-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RqLUgcY/mmftksfn8xlLmuUopAJgQx0cdGG0EdKMXabJVhyaGkFpVjDmWek/wY+q Ocli/astkFvTVkCg3ml7kw== 0000950123-98-005200.txt : 19980518 0000950123-98-005200.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950123-98-005200 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-07367 FILM NUMBER: 98625949 BUSINESS ADDRESS: STREET 1: 1285 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127132000 MAIL ADDRESS: STREET 1: 1285 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: PAINE WEBBER INC DATE OF NAME CHANGE: 19840523 10-Q 1 PAINE WEBBER GROUP INC. 1 United States SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 COMMISSION FILE NUMBER 1-7367 PAINE WEBBER GROUP INC. (Exact name of Registrant as specified in its charter) DELAWARE 13-2760086 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (Address of principal executive offices) (Zip Code) (212) 713-2000 Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| ----------------------- On May 8, 1998, the Registrant had outstanding 139,911,442 shares of common stock of $1 par value, which is the Registrant's only class of common stock. 2 PAINE WEBBER GROUP INC. FORM 10-Q March 31, 1998 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page --------------------- ---- Item 1. Financial Statements. Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 1998 and 1997. 2 Consolidated Statements of Financial Condition (unaudited) at March 31, 1998 and December 31, 1997. 3 Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 1998 and 1997. 4 Notes to Consolidated Financial Statements (unaudited). 5-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14-18 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings. 19 Item 4. Submissions of Matters to a Vote of Security Holders. 19 Item 6. Exhibits and Reports on Form 8-K. 20 Signature. 21
3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Paine Webber Group Inc. Consolidated Statements of Income (unaudited) (In thousands of dollars except share and per share amounts)
Three Months Ended March 31, ----------------------------- 1998 1997 ------------ ------------ Revenues Commissions $ 408,124 $ 370,386 Principal transactions 276,963 256,536 Asset management 158,736 120,968 Investment banking 124,969 97,774 Interest 802,378 643,953 Other 33,940 38,074 ------------ ------------ Total revenues 1,805,110 1,527,691 Interest expense 690,133 542,857 ------------ ------------ Net revenues 1,114,977 984,834 ------------ ------------ Non-interest expenses Compensation and benefits 650,575 574,017 Office and equipment 72,540 68,067 Communications 37,756 38,207 Business development 22,079 18,620 Brokerage, clearing & exchange fees 25,496 22,555 Professional services 33,592 27,540 Other 74,744 70,924 ------------ ------------ Total non-interest expenses 916,782 819,930 ------------ ------------ Income before taxes and minority interest 198,195 164,904 ------------ ------------ Provision for income taxes: Federal 49,385 45,859 State, local and foreign 20,014 13,361 ------------ ------------ 69,399 59,220 ------------ ------------ Income before minority interest 128,796 105,684 Minority interest 8,061 4,849 ------------ ------------ Net income $ 120,735 $ 100,835 ============ ============ Net income applicable to common shares $ 114,823 $ 93,457 ============ ============ Earnings per common share: Basic $ 0.82 $ 0.72 Diluted $ 0.77 $ 0.62 Weighted-average common shares: Basic 139,285,622 130,348,040 Diluted 149,493,190 153,156,479 Dividends declared per common share $ 0.11 $ 0.10
See notes to consolidated financial statements. 2 4 Paine Webber Group Inc. Consolidated Statements of Financial Condition (unaudited) (In thousands of dollars except share and per share amounts)
March 31, December 31, 1998 1997 ----------- ----------- Assets Cash and cash equivalents $ 171,362 $ 233,787 Cash and securities segregated and on deposit for federal and other regulations 648,336 569,138 Trading assets 19,615,929 16,373,792 Securities received as collateral 1,149,777 -- ----------- ----------- Total trading assets, at fair value 20,765,706 16,373,792 Securities purchased under agreements to resell 21,685,090 21,562,739 Securities borrowed 9,053,127 9,573,187 Receivables: Clients, net of allowance for doubtful accounts of $21,943 and $21,315 at March 31, 1998 and December 31, 1997, respectively 6,463,957 5,668,653 Brokers and dealers 267,186 494,855 Dividends and interest 339,222 337,409 Fees and other 187,259 403,575 Office equipment and leasehold improvements, net of accumulated depreciation and amortization of $415,907 and $400,346 at March 31, 1998 and December 31, 1997, respectively 361,239 334,401 Other assets 1,688,435 1,513,497 ----------- ----------- $61,630,919 $57,065,033 =========== =========== Liabilities and Stockholders' Equity Short-term borrowings $ 2,062,195 $ 1,666,216 Trading liabilities, at fair value 8,615,585 7,102,144 Securities sold under agreements to repurchase 29,217,396 29,628,902 Securities loaned 5,295,745 4,733,961 Obligation to return securities received as collateral 1,149,777 -- Payables: Clients 5,770,425 5,052,516 Brokers and dealers 968,018 268,050 Dividends and interest 301,129 343,391 Other liabilities and accrued expenses 1,473,903 1,476,260 Accrued compensation and benefits 640,355 882,251 Long-term borrowings 3,538,591 3,397,961 ----------- ----------- 59,033,119 54,551,652 ----------- ----------- Commitments and contingencies Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts holding solely Company Guaranteed Related Subordinated Debt 393,750 393,750 Redeemable Preferred Stock 188,955 188,668 Stockholders' Equity: Commonstock, $1 par value, 200,000,000 shares authorized (1); issued 189,186,799 shares and 188,458,083 shares at March 31, 1998 and December 31, 1997, respectively 189,187 188,458 Additional paid-in capital 1,434,882 1,405,329 Retained earnings 1,440,443 1,340,966 Treasury stock, at cost; 49,849,441 shares and 48,557,788 shares at March 31, 1998 and December 31, 1997, respectively (1,044,953) (998,300) Foreign currency translation adjustment (4,464) (5,490) ----------- ----------- 2,015,095 1,930,963 ----------- ----------- $61,630,919 $57,065,033 =========== ===========
(1) On May 7, 1998, the shareholders of the Company approved an amendment to the Company's charter which increases the number of common shares authorized for issuance from 200,000,000 to 400,000,000 shares. See notes to consolidated financial statements. 3 5 Paine Webber Group Inc. Consolidated Statements of Cash Flows (unaudited) (In thousands of dollars)
Three Months Ended March 31, -------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net income $ 120,735 $ 100,835 Adjustments to reconcile net income to cash used for operating activities: Noncash items included in net income: Depreciation and amortization 17,104 17,350 Deferred income taxes 41,149 15,395 Amortization of deferred charges 19,499 43,806 Other 34,598 23,392 (Increase) decrease in operating receivables: Clients (796,457) (221,971) Brokers and dealers 227,669 (913) Dividends and interest (1,813) 2,939 Fees and other 216,316 (1,824) Increase (decrease) in operating payables: Clients 717,909 (225,164) Brokers and dealers 699,968 5,663 Dividends and interest (42,262) (3,081) Other (257,184) (443,501) (Increase) decrease in: Cash and securities on deposit (79,198) (4,630) Trading assets (3,242,137) (1,171,988) Securities purchased under agreements to resell (122,351) (2,312,905) Securities borrowed 520,060 (1,398,526) Other assets (222,254) (189,472) Increase (decrease) in: Trading liabilities 1,513,441 1,657,574 Securities sold under agreements to repurchase (411,506) 2,096,414 Securities loaned 561,784 1,154,792 ----------- ----------- Cash used for operating activities (484,930) (855,815) ----------- ----------- Cash flows from investing activities: Payments for: Office equipment and leasehold improvements (45,658) (16,290) ----------- ----------- Cash used for investing activities (45,658) (16,290) ----------- ----------- Cash flows from financing activities: Net proceeds from short-term borrowings 395,979 427,259 Proceeds from: Long-term borrowings 149,332 261,299 Employee stock transactions 12,539 28,727 Issuance of Preferred Trust Securities -- 198,750 Payments for: Long-term borrowings (9,250) (66,733) Repurchases of common stock (59,465) (95,174) Dividends (20,972) (20,888) ----------- ----------- Cash provided by financing activities 468,163 733,240 ----------- ----------- Decrease in cash and cash equivalents (62,425) (138,865) Cash and cash equivalents, beginning of period 233,787 383,856 ----------- ----------- Cash and cash equivalents, end of period $ 171,362 $ 244,991 =========== ===========
See notes to consolidated financial statements. 4 6 Paine Webber Group Inc. Notes to Consolidated Financial Statements (unaudited) (In thousands of dollars except share and per share amounts) Note 1: Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Paine Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its principal subsidiary PaineWebber Incorporated ("PWI") (collectively, the "Company"). All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior year amounts to conform to current year presentations. The December 31, 1997 Consolidated Statement of Financial Condition was derived from the audited consolidated financial statements of the Company. The financial information as of and for the periods ended March 31, 1998 and 1997 is unaudited. All normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation have been made. The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year. Stock Split All 1997 common share and per share data have been retroactively adjusted to reflect a three-for-two common stock split in the form of a 50% stock dividend declared and paid during the quarter ended December 31, 1997. Accounting Changes On January 1, 1998, Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" became fully effective. Previously, the Financial Accounting Standards Board had deferred until January 1, 1998 the implementation of SFAS No. 125 as it related to 1) secured borrowings and collateral, and 2) the transfer of financial assets that are part of repurchase agreements, dollar-roll, securities lending and similar transactions. The adoption of those deferred portions of SFAS No. 125 created the following additional captions on the Company's Consolidated Statement of Financial Condition: o Securities received as collateral; and o Obligation to return securities received as collateral. The balances recognized in these captions primarily represent securities received as collateral in term resale agreements for which the collateral provider does not have the explicit contractual right to substitute. As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which established standards for the reporting and display of comprehensive income. Comprehensive income combines net income and certain items that directly affect stockholders' equity, such as foreign currency translation adjustments. The adoption of SFAS No. 130 had no impact on the Company's net income or stockholders' equity. During the first quarter of 1998 and 1997, total comprehensive income amounted to $121,761 and $98,268. The components of comprehensive income for the three-month periods ended March 31, 1998 and 1997 were as follows:
1998 1997 --------- --------- Net income $ 120,735 $ 100,835 Foreign currency translation adjustment 1,026 (2,567) --------- --------- Comprehensive income $ 121,761 $ 98,268 ========= =========
5 7 Notes to Consolidated Financial Statements (continued) Note 2: Fair Value of Financial Instruments Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash and cash equivalents, cash and securities segregated for regulatory purposes, trading assets, resale agreements, securities borrowed, and certain receivables, are carried at fair value or contracted amounts which approximate fair value. Similarly, liabilities, including short-term borrowings, trading liabilities, repurchase agreements, securities loaned, and certain payables, are carried at fair value or contracted amounts approximating fair value. At March 31, 1998 and December 31, 1997, the fair values of long-term borrowings were $3,626,726 and $3,469,950, respectively, as compared to the carrying amounts of $3,538,591 and $3,397,961, respectively. The estimated fair value of long-term borrowings is based upon quoted market prices for the same or similar issues and pricing models. However, for substantially all of its fixed rate debt, the Company enters into interest rate swap agreements to convert its fixed rate payments into floating rate payments. The fair value of interest rate swaps used to hedge the Company's fixed rate debt is based upon the amounts the Company would receive or pay to terminate the agreements, taking into account current interest rates and creditworthiness of the counterparties. The fair values of the interest rate swaps were $52,421 and $50,796 receivable at March 31, 1998 and December 31, 1997, respectively. The carrying amounts of the interest rate swap agreements included in the Company's Consolidated Statements of Financial Condition at March 31, 1998 and December 31, 1997 were net receivables of $1,847 and $7,193, respectively. See Note 8 for further discussion of interest rate swap agreements used for hedging purposes. Note 3: Trading Assets and Liabilities At March 31, 1998 and December 31, 1997, trading assets and liabilities, recorded at fair value and on a trade date basis, consisted of the following:
March 31, December 31, 1998 1997 ----------- ----------- Trading assets: U.S. government and agency obligations $ 5,613,311 $ 3,449,159 Mortgages and mortgage-backed securities 7,323,584 6,557,629 Corporate debt securities 3,990,807 3,820,317 Commercial paper and other short-term debt 1,243,850 1,410,726 State and municipal obligations 702,665 482,678 Corporate equity securities 741,712 653,283 ----------- ----------- 19,615,929 16,373,792 Securities received as collateral(1) 1,149,777 -- ----------- ----------- $20,765,706 $16,373,792 =========== =========== Trading liabilities: U.S. government and agency obligations $ 6,971,010 $ 5,882,082 Mortgages and mortgage-backed securities 330,270 81,330 Corporate debt securities 911,151 851,413 State and municipal obligations 37,990 14,191 Corporate equity securities 365,164 273,128 ----------- ----------- $ 8,615,585 $ 7,102,144 =========== ===========
(1) This amount relates to the Company's adoption of the deferred portions of SFAS No. 125. Note 4: Short-Term Borrowings The Company meets its short-term financing needs by obtaining bank loans on either a secured or unsecured basis; by issuing commercial paper and medium-term notes; by entering into agreements to repurchase, whereby securities are sold with a commitment to repurchase at a future date; and through securities lending activity. 6 8 Notes to Consolidated Financial Statements (continued) Short-term borrowings at March 31, 1998 and December 31, 1997 consisted of the following:
March 31, December 31, 1998 1997 ---------- ---------- Commercial paper $ 898,197 $ 606,012 Bank loans 941,998 808,204 Medium-Term Notes 222,000 252,000 ---------- ---------- $2,062,195 $1,666,216 ========== ==========
Note 5: Long-Term Borrowings Long-term borrowings at March 31, 1998 and December 31, 1997 consisted of the following:
March 31, December 31, 1998 1997 ---------- ---------- Fixed Rate Notes due 1998 - 2014 $1,547,922 $1,547,817 Fixed Rate Subordinated Notes due 2002 174,611 174,588 Medium-Term Senior Notes 1,601,385 1,461,185 Medium-Term Subordinated Notes 186,950 186,950 Other 27,723 27,421 ---------- ---------- $3,538,591 $3,397,961 ========== ==========
At March 31, 1998, interest rates on the fixed rate notes and fixed rate subordinated notes range from 6 1/4% to 9 1/4% and the weighted-average interest rate on these notes outstanding at March 31, 1998 was 7.52%. Interest on the notes is payable semi-annually. At March 31, 1998, the Company had outstanding $1,088,685 of fixed rate Medium-Term Notes and $699,650 of variable rate Medium-Term Notes. The Medium-Term Notes outstanding at March 31, 1998 had an average maturity of 5.0 years and a weighted-average interest rate of 6.72%. Total interest payments, which relate principally to agreements to repurchase, short-term borrowings, securities loaned and long-term borrowings, were $732,429 and $545,938 for the three months ended March 31, 1998 and 1997, respectively. On April 23, 1998, the Company issued $250,000 of 6.55% notes due 2008. Note 6: Common Stock On May 7, 1998, the Board of Directors declared a regular quarterly dividend on the Company's common stock of $0.11 per share payable on July 3, 1998 to stockholders of record on June 3, 1998. Also on May 7, 1998, the shareholders of the Company approved an amendment to the Company's charter which increases the number of PWG common shares authorized for issuance from 200,000,000 to 400,000,000 shares. Note 7: Capital Requirements PWI, a registered broker-dealer, is subject to the Securities and Exchange Commission Uniform Net Capital Rule and New York Stock Exchange Growth and Business Reduction capital requirements. Under the method of computing capital requirements adopted by PWI, minimum net capital shall not be less than 2% of combined aggregate debit items arising from client transactions, plus excess margin collected on securities purchased under agreements to resell, as defined. A reduction of business is required if net capital is less than 4% of such aggregate debit items. Business may not be expanded if net capital is less than 5% of such aggregate debit items. As of March 31, 1998, PWI's net capital of $1,113,992 was 14.6% of aggregate debit items and its net capital in excess of the minimum required was $955,873. 7 9 Notes to Consolidated Financial Statements (continued) Note 8: Financial Instruments with Off-Balance-Sheet Risk Held or Issued for Trading Purposes Set forth below are the gross contract or notional amounts of the Company's outstanding off-balance-sheet derivative and other financial instruments held or issued for trading purposes. These amounts are not reflected in the Consolidated Statements of Financial Condition and are indicative only of the volume of activity at March 31, 1998 and December 31, 1997. They do not represent amounts subject to market risks, and in many cases, limit the Company's overall exposure to market losses by hedging other on- and off-balance-sheet transactions. The amounts are netted by counterparty only when the criteria of FASB interpretation No. 39 are met.
