. 11.2 TRAINING. QSI will provide training programs and support as described in Appendix "G" hereto. 11.3 DOCUMENTATION. QSI will provide available technical documentation to PWI relating to API's, BSS, Terminal Emulation, SNA and BOS within three (3) months after the signing of this Agreement. 38 42 ARTICLE XII PROPRIETARY INFORMATION 12.1 PROPRIETARY INFORMATION. PWI acknowledges that certain information received through the Service is derived by QSI from proprietary information of third party information sources, exchanges, associations, news disseminating entities, data base vendors and other sources ("Sources"). PWI agrees that no proprietary right or title to the information received from the Service is transferred to PWI. PWI acknowledges that QSI's agreements with the Sources require that information received from the Sources not be resold and will be used only in PWI's business at the Office where Services are installed. PWI will not furnish such information to any person, firm or branch office for re-use. PWI agrees that no display nor subset of display of any Service may be interfaced, re-used or retransmitted with any other equipment and/or via a local area network or data feed without the express written consent of QSI and the written authorization of each Source providing proprietary data to PWI. PWI will not furnish such information to any newspaper, press association or service or permit connection of any other display and keyboard or computer to the communication circuit used to provide Services except with the prior written approval of QSI. PWI shall be responsible for furnishing the Sources with a description of each proposed use of any Services and PWI shall obtain all necessary authorizations from each Source, and will pay all charges (either directly, or to QSI's PWI account) required by such Sources in respect of PWI's use of the Service. 12.2 RIGHT TO INFORMATION. QSI agrees to provide PWI with answers to technical questions, all published product documentation, and technical notes on a timely basis. In addition, PWI development personnel will be given access at all reasonable hours on a non-disruptive basis to QSI development sites (Los Angeles) and associated personnel; such access to be mutually agreed upon by both Parties. PWI acknowledges QSI's proprietary products, and 39 43 QSI acknowledges PWI's proprietary business information. This Agreement serves as an extended non-disclosure agreement where specified PWI individuals will have access on a confidential basis to detailed information about QSI's current and planned products that are deemed important by PWI for PWI's development and ongoing business needs. This non-disclosure agreement is attached as Appendix "H". ARTICLE XIII DISCLAIMER OF WARRANTIES: LIMITATION OF LIABILITY: INDEMNIFICATION 13.1 DISCLAIMER. THE PARTIES HERETO AGREE THAT THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ALL OTHER WARRANTIES, EITHER EXPRESSED OR IMPLIED, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, ARE EXCLUDED FROM ANY TRANSACTION UNDER THIS AGREEMENT. QSI SHALL NOT BE LIABLE IN ANY EVENT FOR LOSS OF ANTICIPATED PROFITS, LOSS BY REASON OF SHUTDOWN, NONOPERATION OR INCREASED EXPENSES OF OPERATION OF OTHER EQUIPMENT, OR OTHER CONSEQUENTIAL LOSS OR DAMAGE OF ANY NATURE ARISING FROM ANY CAUSE WHATSOEVER EXCEPT AS OTHERWISE EXPRESSLY PROVIDED FOR IN THIS AGREEMENT. 13.2 LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, QSI SHALL HAVE NO LIABILITY, CONTINGENT OR OTHERWISE. FOR ACCURACY OF THE INFORMATION FURNISHED, OR OF PWTS COMMUNICATIONS TRAFFIC, RETRIEVED FROM, TRANSPORTED THROUGH 40 44 OR STORED IN QSI NETWORK AND DATA BASES, FOR LOSS OF DATA, OR FOR LOSS OF DATA CONFIDENTIALITY (EXCEPT FOR LOSS OF DATA CONFIDENTIALITY OCCASIONED BY QSI'S NEGLIGENT ACTS OR MISCONDUCT) OR FOR DELAYS OR OMISSIONS THEREIN, OR FOR INTERRUPTIONS OF ANY SERVICE FROM WHATEVER CAUSE, AND QSI SHALL NOT BE LIABLE FOR DAMAGES ARISING FROM THE USE OR PRESENCE OF QSI'S EQUIPMENT ON PWI'S PREMISES EXCEPT WHERE SUCH DAMAGES ARE THE DIRECT RESULT OF QSI'S NEGLIGENCE IN ASSEMBLING OR MAINTAINING ITS EQUIPMENT. 13.3 INDEMNIFICATION. (a) With regard to physical property damage and personal injury, PWI agrees that, at its sole expense, it shall protect, defend, hold harmless and indemnify QSI, its parent, subsidiary and affiliate companies, and all directors, officers and employees of QSI and its parent, subsidiary and affiliate companies, as applicable, (collectively, the "QSI Indemnified Parties") from and against any and all claims, demands, suits or other proceedings by a third party against any QSI Indemnified Party, any damages, losses, expenses and any other liabilities of any nature whatsoever, including without limitation, reasonable attorneys' fees, incurred by any QSI Indemnified Party and arising out of, in connection with, or resulting from PWI's negligence or misconduct hereunder. (b) With regard to physical property damage and personal injury, QSI agrees that, at its sole expense, it shall protect, defend, hold harmless and indemnify PWI, its parent, subsidiary and affiliate companies, and all directors, officers and employees of PWI and its parent, subsidiary and affiliate companies, as applicable, (collectively, the "PWI Indemnified Parties") from and against any and all claims, demands, suits or other proceedings by a third party against any PWI Indemnified Party, any damages, losses, expenses and any other liabilities of any nature whatsoever, 41 45 including without limitation, reasonable attorneys' fees, incurred by any PWI Indemnified Party and arising out of, in connection with, or resulting from QSI's negligence or misconduct hereunder. (c) QSI further agrees that, at its sole expense, its shall protect, defend, hold harmless and indemnify all PWI Indemnified Parties from and against any and all claims, demands, suits or other proceedings against any PWI Indemnified Party, any damages, losses, expenses and any other liabilities of any nature whatsoever, including without limitation, reasonable attorneys' fees, incurred by any PWI Indemnified Party and arising out of, in connection with or resulting from any infringement or alleged infringement by any PWI Indemnified Party of any United States or other patent or copyright covering or alleged to cover the QSI Equipment, the QSI software or any training manuals and technical documents related to the Service provided by QSI to PWI hereunder (collectively, "Covered Item") or the use of any of the foregoing as contemplated by this Agreement. QSI agrees that it shall pay all sums which, by final judgment or decree in any such suits or proceedings, may be assessed against any PWI Indemnified Party on account of any such Infringement. Should any Covered Item or any portion thereof become, or in QSI's opinion by likely to become the subject of a claim of such infringement, PWI shall permit QSI at QSI's option, either (i) to obtain for PWI the right to use such Covered Item; (ii) replace or modify the Covered Item so that it becomes non-infringing; or (iii) grant PWI a credit for such Covered Item less depreciation (an equal amount per year over the life of the Covered Item as established by QSI) for use, damage, and obsolescence and accept its return. However, QSI shall have no liability for any infringement or claim thereof, based upon (i) the use of any Covered Item in combination with any other device, software, or data not supplied by QSI where the combination and not the Covered Item alone caused the infringement, (ii) use 42 46 of the Covered Item in practicing any non-QSI process; (iii) PWI's non-standard use of any information, data or service provided by QSI where such non-standard use and not the information, data or service caused the infringement; and (iv) alteration of the Covered Items not made by QSI. No expense shall be incurred for the account of QSI without QSI's consent. (d) The Parties agrees that this right to indemnification under paragraphs (a), (b) and (c) hereunder shall be subject to: (i) written notice by the Party seeking indemnification to the Party from whom indemnification is sought of the claim, demand, suit or other proceeding requiring indemnification; and (ii) the Parties agree that the Party from whom indemnification is sought is authorized to assume, at its own expense, the sole defense thereof through its own counsel and to compromise or settle, at its own expense, any such claim, demand, suit or other proceeding. So far as this may be done without prejudice to the rights of the Party seeking indemnification or such Party's reputation and standing in the business community and among members of the general public who may utilize such Party's services. Prior to final settlement of any claim, demand, suit or proceeding hereunder, the indemnified Party shall be consulted and if it determines that the proposed settlement is not in its best interest, it may assume its defense from that point forward and the indemnifying Party's liability for that claim, demand, suit or other proceeding shall be limited to the amount of the proposed settlement. 43 47 ARTICLE XIV TERMINATION 14.1 FAILURE TO MEET PAYMENT OBLIGATIONS. In the event PWI shall fail to meet its payment obligations as provided in this Agreement with respect to any Office, QSI may terminate the Service Agreement with respect to such Office if such failure is not corrected within thirty (30) days of delivery of written notice thereof to PWI. 14.2 BANKRUPTCY AND BUSINESS TERMINATION. If either Party shall cease doing business as a going concern (and without assigning its obligations hereunder pursuant to Section 15.1 hereof), make an assignment for the benefit of creditors, admit in writing its inability to pay its debts as they become due, file a voluntary petition in bankruptcy, be adjudicated a bankrupt or an insolvent, file a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statue, law or regulation or file an answer admitting the material allegations of a petition filed against it in any such proceeding or consent to or acquiesce in the appointment of a trustee, receiver or liquidator of it or of all or any substantial part of its assets or properties, or if it shall take any action designed to obtain its dissolution or liquidation, or within 60 days after the commencement of any proceedings against it seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statue, law or regulation, fail to have such proceedings dismissed, or if within 60 days after the appointment, without that party's consent or acquiescence, or any trustee, receiver or liquidator of its or of all or any substantial part of its assets or properties, such appointment shall not be vacated, the other Party may immediately terminate this Agreement. 14.3 FORCE MAJEURE. In the event that the performance of either Party hereto is prevented or 44 48 delayed by reason of any cause or causes beyond the reasonable control of and without fault of such Party, and cannot be overcome by due diligence (such events shall include, without limitation, strikes, riots, floods, fires, acts of God, or acts of any third party not under the control of the Parties hereto, unless a labor interruption, job action, or other delay has been precipitated by either Party's negligence, misconduct or failure to act in accordance with the terms hereof) such Party shall be excused from performance to the extent of and during the continuance of any such happening or event. Any performance obligations affected by such force majeure shall be tolled for the duration thereof. 14.4 BUSINESS DISRUPTION. QSI's intent is to provide PWI with reasonable reimbursement for unplanned expenses that could occur as a result of unilateral actions taken by QSI or Citicorp during the course of the contract. The following scenarios define those unilateral actions which could be taken and the reimbursement values. (a) QUOTRON CEASES TO CONDUCT BUSINESS. QSI will provide PWI with six (6) months prior written notice of QSI's intent to cease operations. PWI can select and manage a new vendor and all four reimbursement options provided below would apply. Citicorp will provide PWI full reimbursement of the cost differential for like Services for this alternative vendor for the duration of the QSI contract up to a maximum of $15.00 per desk unit per month for each remaining month in the term. PWI shall have the right of first refusal with regard to the purchase of the QSI Equipment installed in PWI Offices. Citicorp reserves the right to review the cost differential that results from the selection by PWI of an alternative vendor, and in the absence of the exercise of good faith by PWI, to challenge the amount of the cost differential. PWI shall cooperate in such review. (b) QUOTRON IS SOLD. PWI can select and manage a new vendor and all four reimbursement options would apply. As an alternative option, services would continue to be provided by the new entity. Any system or operational changes 45 49 will be furnished at no cost. Retraining, application changes and evaluation will be covered as described below. PWI shall have the option to proceed with Reimbursement Option (d)(iii) below and, if desired, can then proceed to continue with Options (d)(i), (d)(ii), and (d)(iv). (c) QUOTRON ENGAGES WITH ANOTHER COMPANY AS A JOINT VENTURE. If QSI retains 60% or more of the joint venture and it is not with a significant PWI competitor, no change. Otherwise, PWI can proceed with Reimbursement Option (d)(iii) below and can then proceed to continue with Options (d)(i), (d)(ii) and (d)(iv). 46 50 (d) REIMBURSEMENT OPTIONS. Citicorp reserves the right to review the actual cost incurred under (ii), (iii) and (iv) below and in the absence of good faith by PWI to challenge the validity of expenses. (i) EQUIPMENT DEINSTALLATION AND INSTALLATION. Citicorp will manage the entire process of removing the QSI equipment and installing new hardware in accordance with a mutually agreeable schedule between both Parties recognizing that time is of essence. Citicorp will absorb this entire cost. (ii) CONVERSION AND TRAINING COSTS. Citicorp will reimburse PWI actual costs incurred up to $1,500,000 including overtime and other costs as it relates to the conversion. (iii) NEW VENDOR EVALUATION COSTS. Citicorp will reimburse PWI actual costs up to $300,000 for vendor evaluation. (iv) PWI APPLICATIONS. Citicorp will pay PWI actual costs up to $1,000,000 for conversion costs for PWI applications. (e) PERFORMANCE PROTECTION GUARANTEE. Citicorp shall guarantee performance of all contractual terms stated herein during the term of this Agreement. Notwithstanding anything to the contrary contained herein, Citicorp's liability resulting from this guarantee of performance shall in no event exceed fourteen million dollars. Citicorp's obligation to continue the guarantee of all contractual terms shall cease effective on the event of a Business Disruption as defined in this Article. Notwithstanding anything to the contrary contained herein, Citicorp's liability as a result of these business disruption provisions shall in no event exceed eleven million dollars. 47 51 (f) REPRESENTATIONS BY CITICORP. (i) Citicorp acknowledges that it is currently the parent of QSI and it has committed to the above Performance Protection and Business Disruption provisions for the term of this Agreement. (ii) Citicorp acknowledges receipt of a copy of this Agreement and the commitments made hereunder. (iii) Citicorp represents and warrants that it has full authority to make the Performance Protection and Business Disruption commitments reflected in this Agreement and to execute the Agreement as a guarantor. ARTICLE XV MISCELLANEOUS PROVISIONS 15.1 ENTIRE AGREEMENT. This Agreement, together with all written amendments, schedules, exhibits, appendices, attachments and the individual Service Agreements for each Office, constitute the entire agreement between PWI and QSI with respect to the subject matter addressed herein and therein. This Agreement cannot be modified or supplemented by oral statements made either before or after execution of this Agreement and such statements do not constitute warranties. No collateral or prior statements, representations, understandings, agreements or warranties (express or implied) are part of this Agreement. This Agreement shall be binding upon and inure to the benefit of the Parties, their successors, legal representatives and assigns. This Agreement may not be assigned by either Party without the written consent of the other Party. However, either Party shall have the 48 52 right to assign this Agreement to its parent, subsidiary or an affiliate under the common control of its parent, or to any person, entity or organization which holds or acquires control of the assigning Party. QSI and PWI intend this Agreement to be a valid legal instrument, and no provision of this Agreement which shall be deemed unenforceable shall in any way invalidate any other provision or provisions of this Agreement, all of which shall remain in full force and effect. 15.2 USE OF TRADE NAMES, TRADEMARKS OR SERVICE MARKS. Neither Party shall use any trade name, trademark or service mark of the other Party without the prior written approval of the other Party. QUOTRON, QUOTRON 800, QUOTRON 1000, QUOTRON 5300, PC800, PC1000, QUOTREND, QUOTEVUE, QUOTYPE, QUOTDIAL, QUOTRON F/X TRADER, QUOTTERM, QUOTCHART, QUOTDATA, SATELLITE OFFICE TERMINAL are trademarks of QSI. 15.3 NOTICES. Unless otherwise provided herein or in any Service Agreement, all notices, requests, demands and other communications under this Agreement shall be in writing and shall be delivered by hand or sent by prepaid registered or certified mail with return receipt requested or sent by confirmed facsimile with the original sent by mail and shall be deemed to have been duly delivered when delivered by hand or when received, addressed as follows (or to such other address as may be designated by a Party, in writing, pursuant hereto); (a) IF TO QUOTRON: Quotron Systems, Inc. 12731 West Jefferson Blvd. Los Angeles, CA 90066 Attn: Vice President & General Counsel 49 53 (b) IF TO PWI: PaineWebber Incorporated 1000 Harbor Blvd. Weehawken, NJ 07087 Attn: Chief Information Officer WITH COPY TO: PaineWebber Incorporated 1285 Avenue of Americas New York, NY 10019 Attn: General Counsel (c) IF TO CITICORP: Citicorp 399 Park Avenue New York, NY 10043 Floor 2, Zone 1 Attn: John Roche Executive Vice President (Legal) 15.4 GOVERNING LAW. This Agreement is made and entered into in the State of New York and shall be governed by the laws of that State, The Parties hereto, their successors and assigns, consent to the jurisdiction of the courts of the State of New York in respect to any legal proceedings that may result from a dispute as to the interpretation or breach of any of the terms or conditions of this Agreement. 50 54 15.5 WAIVER. No delay or failure of either Party in exercising any right or power hereunder and no partial or single exercise thereof shall impair or preclude exercise of any such right or power or shall be deemed to constitute a waiver of such right or powers or any other rights or powers hereunder. 15.6 DUE AUTHORIZATION. Each of QSI and PWI represents and warrants that it is authorized to enter into this Agreement and that there are no outstanding commitments, agreements or understandings, express or implied, which may or can in any way defeat or modify the rights conveyed or obligations undertaken by it under this Agreement. 15.7 COUNTERPARTS; SEVERABILITY. This Agreement and any amendments, waivers, consents or supplements may be executed in two or more counterparts each of which when executed shall be deemed to be an original and all of such counterparts shall be deemed to be one and the same instrument. If any provision of this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions, or of such provision in any other jurisdiction, shall not in any way be affected or impaired thereby. 15.8 HEADINGS. The heading of each Article and Section of this Agreement is for the purpose of convenience only and shall not affect the interpretation of any provision hereof. 15.9 CONFIDENTIALITY. (a) PWI and QSI each agree that all of the information contained herein, including without limitation, all of the information contained in the Attachments hereto, as well as all of the information obtained by the Parties in connection with their performance hereunder (collectively, "Information"), is proprietary and confidential. 51 55 (b) PWI and QSI further each agree: (i) to hold all such Information in confidence, using the same degree of care as each Party uses to maintain the confidentiality of its own information; (ii) not make use thereof other than for the performance of this Agreement; (iii) to release such Information only to employees reasonably requiring such Information; and (iv) not to release or disclose any such Information to any third party without the prior written consent of the Party to whom the Information is proprietary. (c) The Parties acknowledge that disclosure or use of the Information contrary to the terms of this Agreement may cause harm to the Parties that may be irreparable by money or damages and therefore, either of the Parties shall have the right in addition to any other remedies available to it to seek to enjoin such disclosure or use. (d) The provisions of paragraph (b) above shall not apply to: (i) any Information which is in the public domain; (ii) Information which is rightfully obtained from any third party or developed independently; or (iii) the release of Information by either of the Parties hereto when such disclosure is required by a self-regulatory agency, applicable law, regulation, 52 56 subpoena or other legal requirement, but in any such instance the disclosing Party shall, to the extent practicable, provide the other Party with notice of such disclosure. Nothing contained herein shall prevent either Party from disclosing such Information to its parent, subsidiary or affiliate companies, subcontractors or agents, or attorneys or accountants, as applicable, when reasonably required in connection with the performance of services hereunder, provided each Party shall take reasonable steps to ensure that any person or entity receiving any such Information treats all such Information confidentially, using the same degree of care as such person or entity uses with respect to its own, like information. The obligations set forth in this section 15.9 shall survive the termination of this Agreement and continue for as long as either Party hereto is in possession of Information protected hereunder. 15.10 WARRANTY OF TITLE. QSI warrants that it has full title to the Equipment to be sold hereunder and the full title or right to license the software to be licensed hereunder, free of all liens and encumbrances, of any nature, whatsoever. 15.11 THIRD PARTY BENEFICIARIES. The Parties intend that the Correspondent Services Corporation ("CSC"), a wholly-owned subsidiary of PWI be a third party beneficiary of this Agreement as provided for in an Agency Agreement between QSI and CSC in particular, CSC shall receive the benefits provided for in Articles 4.1, 4.3, 5.7, 5.8, 7.1, 7.3, 8.1, 8.2, 9.1, 9.2, 11.2. Except as provided herein, the provisions of this Agreement are for the exclusive benefit of the Parties hereto and not for the benefit of any third Party. 53 57 IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed by its duly authorized officer. QUOTRON SYSTEMS, INC. PAINEWEBBER INCORPORATED /s/ Paul F. Glan ________________________________ ________________________________ By Paul F. Glan By ________________________________ ________________________________ Title President Title ________________________________ ________________________________ Date 2/11/91 Date CITICORP ________________________________ By ________________________________ Title ________________________________ Date 54 58 IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed by its duly authorized officer. QUOTRON SYSTEMS, INC. PAINEWEBBER INCORPORATED /s/ Robert H. Bonmosche - ---------------------------- -------------------------------- By By Robert H. Bonmosche Executive Vice President - ---------------------------- -------------------------------- Title Title February 11, 1991 - ---------------------------- -------------------------------- Date Date CITICORP /s/ Lawrence M. Small - ---------------------------- By Lawrence M. Small Vice Chairman - ---------------------------- Title 2/11/91 - ---------------------------- Date 55 EX-10.51 11 DIRECTORS AND OFFICERS LIABILITY 1 EXHIBIT 10.51 POLICY NUMBER: 484-38-07 RENEWAL OF 482-17-58 [AMERICAN INTERNATIONAL COMPANIES LOGO] DIRECTORS, OFFICERS AND CORPORATE LIABILITY INSURANCE POLICY / / AIU Insurance Company / / Illinois National Insurance Company / / American International South Insurance Company /X/ National Union Fire Insurance Company of Pitts., PA / / Birmingham Fire Insurance Company of Penns. / / National Union Fire Insurance Company of Louisiana / / Granite State Insurance Company / / New Hampshire Insurance Company
