-----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, Auf04Yo5AFpSlchhJRFbiccyvaSrt8OBtw59TjL4aaminGBNT4bJ5laKDuJZW15S wSYX5TJ8V0iAiS4V2f/pJw== /in/edgar/work/0000950123-00-008990/0000950123-00-008990.txt : 20001003 0000950123-00-008990.hdr.sgml : 20001003 ACCESSION NUMBER: 0000950123-00-008990 CONFORMED SUBMISSION TYPE: F-1/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 20000929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UBS AG CENTRAL INDEX KEY: 0001114446 STANDARD INDUSTRIAL CLASSIFICATION: [6021 ] IRS NUMBER: 000000000 STATE OF INCORPORATION: V8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1/A SEC ACT: SEC FILE NUMBER: 333-46216 FILM NUMBER: 731890 BUSINESS ADDRESS: STREET 1: BAHNHOFSTRASSE 45 CITY: ZURICH SWITZERLAND STATE: V8 ZIP: 00000 BUSINESS PHONE: 212-821-3000 MAIL ADDRESS: STREET 1: BAHNHOFSTRASSE 45 STREET 2: ZURICH CITY: ZURICH SWITZERLAND STATE: V8 ZIP: 00000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UBS PREFERRED FUNDING TRUST I CENTRAL INDEX KEY: 0001124134 STANDARD INDUSTRIAL CLASSIFICATION: [ ] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1/A SEC ACT: SEC FILE NUMBER: 333-46216-01 FILM NUMBER: 731891 BUSINESS ADDRESS: STREET 1: WILMINGTON TRUST CO STREET 2: 1100 N MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19890 BUSINESS PHONE: 3026511118 MAIL ADDRESS: STREET 1: WILMINGTON TRUST CO STREET 2: 1100 N MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19890 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UBS PREFERRED FUNDING CO LLC I CENTRAL INDEX KEY: 0001124136 STANDARD INDUSTRIAL CLASSIFICATION: [ ] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1/A SEC ACT: SEC FILE NUMBER: 333-46216-02 FILM NUMBER: 731892 BUSINESS ADDRESS: STREET 1: WILMINGTON TRUST CO STREET 2: 1209 ORANGE ST CITY: WILMINGTON STATE: DE ZIP: 19801 BUSINESS PHONE: 3026587581 MAIL ADDRESS: STREET 1: WILMINGTON TRUST CO STREET 2: 1100 N MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19890 F-1/A 1 y39818a1f-1a.txt AMENDENT #1 TO FORM F-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 29 SEPTEMBER 2000 REGISTRATION NO. 333-46216 333-46216-01 333-46216-02 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM F-1 AMENDMENT NO. 1 TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------
UBS AG UBS PREFERRED FUNDING TRUST I (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) SWITZERLAND 6021 98-0186363 DELAWARE 6712 51-6518252 (STATE OR OTHER (PRIMARY (I.R.S. (STATE OR OTHER (PRIMARY (I.R.S. EMPLOYER JURISDICTION OF STANDARD EMPLOYER JURISDICTION OF STANDARD IDENTIFICATION INCORPORATION OR INDUSTRIAL IDENTIFICATION INCORPORATION OR INDUSTRIAL NUMBER) ORGANIZATION) CLASSIFICATION NUMBER) ORGANIZATION) CLASSIFICATION CODE NUMBER) CODE NUMBER) UBS PREFERRED FUNDING COMPANY LLC I (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6712 51-04802885 (STATE OR OTHER (PRIMARY (I.R.S. EMPLOYER JURISDICTION OF STANDARD IDENTIFICATION INCORPORATION OR INDUSTRIAL NUMBER) ORGANIZATION) CLASSIFICATION CODE NUMBER)
BAHNHOFSTRASSE 45, ZURICH, C/O WILMINGTON TRUST COMPANY THE CORPORATION TRUST COMPANY SWITZERLAND, 011 41-1-234 11 11 AND 1100 NORTH MARKET STREET 1209 ORANGE STREET AESCHENVORSTADT 1, BASEL, WILMINGTON, DELAWARE 19890 WILMINGTON, DELAWARE 19801 SWITZERLAND, 011 41-61-288 20 20 302-651-1118 302-658-7581 (ADDRESS AND TELEPHONE NUMBER OF (ADDRESS AND TELEPHONE NUMBER OF (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE REGISTRANT'S PRINCIPAL EXECUTIVE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) OFFICES) OFFICES)
------------------------ ROBERT C. DINERSTEIN, ESQ. UBS AG 299 PARK AVENUE NEW YORK, NEW YORK 10171 TELEPHONE: 212-821-3000 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------ COPIES TO: MARK J. WELSHIMER, ESQ. JEFFREY D. BERMAN, ESQ. SULLIVAN & CROMWELL DAVIS POLK & WARDWELL 125 BROAD STREET 450 LEXINGTON AVENUE NEW YORK, NY 10004-2498 NEW YORK, NY 10017 212-558-4000 212-450-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER UNIT(1)(2) OFFERING PRICE(1)(2) REGISTRATION FEE(2) - --------------------------------------------------------------------------------------------------------------------------------- - --% Noncumulative Trust Preferred Securities issued by UBS Preferred Funding Trust I...................... 1,500,000 $1,000 $1,500,000,000 $66,000(3) - --------------------------------------------------------------------------------------------------------------------------------- - --% Noncumulative Company Preferred Securities issued by UBS Preferred Funding Company LLC I................ 1,500,000 $1,000 $1,500,000,000 0 - --------------------------------------------------------------------------------------------------------------------------------- Subordinated Guarantee of UBS AG with respect to the Company Preferred Securities........................... 0 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee. (2) No separate consideration will be received for the company preferred securities of UBS Preferred Funding Company LLC I or the subordinated guarantee of UBS AG. Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is payable with respect to these securities. (3) The total amount of the registration fee is $396,000, of which $330,000 was paid upon the initial filing of the registration statement. ------------------------ This registration statement contains a prospectus relating to both of the following: the offering of newly issued trust preferred securities and company preferred securities; and market-making transactions that may occur on an ongoing basis in trust preferred securities and company preferred securities that have been previously issued in the offering described above. When the prospectus is delivered to an investor in the initial offering described above, the investor will be informed of that fact in the confirmation of sale. When the prospectus is delivered to an investor who is not so informed, it is delivered in a market-making transaction. THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PROSPECTUS Preliminary Prospectus dated 29 September 2000 - -------------------------------------------------------------------------------- [UBS AG LOGO] $1,500,000,000 UBS Preferred Funding Trust I --% Noncumulative Trust Preferred Securities representing a corresponding amount of --% Noncumulative Company Preferred Securities of UBS Preferred Funding Company LLC I guaranteed on a subordinated basis by UBS AG - -------------------------------------------------------------------------------- - - Each trust preferred security represents a corresponding amount of the company preferred securities and related rights under the UBS AG subordinated guarantee. Dividends and redemption and liquidation payments paid by UBS Preferred Funding Company on the company preferred securities will pass through UBS Preferred Funding Trust to you as distributions and redemption and liquidation payments on the trust preferred securities. - - The company preferred securities will pay semi-annual distributions on April -- and October -- of each year at a fixed rate per annum equal to --% through the dividend payment date in October 2010, and thereafter will pay quarterly distributions on January --, April --, July -- and October -- of each year at a variable rate per annum equal to --% above three-month LIBOR. The company preferred securities are perpetual securities and do not have a maturity date. UBS Preferred Funding Company may redeem the company preferred securities on or after the dividend payment date in October 2010. - - The company preferred securities will provide holders with rights to distributions and redemption and liquidation payments that are similar to those of the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. - - UBS AG will guarantee, on a subordinated basis, dividend, redemption and liquidation payment obligations under the company preferred securities. - - We have applied to list the trust preferred securities on the Luxembourg Stock Exchange. SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR RISKS RELATED TO AN INVESTMENT IN THE TRUST PREFERRED SECURITIES.