Notional or Contract Amount ----------------------------------------------------- March 31, 1998 December 31, 1997 ------------------------- ------------------------- Purchases Sales Purchases Sales ----------- ----------- ----------- ----------- Mortgage-backed forward contracts and options written and purchased $43,436,715 $47,085,667 $20,269,175 $22,948,068 Foreign currency forward contracts, futures contracts, and options written and purchased 3,203,282 3,182,963 1,517,584 1,317,162 Equity securities contracts including futures, forwards, and options written and purchased 148,223 561,808 139,800 517,327 Other fixed income securities contracts including futures, forwards, and options written and purchased 6,051,458 10,643,572 3,580,697 7,906,777 Interest rate swaps and caps 529,740 212,992 143,961 140,292
Set forth below are the fair values of derivative financial instruments held or issued for trading purposes as of March 31, 1998 and December 31, 1997.
Fair Value at Fair Value at March 31, 1998 December 31, 1997 ------------------------- ------------------------- Assets Liabilities Assets Liabilities ----------- ----------- ----------- ----------- Mortgage-backed forward contracts and options written and purchased $ 339,320 $ 334,055 $ 88,428 $ 84,400 Foreign currency forward contracts, futures contracts, and options written and purchased 37,697 35,904 25,749 24,773 Equity securities contracts including futures, forwards, and options written and purchased 36,922 47,202 30,561 39,276 Other fixed income securities contracts including futures, forwards, and options written and purchased 6,656 18,939 13,080 26,588 Interest rate swaps and caps 17,226 68,944 24,579 3,160
8 10 Notes to Consolidated Financial Statements (continued) Set forth below are the average fair values of derivative financial instruments held or issued for trading purposes for the three months ended March 31, 1998 and the twelve months ended December 31, 1997. The average fair value is based on the average of the month-end balances during the periods indicated.
Average Fair Value Average Fair Value Three Months Ended Twelve Months Ended March 31, 1998 December 31, 1997 ------------------------- ------------------------- Assets Liabilities Assets Liabilities ----------- ----------- ----------- ----------- Mortgage-backed forward contracts and options written and purchased $ 184,869 $ 172,533 $ 112,763 $ 111,655 Foreign currency forward contracts, futures contracts, and options written and purchased 31,370 31,280 30,875 32,808 Equity securities contracts including futures, forwards, and options written and purchased 26,104 41,688 49,112 33,604 Other fixed income securities contracts including futures, forwards, and options written and purchased 10,380 20,774 16,251 76,814 Interest rate swaps and caps 13,200 38,933 5,499 5,195
The Company also enters into agreements to sell securities, at predetermined prices, which have not yet been purchased. The Company is exposed to market risk since to satisfy the obligation, the Company must acquire the securities at market prices, which may exceed the values reflected on the Consolidated Statements of Financial Condition. The off-balance-sheet derivative trading transactions are generally short-term. At March 31, 1998 approximately 99% of the off-balance-sheet trading-related derivative and other financial instruments had remaining maturities of less than one year. The Company's risk of loss in the event of counterparty default is limited to the current fair value or the replacement cost on contracts in which the Company has recorded an unrealized gain. These amounts are reflected as assets on the Company's Consolidated Statements of Financial Condition and amounted to $437,821 and $182,397 at March 31, 1998 and December 31, 1997, respectively. Options written do not expose the Company to credit risk since they do not obligate the counterparty to perform. Transactions in futures contracts are conducted through regulated exchanges which have margin requirements, and are settled in cash on a daily basis, thereby minimizing credit risk. The following table summarizes the Company's principal transaction revenues by business activity for the three months ended March 31, 1998 and 1997. Principal transaction revenues include realized and unrealized gains and losses on trading positions, including hedges. In assessing the profitability of its trading activities, the Company views net interest and principal transactions revenues in the aggregate.
Principal Transaction Revenue ----------------------------- Three Months Ended March 31, --------------- 1998 1997 -------- -------- Taxable fixed income (includes futures, forwards, options contracts and other securities) $141,483 $132,591 Equities (includes futures, forwards and options contracts) 104,296 93,285 Municipals 31,184 30,660 -------- -------- $276,963 $256,536 ======== ========
9 11 Notes to Consolidated Financial Statements (continued) Held or Issued for Purposes Other Than Trading The Company enters into interest rate swap agreements to manage the interest rate characteristics of its assets and liabilities. As of March 31, 1998 and December 31, 1997, the Company had outstanding interest rate swap agreements with commercial banks with notional amounts of $2,713,485 and $2,658,485, respectively. These agreements effectively converted substantially all of the Company's fixed rate debt at March 31, 1998 into floating rate debt. The interest rate swap agreements entered into have had the effect of reducing net interest expense on the Company's fixed rate debt by $2,932 and $3,120 for the three months ended March 31, 1998 and 1997, respectively. The Company had no deferred gains or losses related to terminated swap agreements at March 31, 1998 and December 31, 1997. The Company is subject to market risk as interest rates fluctuate. The interest rate swaps contain credit risk to the extent the Company is in a receivable or gain position and the counterparty defaults. However, the counterparties to the agreements are large financial institutions, and the Company has not experienced defaults in the past, and management does not anticipate any counterparty defaults in the foreseeable future. See Note 2 for further discussion of interest rate swap agreements used for hedging purposes. Note 9: Risk Management Transactions involving derivative and non-derivative financial instruments involve varying degrees of both market and credit risk. The Company monitors its exposure to market and credit risk on a daily basis and through a variety of financial, security position and credit exposure reporting and control procedures. Market Risk Market risk is the potential change in value of the financial instrument caused by unfavorable changes in interest rates, equity prices, and foreign currency exchange rates. The Company has a variety of methods to monitor its market risk profile. The senior management of each business group is responsible for reviewing trading positions, exposures, profits and losses, and trading strategies. The Company also has an independent risk management group which reviews the Company's risk profile and aids in setting and monitoring risk management policies of the Company, including monitoring adherence to the established limits, performing market risk modeling, and reviewing trading positions and hedging strategies. The Asset/Liability Management Committee, comprised of senior corporate and business group managers, is responsible for establishing trading position and exposure limits. Market risk modeling is based on estimating loss exposure through sensitivity testing. These results are compared to established limits, and exceptions are subject to review and approval by senior management. Other market risk control procedures include monitoring inventory agings, reviewing traders' marks and regular meetings between the senior management of the business groups and the risk management group. Credit Risk in Proprietary Transactions Counterparties to the Company's proprietary trading, hedging, financing and arbitrage activities are primarily financial institutions, including brokers and dealers, banks and institutional clients. Credit losses could arise should counterparties fail to perform and the value of any collateral proves inadequate. The Company manages credit risk by monitoring net exposure to individual counterparties on a daily basis, monitoring credit limits and requiring additional collateral where appropriate. Derivative credit exposures are calculated, aggregated and compared to established limits by the credit department. Credit reserve requirements are determined by senior management in conjunction with the Company's continuous credit monitoring procedures. Historically, reserve requirements arising from instruments with off-balance-sheet risk have not been material. Receivables and payables with brokers and dealers, agreements to resell and repurchase securities, and securities borrowed and loaned are generally collateralized by cash, government and government-agency securities, or letters of credit. The market value of the initial collateral received is, at a minimum, equal to the contract value. Additional collateral is requested when considered necessary. The Company may pledge clients' margined securities as collateral in support of securities loaned and bank loans, as well as to satisfy margin requirements at clearing organizations. The amounts loaned or pledged are limited to the extent permitted by applicable margin regulations. Should the counterparty fail to return the clients' securities, the Company may be required to replace them at prevailing market prices. At March 31, 1998, the market value of client securities loaned to other brokers approximated the amounts due or collateral obtained. 10 12 Notes to Consolidated Financial Statements (continued) Credit Risk in Client Activities Client transactions are entered on either a cash or margin basis. In a margin transaction, the Company extends credit to a client for the purchase of securities, using the securities purchased and/or other securities in the client's account as collateral for amounts loaned. Amounts loaned are limited by margin regulations of the Federal Reserve Board and other regulatory authorities and are subject to the Company's credit review and daily monitoring procedures. Market declines could, however, reduce the value of any collateral below the principal amount loaned, plus accrued interest, before the collateral can be sold. Client transactions include positions in commodities and financial futures, trading liabilities and written options. The risk to the Company's clients in these transactions can be substantial, principally due to price volatility which can reduce the clients' ability to meet their obligations. Margin deposit requirements pertaining to commodity futures and options transactions are generally lower than those for exchange-traded securities. To the extent clients are unable to meet their commitments to the Company and margin deposits are insufficient to cover outstanding liabilities, the Company may take market action and credit losses could be realized. Client trades are recorded on a settlement date basis. Should either the client or broker fail to perform, the Company may be required to complete the transaction at prevailing market prices. Trades pending at March 31, 1998 were settled without material adverse effect on the Company's consolidated financial statements, taken as a whole. Concentrations of Credit Risk Concentrations of credit risk that arise from financial instruments (whether on- or off-balance-sheet) exist for groups of counterparties when they have similar economic characteristics that would cause their ability to meet obligations to be similarly affected by economic, industry or geographic factors. As a major securities firm, the Company engages in underwriting and other financing activities with a broad range of customers, including other financial institutions, municipalities, governments and commercial real estate investors and operators. These activities could result in concentrations of credit risk with a particular counterparty, or with groups of counterparties operating in a particular geographic area or engaged in business in a particular industry. The Company seeks to control its credit risk and the potential for risk concentration through a variety of reporting and control procedures described above. The Company's most significant industry concentration, which arises within its normal course of business activities, is financial institutions including banks, brokers and dealers, investment funds and insurance companies. Note 10: Commitments and Contingencies At March 31, 1998 and December 31, 1997, the Company was contingently liable under unsecured letters of credit totaling $226,369 and $186,279, respectively, which approximates fair value. At March 31, 1998, certain of the Company's subsidiaries were contingently liable as issuer of $46,073 of notes payable to managing general partners of various limited partnerships pursuant to certain partnership agreements. In addition, as part of the 1995 limited partnership settlements, the Company has agreed, under certain circumstances, to provide to class members additional consideration including assignment of any and all fees the Company is entitled to receive from certain partnerships. In the opinion of management, these contingencies will not have a material adverse effect on the Company's consolidated financial statements, taken as a whole. In February 1996, two limited partnerships, in which a subsidiary of the Company serves as the general partner and certain key employees serve as the limited partners, entered into two unsecured credit facilities with a commercial bank under which the bank agreed to make unsecured loans to the limited partnerships of up to $77,525 through February 2000. The Company entered into an agreement with the bank to purchase the loans under certain specific circumstances. At March 31, 1998, $42,096 had been loaned to the limited partnerships. In meeting the financing needs of certain of its clients, the Company may also issue standby letters of credit which are fully collateralized by marginable securities. At March 31, 1998, the Company had outstanding $62,689 of such standby letters of credit. At March 31, 1998 and December 31, 1997, securities with fair value of $78,847 and $48,378, respectively, had been loaned or pledged as collateral for securities borrowed of approximately equal fair value. 11 13 Notes to Consolidated Financial Statements (continued) In the normal course of business, the Company enters into when-issued transactions, underwriting and other commitments. Also, clients may be extended lines of credit collateralized by mortgages and other real estate interests; the unused portion of such lines of credit amounted to $959,698 at March 31, 1998. These commercial real estate commitments are generally entered into at variable rates of interest based on LIBOR. Settlement of these transactions at March 31, 1998 would not have had a material impact on the Company's consolidated financial statements, taken as a whole. The Company has been named as defendant in numerous legal actions in the ordinary course of business. While the outcome of such matters cannot be predicted with certainty, in the opinion of management of the Company, after consultation with various counsel handling such matters, these actions will be resolved with no material adverse effect on the Company's consolidated financial statements, taken as a whole. Note 11: Income Taxes The reconciliation of income taxes, computed at the statutory federal rates, to the provision for income taxes recorded for the three months ended March 31, 1998 and 1997 was as follows:
Three Months Ended March 31 --------------------- 1998 1997 ------ ------ Tax at statutory federal rate 35.0% 35.0% State and local income taxes, net of federal tax benefit 4.0 4.0 Foreign rate differential (0.5) (1.1) Nontaxable dividends & interest (0.7) (0.8) Minority interest (1.4) (1.1) Other, net (1.4) (0.1) ------ ------ 35.0% 35.9% ====== ======
Income taxes paid were $72,118 and $102,598 for the three months ended March 31, 1998 and 1997, respectively. Note 12: Earnings Per Common Share The Company adopted SFAS No. 128, "Earnings Per Share," during the quarter ended December 31, 1997. Basic earnings per share is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects all potentially dilutive securities. The 1997 earnings per share amounts have been restated to conform to the SFAS No. 128 requirements. Set forth on the following page is the reconciliation of net income applicable to common shares and weighted-average common and common equivalent shares of the basic and diluted earnings per common share computations: 12 14 Notes to Consolidated Financial Statements (continued)
Three Months Ended March 31, ------------------------------ 1998 1997 ------------- ------------- Numerator: Net income $ 120,735 $ 100,835 Preferred stock dividends (5,912) (7,378) ------------- ------------- Net income applicable to common shares for basic earnings per share 114,823 93,457 Effect of dilutive securities: Preferred stock dividends -- 1,500 Interest savings on convertible debentures 105 350 ------------- ------------- 105 1,850 ------------- ------------- Net income applicable to common shares for diluted earnings per share $ 114,928 $ 95,307 ============= ============= Denominator: Weighted-average common shares for basic earnings per share 139,285,622 130,348,040 Weighted-average effect of dilutive securities: Employee stock options and awards 8,780,960 11,726,228 Convertible debentures 1,426,608 2,808,611 6% Convertible Preferred Stock -- 8,273,600 ------------- ------------- Dilutive potential common shares 10,207,568 22,808,439 ------------- ------------- Weighted-average common and common equivalent shares for diluted earnings per share 149,493,190 153,156,479 ============= ============= Earnings per share: Basic $ 0.82 $ 0.72 ============= ============= Diluted $ 0.77 $ 0.62 ============= =============