(each of the above being a capital stock company) ================================================================================ NOTICE: EXCEPT TO SUCH EXTENT AS MAY OTHERWISE BE PROVIDED HEREIN, THE COVERAGE OF THIS POLICY IS GENERALLY LIMITED TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST THE INSUREDS DURING THE POLICY PERIOD AND REPORTED IN WRITING TO THE INSURER PURSUANT TO THE TERMS HEREIN. PLEASE READ THE POLICY CAREFULLY AND DISCUSS THE COVERAGE THEREUNDER WITH YOUR INSURANCE AGENT OR BROKER. NOTICE: THE LIMIT OF LIABILITY AVAILABLE TO PAY JUDGMENTS OR SETTLEMENTS SHALL BE REDUCED BY AMOUNTS INCURRED FOR LEGAL DEFENSE. AMOUNT INCURRED FOR LEGAL DEFENSE SHALL BE APPLIED AGAINST THE RETENTION AMOUNT. NOTICE: THE INSURER DOES NOT ASSUME ANY DUTY TO DEFEND; HOWEVER, THE INSURER MUST ADVANCE DEFENSE COSTS PAYMENTS PURSUANT TO THE ITEMS HEREIN PRIOR TO THE FINAL DISPOSITION OF A CLAIM. DECLARATIONS ITEM 1. NAMED CORPORATION: PAINE WEBBER GROUP INC. MAILING ADDRESS: 1285 AVE OF THE AMERICAS NEW YORK, NY 10019-6028 STATE OF INCORPORATION OF THE NAMED CORPORATION: Delaware ITEM 2. SUBSIDIARY COVERAGE: any past, present or future Subsidiary of the Named Corporation ITEM 3. POLICY PERIOD: From: November 25, 1996 To: November 25, 1999 (12:01 A.M. standard time at the address stated in Item 1.) ITEM 4. LIMIT OF LIABILITY: $20,000,000 aggregate for Coverages A and B combined (including Defense Costs) 2 ITEM 5. RETENTION: SECURITIES CLAIMS: Judgments & Settlements (all coverages) None Defense Costs (non-Indemnifiable Loss) None Defense Costs (Coverage B(i) and Indemnifiable Loss) $2,500,000 for Loss arising from Claims alleging the same Wrongful Act or related Wrongful Acts (waivable under Clause 6 in certain circumstances) OTHER CLAIMS: Judgments, Settlements and Defense Costs (non-Indemnifiable Loss) None Judgments. Settlements and Defense Costs (Indemnifiable Loss) $2,500,000 for Loss arising from Claims alleging the same Wrongful Act or related Wrongful Acts ITEM 6. CONTINUITY DATES: A. Coverages A and B(ii): November 25, 1980 B. Coverage B(i): November 25, 1996 C. Coverages A and B: Outside Entity Coverage (Per Outside Entity) See Endorsement #62790 ITEM 7. PREMIUM: $2,040,000 ITEM 8. NAME AND ADDRESS OF INSURER ("Insurer"): (This policy is issued only by the insurance company indicated below.) National Union Fire Insurance Company of Pittsburgh, Pa. 70 Pine Street New York, NY 10270 3 IN WITNESS WHEREOF, the Insurer has caused this policy to be signed on the Declarations Page by its President, a Secretary and a duly authorized representative of the Insurer. /s/ Elizabeth M. Tuck /s/ - ------------------------- ------------------------- SECRETARY PRESIDENT /s/ -------------------------- AUTHORIZED REPRESENTATIVE ------------------------- ------------------------- COUNTERSIGNATURE DATE COUNTERSIGNED AT MARSH & MCLENNAN, INC. 1166 AVENUE OF THE AMERICAS NEW YORK, NY 10036 4 - -------------------------------------------------------------------------------- USE THIS DECLARATIONS SUPPLEMENT ON ALL NEW YORK CLAIMS MADE LIABILITY POLICIES WHERE A ONE YEAR TAIL (EXTENDED REPORTING PERIOD OR DISCOVERY PERIOD) IS REQUIRED BY NEW YORK REGULATION 121. - -------------------------------------------------------------------------------- NEW YORK REGULATION 121 DECLARATIONS PAGE DISCLOSURE SUPPLEMENT "Us" and "We" where used in this supplement mean the insurance company issuing the policy. "Claims-made relationship" means that period of time between the effective date of the first claims made policy between Us and you (the policy holder) and the cancellation or nonrenewal of the last consecutive claims-made policy between such parties, where there has been no gap in coverage, but does not include any period covered by tail coverage. Retroactive Date/Prior Acts Exclusion Date/"Nose" Coverage Coverage for things that happened prior to the beginning of the policy period is referred to in this supplement as "nose" coverage. If the policy has a retroactive date feature or an exclusion or other wording deleting coverage for things that happened before a certain date (a prior acts exclusion), then nose coverage is limited (or non existent) and THERE IS NO COVERAGE FOR THINGS THAT HAPPENED PRIOR TO THAT DATE Claims-Made Policy In this claims-made policy, generally, coverage is provided for liability ONLY IF THE CLAIM FOR DAMAGES IS FIRST MADE AGAINST THE INSURED AND REPORTED TO US IN WRITING DURING THE POLICY PERIOD. All coverage ceases upon termination of the policy, except for the tail coverage. Extended Reporting Period/Discovery Period/"Tail" Coverage The Extended Reporting Period, or Discovery Period as it may be called, will increase the time within which a claim may be eligible for the policy's coverage. This is referred to in this supplement as "tail" coverage. The tail coverage helps to prevent the situation of a claim going uncovered because of cancellation or nonrenewal of the policy or other termination of the coverage provided by the policy. It provides for a period of time after termination of coverage during which claims first made against the Insured and reported to us in writing, for things that happened before the termination of coverage and otherwise covered by the policy, will be covered. Generally, this optional tail coverage can be purchased if coverage is terminated either by you or by us. If the optional tail is not 1 5 purchased, an automatic tail coverage goes into effect upon termination of coverage; however, this automatic tail lasts for only 60 days, (90 days if the policyholder is a public entity as defined in section 107(a)(51) of the New York Insurance Law). After the end of the tail, you will have a gap in your insurance coverage, unless you have obtained appropriate coverage to fill the gap. UPON TERMINATION OF COVERAGE IT IS VERY IMPORTANT THAT YOU CONSULT WITH YOUR INSURANCE AGENT OR BROKER OR OTHER PROFESSIONAL INSURANCE ADVISER. The length of the optional tail offered in the policy is ONE YEAR generally, but this option will not be available in some circumstances. It will not be available if coverage is terminated by us because of non-payment of premium or fraud and at the effective date of such termination of coverage a claims-made relationship has continued for less than one year. Future Premium Increases As Claims-Made Relationship Matures During the first several years of being covered on a claims-made basis, claims-made rates are generally comparatively lower than rates on other types of policies generally known as occurrence policies, especially if there is no nose coverage initially, and you can expect substantial annual premium increases, independent of overall rate level increases, until the claims-made relationship reaches maturity. Length of Optional Tail and Premium Charge For it The length of the optional tail offered in this policy and the premium charge for it is as follows (please see the policy form and endorsements for complete details): Length Of Optional Tail Premium Charge For Optional Tail One Year 95% of full annual premium THIS DISCLOSURE SUPPLEMENT GENERALLY DISCUSSES CERTAIN IMPORTANT FEATURES OF THE POLICY. PLEASE READ THE ENTIRE POLICY CAREFULLY AND DISCUSS IT WITH YOUR INSURANCE AGENT OR BROKER OR OTHER PROFESSIONAL INSURANCE ADVISER. THE PROVISIONS OF THE POLICY FORM AND ENDORSEMENTS THERETO ARE CONTROLLING. 2 6 [AMERICAN INTERNATIONAL COMPANIES LOGO] DIRECTORS, OFFICERS AND CORPORATE LIABILITY INSURANCE POLICY In consideration of the payment of the premium, and in reliance upon the statements made to the Insurer by application forming a part hereof and its attachments and the material incorporated therein, the insurance company designated in Item 8 of the Declarations, herein called the "Insurer", agrees as follows: 1. INSURING AGREEMENTS COVERAGE A: DIRECTORS AND OFFICERS INSURANCE This policy shall pay the Loss of each and every Director or Officer of the Company arising from a Claim first made against the Directors or Officers during the Policy Period or the Discovery Period (if applicable) and reported to the Insurer pursuant to the terms of this policy for any actual or alleged Wrongful Act in their respective capacities as Directors or Officers of the Company, except when and to the extent that the Company has indemnified the Directors or Officers. The Insurer shall, in accordance with and subject to Clause 8, advance Defense Costs of such Claim prior to its final disposition. COVERAGE B: CORPORATE LIABILITY INSURANCE This policy shall pay the Loss of the Company arising from a: (i) Securities Claim first made against the Company, or (ii) Claim first made against the Directors or Officers, during the Policy Period or the Discovery Period (if applicable) and reported to the Insurer pursuant to the terms of this policy for any actual or alleged Wrongful Act, but, in the case of (ii) above, only when and to the extent that the Company has indemnified the Directors or Officers for such Loss pursuant to law, common or statutory, or contract, or the Charter or By-laws of the Company duly effective under such law which determines and defines such rights of indemnity. The Insurer shall, in accordance with and subject to Clause 8, advance Defense Costs of such Claim prior to its final disposition. 1 7 2. DEFINITIONS (a) "Claim" means: (1) a written demand for monetary or non-monetary relief; or (2) a civil, criminal, or administrative proceeding for monetary or non-monetary relief which is commenced by: (i) service of a complaint or similar pleading; or (ii) return of an indictment (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges. The term "Claim" shall include a Securities Claim; provided, however, that with respect to Coverage B(i) only, Claim or Securities Claim shall not mean a criminal or administrative proceeding against the Company. (b) "Company" means the Named Corporation designated in Item 1 of the Declarations and any Subsidiary thereof. (c) "Continuity Date" means the date set forth in: (1) Item 6A of the Declarations with respect to Coverages A and B (ii); or (2) Item 6B of the Declarations with respect to Coverage B(i); or (3) Item 6C of the Declarations with respect to Coverages A and B for a Claim against an Insured arising out of such Insured serving as a director, officer, trustee or governor of an Outside Entity. (d) "Defense Costs" means reasonable and necessary fees, costs and expenses consented to by the Insurer (including premiums for any appeal bond, attachment bond or similar bond, but without any obligation to apply for or furnish any such bond) resulting solely from the investigation, adjustment, defense and appeal of a Claim against the Insureds, but excluding salaries of Officers or employees of the Company. 2 8 (e) "Director(s) or Officer(s)" or "Insured(s)" means: (1) with respect to Coverages A and B (ii), any past, present or future duly elected or appointed directors or officers of the Company. In the event the Named Corporation or a Subsidiary thereof operates outside the United States, then the terms "Director(s) or Officer(s)" or "Insured(s)" also mean those titles, positions or capacities in such foreign Named Corporation or Subsidiary which is equivalent to the position of Director(s) or Officer(s) in a corporation incorporated within the United States. Coverage will automatically apply to all new Directors and Officers after the inception date of this policy; (2) with respect to Coverage B(i) only, the Company. (f) "Listed Event" means any of the following events: (1) any event for which the Company has reported or is required to report on Form 8-K filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934; or (2) any restatement or correction of a Company financial statement contained in any document filed with the Securities and Exchange Commission; or (3) any statement or disclosure made by or on the behalf of the Company relating to a prior forecast, estimate or projection of the Company's earnings or sales made by or on behalf of the Company, which statement or disclosure represents a greater than 15% change from such prior forecast, estimate or projection. (g) "Loss" means damages, judgments, settlements and Defense Costs; however, Loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, any amount for which the Insureds are not financially liable or which are without legal recourse to the Insureds, or matters which may be deemed uninsurable under the law pursuant to which this policy shall be construed. Further, with respect to Coverage B only, Loss shall not include damages, judgments or settlements arising out of a Claim alleging that the Company paid an inadequate or unfair price or consideration for the purchase of its own securities or the securities of a Subsidiary. Notwithstanding the foregoing, with respect to Coverage B(i) only and subject to the other terms, conditions and exclusions of the policy, Loss shall include punitive damages (if insurable by law) imposed upon the Company. 3 9 (h) "No Liability" means with respect to a Securities Claim made against the Insured(s); (1) a final judgment of no liability obtained prior to trial, in favor of all Insureds, by reason of a motion to dismiss or a motion for summary judgment, after the exhaustion of all appeals; or (2) a final judgment of no liability obtained after trial, in favor of all Insureds, after exhaustion of all appeals. In no event shall the term "No Liability" apply to a Securities Claim made against an Insured for which a settlement has occurred. (i) "Outside Entity" means: (1) a not-for-profit organization under section 501(c)(3) of the Internal Revenue Code of 1986 (as, amended); or (2) any other corporation, partnership, joint venture or other organization listed by endorsement to this, policy. (j) "Policy Period" means the period of time from the inception date shown in Item 3 of the Declarations to the earlier of the expiration date shown in Item 3 of the Declarations or the effective date of cancellation of this policy; however, to the extent that coverage under this policy replaces coverage in other policies terminating at noon standard time on the inception date of such coverage hereunder, then such coverage as is provided by this policy shall not become effective until such other coverage has terminated. (k) "Securities Claim" means a Claim made against an Insured which alleges, a violation of the Securities Act of 1933 or the Securities, Exchange Act of 1934, rules or regulations, promulgated thereunder, the securities laws of any state, or any foreign jurisdiction, and which alleges a Wrongful Act in connection with the claimant's, purchase or sale of, or the offer to purchase or sell to the claimant, any securities of the Company, whether on the open market or arising from a public or private offering of securities by the Company. (l) "Subsidiary" means: (1) any corporation of which the Named Corporation owns on or before the inception of the Policy Period more than 50% of the issued and outstanding voting stock either directly, or indirectly through one or more of its Subsidiaries; (2) automatically any corporation whose assets total less than 10% of the total consolidated assets of the Company as of the inception date of this policy, which corporation becomes a Subsidiary during the Policy Period. The Named Corporation shall provide the Insurer with full particulars of the new Subsidiary before the end of the Policy Period; 4 10 (3) any corporation which becomes a Subsidiary during the Policy Period (other than a corporation described in paragraph (2) above) but only upon the condition that within 90 days of its becoming a Subsidiary the Named Corporation shall have provided the Insurer with full particulars of the new Subsidiary and agreed to any additional premium and/or amendment of the provisions of this, policy required by the Insurer relating to such new Subsidiary. Further, coverage as shall be afforded to the new Subsidiary is conditioned upon the Named Corporation paying when due any additional premium required by the Insurer relating to such new Subsidiary. A corporation becomes a Subsidiary when the Named Corporation owns more than 50% of the issued and outstanding voting stock, either directly, or indirectly through one or more of its Subsidiaries. A corporation ceases to be a Subsidiary when the Named Corporation ceases to own more than 50% of the issued and outstanding voting stock either directly, or indirectly through one or more of its Subsidiaries. In all events, coverage as is afforded under this policy with respect to any Claim made against a Subsidiary or any Director or Officer thereof shall only apply for Wrongful Acts committed or allegedly committed after the effective time that such Subsidiary became a Subsidiary and prior to the time that such Subsidiary ceased to be a Subsidiary (m) "Wrongful Act" means: (1) with respect to individual Directors or Officers, any breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Directors or Officers of the Company in their respective capacities as such, or any matter claimed against them solely by reason of their status as Directors or Officers of the Company, or any matter claimed against them arising out of their serving as a director, officer, trustee or governor of an Outside Entity in such capacities, but only if such service is at the specific written request or direction of the Company, (2) with respect to the Company, any breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Company, but solely as respects a Securities Claim. 5 11 3. EXTENSIONS Subject otherwise to the terms hereof, this policy shall cover Loss arising from any Claims made against the estates, heirs, or legal representatives of deceased Directors or Officers, and the legal representatives of Directors or Officers in the event of incompetency, insolvency or bankruptcy, who were Directors or Officers at the time the Wrongful Acts upon which such Claims are based were committed. Subject otherwise to the terms hereof, this policy shall cover Loss arising from all Claims made against the lawful spouse (whether such status is derived by reason of statutory law, common law or otherwise of any applicable jurisdiction in the world) of an individual Director or Officer for all Claims arising solely out of his or her status as the spouse of an individual Director or Officer, including a Claim that seeks damages recoverable from marital community property, property jointly held by the individual Director or Officer and the spouse, or property transferred from the individual Director or Officer to the spouse; provided, however, that this extension shall not afford coverage for any Claim for any actual or alleged Wrongful Act of the spouse, but shall apply only to Claims arising out of any actual or alleged Wrongful Acts of an individual Director or Officer, subject to the policy's terms, conditions and exclusions. 4. EXCLUSIONS The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against an Insured: (a) arising out of, based upon or attributable to the gaining in fact of any profit or advantage to which an Insured was not legally entitled; (b) arising out of, based upon or attributable to: (1) profits in fact made from the purchase or sale by an Insured of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law; or (2) payments to an Insured of any remuneration without the previous approval of the stockholders of the Company, which payment without such previous approval shall be held to have been illegal; (c) arising out of, based upon or attributable to the committing in fact of any criminal or deliberate fraudulent act; [The Wrongful Act of a Director or Officer shall not be imputed to any other Director or Officer for the purpose of determining the applicability of the foregoing exclusions 4(a) through 4(c)] 6 12 (d) alleging, arising out of, based upon or attributable to the facts alleged, or to the same or related Wrongful Acts alleged or contained, in any claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time; (e) alleging, arising out of, based upon or attributable to any pending or prior litigation as of the Continuity Date, or alleging or derived from the same or essentially the same facts as alleged in such pending or prior litigation; (f) alleging, arising out of, based upon or attributable to a Listed Event that occurs no later than 90 days subsequent to the Continuity Date; provided, however, that this exclusion shall only apply with respect to coverage which would have otherwise been afforded under Coverage B(i) of the policy; (g) with respect to serving as a director, officer, trustee or governor of an Outside Entity, for any Wrongful Act occurring prior to the Continuity Date if the Insured knew or could have reasonably foreseen that such Wrongful Act could lead to a Claim under this policy; (h) alleging, arising out of, based upon or attributable to any actual or alleged act or omission of the Directors or Officers serving in their capacities as directors, officers, trustees or governors of any other entity other than the Company or an Outside Entity, or by reason of their status as directors, officers, trustees or governors of such other entity; (i) which is brought by any Insured or by the Company; or which is brought by any security holder of the Company, whether directly or derivatively, unless such security holder's Claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any Insured or the Company; provided, however, this exclusion shall not apply to a wrongful termination of employment Claim brought by a former employee other than a former employee who is or was a Director of the Company; (j) for any Wrongful Act arising out of the Insured serving as a director, officer, trustee or governor of an Outside Entity if such Claim is brought by the Outside Entity or by any director, officer, trustee or governor thereof; or which is brought by any security holder of the Outside Entity, whether directly or derivatively, unless such security holder's Claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, the Outside Entity, any director, officer, trustee or governor thereof, any Insured or the Company; (k) for bodily injury, sickness, disease, death or emotional distress of any person, or damage to or destruction of any tangible property, including the loss of use thereof, or for injury from libel or slander or defamation or disparagement, or for injury from a violation of a person's right of privacy; 7 13 (l) alleging, arising out of, based upon, attributable to, or in any way involving, directly or indirectly: (1) the actual, alleged or threatened discharge, dispersal, release or escape of pollutants; or (2) any direction or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. including but not limited to a Claim alleging damage to the Company or its securities holders. Pollutants include (but are not limited to) any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes (but is not limited to) materials to be recycled, reconditioned or reclaimed; (m) for violation(s) of any of the responsibilities, obligations or duties imposed upon fiduciaries by the Employee Retirement Income Security Act of 1974, or amendments thereto or any similar provisions of state statutory law or common law. 5. LIMIT OF LIABILITY - (FOR ALL LOSS - INCLUDING DEFENSE COSTS) The Limit of Liability stated in Item 4 of the Declarations is the limit of the Insurer's liability for all Loss, under Coverage A and Coverage B combined, arising out of all Claims first made against the Insureds during the Policy Period and the Discovery Period (if applicable); however, the Limit of Liability for the Discovery Period shall be part of, and not in addition to, the Limit of Liability for the Policy Period. Further, any Claim which is made subsequent to the Policy Period or Discovery Period (if applicable) which pursuant to Clause 7(b) or 7(c) is considered made during the Policy Period or Discovery Period shall also be subject to the one aggregate Limit of Liability stated in Item 4 of the Declarations. DEFENSE COSTS ARE NOT PAYABLE BY THE INSURER IN ADDITION TO THE LIMIT OF LIABILITY. DEFENSE COSTS ARE PART OF LOSS AND AS SUCH ARE SUBJECT TO THE LIMIT OF LIABILITY FOR LOSS. 6. RETENTION CLAUSE The Insurer shall only be liable for the amount of Loss arising from a Claim which is in excess of the Retention amount stated in Item 5 of the Declarations, such Retention amount to be borne by the Company and/or the Insureds and shall remain uninsured, with regard to all Loss under: (i) Coverage A or B(ii) for which the Company has indemnified or is permitted or required to indemnify the Director(s) or Officer(s) ("Indemnifiable Loss"); or (ii) Coverage B(i). A single Retention amount shall apply to Loss arising from all Claims alleging the same Wrongful Act or related Wrongful Acts. 8 14 Notwithstanding the foregoing, solely with respect to a Securities Claim under this policy, the Retention shall only apply to Defense Costs; provided, however, no Retention shall apply for a Securities Claim even as respects Defense Costs in the event of a determination of No Liability of all Insureds, and the Insurer shall thereupon reimburse such Defense Costs paid by the Insured. 7. NOTICE/CLAIM REPORTING PROVISIONS NOTICE HEREUNDER SHALL BE GIVEN IN WRITING TO THE INSURER NAMED IN ITEM 8 OF THE DECLARATIONS AT THE ADDRESS INDICATED IN ITEM 8 OF THE DECLARATIONS. IF MAILED, THE DATE OF MAILING SHALL CONSTITUTE THE DATE THAT SUCH NOTICE WAS GIVEN AND PROOF OF MAILING SHALL BE SUFFICIENT PROOF OF NOTICE. (a) The Company or the Insureds shall, as a condition precedent to the obligations of the Insurer under this policy, give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either: (1) any time during the Policy Period or during the Discovery Period (if applicable); or (2) within 30 days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim is reported no later than 30 days after the date such Claim was first made against an Insured. (b) If written notice of a Claim has been given to the Insurer pursuant to Clause 7(a) above, then any Claim which is subsequently made against the Insureds and reported to the Insurer alleging, arising out of, based upon or attributable to the facts alleged in the Claim for which such notice has been given, or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged in the Claim of which such notice has been given, shall be considered made at the time such notice was given. (c) If during the Policy Period or during the Discovery Period (if applicable) the Company or the Insureds shall become aware of any circumstances which may reasonably be expected to give rise to a Claim being made against the Insureds and shall give written notice to the Insurer of the circumstances and the reasons for anticipating such a Claim, with full particulars as to dates, persons, and entities involved, then any Claim which is subsequently made against the Insureds and reported to the Insurer alleging, arising out of, based upon or attributable to such circumstances or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged or contained in such circumstances, shall be considered made at the time such notice of such circumstances was given. 9 15 8. DEFENSE COSTS, SETTLEMENTS, JUDGMENTS (INCLUDING THE ADVANCEMENT OF DEFENSE COSTS) Under both Coverage A and Coverage B of this policy, except as hereinafter stated, the Insurer shall advance, at the written request of the Insured, Defense Costs prior to the final disposition of a Claim. Such advanced payments by the Insurer shall be repaid to the Insurer by the Insureds or the Company severally according to their respective interests, in the event and to the extent that the Insureds or the Company shall not be entitled under the terms and conditions of this policy to payment of such Loss. THE INSURER DOES NOT, HOWEVER, UNDER THIS POLICY, ASSUME ANY DUTY TO DEFEND. THE INSUREDS SHALL DEFEND AND CONTEST ANY CLAIM MADE AGAINST THEM. THE INSUREDS SHALL NOT ADMIT OR ASSUME ANY LIABILITY, ENTER INTO ANY SETTLEMENT AGREEMENT, STIPULATE TO ANY JUDGMENT, OR INCUR ANY DEFENSE COSTS WITHOUT THE PRIOR WRITTEN CONSENT OF THE INSURER. ONLY THOSE SETTLEMENTS, STIPULATED JUDGMENTS AND DEFENSE COSTS WHICH HAVE BEEN CONSENTED TO BY THE INSURER SHALL BE RECOVERABLE AS LOSS UNDER THE TERMS OF THIS POLICY. THE INSURER'S CONSENT SHALL NOT BE UNREASONABLY WITHHELD, PROVIDED THAT THE INSURER SHALL BE ENTITLED TO EFFECTIVELY ASSOCIATE IN THE DEFENSE AND THE NEGOTIATION OF ANY SETTLEMENT OF ANY CLAIM. The Insurer shall have the right to effectively associate with the Company and the Insureds in the defense of any Claim that appears reasonably likely to involve the Insurer, including but not limited to negotiating a settlement. The Company and the Insureds shall give the Insurer full cooperation and such information as it may reasonably require. The Insurer may make any settlement of any Claim it deems expedient with respect to any Insured subject to such Insured's written consent. If any Insured withholds consent to such settlement, the Insurer's liability for all Loss on account of such Claim shall not exceed the amount for which the Insurer could have settled such Claim plus Defense Costs incurred as of the date such settlement was proposed in writing by the Insurer. The Company is not covered in any respect under Coverage A; the Company is covered, subject to the policy's terms and conditions, only with respect to its indemnification of its Directors or Officers under Coverage B(ii) as respects a Claim against such Directors and Officers, and subject to the policy's terms and conditions, under Coverage B(i) for a Securities Claim made against the Company. Accordingly, the Insurer has no obligation under this policy for Defense Costs incurred by, judgments against or settlements by the Company arising out of a Claim made against the Company other than a covered Securities Claim, or any obligation to pay Loss arising out of any legal liability that the Company has to the claimant except as respects a covered Securities Claim against the Company. 