-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, F04+4fNQAs9qBbv7AE4uapuIug4jdu30vmvgmhfaQADZMHHo72AYMyO/6q+HuVRV 7ON5ZU5zLRDlQhZtRV6vqQ== 0000950123-95-000350.txt : 19950301 0000950123-95-000350.hdr.sgml : 19950301 ACCESSION NUMBER: 0000950123-95-000350 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19941209 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19950224 SROS: NYSE 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-07367 FILM NUMBER: 95515079 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 8-K/A 1 FORM 8-K/A CURRENT REPORT -- PAINE WEBBER GROUP 1 --------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ----------------------------------- FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) December 9, 1994 --------------------- PAINE WEBBER GROUP, INC. ------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-7367 13-2760086 -------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) 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 --------------- Not Applicable ------------------------------------------------------------------- Former name or address, if changed since last report ----------------------------------------------------- 2 THIS FORM 8-K/A AMENDS ITEM 7(A) AND (B) OF THE PAINE WEBBER GROUP INC. (THE "COMPANY") CURRENT REPORT ON FORM 8-K DATED DECEMBER 9, 1994 (FILED DECEMBER 27, 1994) ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS - ------- --------------------------------- The following documents are filed as part of this report: (a) Historical Financial Statements Real Estate, Eurobond, Retail Brokerage and Asset Management Businesses of Kidder, Peabody Group Inc. PAGE ---- Combined Statement of Operations for the nine months ended September 29, 1994 (unaudited) 4 Combined Statement of Operations for the years ended December 27, 1993, December 28, 1992 and December 30, 1991 12 Combined Statement of Assets Acquired and Liabilities Assumed December 26, 1994 or prior date of transfer 20 (b) Proforma Financial Information Paine Webber Group Inc. Proforma Consolidated Financial Statements (unaudited) PAGE ---- Proforma Condensed Consolidated Statement of Financial Condition as of September 30, 1994 31 Proforma Consolidated Statement of Income for the nine months ended September 30, 1994 32 Proforma Consolidated Statement of Income for the year ended December 31, 1993 33 Notes to Proforma Consolidated Financial Statements 34 - 35 (c) Exhibits 36 Third Supplemental Agreement dated as of January 27, 1995 among the Company, General Electric Company and Kidder, Peabody Group Inc. Fourth Supplemental Agreement dated as of February 10, 1995 among the Company, General Electric Company and Kidder, Peabody Group Inc. Consent of KPMG Peat Marwick LLP 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAINE WEBBER GROUP INC. By: /s/ Regina A. Dolan ------------------- Regina A. Dolan Vice President, Chief Financial Officer Dated: February 24, 1995 4 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1994 (UNAUDITED) 5 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. INDEX TO COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1994 (UNAUDITED) Combined Statement of Operations 1 Notes to Combined Statement of Operations 2 to 6 6 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1994 (IN MILLIONS) (UNAUDITED) September 29, 1994 ------------- Revenues Investment Banking $ 92.2 Commissions 155.4 Trading and Interest (net) 129.0 Sales Credits and Selling Concessions (net) 79.1 Investment Advisory 46.4 Other 10.0 ------------- Total Revenues 512.1 ------------- Expenses Employee compensation and benefits 276.4 Rent and occupancy 18.7 Communications 24.1 Clearing fees 28.1 Professional fees 9.6 Other 141.4 ------------- Total Expenses 498.3 ------------- Income before charge in lieu of taxes 13.8 Charge in lieu of taxes 6.1 ------------- Net Income $ 7.7 =============
See accompanying notes to combined financial statement. 7 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. NOTES TO COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1994 (UNAUDITED) 1. BACKGROUND AND BASIS OF PRESENTATION Pursuant to an Asset Purchase Agreement dated October 17, 1994, as amended ("The Purchase Agreements"), among PaineWebber Group Inc. ("PaineWebber"), Kidder, Peabody Group Inc. and subsidiaries ("Kidder, Peabody") and General Electric Company ("General Electric"), PaineWebber agreed to purchase certain assets and liabilities associated with certain businesses of Kidder, Peabody. Significant businesses of which substantial portions were acquired (which are not legal entities) comprise: Real Estate - real estate whole loan underwriting and trading activities; Eurobonds - eurobond trading activities, including related repurchase agreement and reverse repurchase agreement matched book trading activities; Retail Brokerage - retail brokerage activities; and Asset Management - mutual fund management and investment advisory activities ("Purchased Businesses"). At closing, selected assets and liabilities of the Purchased Businesses were purchased or assumed by PaineWebber. Substantially all assets and liabilities transferred consist of securities trading inventories (long and short positions), securities borrowed and securities loaned, mortgage loans held for sale, customers receivable and payable balances, and fixed assets. Reverse repurchase and repurchase agreements employed in the Eurobond business were not transferred pursuant to the Purchase Agreement. In addition, selected Kidder, Peabody employees associated with the Purchased Businesses became employees of PaineWebber, and selected employees of other Kidder, Peabody businesses also became employees of PaineWebber. PaineWeber paid a 2 8 combination of cash and PaineWebber common and preferred stock for the Purchased Businesses. The closing dates for the sale of each of the businesses are as follows: Real Estate - December 9, 1994; Eurobond - December 16, 1994; Retail Brokerage - January 30, 1995 and Asset Management - January 30, 1995 and February 13, 1995. Kidder, Peabody has agreed to indemnify and hold harmless PaineWebber from any losses, damages or claims incurred with respect to any liability relating to the conduct of a Purchased Business (and not otherwise assumed by PaineWebber) arising out of any event or condition existing prior to the relevant closing date. The accompanying Combined Statement of Operations reflects the historical revenue and expenses attributable to the Purchased Businesses for the nine months ended September 29, 1994 (unaudited), based upon the assets and liabilities giving rise to such revenues and expenses at those dates, and not on the assets and liabilities transferred to or assumed by PaineWebber. For example, the revenues and expenses related to the managed futures and structured products portions of the Asset Management business have been included in the Combined Statement of Operations, while the related assets and liabilities have not been acquired or assumed by PaineWebber, nor has that portion of the Asset Management business been acquired by PaineWebber. A small number of the customer accounts of the Retail Brokerage business were not transferred to PaineWebber. The revenues and expenses of the Purchased Businesses as reported in the accompanying Combined Statement of Operations therefore differ from the revenues and expenses associated with the assets and liabilities transferred to PaineWebber. Included in the Combined Statement of Operations are revenue and expense items allocated to the Purchased Businesses. Revenues include sales credits and selling concessions for distributing securities owned or originated in an underwriting by Kidder, Peabody to customers of the Purchased Businesses. These sales credits and selling concessions are based upon 3 9 arrangements between the Purchased Businesses and other businesses of Kidder, Peabody. Costs related to compensation, communication, travel and entertainment, professional services and other expenses are charged directly to the Purchased Businesses as incurred. Occupancy, rent and depreciation and certain employee benefits are charged based on usage or allocation surveys. Corporate overhead representing centralized payroll, operations, finance, research, treasury, human resources, legal, accounts payable, systems and other administrative functions are allocated to the Purchased Businesses based on time spent, standard cost, headcount or usage, depending on the nature of the overhead being allocated. The accompanying Combined Statement of Operations also reflects an allocation of corporate provisions for certain litigation expenses, inventory reserves, corporate headquarters relocation costs, certain EDP system expenses and various other corporate charges. These other corporate charges were approximately $5.3 million, for the nine months ended September 29, 1994. Total corporate overhead costs allocated, which are included in other expenses, were approximately $81.7 million for the nine months ended September 29, 1994, and includes the other corporate charges described above. Kidder, Peabody finances the operations of all its businesses, including those of the Purchased Businesses. Interest allocated to the Purchased Businesses includes interest expense from the financing of all assets, and represents a blended average of Kidder, Peabody's actual short term and long-term financing costs. These allocations do not necessarily represent the amounts that would have been incurred by the Purchased Businesses had they operated on a separate company basis or had they operated as divisions of a different company. However, management of Kidder, Peabody believes such allocations are reasonable in the circumstances. No attempt has been made to identify any respect in which the operations of the Purchased Businesses would have differed had they operated as divisions of PaineWebber or any other company instead of Kidder, Peabody. The Combined Statement of Operations is therefore not indicative of future results of the Purchased Businesses. 4 10 The Combined Statement of Operations reflects all normal recurring adjustments which are, in opinion of Kidder, Peabody's management, necessary for a fair presentation of the results of the Purchased Businesses for the interim period presented. Pursuant to the rules and regulations of the Securities and Exchange Commission applicable to such interim financial statements, certain footnote disclosures which are normally required under generally accepted accounting principles have been omitted. It is recommended that this combined financial statement be read in conjunction with the Purchased Businesses' combined financial statements for each of the three years ended December 27, 1993. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SECURITIES TRANSACTIONS Proprietary securities transactions are recorded on a trade date basis. Trading securities are valued at market. Mortgage loans held for sale are recorded on a trade date basis and are valued at the lower of the aggregate cost or the estimated market value. Unrealized gains and losses are reflected in the Combined Statement of Operations. Investment banking revenues from management fees, underwriting fees and selling concessions are recognized on settlement date. Advisory fee revenues are recorded when services are substantially complete and revenues are reasonably determinable. CHARGE IN LIEU OF TAXES The results of operations for the Purchased Businesses are included as part of Kidder, Peabody's results and are included in the General Electric consolidated Federal income tax return. State and local tax returns are filed separately. The Purchased Businesses have been allocated a charge in lieu of income taxes at an effective rate on income before Charge in Lieu of Taxes of 43.9% for 5 11 the nine months ended September 29, 1994, which represents the effective income tax rate for Kidder, Peabody for that period. 