PROCEEDS TO PRICE TO UNDERWRITING UBS PREFERRED PUBLIC(1) DISCOUNT FUNDING TRUST --------- ------------ ------------- - ---------------------------------------------------------------------------------------------------------------- Per Trust Preferred Security................................ $ -- (2) $ -- - ---------------------------------------------------------------------------------------------------------------- Total....................................................... $ -- (2) $ -- - ----------------------------------------------------------------------------------------------------------------
(1) Plus accrued dividends, if any, from the date of original issue. (2) UBS Preferred Funding Trust will pay the underwriters compensation of $-- per trust preferred security. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This prospectus may be used in the initial sale of the trust preferred securities. In addition, UBS Warburg LLC or any other affiliate controlled by UBS may use this prospectus in a market-making transaction involving the trust preferred securities after their initial sale. Unless the purchaser is informed otherwise in the confirmation of sale, this prospectus is being used in a market-making transaction. We anticipate that the trust preferred securities will be ready for delivery in book-entry form through The Depository Trust Company on or about -- 2000. UBS Warburg LLC PaineWebber Incorporated Credit Suisse First Boston Goldman, Sachs & Co. Merrill Lynch & Co. Morgan Stanley Dean Witter Salomon Smith Barney The date of this prospectus is -- September 2000 3 TABLE OF CONTENTS - -------------------------------------------------------------------------------- Certain Terms......................... 2 Prospectus Summary.................... 3 Risk Factors.......................... 12 Cautionary Note Regarding Forward- Looking Information................. 16 UBS................................... 17 Capitalization of UBS................. 155 UBS Preferred Funding Trust I......... 156 UBS Preferred Funding Company LLC I... 157 Use of Proceeds....................... 163 Description of Trust Preferred Securities.......................... 164 Description of Company Preferred Securities.......................... 171 Book-Entry Issuance of Trust Preferred Securities.......................... 185 Description of UBS AG Subordinated Guarantee........................... 190 Description of Subordinated Notes of UBS AG.............................. 195 Certain U.S. Tax Considerations....... 198 Certain Tax Considerations Under the Laws of Switzerland................. 203 Certain ERISA Considerations.......... 205 Underwriting.......................... 207 Validity of the Securities............ 210 Experts............................... 210 Limitations on Enforcement of U.S. Laws Against UBS AG, Its Management and Others.......................... 210 General Information................... 211 Where You Can Find More Information... 213 Presentation of Financial Information......................... 213 Financial Statements of UBS........... F-1
CERTAIN TERMS - -------------------------------------------------------------------------------- In this prospectus: - when we refer to "UBS AG," we mean UBS AG on a parent only basis. - when we refer to "UBS," we mean UBS AG and its consolidated subsidiaries. - when we refer to "PaineWebber," we mean Paine Webber Group Inc. and its consolidated subsidiaries. - when we refer to the "trust preferred securities," we mean the --% Noncumulative Trust Preferred Securities being issued by UBS Preferred Funding Trust. - when we refer to the "company preferred securities," we mean the --% Noncumulative Company Preferred Securities being issued by UBS Preferred Funding Company to UBS Preferred Funding Trust in connection with the offering of the trust preferred securities by UBS Preferred Funding Trust. - when we refer to "UBS Preferred Funding Trust," we mean UBS Preferred Funding Trust I. - when we refer to "UBS Preferred Funding Company," we mean UBS Preferred Funding Company LLC I. 4 Prospectus summary THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD PAY SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION TO DETERMINE WHETHER AN INVESTMENT IN THE TRUST PREFERRED SECURITIES IS APPROPRIATE FOR YOU. INTRODUCTION The trust preferred securities will provide you with rights to distributions and redemption and liquidation payments that are similar to those to which you would be entitled if you had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. The diagram to the right outlines the relationship among investors in the trust preferred securities, UBS Preferred Funding Trust, UBS Preferred Funding Company and UBS AG following the completion of the offering. UBS Preferred Funding Trust will pass through to you any dividends, redemption payments or liquidation payments that it receives from UBS Preferred Funding Company on the company preferred securities. UBS AG will guarantee, on a subordinated basis, dividend, redemption and liquidation payment obligations under the company preferred securities. UBS Preferred Funding Company will receive payments under the subordinated notes issued by the Cayman Islands branch of UBS AG and will pay dividends on the company preferred securities that are similar to dividends that would be paid on the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have equivalent financial terms. The capital raised in this offering will qualify as consolidated Tier 1 capital for UBS under the relevant regulatory capital guidelines of the Swiss Federal Banking Commission. LOGO 3 5 Parties to the offering For a more complete description of UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company, see "UBS," "UBS Preferred Funding Trust I," "UBS Preferred Funding Company LLC I," "Use of Proceeds," "Capitalization of UBS AG" and "Capital Ratios and Distributable Profits of UBS." UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small and medium sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T". On 12 July 2000, UBS announced that it had entered into a definitive merger agreement with Paine Webber Group Inc., one of the largest full-service securities and commodities firms in the United States. UBS will purchase all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $10.8 billion (based on the UBS share price on 12 July 2000). The transaction is subject to shareholder and regulatory approvals and other conditions and is expected to be completed in the fourth quarter of 2000. The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt I, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS PREFERRED FUNDING TRUST I UBS Preferred Funding Trust I is a Delaware statutory business trust. UBS Preferred Funding Trust exists for the purpose of issuing the trust preferred securities representing a corresponding amount of the company preferred securities, together with related rights under the UBS AG subordinated guarantee. UBS Preferred Funding Trust will pass the dividends it receives on the company preferred securities through to you as distributions on the trust preferred securities. UBS Preferred Funding Trust cannot engage in other activities. The company preferred securities and the related rights under the UBS AG subordinated guarantee will be the only assets of UBS Preferred Funding Trust. UBS AG, Stamford branch, will pay directly all expenses and liabilities of UBS Preferred Funding Trust. UBS Preferred Funding Trust will be treated as a grantor trust for United States federal income tax purposes. As a result, you will be treated as a beneficial owner of interests in the company preferred securities and the related rights under the UBS AG subordinated guarantee for United States federal income tax purposes. The principal executive offices of UBS Preferred Funding Trust are located at c/o Wilmington Trust Company, 1100 North Market Street, Wilmington, Delaware 19890. Its telephone number is 302-651-1118. UBS PREFERRED FUNDING COMPANY LLC I UBS Preferred Funding Company LLC I is a Delaware limited liability company. UBS Preferred Funding Company exists for the purposes of acquiring and holding the subordinated notes issued by the Cayman Islands branch of UBS AG, or other eligible investments, and issuing the company common securities and the company preferred securities. UBS AG is purchasing all of the company common securities, which represent 100% of the voting rights in UBS Preferred Funding Company, subject to your limited right to elect additional directors as described below. UBS Preferred Funding 4 6 Company will apply the cash generated by the subordinated notes and other eligible investments, if any, to pay dividends to UBS Preferred Funding Trust, as holder of the company preferred securities, and UBS AG, as holder of the company common securities. UBS Preferred Funding Company will be treated as a partnership for United States federal income tax purposes. UBS Preferred Funding Company will be managed by a board of directors having not less than three and not more than five members. If the aggregate of unpaid dividends equals or exceeds an amount equal to three semi-annual dividend payments, you and the other holders of trust preferred securities will have the right to elect two additional directors. The principal executive offices of UBS Preferred Funding Company are located at The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. Its telephone number is 302-658-7581. 5 7 The offering For a more complete description of the trust preferred securities, the company preferred securities, the UBS AG subordinated guarantee and the subordinated notes, see "Description of Trust Preferred Securities," "Description of Company Preferred Securities," "Book-Entry Issuance of Trust Preferred Securities," "Description of UBS AG Subordinated Guarantee" and "Description of Subordinated Notes of UBS AG." SECURITIES OFFERED Each trust preferred security represents a corresponding amount of the company preferred securities and related rights under the UBS AG subordinated guarantee. The trust preferred securities will be issued in denominations of $1,000 liquidation amount and whole-number multiples of $1,000, and the company preferred securities will be issued in denominations of $1,000 liquidation preference and whole-number multiples of $1,000. The aggregate liquidation amount of the trust preferred securities is $1,500,000,000 and the aggregate liquidation preference of the company preferred securities is $1,500,000,000. DIVIDENDS UBS Preferred Funding Trust will pass through the dividends it receives on the company preferred securities as distributions on the trust preferred securities. UBS Preferred Funding Company will pay dividends on the company preferred securities from the date of their initial issuance on a noncumulative basis. These dividends will be payable on the liquidation preference of the company preferred securities: - semi-annually in arrears on the first business day on or after April -- and October -- of each year at a fixed rate per annum equal to --%, beginning -- April 2001 and ending -- October 2010, calculated on the basis of a 360-day year consisting of twelve 30-day months, and - thereafter quarterly in arrears on the first business day on or after January --, April --, July -- and October -- of each year at a variable rate per annum equal to --% above three-month LIBOR, calculated on the basis of the actual number of days elapsed in a 360-day year. UBS Preferred Funding Company's obligation to pay dividends is subject to provisions that generally require UBS Preferred Funding Company to pay full or proportional dividends on the company preferred securities when UBS AG pays dividends on UBS AG ordinary shares or on other securities of UBS AG that rank equally with or junior to the UBS AG subordinated guarantee of the company preferred securities. As described below, UBS Preferred Funding Company will be required to pay dividends on the company preferred securities in some circumstances, will be prohibited from paying dividends on the company preferred securities in other circumstances, and, when not required to pay or prohibited from paying dividends, will have discretion as to whether to pay dividends on the company preferred securities. Because UBS AG paid dividends on its ordinary shares in 26 April 2000, dividends on the company preferred securities will be mandatory (as described below) through the dividend payment date in April, 2001. The following text outlines the criteria for determining whether and the extent to which UBS Preferred Funding Company will be required to pay dividends on the company preferred securities or will be prohibited from paying dividends on the company preferred securities: Is there a capital limitation on UBS AG? Unless the Swiss Federal Banking Commission expressly permits otherwise, if on a dividend payment date UBS AG is not in compliance with the Swiss Federal Banking Commission's minimum capital adequacy requirements applicable to UBS AG, or would not be in compliance because of a payment of dividends on the company preferred securities, UBS Preferred Funding Company will not pay dividends on the company preferred securities under any circumstances. For a discussion of UBS's capital resources relative to applicable guidelines, see "UBS -- 6 8 Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources." We refer to this restriction as a capital limitation. Are dividends mandatory? Unless there is a capital limitation, the payment of full dividends by UBS Preferred Funding Company on the company preferred securities will be mandatory during the one-year period beginning on and including each date on which: - UBS AG declares or pays a dividend or makes any other payment or distribution on any shares or other securities that, in a liquidation of UBS AG, rank junior to the UBS AG subordinated guarantee of the company preferred securities; or - UBS AG or any of its subsidiaries redeems, repurchases (except for its trading account) or otherwise acquires any shares or other securities that, in a liquidation of UBS AG, rank equally with or junior to the UBS AG subordinated guarantee of the company preferred securities. The payment of proportional dividends by UBS Preferred Funding Company on the company preferred securities will be mandatory on any date, whether or not a regularly scheduled dividend payment date, on which UBS AG or any of its subsidiaries pays a dividend or makes any other payment or distribution on any shares or other securities that, in a liquidation of UBS AG, rank equally with the UBS AG subordinated guarantee of the company preferred securities if, on the dividend payment dates leading up to the payment or distribution on the equally ranking securities, dividends were paid on the company preferred securities in a lower percentage than are being paid on the equally ranking securities. Unless there is a capital limitation, UBS Preferred Funding Company will be required to pay dividends that are mandatory whether or not: - UBS AG delivers a notice limiting dividends, - UBS AG has available distributable profits, or - interest is paid on the subordinated notes or other eligible investments. Does UBS AG have available distributable profits? Available distributable profits are the pro rata proportion (from among all shares and other securities issued by UBS AG that rank equally with the UBS AG subordinated guarantee of the company preferred