On December 4, 1997, the Company's 6% Convertible Preferred Stock was converted into 8,273,600 common shares. 13 15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company's principal business activities are, by their nature, affected by many factors, including general economic and financial conditions, the level and volatility of interest rates, currency and security valuations, competitive conditions, counterparty risk, transactional volume and market liquidity. As a result, revenues and profitability have been in the past, and are likely to continue to be, subject to fluctuations reflecting the impact of these factors. Market and economic conditions were favorable and relatively stable during the first quarter of 1998 and compared favorably with the prior year period of 1997. In the first quarter of 1998, the U.S. economy grew at a 4.2% GDP annual rate. Despite this strong economic growth, inflation remained relatively constant and the Federal Reserve did not change short-term interest rates. Market interest rates fluctuated in a fairly narrow range. The yield on 90-day Treasury bills slipped from 5.34% to 5.13% during the quarter while the quarter-end yield on the 30-year Treasury bond was 5.94%, approximately the same level at which it began the quarter. The Dow Jones Industrial Average increased 11.3% for the first three months of 1998, as compared to the 2.1% increase for the first three months of 1997. The S&P 500 stock index appreciated 13.5% for the first three months of 1998, as compared to the 2.2% increase for the first three months of 1997. The NASDAQ Composite index advanced 16.9% for the first three months of 1998, up from the 5.4% decrease for the first three months of 1997. Stock market volume also increased. Average daily volume on the New York Stock Exchange was 624.5 million shares for the first three months of 1998, versus 516.7 million shares for the prior year period. The NASDAQ average daily volume increased from 622.1 million shares for the first three months of 1997 to 740.4 million shares for the first three months of 1998. Results of Operations Quarter Ended March 31, 1998 compared to Quarter Ended March 31, 1997 The Company's net income for the quarter ended March 31, 1998 was a record $120.7 million, or $0.82 per basic share ($0.77 per diluted share) compared to net income of $100.8 million, or $0.72 per basic share ($0.62 per diluted share) earned during the first quarter of 1997. During the first quarter of 1998, revenues, net of interest expense, were a record $1,115.0 million, 13.2% higher than the first quarter of 1997. Commission revenues earned during the first quarter of 1998 were a record $408.1 million, slightly higher than the $370.4 million earned during the prior year quarter. Commissions on the sale of listed securities and options increased $26.5 million or 12.1%, mutual fund and insurance commissions increased $8.0 million or 7.8%, and commissions from over-the-counter securities and other commissions increased $3.2 million or 6.6%. Principal transactions revenues increased $20.4 million, or 8.0%, primarily reflecting improved trading results in taxable fixed income securities and equities. Asset management fees increased 31.2% to a record $158.7 million, due to higher revenues earned on managed or wrap accounts and trust accounts. Average assets in wrap and trust accounts during the first quarter of 1998 were approximately 49% higher than during the first quarter of 1997. The increase also reflects higher advisory fees earned on money market accounts and mutual funds. The average assets under management in money market, institutional and long-term mutual funds were approximately $52.3 billion during the first quarter of 1998 and approximately $44.4 billion during the first quarter of 1997. Investment banking revenues were $125.0 million, 27.8% higher than the $97.8 million earned during the first quarter of 1997. The current year quarter primarily reflects increases in underwriting fees, management fees and selling concessions on increased volume of lead-managed and co-managed corporate and municipal issues. Net interest increased $11.1 million, or 11.0% primarily due to increased margin lending to customers and an increased level of fixed income positions offset by higher interest expense on increased borrowings. Compensation and benefits for the quarter ended March 31, 1998 were $650.6 million as compared to $574.0 million during the prior year quarter. The number of employees increased by 918, or 6%, from March 31, 1997 to March 31, 1998, principally due to an expansion in Private Client Group investment executives, selective hirings in Capital Markets and technology personnel working on the millenium and other technology initiatives. Compensation and benefits as a percent of net revenues were 58.3% during the first quarter of 1998 and 1997. 14 16 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) All other operating expenses were $266.2 million, as compared to $245.9 million for the prior year quarter. Principal drivers of the increase in non-compensation costs were technology costs associated with preparations for the millenium and other technology initiatives, and higher brokerage, clearing and exchange fees associated with increased levels of business. The ratio of other operating expenses as a percentage of net revenues declined to 23.9% for the quarter ended March 31, 1998 compared to 25.0% for the prior quarter. Liquidity and Capital Resources The primary objectives of the Company's funding policies are to insure ample liquidity at all times and a strong capital base. These objectives are met by maximization of self-funded assets, diversification of funding sources, maintenance of prudent liquidity and capital ratios, and contingency planning. Liquidity The Company maintains a highly liquid balance sheet with the majority of assets consisting of trading assets, securities purchased under agreements to resell, securities borrowed, and receivables from clients, brokers and dealers, which are readily convertible into cash. The nature of the Company's business as a securities dealer results in carrying significant levels of trading assets and liabilities in order to meet its client and proprietary trading needs. The Company's total assets may fluctuate from period to period as a result of changes in the level of trading positions held to facilitate client transactions, the volume of resale and repurchase transactions, and proprietary trading strategies. These fluctuations depend significantly upon economic and market conditions, and transactional volume. The Company's total assets at March 31, 1998 were $61.6 billion compared to $57.1 billion at December 31, 1997, primarily attributable to an increase in trading assets. The majority of the Company's assets are financed by daily operations such as securities sold under agreements to repurchase, free credit balances in client accounts and securities lending activity. Additional financing sources are available through bank loans and commercial paper, committed and uncommitted lines of credit, and long-term borrowings. The Company maintains committed and uncommitted credit facilities from a diverse group of banks. The Company has a $1.2 billion unsecured revolving credit agreement which expires in December 1998, with provisions for renewal through December 2001. In addition, certain of the Company's subsidiaries have a committed secured revolving credit facility to provide up to an aggregate of $750.0 million through August 1998, with provisions for renewal through August 2000. The secured borrowings under this facility can be collateralized using a variety of financial instruments. The facilities are available for general corporate purposes. At March 31, 1998, there were no outstanding borrowings under these credit facilities. Additionally, the Company had approximately $5.7 billion in uncommitted lines of credit at March 31, 1998. The Company maintains a public shelf registration statement with the SEC for the issuance of debt securities. During the first quarter of 1998, the Company issued $267.0 million of debt under this registration statement. At March 31, 1998, the Company had approximately $995.6 million in debt securities available for issuance under this registration statement. On April 23, 1998, the Company issued $250.0 million of 6.55% notes due 2008 under this shelf registration statement. The Company also maintains a shelf registration statement with the SEC for the issuance of preferred trust securities of PWG Capital Trusts III and IV, business trusts formed under the Delaware law which are wholly owned subsidiaries of the Company, and debt securities of the Company. At March 31, 1998, $106.2 million in Preferred Trust Securities and debt securities of the Company were available for issuance under this registration statement. Capital Resources and Capital Adequacy The Company's businesses are capital intensive. In addition to a funding policy which provides for diversification of funding sources and maximization of liquidity, the Company maintains a strong capital base. The Company's total capital base, which includes long-term borrowings, preferred securities and stockholders' equity, grew to $6.1 billion at March 31, 1998, an increase of $225.0 million from December 31, 1997. The growth in total capital is primarily due to the net increase in long-term borrowings of $140.6 million and an increase in stockholders' equity of $84.1 million. 15 17 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The increase in long-term borrowings primarily reflects the net issuance of medium term notes. The increase in stockholders' equity is primarily the result of net income for the three months ended March 31, 1998 of $120.7 million and the issuance of approximately 1,199,000 shares of common stock related to employee compensation programs. Issuances and tax credits related to these programs had the effect of increasing equity capital by $41.2 million. These increases were offset by the repurchase of approximately 1,903,000 shares of common stock for $59.5 million and dividends accrued of $21.0 million. At March 31, 1998, the remaining number of shares authorized to be repurchased under the Company's common stock repurchase program was approximately 11.2 million. On May 7, 1998, the shareholders of the Company approved an amendment to the Company's charter which increases the number of PWG common shares authorized for issuance from 200,000,000 to 400,000,000 shares. PWI is subject to the net capital requirements of the Securities and Exchange Commission, the New York Stock Exchange, Inc. and the Commodity Futures Trading Commission which are designed to measure the financial soundness and liquidity of broker-dealers. PWI has consistently maintained net capital in excess of the minimum requirements imposed by these agencies. In addition, the Company has other banking and securities subsidiaries, both domestic and foreign, which have also consistently maintained net regulatory capital in excess of requirements. Merchant Banking and Highly Leveraged Transactions In connection with its merchant banking and commercial real estate activities, the Company has provided financing and made investments in companies, some of which are involved in highly leveraged transactions. Positions taken or commitments made by the Company may involve credit or market risk from any one issuer or industry. At March 31, 1998, the Company had investments in merchant banking transactions which were affected by liquidity, reorganization or restructuring issues amounting to $37.3 million, net of reserves, compared to $31.9 million, net of reserves, at December 31, 1997. These investments have not had a material effect on the Company's results of operations. The Company's activities also include underwriting and market-making transactions in high-yield corporate debt and non-investment-grade mortgage- backed securities, and emerging market securities (collectively, "high-yield securities"). These securities generally involve greater risks than investment- grade corporate debt securities because these issuers usually have high levels of indebtedness or lower credit ratings and are, therefore, more vulnerable to general economic conditions. At March 31, 1998, the Company held $692.0 million of high-yield securities, with approximately 20% of such securities attributable to two issuers. The Company continually monitors its risk positions associated with high-yield securities and establishes limits with respect to overall market exposure, industry group and individual issuer. The Company accounts for these positions at fair value, with unrealized gains and losses reflected in revenues. These high-yield securities have not had a material effect on the Company's results of operations. Derivative Financial Instruments A derivative financial instrument represents a contractual agreement between counterparties and has value that is derived from changes in the value of some other underlying asset such as the price of another security, interest rates, currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P 500), or the value referenced in the contract. Derivatives, such as futures, certain option contracts and structured products (e.g. indexed warrants) are traded on exchanges, while derivatives such as forward contracts, certain option contracts, interest rate swaps, caps and floors, and other structured products are negotiated in over-the-counter markets. In the normal course of business, the Company engages in a variety of derivative transactions in connection with its proprietary trading activities and asset and liability management, as well as on behalf of its clients. As a dealer, the Company regularly makes a market in and trades a variety of securities. The Company is also engaged in creating structured products which are sold to clients. In connection with these activities, the Company attempts to reduce its exposure to market risk by entering into offsetting hedging transactions, which may include derivative financial instruments. The Company also enters into interest rate swap contracts to manage the interest rate characteristics of its assets and liabilities. 16 18 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The notional amount of a derivative contract is used to measure the volume of activity and is not reflected on the Consolidated Statement of Financial Condition. The Company had off-balance-sheet derivative contracts outstanding with gross notional amounts of $117.8 billion and $61.1 billion at March 31, 1998 and December 31, 1997, respectively. These amounts included $89.0 billion and $42.3 billion, respectively, related to "to be announced" mortgage-backed securities requiring forward settlement. Also included in these amounts was $2.7 billion notional amount of interest rate swap agreements used to change the interest rate characteristics of the Company's fixed rate debt at March 31, 1998 and December 31, 1997. For further discussion on the Company's derivative financial instruments, see Note 8 in the Notes to Consolidated Financial Statements. The Company records any unrealized gains and losses on its derivative contracts used in a trading capacity by marking-to-market the contracts on a daily basis. The unrealized gain or loss is recorded on the Consolidated Statements of Financial Condition with the related profit or loss reflected in "Principal transactions" revenues. The Company accrues interest income and expense on interest rate swap agreements used to change the interest rate characteristics of the Company's fixed rate debt. The interest rate swap agreements had the effect of reducing net interest expense on the Company's fixed rate debt by $2.9 million and $3.1 million for the three months ended March 31, 1998 and 1997, respectively. The Company had no deferred gains or losses recorded at March 31, 1998 and December 31, 1997 related to terminated swap agreements. The fair value of an exchange-traded derivative financial instrument is determined by quoted market prices, while over-the-counter derivatives are valued based upon pricing models which consider time value and volatility, as well as other economic factors. The fair values of the Company's derivative financial instruments held for trading purposes at March 31, 1998 were $437.8 million and $505.0 million for assets and liabilities, respectively, and are reflected on the Consolidated Statements of Financial Condition. The fair values of these instruments at December 31, 1997 were $182.4 million and $178.2 million for assets and liabilities, respectively. The Company's exposure to market risk relates to changes in interest rates, equity prices, foreign currency exchange rates or the market values of the assets underlying the financial instruments. The Company's exposure to credit risk at any point is represented by the fair value or replacement cost on contracts in which the Company has recorded an unrealized gain. At March 31, 1998 and December 31, 1997, the fair values amounted to $437.8 million and $182.4 million, respectively. The risks inherent in derivative financial instruments are managed consistent with the Company's overall risk management policies. (See Risk Management section below) Risk Management Risk is an inherent part of the Company's principal business activities. Managing risk is critical to the Company's profitability and to reducing the likelihood of earnings volatility. The Company's risk management policies and procedures have been established to continually identify, monitor and manage risk. The Company's principal risks are market, credit, liquidity, legal and operating risks. The Company seeks to manage risk and its impact on earnings volatility through strategic planning and by focusing on the diversification of its business activities. Through capital allocation, and the establishment of trading by product and credit limits by counterparty, the Company manages the risk associated with the various businesses. The Company may reallocate or deploy capital to the business groups based upon changes in market conditions or opportunities in the marketplace that are consistent with the Company's long-term strategy. The discussion on the Company's principal risks and the estimated amounts of the Company's market risk exposure generated from the sensitivity analysis performed by the Company are forward-looking statements assuming certain adverse conditions occur. Actual results in the future may differ materially from these projected results due to actual events in the markets in which the Company operates and other factors. The analysis methods used by the Company to assess and mitigate risks discussed below should not be considered projections of future events or losses. Market Risk All financial instruments involve market risk. Market risk is the potential change in value of the financial instrument caused by unfavorable changes in interest rates, equity prices and foreign currency exchange rates. Market risk is inherent to both derivative and non-derivative financial instruments. 