3. FINANCIAL INSTRUMENTS TRADING AND INTEREST (NET) The Purchased Businesses combine trading and interest revenues and expenses. The individual amounts are as follows: interest revenue $326.7 million, interest expense $262.7 million and net gains on principal transactions $65 million for the nine months ended September 29, 1994. 6 12 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 27, 1993, DECEMBER 28, 1992, AND DECEMBER 30, 1991 13 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. INDEX TO COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 27, 1993, DECEMBER 28, 1992, AND DECEMBER 30, 1991 Independent Auditor's Report 1 Combined Statements of Operations 2 Notes to Combined Statements of Operations 3 to 6 14 Independent Auditors' Report The Board of Directors and Stockholder of Kidder, Peabody Group Inc.: We have audited the accompanying combined statements of operations of the Real Estate, Eurobond, Retail Brokerage and Asset Management Businesses ("Purchased Businesses") of Kidder, Peabody Group Inc. ("Kidder, Peabody") and subsidiaries for the years ended December 27, 1993, December 28, 1992, and December 30, 1991, which, as described in note 1, are prepared pursuant to a purchase agreement, dated October 17, 1994, as amended. These financial statements are the responsibility of Kidder, Peabody'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 combined statements of operations are free of material misstatement. An audit of a combined statement of operations includes examining, on a test basis, evidence supporting the amounts and disclosures in that combined statement of operations. An audit of a combined statement of operations also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined statement of operations. We believe that our audits of the combined statement of operations provide a reasonable basis for our opinion. In our opinion, the combined statements of operations referred to above present fairly, in all material respects, the results of operations of the Purchased Businesses for the years ended December 27, 1993, December 28, 1992, and December 30, 1991, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP February 8, 1995 New York, New York 15 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 27, 1993, DECEMBER 28, 1992, AND DECEMBER 30, 1991 (IN MILLIONS)
1993 1992 1991 ---- ---- ---- Revenues Investment Banking $ 122.0 $ 47.2 $ 29.6 Commissions 209.5 190.6 182.7 Trading and Interest (net) 228.8 152.1 70.5 Sales Credits and Sellig Concessions (net) 179.4 167.4 146.5 Investment Advisory 55.1 48.1 40.0 Other 9.5 6.7 4.0 ------- ------ ------ Total Revenues 804.3 612.1 473.3 ------- ------ ------ Expenses Employee compensation and benefits 388.6 302.3 245.7 Rent and occupancy 21.9 19.9 20.3 Communications 28.1 23.6 22.6 Clearing Fees 29.8 20.0 9.1 Professional fees 7.1 7.2 7.4 Other 188.2 123.0 134.8 ------- ------ ------ Total Expenses 663.7 496.0 439.9 ------- ------ ------ Income before charge in lieu of taxes 140.6 116.1 33.4 Charge in lieu of taxes 62.0 48.9 16.7 ------- ------ ------ Net income $ 78.6 $ 67.2 $ 16.7 ======= ====== ======
See accompanying notes to combined financial statements. 16 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. NOTES TO COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 27, 1993, DECEMBER 28, 1992, AND DECEMBER 30, 1991 1. BACKGROUND AND BASIS OF PRESENTATION Pursuant to an Asset Purchase Agreement dated October 17, 1994, as amended ("The Purchase Agreements"), among PaineWebber Group Inc. ("PaineWebber"), Kidder, Peabody Group Inc. and subsidiaries ("Kidder, Peabody") and General Electric Company ("General Electric"), PaineWebber agreed to purchase certain assets and liabilities associated with certain businesses of Kidder, Peabody. Significant businesses of which substantial portions were acquired (which are not legal entities) comprise: Real Estate - real estate whole loan underwriting and trading activities; Eurobonds - eurobond trading activities, including related repurchase agreement and reverse repurchase agreement matched book trading activities; Retail Brokerage - retail brokerage activities; and Asset Management - mutual fund management and investment advisory activities ("Purchased Businesses"). At closing, selected assets and liabilities of the Purchased Businesses were purchased or assumed by PaineWebber. Substantially all assets and liabilities transferred consist of securities trading inventories (long and short positions), securities borrowed and securities loaned, mortgage loans held for sale, customers receivable and payable balances, and fixed assets. Reverse repurchase and repurchase agreements employed in the Eurobond business were not transferred pursuant to the Purchase Agreement. In addition, selected Kidder, Peabody employees associated with the Purchased Businesses became employees of PaineWebber, and selected employees of other Kidder, Peabody businesses also became employees of PaineWebber. PaineWebber paid a combination of cash and PaineWebber common and preferred stock for the Purchased Businesses. The closing dates for the sale of each of the businesses are as follows: Real Estate - December 9, 3 17 1994; Eurobond - December 16, 1994; Retail Brokerage - January 30, 1995 and Asset Management - January 30, 1995 and February 13, 1995. Kidder, Peabody has agreed to indemnify and hold harmless PaineWebber from any losses, damages or claims incurred with respect to any liability relating to the conduct of a Purchased Business (and not otherwise assumed by PaineWebber) arising out of any event or condition existing prior to the relevant closing date. The accompanying Combined Statements of Operations reflect the historical revenue and expenses attributable to the Purchased Businesses for each of the years ended December 27, 1993, December 28, 1992, and December 30, 1991, based upon the assets or liabilities giving rise to such revenues and expenses at those dates, and not based on the assets and liabilities acquired or assumed by PaineWebber. For example, the revenues and expenses related to the managed futures and structured products portions of the Asset Management business have been included in the Combined Statements of Operations, while the related assets and liabilities have not been acquired or assumed by PaineWebber, nor has that portion of the Asset Management business been acquired or assumed by PaineWebber. A small number of the customer accounts of the Retail Brokerage business were not transferred to PaineWebber. The revenues and expenses of the Purchased Businesses as reported in the accompanying Combined Statements of Operations therefore differ from the revenues and expenses associated with the assets and liabilities transferred to PaineWebber. Included in the Combined Statements of Operations are revenue and expense items allocated to the Purchased Businesses. Revenues include sales credits and selling concessions for distributing securities owned or originated in an underwriting by Kidder, Peabody to customers of the Purchased Businesses. These sales credits and selling concessions are based upon arrangements between the Purchased Businesses and other businesses of Kidder, Peabody. Costs related to compensation, communication, travel and entertainment, professional services and other 4 18 expenses are charged directly to the Purchased Businesses as incurred. Occupancy, rent and depreciation and certain employee benefits are charged based on usage or allocation surveys. Corporate overhead representing centralized payroll, operations, finance, research, treasury, human resources, legal, accounts payable, systems and other administrative functions are allocated to the Purchased Businesses based on time spent, standard cost, head count or usage, depending on the nature of the overhead being allocated. The accompanying Combined Statements of Operations also include an allocation of corporate provisions for certain litigation expenses, inventory reserves, corporate headquarters relocation costs, certain EDP system expenses and various other corporate charges. These other corporate charges (credits) were approximately $34.8 million, $(10.5) million, and $17.0 million for the years ended 1993, 1992 and 1991, respectively. Total corporate overhead costs allocated, and are included in Other Expenses, were approximately $138.5 million, $83.1 million, and $97.7 million for the years ended 1993, 1992 and 1991, respectively, which includes the other corporate charges described above. Kidder, Peabody finances the operations of all its businesses, including those of the Purchased Businesses. Interest allocated to the Purchased Businesses includes interest expense from the financing of all assets, and represents a blended average of Kidder, Peabody's actual short term and long-term financing costs. These allocations do not necessarily represent the amounts that would have been incurred by the Purchased Businesses had they operated on a separate company basis or had they operated as divisions of a different company; however, management of Kidder, Peabody believes such allocations are reasonable in the circumstances. No attempt has been made to identify any respect in which the operations of the Purchased Businesses would have differed had they operated as divisions of PaineWebber or any other company instead of Kidder, Peabody. The Combined Statements of Operations are therefore not indicative of future results of the Purchased Businesses. 5 19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SECURITIES TRANSACTIONS Trading securities are valued at market. Mortgage loans held for sale are recorded on a trade date basis and are valued at the lower of the aggregate cost or the estimated market value. Unrealized gains and losses are included in the Combined Statements of Operations. Investment banking revenues from management fees, underwriting fees and selling concessions are recognized on settlement date. Advisory fee revenues are recorded when services are substantially complete and revenues are reasonably determinable. CHARGE IN LIEU OF TAXES The results of operations for the Purchased Businesses are included as part of Kidder, Peabody's results and are included in the General Electric consolidated Federal income tax return. State and local tax returns of Kidder, Peabody are filed separately. The Purchased Businesses have been allocated a charge in lieu of income taxes at an effective rate on Income Before Charge in Lieu of Taxes of 44.1%, 42.1% and 50.0% for 1993, 1992 and 1991, respectively, which represents the effective income tax rates for Kidder, Peabody in those respective years. 3. FINANCIAL INSTRUMENTS TRADING AND INTEREST (NET) The Purchased Businesses combine trading and interest revenues and expenses. The individual amounts for the three years ended 1993 are as follows (in millions):
1993 1992 1991 ---- ---- ---- Interest Revenue $349.1 $302.5 $152.2 Interest Expense (272.8) (239.3) (118.9) Net Gains on Principal Transactions 152.5 88.9 37.2 ----- ---- ---- $228.8 $152.1 $70.5 ====== ====== =====