securities) of profits that may be distributed in accordance with Swiss law. Currently, distributable profits include the total of current profit, profit brought forward and freely available reserves as reflected in the most recent audited unconsolidated balance sheet and statement of appropriation of retained earnings of UBS AG. Unless required to pay mandatory dividends, UBS Preferred Funding Company will not pay dividends on the company preferred securities in excess of UBS AG's available distributable profits. When are dividends discretionary? The payment of dividends by UBS Preferred Funding Company on the company preferred securities is discretionary if the capital limitation does not apply, dividends are not mandatory as described above, and UBS AG has sufficient available distributable profits. In that case, UBS Preferred Funding Company will pay dividends on the company preferred securities at the specified rate unless, on or before the tenth business day immediately preceding a dividend payment date, UBS AG gives notice to UBS Preferred Funding Company that UBS Preferred Funding Company must pay no dividends or less than full dividends, in which case dividends will be due and payable only in the amount specified in the notice. UBS AG may deliver such a notice in its sole discretion and for any reason, except that such a notice shall have no effect where dividends are mandatory as described above. When does the dividend preference shift from the company preferred securities to the company common securities? The company preferred securities ordinarily will rank senior to the company common securities as to the payment of dividends. However, the dividend preference of the company preferred securities may, at UBS AG's option, shift to the company common securities on dividend 7 9 payment dates to the extent that no mandatory dividend payment amount is then required to be paid on the company preferred securities. If UBS AG does this, the corresponding interest payments or other income received by UBS Preferred Funding Company on the subordinated notes or its other eligible investments may be returned as dividends to UBS AG as holder of the company common securities before any dividends are paid on the company preferred securities. WITHHOLDING TAXES Generally, UBS Preferred Funding Company will pay additional amounts on full or proportional mandatory dividends otherwise due and payable so that the net amount received by you will not be reduced by the withholding of certain taxes or other government charges. However, UBS Preferred Funding Company will not pay any additional amounts if the taxes or governmental charges are withheld because you: - are connected, other than as a holder of trust preferred securities, to Switzerland or the Cayman Islands if it is the jurisdiction that requires the withholding of the taxes or charges, or - have not filed an appropriate declaration stating that you are not a resident of and do not have a connection with Switzerland or the Cayman Islands if it is the jurisdiction that requires the withholding of the taxes or charges, or a similar claim for exemption, if we have given you the opportunity to do so. REDEMPTION UBS Preferred Funding Company may redeem the company preferred securities, in whole or in part, on any dividend payment date on or after the dividend payment date regularly scheduled to occur in October 2010. In that case, you will receive a redemption price equal to unpaid mandatory dividends, other unpaid definitive dividends (for example, discretionary dividends that became due and payable because UBS AG did not deliver a notice to pay no dividends), current accrued dividends (whether or not declared) and the liquidation preference of your company preferred securities. UBS Preferred Funding Company may not redeem the company preferred securities before the dividend payment date regularly scheduled to occur in October 2010, unless an event occurs that results in an adverse consequence for the tax or capital treatment of the company preferred securities, or for the investment company status of UBS Preferred Funding Company or UBS Preferred Funding Trust. If the circumstance giving rise to redemption arises out of a change in tax law that results in the imposition of tax on UBS Preferred Funding Trust or UBS Preferred Funding Company or the imposition of withholding tax on payment of dividends on the company preferred securities, distributions on the trust preferred securities or interest on the subordinated notes, then you will receive a redemption price as described above. If the redemption arises from the other special events, including adverse tax consequences not arising out of a change in tax law, you will receive a redemption price equal to unpaid mandatory dividends, other unpaid definitive dividends, current accrued dividends (whether or not declared) and a make whole amount equal to the greater of the liquidation preference and the sum of the net present value of scheduled dividends and the liquidation preference through October 2010. UBS Preferred Funding Trust will pass through the redemption payments it receives on the company preferred securities to redeem a corresponding amount of the trust preferred securities. Any redemption of the company preferred securities must comply with applicable regulatory requirements, including the prior approval of the Swiss Federal Banking Commission if then required under applicable guidelines or policies of the Swiss Federal Banking Commission. The Swiss Federal Banking Commission in its discretion may impose conditions on its approval of any proposed redemption of the company preferred securities. You may not require redemption of the company preferred securities at any time. 8 10 LIQUIDATION If UBS AG is liquidated, UBS Preferred Funding Company will be liquidated. So long as the company preferred securities are outstanding, UBS AG will not cause UBS Preferred Funding Company to liquidate unless UBS AG is also liquidating. If UBS Preferred Funding Company is liquidated, you will be entitled to receive an amount equal to unpaid mandatory dividends, other unpaid definitive dividends, current accrued dividends (whether or not declared) and the liquidation preference of your company preferred securities. However, any liquidating distributions that you receive will be substantially the same as, but not greater than, those to which you would be entitled if you had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. BOOK-ENTRY ISSUANCE OF THE TRUST PREFERRED SECURITIES UBS Preferred Funding Trust will initially issue the trust preferred securities only in book-entry form through The Depository Trust Company. You may withdraw the company preferred securities represented by your trust preferred securities from UBS Preferred Funding Trust and hold the company preferred securities directly. If you hold the company preferred securities directly, you must hold the company preferred securities in certificated form. If you hold the company preferred securities directly, then you may exercise directly the associated rights under the UBS AG subordinated guarantee, and any rights under the limited liability company agreement of UBS Preferred Funding Company in respect of the company preferred securities, including any rights to elect additional directors of UBS Preferred Funding Company. THE UBS AG SUBORDINATED GUARANTEE UBS AG will unconditionally guarantee, on a subordinated basis, the payment by UBS Preferred Funding Company of any mandatory dividends on the company preferred securities or dividends that have become definitive because UBS AG has sufficient available distributable profits to pay out dividends and has not delivered to UBS Preferred Funding Company an instruction not to pay dividends. UBS AG will also unconditionally guarantee, on a subordinated basis, the redemption price payable with respect to any company preferred securities called for redemption by UBS Preferred Funding Company and the payment by UBS Preferred Funding Company on its liquidation of an amount sufficient to provide you with the distributions described under "Liquidation" above. THE SUBORDINATED NOTES The subordinated notes are undated and will have an aggregate principal amount of $1,500,000,000. The subordinated notes are general unsecured debt obligations of UBS AG and the Cayman Islands branch of UBS AG and, in liquidation of UBS AG, will rank subordinate and junior to all indebtedness of UBS AG except for indebtedness that by its terms expressly ranks equally with the subordinated notes. Interest payable under the subordinated notes will be calculated at the same rate and payable on the same dates as dividends payable under the company preferred securities. UBS AG will not pay interest on the subordinated notes if UBS AG is not solvent. USE OF PROCEEDS - UBS Preferred Funding Trust will use the proceeds from the offering of the trust preferred securities to purchase the company preferred securities from UBS Preferred Funding Company. 9 11 - UBS Preferred Funding Company will use the proceeds from the offering of the company preferred securities to purchase the subordinated notes issued by the Cayman Islands branch of UBS AG. - UBS AG will use the proceeds from the issuance of the subordinated notes for general corporate purposes, including paying certain expenses relating to the offering, and possibly funding a portion of the purchase price of PaineWebber. RISK FACTORS You should carefully consider the information under "Risk Factors," together with the other information contained in this prospectus, before purchasing any trust preferred securities. RATINGS Moody's Investors Service, Inc. has rated both the trust preferred securities and the company preferred securities aa2 and Standard & Poor's Rating Services has rated both the trust preferred securities and the company preferred securities AA-. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency. There is no assurance that a credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency, if in that rating agency's judgment, circumstances so warrant. LISTING We have applied to list the trust preferred securities on the Luxembourg Stock Exchange. GOVERNING LAW The constituent documents of UBS Preferred Funding Trust and UBS Preferred Funding Company, the trust preferred securities and the company preferred securities will be governed by the laws of the State of Delaware, United States of America. The subordinated notes and the UBS AG subordinated guarantee will be governed by the laws of the State of New York, United States of America. 10 12 Ratio of Earnings to Fixed Charges The following table sets forth UBS AG's ratio of earnings to fixed charges, for the periods indicated. Ratios of earnings to combined fixed charges and preferred stock dividends requirements are not presented as there were no preferred share dividends in any of the periods indicated.
SIX MONTHS YEAR ENDED 31 DECEMBER ENDED 30 JUNE 1997 1998 1999 1999 2000 - ----------------------------------------------------------------------------------------------------- IAS(1) Ratio of earnings to fixed charges(2)........ 0.95 1.11 1.25 1.36 1.28 US GAAP(1) Ratio of earnings to fixed charges(3)........ 0.80 1.14 1.16
- ------------ 1. The ratio is provided using both IAS and US GAAP values, as the ratio is materially different between the two accounting standards. No US GAAP information is provided for 31 December 1997 and 30 June 1999 as a U.S. GAAP reconciliation was not required for those periods. 2. The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1997 of CHF 851 million is due to restructuring charges of CHF 7,000 million charged in that period. Without that charge the ratio would have been 1.36. 3. The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 of CHF 5,319 million is due to restructuring charges of CHF 3,982 million under US GAAP, as well as CHF 1,706 million of pre-tax losses from significant financial events (gain on sale of BSI, provision for WWII litigation, and trading losses on LTCM and GED) charged for that period. Without those charges the ratio would have been 1.01. 11 13 - -------------------------------------------------------------------------------- Risk Factors You should carefully consider the following information, together with the other information contained in this prospectus, before purchasing any trust preferred securities in this offering. YOU MAY NOT RECEIVE DIVIDENDS IF UBS AG'S FINANCIAL CONDITION WERE TO DETERIORATE. If UBS AG's financial condition were to deteriorate, UBS Preferred Funding Company and the holders of trust preferred securities could suffer direct and materially adverse consequences, including elimination or reduction of noncumulative dividends on the company preferred securities (and consequently elimination or reduction of the pass through of such dividends as distributions on the trust preferred securities) and, if UBS AG were liquidated (whether voluntarily or involuntarily), loss by the holders of trust preferred securities of their entire investment. YOU MAY NOT RECEIVE DIVIDENDS BECAUSE UBS PREFERRED FUNDING COMPANY WILL BE PROHIBITED FROM PAYING DIVIDENDS ON THE COMPANY PREFERRED SECURITIES UNDER CERTAIN CIRCUMSTANCES AND WILL HAVE DISCRETION AS TO WHETHER TO PAY DIVIDENDS ON THE COMPANY PREFERRED SECURITIES IN OTHER CIRCUMSTANCES. If on a dividend payment date UBS AG is not in compliance with the Swiss Federal Banking Commission's capital adequacy requirements applicable to UBS AG, UBS Preferred Funding Company will not pay dividends under any circumstances (including whether or not funds subsequently become available), even if a full or proportional dividend is otherwise mandatory. For a discussion of UBS's capital resources relative to applicable guidelines, see "UBS--Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Resources." UBS Preferred Funding Company will not pay dividends exceeding UBS AG's available distributable profits, except for mandatory dividends. Except when payment of full or proportional dividends is mandatory or dividends are prohibited by a capital limitation or prohibited or restricted because UBS AG does not have available distributable profits, dividends on the company preferred securities are payable at the discretion of UBS AG and noncumulative. If discretionary dividends on the company preferred securities for any dividend period are not paid, UBS Preferred Funding Trust, as holder of company preferred securities (and, accordingly, investors in the trust preferred securities), will not be entitled to receive dividends whether or not funds are or subsequently become available. YOU SHOULD NOT RELY UPON RECEIVING DIVIDENDS THAT ARE NOT MANDATORY BECAUSE UBS AG MAY ELECT TO SHIFT THE DIVIDEND PREFERENCE FROM THE COMPANY PREFERRED SECURITIES TO THE COMPANY COMMON SECURITIES EXCEPT TO THE EXTENT OF FULL OR PROPORTIONAL MANDATORY DIVIDENDS. UBS Preferred Funding Company's Amended and Restated Limited Liability Company Agreement, which we sometimes refer to as its LLC Agreement, will provide that, except to the extent of full or proportional mandatory dividends, the dividend preference of the company preferred securities may at UBS AG's option shift to the company common securities on any dividend payment date. As a result, the corresponding interest payment received by UBS Preferred Funding Company on the subordinated notes or other eligible investments may be returned as dividends to UBS AG, as holder