10 16 With respect to (i) Defense Costs jointly incurred by, (ii) any joint settlement made by, and/or (iii) any adjudicated judgment of joint and several liability against the Company and any Director or Officer, in connection with any Claim other than a Securities Claim, the Company and the Director(s) or Officer(s) and the Insurer agree to use their best efforts to determine a fair and proper allocation of the amounts as between the Company and the Director(s) or Officers(s) and the Insurer, taking into account the relative legal and financial exposures of and the relative benefits obtained by the Directors and Officers and the Company. In the event that a determination as to the amount of Defense Costs to be advanced under the policy cannot be agreed to, then the Insurer shall advance such Defense Costs which the Insurer states to be fair and proper until a different amount shall be agreed upon or determined pursuant to the provisions of this policy and applicable law. 9. PRE-AUTHORIZED SECURITIES DEFENSE ATTORNEYS Only with respect to a Securities Claim: Affixed as Appendix A hereto and made a part of this policy is a list of Panel Counsel law firms ("Panel Counsel Firms"). The list provides the Insured a choice of law firms from which a selection of legal counsel shall be made to conduct the defense of any Securities Claim made against them. The Insureds shall select a Panel Counsel Firm to defend a Securities Claim made against the Insureds in the jurisdiction in which the Securities Claim is brought. In the event a Securities Claim is brought in a jurisdiction not included on the list, the Insureds shall select a Panel Counsel Firm in the listed jurisdiction which is the nearest geographical jurisdiction to either where the Securities Claim is brought or where the corporate headquarters of the Named Corporation is located. In such instance the Insureds also may, with the consent of the Insurer, which consent shall not be unreasonably withheld, select a non-Panel Counsel Firm in the jurisdiction in which the Securities Claim is brought to function as "local counsel" on the Securities Claim to assist the Panel Counsel Firm which will function as "lead counsel" in conducting the defense of the Securities Claim. With the express prior written consent of the Insurer, an Insured may select a Panel Counsel Firm different from that selected by other Insured defendants if such selection is required due to an actual conflict of interest or is otherwise reasonably justifiable. The list of Panel Counsel Firms may be amended from time to time by the Insurer. However, no change shall be made to the specific list attached to this policy during the Policy Period without the consent of the Named Corporation. At the request of the Insured, the Insurer may in its discretion add to the attached list of Panel Counsel Firms for the purposes of defending a Securities Claim made against the Insured in any specified jurisdiction (including a jurisdiction not originally included in the Panel Counsel list) a Panel Counsel Firm not originally listed for such jurisdiction. The Insurer may in its discretion waive, in part or in whole, the provisions of this clause as respects a particular Securities Claim. 11 17 10. DISCOVERY CLAUSE Except as indicated below, if the Insurer or the Named Corporation shall cancel or refuse to renew this policy, the Named Corporation shall have the right, upon payment of an additional premium of 75% of the "full annual premium", to a period of one year following the effective date of such cancellation or nonrenewal (herein referred to as the "Discovery Period") in which to give to the Insurer written notice of Claims first made against the Insureds during said one year period for any Wrongful Act occurring prior to the end of the Policy Period and otherwise covered by this policy. As used herein, "full annual premium" means the premium level in effect immediately prior to the end of the Policy Period. The rights contained in this paragraph shall terminate, however, unless written notice of such election together with the additional premium due is received by the Insurer within 30 days of the effective date of cancellation or nonrenewal. In the event of a Transaction, as defined in Clause 12, the Named Corporation shall have the right, within 30 days before the end of the Policy Period, to request an offer from the Insurer of a Discovery Period (with respect to Wrongful Acts occurring prior to the effective time of the Transaction) for a period of no less than three years or for such longer or shorter period as the Named Corporation may request. The Insurer shall offer such Discovery Period pursuant to such terms, conditions and premium as the Insurer may reasonably decide. In the event of a Transaction, the right to a Discovery Period shall not otherwise exist except as indicated in this paragraph. The additional premium for the Discovery Period shall be fully earned at the inception of the Discovery Period. The Discovery Period is not cancelable. This clause and the rights contained herein shall not apply to any cancellation resulting from non-payment of premium. 11. CANCELLATION CLAUSE This policy may be canceled by the Named Corporation at any time only by mailing written prior notice to the Insurer or by surrender of this policy to the Insurer or its authorized agent. This policy may also be canceled by or on behalf of the Insurer by delivering to the Named Corporation or by mailing to the Named Corporation, by registered, certified, or other first class mail, at the Named Corporation's address as shown in Item 1 of the Declarations, written notice stating when, not less than 60 days thereafter, the cancellation shall be effective. The mailing of such notice as aforesaid shall be sufficient proof of notice. The Policy Period terminates at the date and hour specified in such notice, or at the date and time of surrender. If this policy shall be canceled by the Named Corporation, the Insurer shall retain the customary short rate proportion of the premium herein. If this policy shall be canceled by the Insurer, the Insurer shall retain the pro rata proportion of the premium herein. 12 18 Payment or tender of any unearned premium by the Insurer shall not be a condition precedent to the effectiveness of cancellation, but such payment shall be made as soon as practicable. If the period of limitation relating to the giving of notice is prohibited or made void by any law controlling the construction thereof, such period shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law. 12. CHANGE IN CONTROL OF NAMED CORPORATION If during the Policy Period: a. the Named Corporation shall consolidate with or merge into, or sell all or substantially all of its assets to any other person or entity or group of persons and/or entities acting in concert; or b. any person or entity or group of persons and/or entities acting in concert shall acquire an amount of the outstanding securities representing more than 50% of the voting power for the election of Directors of the Named Corporation, or acquires the voting rights of such an amount of such securities; (either of the above events herein referred to as the "Transaction") then this policy shall continue in full force and effect as to Wrongful Acts occurring prior to the effective time of the Transaction, but there shall be no coverage afforded by any provision of this policy for any actual or alleged Wrongful Act occurring after the effective time of the Transaction. This policy may not be canceled after the effective time of the Transaction and the entire premium for this policy shall be deemed earned as of such time. The Named Corporation shall also have the right to an offer by the Insurer of a Discovery Period described in Clause 10 of the policy. The Named Corporation shall give the Insurer written notice of the Transaction as soon as practicable, but not later than 30 days after the effective date of the Transaction. 13. SUBROGATION In the event of any payment under this policy, the Insurer shall be subrogated to the extent of such payment to all the Company's and the Insured's rights of recovery thereof, and the Company and the Insureds shall execute all papers required and shall do everything that may be necessary to secure such rights including the execution of such documents necessary to enable the Insurer to effectively bring suit in the name of the Company and/or the Insureds. In no event, however, shall the Insurer exercise its rights of subrogation against an Insured under this policy unless such Insured has been convicted of a criminal act, or been judicially determined to have committed a deliberate fraudulent act, or obtained any profit or advantage to which such Insured was not legally entitled. 13 19 14. OTHER INSURANCE AND INDEMNIFICATION Such insurance as is provided by this policy shall apply only as excess over any other valid and collectible insurance. In the event of a Claim against a Director or Officer arising out of his or her serving as director, officer, trustee or governor of an Outside Entity, coverage as is afforded by this policy shall be specifically excess of indemnification provided by such Outside Entity and any insurance provided to such Outside Entity with respect to its directors, officers, trustees or governors. Further, in the event such other Outside Entity insurance is provided by the Insurer or any member company of American International Group, Inc. ("AIG") (or would be provided but for the application of the retention amount, exhaustion of the limit of liability or failure to submit a notice of a Claim) then the maximum aggregate Limit of Liability for all Losses combined covered by virtue of this policy as respects any such Claim shall be reduced by the limit of liability (as set forth on the declarations page) of the other AIG insurance provided to such Outside Entity. 15. NOTICE AND AUTHORITY It is agreed that the Named Corporation shall act on behalf of its Subsidiaries and all Insureds with respect to the giving notice of Claim or giving and receiving notice of cancellation, the payment of premiums and the receiving of any return premiums that may become due under this policy, the receipt and acceptance of any endorsements issued to form a part of this policy and the exercising or declining to exercise any right to a Discovery Period. 16. ASSIGNMENT This policy and any and all rights hereunder are not assignable without the written consent of the Insurer. 17. ARBITRATION It is hereby understood and agreed that all disputes or differences which may arise under or in connection with this policy, whether arising before or after termination of this policy, including any determination of the amount of Loss, shall be submitted to the American Arbitration Association under and in accordance with its then prevailing commercial arbitration rules. The arbitrators shall be chosen in the manner and within the time frames provided by such rules. If permitted under such rules the arbitrators shall be three disinterested individuals having knowledge of the legal, corporate management or insurance issues relevant to the matters in dispute. 14 20 Any party may commence such arbitration proceeding in either New York, New York; Atlanta, Georgia; Chicago, Illinois; or Denver, Colorado. The arbitrators shall give due consideration to the general principles of Delaware law in the construction and interpretation of the provisions of this policy; provided, however, that the terms, conditions, provisions and exclusions of this policy are to be construed in an evenhanded fashion as between the parties, including without limitation, where the language of this policy is alleged to be ambiguous or otherwise unclear, the issue shall be resolved in the manner most consistent with the relevant terms, conditions, provisions or exclusions of the policy (without regard to the authorship of the language, the doctrine of reasonable expectation of the parties and without any presumption or arbitrary interpretation or construction in favor of either party or parties, and in accordance with the intent of the parties.) The written decision of the arbitrators shall be provided to both parties and shall be binding on them. The arbitrators' award shall not include attorney fees or other costs. Each party shall bear equally the expenses of the arbitration. 18. ACTION AGAINST INSURER Except as provided in Clause 17 of the policy, no action shall lie against the Insurer unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy, nor until the amount of the Insureds' obligation to pay shall have been finally determined either by judgment against the Insureds after actual trial or by written agreement of the Insureds, the claimant and the Insurer. Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by this policy. No person or organization shall have any right under this policy to join the Insurer as a party to any action against the Insureds or the Company to determine the Insureds liability, nor shall the Insurer be impleaded by the Insureds or the Company or their legal representatives. Bankruptcy or insolvency of the Company or the Insureds or of their estates shall not relieve the Insurer of any of its obligations hereunder. 19. HEADINGS The descriptions in the headings of this policy are solely for convenience, and form no part of the terms and conditions of coverage. 15 EX-10.55 12 COMPENSATION PLAN/THEODORE A. LEVINE 1 EXHIBIT 10.55 PAINE WEBBER GROUP INC. Senior Officer Deferred Compensation Plan Grantor Trust Agreement THIS AGREEMENT (this "Trust Agreement"), made as of the 9th day of August, 1996, 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"). WITNESSETH: WHEREAS, PWG or one or more of its direct or indirect subsidiaries is obligated to pay deferred compensation to Theodore Levine (the "Participant") and his beneficiaries (the "Beneficiaries") under the PWG Senior Officer Deferred Compensation Plan (the "Plan"); and WHEREAS, PWG wishes to establish a trust (the "Trust") and to contribute assets to the Trust that shall be held therein, subject to the claims of the creditors of PWG or its Material Subsidiaries, as herein defined, in the event of insolvency, as herein defined, until delivered to the Participant or Beneficiaries in such manner and at such times as specified in the Plan; and WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: 1. ESTABLISHMENT OF TRUST (a) The Trust shall consist of such property, as is acceptable to the Trustee, as shall be deposited with the Trustee from time to time by PWG, which shall be the principal of the Trust, to be held and administered as provided herein. (b) Such property may consist of shares of PWG common stock, par value $1.00 ("Shares"). If any Shares are contributed to the Trust, PWG shall, by virtue of such contribution, represent that the Shares are validly issued, nonassessable and transferrable, subject to the requirements of applicable federal and state securities laws. PWG represents 2 the Shares have been registered on Form S-8 filed with the Securities and Exchange Commission. PWG shall advise the Trustee of any limitations on sale of the Shares. PWG shall also use its reasonable effects to register or qualify such Shares covered by Form S-8 under the "blue sky" or securities laws of such jurisdictions within the United States. (c) The Trust hereby established shall be irrevocable. (d) The Trust is intended to be a grantor trust, of which PWG is the grantor, within the meaning of subpart E, part 1, subchapter J. chapter 1, subtitle A of 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 assets of PWG and shall be used exclusively for the uses and purposes of the Participant, Beneficiaries and the general creditors of PWG and its Material Subsidiaries as herein set forth. The Participant and Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Trust Agreement shall be mere unsecured contractual rights of the Participant and Beneficiaries against PWG. Any assets held by the Trust shall be subject to the claims of the general creditors of PWG and its Material Subsidiaries under federal and state law in the event of insolvency, as defined in Section 3(a) herein. 2. PAYMENTS TO THE PARTICIPANT OR BENEFICIARIES (a) PWG shall deliver to the Trustee written schedules (the "Payment Schedules") in a form acceptable to the Trustee that indicate the dates or events on which the assets of the Trust are to be paid out to the Participant or Beneficiaries; provided that it shall be the responsibility of the Administrator (as defined in Section 2(b)) to determine if an event set forth on the schedule has occurred and advise the Trustee of such event. Except as otherwise provided herein, the Trustee shall make payments to the Participant or Beneficiaries in accordance with such Payment Schedules. (b) All payments shall be in cash except that the Trustee may, at the direction of an administrator (the "Administrator") appointed for purposes of this Trust by the Compensation Committee of PWG's Board of Directors (the "Committee"), distribute assets held in the Trust other than Shares to the Participant or Beneficiaries; provided that, in the event of a distribution in kind, the Administrator shall advise the Trustee of the value of the assets distributed and the Trustee may conclusively rely upon such information without further inquiry. (c) The Administrator shall advise the Trustee of the amount of withholding of any federal, state or local taxes that may be required to be withheld with respect to the payments of benefits pursuant to the terms of the Plan. The Trustee shall pay amounts withheld to the appropriate taxing authorities. 2 3 (d) For the purpose of making cash payments or to satisfy various withholding or other obligations hereunder, if all or part of the principal of the Trust shall consist of securities or other property, which do not have a readily ascertainable market value, PWG may purchase from the Trust (or it may substitute new assets for) such assets at its option for the amount it then designates as the market value; provided that the Administrator certifies to the Trustee that such market value has been determined on the same basis utilized for trust reporting purposes pursuant to Section 7(a). The Trustee shall be absolutely protected in relying upon the value determined by PWG and the Administrator. 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS WHEN COMPANY IS INSOLVENT (a) The Trustee shall cease payment of benefits to the Participant or Beneficiaries 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 such Material Subsidiary is unable to pay its debts as they become due, or (ii) PWG or such Material Subsidiary is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b)At all times during the continuance of this Trust, as provided in Section l(d) hereof, the assets of the Trust shall be subject to claims of general creditors of PWG and its Material Subsidiaries under federal and state law as set forth below. (1) The Chief Financial Officer of PWG shall have the duty to inform the Trustee in writing of the insolvency of PWG or any such Material Subsidiary. If a person claiming to be a creditor of PWG or a Material Subsidiary alleges in writing to the Trustee that PWG or such Material Subsidiary has become insolvent, the Trustee shall, within 2 business days of delivery to the person authorized as the Trustee to discontinue payments hereunder, request a certification from the Chief Financial Officer of PWG as to whether or not PWG or such Material Subsidiary is insolvent, and, pending such certification, the Trustee shall discontinue payment of benefits to the Participant or Beneficiaries. The Trustee may conclusively, without further inquiry, rely upon the certification that it receives. (2) Unless the Trust Department of the Trustee has actual direct written knowledge of the insolvency of PWG or any such Material Subsidiary, or has received notice from PWG or a person claiming to be a creditor alleging that PWG is insolvent, the trustee shall have no duty to inquire whether PWG or any such Material Subsidiary is insolvent. The Trustee may in all events rely on the certification concerning the solvency of PWG or any such Material Subsidiary as may be furnished to the Trustee pursuant to Section 3(b)(1) without further inquiry. (3) if at any time the Trustee has determined that PWG or any such Material Subsidiary is insolvent pursuant to Section 3(b)(1) or (b)(2), the Trustee shall 3 4 discontinue payments to the Participant or Beneficiaries and shall hold the assets of the Trust for the benefit of the general creditors of PWG or any such Material Subsidiary. Nothing in this Trust Agreement shall in any way diminish any rights of the Participant or Beneficiaries to pursue their rights as general creditors of PWG with respect to benefits due under the Plan or otherwise. (4) The Trustee shall resume the payment of benefits to the participant or Beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has received a certification that PWG or any such Material Subsidiary is no longer insolvent. The Trustee shall be entitled to rely on such certification without future inquiry. (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payment, the first payment following such discontinuance shall include the aggregate amount of all payments due to the Participant or Beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to the Participant or Beneficiaries by PWG in lieu of the payments provided for hereunder during any such period of discontinuance. PWG shall certify to the Trustee the amount of payments made to the Participant or Beneficiaries by PWG during the discontinuance. (d) As used herein, "material Subsidiary" shall mean at any time 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. 4. PAYMENTS TO COMPANY Subject to Section 2(a) and Section 5(a), PWG shall have no right or power to direct the Trustee to return to PWG or to divert to any other person any of the Trust assets before all payment of benefits have been made to the Participant or Beneficiaries pursuant to the terms of the Plan. The Administrator shall certify to the Trustee in writing that all payments of benefits under the Trust have been made. The trustee may conclusively rely upon such certification. 5. INVESTMENT AUTHORITY (a) The Trustee shall, upon written instructions received from the Administrator or investment manager appointed by PWG, hold, dispose, invest and reinvest the assets of the Trust (including the Shares), without distinction between principal and income, in treasury bills, mutual funds, hedge funds, investment partnerships sponsored by PWG and marketable securities. Notwithstanding the foregoing, in no event may assets of the Trust be invested in Shares except to the extent such Shares have been deposited in the Trust pursuant to Section l(a). PWG shall have the right at any time, and from time to time, 4 5 in its sole discretion, to substitute assets of equal market value for any asset held by the Trust as provided in Section 2(d). The right of PWG to purchase or substitute assets held in the trust is exercisable by PWG in a nonfiduciary capacity. (b) Except as provided for in Section 5(d) with respect to Shares, all rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable be or rest with PWG, the Participant or the Beneficiaries. (c) When disposing of assets held in the Trust, nothing shall prevent the Trustee, upon the direction of the Administrator, from selling such assets to the Participant or the Beneficiaries for the amount set forth in the Trust accounting. (d) The Trustee shall have the absolute discretion to vote or abstain from voting the shares with respect to any matters brought before shareholders. The Trustee shall tender or not tender any Shares as directed by the Administrator. (e) The Trustee may hold the assets of the Trust in nominee name. (f) When the Trustee delivers property 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 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 wilful misconduct. All credits to the Trust of the anticipated proceeds of sales and redemptions of property and of anticipated income from property 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 property, it is authorized to accept documents in lieu of such property as long as such documents contain the agreement of the issuer thereof to hold such property 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. 6. DISPOSITION OF INCOME During the term of this Trust, all income received by the Trust shall be accumulated and reinvested in accordance with Section 5 above. 5 6 7. ACCOUNTING BY TRUSTEE (a) (i) The Trustee shall keep accurate and detailed accounts of all its receipts, investments and disbursements under this Trust Agreement. Such person or persons as PWG shall designate shall be allowed to inspect the books of account relating to the trust upon request at any reasonable time during the business hours of the Trustee. With respect to any securities or properties which do not have a readily ascertainable market value, PWG shall provide the Trustee with periodic valuations of such securities or properties. 