6 20 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. COMBINED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED DECEMBER 26, 1994 OR PRIOR DATE OF TRANSFER 21 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. INDEX TO COMBINED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED DECEMBER 26, 1994 OR PRIOR DATE OF TRANSFER Independent Auditors' Report 1 Combined Statement of Assets Acquired and Liabilities Assumed 2 Notes to Combined Statement of Assets Acquired and Liabilities Assumed 3 to 8 22 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder of Kidder, Peabody Group Inc.: We have audited the accompanying combined statement of assets acquired and liabilities assumed of the Real Estate, Eurobond, Retail Brokerage and Asset Management Businesses ("Purchased Businesses") of Kidder, Peabody Group Inc. ("Kidder, Peabody") and subsidiaries as of December 26, 1994 or prior date of transfer (see note 1), which, as described in note 1, is prepared pursuant to a purchase agreement, dated October 17, 1994, as amended. This financial statement is the responsibility of Kidder, Peabody's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined statement of assets acquired and liabilities assumed is free of material misstatement. An audit of a combined statement of assets acquired and liabilities assumed includes examining, on a test basis, evidence supporting the amounts and disclosures in that combined statement of assets acquired and liabilities assumed. An audit of a combined statement of assets acquired and liabilities assumed also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined statement of assets acquired and liabilities assumed. We believe that our audit of the combined statement of assets acquired and liabilities assumed provides a reasonable basis for our opinion. In our opinion, the combined statement of assets acquired and liabilities assumed referred to above presents fairly, in all material respects, the combined assets acquired and liabilities assumed of the Purchased Businesses as of December 26, 1994 or prior date of transfer (see note 1), in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP February 8, 1995 New York, New York 23 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. COMBINED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED DECEMBER 26, 1994 OR PRIOR DATE OF TRANSFER (SEE NOTE 1) (IN THOUSANDS) Assets Acquired - --------------- Securities Borrowed $ 292,529 Receivable From Customers 1,069,647 Securities Owned 833,121 Mortgage Loans Held for Sale 639,812 Other 58,705 ---------- $2,893,814 ========== Liabilities Assumed - ------------------- Securities Loaned $ 13,517 Payable to Customers 827,968 Securities Sold, but not yet Purchased 172,201 Other 66,289 ---------- $1,079,975 ==========
See accompanying notes to combined statement of assets acquired and liabilities assumed. 24 REAL ESTATE, EUROBOND, RETAIL BROKERAGE AND ASSET MANAGEMENT BUSINESSES OF KIDDER, PEABODY GROUP INC. NOTES TO COMBINED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED DECEMBER 26, 1994 OR PRIOR DATE OF TRANSFER (SEE NOTE 1) 1. BACKGROUND AND BASIS OF PRESENTATION Pursuant to an Asset Purchase Agreement dated October 17, 1994, as amended, ("The Purchase Agreements"), among PaineWebber Group Inc. ("PaineWebber"), Kidder, Peabody Group Inc. and subsidiaries ("Kidder, Peabody") and General Electric Company ("General Electric"), PaineWebber agreed to purchase certain assets and liabilities associated with certain businesses of Kidder, Peabody. Significant businesses of which substantial portions were acquired (which are not legal entities) comprise: Real Estate - real estate whole loan underwriting and trading activities; Eurobonds - eurobond trading activities, including related repurchase agreement and reverse repurchase agreement matched book trading activities; Retail Brokerage - retail brokerage activities; and Asset Management - mutual fund management and investment advisory activities ("Purchased Businesses"). At closing, selected assets and liabilities of the Purchased Business were purchased or assumed by PaineWebber. Substantially all assets and liabilities transferred consist of securities trading inventories (long and short positions), securities borrowed and securities loaned, mortgage loans held for sale, customers receivable and payable balances, and fixed assets. Reverse repurchase and repurchase agreements employed in the Eurobond business were not transferred pursuant to the Purchase Agreement. In addition, selected Kidder, Peabody employees associated with the Purchased Businesses became employees of PaineWebber, and selected employees of 3 25 other Kidder, Peabody businesses also became employees of PaineWebber. PaineWebber paid a combination of cash and PaineWebber common and preferred stock for the Purchased Businesses. The closing dates for the sale of each of the businesses are as follows: Real Estate - December 9, 1994; Eurobond - December 16, 1994; Retail Brokerage - January 30, 1995 and Asset Management - January 30, 1995 and February 13, 1995. Kidder, Peabody has agreed to indemnify and hold harmless PaineWebber from any losses, damages or claims incurred with respect to any liability relating to the conduct of a Purchased Business (and not otherwise assumed by PaineWebber) arising out of any event or condition existing prior to the relevant closing date. The Combined Statement of Assets Acquired and Liabilities Assumed presents the assets acquired and liabilities assumed for the Purchased Businesses; the Statement presents those assets and liabilities transferred as of December 9, 1994 for the Real Estate business, December 16, 1994 for the Eurobond business and December 26, 1994 (Kidder, Peabody's fiscal 1994 year end) for the Retail Brokerage and Asset Management businesses for which those transactions closed on January 30, 1995 and February 13, 1995. The assets acquired and liabilities transferred related to the Retail Brokerage and Asset Management businesses included in this Statement may therefore not be representative of the actual assets and liabilities transferred at closing. In addition, a small number of the customer accounts of the Retail Brokerage business were not transferred to PaineWebber. 4 26 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SECURITIES TRANSACTIONS Proprietary securities transactions are recorded on a trade date basis. Trading securities are valued at market. Mortgage loans held for sale are recorded on a trade date basis and are valued at the lower of the aggregate cost or the estimated market value. SECURITIES LENDING ACTIVITIES Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require the Purchased Businesses to deposit cash, letters of credit or other collateral with the lender. With respect to securities loaned, the Purchased Businesses receive cash or other collateral in an amount generally in excess of the market value of the securities loaned. The Purchased Businesses monitor the market value of securities borrowed and loaned on a daily basis with additional collateral obtained or refunded as necessary. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations are translated at year-end rates of exchange in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation. FIXED ASSETS Fixed assets are valued at net realizable value at amounts established in the Purchase Agreements for those assets transferred. 5 27 3. NET CAPITAL AND OTHER REGULATORY REQUIREMENTS The assets acquired and liabilities assumed are part of the Purchased Businesses which do not represent a separate legal entity. Kidder, Peabody and certain of the subsidiaries of which the Purchased Businesses are part of are, however, subject to various regulatory rules. At December 26, 1994, Kidder, Peabody and subsidiaries were in compliance with the minimum capital required by its various regulatory agencies. 4. SECURITIES Securities owned at December 26, 1994, consist of $832.4 million of Eurobonds and $0.7 million of investments in mutual funds. Securities sold, but not yet purchased are comprised of $54.8 million of U.S. Treasuries and $117.4 million of Eurobonds. Securities sold, but not yet purchased represent obligations of the Purchased Businesses to deliver the specified security at the contracted price, and thereby, create a liability to purchase the security in the market at prevailing prices. 5. EMPLOYEE BENEFITS Substantially all of the employees of the Purchased Businesses participate in a funded defined benefit retirement plan of Kidder, Peabody. In addition, Kidder, Peabody has an unfunded supplemental plan covering certain executives. Since Kidder, Peabody has not transferred any pension obligation to PaineWebber no obligation has been included in the Combined Statement of Assets Acquired and Liabilities Assumed. PaineWebber has included the former Kidder, Peabody employees into the PaineWebber pension plan providing them credit for their service based upon 6 28 their history of service at Kidder, Peabody. The assets of Kidder, Peabody's retirement plan will not be transferred to PaineWebber. Kidder, Peabody sponsors a defined benefit postretirement health care plan that covers substantially all full time employees. Pursuant to the Purchase Agreement, PaineWebber has agreed to pay an aggregate amount of $5 million in four equal installments payable on January 30, 1995-1998, to Kidder, Peabody for certain post-retirement medical benefits. No payment shall be due in 1997-1998 unless 40 or more of the transferred employees are employed by PaineWebber as of January 30, 1997. 6. COMMITMENTS AND CONTINGENT LIABILITIES LEASES Pursuant to the Purchase Agreements, certain operating leases for office premises and equipment associated with the Purchased Businesses will be assumed by PaineWebber. The aggregate minimum annual rental commitments related to the leases at December 26, 1994 which expire at various dates through 2005 amounted to $118.8 million. 7. FINANCIAL INSTRUMENTS CUSTOMER CREDIT RISK The assets acquired and liabilities assumed are part of the Purchased Businesses whose customer activities involve the execution, settlement, custody and financing of various securities and commodities transactions on behalf of customers. Customer securities activities are transacted on either a cash or margin basis. The Purchased Businesses' customer activities may expose it to off-balance-sheet credit risk. The Purchased Businesses may have to purchase or sell financial instruments at prevailing market 7 29 prices in the event of failure of a customer to settle a trade on its original terms, or in the event cash and securities in customer margin accounts are not sufficient to fully cover customer losses. The Purchased Businesses seek to control the risk associated with customer activities by requiring customers to maintain margin collateral in compliance with various regulations and Kidder, Peabody policies. COUNTERPARTY CREDIT RISK The Purchased Businesses' principal activities are also subject to the risk of counterparty non-performance. As part of these activities, the Purchased Businesses enter into collateralized securities lending arrangements which may result in significant credit exposure in the event the counterparty to the transaction is unable to fulfill its contractual obligations. In accordance with industry practice, securities borrowing arrangements are generally collateralized by cash or securities with a market value in excess of the Purchased Businesses obligation or rights under the contract. The Purchased Businesses attempt to minimize credit risk associated with these activities by screening customers and monitoring customer credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Purchased Businesses when deemed necessary. FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments. This statement requires all entities to disclose the fair value of financial instruments (as defined), both assets and liabilities recognized and not recognized in the Combined Statement of Assets Acquired and Liabilities Assumed. At December 26, 1994, securities inventories are valued at fair value. The carrying value of mortgage loans held for sale and customer receivable and payables, due to their short term nature, are considered to be approximate fair value. 