of company common securities, before any dividends are paid on the company preferred securities. - -------------------------------------------------------------------------------- 12 14 RISK FACTORS - -------------------------------------------------------------------------------- UBS AG IS NOT OBLIGATED TO MAKE PAYMENTS UNDER THE UBS AG SUBORDINATED GUARANTEE UNLESS IT FIRST MAKES OTHER REQUIRED PAYMENTS. UBS AG's obligations under the UBS AG subordinated guarantee are unsecured and rank subordinate and junior in right of payment to all of UBS AG's other liabilities, except for liabilities that rank equally with the UBS AG subordinated guarantee. This means that if UBS AG fails to pay any liability that is senior to the UBS AG subordinated guarantee, it may not make payments on the UBS AG subordinated guarantee. As of 30 June 2000, UBS AG had CHF 509 billion of other debt obligations that are senior to UBS AG's obligations under the UBS AG subordinated guarantee. Also, if UBS AG is bankrupt or liquidates or dissolves, UBS AG or its trustee will use assets of UBS AG to satisfy all liabilities ranking senior to the UBS AG subordinated guarantee before making payments on the UBS AG subordinated guarantee. Parity obligations will share equally in payment with the UBS AG subordinated guarantee if UBS AG does not have sufficient funds to make full payments on all of them. The entitlement of the holders of company preferred securities under the UBS AG subordinated guarantee in a liquidation of UBS AG will be substantially the same as, and no greater than, the claim such holders would have been entitled to if they had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. UBS PREFERRED FUNDING TRUST MAY REDEEM THE TRUST PREFERRED SECURITIES IF CERTAIN ADVERSE CONSEQUENCES OCCUR AS A RESULT OF THE APPLICATION OF SWISS OR U.S. REGULATIONS OR TAX OR INVESTMENT COMPANY LAW AND CERTAIN CONDITIONS ARE SATISFIED. If certain consequences occur, which are more fully described below in this prospectus, as a result of application of Swiss or U.S. regulations or tax or investment company law and certain other conditions that are more fully described below are satisfied, UBS Preferred Funding Company could redeem the company preferred securities before the dividend payment date in October 2010. If the company preferred securities are redeemed, UBS Preferred Funding Trust will redeem the trust preferred securities. The redemption price is described below under "Description of Company Preferred Securities--Redemption." You may be unable to reinvest the proceeds of a redemption at a yield comparable to the yield you are receiving on the trust preferred securities. YOU COULD SUFFER ADVERSE TAX AND LIQUIDITY CONSEQUENCES IF UBS AG LIQUIDATES UBS PREFERRED FUNDING TRUST AND DISTRIBUTES THE COMPANY PREFERRED SECURITIES TO YOU. UBS AG has the right to liquidate UBS Preferred Funding Trust in some circumstances. If UBS AG exercises this right, the company preferred securities will be distributed to you in an amount corresponding to the amount of trust preferred securities you hold. If the company trust preferred securities are distributed to you: - - you will receive reports of your income in respect of the company preferred securities on Schedule K-1, - - the company preferred securities will be in definitive certificated form and will not be eligible for trading through DTC, Euroclear or Clearstream, - - the trading value of the company preferred securities you receive may be lower than the trading value of the trust preferred securities, and, as a result, you may receive a lower return upon the sale of the company preferred securities, and - - you may incur an additional tax liability in excess of what you originally contemplated. Under current U.S. federal income tax law, a distribution of company preferred securities to you on the dissolution of UBS Preferred Funding Trust should not be a taxable event to you. However, if UBS - -------------------------------------------------------------------------------- 13 15 RISK FACTORS - -------------------------------------------------------------------------------- Preferred Funding Trust is characterized for U.S. federal income tax purposes as an association taxable as a corporation at the time it is dissolved or if there is a change in law, the distribution of company preferred securities may be a taxable event to you. YOU MAY NOT RECEIVE DISTRIBUTIONS OR REDEMPTION PAYMENTS IF THE SWISS FEDERAL BANKING COMMISSION RESTRICTS THE OPERATIONS OF UBS PREFERRED FUNDING COMPANY. The Swiss Federal Banking Commission could make determinations in the future with respect to UBS AG that could adversely affect UBS Preferred Funding Company's ability to make distributions to the holders of company preferred securities or to redeem the company preferred securities. For example, the Swiss Federal Banking Commission could impose regulatory capital requirements that cause, or otherwise request or instruct UBS AG to cause, UBS Preferred Funding Company not to pay dividends on or redeem the company preferred securities at times when UBS Preferred Funding Company otherwise is entitled to do so. BECAUSE YOU HAVE LIMITED VOTING RIGHTS AND UBS AG IS INVOLVED IN VIRTUALLY EVERY ASPECT OF UBS PREFERRED FUNDING COMPANY'S EXISTENCE, YOU COULD SUFFER ADVERSE CONSEQUENCES FROM UBS PREFERRED FUNDING COMPANY ACTING CONTRARY TO YOUR INTERESTS. The company preferred securities will be non-voting, expect in the limited cases described under "Description of Company Preferred Securities--Voting Rights." UBS AG is involved in virtually every aspect of UBS Preferred Funding Company's existence. UBS AG will be the sole holder of the company common securities. As holder of all outstanding company common securities, UBS AG will have the right to elect all directors of UBS Preferred Funding Company except for the situation where the holders of company preferred securities have the right to elect two directors as described under "Description of Company Preferred Securities--Voting Rights." The initial (and UBS Preferred Funding Company anticipates that all future) directors of UBS Preferred Funding Company will also be directors or employees of UBS AG or its affiliates. Conflicts of interest may arise between the discharge by such individuals of their duties as directors of UBS Preferred Funding Company, on the one hand, and as directors or employees of UBS AG and its affiliates, on the other hand. Decisions with respect to enforcement of the subordinated notes issued by the Cayman Islands Branch of UBS AG and actions to be taken by UBS Preferred Funding Company upon a default by UBS AG under them will be made by the board of directors of UBS Preferred Funding Company by majority vote. There can be no assurance that, under any circumstances, enforcement action will be taken by UBS Preferred Funding Company with respect to a default under the subordinated notes. However, UBS AG's failure to perform its obligations under the subordinated notes will not relieve it of its obligations under the UBS AG subordinated guarantee. See "Description of UBS AG Subordinated Guarantee." UBS AG and its affiliates may have interests which are different from those of UBS Preferred Funding Company. As a result, conflicts of interest may arise with respect to transactions, including UBS Preferred Funding Company's administration of the subordinated notes. UBS Preferred Funding Company and UBS AG intend that any agreements and transactions between UBS Preferred Funding Company, on the one hand, and UBS AG or its affiliates, on the other hand, be established in good faith and, to the extent deemed advisable by UBS AG, reflect arm's-length terms for such types of transactions. The LLC Agreement of UBS Preferred Funding Company requires that certain actions of UBS Preferred Funding Company be approved by the holders of company preferred securities; this requirement is also intended to ensure fair dealings between UBS Preferred Funding Company and UBS AG and its affiliates. However, there can be no assurance that such agreements or - -------------------------------------------------------------------------------- 14 16 RISK FACTORS - -------------------------------------------------------------------------------- transactions will be on terms as favorable to UBS Preferred Funding Company as those that could have been obtained from unaffiliated third parties. WE CANNOT GIVE YOU ANY ASSURANCE AS TO THE MARKET PRICES FOR THE TRUST PREFERRED SECURITIES OR THE COMPANY PREFERRED SECURITIES. We cannot give you any assurance as to the market prices for the trust preferred securities or the company preferred securities because there is no prior market for these securities. In addition, because the trust preferred securities are deeply subordinated securities and payment of dividends on the company preferred securities may be limited by the capital limitation or by lack of sufficient available distributable profits, the market prices of the trust preferred securities or company preferred securities, as applicable, may be more volatile than other securities not having such provisions. Although the underwriters of the trust preferred securities have informed UBS Preferred Funding Company and UBS AG that they intend to make a market in the trust preferred securities, the underwriters are not obligated to do so, and any such market-making activity will be subject to the limits imposed by applicable law and may be interrupted or discontinued at any time. YOU WILL NOT BE ENTITLED TO RECOVER CERTAIN MISSED PAYMENTS BECAUSE OF THE NONCUMULATIVE NATURE OF DIVIDENDS ON THE COMPANY PREFERRED SECURITIES AND RELATED DISTRIBUTIONS ON THE TRUST PREFERRED SECURITIES. If UBS Preferred Funding Company does not make a payment or only makes a partial payment on a dividend payment date as a result of a capital limitation, a lack of available distributable profits or a properly delivered "no dividend instruction," you will not be entitled to recover that missed payment. - -------------------------------------------------------------------------------- 15 17 - -------------------------------------------------------------------------------- Cautionary Note Regarding Forward-looking Information This prospectus contains forward-looking information. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as the information is identified as forward looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. Forward-looking information is indicated by the use of words such as "anticipates," "expects," "believes," "should," "could," "intends," "estimates" and "may," or other comparable language. We identify the following important factors that could cause UBS's actual results to differ materially from any results that might be projected by UBS in forward-looking information. All of these factors are difficult to predict, and many are beyond the control of UBS. Accordingly, although we believe that the assumptions underlying the forward-looking information are reasonable, there can be no assurance that those assumptions will approximate actual experience. The important factors include, among others, the following: - - general economic conditions, including prevailing interest rates and performance of financial markets, which may affect UBS's ability to sell its products, - - the market value of UBS's investments, - - UBS's and PaineWebber's ability to consummate their merger on the anticipated schedule, including their ability to achieve anticipated cost savings and efficiencies, to integrate their sales and distribution channels in a timely manner and to retain their key employees, - - changes in federal tax laws, which could adversely affect the tax advantages of certain of UBS's products and subject it to increased taxation, - - industry consolidation and competition, - - changes affecting the banking industry generally and UBS AG's banking operations specifically, including asset quality, - - increasing levels of competition in emerging markets and general competitive factors, locally, nationally, regionally and globally, and - - changes in currency exchange rates, including the exchange rate for the Swiss franc into U.S. dollars. You should also consider other risks and uncertainties discussed in documents filed by UBS with the SEC, including UBS's most recent Annual Report on Form 20-F for the fiscal year ended 31 December 1999. We have no obligation to update forward-looking information to reflect actual results. - -------------------------------------------------------------------------------- 16 18 - -------------------------------------------------------------------------------- UBS DESCRIPTION OF BUSINESS Mission The UBS mission is to: - provide clients with superior value-added investment services; - provide above average rewards to shareholders; - be an employer of choice; and - be a good corporate citizen. Overview UBS is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and UBS's Corporate Center. The business groups are: - UBS Switzerland; - UBS Warburg; and - UBS Asset Management. The philosophy of UBS's business model is that each of the business groups holds primary responsibility for managing relationships with well-defined client segments, while ensuring appropriate access to the products and services of the entire Group. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. Individuals include high net worth individuals, affluent clients and retail customers. UBS provides its clients with a broad range of products and services. These include: - wealth management services; - investment funds; - corporate advisory (mergers and acquisitions) services; - equity and debt underwriting; - securities and financial market research; - securities and derivatives sales and trading; - structured risk management; - retail, commercial and transaction banking in Switzerland; - asset management; and - private equity funds. Each of the business groups is one of the leaders in its field. UBS has the world's largest private banking business and is a leading global asset manager, as measured by assets under management. UBS Warburg is among the leading corporate and institutional investment banks, and it is differentiated by its European roots. UBS is the leading retail and commercial bank in Switzerland. - -------------------------------------------------------------------------------- 17 19 UBS - -------------------------------------------------------------------------------- UBS's Corporate Center encompasses Group level functions that cannot be delegated to the business groups. All of UBS's business groups work together in an integrated investment services firm. UBS believes this allows it to provide several types of services to its clients, resulting in additional profits. Examples of inter-group synergies include: - - UBS Warburg provides research, securities brokerage and foreign exchange execution services to clients of UBS Switzerland. - - UBS Switzerland and UBS Warburg banking clients also have the opportunity to invest in UBS Capital and UBS Asset Management funds. - - UBS Asset Management researches and recommends the asset allocation strategies employed by UBS Warburg and UBS Switzerland, in particular with respect to investment funds. - - Technology and premises infrastructure, operations and other support services are generally shared between all business groups in a given country, especially in Switzerland. Set forth below is summary information relating to UBS.