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) Within 60 days after the close of each calendar year (subject to the valuations supplied by PWG), the Trustee shall transmit to PWG, and certify the accuracy of, a written statement of the assets and liabilities of the Trust at the close of that year and a written account of all the Trustee's transactions relating to the Trust during the period from the last previous accounting to the close of that year. (For purposes of this paragraph, the date of the Trustee's resignation or removal as provided in Section 10 hereof shall be deemed to be the close of a calendar year.) (iii) Unless PWG shall have filed with the Trustee written exceptions or objections to any such statement and account within 90 days after receipt thereof, PWG shall be deemed to have approved such statement and account, and in such case or upon the written approval by PWG of any such statement and account, the Trustee shall be forever released and discharged with respect to all matters and things embraced in such statement and account as though it had been settled by decree of a court of competent jurisdiction in an action or proceeding to which PWG and all persons having any beneficial interest in the Trust were parties. (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 Participant or Beneficiaries. No person interested in the Trust, other than PWG and the Participant or Beneficiaries, shall have a right to compel an accounting, judicial or otherwise, by the Trustee, and each such person shall be bound by all accounting by the Trustee to PWG, as herein provided, as if the account had been settled by decree of a court of competent jurisdiction in an action or proceeding to which such person was a party. 8. RESPONSIBILITY OF PWG AND TRUSTEE (a) The Trustee shall discharge its duties under this Trust Agreement in a reasonably prudent manner. 6 7 (b) 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 any action in accordance with the opinion of 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. (c) The Trustee shall be under no duties whatsoever, except 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 pan of PWG to perform any of its obligations under this Trust Agreement. (d) PWG shall act in accordance with the Plan as provided herein, and the Trustee shall not be responsible in any respect for acting in accordance with the Plan nor shall the Trustee be responsible for the adequacy of the Trust to meet and discharge all payments and liabilities under the Plan. 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 authorized officers of PWG that is not contrary to the express provisions of this Trust Agreement. PWG shall furnish the Trustee with the name and specimen signature of the Administrator or other authorized officers of PWG authorized to act or give directions hereunder and shall promptly notify the Trustee of the termination of the Administrator and the appointment of a successor thereto. Until notified to the contrary, the Trustee shall be fully protected in relying upon the most recent name and specimen signature of the Administrator furnished to it by PWG. (e) Unless other evidence with respect thereto has been specifically prescribed in this Trust Agreement, any action of PWG under any provision of this Trust Agreement, including any approval of or exceptions to the Trustee's accounts, shall be evidenced by a certificate signed by the Administrator, and the Trustee shall be fully protected in relying upon such certificate. The Trustee may accept a certificate signed by the Administrator as proof of any fact or matter that it deems necessary or desirable to have established in the administration of the Trust (unless other evidence of such fact or matter is expressly prescribed herein), and the Trustee shall be fully protected in relying upon the statements in the certificate. (f) 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. 7 8 (g) in no event shall the Trustee be liable for special or consequential or punitive damages. (h) Until notice be given to the contrary, communications to the Trustee shall be sent to it at its office at The Chase Manhattan Bank, N.A., 770 Broadway, New York, New York 10003-9598, and to PWG at its offices located at 1285 Avenue of Americas, New York, New York 10019, Attention: Director of Human Resources. (i) PWG shall pay and shall protect, indemnify and save harmless the Trustee and its officers, directors or trustee, 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, its officers, directors or trustee, employees, nominees and agents 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 wilful misconduct of the Trustee, its officers, directors or trustees, employees, nominees or agents. (j) The Trustee shall have, without exclusions, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein. (k) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. 9. TRANSACTION COSTS, TAXES, COMPENSATION AND EXPENSES OF TRUSTEE (a) PWG shall pay (or make available to the Trustee to pay) any transaction costs and any federal, state, local or other taxes (including withholding taxes) imposed or levied with respect to the corpus and/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. Notwithstanding the foregoing, to the extent instructed by the Administrator and to the extent Trust assets are available, the Trustee, solely in its capacity as trustee and not in its individual capacity, shall advance funds to PWG to enable PWG to satisfy any such transaction costs or taxes. Such advances shall be repayable at such date or dates, with or without interest to be set at a reasonable market rate, or shall be forgiven in whole or in part, in each case, as determined by the Administrator in its sole discretion. In the event PWG pays such transaction costs or such taxes directly, the Administrator may require the Trustee to reimburse PWG for the cost of funds incurred by PWG for any transaction costs 8 9 or any tax payments made on behalf of the Trust. The Trustee upon notice from the Administrator that a payment is for the purposes set forth in the preceding sentence may reimburse PWG without further inquiry. (b) PWG shall pay 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. 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 this Trust and any other trust between PWG and the Trustee which is established in whole or in part to fund PWG's obligations under the Plan and which are reimbursable to the Trustee under this section or the corresponding section of each trust agreement entered into by the parties hereto in connection with any such other trust shall not exceed $3,500, unless (i) the Trustee has delivered written notice ("Notice") to PWG at least ten business days prior to the date on which such legal expenses or expenses are to be incurred 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. 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 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. 10. RESIGNATION AND REMOVAL OF TRUSTEE (a) The Trustee may resign at any time by written notice to PWG, which shall be effective 60 days after receipt of such notice unless PWG and the Trustee agree otherwise. (b) The Trustee may be removed by PWG on 60 days' written notice or upon shorter notice accepted by the Trustee. (c) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The 9 10 transfer shall be completed within 60 days after receipt of notice or resignation, removal or transfer, unless PWG extends the time limit. (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 under paragraph (a) or (b) of this Section. 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 described in the previous sentence shall be paid by PWG. 11. APPOINTMENT OF SUCCESSOR TRUSTEE If the Trustee resigns or is removed in accordance with Section 10 hereof, PWG, by action of the Committee, shall appoint a successor trustee reasonably acceptable to the Participant or Beneficiaries to act hereunder after the effective date of such removal or resignation. Each successor trustee shall have the powers and duties conferred upon the Trustee in this Trust Agreement, and the term "Trustee" as used in this Trust Agreement shall be deemed to include any successor trustee. Upon designation or appointment of a successor trustee, the Trustee shall transfer and deliver the Trust to the successor trustee, reserving such sums as the Trustee shall deem necessary to defray its expenses in settling its accounts, to pay any of its compensation due and unpaid and to discharge any obligation of the Trust for which the Trustee may be liable. Any amounts remaining shall be restored to the Trust by PWG with interest at 30-day treasury bill rate. If the sums so reserved are not sufficient for these purposes, the Trustee shall be entitled to recover the amount of any deficiency from PWG. When the 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 the Trust (except for any acts (other than any accounting) resulting from the gross negligence or willful misconduct of the Trustee during the period it was acting hereunder) and shall not be responsible in any way for the further disposition of the Trust or any part thereof. 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. PWG shall certify to the Trustee that any proposed amendment is not in conflict with the terms of the Plan or the Trust. (b) The Trust shall not terminate until the earlier to occur of (i) the date on which the Participant or Beneficiaries are no longer entitled by any benefits pursuant to the Plan or (ii) the twenty-first anniversary of the death of the Participant who is the beneficiary 10 11 of the Trust as of the date of execution of this Trust Agreement. Upon termination of the Trust, any assets remaining in the Trust shall be returned to PWG. 13. MISCELLANEOUS (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such provisions, without invalidating the remaining provisions hereof. (b) Benefits payable to the Participants or Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subject to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of New York. (d) The titles to Sections of this Trust Agreement are placed herein for convenience of reference only, and the Trust Agreement is not to be construed by reference thereto. (e) This Trust Agreement shall bind and inure to the benefit of the successors and assigns of PWG and the Trustee, respectively, and the Participant or Beneficiaries and legal representatives (e.g., executors, administrators, conservators, etc.). (f) This Trust Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one instrument, which may be sufficiently evidenced by a counterpart. 14. EFFECTIVE DATE The effective date of this Trust Agreement shall be August 9, 1996. 11 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first above written. PAINE WEBBER GROUP INC. ______________________ By: ______________________ Notary Pubic Title: THE CHASE MANHATTAN BANK ______________________ By:_______________________ Notary Public Title: 12 EX-11 13 COMPUTATION OF EARNINGS PER COMMONS SHARE 1 EXHIBIT 11 PAINE WEBBER GROUP INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands of dollars except share and per share amounts)
Years Ended December 31, ----------------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- PRIMARY: Weighted-average common shares outstanding 87,698,138 92,030,417 71,693,020 Incremental stock options and awards 6,708,357 9,241,691 6,370,453 ------------- ------------- ------------- Weighted-average common and common equivalent shares 94,406,495 101,272,108 78,063,473 ============= ============= ============= Net income $ 364,350 $ 80,750 $ 31,631 Interest savings on convertible debentures and short-term borrowings 4,062 3,322 1,330 Preferred dividend requirements (29,395) (29,291) (1,219) ------------- ------------- ------------- Net income applicable to common shares $ 339,017 $ 54,781 $ 31,742 ============= ============= ============= Primary earnings per common share $ 3.59 $ 0.54 $ 0.41 ============= ============= ============= FULLY DILUTED: Weighted-average common shares outstanding 87,698,138 92,030,417 71,693,020 Conversion of Convertible Preferred Stock 5,515,720 -- -- Incremental stock options and awards 8,480,906 9,241,691 7,673,929 Weighted-average common shares issuable assuming conversion of 8% Debentures 449,752 -- 1,647,190 ------------- ------------- ------------- Weighted-average common and common equivalent shares 102,144,516 101,272,108 81,014,139 ============= ============= ============= Net income $ 364,350 $ 80,750 $ 31,631 Interest savings on convertible debentures and short-term borrowings 3,865 1,526 2,181 Preferred dividend requirements (23,395) (29,291) (969) ------------- ------------- ------------- Net income applicable to common shares $ 344,820 $ 52,985 $ 32,843 ============= ============= ============= Fully diluted earnings per common share $ 3.38 $ 0.52 $ 0.41 ============= ============= =============
EX-12.1 14 COMPUTATION OF RATIO EARNINGS/PREFERRED STOCK 1 EXHIBIT 12.1 PAINE WEBBER GROUP INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (In thousands of dollars)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1996* 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Income before taxes $ 558,999 $ 102,677 $ 44,385 $ 407,576 $ 339,115 ---------- ---------- ---------- ---------- ---------- Preferred stock dividends 43,712 36,260 1,710 5,828 27,789 ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 1,971,788 1,969,811 1,428,653 1,130,712 879,242 Interest factor in rents 54,537 59,491 51,102 50,133 45,962 ---------- ---------- ---------- ---------- ---------- Total fixed charges 2,026,325 2,029,302 1,479,755 1,180,845 925,204 ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends 2,070,037 2,065,562 1,481,465 1,186,673 952,993 ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $2,585,324 $2,131,979 $1,524,140 $1,588,421 $1,264,319 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges and preferred stock dividends 1.2 1.0 1.0 1.3 1.3 ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to combined fixed charges and preferred stock dividends (tax effected), "earnings" consist of income before taxes and fixed charges. "Fixed charges" consist of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings, 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 trust. EX-12.2 15 COMPUTATION OF RATIO OF EARNINGS /FIXED CHARGES 1 EXHIBIT 12.2 PAINE WEBBER GROUP INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands of dollars)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1996* 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Income before taxes $ 558,999 $ 102,677 $ 44,385 $ 407,576 $ 339,115 ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 1,971,788 1,969,811 1,428,653 1,130,712 879,242 Interest factor in rents 54,537 59,491 51,102 50,133 45,962 ---------- ---------- ---------- ---------- ---------- Total fixed charges 2,026,325 2,029,302 1,479,755 1,180,845 925,204 ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $2,585,324 $2,131,979 $1,524,140 $1,588,421 $1,264,319 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.3 1.1 1.0 1.3 1.4 ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before taxes and fixed charges. "Fixed charges" consist of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings, 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 trust. EX-13 16 1996 ANNUAL REPORT TO STOCKHOLDES OF REGISTRANT 1 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 industry. Founded in 1879, the Company employs approximately 15,870 people in 298 offices worldwide. The Company's principal line of business is to serve the investment and capital needs of individual, corporate, institutional and public agency clients through its broker-dealer subsidiary, PaineWebber Incorporated ("PWI"), and other specialized subsidiaries. The Company holds memberships in all 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 Company is comprised of interrelated business groups, including Research, the Private Client Group, the Municipal Securities Group, Investment Banking, Asset Management, Global Fixed Income and Commercial Real Estate, and Global Equities and Transaction Services, which utilize common operational and administrative personnel and facilities. The Research group provides investment advice to institutional and individual investors, and other business areas of the Company, covering more than 770 companies in 53 industries. 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, 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. The Municipal Securities Group structures, underwrites, sells and trades taxable and tax-exempt issues for municipal and public agency clients. 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 Asset Management group is comprised of Mitchell Hutchins Asset Management Inc. ("MHAM"), including Mitchell Hutchins Investment Advisory division ("MHIA"), Mitchell Hutchins Institutional Investors Inc. ("MHII") and Financial Counselors Inc. ("FCI"). The Asset Management group provides investment advisory and portfolio management services to mutual funds, institutions, pension funds, endowment funds, individuals and trusts. 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. In addition, the Company takes positions in both fixed income securities and listed and over-the-counter equity securities to facilitate client transactions or for the Company's own account. 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, equity and partnership investments, debt restructuring, property sales and bulk sales services, and a broad range of other advisory services. The Transaction Services group includes the correspondent services, prime brokerage and securities lending businesses, and specialist trading. Through Correspondent Services Corporation [csc], the Company provides execution and clearing services to broker-dealers in the U.S. and overseas. The Company also acts as a specialist responsible for executing transactions and maintaining an orderly market in certain securities. 25 2 The Company's businesses operate in one of the nation's most highly regulated industries. Violations 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, 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") and the National Association of Securities Dealers. The Company's principal business activities are, by their nature, affected by many factors, including general economic and financial conditions, the level and volatility of interest rates, currency and security valuations, competitive conditions, counterparty risk, transactional volume, and market liquidity. As a result, revenues and profitability are subject to fluctuations reflecting the impact of these factors. GENERAL BUSINESS ENVIRONMENT The general business environment continued to be favorable in 1996. Although the U.S. economy grew somewhat faster during 1996 than in 1995, inflation remained subdued. After a modest easing of monetary policy in January, the Federal Reserve did not change its stance. Consequently, the yield on the three-month treasury bill was very stable, remaining in the range of 5 to 5-1/4%. The yield on the 30-year treasury bond was more volatile, rising 100 basis points to about 7% in the first half of 1996, before drifting back toward 6-1/2% in the second half of the year. Although profit growth of corporations slowed in 1996, investors were nevertheless impressed by the durability of the economic expansion and the prospect of continued profit growth and moderate inflation in 1997. The S&P 500 Index increased 20% and the NASDAQ Composite Index increased 23% from year end 1995. Average daily volume on the NYSE increased 19% to 412 million shares versus 346 million shares in 1995, while average daily volume on the NASDAQ increased 36% to 545 million shares versus 401 million shares in 1995. This positive environment in both the debt and equity markets led to a high level of corporate finance activity in 1996. The value of mergers and acquisitions in 1996 was 26% higher than in 1995. Total common stock offerings increased 40% in 1996 and total corporate debt underwritings rose 21%. Many organizations currently use computer programs which represent the calendar year portion of dates by their last two digits. Calculations performed with these truncated fields will not work properly with dates from 2000 and beyond, which poses the risk that applications critical to operations could fail. The Company has begun its efforts to identify and remedy improper date fields, and expects that the annual incremental cost to complete these efforts will not be material. Further, the Company expects the modifications to be in effect in sufficient time so as to not disrupt operations. RESULTS OF OPERATIONS 1996 Compared with 1995 Net income for the year ended December 31, 1996 was $364.4 million, or $3.59 per primary share ($3.38 per fully diluted share). This compares to net income of $226.8 million earned during 1995, or $1.98 per primary share ($1.90 per fully diluted share), before giving effect to after-tax charges of approximately $146 million ($230 million before income taxes) associated with the resolution of the issues arising out of the Company's sale of public proprietary limited partnerships. Net income for 1995, including the charges, was $80.8 million, or $0.54 per primary share ($0.52 per fully diluted share). The results for the year ended December 31, 1995 were reduced by charges in the second and fourth quarters of $125.9 million ($200.0 million before income taxes) and $20.1 million ($30.0 million before income taxes), respectively, related to the costs of resolving the SEC, individual and class action claims, and administrative costs related to the Company's sale of public proprietary limited partnerships in the 1980s and early 1990s. The charges are included in "Other expenses" in the Consolidated Statement of Income. Revenues, net of interest expense, were $3,735.2 million for 1996, an increase of 12% from the $3,350.3 million in 1995. Commission revenues earned during 1996 were $1,381.5 million, an increase of 9% from the $1,272.8 million earned in the prior year. Mutual fund and insurance commissions increased $78.3 million, or 26%, commissions from over-the-counter securities and other commissions increased $25.4 million, or 17%, and commissions on listed securities and options increased $5.0 million, or 1%. Revenues from principal transactions increased $109.4 million, or 12% from 1995. For financial reporting purposes, realized and unrealized gains and losses on trading positions, including hedges, are recorded in principal transactions revenues. The increase from the prior year reflects overall improved trading results in both equity and fixed income trading activities which benefited from the favorable market environment and increased customer demand. 26 3 Asset management fees increased 13% to $453.3 million, primarily due to higher fees earned on managed or wrap accounts and trust accounts. Average assets in wrap and trust accounts during 1996 were 40% higher than during 1995. The increase also reflects 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 $45 billion during 1996 compared to $42 billion in 1995. Investment banking revenues were $391.2 million, as compared to $326.8 million, reflecting an increased number of equity and corporate debt underwritings, an increased dollar volume of lead-managed and co-managed municipal issues and an increase in private placement fees. Net interest increased $52.0 million, or 18%, reflecting increased margin lending to clients and an increased level of fixed income positions. Compensation and benefit expenses for 1996 increased $214.5 million, or 11%, primarily due to higher revenue-driven compensation paid to retail investment executives and higher performance-based incentive compensation. Compensation and benefits as a percentage of net revenues were 59.4% during 1996, as compared to 59.8% during 1995. All other operating expenses decreased $287.0 million, or 23%, from 1995. In 1995, other expenses included the $230.0 million charge related to the limited partnership settlements. All other operating expenses as a percentage of net revenues, excluding the non-recurring charges, were 25.6% in 1996, as compared to 30.2% during 1995. This reduction reflects various cost saving initiatives including renegotiating contracts and leases on more favorable terms, and centralizing purchasing of supplies and equipment. Offsetting the reduction were increases in professional services which includes system programming costs for the millennium. 1995 Compared with 1994 Net income for the year ended December 31, 1995 was $226.8 million, or $1.98 per primary share ($1.90 per fully diluted share), before giving effect to the $146 million after-tax charge related to the limited partnership settlements. This compares to net income of $101.5 million, or $1.30 per primary share ($1.27 per fully diluted share), earned during 1994 before giving effect to the costs related to the Kidder, Peabody Group Inc. ("Kidder") acquisition and a non-recurring charge in the second quarter related to the PaineWebber Short-Term U.S. Government Income Fund (the "Fund"). Net income for 1995, including the charges, was $80.8 million, or $0.54 per primary share ($0.52 per fully diluted share). This compares to 1994 net income of $31.6 million, or $0.41 per primary and fully diluted share, after giving effect to acquisition costs and the non-recurring charge related to the Fund. In late 1994 and early 1995, the Company entered into an agreement with General Electric Company and Kidder, whereby the Company agreed to purchase certain net assets and specific businesses of Kidder, for consideration consisting of cash and the Company's common and preferred stock valued at approximately $2.0 billion at the time of issuance. The excess of the purchase price over the fair value of the net assets acquired was approximately $98 million. The consolidated financial statements of the Company include the results of operations of the Kidder businesses acquired in December 1994 and early 1995 from the date of acquisition. As a result of the acquisition, the results for the year ended December 31, 1994 were reduced by after-tax costs in the fourth quarter of approximately $36 million ($50 million before income taxes). The costs related to closing duplicate facilities, severance and other personnel-related costs are included in "Other expenses" in the Consolidated Statement of Income. In addition, results for the year ended December 31, 1994 were reduced by a non-recurring after-tax charge in the second quarter of approximately $34 million ($57 million before income taxes) relating to the reimbursement to certain shareholders of the Fund, a mutual fund managed by the Company's investment subsidiary, MHAM, for losses and other expenses attributable to mortgage-derivative securities owned by the Fund. The Fund's performance was adversely affected by the rapid and substantial decline in the mortgage-backed securities market which was triggered by rising interest rates. Beyond these unusual market conditions, however, the Company determined that certain Non-Planned Amortization Class interest only and principal only securities held by the Fund had shown an unacceptable level of volatility and reduced liquidity. In view of the Fund's stated investment objectives, the Company decided to reimburse certain then current and former Fund shareholders for the decline in the net asset value attributable to these securities. Revenues, net of interest expense, increased 32%, primarily attributable to the Kidder acquisition and improved market conditions. Commission revenues earned during 1995 were $1,272.8 million, 31% higher than the $970.3 million earned during 1994. Commissions on listed securities and options increased $236.2 million, or 41%, mutual fund commissions increased $42.7 million, or 27%, and commissions from over-the-counter securities and other commissions increased $43.3 million, or 39%. These increases were partially offset by lower insurance commissions due to decreased sales of insurance annuities. 