17 19 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Company actively monitors its market risk profile through a variety of control procedures including market risk modeling, review of trading positions and hedging strategies, and monitoring adherence to established limits. Each department's trading positions, exposures, profits and losses, and trading strategies are reviewed by the senior management of each business group. Independent of the trading departments is a risk management group. The Company's risk management group reviews the Company's risk profile and adherence to established trading limits, and aids in the development of risk management policies. In addition the Company has in place committees and management controls to review inventory positions, other asset accounts and asset agings on a regular basis. Trading position and exposure limits are established by the Asset/Liability Management Committee, which meets regularly and is comprised of senior corporate and business group managers. The following is a discussion of the Company's primary market risk exposures at March 31, 1998 and December 31, 1997 and how those exposures are managed: Interest Rate Risk In connection with the Company's dealer activities, the Company is exposed to interest rate risk due to changes in the level or volatility of interest rates, changes in the yield curve, mortgage prepayments and credit spreads. The Company attempts to mitigate its exposure to interest rate risk by entering into hedging transactions such as U.S. government and Eurodollar forward and future contracts, options, and interest rate swap and cap agreements. The Company also issues fixed rate instruments in connection with its nontrading activities, which expose the Company to interest rate risk. The Company enters into interest rate swap agreements which are designed to mitigate its exposure by effectively converting its fixed rate liabilities into floating rate liabilities. Equity Price Risk In connection with the Company's dealer activities, the Company buys and sells equity and equity derivative instruments. The Company is exposed to equity price risk due to changes in the level or volatility of equity prices. The Company attempts to mitigate its exposure to equity price risk by entering into hedging transactions including equity option agreements. Sensitivity Analysis For purposes of the Securities and Exchange Commission disclosure requirements, the Company has elected to use a sensitivity approach to express the potential loss in future earnings of its financial instruments. In preparing the analysis, the Company has combined both derivative and non-derivative financial instruments held for trading purposes with those held for purposes other than trading because the amounts were not material. The sensitivity calculation employed to analyze interest rate risk on fixed income financial instruments was based on a proprietary methodology which converted substantially all the Company's interest rate sensitive financial instruments at March 31, 1998 and December 31, 1997, into a uniform benchmark (a ten year U.S. Treasury note equivalent), and evaluated the impact assuming a 10 basis point change to the ten-year U.S. Treasury note at March 31, 1998 and December 31, 1997, respectively. The hypothetical 10 basis point change was derived from a proprietary model which, uses a one-day interval and a 95% confidence level, and was based on historical data over a one-year period. This analysis does not consider other factors that may influence these results, such as credit spread risk, prepayment risk on mortgage-backed securities or changes in the shape of the yield curve. The sensitivity calculation employed to analyze equity price risk on its equity financial instruments at March 31, 1998 and December 31, 1997, was based on a 2% move in the Dow Jones Industrial Average at March 31, 1998 and December 31, 1997, respectively, using a one-day interval and a 95% confidence level, and was based on historical data over a one-year period. Based upon the aforementioned methodologies, the Company's potential daily loss in future earnings at March 31, 1998 was approximately $8 million and $0.5 million for interest rate risk and equity price risk, respectively, and the Company's potential daily loss in future earnings at December 31, 1997 was approximately $4 million and $0.5 million for interest rate risk and equity price risk, respectively. 18 20 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings The Company is involved in a number of proceedings concerning matters arising in connection with the conduct of its business. Certain actions in which compensatory damages of $202 million or more appear to be sought, and in which there have been material developments during the quarter, are described below. The Company is also involved in numerous proceedings in which compensatory damages of less than $202 million appear to be sought, or in which punitive or exemplary damages, together with the apparent compensatory damages alleged, appear to exceed $202 million. The Company has denied, or believes it has legitimate defenses and will deny, liability in all significant cases pending against it, and intends to defend actively each such case. The following developments have occurred in the case below, which was previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Newton v. Merrill Lynch, et al. Securities Litigation On April 30, 1998, defendants filed a petition for a writ of certiorari with the United States Supreme Court. Askin Litigation* In a decision dated March 19, 1998, the district court denied plaintiffs' motion for class certification in Primavera Familienstifung v. David J. Askin, et al., Docket No. 95 Civ. 8905 and Montpellier Resources, Limited et al. v. Askin Capital Management, L.P., et al., Docket No. 97 Civ. 1856, the two class actions. ITEM 4. Submission of Matters to a Vote of Security Holders (a) Proxies for the Annual Meeting of Stockholders held on May 7, 1998 were solicited by the Company pursuant to Regulation 14A of the Securities Act of 1934, as amended. (c) Matters voted upon at the Annual Meeting of Stockholders: (1) The election of four directors to the Board of Directors to hold office for a term of three years. There was no solicitation in opposition of the nominees and all such nominees were elected. There were no broker non- votes with respect to the election of Directors.
Votes For Votes Withheld --------- -------------- Regina A. Dolan 113,965,968 1,590,712 Robert M. Loeffler 113,715,678 1,841,002 Henry Rosovsky 113,803,135 1,753,545 John R. Torell III 113,925,288 1,631,392
(2) The approval to amend the Restated Certificate of Incorporation of Paine Webber Group Inc. to increase the number of shares of common stock, par value $1.00 per share, authorized for issuance from 200,000,000 to 400,000,000 shares. Votes for: 112,092,500 Votes against: 3,138,364 Abstentions: 325,816
(3) The ratification of the selection by the Board of Directors of Ernst & Young LLP as the Company's independent public accountants for the 1998 fiscal year. Votes for: 115,143,108 Votes against: 245,646 Abstentions: 167,926
- ------------------------ * This item relates to a matter involving Kidder, Peabody & Co. which was acquired by the Company in August 1997. In connection with the acquisition, the seller and its parent General Electric Company agreed to indemnify the Company for all losses relating to this matter. 19 21 ITEM 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: Exhibit 3.1 - Restated Certificate of Incorporation of Paine Webber Group Inc., as filed with the Office of the Secretary of State of Delaware on May 15, 1998 Exhibit 12.1 - Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 12.2 - Computation of Ratio of Earnings to Fixed Charges Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K: None 20 22 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Paine Webber Group Inc. (Registrant) Date: May 15, 1998 By: /s/ Regina A. Dolan ------------- ----------------------- Regina A. Dolan Senior Vice President, Chief Financial Officer 21 23 EXHIBIT INDEX ------------- Exhibit No. Description ----------- ----------- Exhibit 3.1 - Restated Certificate of Incorporation of Paine Webber Group Inc. Exhibit 12.1 - Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 12.2 - Computation of Ratio of Earnings to Fixed Charges Exhibit 27 - Financial Data Schedule EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 1 RESTATED CERTIFICATE OF INCORPORATION OF PAINE WEBBER GROUP INC. Paine Webber Group Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is Paine Webber Group Inc. The date of the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was October 30, 1973, under the name Paine Webber Incorporated. 2. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Certificate of Incorporation of the Corporation as heretofore amended or supplemented and there is no discrepancy between such provisions and the provisions of this Restated Certificate of Incorporation, except (i) the Certificates of Designation relating to series of the Corporation's Preferred Stock have been included in this Restated Certificate of Incorporation as annexes thereto, and paragraphs (f) and (g) of Article IV have been added in order to incorporate such annexes into this Restated Certificate of Incorporation and (ii) the provisions of the Certificate of Incorporation have been appropriately renumbered. 3. The text of the Restated Certificate of Incorporation is hereby stated to read as herein set forth in full: ARTICLE I Name The name of the Corporation is: Paine Webber Group Inc. 2 2 ARTICLE II Registered Office and Registered Agent The registered office of the Corporation in the State of Delaware is to be located at 1013 Centre Road, in the City of Wilmington, County of New Castle. The name and address of the Corporation's registered agent is The Corporation Service Company, 1013 Centre Road, in the City of Wilmington, County of New Castle, State of Delaware. ARTICLE III Corporate Purposes and Powers The purpose of the Corporation is to engage in any part of the world in any capacity whether by itself or by or through any other person, organization, association, partnership, corporation or other entity in which the Corporation may have an interest in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and the Corporation shall be authorized to exercise and enjoy all powers, rights and privileges conferred upon corporations by the laws of the State of Delaware as in force from time to time, including without limitation all powers necessary or appropriate to carry out all those acts and activities in which it may lawfully engage. ARTICLE IV Capital Stock SECTION 1. Shares, Classes and Series Authorized. The total number of shares of capital stock which the Corporation shall have the authority to issue is 20,000,000 shares of Series Preferred Stock of the par value of $20 3 3 each and 400,000,000 shares of Common Stock of the par value of $1 each. Such Series Preferred Stock and Common Stock are sometimes hereinafter collectively called "capital stock." SECTION 2. Designations, Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of Capital Stock. The following is a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of the classes of the capital stock, and of the authority with respect thereto expressly vested in the Board of Directors of the Corporation: PART I - SERIES PREFERRED STOCK (a) The Series Preferred Stock may be issued from time to time in one or more series, the shares of each series to have such powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as are stated and expressed herein or in a resolution or resolutions providing for the issue of such series, adopted by the Board of Directors as hereinafter provided. (b) Authority is hereby expressly granted to the Board of Directors, subject to the provisions of this Section 2, to authorize the issue of one or more series of Series Preferred Stock, and with respect to each such series to fix by resolution or resolutions providing for the issue of such series: (i) the maximum number of shares to constitute such series and the distinctive designation thereof; (ii) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights; (iii) the dividend rate, if any, on the shares of such series, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends shall bear to the dividends 4 4 payable on any other class or classes or on any other series of capital stock, and whether such dividends shall be cumulative or noncumulative; (iv) whether the shares of such series shall be subject to redemption by the Corporation, and, if made subject to redemption, the times, prices and other terms and conditions of such redemption; (v) the rights of the holders of shares of such series upon the liquidation, dissolution or winding up of the Corporation; (vi) whether or not the shares of such series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporate purposes and the terms and provisions relative to the operation thereof; (vii) whether or not the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes, or of any other series of the same class, and if so convertible or exchangeable, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; (viii) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, Common Stock or any other class or classes of stock of the Corporation ranking junior to the shares of such series either as to dividends or upon liquidation; (ix) the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock (including additional shares of such series or of any other series or of any other class) ranking on a parity with or prior to the shares of such series as to dividends or distribution 5 5 of assets on liquidation, dissolution or winding up; and (x) any other preference and relative, participating, optional, or other special rights, and qualifications, limitations or restrictions thereof as shall not be inconsistent with this Section 2. (c) All shares of any one series of Series Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends, if any, thereon shall be cumulative; and all series shall rank equally and be identical in all respects, except as permitted by the foregoing provisions of Paragraph (b) hereof; and all shares of Series Preferred Stock shall rank senior to the Common Stock both as to dividends and upon liquidation. (d) In the event of any liquidation, dissolution or winding up of the Corporation, before any payment or distribution of the assets of the Corporation (whether capital or surplus), shall be made to or set apart for the holders of any class or classes of stock of the Corporation ranking junior to the Series Preferred Stock upon liquidation, the holders of the shares of the Series Preferred Stock shall be entitled to receive payment at the rate fixed herein or in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series, plus (if dividends on shares of such series of Series Preferred Stock shall be cumulative) an amount equal to all dividends (whether or not earned or declared) accumulated to the date of final distribution to such holders; but they shall be entitled to no further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation or proceeds thereof, distributable among the holders of the shares of the Series Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes of this Paragraph (d), the voluntary sale, conveyance, exchange or 6 6 transfer (for cash, shares of stock, securities, or other consideration) of all or substantially all the property or assets of the Corporation shall be deemed a voluntary liquidation, dissolution or winding up of the Corporation, but a consolidation or merger of the Corporation with one or more other corporations shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. (e) Except as shall be otherwise stated and expressed herein or in the resolution or resolutions of the Board of Directors providing for the issue of any series and except as otherwise required by the laws of the State of Delaware, the holders of shares of Series Preferred Stock shall have, with respect to such shares, no right or power to vote on any question or in any proceeding or to be represented at, or to receive notice of, any meeting of stockholders. (f) The powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Corporation's 6% Convertible Preferred Stock not set forth in the body of this Certificate of Incorporation are set forth in Annex I hereto. (g) The powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Corporation's 9% Cumulative Redeemable Preferred Stock, Series C, not set forth in the body of this Certificate of Incorporation are set forth in Annex II hereto. PART II - COMMON STOCK (h) All shares of Common Stock shall be identical with each other in every respect. The shares of Common Stock shall entitle the holders thereof to one vote for each share upon all matters upon which stockholders have the right to vote. 7 7 (i) The Common Stock is subject to all the powers, rights, privileges, preferences and priorities of the Series Preferred Stock as are stated and expressed herein and as shall be stated and expressed in any resolution or resolutions adopted by the Board of Directors pursuant to authority expressly granted to and vested in it by the provisions of this Section 2. ARTICLE IV(A) Voting Debentures The holders of the Corporation's 7% Convertible Subordinated Voting Debentures Due 2007 ("Exchange Debentures") which may be issued from time to time pursuant to the Investment Agreement dated as of November 30, 1987, between the Corporation and The Yasuda Mutual Life Insurance Company, in exchange for the Corporation's 7% Cumulative Convertible Exchangeable Voting Preferred Stock, Series A, shall be entitled to vote together with the shares of Common Stock (and of any other class of series of capital stock which may, now or in the future, similarly be entitled to vote with shares of Common Stock) as a single class upon all matters upon which holders of Common Stock are entitled to vote, as follows: each $1,000 aggregate principal amount of Exchange Debentures shall be entitled to a number of votes equal to the product of (x) the number of votes to which each share of the Series A Preferred was entitled on the effective date of the exchange of such share of Series A Preferred for any Exchange Debenture times (y) the quotient of $1,000 divided by $44.50. ARTICLE IV(B) Preemptive Rights The Yasuda Mutual Life Insurance Company ("Yasuda") shall be entitled, subject to the conditions set forth in Section 5.1(c) of the Investment Agreement dated as of November 30, 1987, between the Corporation and Yasuda (the "Investment Agreement"), to (1) equity purchase rights 8 8 that are no less favorable than the preemptive or equity purchase rights, if any, that might be granted by the Corporation to any other person or (2) if the Corporation has no class or series of voting securities which is registered under the Securities Exchange Act of 1934 and broadly held and actively traded or if permitted by the rules of any national stock exchange on which any such class or series of voting securities is listed, or the over-the-counter market in which any such class or series of voting securities is traded if no longer listed, equity purchase rights which allow Yasuda a preemptive right to purchase the amount of voting securities of the Corporation or any securities convertible into or exchangeable for voting securities of the Corporation or any options, warrants or rights exercisable for voting securities of the Corporation ("Equity Purchase Shares") equal to the product of (A) the quotient of (x) the number of voting securities of the Corporation owned by Yasuda immediately prior to the issuance of Equity Purchase Shares divided by (y) the aggregate number of outstanding voting securities owned by persons other than Yasuda immediately prior to the issuance of Equity Purchase Shares (for purposes of this calculation, treating all securities of the Corporation convertible into voting securities as though they have been so converted), multiplied by (B) the aggregate number of Equity Purchase Shares being issued by the Corporation to persons other than Yasuda, rounded up to the nearest whole Equity Purchase Share. If, at the time of the determination of the amount of Equity Purchase Shares which Yasuda shall be entitled to purchase, any other person has preemptive or other equity purchase rights similar to those granted to Yasuda, the amount Yasuda is entitled to purchase shall be recalculated to take into account the amount of voting securities to be sold to such persons, rounding up the amount of Equity Purchase Shares which Yasuda shall be entitled to purchase to the nearest whole Equity Purchase Share. The terms upon which, the time or times at or within which, and the price or prices at which any such preemptive rights or equity purchase rights may be exercised shall, if applicable, be as set forth in the Investment Agreement or, if not applicable, as determined by the Board of Directors. 