FOR THE SIX MONTHS FOR THE YEAR ENDED ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions, except per share data) - ---------------------------------------------------------------------------------------------- Operating income................................. 18,557 15,102 28,425 22,247 Operating expenses............................... 12,997 10,071 20,532 18,376 ------- ------ ------- ------- Operating profit before tax and minority interests...................................... 5,560 5,031 7,893 3,871 ------- ------ ------- ------- Net profit....................................... 4,268 3,859 6,153 2,972 ======= ====== ======= ======= Basic earnings per share......................... 10.91 9.38 15.20 7.33 ======= ====== ======= ======= (at period end) Total assets..................................... 946,307 898,888 861,282.. Shareholders' equity............................. 31,876 30,608 28,794 Assets under management (CHF billion)(2)......... 1,711 1,744 1,572
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. (2) Assets under management is defined as third-party on- and off-balance sheet assets for which UBS has investment responsibility, as well as deposits and current accounts. This includes discretionary assets (deposited with UBS or externally), where UBS has a mandate to invest and manage the assets, as well as advisory assets. The major product categories of assets under management are mutual funds, securities (bonds and equities) and deposit and current accounts. UBS's financial stability stems from the fact that it is one of the most well capitalized banks in the world. UBS believes that this financial strength is a key part of the value proposition offered to both clients and investors. The long-term credit ratings assigned to UBS by rating agencies are set out below.
AT AT AT 30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 - ------------------------------------------------------------------------------------- Moody's, New York................ Aa1 Aa1 Aa1 Fitch/IBCA, London............... AAA AAA AAA Standard & Poor's, New York...... AA+ AA+ AA+ Thomson BankWatch, New York...... AA AA AA
- -------------------------------------------------------------------------------- 18 20 UBS - -------------------------------------------------------------------------------- Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of such rating may be obtained only from such rating agency. There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency, if in such rating agency's judgment, circumstances so warrant. Moody's announced on 28 April 2000 that it had changed its outlook for its long-term rating of UBS AG from stable to negative. Strategy UBS seeks to grow the profitability and enhance the efficiency of all of its businesses, while continuously improving the provision of products and services to its clients. UBS will build its franchise either through investments in internal growth or, where appropriate, through selected acquisitions, such as the merger with PaineWebber. UBS believes that its business model and its recent history of embracing and managing change will enable flexible responses to the rapid and unpredictable changes taking place in the financial services industry. In order to maintain an edge in the highly competitive markets in which UBS operates, UBS will continue to make ongoing investments in top quality staff and technology. In addition to the delivery of products and services through traditional channels, UBS is strengthening its e-commerce initiatives. UBS's business groups are well advanced in formulating and implementing their e-commerce strategies. - - UBS Switzerland will invest CHF 90-100 million annually over the next few years to extend its electronic banking and mobile phone banking initiatives. Since April 2000, a single unit has been responsible for handling all the business group's e-banking activities with its primary goal being to bring personalized service to private clients. A further goal is to expand relationships with active online clients, strengthening cross-selling in the process. - - UBS Warburg has launched its web-based business-to-business solution, Investment Banking On-Line or "IBOL". From the IBOL homepage, corporate and institutional clients can access services and content electronically and link to execution capabilities across all product areas. Background On 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation merged to form UBS. Union Bank of Switzerland was created by the merger of two Swiss regional banks in 1912; these two Swiss regional banks can trace their history back to 1862 and 1863. Swiss Bank Corporation was incorporated in Basel in 1872 and its history can be traced back to the creation of "Bankverein" from six private banking houses in 1854. Prior to the 1998 merger, Union Bank of Switzerland developed primarily through internal growth, although it made certain significant acquisitions such as Phillips & Drew in 1985. Swiss Bank Corporation expanded mainly through acquisitions. These included the acquisitions of: - - O'Connor & Associates, a group of affiliated firms specializing in the trading of options and other derivative instruments (1992); - - Brinson Partners, a leading institutional investment management firm in terms of assets under management (1995); - - the investment banking operating subsidiaries of S.G. Warburg Group p.l.c. (1995); and - - Dillon Read & Co., Inc., a United States-based investment bank (1997). - -------------------------------------------------------------------------------- 19 21 UBS - -------------------------------------------------------------------------------- The integration of Union Bank of Switzerland and Swiss Bank Corporation was largely completed within one year, despite the additional challenges presented by preparation for the Year 2000 and the introduction of the euro. Merger with Paine Webber On 12 July 2000, UBS announced that it had entered into a definitive merger agreement with Paine Webber Group Inc. UBS will offer to purchase all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $10.8 billion (based on the UBS share price on 12 July 2000). The transaction is subject to shareholder and regulatory approvals and other conditions and is expected to be completed in the fourth quarter of 2000. PaineWebber is one of the largest full-service securities and commodities firms in the United States. Founded in 1879, PaineWebber employs approximately 23,175 people in 385 offices worldwide. PaineWebber offers a wide variety of products and services, consisting of those of a full service broker-dealer to primarily a domestic market, through its two operating segments: Individual and Institutional. The Individual segment offers brokerage services and products, asset management and other investment advisory and portfolio management products and services, and execution and clearing services for transactions originated by individual investors. The Institutional segment principally includes capital markets products and services such as securities dealer activities and investment banking. Business and Management Structure Prior to the 1998 merger, Union Bank of Switzerland operated four strategic business segments: - - private banking and institutional asset management; - - corporate and institutional finance; - - trading, sales and risk management services; and - - retail banking. Swiss Bank Corporation also operated in four divisions prior to the 1998 merger: - - SBC Private Banking; - - SBC Warburg Dillon Read (investment banking); - - SBC Switzerland (corporate and retail banking); and - - SBC Brinson (investment management). The combined entity following the 1998 merger initially had the following five operating divisions and the Corporate Center: - - UBS Private Banking; - - Warburg Dillon Read; - - UBS Private and Corporate Clients; - - UBS Brinson, which was renamed UBS Asset Management; and - - UBS Private Equity. - -------------------------------------------------------------------------------- 20 22 UBS - -------------------------------------------------------------------------------- On 18 February 2000, UBS regrouped its businesses into the following three main business groups to align itself as closely as possible to client needs. - - UBS Switzerland, which is now composed of two business units: - Private and Corporate Clients: Swiss retail and commercial banking. - Private Banking: private banking services offered to all Swiss and international high net worth clients who bank in Switzerland or offshore centers. - - UBS Asset Management, which now includes: - Institutional Asset Management: Brinson Partners and Phillips & Drew business areas, which are now integrated to form a single global investment platform. - Investment Funds/GAM: The Investment Funds and Global Asset Management, or GAM, business areas, transferred from UBS Private Banking. - - UBS Warburg, which is now comprised of four business units: - Corporate and Institutional Clients: securities and investment banking products and services for institutional and corporate clients. This includes the Corporate Finance, Equities, Fixed Income and Treasury Products businesses. - UBS Capital: investment of UBS and third-party funds in a diverse range of private, and occasionally public, companies on a global basis. - Private Clients: UBS's onshore private banking services for high net worth individuals worldwide, outside of Switzerland. - e-services: personalized investment and advisory services at competitive fees for affluent clients in Europe, delivered via a multi-channel structure that integrates internet, call centers and investment centers. UBS's board of directors, which consists exclusively of non-executive directors in accordance with Swiss Banking Law, has the ultimate responsibility for the strategic direction of UBS's business and the supervision and control of executive management. The Group Executive Board, which is UBS's most senior executive body, assumes overall responsibility for the development of UBS's strategies and its implementation and results. The Chief Executive Officer of each business group is a member of the Group Executive Board and is responsible and accountable for the results of the business group as a whole. However, when the new business group structure was introduced, UBS committed to continue to provide summary financial and management information about the business units, in order to maintain transparency in its affairs and allow shareholders to make meaningful comparisons to the performance of the Group under its previous structure. Therefore, the discussion in this section describes the business groups mainly in terms of their constituent business units. In the remainder of this section, the discussion will be divided into the three business groups and their constituent business units, as they exist now, not the five divisions as they existed on 31 December 1999. - -------------------------------------------------------------------------------- 21 23 UBS - -------------------------------------------------------------------------------- UBS Switzerland The UBS Switzerland business group is made up of two business units: - - Private and Corporate Clients -- The leading retail and commercial bank in Switzerland. - - Private Banking -- Covers all Swiss and international high net worth clients who bank in Switzerland or offshore centers. The onshore Private Clients business, formerly part of Private Banking, is now managed within the UBS Warburg business group. UBS Switzerland is the leading Swiss bank for individual and corporate clients and a premier Swiss private banking institution. UBS Switzerland offers a continuum of services to all Swiss-based clients. It benefits from an integrated infrastructure and the opportunity for shared distribution via its developing multi-channel architecture. To drive forward its e-commerce vision and strategy, UBS Switzerland has created a single business area called "e-Channels and Products" to lead all its e-banking activities. The new business area will be responsible for all electronic channels and products as well as associated service and support centers and will oversee all e-banking functions of UBS Switzerland. Its costs are shared between Private Banking and Private and Corporate Clients, based on service level agreements. Private and Corporate Clients. The Private and Corporate Clients business unit of UBS Switzerland is the leading retail bank in Switzerland and targets individual clients with assets of up to approximately CHF 1 million as well as business and corporate clients in Switzerland. At 30 June 2000, this business unit had about CHF 439 billion in assets under management and a loan portfolio of approximately CHF 163 billion. Private and Corporate Clients employs over 22,000 people in its headquarters in Zurich and its offices throughout Switzerland. Set forth below is summary information, based on management accounting data, relating to the Private and Corporate Clients business unit, which is discussed in greater detail under "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations by Business Unit--UBS Switzerland--Private and Corporate Clients."