27 4 Principal transactions revenues increased $394.8 million, or 76%, primarily due to improved trading results, including hedges, in mortgage, corporate debt and equity securities. Asset management fees increased 12% to $399.5 million, primarily due to higher fees earned on managed or wrap accounts and trust accounts. Average assets in wrap and trust accounts during 1995 were 46% higher than during 1994. The increase also reflects higher advisory fees earned on money market and institutional accounts partially offset by lower advisory and distribution fees earned on proprietary long-term mutual funds. The average assets under management in money market, institutional and long-term mutual funds were approximately $42 billion during 1995 compared to $37 billion in 1994. Investment banking revenues were $326.8 million, as compared to $284.5 million, reflecting an increased number of equity and corporate debt underwritings and an increased dollar volume of lead-managed municipal issues. Net interest increased $21.0 million, or 8%, primarily due to the expansion of the stock loan business and increased margin lending to clients. These increases were partially offset by lower spreads earned on fixed income positions. Other income increased $11.2 million, or 8%, due to increased transaction fees and higher fees from Individual Retirement Accounts ("IRAs") as a result of an increased number of accounts. These increases were partially offset by lower dividends on proprietary trading inventories. Compensation and benefit expenses for 1995 increased $458.1 million, or 30%, primarily due to higher revenue-driven compensation paid to retail and institutional investment executives and higher performance-based incentive compensation. The increased compensation costs also reflect the acquisition of Kidder businesses and normal salary increases. Compensation and benefits as a percentage of net revenues were 59.8% during 1995, as compared to 61.0% during 1994. All other operating expenses increased $298.4 million, or 32%, over 1994. In 1995, other expenses include the $230.0 million charge related to the limited partnership settlements, and in 1994, other expenses include the charge related to the Fund and costs associated with the Kidder acquisition. Higher professional fees relate primarily to increased legal and consulting fees. Higher office and equipment, communications, business development, and brokerage and clearing fees are primarily attributable to the acquired Kidder businesses. All other operating expenses as a percentage of net revenues, excluding the non-recurring charges, were 30.2% in 1995, as compared to 33.0% during 1994. INCOME TAXES The effective tax rate for the year ended December 31, 1996 was 34.8% as compared to 21.4% for 1995. The increase in the effective rate was primarily due to higher state and local income taxes and lower nontaxable interest for the year. The effective tax rate for the year ended December 31, 1995 declined 7.3% from the 1994 rate of 28.7%. This decline was due to lower state and local taxes, proportionally lower nondeductible expenses, and higher nontaxable interest for the year. 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 inventories 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, 1996 were $52.5 billion compared to $45.7 billion at December 31, 1995. The increase is primarily attributable to growth in securities purchased under agreements to resell and trading assets. The majority of the Company's assets are financed by daily operations such as securities sold under agreements to repurchase, free credit balances in client accounts and securities lending activity. Additional financing sources are available through bank loans and commercial paper, committed and uncommitted lines of credit, and long-term borrowings. The Company maintains committed and uncommitted credit facilities from a diverse group of banks. The Company has a committed unsecured senior revolving credit agreement to provide up to $1.2 billion through December 1997. In addition, certain of the Company's subsidiaries have a committed secured revolving credit facility to provide up to an aggregate of $750.0 million through August 1997, with provisions for renewal through August 2000. The secured borrowings under this facility 28 5 can be collateralized using a variety of financial instruments. The facilities are available for general corporate purposes. At December 31, 1996, there were no outstanding borrowings under these credit facilities. Additionally, the Company had approximately $4.6 billion in uncommitted lines of credit at December 31, 1996. The Company maintains public shelf registration statements with the SEC for the issuance of debt securities. In December 1996, the Company filed a shelf registration statement with the SEC providing for the issuance of an additional $2.0 billion of debt securities. The Company issued $467.5 million of debt under these registration statements in 1996. At December 31, 1996, the Company had approximately $2.3 billion in debt securities available for issuance under these registration statements. In October 1996, the Company filed a shelf registration statement with the SEC to issue up to an aggregate of $500.0 million of preferred trust securities of PWG Capital Trusts I, II, III, and IV, business trusts formed under Delaware law which are wholly owned subsidiaries of the Company, and debt securities of the Company. In December 1996, PWG Capital Trust I issued $195.0 million of 8.30% Preferred Trust Securities ("Preferred Trust Securities"), under this registration statement. At December 31, 1996, $305.0 million in Preferred Trust Securities and debt securities of the Company were available for issuance under this registration statement. (For further discussion on the Preferred Trust Securities, see Note 7 in the Company's Notes to Consolidated Financial Statements.) Long-term borrowings at December 31, 1996 grew to $2,781.7 million from $2,436.0 million at December 31, 1995. This increase primarily reflects the issuances of $100.0 million of 6 3/4% Notes in January 1996, $150.0 million of 7 5/8% Notes in October 1996, and $217.5 million of Medium-Term Notes during the year. Offsetting these increases were the maturities of $128.2 million of Medium-Term Notes. At December 31, 1996, $168.8 million of long-term borrowings had maturity dates in 1997. The weighted-average maturity on all outstanding long-term borrowings at December 31, 1996 was 6.0 years. Capital Resources and Capital Adequacy The Company's businesses are capital intensive. In addition to a funding policy which provides for diversification of funding sources and maximization of liquidity, the Company maintains a strong capital base. The Company's total capital base, which includes long-term borrowings, preferred stock and stockholders' equity, grew to $4.9 billion at December 31, 1996, an increase of $719.7 million from the prior year. The growth in total capital is primarily due to the net increase in long-term borrowings of $345.7 million, the issuance of $195.0 million of Preferred Trust Securities, and an increase in stockholders' equity of $178.1 million. During 1996, the Company issued 6.7 million shares of common stock related to employee compensation programs. Activity related to these programs had the effect of increasing equity capital by more than $71 million. In the second and fourth quarters of 1996, the Company's Board of Directors authorized for repurchase, in the open market or otherwise, an additional 17.0 million shares of its common stock. The Company repurchased 10.7 million shares of its common stock during 1996, at an aggregate cost of $237.8 million. At December 31, 1996, the remaining number of shares of common stock authorized to be repurchased by the Company's Board of Directors was 14.0 million. The Board of Directors declared regular quarterly cash dividends of $0.12 per share on the Company's common stock during 1996. Dividends were also declared on the Redeemable Preferred Stock and the Convertible Preferred Stock. On February 6, 1997, the Board of Directors declared a 1997 first quarter dividend of $0.15 per common share, an increase of 25% over the prior quarter. 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 and commercial real estate activities, the Company has provided financing and made investments in companies, some of which are involved in highly leveraged transactions. Positions taken or commitments made by the Company may involve credit or market risk from any one issuer or industry. At December 31, 1996, the Company had investments in merchant banking and commercial real estate transactions which were affected by liquidity, reorganization or restructuring issues amounting to $41.8 million, net of reserves, compared to $85.5 million, net of reserves, at December 31, 1995. These investments have not had a material effect on the Company's results of operations. Included in the portfolio at December 31, 1996 and 1995 was an investment of $15.0 and $52.2 million, respectively, in a limited partnership which specializes in investments in corporate restructurings and special situations. 29 6 The Company's activities include underwriting and market-making transactions in high-yield securities. These securities generally involve greater risks than investment-grade corporate debt securities because these issuers usually have high levels of indebtedness and lower credit ratings and are, therefore, more vulnerable to general economic conditions. At December 31, 1996, the Company held $111.4 million of high-yield securities, with approximately 32% of such securities attributable to three issuers. The Company continually monitors its risk positions associated with high-yield securities and establishes limits with respect to overall market exposure, industry group and individual issuer. The Company accounts for these positions at fair value, with unrealized gains and losses reflected in revenues. For the years ended December 31, 1996 and 1995, the Company recorded pre-tax trading profits on transactions in high-yield securities of $18.8 million and $10.4 million, respectively. For the year ended December 31, 1994, the Company recorded a pre-tax trading loss on transactions in high-yield securities of $16.3 million. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument represents a contractual agreement between counterparties and has value that is derived from changes in the value of some other underlying asset such as the price of another security, interest rates, currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P 500), or the value referenced in the contract. Derivatives such as futures, certain options contracts and structured products (e.g. indexed warrants) are traded on exchanges, while derivatives such as forward contracts, certain options contracts, interest rate swaps, caps and floors, and other structured products are negotiated in over-the-counter markets. In the normal course of business, the Company engages in a variety of derivative transactions in connection with its proprietary trading activities and asset and liability management, as well as on behalf of its clients. As a dealer, the Company regularly makes a market in and trades a variety of securities. The Company is also engaged in creating structured products which are sold to clients. In connection with these activities, the Company attempts to reduce its exposure to market risk by entering into offsetting hedging transactions, which may include derivative financial instruments. The Company also enters into interest rate swap contracts to hedge its fixed rate borrowings and reduce overall borrowing costs. The notional amount of a derivative contract is used to measure the volume of activity and is not reflected on the Consolidated Statements of Financial Condition. The Company had off-balance-sheet derivative contracts outstanding with gross notional amounts of $41.1 billion and $43.0 billion at December 31, 1996 and 1995, respectively. These amounts included $22.4 billion and $26.7 billion, respectively, related to "to be announced" mortgage securities requiring forward settlement. Also included in these amounts were $2.1 billion and $1.9 billion notional amounts of interest rate swap agreements used to hedge the Company's long-term borrowings at December 31, 1996 and 1995, respectively. (For further discussion on the Company's derivative financial instruments, see Note 10 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. The Company accrues interest income and expense on interest rate swap agreements used to hedge its fixed rate long-term borrowings. The interest rate swap agreements had the effect of reducing net interest expense on the Company's long-term borrowings by $7.9 million and $29.6 million for the years ended December 31, 1996 and 1994, respectively, and increasing net interest expense on the Company's long-term borrowings by $1.7 million for the year ended December 31, 1995. The Company had no deferred gains or losses recorded at December 31, 1996 and 1995 related to terminated swap agreements. The fair value of an exchange-traded derivative financial instrument is determined by quoted market prices, while over-the-counter derivatives are valued based upon pricing models which consider time value and volatility, as well as other economic factors. The fair values of the Company's derivative financial instruments held for trading purposes at December 31, 1996 were $185.4 million and $242.4 million for assets and liabilities, respectively, and are reflected on the Consolidated Statement of Financial Condition. The fair values of these instruments at December 31, 1995 were $375.5 million and $275.6 million for assets and liabilities, respectively. 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, foreign currency exchange rates or the market values of the assets underlying the instruments. The Company actively monitors 30 7 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 by an independent risk management group. 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. The Company manages credit risk by monitoring net exposure to individual counterparties, monitoring credit limits and requiring additional collateral where appropriate. The current credit exposure represents the fair value or replacement cost on contracts in which the Company has recorded an unrealized gain. At December 31, 1996 and 1995, the fair values amounted to $185.4 million and $375.5 million, respectively. RISK MANAGEMENT The Company monitors its exposure to market and counterparty risk on a daily basis through a variety of financial, security position, and credit exposure reporting and control procedures. Each department's trading positions, exposures, profits and losses, and trading strategies are reviewed by the senior management of each business group on a daily basis. The Company also has an independent risk management group that meets daily to review the Company's risk profile and adherence to established trading limits, and aids in the development of risk management policies. Trading position and exposure limits, as well as credit policy, are established by the Asset/Liability Management Committee which meets regularly and is comprised of senior corporate and business unit managers. Credit risk is substantially reduced by the industry practice of obtaining and maintaining adequate collateral until the 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 the 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. In addition to the above procedures, the Company has in place committees and management controls to review inventory positions, other asset accounts and asset agings on a regular basis. 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, which 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's business activities encompass several classes of highly integrated services, primarily those of a full-service securities broker-dealer, and are considered a single business segment for purposes of Statement of Financial Accounting Standards ("SFAS") No. 14. (For information on geographic data, see Note 16 in the Company's Notes to Consolidated Financial Statements.) NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 introduces the financial-components approach which focuses on the recognition of financial assets an entity controls and the derecognition of financial assets for which control has been transferred. This statement is effective for certain types of transactions occurring after December 31, 1996, including securitizations, sales of mortgages and other receivables. The FASB has deferred the effective date of accounting for other types of transfers of financial assets, including repurchase agreements and securities lending transactions, until January 1, 1998. The Company does not expect the adoption of this Statement to have a material impact on the Company's consolidated financial statements, taken as a whole. 31 8 Consolidated Statements of Income (In thousands of dollars except per share amounts)
Years Ended December 31, 1996 1995 1994 ---------- ---------- ---------- REVENUES Commissions $1,381,475 $1,272,766 $ 970,294 Principal transactions 1,023,615 914,201 519,438 Asset management 453,267 399,540 356,368 Investment banking 391,164 326,777 284,503 Interest 2,309,737 2,256,750 1,694,572 Other 146,708 150,056 138,902 ---------- ---------- ---------- Total revenues 5,705,966 5,320,090 3,964,077 Interest expense 1,970,754 1,969,811 1,428,653 ---------- ---------- ---------- Net revenues 3,735,212 3,350,279 2,535,424 ---------- ---------- ---------- NON-INTEREST EXPENSES Compensation and benefits 2,219,129 2,004,585 1,546,467 Office and equipment 267,006 266,291 225,375 Communications 153,301 149,047 130,095 Business development 75,981 90,752 85,430 Brokerage, clearing and exchange fees 87,839 93,657 82,577 Professional services 108,123 101,911 78,856 Other 263,800 541,359 342,239 ---------- ---------- ---------- Total non-interest expenses 3,175,179 3,247,602 2,491,039 ---------- ---------- ---------- Income before taxes and minority interest 560,033 102,677 44,385 Provision for income taxes 194,649 21,927 12,754 ---------- ---------- ---------- Income before minority interest 365,384 80,750 31,631 Minority interest 1,034 -- -- ---------- ---------- ---------- Net income $ 364,350 $ 80,750 $ 31,631 ========== ========== ========== Net income applicable to common shares $ 339,017 $ 54,781 $ 31,742 ========== ========== ========== EARNINGS PER COMMON SHARE Primary $ 3.59 $ 0.54 $ 0.41 Fully diluted $ 3.38 $ 0.52 $ 0.41 ---------- ---------- ----------
See Notes to Consolidated Financial Statements. 32 9 Consolidated Statements of Financial Condition (In thousands of dollars except share and per share amounts)
December 31, 1996 1995 ------------ ------------ ASSETS Cash and cash equivalents $ 383,856 $ 222,497 Cash and securities segregated and on deposit for federal and other regulations 499,761 427,068 Trading assets, at fair value 16,823,307 14,095,446 Securities purchased under agreements to resell 20,746,831 16,699,295 Securities borrowed 7,380,374 7,226,515 Receivables: Clients, net of allowance for doubtful accounts of $12,109 and $12,400 in 1996 and 1995, respectively 4,327,996 4,070,599 Brokers and dealers 273,737 279,676 Dividends and interest 350,796 263,948 Fees and other 136,545 200,444 Office equipment and leasehold improvements, net of accumulated depreciation and amortization of $343,322 and $288,807 in 1996 and 1995, respectively 313,261 322,056 Other assets 1,277,036 1,863,750 ------------ ------------ $ 52,513,500 $ 45,671,294 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 1,337,646 $ 991,227 Trading liabilities, at fair value 6,621,891 6,233,054 Securities sold under agreements to repurchase 28,797,276 25,199,377 Securities loaned 3,459,860 2,752,429 Payables: Clients 4,883,344 3,698,477 Brokers and dealers 205,437 155,118 Dividends and interest 285,341 256,338 Other liabilities and accrued expenses 1,290,555 1,639,403 Accrued compensation and benefits 737,376 570,786 ------------ ------------ 47,618,726 41,496,209 Long-term borrowings 2,781,694 2,436,037 ------------ ------------ 50,400,420 43,932,246 ------------ ------------ Commitments and contingencies Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely Company Guaranteed Related Subordinated Debt 195,000 -- Redeemable Preferred Stock 187,655 186,760 Stockholders' equity: Convertible Preferred Stock 100,000 100,000 Common stock, $1 par value, 200,000,000 shares authorized; issued 108,358,178 shares and 104,492,091 shares in 1996 and 1995, respectively 108,358 104,492 Additional paid-in capital 913,927 831,763 Retained earnings 1,009,448 719,325 ------------ ------------ 2,131,733 1,755,580 Treasury stock, at cost; 15,366,234 shares and 7,417,845 shares in 1996 and 1995, respectively (331,907) (151,616) Unamortized cost of restricted stock (67,533) (55,302) Foreign currency translation adjustment (1,868) 3,626 ------------ ------------ 1,730,425 1,552,288 ------------ ------------ $ 52,513,500 $ 45,671,294 ============ ============
See Notes to Consolidated Financial Statements. 33 10 Consolidated Statements of Changes in Stockholders' Equity (In thousands of dollars except share and per share amounts)
6% Cumulative Convertible Additional Redeemable Common Paid-in Preferred Stock Stock Capital ------------ ------------ ------------ Balance at December 31, 1993 $ 0 $ 83,603 $ 568,487 ------------ ------------ ------------ Net income Dividends declared: Common stock, $.48 per share Dividends accrued: Redeemable Preferred Stock Convertible Preferred Stock Issuance of Convertible Preferred Stock 100,000 Issuance of common stock relating to business acquisition 14,000 177,374 Exercises of stock options 579 3,803 Restricted stock awards 2,432 32,464 Amortization of the cost of restricted stock Conversion of debentures (205) Tax benefit relating to employee compensation programs 2,597 Other 454 Repurchases of common stock Foreign currency translation ------------ ------------ ------------ Balance at December 31, 1994 $ 100,000 $ 100,614 $ 784,974 ------------ ------------ ------------ Net income Dividends declared: Common stock, $.48 per share Redeemable Preferred Stock, $9.00 per share Convertible Preferred Stock, $6.00 per share Exercises of stock options 942 (4,377) Restricted stock awards 2,936 52,471 Amortization of the cost of restricted stock Conversion of debentures (4,252) Tax benefit relating to employee compensation programs 2,947 Other Repurchases of common stock Foreign currency translation ------------ ------------ ------------ Balance at December 31, 1995 $ 100,000 $ 104,492 $ 831,763 ------------ ------------ ------------ Net income Dividends declared: Common stock, $.48 per share Redeemable Preferred Stock, $9.00 per share Convertible Preferred Stock, $6.00 per share Exercises of stock options 1,411 1,431 Restricted stock awards 2,455 69,721 Amortization of the cost of restricted stock Conversion of debentures (10,214) Tax benefit relating to employee compensation programs 21,226 Other Repurchases of common stock Foreign currency translation ------------ ------------ ------------ Balance at December 31, 1996 $ 100,000 $ 108,358 $ 913,927 ------------ ------------ ------------
See Notes to Consolidated Financial Statements. 34 11 Consolidated Statements of Changes in Stockholders' Equity (In thousands of dollars except share and per share amounts)
Unamortized Foreign Number of Shares Cost of Currency Total ----------------------- Retained Treasury Restricted Translation Stockholders' Common Treasury Earnings Stock Stock Adjustment Equity Stock Stock ---------- --------- -------- ------- ---------- ---------- ---------- Balance at December 31, 1993 $ 721,115 $(112,390) $(60,980) $(4,788) $1,195,047 83,603,262 (6,568,433) ---------- --------- -------- ------- ---------- ---------- ---------- Net income 31,631 31,631 Dividends declared: Common stock, $.48 per share (36,475) (36,475) Dividends accrued: Redeemable Preferred Stock (969) (969) Convertible Preferred Stock (250) (250) Issuance of Convertible Preferred Stock 100,000 Issuance of common stock relating to business acquisition 127,095 318,469 14,000,000 7,500,000 Exercises of stock options 4,382 578,593 Restricted stock awards (34,896) 0 2,431,882 Amortization of the cost of restricted stock 44,073 44,073 Conversion of debentures 1,455 1,250 84,740 Tax benefit relating to employee compensation programs 2,597 Other 4,992 5,446 291,750 Repurchases of common stock (43,133) (43,133) (2,605,138) Foreign currency translation 8,431 8,431 ---------- --------- -------- ------- ---------- ---------- ---------- Balance at December 31, 1994 $ 715,052 $ (21,981) $(51,803) $ 3,643 $1,630,499 100,613,737 (1,297,081) ---------- --------- -------- ------- ---------- ---------- ---------- Net income 80,750 80,750 Dividends declared: Common stock, $.48 per share (47,203) (47,203) Redeemable Preferred Stock, $9.00 per share (22,500) (22,500) Convertible Preferred Stock, $6.00 per share (6,000) (6,000) Exercises of stock options 34,388 30,953 942,511 1,993,837 Restricted stock awards (55,407) 0 2,935,843 Amortization of the cost of restricted stock 51,908 51,908 Conversion of debentures 9,502 5,250 524,303 Tax benefit relating to employee compensation programs 2,947 Other (774) (774) Repurchases of common stock (173,525) (173,525) (8,638,904) Foreign currency translation (17) (17) ---------- --------- -------- ------- ---------- ---------- ---------- Balance at December 31, 1995 $ 719,325 $(151,616) $(55,302) $ 3,626 $1,552,288 104,492,091 (7,417,845) ---------- --------- -------- ------- ---------- ---------- ---------- Net income 364,350 364,350 Dividends declared: Common stock, $.48 per share (44,832) (44,832) Redeemable Preferred Stock, $9.00 per share (22,500) (22,500) Convertible Preferred Stock, $6.00 per share (6,000) (6,000) Exercises of stock options 32,699 35,541 1,410,818 1,590,777 Restricted stock awards (72,176) 0 2,455,269 Amortization of the cost of restricted stock 59,945 59,945 Conversion of debentures 24,776 14,562 1,207,350 Tax benefit relating to employee compensation programs 21,226 Other (895) (895) Repurchases of common stock (237,766) (237,766) (10,746,516) Foreign currency translation (5,494) (5,494) ---------- --------- -------- ------- ---------- ---------- ---------- Balance at December 31, 1996 $1,009,448 $(331,907) $(67,533) $(1,868) $1,730,425 108,358,178 (15,366,234) ---------- --------- -------- ------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements. 35 12 Consolidated Statements of Cash Flows (In thousands of dollars)