9 9 ARTICLE V Restriction on Dividends No dividend shall be declared or paid which shall impair the capital of the Corporation nor shall any distribution of assets be made to any stockholder unless the value of the assets of the Corporation remaining after such payment or distribution is at least equal to the aggregate of its debts, liabilities and capital. A director shall be fully protected in relying in good faith upon the books of account of the Corporation or statements prepared by any of its officers or by independent public accountants as to the value and amount of the assets, liabilities, net profits, capital stock and surplus of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. ARTICLE VI Board of Directors SECTION 1. Powers of the Board of Directors. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized: (a) To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation. (b) To determine the use and disposition of any surplus and net profits of the Corporation, including the determination of the amount of working capital required, to set apart out of any of the funds of the Corporation, whether or not available for dividends, a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. (c) To designate, by resolution passed by a majority of the whole Board, one or more committees, each 10 10 committee to consist of one or more directors of the Corporation, which, to the extent provided in the resolution designating the committee or in the By-Laws of the Corporation, shall have and may exercise subject to the provisions of the General Corporation Law of Delaware the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be provided in the By-Laws of the Corporation or as may be determined from time to time by resolution adopted by the Board of Directors. (d) To grant rights or options entitling the holders thereof to purchase from the Corporation shares of its capital stock of any class or series. The terms upon which, the time or times at or within which, and the price or prices at which any such rights or options may be issued and any such shares may be purchased from the Corporation upon the exercise of any such right or option, shall be determined by the Board of Directors. In the absence of actual fraud in the transaction, the judgment of the Board of Directors as to the consideration for the issuance of such rights or options and for the issuance of shares of capital stock upon exercise thereof and the sufficiency of such consideration shall be conclusive. No such rights or options shall be invalidated or in any way affected by the fact that any director shall be a grantee thereof or shall vote for the issuance of such rights or options to himself or for any plan pursuant to which he may receive any such rights or options. (e) To adopt or assume such plans as may from time to time be approved by it for the purchase by officers or employees of the Corporation of shares of capital stock of the Corporation of any class or series. The terms upon which, the time or times at or within which, and the price or prices at which shares may be purchased from the Corporation pursuant to such a plan shall be determined by the Board of Directors in the plan. In the absence of actual fraud in the transaction, the judgment of the Board of Directors as to the consideration for the issuance of such shares and the sufficiency thereof shall be conclusive. No such plan which is not at the time of adoption or 11 11 assumption unreasonable or unfair shall be invalidated or in any way affected because any director shall be entitled to purchase shares of capital stock of the Corporation thereunder and shall vote for any such plan. (f) To adopt or assume and carry out such plans as may from time to time be approved by it for the distribution among the officers or employees of the Corporation, or any of them, in addition to their regular salaries or wages, of part of the earnings of the Corporation in consideration for or in recognition of the services rendered by such officers or employees or as an inducement to future efforts. No such plan which is not at the time of adoption or assumption unreasonable or unfair shall be invalidated or in any way affected because any director shall be a beneficiary thereunder or shall vote for any plan under which he may benefit or for any distribution thereunder in which he may participate. (g) To adopt or assume and carry out such pension, deferred compensation, profit-sharing or retirement plans as may from time to time be approved by it, providing for pensions, deferred compensation, profit-sharing plan benefits or retirement income for officers or employees of the Corporation, in consideration for or in recognition of the services rendered by such officers or employees or as an inducement to future efforts. No such plan which is not at the time of adoption or assumption unreasonable or unfair shall be invalidated or in any way affected because any director shall be a beneficiary thereunder or shall vote for any plan under which he may benefit or for any distribution thereunder in which he may participate. (h) To exercise, in addition to the powers and authorities hereinbefore or by law conferred upon it, any such powers and authorities and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the laws of the State of Delaware and of this Certificate of Incorporation and to the By-Laws of the Corporation. SECTION 2. Reliance on Books. A director shall be fully protected in relying in good faith upon the books of account of the Corporation or statements prepared by any 12 12 of its officers or by independent public accountants as to the value and amount of the assets, liabilities and/or net profits of the Corporation or any facts pertinent to the existence and amount of surplus or other funds with which the Corporation's capital stock might properly be purchased or redeemed. SECTION 3. Classification of the Board of Directors. (a) Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, the number of the directors of the Corporation shall be fixed from time to time by or pursuant to the By-Laws of the Corporation. The directors, other than those who may be elected by the holders of the Preferred Stock or any other class or series of stock having a preference over the Common Stock as to dividends or upon liquidation pursuant to the terms of this Certificate of Incorporation or any resolution or resolutions providing for the issue of such class or series of stock adopted by the Board of Directors, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as shall be provided in the By-Laws of the Corporation, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1988, another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1989, and another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1990, with each class to hold office until its successors are elected and qualified. At each annual meeting of the stockholders of the Corporation, the date of which shall be fixed by or pursuant to the By-Laws of the Corporation, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Unless and except to the extent that the By-Laws of the Corporation shall so require, the election of directors need not be by written ballot. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 13 13 (b) Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, newly created directorships resulting from any increase in the number of directors may be filled by the Board of Directors, or as otherwise provided in the By-Laws, and any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall only be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, or as otherwise provided in the By-Laws. Any director elected in accordance with the preceding sentence of this Paragraph (b) shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. (c) Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, any director may be removed from office only for cause, and in such case, only by the affirmative vote of the holders of a majority of the combined voting power of the then outstanding shares of stock of all classes and series of the Corporation entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class. For purposes of this Paragraph (c), "cause" shall mean the wilful and continuous failure of a director substantially to perform such director's duties to the Corporation (other than any such failure resulting from incapacity due to physical or mental illness) or the wilful engaging by a director in gross misconduct materially and demonstrably injurious to the Corporation. Any officer of the Corporation may be removed at any time in such manner as provided in the ByLaws of the Corporation. (d) In addition to any requirements of law and any other provisions of this Certificate of Incorporation or any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by law or this Certificate of Incorporation or any such resolution or resolutions), the 14 14 affirmative vote of the holders of 80% or more of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Section 3. ARTICLE VII Meetings of Stockholders SECTION 1. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Except as otherwise required by law and subject to the rights of the holders of the Preferred Stock or any other class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors or as otherwise provided in the By-Laws of the Corporation. SECTION 2. In addition to any requirements of law and any other provisions of this Certificate of Incorporation or any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by law or this Certificate of Incorporation or any such resolution or resolutions), the affirmative vote of the holders of 80% or more of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article VII. 15 15 ARTICLE VIII Transactions with Directors or Officers No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 16 16 ARTICLE IX Liability of Directors (a) To the fullest extent that the General Corporation Law of the State of Delaware as it exists on the date hereof or as it may hereafter be amended permits the limitation or elimination of the liability of directors, no director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. (b) In addition to any requirements of law and any other provisions of this Certificate of Incorporation or any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by law or this Certificate of Incorporation or any such resolution or resolutions), the affirmative vote of the holders of 80% or more of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article IX. ARTICLE X Compromise or Arrangement between Corporation and its Creditors or Stockholders Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the 17 17 provisions of Section 291 of Title 8 of the Delaware Code, or on the application of trustees in dissolution, or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders, of this Corporation, as the case may be, to be summoned in such manner as said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders, of this Corporation as the case may be, agrees to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding upon all the creditors or class of creditors, and/or upon all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. ARTICLE XI Reservation of Right to Amend Certificate of Incorporation The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all the provisions of this Certificate of Incorporation and all rights and powers conferred in this Certificate of Incorporation on stockholders, directors and officers are subject to this reserve power. ARTICLE XII Adopting and Amending the By-Laws SECTION 1. The Board of Directors may adopt, repeal, alter or amend the By-Laws of the Corporation by the 18 18 vote of a majority of the entire Board of Directors. Without limiting its authority to adopt, repeal, alter or amend the By-Laws of the Corporation, the Board of Directors is expressly authorized to adopt By-Laws which a majority of the entire Board of Directors may deem necessary or desirable for the efficient conduct of the affairs of the Corporation, including, without limitation, provisions governing the conduct of, and the matters which may properly be brought before, meetings of the stockholders and provisions specifying the manner and extent to which prior notice shall be given of the submission of proposals to be considered at any meeting of stockholders or of nominations for the election of directors to be held at any such meeting. SECTION 2. In addition to any requirements of law and any other provisions of this Certificate of Incorporation or any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or any such resolution or resolutions), the stockholders may not adopt, amend, alter or repeal any provision of the By-Laws of the Corporation, except by the affirmative vote of the holders of 80% or more of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, unless recommended to the stockholders for their approval by two-thirds of the Disinterested Directors as such term is defined in Article XIII of this Certificate of Incorporation. SECTION 3. In addition to any requirements of law and any other provisions of this Certificate of Incorporation or any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by law or this Certificate of Incorporation or any such resolution or resolutions), the affirmative vote of the holders of 80% or more of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article XII. 19 19 ARTICLE XIII Approval of Business Combinations The vote of stockholders of the Corporation required to approve Business Combinations (as hereinafter defined) shall be as set forth in this Article XIII. SECTION 1. In addition to any affirmative vote required by law or by this Certificate of Incorporation or any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation, and except as otherwise expressly provided in Section 3 of this Article XIII: (a) any merger or consolidation of the Corporation or any Subsidiary with (i) any Interested Stockholder or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate or Associate of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or series of transactions) to or with any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder of any assets of the Corporation or of any Subsidiary having an aggregate Fair Market Value equal to 10% or more of the consolidated stockholders' equity of the Corporation and its subsidiaries as shown in the most recent audited consolidated balance sheet of the Corporation and its consolidated subsidiaries; or (c) the issuance, sale or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) to any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder of any securities of the Corporation or any Subsidiary in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value equal to 10% or more of the consolidated stockholders' equity of the Corporation and its subsidiaries, as shown in the most recent audited consolidated balance sheet of the Corporation 20 20 and its consolidated subsidiaries, other than the issuance of securities upon the conversion of convertible securities of the Corporation or any Subsidiary which were not acquired by such Interested Stockholder (or such Affiliate or Associate) from the Corporation or a Subsidiary; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (e) any reclassification of securities (including any reverse stock split) or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries, or any other transaction (whether or not with or into or otherwise involving any Interested Stockholder), which in any such case has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class or series of stock or securities convertible into stock of the Corporation or any Subsidiary which is directly or indirectly beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; shall not be consummated without (i) the affirmative vote of the holders of at least 80% of the combined voting power of the then outstanding shares of Voting Stock and (ii) the affirmative vote of a majority of the combined voting power of the then outstanding shares of Voting Stock held by Disinterested Stockholders, in each case voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by this Certificate of Incorporation or any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation or in any agreement with any national securities exchange or otherwise. SECTION 2. The term "Business Combination" as used in this Article XIII shall mean any transaction which is referred to in any one or more of Paragraphs (a) through (e) of Section 1 of this Article XIII. 21 21 SECTION 3. The provisions of Section 1 of this Article XIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation and any resolution or resolutions of the Board of Directors adopted pursuant to Article IV of this Certificate of Incorporation, if all the conditions specified in either of the following Paragraphs (a) or (b) are met: (a) such Business Combination shall have been approved by a majority of the Disinterested Directors; or (b) all the six conditions specified in the following clauses (i) through (vi) shall have been met: (i) the transaction constituting the Business Combination shall provide for a consideration to be received by holders of Common Stock in exchange for all their shares of Common Stock, and the aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of any consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (A) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid in order to acquire any shares of Common Stock beneficially owned by the Interested Stockholder which were acquired (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; and (B) the Fair Market Value per share of Common Stock on the Announcement Date or on the Determination Date, whichever is higher; and (ii) if the transaction constituting the Business Combination shall provide for a consideration to be received by holders of any class or series of outstanding Voting Stock other than Common Stock, the 22 22 aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of any consideration other than cash to be received per share by holders of shares of such Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this clause (ii) shall be required to be met with respect to every class and series of such outstanding Voting Stock, whether or not the Interested Stockholder