FOR THE FOR THE SIX MONTHS YEAR ENDED ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ----------------------------------------------------------------------------------- Operating income before credit loss expense................................ 3,803 3,599 7,193 7,025 Credit loss expense...................... 412 554 1,050 1,170 Personnel, general and administrative expenses............................... 2,154 2,224 4,486 4,263 Depreciation and amortization............ 219 200 386 684 ------- ------- ------- ------- Operating profit before tax.............. 1,018 621 1,271 908 ======= ======= ======= ======= Average regulatory equity used........... 8,850 8,400 8,550 8,250 (at period end) Assets under management (CHF in billions).............................. 439 443 439 434 Numbers of employees..................... 22,270 24,186 24,098 24,043 Total loans.............................. 162,752 167,004 164,743 164,840
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. - -------------------------------------------------------------------------------- 22 24 UBS - -------------------------------------------------------------------------------- Organizational Structure. Private and Corporate Clients operates four main business areas: - - Individual Clients -- This business area includes over 4,000,000 client accounts, of which over 25% are client accounts that relate to clients with assets over CHF 50,000. - - Corporate Clients -- This business area focuses on Swiss corporate clients and includes 160 top corporations, over 7,500 large corporate clients and 180,000 small- and medium-sized businesses. - - Operations -- In addition to providing operational support to the retail banking business and other Swiss-based UBS units, this business area provides payment and custodial services to approximately 1,800 banking institutions throughout the world. - - Risk Transformation and Capital Management -- This business area has responsibility for clients with impaired or non-performing loans and manages the risk in Private and Corporate Clients' loan portfolio. It is also responsible for optimizing capital utilization. Private and Corporate Clients also includes the Resources business area, which provides real estate, marketing, personnel and administrative services to Private and Corporate Clients and the other UBS business units in Switzerland, particularly Private Banking, and the Information Technology business area, which provides information technology services to Private and Corporate Clients and the other Swiss-based UBS offices, again with Private Banking as the main recipient. Profit Enhancement Initiatives. The domestic retail banking sector in Switzerland has historically been a high-cost, low-return business. In order to further enhance the profitability of the retail business and to exploit the synergies after the 1998 merger, UBS has developed and commenced a number of initiatives that are intended to reduce the costs and increase the revenues of this business unit. These include: - - The further development and enhancement of alternative distribution channels, including: - UBS e-banking, on-line internet and teletext banking, and telephone banking. - UBS Multimat and UBS Bancomat Plus, which together offer a direct electronic link to the customer's account and to a full range of traditional ATM services, including accepting cash deposits, and permits additional functions, such as the set-up and maintenance of payment and standing orders. - Increasing revenue principally through improvements in pricing, increased focus on higher yielding investment products and fee-based businesses, and improvements in the distribution of UBS's products, including implementing risk-adjusted pricing in its new and maturing loan business and by expanding its e-banking services. - Reducing costs by continuing to close branches. Since the 1998 merger, UBS has closed 200 branches, or 36%, still leaving UBS with more branches than either predecessor institution. - Increasing the efficiency and productivity of Private and Corporate Clients' processes by standardizing its products and taking advantage of automation and other technological developments. Clients. Private and Corporate Clients has a diverse client base, ranging from individual clients to corporate clients and international banking institutions. Private and Corporate Clients provides a broad range of products and services to these clients, including retail banking, investment services and lending. UBS believes that clients choose Private and Corporate Clients primarily based on UBS's leading position as a bank and an asset manager in Switzerland, its broad distribution network and its ability to provide a comprehensive range of financial products and services. Based on market surveys, over 96% of the Swiss market readily recognizes the UBS brand, which has a long history and is well established in Switzerland. - -------------------------------------------------------------------------------- 23 25 UBS - -------------------------------------------------------------------------------- The table below sets forth assets under management attributable to each of Private and Corporate Client's main client areas at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 ASSETS UNDER MANAGEMENT (CHF in billions) - ------------------------------------------------------------------------------------------ Individual Clients.................. 221 223 229 Corporate Clients................... 213 212 178 Banks............................... 5 4 27 ------------ ---------------- ---------------- Total............................. 439 439 434 ============ ================ ================
Client/Product Initiatives. Rapid growth of technology has made available a number of alternative distribution channels. UBS has offered telebanking since 1985 and, based upon its market research, UBS has the leading position in the Swiss telebanking market, initiating in excess of one-half of all telebanking transactions in Switzerland during 1998. Since 1997, UBS has expanded its product offerings and taken steps to market additional services to its client base. Key initiatives include: - - The launch of UBS Tradepac, an expanded all-inclusive internet-based offering aimed at serving the on-line trading needs of UBS's customers and providing access to six international exchanges. As part of UBS Tradepac, UBS has established a partnership with Intuit Inc. that has permitted it to introduce UBS Quicken, a specially adapted version of the Quicken software that includes enhanced financial management functions and adds to the attractiveness of its product offering. - - The launch of UBS's small- and medium-sized business enterprises initiative, which is intended to respond to the lack of risk capital for small business enterprises. Investment Services. UBS's investment services for Private and Corporate Clients are a collaborative effort among: - - UBS Asset Management, which manages the UBS mutual fund portfolio and determines the investment strategy for, delivers monthly tactical asset allocations to, and manages discretionary mandates of, Private and Corporate Clients' institutional clients. - - UBS Warburg, which provides research and access to the securities exchanges. - - UBS Switzerland, which actively markets and distributes investment products to its clients after making the appropriate revisions to take into account the needs of those clients. The principal result is a full range of investment options to offer UBS's clients including those of Private and Corporate Clients. The following table illustrates Private and Corporate Clients' assets under management by asset class at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in billions) - ------------------------------------------------------------------------------------------ Deposit and current accounts........ 125 129 153 Securities accounts................. 314 310 281 ------------ ---------------- ---------------- Total............................. 439 439 434 ============ ================ ================
- -------------------------------------------------------------------------------- 24 26 UBS - -------------------------------------------------------------------------------- Loan Portfolio. The following table shows the loan portfolio, before all allowances, in Private and Corporate Clients, broken down by Private and Corporate Clients' main business areas at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in billions) - ------------------------------------------------------------------------------------------ Individual Clients.................. 77 76 90 Corporate Clients................... 68 68 49 Recovery Portfolio.................. 18 21 26 ------------ ---------------- ---------------- Total............................. 163 165 165 ============ ================ ================
The following table shows the loan portfolio in Private and Corporate Clients, broken down by loan category at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in billions) - ------------------------------------------------------------------------------------------ Fixed rate mortgages................ 79 81 80 Commercial credits.................. 40 44 44 Variable rate mortgages............. 28 30 36 Other............................... 16 10 5 ---- ---- ---- Total............................. 163 165 165 ---- ---- ---- ---- ---- ----
At 30 June 2000, about CHF 107 billion (or 66%) of the CHF 163 billion loan portfolio in Private and Corporate Clients related to mortgages, of which approximately 81% were secured by residential real estate. A discussion of UBS's loan portfolio classified by industry is included under "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Selected Statistical Information--Loans." Private and Corporate Clients' impaired loans, which include non-performing loans, are transferred to the Risk Transformation and Capital Management business area to be managed by UBS's Recovery Group, which specializes in working-out or otherwise recovering the value of those loans. At 30 June 2000, Private and Corporate Clients' loan portfolio included approximately a CHF 18 billion recovery portfolio. Approximately CHF 16 billion of Private and Corporate Clients' 30 June 2000 recovery portfolio was impaired and related to provisional positions and positions stemming back to weakness in the Swiss commercial real estate markets during the 1990s. A provision of CHF 10.4 billion has been established against the portion of impaired loans not secured by collateral or otherwise deemed uncollectible. Approximately CHF 2 billion of UBS's 30 June 2000 recovery portfolio is performing and unimpaired. The unimpaired loans included in UBS's recovery portfolio are outstanding with counterparties for whom other loans have become impaired. No provisions have been established against these loans. UBS's lending officers actively manage the recovery portfolio, seeking to restructure the lending relationship with a goal of removing the loan from the recovery portfolio. The following table describes the development in UBS's recovery portfolio from 1 January 1998 to 30 June 2000. - -------------------------------------------------------------------------------- 25 27 UBS - --------------------------------------------------------------------------------
(CHF in billions) - --------------------------------------------------------------------------------- Balance, 1 January 1998..................................... 29 Changes in 1998: New recovery loans added.................................. 7 Settlements of outstanding recovery loans................. (10) --- Balance, 31 December 1998................................... 26 Changes in 1999: New recovery loans added.................................. 5 Settlements of outstanding recovery loans................. (10) --- Balance, 31 December 1999................................... 21 Changes in 2000: New recovery loans added.................................. 1 Settlements of outstanding recovery loans................. (4) --- Balance, 30 June 2000....................................... 18 ===
Approximately 60% of the loans that were originally included in UBS's recovery portfolio in 1997 have been worked out and removed. See "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Analysis of Risks--Credit Risk" for a further description of UBS's process for credit risk management and control and a discussion of impaired and non-performing loans. Private and Corporate Clients' continued implementation of "risk-adjusted pricing," which differentiates loan pricing based on risk profiles, has led to improved margins on UBS's lending portfolio and has resulted in more effective use of UBS's capital. For a discussion of UBS's credit approval process and how UBS manages interest rate risk, see "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Interest Rate Management." The credit approval activities of Private and Corporate Clients are the responsibility of the business area, coordinated by a separate chief credit officer who is accountable to the Chief Credit Officer, or "CCO." Generally, loans are approved by a credit officer who does not participate in the client relationship, but works with the lending officer to establish a set of lending criteria that are applicable to the risk profile rating of the borrower. The exception is for certain high-risk lending relationships, in which case the credit officer directly corresponds with the borrower. Private and Corporate Clients' chief credit officer reviews the business area's loans on a periodic basis (annually for most loans and at least quarterly for high-risk loans) to confirm the ratings. The CCO further coordinates Private and Corporate Clients' lending activities and credit exposure with the lending activities and credit exposure of UBS Warburg and the remainder of UBS Switzerland. Private Banking. UBS is one of the leading international private banks, as measured by assets under management. At 30 June 2000, Private Banking had CHF 683 billion in assets under management. Private Banking serves high net worth individuals with a broad range of comprehensive wealth management services and financial products. Private Banking's approach is to focus on establishing long-term client relationships and emphasizing the life-time value of these relationships. The private banking industry is in the process of undergoing some fundamental changes resulting from the changing profile of high net worth individuals, emerging technologies and increased competition. Clients are increasingly taking a more active role in managing their wealth and are demanding more sophisticated products and a broader geographic range of services. They are focused on asset - -------------------------------------------------------------------------------- 26 28 UBS - -------------------------------------------------------------------------------- performance and allocation, quality of information and advice and extended availability of services, such as 24-hour, remote and internet access. The private banking industry is also experiencing an increase in the wealth that remains in onshore markets, particularly in the form of equity and equity-linked investments, as domestic capital markets become more developed and generate higher returns. To address this changing environment, Private Banking is seeking to further penetrate its existing client base with enhanced wealth management solutions. Private Banking's size provides it with the flexibility to offer its clients customized and expanded service offerings tailored to their particular needs. To further increase its assets under management in its private banking business, UBS will also continue to consider select acquisition opportunities that may arise, as evidenced by the acquisition in 1999 of Bank of America's international private banking activities. Set forth below is summary information, based on management accounting data, relating to the Private Banking business unit of UBS Switzerland, which is discussed in greater detail under "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations by Business Unit--UBS Switzerland--Private Banking."