8 30 PROFORMA CONSOLIDATED FINANCIAL DATA The following unaudited proforma consolidated statements of income of Paine Webber Group Inc. (the "Company") for the nine months ended September 30, 1994 and for the year ended December 31, 1993 present consolidated operating results for the Company as if the Company's purchase of certain assets and assumption of certain liabilities of Kidder, Peabody Group Inc.'s ("Kidder") retail, asset management, international fixed income and real estate businesses had occurred as of January 1, 1994 and 1993, respectively. In addition, the Company's unaudited proforma consolidated statements of income give effect to additions of selected Kidder personnel for investment banking and institutional equity and fixed income sales and trading departments. The following unaudited proforma condensed consolidated statement of financial condition as of September 30, 1994 gives effect to the acquisition of such businesses and related transactions as if they had occurred as of September 30, 1994. The proforma consolidated financial data does not purport to represent what the Company's financial position or results of operations actually would have been had the acquisition and related transactions in fact occurred on the dates indicated, or to project the Company's financial position or results of operations for any future period. The proforma adjustments are based upon available information and certain assumptions that the Company believes are reasonable in the circumstances. The proforma consolidated financial data should be read in conjunction with the accompanying notes thereto, the combined historical financial statements of the businesses acquired from Kidder contained elsewhere in this Amendment to the Form 8-K of the Company filed December 27, 1994 and the separate historical financial statements of the Company included in its filings on Form 10-K and Form 10-Q for the year ended December 31, 1993 and the quarter ended September 30, 1994, respectively. Proforma adjustments are applied to the historical consolidated financial statements of the Company to account for the acquisition under the purchase method of accounting. Under purchase accounting, the total purchase costs will be allocated to assets and liabilities acquired based on their relative fair values. Allocations are based on valuation information as of the date of acquisition, not all of which is final. Accordingly, the final allocations may be different from the amounts reflected herein, however, such differences are not expected to have a material impact on results of operations. 31 PAINE WEBBER GROUP INC. UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1994 (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
ADJUSTMENTS FROM PAINE WEBBER KIDDER HISTORICAL FINANCING & OTHER PROFORMA HISTORICAL HISTORICAL TO ACTUAL FAIR VALUE ADJUSTMENTS PAINE WEBBER -------------- ------------ ------------- ------------- ------------ ------------ (A) (B) (C) ASSETS Cash and cash equivalents $249,621 $249,621 Cash and securities segregated 329,554 329,554 Trading inventories 8,792,481 $1,472,933 ($43) ($635) 10,264,736 Securities borrowed or purchased under agreements to resell 21,477,707 292,529 (217,794) 5,021,000 26,573,442 Receivables: Clients 4,132,408 1,069,647 (298,325) 4,903,730 Other 816,391 21,163 837,554 Other assets 1,101,876 58,705 2,156 $90,000 69,971 1,322,708 ------------ ----------- ---------- ---------- ---------- ----------- Total assets $36,900,038 $2,893,814 ($514,006) $90,000 $5,111,499 $44,481,345 ============ =========== ========== ========== ========== =========== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Short-term borrowings $1,265,922 $452,672 $89,549 $1,808,143 Securities sold but not yet purchased 6,725,179 $172,201 (754) 6,896,626 Securities loaned or sold under agreements to repurchase 20,323,238 13,517 $26,633 900,000 5,021,000 26,284,388 Payables: Clients 3,528,841 827,968 (616,529) 3,740,280 Others 1,391,387 66,289 (41,974) 65,562 37,704 1,518,968 ------------ ----------- ---------- ---------- ---------- ----------- 33,234,567 1,079,975 (631,870) 1,418,234 5,147,499 40,248,405 Long-term borrowings 2,440,339 2,440,339 ------------ ----------- ---------- ---------- ---------- ----------- 35,674,906 1,079,975 (631,870) 1,418,234 5,147,499 42,688,744 Redeemable preferred stock 185,000 185,000 Stockholders' equity Convertible preferred stock 100,000 100,000 Common stock 84,101 14,000 98,101 Additional paid in capital 574,428 177,374 751,802 Retained earnings 744,593 (36,000) 708,593 ------------ ---------- ---------- ----------- 1,403,122 291,374 (36,000) 1,658,496 Treasury stock (145,489) 127,095 (18,394) Other (32,501) (32,501) ------------ ---------- ---------- ----------- 1,225,132 418,469 (36,000) 1,607,601 ------------ ---------- ---------- ----------- Excess of assets acquired over liabilities assumed 1,813,839 117,864 (1,931,703) Total liabilities, redeemable preferred ------------ ----------- ---------- ---------- ---------- ----------- stock and stockholders' equity $36,900,038 $2,893,814 ($514,006) $90,000 $5,111,499 $44,481,345 ============ =========== ========== ========== ========== ===========
See accompanying notes to unaudited Proforma Consolidated Financial Statements 32 PAINE WEBBER GROUP INC. UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1994 (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
PROFORMA ADJUSTMENTS ------------------------------------------------- COST REDUCTIONS PAINE WEBBER KIDDER BUSINESS AND REVENUE PURCHASE PROFORMA HISTORICAL HISTORICAL SCOPE TRANSFERS ACCOUNTING OTHER PAINE WEBBER ------------ ---------- -------- --------- ---------- ----- ------------ (D) (E) (F) (G) REVENUES Commissions $ 742,062 $ 155,400 ($9,474) $ 0 $ $ $ 887,988 Principal Transactions 386,526 115,000 30,632 10,820 542,978 Investment Banking 221,598 121,300 4,551 4,363 351,812 Asset Management 268,056 46,400 (3,068) 0 311,388 Other 102,814 10,000 (4,859) 0 107,955 Interest 1,203,790 326,700 (6,588) 0 1,523,902 ---------- --------- ---------- ------- ----------- TOTAL REVENUES 2,924,846 774,800 11,194 15,183 3,726,023 Interest Expenses 1,003,989 262,700 4,614 (19,557) 1,251,746 ---------- --------- ---------- ------- ----------- NET REVENUES 1,920,857 512,100 6,580 34,740 2,474,277 NON-INTEREST EXPENSES Compensation and Benefits 1,138,727 276,400 889 (1,405) 17,062 1,431,673 Office & Equipment 168,445 18,700 1,467 3,060 7,825 199,497 Communications 97,542 24,100 2,354 1,944 125,940 Business Development 63,167 0 2,764 97 8,500 74,528 Brokerage, Clearing & Exchange Fees 61,965 28,100 1,015 3,479 94,559 Professional Services 58,777 9,600 295 (1,734) 66,938 Other Expenses 247,350 141,400 2,716 (79,219) 1,928 (18,910) 295,265 ---------- --------- ---------- -------- -------- -------- ----------- TOTAL NON-INTEREST EXPENSES 1,835,973 498,300 11,500 (73,778) 1,928 14,477 2,288,400 EARNINGS BEFORE INCOME TAXES 84,884 13,800 (4,920) 108,518 (1,928) (14,477) 185,877 PROVISIONS FOR INCOME TAXES 33,954 6,100 (1,968) 43,407 (771) (6,371) 74,351 ---------- --------- ---------- -------- -------- -------- ----------- NET EARNINGS $ 50,930 $ 7,700 ($2,952) $65,111 ($1,157) ($8,106) $ 111,526 ========== ========= ========== ======= ======== ======== =========== EARNINGS APPLICABLE TO COMMON SHARES $ 53,429 $ 92,062 ========== =========== EARNINGS PER SHARE PRIMARY $ 0.67 $ 0.91 ========== =========== FULLY DILUTED $ 0.67 $ 0.90 ========== =========== WEIGHTED AVERAGE COMMON SHARE PRIMARY 79,320,000 100,820,000 ========== =========== FULLY DILUTED 80,726,000 107,742,000 ========== ===========
See accompanying notes to unaudited ProForma Consolidated Financial Statements. 33 PAINE WEBBER GROUP INC. UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
PROFORMA ADJUSTMENTS ------------------------------------- COST REDUCTIONS PAINE WEBBER KIDDER BUSINESS AND REVENUE PURCHASE PROFORMA HISTORICAL HISTORICAL SCOPE TRANSFERS ACCOUNTING OTHER PAINE WEBBER ------------- ---------- --------- ------------- ---------- ---------- ------------ (D) (E) (F) (G) REVENUES Commissions $996,127 $209,500 (2,065) $1,203,562 Principal Transactions 779,444 296,000 60,781 19,883 1,156,108 Investment Banking 413,643 157,900 (3,675) 5,084 572,952 Asset Management 325,690 55,100 (4,094) 376,696 Other 113,253 9,500 (2,841) 119,912 Interest 1,376,560 349,100 (5,731) 1,719,929 ---------- ---------- --------- ------------- ------------ TOTAL REVENUES 4,004,717 1,077,100 42,375 24,967 5,149,159 Interest Expense 1,130,712 272,800 9,296 (20,976) 1,391,832 ---------- ---------- --------- ------------- ------------ NET REVENUES 2,874,005 804,300 33,079 45,943 3,757,327 NON-INTEREST EXPENSES Compensation and Benefits 1,628,889 388,600 13,570 (3,231) 22,750 2,050,578 Office & Equipment 211,880 21,900 2,240 3,902 9,500 249,422 Communications 123,601 28,100 3,382 1,948 157,031 Business Development 93,962 0 3,689 319 10,100 108,070 Brokerage, Clearing, & Exchange Fees 79,752 29,800 1,883 4,028 115,463 Professional Services 66,825 7,100 454 (1,695) 72,684 Other Expenses 261,520 188,200 2,494 (103,388) 2,571 (6,450) 344,947 ---------- ---------- --------- ------------- ---------- --------- ------------ TOTAL NON-INTEREST EXPENSES 2,466,429 663,700 27,712 (98,117) 2,571 35,900 3,098,195 EARNINGS BEFORE INCOME TAXES 407,576 140,600 5,367 144,060 (2,571) (35,900) 659,132 PROVISION FOR INCOME TAXES 161,393 62,000 2,125 57,045 (1,018) (20,540) 261,005 ---------- ---------- --------- ------------- ---------- --------- ------------ NET EARNINGS $246,183 $78,600 $3,242 $87,015 ($1,553) ($15,360) $398,127 ========== ========== ========= ============= ========== ========= ============ EARNINGS APPLICABLE TO COMMON SHARES $244,349 $366,997 ========== ============ EARNINGS PER SHARE PRIMARY $3.11 $3.66 ========== ============ FULLY DILUTED $2.95 $3.39 ========== ============ WEIGHTED AVERAGE COMMON SHARES PRIMARY 78,690,000 100,190,000 ========== ============ FULLY DILUTED 84,327,000 111,343,000 ========== ============
See accompanying notes to unaudited ProForma Consolidated Financial Statements. 34 PAINE WEBBER GROUP INC. NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS (in thousands of dollars) THE PROFORMA ADJUSTMENTS TO THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION ARE AS FOLLOWS: (A.) Adjustments from Historical to Actual reflect the activity in the net assets actually acquired subsequent to December 26, 1994 through the closing dates of those respective businesses. (B.) Financing and fair value adjustments are to reflect the acquisition of certain assets and assumption of certain liabilities of Kidder and the allocation of the purchase price on the basis of the fair values of the assets acquired and liabilities assumed. The amounts reflected in the Kidder Historical column are comprised of the net assets transferred as of the closing dates occurring in 1994 and the balances as of December 26, 1994 of those net assets transferred subsequently. The purchase was actually completed in four separate closing held on December 9, 1994; December 16, 1994; January 30, 1995 and February 13, 1995. In the aggregate, the Company purchased net assets of $1,866,141 in exchange of the following consideration, resulting in goodwill of $90,000. Financing of purchased assets with repurchase agreements $ 900,000 Cash from short term borrowings 452,672 Redeemable preferred stock (redemption value) 250,000 Convertible preferred stock 100,000 Common stock 318,469 --------- 2,021,141 Less: Fair value adjustment on Redeemable preferred stock (65,000) --------- $1,956,141 ==========