Years Ended December 31, 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 364,350 $ 80,750 $ 31,631 Adjustments to reconcile net income to cash (used for) provided by operating activities: Noncash items included in net income: Depreciation and amortization 64,116 54,100 40,619 Deferred income taxes 27,134 (90,778) (48,827) Amortization of deferred charges 189,519 174,122 128,817 Other 46,204 213,852 29,232 (Increase) decrease in operating receivables: Clients (262,538) 189,652 (82,116) Brokers and dealers 5,939 152,889 479,265 Dividends and interest (86,848) (33,608) (12,205) Fees and other 63,899 37,124 (113,067) Increase (decrease) in operating payables: Clients 1,184,867 587,798 154,031 Brokers and dealers 50,319 (148,126) (361,016) Dividends and interest 29,003 37,602 (47,992) Other (203,565) 739,065 142,176 (Increase) decrease in: Cash and securities on deposit (72,693) (57,483) (42,413) Trading assets (2,727,861) (3,310,637) 5,534,676 Securities purchased under agreements to resell (4,047,536) (5,820,114) (530,933) Securities borrowed (153,859) 599,696 (1,908,905) Other assets 306,054 (820,625) (318,193) Increase (decrease) in: Trading liabilities 388,837 198,348 (1,502,636) Securities sold under agreements to repurchase 3,597,899 8,285,379 (29,888) Securities loaned 707,431 526,511 100,101 ----------- ----------- ----------- Cash (used for) provided by operating activities (529,329) 1,595,517 1,642,357 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from (payments for): Net assets acquired in business acquisition -- (624,090) (726,217) Acquisition-related expenditures (3,843) (46,157) -- Sales (purchases) of investments 122,032 112,499 (234,531) Office equipment and leasehold improvements (51,583) (81,880) (82,904) ----------- ----------- ----------- Cash provided by (used for) investing activities 66,606 (639,628) (1,043,652) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (payments on): Short-term borrowings 346,419 (898,382) (889,604) Proceeds from: Long-term borrowings 484,786 493,357 637,379 Employee stock transactions 50,103 36,203 11,078 Issuance of Preferred Trust Securities 195,000 -- -- Payments for: Long-term borrowings (141,128) (374,580) (259,750) Repurchases of common stock (237,766) (173,525) (43,133) Dividends (73,332) (75,703) (36,475) ----------- ----------- ----------- Cash provided by (used for) financing activities 624,082 (992,630) (580,505) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 161,359 (36,741) 18,200 Cash and cash equivalents, beginning of year 222,497 259,238 241,038 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 383,856 $ 222,497 $ 259,238 =========== =========== ===========
See Notes to Consolidated Financial Statements 36 13 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, corporate, institutional and public agency clients. In late 1994 and early 1995, the Company entered into an agreement with General Electric Company and Kidder, Peabody Group Inc. ("Kidder"), whereby the Company agreed to purchase certain assets and liabilities, and specific businesses of Kidder for consideration valued at approximately $2.0 billion at the time of issuance, which consisted of cash of approximately $1.4 billion and the Company's common and preferred stock. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the fair value of the net assets acquired was approximately $98,000 and is being amortized on a straight-line basis over 35 years. The consolidated financial statements of the Company include the results of operations of the Kidder businesses acquired in December 1994 and early 1995 from the date of acquisition. In the fourth quarter of 1994, the Company recorded after-tax costs of approximately $36 million ($50 million before income taxes) relating primarily to the elimination of duplicate facilities, severance and other personnel-related costs. 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. 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 Instruments Trading assets and liabilities are recorded in the Consolidated Statements of Financial Condition on settlement date. Recording such transactions on a trade date basis would not result in a material difference. Related revenues and expenses are recorded in the accounts on trade date. Trading assets and liabilities, including derivative contracts held for trading or to hedge trading inventory positions, are recorded at fair value in the Consolidated Statements of Financial Condition. Realized and unrealized gains and losses are reflected in revenues in the period during which the change in fair value occurs. 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. Collateralized Securities Transactions Securities purchased under agreements to resell ("resale agreements") and securities sold under agreements to repurchase ("repurchase agreements"), principally U.S. government and agency securities, are accounted for 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 37 14 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. Should the fair value of the securities decline below or increase above the principal amount advanced or received, plus accrued interest, additional collateral is requested or excess collateral is returned when deemed appropriate. When specific conditions are met, including the existence of a legally enforceable master netting agreement, resale agreements and repurchase agreements are netted by counterparty on the Consolidated Statements of Financial Condition as permitted under Financial Accounting Standards Board ("FASB") Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," and Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." 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 has a fair value equal to, or 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. Office Equipment and Leasehold Improvements 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. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred taxes are provided based upon the net tax effects of temporary differences between the book and tax bases of assets and liabilities. The Company files a consolidated federal income tax return. 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 in a separate component of 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. Statement of Cash Flows For purposes of the Consolidated Statements of Cash Flows, cash and 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, 1996, 1995 and 1994 were $1,941,751, $1,932,192 and $1,499,398, respectively. 38 15 Accounting Pronouncements Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires impairment losses to be recognized when the sum of the expected future cash flows from the use of the asset is less than the carrying amount of the asset. SFAS No. 121 also addresses accounting for long-lived assets that are expected to be disposed. The adoption of SFAS No. 121 did not have a material impact on the Company's consolidated financial statements, taken as a whole. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 introduces the financial-components approach which focuses on the recognition of financial assets an entity controls and the derecognition of financial assets for which control has been transferred. This statement is effective for certain types of transactions occurring after December 31, 1996, including securitizations, sales of mortgages and other receivables. The FASB has deferred the effective date of accounting for other types of transfers of financial assets, including repurchase agreements and securities lending transactions, until January 1, 1998. The Company does not expect the adoption of this Statement to have a material impact on the Company's consolidated financial statements, taken as a whole. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which allows an entity to continue to measure compensation cost for employee stock compensation plans in accordance with APB No. 25 or adopt the fair value based method of accounting prescribed by SFAS No. 123. Entities electing to continue to apply APB No. 25 must disclose pro forma net income and earnings per share using the fair value method. The Company has elected to continue to account for stock option grants under APB No. 25 and has included the disclosure requirements in Note 13 of the Notes to Consolidated Financial Statements. NOTE 2: LIMITED PARTNERSHIP INVESTMENT CHARGES The results for the year ended December 31, 1995 were reduced by after-tax charges of approximately $146,000 ($230,000 before income taxes) associated with the resolution of the issues arising out of the Company's sale of public proprietary limited partnerships in the 1980s and early 1990s. The charges are included in "Other expenses" in the Consolidated Statements of Income. The Company reached a final and comprehensive resolution of the issues related to the sale of the limited partnerships, including an agreement to settle all pending class actions, a settlement with the SEC and an agreement to settle with various state regulators. NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash and cash equivalents, cash and securities segregated for regulatory purposes, trading assets, resale agreements, securities borrowed, and certain receivables, are carried at fair value or contracted amounts which approximate fair value. Similarly, liabilities, including short-term borrowings, trading liabilities, repurchase agreements, securities loaned, and certain payables, are carried at fair value or contracted amounts approximating fair value. At December 31, 1996 and 1995, the fair values of long-term borrowings were $2,813,699 and $2,478,095, respectively, as compared to the carrying amounts of $2,781,694 and $2,436,037, respectively. The estimated fair value of long-term borrowings is based upon quoted market prices for the same or similar issues and pricing models. However, for substantially all of its fixed rate debt, the Company enters into interest rate swap agreements to convert its fixed rate payments into floating rate payments, which partially offset the effect of the changes in interest rates on the fair value of the Company's long-term borrowings. The fair value of interest rate swaps used to hedge the Company's long-term borrowings is based upon the amounts the Company would receive or pay to terminate the agreements, taking into account current interest rates and creditworthiness of the counterparties. The fair values of the interest rate swaps were $21,170 payable and $33,756 receivable at December 31, 1996 and 1995, respectively. The carrying amounts of the interest rate swap agreements included in the Company's Consolidated Statements of Financial Condition at December 31, 1996 and 1995 were net receivables of $3,252 and $1,730, respectively. For discussion on the fair values of the Company's off-balance-sheet financial instruments, see Notes 10 and 12. 39 16 NOTE 4: TRADING INVENTORIES At December 31, 1996 and 1995, trading assets and liabilities, recorded at fair value, consisted of the following:
1996 1995 ----------- ----------- TRADING ASSETS U.S. government and agency obligations $ 4,767,991 $ 4,854,878 Mortgages and mortgage-backed securities 5,968,704 4,240,163 Corporate debt securities 3,284,235 2,364,597 Commercial paper and other short-term debt 1,457,226 1,252,652 State and municipal obligations 568,799 821,487 Corporate equity securities 776,352 561,669 ----------- ----------- $16,823,307 $14,095,446 =========== =========== TRADING LIABILITIES U.S. government and agency obligations $ 5,118,658 $ 4,570,733 Mortgages and mortgage-backed securities 53,845 127,708 Corporate debt securities 672,683 714,588 State and municipal obligations 20,019 21,467 Corporate equity securities 756,686 798,558 ----------- ----------- $ 6,621,891 $ 6,233,054 =========== ===========
Trading liabilities commit the Company to deliver specified securities at predetermined prices. These transactions may result in market risk, since, to satisfy the obligation, the Company must acquire the securities at market prices, which may exceed the values reflected in the Consolidated Statement of Financial Condition. NOTE 5: SHORT-TERM BORROWINGS The Company meets its short-term financing needs by obtaining bank loans on either a secured or unsecured basis; by issuing commercial paper and medium-term notes; by entering into agreements to repurchase, whereby securities are sold with a commitment to repurchase at a future date; and through securities lending activity. Short-term borrowings at December 31, 1996 and 1995 consisted of the following:
1996 1995 ---------- ---------- Commercial paper $ 688,910 $ 547,554 Bank loans and other 648,736 443,673 ---------- ---------- $1,337,646 $ 991,227 ========== ==========
The interest rate on commercial paper fluctuates throughout the year. The weighted-average interest rates on commercial paper borrowings outstanding at December 31, 1996 and 1995 were 5.66% and 6.00%, respectively, and during 1996 and 1995 were 5.61% and 6.09%, 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 rate on bank loans outstanding at December 31, 1996 and 1995 was 5.63% for both periods, and the weighted-average interest rates during 1996 and 1995 were 5.64% and 6.63%, respectively. The Company has a $1,200,000 committed unsecured senior revolving credit facility with a group of banks which expires in December 1997. 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 1997, 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, 1996 and 1995, there were no outstanding borrowings under these credit facilities. 40 17 NOTE 6: LONG-TERM BORROWINGS Long-term borrowings at December 31, 1996 and 1995 consisted of the following:
1996 1995 ---- ---- Fixed Rate Notes due 1997 -- 2014 $1,547,398 $1,289,478 Fixed Rate Subordinated Notes due 2002 174,500 174,412 Medium-Term Senior Notes 747,725 651,475 Medium-Term Subordinated Notes 276,150 283,150 Convertible Debentures 13,935 17,038 Other 21,986 20,484 ---------- ---------- $2,781,694 $2,436,037 ========== ==========
During 1996, the Company issued, in two separate offerings, fixed rate notes in an aggregate principal amount of $250,000 due 2006 and 2008, with interest rates of 6 3/4% and 7 5/8%, respectively. Interest rates on the fixed rate notes and the fixed rate subordinated notes outstanding at December 31, 1996 and 1995 range from 6 1/4% to 9 1/4%. The weighted-average interest rates on these notes outstanding at December 31, 1996 and 1995 were 7.52% and 7.56%, respectively. Interest on the notes is payable semi-annually. 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. The Medium-Term Notes may be either fixed or variable with respect to interest rates. At December 31, 1996 and 1995, the Company had outstanding $764,925 and $753,425 of fixed rate Medium-Term Notes and $258,950 and $181,200 of variable rate Medium-Term Notes, respectively. The Medium-Term Notes outstanding at December 31, 1996 and 1995 had a weighted-average interest rate of 6.98% and 7.03%, respectively. At December 31, 1996, these notes had an average maturity of 3.8 years. The Company has entered into interest rate swap agreements which effectively convert substantially all of its fixed rate notes into floating rate obligations. 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 6.92% and 7.07% at December 31, 1996 and 1995, respectively. The notional amounts and maturities of the interest rate swap agreements outstanding at December 31, 1996 were as follows: 1997--1999 $ 582,700 2000--2002 527,500 2003--2005 602,000 2006--2008 400,000 ---------- $2,112,200 ==========
Pursuant to an employee benefit plan, the Company issued 8% Convertible Debentures (the "8% Debentures") due December 1998 and 2000, and 6.5% Convertible Debentures (the "6.5% Debentures") due December 2002 (the 8% Debentures and the 6.5% Debentures being collectively referred to as "the Debentures"). The Debentures are 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 may be forgiven at the end of a calendar year in which certain specified pre-tax earnings are achieved by the Company. The 8% Debentures outstanding at December 31, 1996 are fully convertible, at the option of the holders, into 120,000 shares of 7.5% Convertible Preferred Stock, which in turn, are convertible into 324,324 shares of common stock. The 6.5% Debentures outstanding at December 31, 1996 are fully convertible, at the option of the holders, into 1,452,557 shares of 6.0% Convertible Preferred Stock, which in turn, are convertible into 2,178,836 shares of common stock. The Debentures are redeemable at the employees' option, subject to certain conditions through 1998. During 1996, $14,562 principal amount of the Debentures was converted into 1,207,350 shares of the Company's common stock. 41 18 The aggregate amount of principal repayment requirements on long-term borrowings for each of the five years subsequent to December 31, 1996, and the total amount due thereafter, are as follows: 1997 $ 168,750 1998 287,235 1999 184,475 2000 486,762 2001 196,500 Thereafter 1,457,972 ---------- $2,781,694 ==========
NOTE 7: 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, with a par value of $20.00 per share. Redeemable Preferred Stock In connection with the acquisition of certain net assets of 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. Convertible Preferred Stock The Company also issued, in connection with the Kidder acquisition, 1,000,000 shares of 20 year 6% Cumulative Convertible Redeemable Preferred Stock, Series A (the "Convertible Preferred Stock"), with a stated value and liquidation preference of $100.00 per share. The Convertible Preferred Stock was recorded at its fair value of $100,000. The Convertible Preferred Stock is convertible into the Company's common stock at any time, in whole or in part, at the option of the holder, at a conversion price of $18.13 per common share, subject to adjustment. The Convertible Preferred Stock is redeemable in cash at any time, in whole or in part, at the option of the Company, at redemption prices equal to the greater of $140.00 per share or a formula price for the first five years, then $105.00 per share on or after December 16, 1999 and declining by $1.00 per share per year to $100.00 on or after December 16, 2004, plus accrued and unpaid dividends. Beginning December 16, 1999, in lieu of a cash payment upon redemption, the Company may issue, subject to shareholder approval, shares of its common stock equivalent to the redemption price divided by the then current market price per common share. The Convertible Preferred Stock is subject to mandatory redemption on December 15, 2014. Dividends on the Convertible Preferred Stock are cumulative and payable in quarterly installments. Holders of the Convertible Preferred Stock have no voting rights, except in the event of certain dividend payment defaults. 42 19 PREFERRED STOCK ISSUED BY SUBSIDIARY TRUST Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely Company Guaranteed Related Subordinated Debt In December 1996, PWG Capital Trust I (the "Trust"), a business trust formed under Delaware law and a wholly owned subsidiary of the Company, issued $195,000 (7,800,000 securities) of 8.30% Preferred Trust Securities (the "Preferred Trust Securities") to the public at $25.00 per security and $6,031 (241,238 securities) of 8.30% Common Trust Securities (the "Common Trust Securities") to the Company at $25.00 per security. The Preferred Trust Securities and Common Trust Securities have a stated liquidation amount of $25.00 per security. The Trust exists for the sole purpose of issuing the Preferred Trust Securities and Common Trust Securities and investing the proceeds in an equivalent amount of junior subordinated debentures of the Company. The sole assets of the Trust at December 31, 1996 were $201,031 of 8.30% Junior Subordinated Debentures due December 1, 2036 (the "Junior Subordinated Debentures") issued by the Company. The Junior Subordinated Debentures held by the Trust are redeemable by the Company, in whole or in part, on or after December 1, 2001. If the Company redeems Junior Subordinated Debentures, the Trust must redeem Preferred Trust Securities and Common Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of Junior Subordinated Debentures so redeemed. The Company guarantees payments due from the Trust 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. Distributions on the Preferred Trust Securities are cumulative and payable monthly in arrears to the extent that interest payments are made in respect of the Junior Subordinated Debentures held by the Trust. The payment of interest on the Junior Subordinated Debentures is deferrable at the Company's option for periods not to exceed sixty consecutive months. The Company generally cannot pay dividends on or redeem its preferred and common stocks during such deferments. Distributions on the Preferred Trust Securities have been classified as minority interest in the Company's Consolidated Statement of Income. NOTE 8: COMMON STOCK During 1996, the Company repurchased 10,746,516 shares of its common stock at an aggregate cost of $237,766. In the second and fourth quarters of 1996, the Company's Board of Directors increased the number of shares of common stock authorized for repurchase by 7,000,000 and 10,000,000 shares, respectively. In accordance with the repurchase programs, the Company had available to repurchase at December 31, 1996 a maximum of 13,996,382 shares of its common stock. As of December 31, 1996, the Company had 32,253,343 authorized shares of common stock reserved for issuance in connection with convertible securities, and stock option and stock award plans. NOTE 9: 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 resale agreements, 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, 1996, PWI's net capital of $948,954 was 16% of aggregate debit items and its net capital in excess of the minimum required was $829,635. 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, 1996, the equity of the Company's subsidiaries totaled approximately $1,971,000. Of this amount, approximately $430,000 was not available for payment of cash dividends and advances. Under the terms of certain credit agreements, the Company is subject to dividend payment restrictions and minimum net worth and net capital requirements. At December 31, 1996, these restrictions did not affect the Company's ability to pay dividends. 43 20 NOTE 10: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK Held or Issued for Trading Purposes In the normal course of business, the Company engages in a variety of derivative and non-derivative financial instrument transactions in connection with its market risk management, its principal trading activities and also on behalf of its clients. Derivative financial instruments include forward and futures contracts, options contracts, interest rate swaps, and other contracts committing the Company to purchase or deliver other instruments at specified future dates and prices, or to make or receive payments based upon notional amounts and specified rates or indices. As defined by the FASB in SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," a derivative financial instrument also includes unsettled purchase and sale agreements and firm or standby commitments for the purchase of securities. It does not include on-balance-sheet receivables and payables whose value is derived from changes in the value of some underlying asset or index, such as mortgage-backed securities and structured notes. In connection with its market risk management and principal trading activities, the Company may enter into a derivative contract to manage the risk arising from other financial instruments or to take a position based upon expected future market conditions. The Company also takes positions to facilitate client transactions and acts as a market-maker in certain listed and unlisted securities. These contracts are valued at market, and unrealized gains and losses are reflected in the consolidated financial statements. A large portion of the Company's derivative financial instruments are "to be announced" mortgage securities requiring forward settlement. As a principal in the mortgage-backed securitization business, the Company has outstanding forward purchase and sale agreements committing the Company to deliver participation certificates and mortgage-backed securities. Set forth below are the gross contract or notional amounts of all off-balance-sheet derivative financial instruments held or issued for trading purposes. These amounts are not reflected in the Consolidated Statements of Financial Condition and are indicative only of the volume of activity at December 31, 1996 and 1995. They do not represent amounts subject to market risks, and in many cases, limit the Company's overall exposure to market losses by hedging other on- and off-balance-sheet transactions.
Notional or Contract Amount at DECEMBER 31, 1996 December 31, 1995 ------------------- --------------------- Purchases Sales Purchases Sales --------- ----- --------- ----- Mortgage-backed forward contracts and options written and purchased $13,443,158 $16,383,162 $13,140,269 $15,861,501 Foreign currency forward contracts, futures contracts, and options written and purchased 440,864 434,072 1,894,724 2,040,414 Equity securities contracts including futures, forwards, and options written and purchased 442,500 888,784 993,161 1,220,400 Other fixed income securities contracts including futures, forwards, and options written and purchased 2,916,929 3,183,749 2,647,504 3,148,312 Interest rate swaps and caps 438,562 415,597 104,050 --
44 21 Set forth below are the fair values of derivative financial instruments held or issued for trading purposes as of December 31, 1996 and 1995. The fair value amounts are determined by quoted market prices and pricing models which consider the time value and volatility of the underlying instruments. Changes in fair value are reflected in principal transactions revenues as incurred. The amounts are netted by counterparty only when the criteria of FASB Interpretation No. 39 are met.
Fair Value at DECEMBER 31, 1996 December 31, 1995 ---------------------- --------------------- Assets Liabilities Assets Liabilities ------- ----------- ------ ----------- Mortgage-backed forward contracts and options written and purchased $78,800 $ 50,480 $129,272 $116,536 Foreign currency forward contracts, futures contracts, and options written and purchased 21,857 21,647 83,222 48,710 Equity securities contracts including futures, forwards, and options written and purchased 56,679 30,919 135,977 52,250 Other fixed income securities contracts including futures, forwards, and options written and purchased 15,431 131,088 22,353 58,148 Interest rate swaps and caps 12,654 8,216 4,660 --
Set forth below are the average fair values of derivative financial instruments held or issued for trading purposes during the years ended December 31, 1996 and 1995. The average fair value is based on the average of the month-end balances during the year.