FOR THE SIX FOR THE MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999 1999 1998 (CHF in millions) - -------------------------------------------------------------------------------------------- Operating income before credit loss expense............... 3,471 2,728 5,568 6,933 Credit loss expense....................................... 11 6 21 16 Personnel, general and administrative expenses............ 1,425 1,147 2,513 2,411 Depreciation and amortization............................. 55 38 97 91 ----- ----- ----- ----- Operating profit before tax............................... 1,980 1,537 2,937 4,415 ===== ===== ===== ===== (at period end) Assets under management (CHF in billions)................. 683 630 671 579 Number of employees....................................... 7,447 6,697 7,256 6,546
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Marketing and Distribution. Private Banking provides wealth management services to its clients in a number of geographic regions and seeks to tailor its service offerings to meet the specific needs of particular client segments and markets. To better understand the needs of its existing and prospective clients, Private Banking differentiates its clients by geographic location and the amount of assets under management and then based on their product needs and utilization and service requirements. The client advisors who serve Private Banking's clients are principally organized by client market, which allows them a higher level of client focus. Private Banking believes that this approach fosters valued long-term client relationships. Private Banking's client advisors retain primary responsibility for introducing products and services to its existing and prospective private banking clients. The business areas that deal directly with clients are generally responsible for their own marketing activities. The client advisors are central to the delivery of services to Private Banking's clients and are responsible for increasing the penetration of Private Banking service offerings within its existing customer base. The client advisors are supported by a separate marketing department, which is responsible for market research and the preparation of standardized marketing materials. Products and Services. Private Banking provides a number of asset-based, transaction-based and other services to its clients. Asset-based services include custodial services, deposit accounts, loans and - -------------------------------------------------------------------------------- 27 29 UBS - -------------------------------------------------------------------------------- fiduciary services while transaction-based services include trading and brokerage and investment fund services. Private Banking also provides financial planning and consulting and offers financial planning instruments to its clients. These services include establishing proprietary trusts and foundations, the execution of wills, corporate and personal tax structuring and tax efficient investments. Private Banking has the following three core product and service business areas: - Financial Planning and Wealth Management -- Responsible for developing integrated comprehensive wealth management services in the form of tax and estate planning, liquidity and retirement lifestyle planning, insurance products, art and real estate advisory services and a variety of sophisticated capital enhancement and asset protection strategies. - Portfolio Management -- Responsible for providing portfolio management services to Private Banking clients and for the investment clients of Private and Corporate Clients. - Active Advisory Team -- Provides sales brokerage, investment advisory services and products to key private banking locations worldwide. The Active Advisory Team provides information concerning, and facilitates investments in, primary initial public offerings and secondary placements. This team also provides fiduciary services and the execution of private banking orders outside Switzerland. At 30 June 2000, slightly more than one-fifth of Private Banking's assets under management were managed on a discretionary basis. The remaining assets under management related to advisory engagements. The following table shows information concerning assets under management by type of engagement and asset class in Private Banking at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - ------------------------------------------------------------------------------------------ TYPE OF ENGAGEMENT Advisory............................ 533,000 501,000 437,000 Discretionary....................... 150,000 170,000 142,000 ------------ ---------------- ---------------- Total............................. 683,000 671,000 579,000] ============ ================ ================ ASSET CLASS Deposit and current accounts........ 59,000 59,000 50,000 Equities............................ 199,000 196,000 148,000 Bonds............................... 194,000 187,000 187,000 Investment Funds.................... 106,000 119,000 93,000 Other(1)............................ 125,000 110,000 101,000 ------------ ---------------- ---------------- Total............................. 683,000 671,000 579,000 ============ ================ ================
- --------------- (1) Includes money market instruments, UBS medium-term notes, derivatives, mutual funds not managed by UBS and precious metals. - -------------------------------------------------------------------------------- 28 30 UBS - -------------------------------------------------------------------------------- UBS Asset Management UBS Asset Management brings together UBS's asset management activities. It consists of two business units: - Institutional Asset Management -- One of the largest institutional asset managers in the world. - Investment Funds/GAM -- Investment Funds is one of the leading funds providers in Europe and the seventh largest in the world. GAM is a diversified asset management group with assets composed primarily of private client accounts, institutional and mutual funds. UBS Asset Management benefits from an integrated business model and single management team. Institutional Asset Management. Based on assets under management, Institutional Asset Management is one of the largest institutional asset managers in the world and among the industry leaders in the United States, the United Kingdom and Switzerland. At 30 June 2000, Institutional Asset Management had over CHF 525 billion in assets under management, including CHF 326 billion of institutional assets and CHF 199 billion of non-institutional assets, including the UBS Investment Funds offered by the Investment Funds business area of the Investment Funds/GAM business unit, which are managed by Institutional Asset Management. Institutional Asset Management is headquartered in Chicago and has offices in Dallas/Houston, Frankfurt, Geneva, Hartford, Hong Kong, London, Melbourne, New York, Paris, Rio de Janeiro, San Francisco, Singapore, Sydney, Tokyo and Zurich. Institutional Asset Management markets its services under the UBS Asset Management name, with Brinson Partners and Phillips & Drew serving as sub-brands within the Americas and the United Kingdom, respectively. Institutional Asset Management believes that its broad geographic spread of operations and strong brand names will help it pursue growth opportunities in Continental Europe, Asia-Pacific and Latin America and maintain its strong positions in the mature markets it serves in the United States, the United Kingdom and Switzerland. Set forth below is summary information, based on management accounting data, relating to Institutional Asset Management, which is discussed in greater detail under "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations by Business Unit--UBS Asset Management--Institutional Asset Management."