(C.) Other adjustments include an adjustment of $5,021,000 to reflect securities purchased under agreements to resell and securities sold under agreements to repurchase at levels estimated to be maintained by the acquired International Fixed Income business subsequent to the acquisition. Specific repurchase agreements held by Kidder were not transferred to the Company and are not included in the Kidder Combined Statement of Assets Acquired and Liabilities Assumed. Other adjustments also include an after-tax charge of $36,000 to reflect acquisition related costs recorded by the Company in the fourth quarter of 1994. These acquisition costs consist primarily of branch consolidation and severance costs. Additionally, deferred compensation paid in the form of employee forgivable loans to former Kidder employees has been reflected. Other adjustments relate to reclassifications of amounts to conform to the Company's basis of financial presentation. 35 PAINE WEBBER GROUP INC. NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) (in thousands of dollars) THE PROFORMA ADJUSTMENTS TO THE CONSOLIDATED STATEMENTS OF OPERATIONS ARE AS FOLLOWS: The unaudited proforma consolidated statements of operations for the year ended December 31, 1993 and for the nine months ended September 30, 1994 do not include the nonrecurring $36,000 after-tax effect of acquisition costs deducted from the Company's results in the fourth quarter of 1994. (D.) Business Scope To include immaterial Kidder businesses acquired but not included in the Historical Combined Statements of Operations and to exclude elements of businesses included in the Historical Combined Statements of Operations that were not acquired. This adjustment also reflects a.) the estimated effect on revenues and expenses of excluding employees of the acquired Kidder businesses who did not accept an offer of employment from the Company, and of including employees joining the Company from areas of Kidder not constituting an acquired business and b.) the estimated effect on operations of closing duplicate retail offices. (E.) Cost Reductions and Revenue Transfers To eliminate from other expenses the allocated cost of certain Kidder support services and to provide for the estimated additional costs of providing such services through the Company's support service divisions. This adjustment also records the effect of differing interdivisional revenue transfer policies and the effect on compensation expense of Company employees severed as a result of the acquisition. (F.) Purchase Accounting To amortize the excess of purchase cost over the fair value of the net assets acquired over thirty-five years. (G.) Other To give effect to a.) deferred compensation paid in the form of employee forgivable loans b.) the additional net cost of office space and equipment and c.) certain reclassifications among expense categories for consistency with the Company's presentation. Also income tax expense is adjusted to reflect the income tax effects at the Company's effective tax rate. The adjustment to net income applicable to common shares gives effect to the dividend requirements of the Redeemable Preferred Stock and Convertible Preferred Stock, when dilutive, issued in connection with the acquisition and accretion of the related valuation discount. Proforma earnings per common share reflect the incremental common and common equivalent shares issued in connection with the acquisition as if issued at the beginning of the period. 36 EXHIBIT INDEX A) The following Exhibits are filed herewith: 10.3) Third Supplemental Agreement dated as of January 27, 1995 among the Company, General Electric Company and Kidder, Peabody Group, Inc. 10.4) Fourth Supplemental Agreement dated as of February 10, 1995 among the Company, General Electric Company and Kidder, Peabody Group, Inc. 23) Consent of KPMG Peat Marwick LLP EX-10.3 2 THIRD SUPPLEMENTAL AGREEMENT DATED 1/27/94 1 EXHIBIT 10.3) THIRD SUPPLEMENTAL AGREEMENT THIRD SUPPLEMENTAL AGREEMENT dated as of January 27, 1995 among Paine Webber Group Inc., a Delaware corporation (the "Purchaser"), General Electric Company, a New York corporation (the "Parent"), and Kidder, Peabody Group Inc., a Delaware corporation (the "Seller"). WHEREAS, the parties hereto have previously entered into an Asset Purchase Agreement dated as of October 17, 1994 (as amended and supplemented, the "Asset Purchase Agreement") and a Restructuring Agreement dated as of October 17, 1994 (as amended and supplemented, the "Restructuring Agreement"); WHEREAS, the parties hereto have previously entered into a Supplemental Agreement dated as of December 9, 1994 (the "First Supplemental Agreement"); WHEREAS, the parties hereto have previously entered into a Second Supplemental Agreement dated as of December 16, 1994 (the "Second Supplemental Agreement"); and WHEREAS, the parties hereto desire to further supplement the provisions of the Asset Purchase Agreement, the Restructuring Agreement, the First Supplemental Agreement and the Second Supplemental Agreement in the manner set forth in this Agreement; NOW THEREFORE, in consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01 Definitions. (a) Terms used herein and not ----------- otherwise defined herein shall have the meanings set forth in the Asset Purchase Agreement, the Restructuring Agreement, the First Supplemental Agreement and the Second Supplemental Agreement, as the case may be. (b) As used in this Agreement, the following terms shall have the following meanings: "Contemplated Payment" has the meaning set forth in Section 4.07. "First Asset Management Closing" has the meaning set forth in Section 3.01. 2 "First Asset Management Closing Date" has the meaning set forth in Section 3.01. "KPAM" has the meaning set forth in Section 4.07. "MHAM" has the meaning set forth in Section 4.07. "Physical Securities" has the meaning set forth in Section 4.02. "Related Retail Brokerage Closing Date" has the meaning set forth in Section 2.01(a). "Reorganization Transactions" has the meaning set forth in Section 2.03. (c) This Agreement shall be deemed to be a Transaction Document and each reference in any of the Transaction Documents to the Transaction Documents shall be deemed to include this Agreement. SECTION 1.02 Rules of Interpretation. The rules of interpretation ----------------------- specified in Section 1.02 of the Asset Purchase Agreement shall be applicable to this Agreement. ARTICLE II RELATED RETAIL BROKERAGE SECTION 2.01 Related Retail Brokerage Closing. (a) The -------------------------------- Related Retail Brokerage Closing shall take place at the offices of Paine Webber at 1000 Harbor Boulevard, Weehawken, New Jersey at 12:00 noon, or as soon as practicable thereafter, on January 29, 1995. The Related Retail Brokerage Closing shall be effective as of 12:01 a.m. on January 30, 1995 (the "Related Retail Brokerage Closing Date"). (b) The payment to be made by the Purchaser at the Related Retail Brokerage Closing shall be made in the form of a cashier's check to the seller on behalf of the members of the Seller Group. The parties hereto acknowledge that the amount of the cashier's check shall have been determined on January 27, 1995 based on an estimated valuation as of the close of business on January 26, 1995 and that the actual amount to be paid by the Purchaser to the members of the Seller Group at the Related Retail Brokerage Closing shall be determined based on an estimated valuation as of the close of business on January 29, 1995. To the extent that the amount of the cashier's check is less than the actual amount to be paid by the Purchaser to the members of the Seller Group, the Purchaser shall make a wire transfer to the Seller on behalf of the members of the 2 3 Seller Group on January 30, 1995, or such other date as shall be agreed upon by the parties, in the amount of such difference. To the extent that the amount of the cashier's check is greater than the actual amount to be paid by the Purchaser to the members of the Seller Group, the Seller on behalf of the members of the Seller Group shall make a wire transfer to the Purchaser on January 30, 1995, or such other date as shall be agreed upon by the parties, in the amount of such difference. SECTION 2.02 Margin and Cash Accounts. (a) With regard to any ------------------------ margin accounts with debit balances maintained by the Seller Group that are transferred to the Purchaser at the Related Retail Brokerage Closing, the following conditions shall apply: (i) During the 30-day period following the Related Retail Brokerage Closing Date, the Purchaser may return for cash any such account that fails to meet New York Stock Exchange margin requirements as of the Related Retail Brokerage Closing Date or differs materially and adversely from the representations made by the Seller with respect to such account on or prior to the Related Retail Brokerage Closing; and (ii) during the 90-day period following the Related Retail Brokerage Closing Date, the Purchaser may return for cash any such account that lacks an executed margin agreement or other documentation authorizing trading in the account on margin after a reasonable effort to obtain such agreement or documentation. (b) With regard to cash accounts maintained by the Seller Group that are proposed to be transferred to the Purchaser at the Related Retail Brokerage Closing the following conditions shall apply: (i) no accounts with unsecured debits will be accepted; and (ii) within 15 business days of the Related Retail Brokerage Closing Date, the Purchaser will verify the validity and collectibility of those accounts with debit balances. If a dispute exists as to the validity of the claims between the Seller and the Purchaser with respect to any debit balance, the Purchaser may return for cash the account that includes such balance to the Seller Group. SECTION 2.03 Omnibus Account. The Seller shall maintain --------------- an omnibus account for 30 business days following the Related Retail Brokerage Closing Date in respect of 3 4 failed trades and short inventory positions and securities transactions handled by the Reorganization Department of any member of the Seller Group ("Reorganization Transactions"), in each case arising out of Related Retail Brokerage, as of the Related Retail Brokerage Closing Date and use its reasonable efforts during such period of time to resolve any such failed trades, short inventory positions or Reorganization Transactions. Within 30 days following the Related Retail Brokerage Closing Date, the Seller and the Purchaser shall commence negotiation in good faith to reach an agreement pursuant to which, at the end of the 30 business day period, (i) the Seller Group shall transfer to the Purchaser all the rights of the Seller Group, and the Purchaser shall assume the obligations, related to any remaining such failed trades, short inventory positions or Reorganization Transactions, (ii) the Seller on behalf of the members of the Seller Group shall compensate the Purchaser therefor (which compensation may, to the extent agreed, take into account illiquidity and market risk) and (iii) to the extent the Purchaser is subsequently able to resolve any such failed trade or short inventory position following such transfer or realize any amount in respect of a Reorganization Transaction, the Purchaser shall make an appropriate cash payment to the Seller on behalf of the members of the Seller Group in respect thereof. Unless and until such transfer and assumption occurs pursuant to such an agreement between the Purchaser and the Seller, such rights shall not be Acquired Assets and such obligations shall not be Assumed Liabilities. Following any such transfer, the Purchaser shall use its reasonable efforts on an ongoing basis to resolve such failed trades, short inventory positions or Reorganization Transactions. SECTION 2.04 Retail Branch Offices. (a) The Purchaser --------------------- hereby represents and warrants that the Office Closure Costs that would actually be incurred by the Seller or the Purchaser and their respective subsidiaries in connection with the closure of the 14 retail brokerage branches previously identified to the Seller pursuant to Section 4.01 of the Restructuring Agreement and the Relocation and Refurbishment Costs and Office Closure Costs in connection with the retail brokerage operations of Hanover Square would exceed $10,000,000. The $10,000,000 amount payable by the Seller to the Purchaser pursuant to Section 4.01 of the Restructuring Agreement shall be paid at the Related Retail Brokerage Closing. The parties hereto agree that, in connection with the Restructuring, the Purchaser shall be responsible for the actual closing of any retail brokerage branches and that the Purchaser may substitute other retail brokerage branches for the 14 retail brokerage branches previously identified the Seller. 