beneficially owns any shares of a particular class or series of Voting Stock): (A) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid in order to acquire any shares of such class or series of Voting Stock beneficially owned by the Interested Stockholder which were acquired (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (B) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of the redemption thereof or of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (C) the Fair Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and (iii) the consideration to be received by holders of a particular class or series of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as was previously paid in order to acquire shares of such class or series of Voting Stock which are beneficially owned by the Interested Stockholder and, if the Interested Stockholder beneficially owns shares of any class or series of Voting Stock which were acquired with varying forms of 23 23 consideration, the form of consideration to be received by holders of such class or series of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock beneficially owned by it; and (iv) after such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (A) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular dates therefor the full amount of any dividends (whether or not cumulative) payable on the Preferred Stock or any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation; (B) there shall have been (x) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (y) an increase in such annual rate of dividends (as necessary to prevent any such reduction) in the event of any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (C) such Interested Stockholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction in which it became an Interested Stockholder; and (v) after such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or 24 24 indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and (vi) a proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to the stockholders of the Corporation at least 30 calendar days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). SECTION 4. For the purposes of this Article XIII: (a) A "person" shall mean any individual, firm, corporation, partnership, trust or other entity. (b) "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (1) is the beneficial owner, directly or indirectly, of 20% or more of the combined voting power of the then outstanding shares of Voting Stock; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 20% or more of the combined voting power of the then outstanding shares of Voting Stock; or (3) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession, shall have occurred in the course of a 25 25 transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (c) "Disinterested Stockholder" shall mean a stockholder of the Corporation (other than the Corporation or a Subsidiary) who is not an Interested Stockholder or an Affiliate or an Associate of an Interested Stockholder. (d) A person shall be a "beneficial owner" of any Voting Stock: (1) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (2) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote or to direct the vote pursuant to any agreement, arrangement or understanding; or (3) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (e) For the purposes of determining whether a person is an Interested Stockholder pursuant to Paragraph (b) of this Section 4, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by such person through application of Paragraph (d) of this Section 4 but shall not include any other shares of Voting Stock which may be issuable to other persons pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, exchange rights, warrants or options, or otherwise. 26 26 (f) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on December 16, 1986. (g) "Subsidiary" shall mean any corporation of which a majority of the outstanding stock having ordinary voting power for the election of directors is owned by the Corporation, by a Subsidiary or by the Corporation and one or more Subsidiaries, provided, however, that for the purposes of the definitions set forth in Paragraphs (b) and (c) of this Section 4, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned by the Corporation, by a Subsidiary or by the Corporation and one or more Subsidiaries. (h) "Disinterested Director" means any member of the Board of Directors of the Corporation who is unaffiliated with, and not a nominee of, the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with, and not a nominee of, the Interested Stockholder and who is recommended to succeed a Disinterested Director by a majority of the Disinterested Directors then on the Board of Directors. (i) "Fair Market Value" means: (1) in the case of stock, the highest closing sale price during the 30 calendar day period immediately preceding the date in question of a share of such stock on the New York Stock Exchange Composite Tape, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sales price or bid quotation with respect to a share of such stock during the 30 calendar day period preceding the date in question on the National Association of Securities Dealers, Inc., Automated Quotations System or any system then in use, or, if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a 27 27 majority of the Disinterested Directors in good faith; and (2) in the case of stock of any class or series which is not traded on any securities exchange or in the over-the-counter market or in the case of property other than cash or stock, the fair market value of such stock or property, as the case may be, on the date in question as determined by a majority of the Disinterested Directors in good faith. (j) "Announcement Date" means the date of first public announcement of the proposed Business Combination. (k) "Determination Date" means the date on which the Interested Stockholder became an Interested Stockholder. SECTION 5. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article XIII, including, without limitation, (a) whether a person is an Interested Stockholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another person, (d) whether the requirements of Section 3 of this Article XIII have been met with respect to any Business Combination and, (e) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value equal to or in excess of 10% of the consolidated stockholders' equity of the Corporation and its subsidiaries reflected in the Corporation's most recent audited consolidated balance sheet; and the good faith determination of a majority of the Disinterested Directors on such matters shall be conclusive and binding for all purposes of this Article XIII. SECTION 6. Nothing contained in this Article XIII shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. SECTION 7. In addition to any requirements of law and any other provisions of this Certificate of Incorporation or any resolution or resolutions of the Board 28 28 of Directors adopted pursuant to Article IV of this Certificate of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or any such resolution or resolutions), the affirmative vote of the holders of 80% or more of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article XIII; provided, however, that the affirmative vote of a majority of the combined voting power of the then outstanding shares of Voting Stock held by the Disinterested Stockholders (as defined in Section 4 of this Article XIII) voting together as a single class, shall also be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article XIII. 4. This Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation on 29 29 May 7, 1998, in accordance with Section 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Paine Webber Group Inc. has caused this certificate to be signed by Donald B. Marron, its Chairman of the Board, President and Chief Executive Officer, and attested by Theodore A. Levine, its Secretary, on this ____ day of May, 1998. ---------------------------------- Donald B. Marron, Chairman of the Board and Chief Executive Officer [Seal] Attest: - ----------------------------- Theodore A. Levine, Secretary 30 ANNEX I 6% CONVERTIBLE PREFERRED STOCK ($20 Par Value) The designation of this series of the Series Preferred Stock shall be the 6% Convertible Preferred Stock (the "Convertible Preferred Stock"). The number of shares of Convertible Preferred Stock shall be 2,200,000. (i) Holders of shares of Convertible Preferred Stock will be entitled to receive, when and as declared by the Board of Directors (the "Board") of Paine Webber Group Inc. (the "Corporation") out of assets of the Corporation legally available for payment, an annual cash dividend of $1.50 per share, payable in semi-annual installments on June 30 and December 31, commencing December 31, 1992. Dividends on the Convertible Preferred Stock will be cumulative from the date of initial issuance of any shares of Convertible Preferred Stock. Dividends will be payable to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board. When dividends are not paid in full upon the Convertible Preferred Stock and any other preferred stock ranking on a parity as to dividends with the Convertible Preferred Stock (such other preferred stock and the Convertible Preferred Stock hereinafter being collectively referred to as "Parity Preferred Stock"), all dividends declared upon shares of Parity Preferred Stock will be declared pro rata so that in all cases the amount of dividends declared per share on the Convertible Preferred Stock and such other Parity Preferred Stock shall bear to each other the same ratio that accumulated and unpaid dividends per share on the shares of Convertible Preferred Stock and such other Parity Preferred Stock bear to each other. Except as set forth in the preceding sentence, unless full cumulative dividends on the Convertible Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation (as defined in paragraph (iii)(I) below) or any other stock of the Corporation ranking junior to the Convertible Preferred Stock as to dividends) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Convertible Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Convertible Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or 31 2 any payment made to or available for a sinking fund for the redemption of any shares of such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Convertible Preferred Stock as to dividends). Dividends payable for any partial dividend period shall be calculated on the basis of a 360-day year of 12 30-day months. (ii) The shares of Convertible Preferred Stock shall rank prior to the shares of Common Stock and of any other class of stock of the Corporation ranking junior to the Series Preferred Stock upon liquidation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $25 per share (the "Liquidation Preference" of a share of Convertible Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accumulated and unpaid on the shares of Convertible Preferred Stock to the date of final distribution. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the liquidation preference amounts of the Parity Preferred Stock and all dividends (whether or not earned or declared) accumulated and unpaid thereon, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property or assets of the Corporation shall be deemed a voluntary liquidation, dissolution or winding up of the Corporation, but a consolidation or merger of the Corporation with one or more other corporations shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. 32 3 (iii) (I) Subject to and upon compliance with the provisions of this paragraph (iii), the holder of a share of Convertible Preferred Stock shall have the right, at his option, at any time, except that, if such share is called for redemption, not after the close of business on the fifth day next preceding the date fixed for such redemption, to convert such share into that number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) obtained by dividing the Liquidation Preference of such share being converted by the Conversion Price (as defined below), upon surrender of such share so to be converted, such surrender to be made in the manner provided in subsection (II) of this paragraph (iii). The term "Common Stock" shall mean the Common Stock, $1 par value, of the Corporation as the same exists at the date of this Certificate or as such stock may be constituted from time to time, except that for the purpose of subsection (V) of this paragraph (iii) the term "Common Stock" shall also mean and include stock of the Corporation of any class, whether now or hereafter authorized, which shall have the right to participate in the distribution of either earnings or assets of the Corporation without limit as to amount or percentage. The term "Conversion Price" shall mean $22.125 as adjusted in accordance with the provisions of this paragraph (iii). (II) In order to exercise the conversion privilege, the holder of each share of Convertible Preferred Stock to be converted shall surrender the certificate representing such share at the office of the conversion agent for the Convertible Preferred Stock in the Borough of Manhattan, City of New York, appointed for such purpose by the Corporation, with the Notice of Election to Convert on the back of said certificate completed and signed. Unless the shares issuable on conversion are to be issued in the same name as the name in which such share of Convertible Preferred Stock is registered, each share surrendered for conversion shall be accompanied by instruments of 33 4 transfer, in form satisfactory to the Corporation and duly executed by the holder or his duly authorized attorney, and an amount sufficient to pay any transfer or similar tax. No payment or adjustment shall be made on conversion for dividends accumulated on the Convertible Preferred Stock surrendered for conversion or for dividends on Common Stock delivered on such conversion. As promptly as practicable after the surrender of the certificates for shares of Convertible Preferred Stock as aforesaid, the Corporation shall issue and shall deliver at such office to such holder, or on his written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions of this paragraph (iii), and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be settled as provided in subsection (III) of this paragraph (iii). Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Convertible Preferred Stock shall have been surrendered and such notice received by the Corporation as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date, unless the stock transfer books of the Corporation shall be closed on that date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such shares shall have been surrendered and such notice received by the Corporation. All shares of Common Stock delivered upon conversions of the Convertible Preferred Stock will upon delivery be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights. 34 5 (III) No fractional shares or scrip representing fractions of shares of Common Stock shall be issued upon conversion of the Convertible Preferred Stock. Instead of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of a share of Convertible Preferred Stock, the Corporation shall pay to the holder of such share an amount in cash (computed to the nearest cent) equal to the current market price (as defined in subsection (IV)(d) of this paragraph (iii)) thereof at the close of business on the business day next preceding the day of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate Liquidation Preference of the shares of Convertible Preferred Stock so surrendered. (IV) The Conversion Price shall be adjusted from time to time as follows: (a) In case the Corporation shall hereafter (i) pay a dividend or make a distribution on the Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of the Common Stock any shares of capital stock of the Corporation, the Conversion Price in effect immediately prior to such action shall be adjusted so that the holder of any share of Convertible Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other capital stock of the Corporation which he would have owned or been entitled to receive immediately following such action had such share been converted immediately prior thereto. An adjustment made pursuant to this subdivision (a) shall become effective immediately after the record date, in the case of a dividend or distribution, or immediately after the effective date, in the case of a subdivision, 35 6 combination or reclassification. If, as a result of an adjustment made pursuant to this subdivision (a), the holder of any share of Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Corporation, the Board (whose determination shall be conclusive and shall be described in a statement filed with the conversion agent by the Corporation as soon as practicable) shall determine the allocation of the adjusted Conversion Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. (b) In case the Corporation shall hereafter issue rights or warrants to holders of its outstanding shares of Common Stock generally entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (as determined pursuant to subdivision (d) of this subsection (IV)) of the Common Stock on the record date mentioned in the next sentence (other than pursuant to an automatic dividend reinvestment plan of the Corporation or any substantially similar plan), the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of issuance of such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall become effective immediately 36 7 after the record date for the determination of stockholders entitled to receive such rights or warrants. (c) In case the Corporation shall hereafter distribute to holders of its outstanding shares of Common Stock generally evidences of its indebtedness or assets (excluding any cash dividend paid from retained earnings of the Corporation and dividends or distributions payable in stock for which adjustment is made pursuant to subdivision (a) of this subsection (IV)) or rights or warrants to subscribe to securities of the Corporation (excluding those referred to in subdivision (b) of this subsection (IV)), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in subdivision (d) of this subsection (IV)) of the Common Stock on the record date mentioned in the next sentence less the then fair market value (as determined by the Board, whose determination shall be conclusive and shall be described in a statement filed with the conversion agent by the Corporation as soon as practicable) of the portion of the evidences of indebtedness or assets so distributed to the holder of one share of Common Stock or of such subscription rights or warrants applicable to one share of Common Stock, and of which the denominator shall be such current market price per share of Common Stock. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) For the purpose of subsection (III) and subdivisions (b) and (c) of this subsection (IV), the current market price per share of Common Stock on any date shall mean the price of a share of Common Stock on the relevant date, determined on the basis of the last reported sale price regular 37 8 way of the Common Stock as reported on the composite tape, or similar reporting system, for issues listed on the New York Stock Exchange (or if the Common Stock is not then listed on that Exchange, for issues listed on such other national securities exchange upon which the Common Stock is listed as may be designated by the Board for the purposes hereof) or, if there is no such reported sale on the day in question, on the basis of the average of the closing bid and asked quotations as so reported, or, if the Common Stock is not then listed on any national securities exchange, on the basis of the closing price, if the Common Stock is a national market issue, or the average of the high bid and low asked quotations on the day in question in the over-the-counter market as reported by the National Association of Securities Dealers' Automated Quotations System, or if not so quoted, as reported by National Quotation Bureau, Incorporated, or a similar organization. (e) In any case in which this paragraph (iii) shall require that an adjustment be made immediately following a record date or an effective date, the Corporation may elect to defer (but only until five business days following the filing by the Corporation with the conversion agent of the certificate of independent public accountants required by subdivision (g) of this subsection (IV)) issuing to the holder of any share of Convertible Preferred Stock converted after such record date or effective date the additional shares of Common Stock or other capital stock issuable upon such conversion over and above the shares of Common Stock or other capital stock issuable upon such conversion on the basis of the Conversion Price prior to adjustment, and paying to such holder any amount of cash in lieu of a fractional share. (f) No adjustment in the Conversion Price shall be required to be made unless such adjustment would require an increase or decrease of at least 1% of such price; provided, however, that any adjustments which by reason of this 38 9 subdivision (f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph (iii) shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Anything in this paragraph (iii) to the contrary notwithstanding, the Corporation shall be entitled to make such reduction in the Conversion Price, in addition to those required by this paragraph (iii), as it in its discretion shall determine to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Corporation to its stockholders shall not be taxable to the recipients. (g) Whenever the Conversion Price is adjusted as herein provided, (i) the Corporation shall promptly file with the conversion agent a certificate of a firm of independent public accountants (who may be the regular accountants employed by the Corporation) setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the manner of computing the same, which certificate shall be conclusive evidence of the correctness of such adjustment, and (ii) a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall forthwith be mailed by the Corporation to the holders of the Convertible Preferred Stock at their addresses as shown on the stock books of the Corporation. (h) In the event that at any time as a result of an adjustment made pursuant to subdivision (a) of this subsection (IV), the holder of any share of Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of Common Stock, thereafter the Conversion Price of such other shares so 39 10 receivable upon conversion of any share shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this paragraph (iii). (V) In case: (a) the Corporation shall take any action which would require any adjustment in the Conversion Price pursuant to subsection (IV)(c); or (b) the Corporation shall authorize the granting to the holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights; or (c) there shall be any capital stock reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in the par value of the Common Stock), or any consolidation or merger to which the Corporation is a party or any statutory exchange of securities with another corporation and for which approval of any stockholders of the Corporation is required, or any sale or transfer of all or substantially all the assets of the Corporation; or (d) there shall be a voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed with the conversion agent, and shall cause to be mailed to the holders of shares of the Convertible Preferred Stock at their addresses as shown on the stock books of the Corporation, at least 10 days prior to the applicable date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such distribution or rights, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such distribution or 40 11 rights are to be determined, or (ii) the date on which such reorganization, reclassification, consolidation, merger, statutory exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, statutory exchange, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice or any defect therein shall not affect the legality or validity of the proceedings described in subdivision (a), (b), (c) or (d) of this subsection (V). (VI) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or both, for the purpose of effecting conversions of the Convertible Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all shares of Convertible Preferred Stock then outstanding and not theretofore converted or then deliverable upon conversion of the Corporation's 6.5% Convertible Debentures Due 2002 (the "2002 Debentures"). For purposes of this subsection (VI), the number of shares of Common Stock which shall be deliverable upon the conversion of all such shares of Convertible Preferred Stock shall be computed as if at the time of computation all such shares were held by a single holder. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value (if any) of the shares of Common Stock deliverable upon conversion of the Convertible Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Conversion Price. 41 12 To the extent not already listed, the Corporation will endeavor to list the shares of Common Stock required to be delivered upon conversion of the Convertible Preferred Stock prior to such delivery upon each national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery. Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Convertible Preferred Stock, the Corporation will endeavor to comply with all Federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority. (VII) The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the Convertible Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Convertible Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (VIII) Notwithstanding any other provision herein to the contrary, in case of any consolidation or merger to which the Corporation is a party (other than a merger or consolidation in which the Corporation is the continuing corporation), or in case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), the holder of each share of Convertible Preferred Stock then outstanding shall have the right thereafter to convert such share into the kind and amount of securities, cash or other property receivable upon such 42 13 consolidation, merger or statutory exchange by a holder of the number of shares of Common Stock into which such share of Convertible Preferred Stock might have been converted immediately prior to such consolidation, merger or statutory exchange, assuming such holder of Common Stock failed to exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger or statutory exchange (provided that if the kind or amount of securities, cash or other property receivable upon such consolidation, merger or statutory exchange is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this subsection (VIII) the kind and amount of securities, cash or other property receivable upon such consolidation, merger or statutory exchange for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Thereafter, the holders of the Convertible Preferred Stock shall be entitled to appropriate adjustments with respect to their conversion rights to the end that the provisions set forth in this paragraph (iii) shall correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of the Convertible Preferred Stock. Any such adjustment shall be approved by a firm of independent public accountants, evidenced by a certificate to that effect delivered to the conversion agent; and any adjustment so approved shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. The above provisions of this subsection (VIII) shall similarly apply to successive consolidations, mergers or statutory exchanges. (iv) Upon any conversion or redemption of shares of Convertible Preferred Stock, the shares of Convertible Preferred Stock so converted or redeemed shall have the status of authorized and unissued shares of Series Preferred Stock, and the number of shares of Series Preferred Stock which the Corporation shall have the authority to issue 43 14 shall not be decreased by the conversion or redemption of shares of Convertible Preferred Stock. (v) The holders of shares of Convertible Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (I) If and whenever at any time or times dividends payable on the Convertible Preferred Stock or on any other Parity Preferred Stock shall have been in arrears and unpaid in an aggregate amount equal to or exceeding the amount of dividends payable thereon for six quarterly periods or three semi-annual periods, as the case may be, then the holders of Parity Preferred Stock shall have, in addition to the other voting rights set forth herein, the exclusive right, voting separately as a class, to elect two directors of the Corporation, such directors to be in addition to the number of directors constituting the Board of Directors immediately prior to the accrual of such right, the remaining directors to be elected by the other class or classes of stock entitled to vote therefor at each meeting of stockholders held for the purpose of electing directors. Such voting right shall continue until such time as all cumulative dividends accumulated on all the Parity Preferred Stock having cumulative dividends shall have been paid in full and until any noncumulative dividends payable on all the Parity Preferred Stock having noncumulative dividends shall have been paid regularly for at least one year, at which time such voting right of the holders of the Parity Preferred Stock shall terminate, subject to revesting in the event of each and every subsequent event of default of the character indicated above. Whenever such voting right shall have vested, such right may be exercised initially either at a special meeting of the holders of the Parity Preferred Stock, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at each successive annual meeting. 44 15 At any time when such voting right shall have vested in the holders of the Parity Preferred Stock, and if such right shall not already have been initially exercised, a proper officer of the Corporation shall, upon the written request of the holders of record of 10% in number of shares of the Parity Preferred Stock then outstanding, addressed to the Secretary of the Corporation, call a special meeting of the holders of the Parity Preferred Stock and of any other class or classes of stock having voting power with respect thereto for the purpose of electing directors. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding of annual meetings of stockholders of the Corporation, or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by the proper officers of the Corporation within 30 days after the personal service of such written request upon the Secretary of the Corporation, or within 30 days after mailing the same within the United States of America, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of 10% in number of shares of the Parity Preferred Stock then outstanding may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the same place as is elsewhere provided for in this subsection (I). Any holder of the Parity Preferred Stock shall have access to the stock books of the Corporation for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this paragraph. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called during a period within 90 days immediately preceding the date fixed for the next annual meeting of stockholders. At any meeting held for the purpose of electing directors at which the holders of the Parity Preferred Stock shall have the right to elect directors as 45 16 provided herein, the presence in person or by proxy of the holders of 33-1/3% of the then outstanding shares of the Parity Preferred Stock shall be required and be sufficient to constitute a quorum of the Parity Preferred Stock for the election of directors by the holders of the Parity Preferred Stock. At any such meeting or adjournment thereof (A) the absence of a quorum of the holders of the Parity Preferred Stock shall not prevent the election of directors other than those to be elected by the holders of the Parity Preferred Stock and the absence of a quorum or quorums of the holders of other classes of capital stock entitled to elect such other directors shall not prevent the election of directors to be elected by the holders of the Parity Preferred Stock and (B) in the absence of a quorum of the holders of any class of stock entitled to vote for the election of directors, a majority of the holders present in person or by proxy of such class shall have the power to adjourn the meeting for the election of directors which the holders of such class are entitled to elect, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. The directors elected pursuant to this subsection (I) shall serve until the next annual meeting or until their respective successors shall be elected and shall qualify; provided, however, that when the right of the holders of the Parity Preferred Stock to elect directors as herein provided shall terminate, the terms of office of all persons so elected by the holders of the Parity Preferred Stock shall terminate, and the number of directors of the Corporation shall thereupon be such number as may be provided in the By-Laws of the Corporation irrespective of any increase made pursuant to this subsection (I). (II) So long as any shares of the Convertible Preferred Stock remain outstanding, the Corporation will not, either directly or indirectly or through merger or consolidation with any other corporation: (a) without the affirmative vote at a meeting or the written consent with or without a meeting of the holders of at least 66-2/3% in number of 46 17 shares of the Series Preferred Stock of all series then outstanding, (A) create any class or classes of stock ranking equal or prior to the Series Preferred Stock either as to dividends or upon liquidation or increase the authorized number of shares of any class or classes of stock ranking equal or prior to the Series Preferred Stock either as to dividends or upon liquidation, (B) amend, alter or repeal any of the provisions of the Certificate of Incorporation so as to affect adversely the preferences, special rights or powers of the Series Preferred Stock or (C) authorize any reclassification of the Series Preferred Stock; (b) without the affirmative vote at a meeting or the written consent with or without a meeting of the holders of at least 66-2/3% in number of shares of the Convertible Preferred Stock then outstanding, amend, alter or repeal any of the provisions hereof so as to affect adversely the preferences, special rights or powers of the Convertible Preferred Stock; or (c) without the affirmative vote at a meeting or the written consent with or without a meeting of the holders of at least a majority in number of shares of the Series Preferred Stock of all series then outstanding, increase the authorized number of shares of the Series Preferred Stock. (vi) The shares of the Convertible Preferred Stock may be redeemed at the option of the Corporation as a whole at any time, upon not less than 25 nor more than 60 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation, at a redemption price of $25.00 per share, together with an amount equal to all dividends (whether or not earned or declared) accumulated and unpaid to the date fixed for redemption. Upon such redemption date, all holders of shares of Convertible Preferred Stock shall cease to be stockholders with respect to such shares and thereafter such shares shall no longer be transferable on the books of the Corporation and such holders shall have no interest or claim against the Corporation with respect to 47 18 such shares except the right to receive payment of the redemption price upon surrender of their certificates. If full cumulative dividends on the Convertible Preferred Stock have not been paid, the Corporation may not purchase or acquire any shares of the Convertible Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Convertible Preferred Stock. (vii) No consent of the holders of the Convertible Preferred Stock shall be required for (i) the creation of any indebtedness of any kind of the Corporation, (ii) the creation of any class of stock of the Corporation ranking junior as to dividends or upon liquidation to the Series Preferred Stock or (iii) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. (viii) The Board reserves the right by subsequent amendment from time to time to increase (subject to the provisions of paragraph (v)(II)(c)) or decrease the number of shares which constitute the Convertible Preferred Stock (but not below the aggregate number of shares thereof then outstanding or then deliverable upon conversion of the 2002 Debentures) and in other respects to amend the terms of the Convertible Preferred Stock within the limitations provided by law, resolutions of the Board and the Certificate of Incorporation. 48 ANNEX II 9% CUMULATIVE REDEEMABLE PREFERRED STOCK, SERIES C ($100 Stated Value) PAINE WEBBER GROUP INC. (1) Number and Designation. 