Average Fair Value for the Years Ended DECEMBER 31, 1996 December 31, 1995 ---------------------------------------------- Assets Liabilities Assets Liabilities ------ ----------- ------ ------------ Mortgage-backed forward contracts and options written and purchased $150,053 $145,396 $118,784 $108,825 Foreign currency forward contracts, futures contracts, and options written and purchased 37,872 43,132 71,805 89,857 Equity securities contracts including futures, forwards, and options written and purchased 34,583 20,699 217,849 142,507 Other fixed income securities contracts including futures, forwards, and options written and purchased 25,027 90,877 16,620 21,449 Interest rate swaps and caps 5,407 1,782 2,132 --
45 22 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, 1996, more than 97% of the off-balance-sheet derivatives trading 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 $185,421 and $375,484 at December 31, 1996 and 1995, respectively. Options written do not expose the Company to credit risk since they do not obligate the counterparty to perform. Transactions in futures contracts are conducted through regulated exchanges which have margin requirements, and are settled in cash on a daily basis, thereby minimizing credit risk. The following table summarizes the Company's principal transactions revenues by business activity for the years ended December 31, 1996 and 1995. 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.
Years Ended December 31, 1996 1995 ---------- -------- Taxable fixed income (includes futures and options contracts, mortgage-backed forwards, foreign currency forwards, and other securities) $ 500,391 $396,787 Equities (includes equity index futures, equity index options and swaps, and equity options contracts) 379,446 377,650 Municipals 143,778 139,764 ---------- -------- $1,023,615 $914,201 ========== ========
Held or Issued for Purposes other than Trading The Company enters into interest rate swap agreements to ensure that the interest rate characteristics of assets and liabilities are matched. As of December 31, 1996 and 1995, the Company had outstanding interest rate swap agreements with commercial banks with notional amounts of $2,112,200 and $1,938,700, respectively. These agreements effectively converted substantially all of the Company's fixed rate debt at December 31, 1996 into floating rate debt. The interest rate swap agreements entered into have had the effect of reducing net interest expense on the Company's long-term borrowings by $7,890 and $29,563 for the years ended December 31, 1996 and 1994, respectively, and increasing net interest expense by $1,682 for the year ended December 31, 1995. The difference to be received or paid on the swap agreements is included in interest expense as incurred and any related receivable from or payable to counterparties is reflected as an asset or liability, accordingly. The Company had no deferred gains or losses related to terminated swap agreements at December 31, 1996 and 1995. The Company is subject to market risk as interest rates fluctuate. The interest rate swaps contain credit risk to the extent the Company is in a receivable or gain position and the counterparty defaults. However, the counterparties to the agreements are large financial institutions, and the Company has not experienced defaults in the past, and management does not anticipate any counterparty defaults in the foreseeable future. See Note 3 for further discussion of interest rate swap agreements used for hedging purposes. 46 23 NOTE 11: 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 through a variety of financial, security position and credit exposure reporting and control procedures. Market Risk Market risk is the potential change in value of the financial instrument caused by unfavorable changes in interest rates, foreign currency exchange rates or the fair values of the securities underlying the instrument. The Company has a variety of methods to monitor its market risk profile. The senior management of each business group is responsible for reviewing trading positions, exposures, profits and losses, and trading strategies on a daily basis. The Company also has an independent risk management group which aids in setting and monitoring risk management policies of the Company, including monitoring adherence to the established limits, performing market risk modeling, and reviewing trading positions and hedging strategies. The Asset/Liability Management Committee, comprised of senior corporate and business unit managers, is responsible for establishing trading position and exposure limits. Market risk modeling is based on estimating loss exposure through stress testing. These results are compared to established limits, and exceptions are subject to review and approval by senior management. Other market risk control procedures include monitoring inventory agings, reviewing traders' marks and regular meetings between the senior management of the business groups and the risk management group. Credit Risk in Proprietary Transactions Counterparties to the Company's proprietary trading, hedging, financing and arbitrage activities are primarily financial institutions, including brokers and dealers, banks, and institutional clients. Credit losses could arise should counterparties fail to perform and the value of any collateral proves inadequate. The Company manages credit risk by monitoring net exposure to individual counterparties on a daily basis, monitoring credit limits and requiring additional collateral where appropriate. Derivative credit exposures are calculated, aggregated and compared to established limits by the credit department. Credit reserve requirements are determined by senior management in conjunction with the Company's continuous credit monitoring procedures. Historically, reserve requirements arising from instruments with off-balance-sheet risk have not been material. Receivables and payables with brokers and dealers, and agreements to resell and repurchase securities are generally collateralized by cash, U.S. government and government-agency securities, and letters of credit. The market value of the initial collateral received is, at a minimum, equal to the contract value. Additional collateral is requested when considered necessary. The Company may pledge clients' margined securities as collateral in support of securities loaned and bank loans, 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, 1996, 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. 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. 47 24 Client transactions include positions in commodities and financial futures, trading liabilities, and written options. The risk to the Company's clients in these transactions can be substantial, principally due to price volatility which can reduce the clients' ability to meet their obligations. Margin deposit requirements pertaining to commodity futures and options transactions are generally lower than those for exchange-traded securities. To the extent clients are unable to meet their commitments to the Company and margin deposits are insufficient to cover outstanding liabilities, the Company may take market action and credit losses could be realized. Client trades are recorded on a settlement date basis. Should either the client or broker fail to perform, the Company may be required to complete the transaction at prevailing market prices. Trades pending at December 31, 1996 were settled without 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 activities with a broad range of corporations, governments, and institutional and individual investors. The Company has no significant exposure to any individual counterparty. The Company seeks to control its credit risk and the potential for risk concentration through a variety of reporting and control procedures described above. The Company's most significant industry concentration, which arises within its normal course of business activities, is financial institutions including banks, brokers and dealers, mutual funds, and insurance companies. NOTE 12: 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, 1996, the aggregate minimum future rental payments required by operating leases with initial or remaining lease terms exceeding one year were as follows: 1997 $ 146,507 1998 128,882 1999 121,214 2000 100,267 2001 91,300 Thereafter 756,869 ---------- $1,345,039 ==========
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 $26,194. For the years ended December 31, 1996, 1995 and 1994, rent expense under operating leases was $163,612, $169,852 and $145,508, respectively. Other Commitments and Contingencies At December 31, 1996 and 1995, the Company was contingently liable under unsecured letters of credit totaling $303,543 and $114,090, respectively, which approximates fair value. At December 31, 1996, certain of the Company's subsidiaries were contingently liable as issuer of $85,518 of notes payable to managing general partners of various limited partnerships pursuant to Internal Revenue Service guidelines. There is no market for these contingent liabilities therefore, it is not practicable to estimate their fair value. In addition, as part of the limited partnership settlements discussed in Note 2, the Company has agreed, under certain circumstances, to provide to class members additional consideration including assignment of any and all fees the Company is entitled to receive from certain partnerships. In the opinion of management, these contingencies will not have a material adverse effect on the Company's consolidated financial statements, taken as a whole. 48 25 In February 1996, two limited partnerships, in which a subsidiary of the Company serves as the general partner and certain key employees serve as the limited partners, entered into two unsecured credit facilities with a commercial bank under which the bank agreed to make unsecured loans to the limited partnerships of up to $77,525. The Company entered into an agreement with the bank to purchase the loans under certain specific circumstances. At December 31, 1996, $55,582 had been loaned to the partnerships. In meeting the financing needs of certain of its clients, the Company may also issue standby letters of credit which are fully collateralized by marginable securities. At December 31, 1996, the Company had outstanding $33,736 of such standby letters of credit. At December 31, 1996 and 1995, securities with a fair value of $215,286 and $441,612, 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 commercial real estate commitments. Settlement of these transactions at December 31, 1996 would not have had a material impact on the Company's consolidated financial statements, taken as a whole. The Company has been named as 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. NOTE 13: STOCK OPTIONS AND STOCK AWARDS Under the Company's various Stock Option and Award Plans ("the Plans"), officers and other key employees are granted options (both non-qualified stock options and incentive 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 four years from the date of grant. The rights generally expire within ten years after the date of grant. The activity during the years ended December 31, 1994, 1995 and 1996 was as follows:
Number of Exercise price Weighted-average shares per share exercise price ---------- -------------- ------ Options outstanding at December 31, 1993 (2,776,678 exercisable) 12,280,955 $ 6.55 - 20.42 $12.61 Granted 4,095,550 14.44 - 18.67 17.23 Exercised (574,586) 6.55 - 16.29 7.54 Terminated (630,309) 7.14 - 19.46 15.13 ---------- -------------- ------ Options outstanding at December 31, 1994 (5,201,831 exercisable) 15,171,610 $ 6.55 - 20.42 $13.94 Granted 5,666,430 14.44 - 20.13 17.50 Exercised (2,934,098) 6.55 - 19.46 10.54 Terminated (958,519) 6.55 - 19.46 16.43 ---------- -------------- ------ Options outstanding at December 31, 1995 (3,188,665 exercisable) 16,945,423 $ 6.55 - 20.42 $15.58 Granted 4,790,764 18.94 - 26.56 21.62 Exercised (2,999,720) 6.55 - 20.13 11.83 Terminated (1,182,730) 7.14 - 21.13 18.19 ---------- -------------- ------ Options outstanding at December 31, 1996 (4,234,367 exercisable) 17,553,737 $ 6.55 - 26.56 $17.69
49 26 The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------- ------------------------------- Weighted-average Number of remaining Number of Range of exercise shares Weighted-average contractual life shares Weighted-average prices per share outstanding exercise price (years) exercisable exercise price - ---------------- ----------- ---------------- ---------------- ----------- ---------------- $ 6.55 - 10.00 1,148,023 $ 7.36 2.3 1,148,023 $ 7.36 10.01 - 14.00 350,220 10.20 4.1 350,220 10.20 14.01 - 18.00 7,982,398 16.44 7.3 2,521,927 17.05 18.01 - 22.00 5,612,096 19.70 8.3 214,197 19.80 22.01 - 26.56 2,461,000 23.06 6.8 -- -- ---------- ------ --- --------- ------ $ 6.55 - 26.56 17,553,737 $17.69 7.2 4,234,367 $14.00 ---------- ------ --- --------- ------
The Company accounts for stock option grants in accordance with APB 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 1996 and 1995 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. 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 1996 and 1995, respectively: dividend yields of 2.2% and 2.8%; expected lives of 4.2 and 4.7 years; risk-free interest rates of 5.9% and 6.9%; and expected volatility of 28% for both years. The weighted-average fair value of options granted during 1996 and 1995 were $5.53 and $4.46, respectively. For purposes of the pro forma information, the fair values of the 1996 and 1995 stock option grants are amortized over the vesting period. The pro forma information for the years ended December 31, 1996 and 1995 is as follows:
1996 1995 -------- ------- Net Income As reported $364,350 $80,750 Pro forma $356,475 $75,649 Earnings per common share: Primary As reported $ 3.59 $ 0.54 Pro forma $ 3.51 $ 0.49 Fully diluted As reported $ 3.38 $ 0.52 Pro forma $ 3.31 $ 0.48
The Plans also provide for the granting of cash and restricted stock awards, stock appreciation rights, restricted stock units, stock purchase rights, performance units and other stock based awards. The Company had no stock appreciation rights or stock purchase rights outstanding at December 31, 1996 and 1995. 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 is terminated prior to the prescribed restriction period. During the years ended December 31, 1996, 1995 and 1994, the Company awarded 2,455,269, 2,935,843 and 2,431,882 shares, respectively, of restricted stock, net of forfeitures. The market value of the restricted shares awarded has been recorded as unamortized cost of restricted stock and is shown as a separate component of stockholders' equity. The unamortized cost of restricted stock is being amortized over the restriction period. The charge to compensation expense, net of forfeitures, amounted to $59,945, $51,908 and $44,073 in the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, there were 6,680,726 and 6,560,893 shares, respectively, available for future stock option, common stock and restricted stock awards under these Plans. 50 27 NOTE 14: EMPLOYEE BENEFIT PLANS Pension Plan The Company has a non-contributory defined benefit pension plan (the "Plan"), which provides benefits to eligible employees. Pension expense for the years ended 1996, 1995 and 1994 for the Plan included the following components:
1996 1995 1994 -------- -------- -------- Service cost for benefits earned during the period $ 19,191 $ 14,641 $ 14,626 Interest cost on projected benefit obligation 20,225 17,024 16,448 Actual return on Plan assets (37,725) (47,269) 1,777 Net amortization and deferral 21,254 32,424 (15,167) -------- -------- -------- Net periodic pension cost $ 22,945 $ 16,820 $ 17,684 ======== ======== ========
The following table summarizes the funded status and the prepaid pension asset included in "Other assets" on the Company's Consolidated Statements of Financial Condition at December 31, 1996 and 1995:
1996 1995 --------- --------- Actuarial present value of benefit obligations: Vested $ 273,085 $ 254,656 Non-vested 8,446 8,185 --------- --------- Accumulated benefit obligation 281,531 262,841 Effect of projected future compensation levels 20,677 15,273 --------- --------- Projected benefit obligation 302,208 278,114 Plan assets at fair value 311,171 274,505 --------- --------- Plan assets in excess of (less than) projected benefit obligation 8,963 (3,609) Unrecognized net assets existing at January 1, 1987 being recognized over fifteen years (4,525) (5,365) Unrecognized prior service cost 3,780 5,817 Unrecognized net loss and actuarial experience 57,274 81,593 --------- --------- Prepaid pension asset at year end $ 65,492 $ 78,436 ========= =========
The projected benefit obligation for the Plan was determined for 1996 and 1995 using an assumed discount rate of 7 1/2% and 7 1/4%, respectively, and an assumed rate of compensation increase of 5%. The weighted-average assumed rate of return on Plan assets was 9 1/2% for 1996, 1995 and 1994. 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. Savings Investment Plan The Paine Webber 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 to the SIP and invested in the PaineWebber Common Stock Fund amounted to approximately $12,100, $7,100 and $5,900 for the years ended December 31, 1996, 1995 and 1994, respectively. 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, 1996, 1995 and 1994 were $55,700, $55,600 and $50,800, respectively. 51 28 NOTE 15: 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, 1996, 1995 and 1994 were as follows:
1996 1995 1994 -------- -------- -------- DEFERRED TAX ASSETS: Employee benefits $141,929 $ 98,389 $ 73,783 Deferred deductions 40,767 99,205 44,388 Other 39,065 26,998 28,456 -------- -------- -------- Total deferred tax assets 221,761 224,592 146,627 -------- -------- -------- DEFERRED TAX LIABILITIES: Tax over book depreciation 16,520 15,543 14,135 Accelerated deductions and deferred income 11,864 16,809 10,379 Safe harbor leases 4,976 5,567 6,135 Valuation of trading assets and investments 31,827 5,270 17,154 Other 6,016 3,711 11,910 -------- -------- -------- Total deferred tax liabilities 71,203 46,900 59,713 -------- -------- -------- $150,558 $177,692 $ 86,914 ======== ======== ========
The significant components of the provision for income taxes for the years ended December 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994 -------- -------- -------- CURRENT: Federal $134,940 $ 64,953 $ 12,224 State 11,436 27,033 9,930 Foreign 21,139 20,719 11,448 -------- -------- -------- Total current 167,515 112,705 33,602 -------- -------- -------- DEFERRED: Federal 11,978 (65,601) (17,947) State 23,984 (25,177) (6,490) Foreign (8,828) -- 3,589 -------- -------- -------- Total deferred 27,134 (90,778) (20,848) -------- -------- -------- $194,649 $ 21,927 $ 12,754 ======== ======== ========
The reconciliation of income taxes, computed at the statutory federal rate, to the provision for income taxes recorded for the years ended December 31, 1996, 1995 and 1994, was as follows:
1996 1995 1994 -------------------- ------------------- ------------------- Amount % Amount % Amount % --------- ---- -------- ---- -------- ---- Tax at statutory federal rate $ 196,012 35.0 $ 35,937 35.0 $ 15,536 35.0 State and local income taxes, net of federal tax benefit 23,023 4.1 1,206 1.2 2,236 5.0 Foreign rate differential (9,227) (1.7) (2,500) (2.4) (1,141) (2.6) Nontaxable dividends and interest (6,695) (1.2) (9,754) (9.5) (3,545) (8.0) Restricted stock dividends (921) (0.2) (1,025) (1.0) (864) (1.9) Nondeductible expenses 2,514 0.4 2,779 2.7 2,743 6.2 Minority interest (362) (0.1) -- -- -- -- Other, net (9,695) (1.5) (4,716) (4.6) (2,211) (5.0) $ 194,649 34.8 $ 21,927 21.4 $ 12,754 28.7
52 29 Income taxes paid for the years ended December 31, 1996, 1995 and 1994 were $130,886, $28,248 and $68,455, 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, 1996, such earnings were estimated to be $152,000. The estimated U.S. income taxes that would be payable upon the repatriation of such earnings are not material. NOTE 16: GEOGRAPHIC DATA The Company's business activities are highly integrated and constitute a single industry segment for purposes of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The table below presents information about the Company's operations by geographic area. Calculations are based on the location of the Company's individual legal entities within their respective subsidiaries. Due to the global nature of the financial markets and the integration of the Company's business activities, the Company believes that the amounts derived in this manner are not necessarily meaningful in understanding its business.