4 5 (b) In connection with the assignment to the Purchaser of the leases of the retail branch offices of the Seller Group, the Purchaser and the Seller have agreed as to certain special arrangements with respect to the Atlanta, Chicago and Los Angeles offices of the Seller Group, as set forth in Schedule 1. (c) Following the Retail Brokerage Closing Date (and without prejudice to the rights of the Purchaser under the Asset Purchase Agreement), to the extent that the Purchaser uses services pursuant to any Contracts that the Purchaser has not yet made a determination whether to assume or to reject, and to the extent that the Purchaser subsequently determines to reject any such Contracts, the Purchaser shall pay the Seller on behalf of the members of the Seller Group reasonable compensation (determined by the reference to the relevant Contract) for the use of such services to the extent the Seller Group has liability therefor; provided that (i) the Continuing Employees of Related Retail Brokerage shall be entitled to use the work stations (i.e., branch office computing equipment) of the Seller Group and (ii) the Purchaser shall have reasonable access to the mainframe computer of the Seller Group, in each case, for a period of 45 days (which may be extended by the Seller) following the Related Retail Brokerage Closing Date and without any obligation of the Purchaser to pay for the use thereof. SECTION 2.05 CBOT. The parties hereto agree that the third seat ---- on the Chicago Board of Trade to be transferred to the Purchaser on the Related Retail Brokerage Closing Date referred to in Section 3.10(b) of the Second Supplemental Agreement is in fact a Government Instrument Market Membership. The purchase price to be paid by the Purchaser for such Membership shall be $200,000 and shall be made by the Purchaser directly to the Chicago Board of Trade for the account of the Seller Group. SECTION 2.06 Insurance and Annuities Commissions Receivable. ---------------------------------------------- The Purchaser shall reimburse the Seller on behalf of the members of the Seller Group for any insurance commissions advanced to investment executives of the Seller Group prior to the Related Retail Brokerage Closing Date that will subsequently be recovered by the Purchaser from third-party insurance companies. If any such amounts cannot be recovered from such third-party insurance companies within 90 days of the Related Retail Brokerage Closing Date, the Seller shall reimburse the Purchaser for such amounts. To the extent not otherwise recoverable through reasonable efforts by the Purchaser from Continuing Employees, the Seller shall reimburse the Purchaser for all commission charge-backs demanded from the Purchaser by third-party insurance companies whose annuities and insurance contracts 5 6 were sold through the investment executives of the Seller Group, which annuities or insurance contracts are cancelled within the one-year period subsequent to the date the relevant annuity or insurance contract was initially sold. An estimate of the amount to be paid to the Seller on behalf of members of the Seller Group for advanced commissions (subject to later adjustments as referred to above) shall be included in the Related Retail Brokerage Interim Balance Sheet and any difference from the actual amount shall be adjusted on the Closing Balance Sheet. The Seller Group shall have no rights with respect to any future cyclical trailing commissions for such products for the period following the Related Retail Brokerage Closing Date. SECTION 2.07 Market Data Services Contracts. The parties hereto ------------------------------ agree that certain market data services Contracts shall be Assigned Contracts within the meaning of Section 2.07(c) of the Agreement; provided that the Seller Group will remain liable for any liquidated damages payable (whether before or after the Related Retail Brokerage Closing) under any such Contract arising prior to the first renewal of or time for giving notice not to renew such Contract by the Purchaser. The Purchaser and the Seller hereby agree to use their reasonable efforts to prepare, within 30 days of the Related Retail Brokerage Closing Date, an agreed upon list of all such market data services Contracts, the dates by which the appropriate vendors are required to be given notice of renewal or termination, the renewal dates and the liquidated damages provisions of each such Contract. The Purchaser hereby agrees to act in good faith in taking any actions under such Contracts that would give rise to liquidated damages. SECTION 2.08 FORMS 1099. The Seller hereby agrees, as ---------- required by Applicable Law, to prepare IRS Forms 1099 for the customers of the Seller Group whose accounts are transferred to the Purchaser and to send such Forms 1099 to such customers between September 1, 1995 and January 31, 1996. The Seller further agrees, until June 30,1996, to respond to questions from such customers regarding these Forms 1099. ARTICLE III ASSET MANAGEMENT SECTION 3.01 Asset Management. In the event that an exemptive ---------------- order, effective on or prior to January 30, 1995, in form and substance reasonably satisfactory to each of the parties hereto, concerning the Funds is received from the Commission: 6 7 (i) the Seller Group shall transfer to the Purchaser (or its designee) the Acquired Assets of the portion of Asset Management that relates to the management of investment companies and managed accounts identified on Schedule 2 hereto and the Purchaser shall assume the Assumed Liabilities arising out of such portion of Asset Management (the consummation of such transfer and assumption, The "First Asset Management Closing"); (ii) the First Asset Management Closing shall take place at the same time as the Related Retail Brokerage Closing and the First Asset Management Closing Date (the "First Asset Management Closing Date") and the Related Retail Brokerage Closing Date shall be the same date; (iii) the Related Retail Brokerage Interim Balance Sheet and the Related Retail Brokerage Interim Net Book Value Statement shall include the Acquired Assets and Assumed Liabilities of that portion of Asset Management Referred to in clause (i) above; and (iv) the Acquired Assets being transferred to, and the Assumed Liabilities being assumed by, the Purchaser shall include the Acquired Assets and Assumed Liabilities of that portion of Asset Management referred to in clause (i) above. SECTION 3.02 FCI. The Seller hereby agrees to keep in existence Financial Counselors, Inc. (whose name is expected to be changed to Broad Street Advisors Inc.) or a successor corporation (by merger or otherwise) thereto for a period of not less than six years from the First Asset Management Closing Date. For such period of time, the Seller shall cause Financial Counselors, Inc. to maintain an errors and omissions insurance policy in an amount of not less than $5,000,000 covering claims accruing prior to the First Asset Management Closing Date, and the Purchaser shall reimburse the Seller on behalf of the members of the Seller Group for the cost of such insurance. SECTION 3.03 ASSET MANAGEMENT OFFICES. The Seller hereby agrees to ------------------------ enter into arrangements with the Purchaser on terms substantially similar to those in the Revocable License Agreement previously entered into between the Purchase and the Seller to permit the Purchaser to use and occupy for a period of time not to exceed two months certain space owned and leased by the Seller Group and used in connection with Asset Management. 7 8 ARTICLE IV SUPPLEMENTAL MATTERS SECTION 4.01 In Treatment Status. The parties hereto agree that ------------------- the amount payable by the Seller to the Purchaser pursuant to Section 4.02 of the Second Supplemental Agreement shall be $1,398,257. Such Amount shall be paid by the Seller on behalf of the members of the Seller Group to the Purchaser at the Related Retail Brokerage Closing. SECTION 4.02 Physical Securities. With respect to the transfer of ------------------- certain Securities in physical, certificated form (the "Physical Securities") from the Seller to the Purchaser, the parties hereto have agreed as follows: (i) During the weekend of January 28-29, 1995, at the offices of the Seller at 2 Broadway, New York, New York, the Seller shall conduct a review and accounting of the Physical Securities at which the Purchaser shall be present and observe, following which the Physical Securities shall be placed in appropriate storage containers, sealed and placed in the Seller's vault at such address. (ii) The Physical Securities shall be transported in sealed storage containers by armored car to the offices of the Purchaser at 1000 Harbor Boulevard, Weehawken, New Jersey, in three one-car shipments on each of January 30, January 31 and February 1, 1995, respectively. The cost of such transportation, including insurance, shall be shared equally by the Purchaser and the Seller on behalf of the members of the Seller Group. (iii) The Purchaser shall receive the Physical Securities at its offices at 1000 Harbor Boulevard, Weehawken, New Jersey, at which time the Purchaser shall be deemed to have accepted the Physical Securities and risk of loss shall have passed to the Purchaser and the Seller Group shall have no further obligations of any kind to the Purchaser with respect to the custody of the Physical Securities and the safe-keeping thereof; provided that, immediately following the arrival of each of the one-car shipments referred to in clause (ii) above, the Purchaser shall conduct a review of the Physical Securities and a reconciliation of the accounting referred to in clause (i) above, at which the Seller shall be present and observe, and the Purchaser shall have twelve hours following the arrival of each such shipment to notify the Seller in writing 8 9 as to any discrepancies in the reconciliation of such shipment of Physical Securities. SECTION 4.03 Custody Agreement. The Purchaser and the Seller have ----------------- agreed to enter into a custody arrangement in the form of Exhibit 1 hereto with respect to certain Books and Records. SECTION 4.04 Foreign Leases. With respect to the office of the -------------- Seller Group in Tokyo, Japan (the "Tokyo Office"), the parties hereto have agreed as follows: (a) The Purchaser shall take all action necessary as promptly as practicable to close its office in Tokyo. The Seller of behalf of members of the Seller Group shall be responsible for the Office Closure Costs (which shall include for purposes of this Section 