2,500,000 shares of the Preferred Stock of the Corporation shall be designated as 9% Cumulative Redeemable Preferred Stock, Series C (the "Series C Preferred Stock"). (2) Rank. The shares of Series C Preferred Stock shall rank prior to the shares of the Corporation's common stock, $1 par value (the "Common Stock"), and any other class of stock of the Corporation ranking junior to the Series C Preferred Stock (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise). All equity securities of the Corporation to which the Series C Preferred Stock ranks prior (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Common Stock, are collectively referred to herein as the "Junior Securities." All equity securities of the Corporation with which the Series C Preferred Stock ranks on a parity (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Corporation's 6% Convertible Preferred Stock, are collectively referred to herein as the "Parity Securities." The respective definitions of Junior Securities and Parity Securities shall also include any rights or options exercisable for or convertible into any of the Junior Securities and Parity Securities, as the case may be. (3) Dividends. (a) The holders of shares of Series C Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cash dividends at the annual rate of $9 per share. Such dividends shall be payable in arrears in equal amounts quarterly on March 15, June 15, September 15 and December 15 of each year (unless such day is not a Business Day, in which event on the next succeeding Business Day) (each of such dates being a "Dividend Payment Date" and each such quarterly period being a "Dividend Period") commencing on the Dividend Payment Date which next follows the issuance of 49 2 such shares of Series C Preferred Stock. Such dividends (i) shall be cumulative from the date of issue, whether or not declared and whether or not in any Dividend Period or Periods there shall be funds of the Corporation legally available for the payment of such dividends and (ii) shall compound quarterly, to the extent they are unpaid, at the rate of 9% per annum computed on the basis of a 360-day year and twelve 30-day months. Each such dividend shall be payable to the holders of record of shares of the Series C Preferred Stock, as they appear on the stock records of the Corporation at the close of business on such record dates, not more than 60 days, or less than 10 days, preceding the payment dates thereof, as shall be fixed by the Board of Directors or a duly authorized committee thereof. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not more than 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. As used herein, the term "Business Day" shall mean any day other than a Saturday, Sunday, a day on which the New York Stock Exchange does not conduct regular trading or a day on which is or is declared a national or New York State holiday. (b) The amount of dividends payable for each full Dividend Period for the Series C Preferred Stock shall be computed by dividing the annual dividend rate by four. The amount of dividends payable for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Series C Preferred Stock shall be computed on the basis of twelve 30-day months and a 360-day year. Holders of shares of Series C Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Series C Preferred Stock. (c) So long as any shares of the Series C Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on Parity Securities, for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a 50 3 sum sufficient for the payment thereof set apart for such payment on the Series C Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of parity stock. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Series C Preferred Stock and all dividends declared upon any other Parity Security shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Series C Preferred Stock and accumulated and unpaid on such Parity Security. (d) So long as any shares of the Series C Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Securities) shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Securities, nor shall any Junior Securities be redeemed, purchased or otherwise acquired (all such dividends, distributions, redemptions or purchases being hereinafter referred to as a "Junior Securities Distribution") for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly (except by conversion into or exchange for Junior Securities), unless in each case (i) the full cumulative dividends on all outstanding shares of the Series C Preferred Stock and any other Parity Securities shall have been paid or set apart for payment for all past Dividend Periods with respect to the Series C Preferred Stock and all past dividend periods with respect to such Parity Securities and (ii) sufficient funds shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series C Preferred Stock and the current dividend period with respect to such Parity Securities. (4) Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation 51 4 (whether capital or surplus) shall be made to or set apart for the holders of Junior Securities, the holders of the shares of Series C Preferred Stock shall be entitled to receive $100 per share of Series C Preferred Stock plus an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of Series C Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Securities, then such assets, or the proceeds thereof, shall be distributed among the holders of shares of Series C Preferred Stock and any such other Parity Securities ratably in accordance with the respective amounts that would be payable on such shares of Series C Preferred Stock and any such other stock if all amounts payable thereon were paid in full. For the purposes of this paragraph (4), a sale or transfer of all or substantially all of the Corporation's assets, shall be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation, but a consolidation or merger of the Corporation with one or more corporations shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation. (b) Subject to the rights of the holders of any Parity Securities, after payment shall have been made in full to the holders of the Series C Preferred Stock, as provided in this paragraph (4), any other series or class or classes of Junior Securities shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series C Preferred Stock shall not be entitled to share therein. (5) Redemption. (a) To the extent the Corporation shall have funds legally available for such payment, the Corporation may redeem at its option at any time on or after December 16, 1999 or from time to time 52 5 thereafter, in whole or in part, the shares of Series C Preferred Stock, at a redemption price of $100 per share in cash, together with accrued and unpaid dividends thereon to the date fixed for redemption. (b) To the extent the Corporation shall have funds legally available for such payment, on December 15, 2014, if any shares of the Series C Preferred Stock shall be outstanding, the Corporation shall redeem all outstanding shares of the Series C Preferred Stock, at a redemption price of $100 per share in cash, together with accrued and unpaid dividends thereon to such date. (c) Immediately prior to authorizing or making any redemption pursuant to this paragraph (5) the Corporation, by resolution of its Board of Directors, shall, to the extent of any funds legally available therefor, declare a dividend on the Series C Preferred Stock payable on the redemption date in an amount equal to any accrued and unpaid dividends on the Series C Preferred Stock as of such redemption date. (d) If the Corporation is unable or shall fail to discharge its obligation to redeem all outstanding shares of Series C Preferred Stock pursuant to paragraph (5)(b) (the "Mandatory Redemption Obligation"), the Mandatory Redemption Obligation shall be discharged as soon as the Corporation is able to discharge such Mandatory Redemption Obligation. If and so long as any Mandatory Redemption Obligation with respect to the Series C Preferred Stock shall not be fully discharged, the Corporation shall not (i) directly or indirectly, redeem, purchase, or otherwise acquire any Parity Security or discharge any mandatory or optional redemption, sinking fund or other similar obligation in respect of any Parity Securities (except in connection with a redemption, sinking fund or other similar obligation to be satisfied pro rata with the Series C Preferred Stock) or (ii) in accordance with paragraph (3)(d), declare or make any Junior Securities Distribution, or, directly or indirectly, discharge any mandatory or optional redemption, sinking fund or other similar obligation in respect of the Junior Securities. 53 6 (e) Shares of Series C Preferred Stock which have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock; provided that no such issued and reacquired shares of Series C Preferred Stock shall be reissued or sold as Series C Preferred Stock. (6) Procedure for Redemption. (a) In the event that fewer than all the outstanding shares of Series C Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be selected pro rata (with any fractional shares being rounded to the nearest whole share) as nearly as practicable or by lot, or by such other method as the Board of Directors may determine to be equitable. (b) In the event the Corporation shall redeem shares of Series C Preferred Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Corporation; provided that neither the failure to give such notice nor any defect therein shall affect the validity of the giving of notice for the redemption of any share of Series C Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series C Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on 54 7 the shares to be redeemed will cease to accrue on such redemption date. (c) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the redemption price of the shares called for redemption), dividends on the shares of Series C Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for the shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (7) Voting Rights. (a) The holders of record of shares of Series C Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph (7) or as otherwise provided by law. (b) If and whenever six quarterly dividends (whether or not consecutive) payable on the Series C Preferred Stock have not been paid in full or if the Corporation shall have failed to discharge its Mandatory Redemption Obligation, the number of directors then constituting the Board of Directors shall be increased by two and the holders of shares of Series C Preferred Stock, together with the holders of shares of every other series of preferred stock upon which like rights to vote for the election of two additional directors have been conferred and are exercisable (resulting from either the failure to pay dividends or the failure to redeem) (any such other series is referred to as the "Preferred Shares"), voting as a single class regardless of series, shall be entitled to elect the two additional directors to serve on the Board of 55 8 Directors at any annual meeting of stockholders or special meeting held in place thereof, or at a special meeting of the holders of the Series C Preferred Stock and the Preferred Shares called as hereinafter provided. Whenever all arrears in dividends on the Series C Preferred Stock and the Preferred Shares then outstanding shall have been paid and dividends thereon shall have been paid regularly for at least one year, or the Corporation shall have fulfilled its Mandatory Redemption Obligation, as the case may be, then the right of the holders of the Series C Preferred Stock and the Preferred Shares to elect such additional two directors shall cease (but subject always to the same provisions for the vesting of such voting rights in the case of any similar future arrearages in six quarterly dividends or failure to fulfill any Mandatory Redemption Obligation), and the terms of office of all persons elected as directors by the holders of the Series C Preferred Stock and the Preferred Shares shall forthwith terminate and the number of the Board of Directors shall be reduced accordingly. At any time after such voting power shall have been so vested in the holders of shares of Series C Preferred Stock and the Preferred Shares, the secretary of the Corporation may, and upon the written request of any holder of Series C Preferred Stock (addressed to the secretary at the principal office of the Corporation) shall, call a special meeting of the holders of the Series C Preferred Stock and of the Preferred Shares for the election of the two directors to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws of the Corporation for a special meeting of the stockholders or as required by law. If any such special meeting required to be called as above provided shall not be called by the secretary within 20 days after receipt of any such request, then any holder of shares of Series C Preferred Stock may call such meeting, upon the notice above provided, and for that purpose shall have access to the stock books of the Corporation. The directors elected at any such special meeting shall hold office until the next annual meeting of the stockholders or special meeting held in lieu thereof if such office shall not have previously terminated as above provided. If any vacancy shall occur among the directors elected by the holders of the Series C Preferred Stock and the Preferred Shares, a 56 9 successor shall be elected by the Board of Directors, upon the nomination of the then-remaining director elected by the holders of the Series C Preferred Stock and the Preferred Shares or the successor of such remaining director, to serve until the next annual meeting of the stockholders or special meeting held in place thereof if such office shall not have previously terminated as provided above. (c) Without the written consent of a majority of the outstanding shares of Series C Preferred Stock or the vote of holders of a majority of the outstanding shares of Series C Preferred Stock at a meeting of the holders of Series C Preferred Stock called for such purpose, the Corporation will not (i) amend, alter or repeal any provision hereof or of the Certificate of Incorporation (by merger or otherwise) so as to affect the preferences, rights or powers of the Series C Preferred Stock; provided that any such amendment that changes the dividend payable on or the liquidation preference of the Series C Preferred Stock shall require the affirmative vote at a meeting of holders of Series C Preferred Stock called for such purpose or written consent of the holder of each share of Series C Preferred Stock; or (ii) create any class or classes of stock ranking equal or prior to the Series C Preferred Stock either as to dividends or upon liquidation, dissolution or winding up or increase the number of authorized number of shares of any class or classes of stock ranking equal or prior to the Series C Preferred Stock either as to dividends or upon liquidation, dissolution or winding up. Notwithstanding the foregoing, no consent of the holders of the Series C Preferred Stock shall be required for (i) the creation of any indebtedness of any kind of the Corporation, (ii) the creation of any class of Junior Securities or (iii) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. (d) In exercising the voting rights set forth in this paragraph (7), each share of Series C Preferred Stock shall have one vote per share, except that when any other series of preferred stock shall have the right to vote with the Series C Preferred Stock as a single class on any 57 10 matter, then the Series C Preferred Stock and such other series shall have with respect to such matters one vote per $100 of stated liquidation preference. Except as set forth herein, the shares of Series C Preferred Stock shall not have any relative, participating, optional or other special voting rights and powers and the consent of the holders thereof shall not be required for the taking of any corporate action. (8) Stockholders Agreement. The Series C Preferred Stock shall be subject to the provisions of the Stockholders Agreement among the Corporation, Kidder, Peabody Group Inc. and General Electric Company dated December 16, 1994. (9) General Provisions. (a) The term "Person" as used herein means any corporation, limited liability company, partnership, trust, organization, association, other entity or individual. (b) The term "outstanding", when used with reference to shares of stock, shall mean issued shares, excluding shares held by the Corporation or a subsidiary. (c) The headings of the paragraphs of this Annex II are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. EX-12.1 3 COMPUTATION TO RATIO OF EARNINGS 1 Exhibit 12.1 Paine Webber Group Inc. Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (In thousands of dollars)
Three Months Years Ended December 31, Ended March 31, -------------------------------------------------------------- 1998 * 1997 * 1996 * 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes $ 190,134 $ 644,075 $ 558,999 $ 102,677 $ 44,385 $ 407,576 ---------- ---------- ---------- ---------- ---------- ---------- Preferred stock dividends 8,844 44,186 43,712 36,260 1,710 5,828 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 690,133 2,573,582 1,971,788 1,969,811 1,428,653 1,130,712 Interest factor in rents 14,762 53,665 54,537 59,491 51,102 50,133 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 704,895 2,627,247 2,026,325 2,029,302 1,479,755 1,180,845 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends 713,739 2,671,433 2,070,037 2,065,562 1,481,465 1,186,673 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $ 895,029 $3,271,322 $2,585,324 $2,131,979 $1,524,140 $1,588,421 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges and preferred stock dividends 1.3 1.2 1.2 1.0 1.0 1.3 ========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to combined fixed charges and preferred stock dividends (tax effected), "earnings" consist of income before taxes and fixed charges. "Fixed charges" consist principally of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings, preferred trust securities and that portion of rental expense estimated to be representative of the interest factor. * Income before taxes includes minority interest in wholly owned subsidiary trusts. EX-12.2 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12.2 Paine Webber Group Inc. Computation of Ratio of Earnings to Fixed Charges (In thousands of dollars)
Three Months Years Ended December 31, Ended March 31, -------------------------------------------------------------- 1998 * 1997 * 1996 * 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes $ 190,134 $ 644,075 $ 558,999 $ 102,677 $ 44,385 $ 407,576 ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges: Interest 690,133 2,573,582 1,971,788 1,969,811 1,428,653 1,130,712 Interest factor in rents 14,762 53,665 54,537 59,491 51,102 50,133 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 704,895 2,627,247 2,026,325 2,029,302 1,479,755 1,180,845 ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and fixed charges $ 895,029 $3,271,322 $2,585,324 $2,131,979 $1,524,140 $1,588,421 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.3 1.2 1.3 1.1 1.0 1.3 ========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before taxes and fixed charges. "Fixed charges" consist principally of interest expense incurred on securities sold under agreements to repurchase, short-term borrowings, long-term borrowings, preferred trust securities and that portion of rental expense estimated to be representative of the interest factor. * Income before taxes includes minority interest in wholly owned subsidiary trusts. EX-27 5 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the financial statements of Paine Webber Group Inc. for the three months ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1998 MAR-31-1998 819,698 7,257,624 21,685,090 9,053,127 20,765,706 361,239 61,630,919 2,062,195 8,513,475 29,217,396 5,295,745 8,615,585 3,538,591 189,187 582,705 0 1,825,908 61,630,919 276,963 802,378 408,124 124,969 158,736 690,133 650,575 198,195 120,735 0 0 120,735 0.82 0.77
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