1996 1995 1994 ----------- ----------- ----------- TOTAL REVENUES: United States $ 5,516,443 $ 5,107,476 $ 3,806,784 Non-U.S.* 189,523 212,614 157,293 ----------- ----------- ----------- $ 5,705,966 $ 5,320,090 $ 3,964,077 =========== =========== =========== NET REVENUES: United States $ 3,576,442 $ 3,161,799 $ 2,399,884 Non-U.S.* 158,770 188,480 135,540 ----------- ----------- ----------- $ 3,735,212 $ 3,350,279 $ 2,535,424 =========== =========== =========== INCOME BEFORE TAXES & MINORITY INTEREST: United States $ 526,422 $ 58,498 $ 220 Non-U.S.* 33,611 44,179 44,165 ----------- ----------- ----------- $ 560,033 $ 102,677 $ 44,385 =========== =========== =========== NET INCOME: United States $ 333,711 $ 52,095 $ 2,099 Non-U.S.* 30,639 28,655 29,532 ----------- ----------- ----------- $ 364,350 $ 80,750 $ 31,631 =========== =========== =========== IDENTIFIABLE ASSETS: United States $39,549,604 $36,575,206 $29,758,945 Non-U.S.* 12,963,896 9,096,088 6,097,180 ----------- ----------- ----------- $52,513,500 $45,671,294 $35,856,125 =========== =========== ===========
*Predominantly the United Kingdom 53 30 NOTE 17: EARNINGS PER COMMON SHARE Earnings per common share is computed by dividing net income, adjusted for preferred stock dividends and interest savings, by the weighted-average common and common equivalent shares outstanding during each period presented. Common equivalent shares include common shares issuable under the Company's stock option and award plans, the conversion of convertible debentures and convertible preferred stock, and restricted stock outstanding. The Company computes its earnings per common share under the modified treasury stock method in accordance with APB No. 15, "Earnings Per Share." The modified treasury stock method is used when the number of shares obtainable upon exercise of outstanding options, warrants and their equivalents, in the aggregate, exceeds 20% of the Company's outstanding common stock. Under this method, all options, warrants and their equivalents are assumed to have been exercised, whether or not dilutive, and the aggregate proceeds used to repurchase up to 20% of the outstanding shares. Any remaining proceeds are then assumed to reduce short-term borrowings. The Company calculated primary and fully diluted earnings per share as follows:
Years Ended December 31, 1996 1995 1994 ------------- ------------- ------------ PRIMARY: Weighted-average common shares outstanding 87,698,138 92,030,417 71,693,020 Incremental stock options and awards 6,708,357 9,241,691 6,370,453 ------------- ------------- ------------ Weighted-average common and common equivalent shares 94,406,495 101,272,108 78,063,473 ============= ============= ============ Net income $ 364,350 $ 80,750 $ 31,631 Interest savings on convertible debentures and short-term borrowings 4,062 3,322 1,330 Preferred dividend requirements (29,395) (29,291) (1,219) ------------- ------------- ------------ Net income applicable to common shares $ 339,017 $ 54,781 $ 31,742 ------------- ------------- ------------ Primary earnings per common share $ 3.59 $ 0.54 $ 0.41 ============= ============= ============ FULLY DILUTED: Weighted-average common shares outstanding 87,698,138 92,030,417 71,693,020 Incremental stock options and awards 8,480,906 9,241,691 7,673,929 Conversion of Convertible Preferred Stock 5,515,720 -- -- Weighted-average common shares issuable assuming conversion of 8% Debentures 449,752 -- 1,647,190 ------------- ------------- ------------ Weighted-average common and common equivalent shares 102,144,516 101,272,108 81,014,139 ============= ============= ============ Net income $ 364,350 $ 80,750 $ 31,631 Interest savings on convertible debentures and short-term borrowings 3,865 1,526 2,181 Preferred dividend requirements (23,395) (29,291) (969) ------------- ------------- ------------ Net income applicable to common shares $ 344,820 $ 52,985 $ 32,843 ------------- ------------- ------------ Fully diluted earnings per common share $ 3.38 $ 0.52 $ 0.41 ============= ============= ============
54 31 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York February 3, 1997 55 32 Five Year Financial Summary (In thousands of dollars except share and per share amounts)
Years Ended December 31, 1996 1995(1) 1994(2) 1993 1992 ----------------- ----------------- ----------------- ------------------ ---------------- Amount % Amount % Amount % Amount % Amount % ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- REVENUES COMMISSIONS Listed securities and options $ 821,499 22.0 $ 816,517 24.4 $ 580,323 22.9 $ 599,599 20.9 $ 500,572 20.1 Mutual funds and insurance 380,982 10.2 302,654 9.0 279,688 11.0 259,130 9.0 180,244 7.3 Over-the-counter securities and other 178,994 4.8 153,595 4.6 110,283 4.4 137,398 4.8 141,062 5.7 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- 1,381,475 37.0 1,272,766 38.0 970,294 38.3 996,127 34.7 821,878 33.1 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- PRINCIPAL TRANSACTIONS Taxable fixed income 500,391 13.4 396,787 11.8 56,221 2.2 396,310 13.8 383,146 15.4 Equities 379,446 10.2 377,650 11.3 324,178 12.8 272,539 9.5 241,824 9.7 Municipals 143,778 3.8 139,764 4.2 139,039 5.5 110,595 3.8 94,819 3.8 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- 1,023,615 27.4 914,201 27.3 519,438 20.5 779,444 27.1 719,789 28.9 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- ASSET MANAGEMENT 453,267 12.1 399,540 11.9 356,368 14.1 325,690 11.3 267,088 10.8 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- INVESTMENT BANKING Selling concessions and underwriting fees: Corporate securities 188,991 5.1 171,903 5.1 136,494 5.4 223,745 7.8 217,180 8.8 Municipal obligations 44,882 1.2 35,842 1.1 32,228 1.3 55,573 1.9 40,705 1.6 Underwriting management fees: Corporate securities 37,072 1.0 35,596 1.0 44,592 1.7 70,510 2.4 51,394 2.1 Municipal obligations 9,032 0.2 7,736 0.2 7,413 0.3 13,303 0.5 9,385 0.4 Private placement and other fees 111,187 3.0 75,700 2.3 63,776 2.5 50,512 1.8 65,657 2.6 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- 391,164 10.5 326,777 9.7 284,503 11.2 413,643 14.4 384,321 15.5 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- OTHER 146,708 3.9 150,056 4.5 138,902 5.5 113,253 3.9 76,114 3.1 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- INTEREST 2,309,737 61.9 2,256,750 67.4 1,694,572 66.8 1,376,560 47.9 1,094,541 44.0 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- TOTAL REVENUES 5,705,966 152.8 5,320,090 158.8 3,964,077 156.4 4,004,717 139.3 3,363,731 135.4 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- INTEREST EXPENSE 1,970,754 (52.8) 1,969,811 (58.8) 1,428,653 (56.4) 1,130,712 (39.3) 879,242 (35.4) ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- NET REVENUES $3,735,212 100.0 $3,350,279 100.0 $2,535,424 100.0 $2,874,005 100.0 $2,484,489 100.0 ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
56 33 Five Year Financial Summary (In thousands of dollars except share and per share amounts)
Years Ended December 31, 1996 1995(1) 1994(2) 1993 1992 ---------------- ---------------- ---------------- ---------------- ---------------- Amount % Amount % Amount % Amount % Amount % ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- NON-INTEREST EXPENSES Compensation and benefits $ 2,219,129 59.4 $2,004,585 59.8 $1,546,467 61.0 $1,628,889 56.7 $1,432,930 57.7 Office and equipment 267,006 7.1 266,291 7.9 225,375 8.9 211,880 7.4 192,948 7.8 Communications 153,301 4.1 149,047 4.5 130,095 5.1 123,601 4.3 112,255 4.5 Business development 75,981 2.0 90,752 2.7 85,430 3.4 93,962 3.3 75,061 3.0 Brokerage, clearing and exchange fees 87,839 2.4 93,657 2.8 82,577 3.2 79,752 2.8 75,689 3.1 Professional services 108,123 2.9 101,911 3.0 78,856 3.1 66,825 2.2 59,820 2.4 Other 263,800 7.1 541,359 16.2 342,239 13.5 261,520 9.1 196,671 7.9 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- TOTAL NON-INTEREST EXPENSE 3,175,179 85.0 3,247,602 96.9 2,491,039 98.2 2,466,429 85.8 2,145,374 86.4 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- Income before taxes and minority interest 560,033 15.0 102,677 3.1 44,385 1.8 407,576 14.2 339,115 13.6 Provision for income taxes 194,649 5.2 21,927 0.7 12,754 0.5 161,393 5.6 125,940 5.0 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- Income before minority interest 365,384 9.8 80,750 2.4 31,631 1.3 246,183 8.6 213,175 8.6 Minority interest 1,034 0.0 -- 0.0 -- 0.0 -- 0.0 -- 0.0 ---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- Net income $ 364,350 9.8 $ 80,750 2.4 $ 31,631 1.3 $ 246,183 8.6 $ 213,175 8.6 EARNINGS PER COMMON SHARE:(3) Primary $ 3.59 $ 0.54 $ 0.41 $ 3.11 $ 2.83 Fully diluted $ 3.38 $ 0.52 $ 0.41 $ 2.95 $ 2.37 - ----------------------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE COMMON SHARES:(3) Primary 94,406,495 101,272,108 78,063,473 78,689,958 69,379,863 Fully diluted 102,144,516 101,272,108 81,014,139 84,327,291 92,365,438 - ----------------------------------------------------------------------------------------------------------------- DIVIDENDS DECLARED PER SHARE: Common stock(3) $ .48 $ .48 $ .48 $ .38 $ .31 Preferred stock: Redeemable Preferred Stock $ 9.00 $ 9.00 $ -- $ -- $ -- Convertible Preferred Stock $ 6.00 $ 6.00 $ -- $ -- $ -- 7% Preferred Stock $ -- $ -- $ -- $ -- $ 2.336 $1.375 Preferred Stock $ -- $ -- $ -- $ 1.241 $ 1.375 Participating Preferred Stock $ -- $ -- $ -- $ .33 $ .053 - -----------------------------------------------------------------------------------------------------------------
(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 have been restated to reflect a three-for-two common stock split in March 1994. 57 34 Common Stock and Quarterly Information COMMON STOCK DIVIDEND HISTORY During 1996, Paine Webber Group Inc. continued its policy of paying quarterly common stock dividends. Dividends declared during the last twelve quarters were as follows:
Calendar Quarter 1st 2nd 3rd 4th - --------------------------------------------------------------------------------------------------------------------------- 1996 $ .12 $ .12 $ .12 $ .12 1995 .12 .12 .12 .12 1994 .12 .12 .12 .12
On February 6, 1997, Paine Webber Group Inc. declared a 1997 first quarter dividend of $0.15 per share, an increase of 25% over the fourth quarter of 1996. 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 9 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:
High Low - ------------------------------------------------------------------------------------------------------------------ CALENDAR 1996 4th Quarter $ 29.50 $ 21.00 3rd Quarter 23.75 19.00 2nd Quarter 23.75 19.88 1st Quarter 22.25 17.88 ------------------------- CALENDAR 1995 4th Quarter $ 23.13 $ 18.00 3rd Quarter 20.88 18.63 2nd Quarter 20.38 15.88 1st Quarter 18.13 14.38 -------------------------
On February 14, 1997, the last reported sale price per share of Paine Webber Group Inc. common stock on the NYSE was $36.00. The approximate number of holders of record of Paine Webber Group Inc. common stock as of the close of business on February 14, 1997 was 6,413. Included as one holder of record is Paine Webber Incorporated, which holds securities beneficially owned by approximately 7,119 clients. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Income (loss) Earnings (loss) before taxes Net per common (In thousands of dollars Total Net and minority Income share Primary/ except per share amounts) Revenues Revenues interest (loss) Fully diluted - ---------------------------------------------------------------------------------------------------------------- CALENDAR 1996 4th Quarter $ 1,469,528 $ 939,968 $ 141,776 $ 91,482 $ .91/.86 3rd Quarter 1,375,248 882,986 123,315 80,155 .79/.75 2nd Quarter 1,431,164 949,623 140,326 92,212 .90/.86 1st Quarter 1,430,026 962,635 154,616 100,501 .96/.92 --------------------------------------------------------------------------- CALENDAR 1995 4th Quarter $ 1,374,377 $ 887,672 $ 78,803(1) $ 58,798(1) $ .52/.50(1) 3rd Quarter 1,379,558 912,025 116,702 78,190 .71/.67 2nd Quarter 1,332,245 824,798 (145,613)(1) (90,548)(1) (1.06)/(1.06)(1) 1st Quarter 1,233,910 725,784 52,785 34,310 .27/.27 ---------------------------------------------------------------------------
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. (1) Includes after-tax charges of $125.9 million ($200 million before income taxes) and $20.1 million ($30 million before income taxes) in the second and fourth quarters, respectively, related to the resolution of the issues arising from the Company's sale of public proprietary limited partnerships. 58 35 Corporate Information
PAINEWEBBER INCORPORATED PAINE WEBBER GROUP INC. PAINE WEBBER GROUP INC. BOARD OF DIRECTORS BOARD OF DIRECTORS 1285 Avenue of the Americas T. Stanton Armour Donald B. Marron, New York, NY 10019-6028 Private Investor Chairman 212-713-2000 E. Garrett Bewkes, Jr. Margo N. Alexander Private Investor Terry L. Atkinson OFFICERS Brian M. Barefoot Reto Braun Steven P. Baum Donald B. Marron Chairman of the Board, President and Chief Timothy E. Cronin Chairman and Chief Executive Officer Executive Officer, Moore Corporation Limited Regina A. Dolan Joseph J. Grano, Jr. Theodore A. Levine John A. Bult Edward M. Kerschner Vice President, General Counsel and Secretary Director, PaineWebber International Inc. Jerome A. Lichtstein James P. MacGilvray Regina A. Dolan Frank P. Doyle Ronald M. Schwartz Vice President and Chief Financial Officer Executive Vice President (retired) Robert H. Silver General Electric Company Mark B. Sutton William J. Nolan Treasurer Joseph J. Grano, Jr. President, PaineWebber Incorporated Geraldine L. Banyai Assistant Secretary John E. Kilgore, Jr. Private Investor James W. Kinnear Retired President and Chief Executive Officer, Texaco Inc. Naoshi Kiyono Managing Director and General Manager, International Investment Department, 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
59 36 Subsidiaries and Affiliated Companies PAINEWEBBER INTERNATIONAL OFFICES GENEVA PARIS TOKYO 13 Cours de Rive 56 rue du Faubourg Saint Honore Asahi Seimei Hibiya P.O. Box 3429 75008 Paris Building 3F 1211 Geneva 3 France 1-5-1 Yuraku-Cho Switzerland 33-14-471-1300 Chiyoda-Ku, Tokyo 100 41-22-849-0707 Japan SAN JUAN 813-3593-5200 HONG KONG American International Plaza, Suite 3204-05 Penthouse ZURICH Citibank Tower 250 Munoz Rivera Avenue Talacker 41 Citibank Plaza, 3 Garden Road Hato Rey 8001 Zurich Hong Kong Puerto Rico 00918-1918 Switzerland 852-2842-0600 809-250-3600 411-221-3344 LONDON SINGAPORE 1 Finsbury Avenue 80 Raffles Place London EC2M 2PA #13-20 UOB Plaza 2 England Singapore 0104 44-171-422-2000 65-323-0188
- -------------------------------------------------------------------------------- PAINEWEBBER INTERNATIONAL BANK LTD. PAINEWEBBER INTERNATIONAL (U.K.) LTD. 1 Finsbury Avenue 1 Finsbury Avenue London EC2M 2PA London EC2M 2PA England England 44-171-422-2000 44-171-422-2000 - -------------------------------------------------------------------------------- MITCHELL HUTCHINS ASSET MANAGEMENT INC. PAINE WEBBER DEVELOPMENT CORPORATION CORRESPONDENT SERVICES CORPORATION 1285 Avenue of the Americas 1285 Avenue of the Americas 120 Broadway New York, NY 10019-6028 New York, NY 10019-6028 New York, NY 10271-0002 MITCHELL HUTCHINS INSTITUTIONAL INVESTORS INC. PAINE WEBBER PROPERTIES INCORPORATED PAINEWEBBER SPECIALISTS INCORPORATED 1285 Avenue of the Americas 1285 Avenue of the Americas 120 Broadway New York, NY 10019-6028 New York, NY 10019-6028 New York, NY 10271-0002 PAINEWEBBER CAPITAL INC. PW TRUST COMPANY PAINEWEBBER LIFE INSURANCE COMPANY 1285 Avenue of the Americas 1200 Harbor Boulevard 601 6th Avenue New York, NY 10019-6028 Weehawken, NJ 07087-6725 Des Moines, IA 50309-1605
60 37 Branch Locations (by division) NORTHEAST Tarrytown, NY Kenwood, OH CENTRAL Minneapolis, MN Hemet, CA Wellesley, MA Knoxville, TN Minnetonka, MN Hilo, HI Albany, NY Westfield, NJ Lexington, KY Albuquerque, NM Muskegon, MI Honolulu, HI Andover, MA Westport, CT Little Rock, AR Anderson, IN Muskogee, OK Indian Wells, CA Bangor, ME White Plains, NY Louisville, KY Aspen, CO New Orleans, LA Kalispell, MT Boston, MA Worcester, MA Maryville, TN Atlantic, IA Northbrook, IL Kennewick, WA Buffalo, NY McLean, VA Austin, TX Oakbrook Terrace, IL Kenwood, CA Burlington, VT Melbourne, FL Baton Rouge, LA Oklahoma City, OK La Jolla, CA Cherry Hill, NJ SOUTHERN Memphis, TN Beaumont, TX Omaha, NE Las Vegas, NV Concord, NH Miami, FL Birmingham, MI Overland Park, KS Long Beach, CA Darien, CT Akron, OH Naples, FL Boulder, CO Rodchester, MI Los Angeles, CA East Hampton, NY Altoona, PA Nashville, TN Bryan/College Station, TX St. Louis, MO Medford, OR Florham Park, NJ Atlanta, GA New Kensington, PA Chesterfield, MO St. Paul, MN Menlo Park, CA Garden City, NY Aventura, FL Norfolk ,VA Chicago, IL San Angelo, TX Merced, CA Glens Falls, NY Baltimore, MD North Palm Beach, FL Clayton, MO San Antonio, TX Mission Viejo, CA Greenwich, CT Beachwood, OH Oak Ridge, TN Colorado Springs, CO Santa Fe, NM Missoula, MT Hackensack, NJ Bethesda, MD Ocala, FL Corpus Christi, TX Schaumburg, IL Napa, CA Hartford, CT Bethlehem, PA Orlando, FL Dallas, TX Sioux Falls, SD Newport Beach, CA Hingham, MA Birmingham, AL Paducah, KY Denver, CO Sugarland, TX Newport Center, CA Hyannis, MA Boca Raton, FL Palm Beach, FL Des Moines, IA Topeka, KS Orange, CA Marblehead, MA Bradford, PA Pensacola, FL Detroit, MI Traverse City, MI Palo Alto, CA Melville, NY Bristol, VA Philadelphia, PA Duluth, MN Troy, MI Pasadena, CA Metro Park, NJ Charlotte, NC Pittsburgh, PA Farmington Hills, MI Tulsa, OK Phoenix, AZ Middlebury, CT Charlottesville, VA Ponte Vedra, FL Flint, MI Tyler, TX Portland, OR Morristown, NJ Cincinnati, OH Port Charlotte, FL Fort Collins, CO Vail, CO Rancho Bernardo, CA Nantucket, MA Clearwater, FL Radnor, PA Fort Wayne, IN Victoria, TX Redlands, CA New Haven, CT Cleveland, OH Raleigh, NC Fort Worth, TX Virginia, MN Reno, NV New London, CT Columbus, OH Richmond, VA Grand Forks, ND Waco, TX Riverside, CA New York, NY Coral Gables, FL Roanoke, VA Grand Rapids, MI Wauwatosa, WI Roseville, CA Newtown, PA (International) Rockville, MD Greeley, CO Wayzata, MN Sacramento, CA Norwich, CT Corry, PA St. Petersburg, FL Hibbing, MN West Beaumont, TX Salt Lake City, UT Paramus, NJ Dayton, OH St. Simons Island, GA Hinsdale, IL Wichita, KS San Diego, CA Peabody, MA Daytona Beach, FL Salem, SC Houston, TX San Francisco, CA Pearl River, NY Destin, FL Sarasota, FL Hurst, TX San Jose, CA Pittsfield, MA Durham, NC Stuart, FL Indianapolis, IN WESTERN San Mateo, CA Plattsburgh, NY Erie, PA Tampa, FL Kansas City, MO Santa Barbara, CA Portland, ME Fayetteville, NC Toledo, OH Kingwood, TX Anchorage, AK Santa Rosa, CA Portsmouth, NH Fort Lauderdale, FL Troy, OH Lafayette, LA Bakersfield, CA Scottsdale, AZ Princeton, NJ Fort Myers, FL Upper Arlington, OH Lansing, MI Bellevue, WA Seattle, WA Providence, RI Gainesville, FL Venice, FL Lincoln, NE Beverly Hills, CA Sedona, AZ Red Bank, NJ Greensboro, NC Vero Beach, FL Livonia, MI Billings, MT Spokane, WA Rochester, NY Greensburg, PA Virginia Beach, VA Longview, TX Bozeman, MT Stockton, CA Rockland, ME Greenville, SC Washington, DC Madison, WI Brea, CA Sun City, AZ Somers Point, NJ Hendersonville, NC West Palm Beach, FL McAllen, TX Carlsbad, CA Sun Valley, ID Southampton, NY Hunt Valley, MD Wilkes-Barre, PA Mexia, TX Carmel, CA Tucson, AZ Springfield, MA Jackson, MS Winston-Salem, NC Midland, TX Century City, CA Ventura, CA Stamford, CT Jackson, TN Youngstown, OH Milwaukee, WI Chico, CA Wailuku, HI Syracuse, NY Jacksonville, FL Encino, CA Walnut Creek, CA Jamestown, NY Fresno, CA Woodland Hills, CA Jenkintown, PA Grass Valley, CA Johnstown, PA
61 38 Corporate Data
HEADQUARTERS SHAREHOLDER INQUIRIES STOCK, DEBT AND TRUST SECURITIES LISTINGS The PaineWebber Building For information regarding your shares Paine Webber Group Inc. Common Stock 1285 Avenue of the Americas of Paine Webber Group Inc. (trading symbol PWJ) is listed on the New York, NY 10019-6028 Common Stock, please contact: New York Stock Exchange and the Pacific 212-713-2000 Stock Exchange. The Stock Index Return Assistant Secretary Securities on the Standard and Poor's Lincoln Harbor Facility 212-713-3224 MidCap 400 Index due June 2, 2000 are 1000-1200 Harbor Boulevard listed on the American Stock Exchange. Weehawken, NJ 07087-6725 The 8.30% Preferred Trust Securities of 201-902-3000 FINANCIAL INFORMATION PWG Capital Trust I are listed on the New York Stock Exchange. Internet address: Investors, securities analysts and others www.painewebber.com desiring financial information should contact 10-K Investor Relations 212-713-3641 The annual report to the Securities and Exchange Commission on Form 10-K will be available in March 1997. A copy may be TRANSFER AGENT AND REGISTRAR obtained upon request in writing or by telephone to Assistant Secretary, Paine Chase Mellon Shareholder Services Webber Group Inc. 450 West 33rd Street New York, NY 10001 AUDITORS Ernst & Young LLP 787 Seventh Avenue New York, NY 10019-6013
62 39 FINANCIAL HIGHLIGHTS Years Ended December 31, 1996 1995(1) 1994(2) 1993 1992 (In thousands of dollars except per share amounts) Operating Results Total revenues . . . . . . . . . . . . . . $ 5,705,966 $ 5,320,090 $ 3,964,077 $ 4,004,717 $ 3,363,731 Net revenues (including net interest) . . $ 3,735,212 $ 3,350,279 $ 2,535,424 $ 2,874,005 $ 2,484,489 Income before income taxes and minority interest . . . . . . . . . . . $ 560,033 $ 102,677 $ 44,385 $ 407,576 $ 339,115 Net income . . . . . . . . . . . . . . . . $ 364,350 $ 80,750 $ 31,631 $ 246,183 $ 212,175 ------------ ----------- ----------- ----------- ----------- Per Common Share(3) Primary earnings . . . . . . . . . . . . $ 3.59 $ 0.54 $ 0.41 $ 3.11 $ 2.83 Fully diluted earnings . . . . . . . . . $ 3.38 $ 0.52 $ 0.41 $ 2.95 $ 2.37 Dividends declared . . . . . . . . . . . $ 0.48 $ 0.48 $ 0.48 $ 0.38 $ 0.31 Book value . . . . . . . . . . . . . . . $ 18.28 $ 15.62 $ 15.96 $ 16.29 $ 14.24 ----------- ----------- ----------- ----------- ----------- Financial Condition Total assets . . . . . . . . . . . . . . . $52,513,500 $45,671,294 $35,856,125 $37,026,909 $26,508,982 Long-term borrowings and Redeemable Preferred Stock . . . . . . . $ 3,164,349 $ 2,622,797 $ 2,501,384 $ 1,936,082 $ 1,150,553 Stockholders' equity . . . . . . . . . . . $ 1,730,425 $ 1,552,288 $ 1,630,499 $ 1,195,047 $ 1,080,667 Total Capitalization . . . . . . . . . . . $ 4,894,774 $ 4,370,085 $ 4,131,883 $ 3,131,129 $ 2,231,220 =========== =========== =========== =========== ===========
- ---------- (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 per share data have been restated to reflect three-for-two common stock splits in March 1994.
EX-21 17 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 PAINE WEBBER GROUP INC. SUBSIDIARIES OF THE REGISTRANT A list of significant subsidiaries, all of which are consolidated, of Paine Webber Group Inc. (the "Company") as of December 31, 1996 and the state or jurisdiction in which organized follows. In each case, 100% of the voting securities are owned by the Company. Certain subsidiaries have been omitted because, in the aggregate, they do not constitute a significant subsidiary. State or jurisdiction of incorporation or Name organization ---- ------------ PaineWebber Incorporated Delaware Mitchell Hutchins Asset Management Inc. Delaware PaineWebber International (U.K.) Ltd. United Kingdom EX-23 18 CONSENT OF INDEPENDENT AUDITORS 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 3, 1997, included in the 1996 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 and 333-05269) 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 and 333-17913) of Paine Webber Group Inc. and in the related prospectuses, of our reports dated February 3, 1997 with respect to the consolidated financial statements and financial statement schedule of Paine Webber Group Inc. included and/or incorporated by reference in this 1996 Annual Report on Form 10-K for the year ended December 31, 1996. ERNST & YOUNG LLP New York, New York March 26, 1997 EX-27 19 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE FINANCIAL STATEMENTS OF PAINE WEBBER GROUP INC. FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 0000075754 PAINE WEBBER 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 883,617 5,089,074 20,746,831 7,380,374 16,823,307 313,261 52,513,500 1,337,646 6,664,677 28,797,276 3,459,860 6,621,891 2,781,694 382,655 100,000 108,358 1,522,067 52,513,500 1,023,615 2,309,737 1,381,475 391,164 453,267 1,970,754 2,219,129 560,033 364,350 0 0 364,350 3.59 3.38
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