4.04(a) all rent paid by the Purchaser for its existing Tokyo office space until such time as the Purchaser occupies the Tokyo Office) actually incurred by the Purchaser in connection with the closure of such office, up to an aggregate of $2,500,000. Any Office Closure Costs in connection with such closure in excess of $2,500,000 shall be the responsibility of the Purchaser. (b) The Tokyo Office lease shall be treated as a Delayed Asset for which the Required Consent could not be obtained and, in accordance with Section 2.04(a) of the Asset Purchase Agreement, until at least January 31, 1996, the Purchaser shall be entitled to use and occupy the Tokyo Office and the Seller Group shall provide the Purchaser with the benefits under or applicable to such lease and the Purchaser shall assume and pay and perform all liabilities relating to such lease. For the period from February 1, 1995 through January 31, 1996, (i) to the extent that the Purchaser uses and occupies the Tokyo Office under the existing lease of the Seller Group, the Purchaser shall not be responsible (in a manner consistent with customary rent concession practices in Tokyo) for the payment of rent and the Seller Group shall remain liable therefor and (ii) to the extent that the Purchaser uses and occupies the Tokyo Office under a lease to the Purchaser, the Seller on behalf of the members of the Seller Group shall pay an amount monthly to the Purchaser equal to the monthly amount of the rent concession provided for pursuant to clause (i). (c) Effective February 1, 1995, leases of Equipment and Machinery used in the Tokyo Office with aggregate lease payment obligations of $2,200,000 shall be assumed by the Purchaser. Such leases (which shall not include the leases of the telephone equipment and the AS-400 mini-mainframe computer) shall be selected by the Purchaser and shall be Assigned Contracts. 9 10 (d) The Purchaser shall purchase from the Seller Group at Seller's net book value (exclusive of any writedown effected as a result of the transactions contemplated by the Transaction Documents) the Equipment and Machinery (excluding any software and licenses) used by the Seller Group in the operation of the Tokyo Office; provided that the Purchaser shall not be -------- obligated to pay more than $1,900,000 for all such Equipment and Machinery. (e) Effective February 1, 1995, all Contracts of the Seller Group relating to the occupancy or maintenance of the Tokyo Office or office services being provided to the Tokyo Office not otherwise described in Sections 4.04(a), (b) and (c), shall be Assigned Contracts, to the extent that such Contracts shall be useful to the Purchaser in connection with the conduct of its business in the Tokyo Office. (f) The Purchaser and the Seller shall jointly review the existing agreements of the Purchaser and the Seller Group for the provision of market data services in Tokyo and negotiate in good faith to agree on the action to be taken to ensure that the Purchaser shall have reasonable access to the market data services necessary to the conduct of its business in Tokyo and to minimize the costs associated with the termination of any existing agreements of the Purchaser and the Seller Group not necessary to provide the Purchaser with such market data services. To the extent the Seller Group and the Purchaser have existing agreements for market data services that are the same or nearly the same, the Purchaser agrees to take assignment of the longer term agreement (consistent with its existing business plan) and the Seller on behalf of the members of the Seller Group agrees to assume financial responsibility for the termination costs or expenses of the shorter term agreement; provided that the -------- Seller Group's obligation in respect thereof shall not exceed the amount it would have been obligated to pay under its existing agreement. Any costs incurred by the Purchaser in connection with the termination of its contractual obligations under its existing agreements may be deemed to be Office Closure Costs for purposes of Section 4.04(a), or shall otherwise be for the account of the Purchaser. (g) Effective February 1, 1995, but subject to any necessary Japanese regulatory approvals, the Purchaser shall permit the employees of the Seller Group to use and occupy on a rent-free basis approximately 1,000 square feet of office space in the Tokyo Office through December 31, 1995. SECTION 4.05 Certain Post-Retirement Medical Benefits. The Seller ---------------------------------------- and the Purchaser have agreed as to 10 11 the medical benefits to be made available to the Continuing Employees listed on Schedule 3 hereto and, except as provided in the next succeeding sentence, the Seller on behalf of the members of the Seller Group shall be responsible for the costs associated with the providing of such medical benefits. The Purchaser shall pay an aggregate amount of $5,000,000 to the Seller on behalf of the members of the Seller Group in four equal installments of $1,250,000 payable on January 30th in each of 1995, 1996, 1997 and 1998; provided that no -------- payment shall be due in each of 1997 and 1998 unless 40 or more of the investment executives listed on Schedule 3 hereto are employed by the Purchaser or any of its controlled Affiliates as of January 30th, 1997. For purposes of determining the number of investment executives listed on Schedule 3 hereto employed by the Purchaser as of January 30, 1997, any investment executive listed on Schedule 3 hereto who is terminated without cause by the Purchaser or any of its controlled Affiliates prior to January 30, 1997 shall be treated as if such investment executive were employed by the Purchaser as of January 30, 1997. SECTION 4.06 Deferred Broker Production Bonus Programs. The parties ----------------------------------------- hereto agree that payments to be made for any year by the Purchaser to Continuing Employees pursuant to Section 3.08(a) of the Restructuring Agreement under the Deferred Broker Production Bonus Programs shall be made no later than the January 31st of the year following such year. The Purchaser shall be responsible for any and all payroll taxes in connection therewith. SECTION 4.07 Asset Management Indemnification. The Purchaser, -------------------------------- PaineWebber Incorporated and Mitchell Hutchins Asset Management Inc. ("MHAM") shall be fully indemnified, defended and held harmless, jointly and severally by the Parent and the Seller, with respect to any amounts paid or advanced to or in respect of any of the investment companies (or successors thereto) listed on Schedule 2 hereto that are based on: (a) an act or failure to act by Kidder Peabody Asset Management, Inc. ("KPAM"), or one of its agents, in the management of such investment company prior to the First Asset Management Closing Data, as a result of which and to the extent that: (i) KPAM (or its agent) has legal liability to such investment company or its shareholders including, without limitation, any liability attributable to the failure of any such investment company to: (A) comply with any applicable state securities or Blue Sky registration requirements; 11 12 (B) value any asset in its portfolio in accordance with such investment company's policies or applicable law; or (c) maintain its portfolio in material compliance with the terms, conditions or descriptions thereof contained in any applicable registration statement filed under the federal securities laws; or (ii) Purchaser or MHAM has a reasonable belief that if such payment or advance were not made, MHAM's business reputation as a manager of investment companies would be materially injured; or (b) an error (by act or omission) or oversight by KPAM, or one of its agents, in the management of such investment company prior to the First Asset Management Closing Date, as a result of which and to the extent that any Tax is determined by the Internal Revenue Service or the independent accountants of the investment company to be owing by such investment company or by any shareholder of such company (other than income taxes payable by such shareholder in the ordinary course), whether or not such Tax is yet due or payable (so long as any decision by the Purchaser, PaineWebber Incorporated or MHAM to pay in advance is made on a reasonable basis). If the Purchaser is contemplating paying or advancing any amount to or in respect of any investment company (or successor thereto) listed on Schedule 2 hereto with respect to which the Purchaser believes it may be entitled to indemnification pursuant to this Section 4.07 (a "Contemplated Payment"), and a purchase by the Parent or the Seller of Securities owned by such investment company at a price above the then current market price would obviate the need for such payment or advance; (i) The Purchaser shall provide the Parent and the Seller with two business days' prior written notice of such Contemplated Payment (or, if such notice is not practicable, such lesser notice but in any event not less than 4 hours), which notice shall include a description of the relevant Securities, the events relating to the Contemplated Payment, the amount of the Contemplated Payment and current market price information concerning the relevant Securities. (ii) The Parent or the Seller shall have the option, exercisable within such two business days (or lesser) period, subject to any necessary Commission, investment company board and other approvals, to either (A) make the Contemplated Payment in lieu of the Purchaser or (B) purchase the relevant Securities from 12 13 such investment company for any amount equal to the amount of the Contemplated Payment plus the aggregate market price of the relevant Securities set forth in the notice. (iii) If the Parent or the Seller exercises its option pursuant to clause (ii) above, neither the Parent nor the Seller shall have any further obligations toward the Purchaser, PaineWebber Incorporated and MHAM under Section 4.07(a) (ii) in respect of the events relating to the Contemplated Payment. The parties hereto acknowledge that this Section 4.07 shall not apply to any investment company (or successor thereto) other than those listed on Schedule 2 hereto. ARTICLE V MISCELLANEOUS SECTION 5.01 Incorporation by Reference. The provisions of Article XI --------------------------- or the First Supplemental Agreement shall be incorporated by reference herein and each reference therein to the First Supplemental Agreement shall apply to this Agreement as if this Agreement were referred to therein. SECTION 5.02 Other References to Closing and Closing Date. The -------------------------------------------- parties hereto acknowledge that each reference in the Asset Purchase Agreement to the "Closing", the "Closing Date", the "Asset Management Closing" and the "Asset Management Closing Date" shall, to the extent such reference relates to the portion of Asset Management transferred at the First Asset Management Closing, be construed as a reference to the First Asset Management Closing or the First Asset Management Closing Date, as applicable. 13 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. PAINE WEBBER GROUP INC. By /s/ REGINA A. DOLAN ------------------------ Name: Regina A. Dolan Title: Chief Financial Officer and Vice President GENERAL ELECTRIC COMPANY By ------------------------ Name: Title: KIDDER, PEABODY GROUP INC. By ------------------------ Name: Title: 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. PAINE WEBBER GROUP INC. By --------------------------- Name: Title: GENERAL ELECTRIC COMPANY By /s/ DENNIS D. DAMMERMAN --------------------------- Name: Dennis D. Dammerman Title: Senior Vice President-Finance KIDDER, PEABODY GROUP INC. By /s/ RICHARD W. O'DONNELL --------------------------- Name: Richard W. O'Donnell Title: Senior Vice President, Chief Financial & Administrative Officer EX-10.4 3 FOURTH SUPPLEMENTAL AGREEMENT DATED 2/10/95 1 EXHIBIT 10.4) FOURTH SUPPLEMENTAL AGREEMENT FOURTH SUPPLEMENTAL AGREEMENT dated as of February 10, 1995 among Paine Webber Group, Inc., a Delaware corporation (the "Purchaser"), General Electric Company, a New York corporation (the "Parent"), and Kidder, Peabody Group Inc., a Delaware corporation (the "Seller"). WHEREAS, the parties hereto have previously entered into an Asset Purchase Agreement dated as of October 17, 1994 (as amended and supplemented, the "Asset Purchase Agreement") and a Restructuring Agreement dated as of October 17, 1994 (as amended and supplemented, the "Restructuring Agreement"); WHEREAS, the parties hereto have previously entered into a Supplemental Agreement dated as of December 9, 1994 (the "First Supplemental Agreement"); WHEREAS, the parties hereto have previously entered into a Second Supplemental Agreement dated as of December 16, 1994 (the "Second Supplemental Agreement"); and WHEREAS, the parties hereto have previously entered into a Third Supplemental Agreement dated as of January 27, 1995 (the "Third Supplemental Agreement"); and WHEREAS, the parties hereto desire to further supplement the provisions of the Asset Purchase Agreement, the First Supplemental Agreement, the Second Supplemental Agreement and the Third Supplemental Agreement in the manner set forth in this Agreement; NOW THEREFORE, in consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01 Definitions. (a) Terms used herein and not ----------- otherwise defined herein shall have the meanings set forth in the Asset Purchase Agreement, the First Supplemental Agreement, the Second Supplemental Agreement and the Third Supplemental Agreement, as the case may be. (b) As used in this Agreement, the following terms shall have the following meanings: 2 "Contemplated Payment" has the meaning set forth in Section 2.02. "Second Asset Management Closing" has the meaning set forth in Section 2.01(a). "Second Asset Management Closing Date" has the meaning set forth in Section 2.01(a). "Second Asset Management Interim Net Book Value Statement" has the meaning set forth in Section 2.01(c). (c) This Agreement shall be deemed to be a Transaction Document and each reference in any of the Transaction Documents to the Transaction Documents shall be deemed to include this Agreement. SECTION 1.02 Rules of Interpretation. The rules of interpretation specified in Section 1.02 of the Asset Purchase Agreement shall be applicable to this Agreement. ARTICLE II ASSET MANAGEMENT SECTION 2.01 Second Asset Management Closing. (a) The Second Asset ------------------------------- Management Closing shall take place at the offices of Cravath, Swaine & Moore at 825 Eighth Avenue, New York, New York at 1:00 p.m., or as soon as practicable thereafter, on February 12, 1995. The Second Asset Management Closing shall be effective as of 12:01 a.m. on February 13, 1995 (the "Second Asset Management Closing Date"). (b) At the Second Asset Management Closing, the Seller Group shall transfer to the Purchaser (or its designee) the Acquired Assets of the portion of Asset Management that relates to the management of investment companies identified on Schedule 1 and hereto the Purchaser shall assume the Assumed Liabilities arising out of such portion of Asset Management. (c) The Purchaser shall make a payment to the Seller on behalf of the members of the Seller Group of an amount in cash equal to the excess, if any, of (A) the Acquired Liquid Assets over (B) the Assumed Liabilities, each as reflected on the Second Asset Management Interim Net Book Value Statement (to be provided by the seller to the Purchaser at the Second Asset Management Closing), payable in Federal funds by 11:00 a.m. on February 13, 1995. SECTION 2.02 Asset Management Indemnification. The Purchaser, -------------------------------- PaineWebber Incorporated and MHAM shall be 2 3 fully indemnified, defended and held harmless, jointly and severally, by the Parent and the Seller, with respect to any amounts paid or advanced to or in respect of any of the investment companies (or successors thereto) listed on Schedule 1 hereto that are based on: (a) an act or failure to act by KPAM, or one of its agents (including subadvisors), in the management of such investment company prior to the Second Asset Management Closing Date, as a result of which and to the extent that KPAM (or its agent) has legal liability to such investment company or its shareholders including, without limitation, any liability attributable to the failure of any such investment company to: (i) comply with any applicable state securities or Blue Sky registration requirements; (ii) value any asset in its portfolio in accordance with such investment company's policies or applicable law; or (iii) maintain its portfolio in material compliance with the terms, conditions or descriptions thereof contained in any applicable registration statement filed under the federal securities laws; or (b) an error (by act or omission) or oversight by KPAM, or one of its agents (including subdivisors), in the management of such investment company prior to the Second Asset Management Closing Date, as a result of which and to the extent that any Tax is determined by the Internal Revenue Service or the independent accountants of the investment company to be owing by such investment company or by any shareholder of such company (other than income taxes payable by such shareholder in the ordinary course), whether or not such Tax is yet due or payable (so long as any decision by the Purchaser, PaineWebber Incorporated or MHAM to pay in advance is made on a reasonable basis). If the Purchaser is contemplating paying or advancing any amount to or in respect of any investment company (or successor thereto) listed on Schedule 1 hereto with respect to which the Purchaser believes it may be entitled to indemnification pursuant to this Section 2.02 (a "Contemplated Payment"), and a purchase by the Parent or the Seller of Securities owned by such investment company at a price above the then current market price would obviate the need for such Contemplated Payment: (x) The Purchaser shall provide the Parent and the Seller with two business days' prior written notice of such Contemplated Payment (or, if such notice is not 3 4 practicable, such lesser notice but in any event not less than 4 hours), which notice shall include a description of the relevant Securities, the events relating to the Contemplated Payment, the amount of the Contemplated Payment and current market price information concerning the relevant Securities. (y) The Parent or the Seller shall have the option, exercisable within such two business day (or lesser) period, subject to any necessary Commission, investment company board and other approvals, to either (A) make the Contemplated Payment in lieu of the Purchaser or (B) purchase the relevant Securities from such investment company for an amount equal to the amount of the Contemplated Payment plus the aggregate market price of the relevant Securities set forth in the notice. The parties hereto acknowledge that this Section 2.02 shall not apply to any investment company (or successor thereto) other than those listed on Schedule 1 hereto. Nothing contained in this Section 2.02 or in Section 4.07 of the Third Supplemental Agreement shall in any way be interpreted or construed as limiting, diminishing or affecting in any adverse way the indemnification provisions of the Asset Purchase Agreement as applied to the Purchaser, which provisions shall remain applicable to the extent provided therein and without duplication. ARTICLE III MISCELLANEOUS SECTION 3.01 Incorporation by Reference. The provisions of Article -------------------------- XI of the First Supplemental Agreement shall be incorporated by reference herein and each reference therein to the First Supplemental Agreement shall apply to this Agreement as if this Agreement were referred to therein. SECTION 3.02 Other References to Closing and Closing Date. The -------------------------------------------- parties hereto acknowledge that each reference in the Asset Purchase Agreement to the "Closing", the "Closing Date", the "Asset Management Closing" and the "Asset Management Closing Date" shall, to the extent such reference relates to the portion of Asset Management transferred at the Second Asset Management Closing, be construed as a reference to the Second Asset Management Closing or the Second Asset Management Closing Date, as applicable. 4 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. PAINE WEBBER GROUP INC. By /s/ REGINA A. DOLAN ----------------------- Name: Regina A. Dolan Title: Chief Financial Officer and Vice President GENERAL ELECTRIC COMPANY By -------------------------- Name: Title: KIDDER, PEABODY GROUP INC. By -------------------------- Name: Title: 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. PAINE WEBBER GROUP INC. By ------------------------- Name: Title: GENERAL ELECTRIC COMPANY By /s/ PAMELA DALEY ------------------------- Name: Pamela Daley Title: Vice President and Senior Counsel KIDDER, PEABODY GROUP INC. By ------------------------- Name: Title: 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. PAINE WEBBER GROUP INC. By ----------------------- Name: Title: GENERAL ELECTRIC COMPANY By -------------------------- Name: Title: KIDDER, PEABODY GROUP INC. By /s/ RICHARD W. O'DONNELL -------------------------- Name: Richard W. O'Donnell Title: Senior Vice President 8 SCHEDULE 1 Kidder, Peabody Equity Income Fund, Inc. Kidder, Peabody Government Income Fund, Inc. Kidder, Peabody Investment Trust, consisting of Kidder, Peabody Global Equity Fund Kidder, Peabody Intermediate Fixed Income Fund Kidder, Peabody Asset Allocation Fund Kidder, Peabody Adjustable Rate Government Fund Kidder, Peabody Global Fixed Income Fund Kidder, Peabody Investment Trust II, consisting of Kidder, Peabody Municipal Bond Fund Kidder, Peabody Emerging Markets Equity Fund Kidder, Peabody Global High Income Fund Kidder, Peabody Investment Trust III, consisting of Kidder, Peabody Small Cap Equity Fund Institutional Series Trust, consisting of Institutional Adjustable Rate Government Portfolio EX-23 4 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Kidder, Peabody Group Inc. We consent to the inclusion of our report dated February 8, 1995, with respect to the combined statement of assets acquired and liabilities assumed of the Real Estate, Eurobond, Retail Brokerage and Asset Management Businesses ("Purchased Businesses") of Kidder, Peabody Group Inc. as of December 26, 1994 or date prior to transfer (the Real Estate and Eurobond Businesses are combined on their respective closing dates - December 9 and December 16, 1994), and our report dated February 8, 1995, with respect to the combined statement of operations of the Purchased Businesses for the years ended December 27, 1993, December 28, 1992, and December 30, 1991, in the Form 8-K/A of Paine Webber Group Inc. dated February 22, 1995, which is incorporated by reference in the following registration statements of Paine Webber Group Inc. 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, 33-45583, 33-65296, 33-65298, 33-53489, 33-55451, and 33-55457) and on Form S-3 (Registration Nos. 2-99979, 2-80528, 33-1985, 33-7738, 33-29253, 33-33613, 33-38960, 33-39818, 33-45041, 33-45148, 33-47267, 33-56156, 33-58124, 33-53776, 33-51149, 33-52695 and 33-52695-01) and in the related prospectuses. KPMG Peat Marwick LLP February 24, 1995 New York, New York -----END PRIVACY-ENHANCED MESSAGE-----