FOR THE FOR THE SIX MONTHS YEAR ENDED ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------------- Operating income.................................. 638 542 1,099 1,163 Personnel, general and administrative expenses.... 402 331 636 619 Depreciation and amortization..................... 98 63 138 107 ----- ----- ----- ----- Operating profit before tax....................... 138 148 325 437 ===== ===== ===== ===== (at period end) Assets under management (CHF in billions)......... 525 563 574 531 Number of employees............................... 1,712 1,507 1,653 1,497
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Organizational Structure. During 1999, Institutional Asset Management implemented a client-centric business model and modified its organizational structure to strengthen local and regional roles. Institutional Asset Management believes that its new organizational structure will improve - -------------------------------------------------------------------------------- 29 31 UBS - -------------------------------------------------------------------------------- accountability for results and the business group's effectiveness and efficiency. At 30 June 2000, Institutional Asset Management's organizational structure consisted of the following business areas: - - Brinson Partners and Phillips & Drew -- These business areas have the mandate to optimize the contribution from the Americas and the United Kingdom, respectively, and to further develop their investment capabilities and to contribute to global business development efforts in Europe and the Asia-Pacific region. - - Europe, Middle East & Africa and Asia Pacific -- These two business areas have a mandate to capture profitable growth opportunities in their assigned geographic markets and to optimize the contribution from existing businesses in these regions. These mandates strengthen the regional accountability for results and resources. At the same time, both regional business areas continue to contribute to the UBS Asset Management global investment process as well as ensure their adaptation to regional client needs where appropriate. - - O'Connor -- Launched at the beginning of June 2000, O'Connor is comprised of part of the proprietary equity trading group of UBS Warburg, as well as the Fund of Funds and Currency Funds businesses of UBS Warburg. O'Connor will focus on alternative investments, or investment strategies designed to provide attractive risk-adjusted returns with a low correlation to traditional investments. - - IT and Operations -- This business area is responsible for implementing and maintaining information technology and delivery platforms for the Institutional Asset Management business unit. Clients. Institutional Asset Management has a diverse institutional client base located throughout Europe, the Middle East, Africa, the Asia-Pacific region and the Americas. Its clients consist of: - - corporate and public pension plans; - - endowments and private foundations; - - insurance companies; - - central banks and supranationals; and - - financial advisers. Externally managed pension assets constitute the majority of worldwide available institutional assets. The pension market is undergoing a shift from traditional defined benefit plans to defined contribution schemes. One of Institutional Asset Management's strategic initiatives is to position itself to take advantage of the opportunities created in this changing environment. The following table shows assets under management broken down between institutional assets and non-institutional assets at 30 June 2000 and 31 December 1999 and 1998. Non-institutional assets include the UBS Investment Funds, which are managed by Institutional Asset Management.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - -------------------------------------------------------------------------------------------------- Institutional............................... 326,000 376,000 360,000 Non-institutional........................... 199,000 198,000 171,000 --------- --------- --------- Total.................................. 525,000 574,000 531,000 --------- --------- --------- --------- --------- ---------
Institutional Asset Management is well represented in the United States, Europe and Australia, and is one of the largest foreign investment managers in Japan. Institutional Asset Management believes this gives it a strong platform to meet the increasingly complex global investment and servicing needs of its major clients, and to expand its presence in growth markets. - -------------------------------------------------------------------------------- 30 32 UBS - -------------------------------------------------------------------------------- The following table shows Institutional Asset Management's institutional assets under management by the geographic location of its clients at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - -------------------------------------------------------------------------------------------------- Europe, Middle East & Africa................ 171,000 185,000 202,000 The Americas................................ 110,000 140,000 122,000 Asia-Pacific................................ 45,000 51,000 36,000 --------- --------- --------- Total.................................. 326,000 376,000 360,000 --------- --------- --------- --------- --------- ---------
Marketing and Distribution. Clients differentiate among institutional asset managers based on client service, investment performance, process and philosophy, fees and continuity of staff. Institutional Asset Management seeks to use its long-term track record and strong client franchise to increase the penetration of its services with both new and existing clients. It is a full service institutional asset management firm, offering its clients a comprehensive range of research and investment analysis as part of its overall service and capability package. Consultants advise institutional investors based on their expert knowledge of managers' investment performance, process and client service capabilities, as well as other factors. In consultant-driven markets, such as the United States and the United Kingdom, Institutional Asset Management relies on its strong relationships with the major consultants that advise corporate and public pension plans, endowments, foundations, and other institutions. It also dedicates resources to generating new business directly with large clients. Institutional Asset Management also seeks to increase its revenues from existing clients. Each of its client-facing business areas has dedicated account management teams that service existing clients and seek to find new ways to address client needs. These account managers are also focused on further developing and solidifying the relationships that Institutional Asset Management has with the major consultants that serve its clients. Client Mandates. Institutional Asset Management seeks to deliver sustained value-added investment performance relative to client-mandated benchmarks. Its client mandates range from fully discretionary global asset allocation portfolios to equity or fixed income portfolios with a single country emphasis to other asset classes, including real estate, timber, oil and gas, and private equity. These portfolios are available through separately managed portfolios as well as through a comprehensive range of pooled investment funds. The following table sets forth institutional assets under management for Institutional Asset Management by client mandate at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - ------------------------------------------------------------------------------------------ Equity.............................. 100,000 125,000 115,000 Asset Allocation.................... 110,000 130,000 148,000 Fixed Income........................ 79,000 90,000 83,000 Private Markets..................... 37,000 31,000 14,000 --------- --------- --------- Total............................. 326,000 376,000 360,000 --------- --------- --------- --------- --------- ---------
Within each of these broad client mandate categories, Institutional Asset Management has a diverse range of particular mandates that it provides to its clients without a high concentration of business in - -------------------------------------------------------------------------------- 31 33 UBS - -------------------------------------------------------------------------------- any particular segment. For example, within the equity, asset allocation and fixed income areas, it offers a range of mandates on global, regional, emerging market and sector-specific bases. The private markets category includes such mandates as direct investments, oil and gas, partnership investments, real estate and timber. Investment Process and Research. At the beginning of March 2000, Institutional Asset Management announced that Brinson Partners and Phillips & Drew were being combined to establish a common global investment management platform. This decision reflected the shared investment philosophies of Phillips & Drew and Brinson Partners, based on capturing price-value discrepancies identified through fundamental research as well as similar cultures. The initial integration was completed according to schedule at the beginning of May 2000. The investment process is based on Institutional Asset Management efforts to determine and quantify investment value. Senior investment professionals set policy and oversee research activity within the units, drawing upon the expertise of investment specialists in each asset class. These specialists consult with external analysts, economists, consultants and academics. They develop research and provide input into Institutional Asset Management's quantitative valuation models. Institutional Asset Management estimates long-term expected returns for asset classes, markets, and securities using proprietary valuation models that consider cash flows discounted at risk-adjusted rates and then evaluates potential strategies in the context of forecasted returns as well as its forecasted risks and correlations. Institutional Asset Management creates portfolios and monitors and adjusts them based on relative price/value discrepancies. Its method is to identify periodic discrepancies between market price and investment value and turn them to its clients' advantage. Where no significant discrepancies exist between price and value, Institutional Asset Management continues its research and analysis. Institutional Asset Management believes that its approach allows it to respond to market changes, while providing its clients with the benefit of its knowledge and experience and maintains the flexibility to customize portfolios to meet their requirements. Investment Funds/GAM. As part of the re-grouping announced in February 2000, the Global Asset Management, or GAM, and Investment Funds areas of the former Private Banking division were transferred to UBS Asset Management, bringing together all of UBS's asset management activities. UBS Asset Management will benefit from an integrated business model and single management team. Within this framework GAM will be distinctly positioned and maintain its brand identity as well as its unique investment styles. Set forth below is summary information, based on management accounting data, relating to the Investment Funds/GAM business unit, which is discussed in greater detail under "--Management's Discussion and Analysis of Financial Condition and Results of Operations --UBS Asset Management--Investment Funds/GAM." - -------------------------------------------------------------------------------- 32 34 UBS - --------------------------------------------------------------------------------
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------------- Operating income.................................... 334 102 270 195 Personnel, general and administrative expenses...... 215 75 151 124 Depreciation and amortization....................... 55 3 7 6 ----- --- --- --- Operating profit before tax......................... 64 24 112 65 ===== === === === (at period end) Assets under management (CHF in billions)........... 225 190 225 176 Number of employees................................. 1,038 392 923 366
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. The following table sets forth assets under management by business area within the Investment Funds/GAM business unit at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - -------------------------------------------------------------------------------------------------- Investment Funds.......................... 202,500 201,000 175,600 GAM....................................... 22,100 23,500 0 --------- --------- --------- Total................................... 224,600 224,500 175,600 --------- --------- --------- --------- --------- ---------
Investment Funds. As a result of the merger between the Union Bank of Switzerland and Swiss Bank Corporation, Investment Funds became the leading investment fund provider in Europe and Switzerland in terms of investment fund assets under management. By year-end 1999, Investment Funds' assets under management increased 15% with growth primarily attributable to investment performance. UBS has received numerous awards, including being named "Switzerland's Best Overall Management Group" by Standard & Poor's Fund Services in 1999. Marketing and Distribution. Investment Funds are distributed primarily through UBS Switzerland and UBS Warburg, with a minority of assets distributed through third-party distribution partners. As of 30 June 2000, Investment Funds had CHF 203 billion in assets under management, including CHF 9.2 billion in assets under management distributed through third-party distribution partners. In addition, Investment Funds has a significant business administering assets for third-parties. As part of the Group reorganization, Investment Funds is evolving towards an open, multi-channel distribution architecture. Initiatives include establishing additional third-party distribution partnerships, developing electronic sales channels and combining distribution efforts with Institutional Asset Management in various markets to better capture defined contribution opportunities. Additionally, the Investment Funds business unit is currently developing an e-based investment fund distribution strategy. This channel will offer clients personalized advisory services, investor education content, online decision support tools, and automated trade execution, delivered through intermediaries. - -------------------------------------------------------------------------------- 33 35 UBS - -------------------------------------------------------------------------------- Client Mandates. Investment Funds has an extensive product range of approximately 163 funds. The following table shows total assets under management in these investment funds by fund category at 30 June 2000 and 31 December 1999 and 1998.
FUND CATEGORY 30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - ---------------------------------------------------------------------------------- Asset Allocation............ 46,700 44,200 35,000 Money Market................ 44,100 46,200 45,500 Bond........................ 37,100 40,200 42,500 Equity...................... 61,900 52,300 35,400 Capital Preservation........ 7,600 12,100 12,400 Real Estate................. 5,100 6,000 4,800 --------- --------- --------- Total..................... 202,500 201,000 175,600 --------- --------- --------- --------- --------- ---------
The continuing trend toward equity investments helped increase equity funds by 75% since the end of 1998, making Equity Investment Funds' largest asset category, accounting for 31% of total Investment Funds volume. The number of Investment Fund accounts, which make it easy for clients to make regular savings in UBS Investment Funds, has grown by 80% to 90,000, with assets invested through them increasing by 39% to a total of CHF 2.5 billion in 1999. Investment Process and Research. The Institutional Asset Management business unit is responsible for managing the investment funds offered by the Investment Funds business unit, other than some real estate funds. However, Investment Funds is responsible for managing its product range, which is tailored to meet the needs of individual investors, and for the development and marketing of individual funds. Global Asset Management. Acquired in late 1999, Global Asset Management, or "GAM," is a diversified asset management group with approximately 600 employees and operations in Europe, North America, Asia and the Middle East. It manages assets comprised of private client portfolios and over 170 private client mutual funds, as well as institutional mandates. GAM continues to operate under its established brand name within UBS Asset Management and continues to employ its own distinctive investment style. UBS Asset Management will increasingly take advantage of GAM's range of mutual funds and its multi-manager selection process, in which it selects the top 90 out of about 6,000 third-party fund providers, to enhance the range of its investment styles and products. Marketing and Distribution. Marketing and distribution for GAM is divided into three areas: Private Clients, Mutual Funds and Institutional. Each area markets and services clients within its specific segment. - Private Clients -- Offers and manages a broad range of tailored investment strategies for its clients across the risk/return spectrum and from all major reference currency perspectives. Implementation is through a combination of GAM funds, under guidance established by GAM's investment committee. The private client area seeks clients from a variety of sources including referrals from its existing client base, intermediaries, and professional advisors. Clients receive a high level of service from a dedicated team of portfolio managers. Communication is ongoing and includes regular formal review meetings. - - Mutual Funds -- GAM distributes mutual funds on a global basis, including within the United States. GAM's Mutual Funds area seeks clients at the high end of the market. Mutual funds are - -------------------------------------------------------------------------------- 34 36 UBS - -------------------------------------------------------------------------------- distributed through multiple channels, including brokerage firms, banks, portfolio and fund managers, financial advisors, family offices, employee pension plans, and directly to major investors. - - Institutional -- GAM provides a full range of services to its institutional clients through dedicated account managers. Institutions are offered the same products developed to support GAM's private client and fund distributions businesses. This includes traditional equity portfolio management, as well as multi-manager funds and alternative assets classes. Investment Process and Research. GAM was founded in 1983 to give private clients "access to great investment talent." As a result, the investment process is based on selecting the world's leading investment talent, whether the manager selected for a particular fund or mandate is internal to GAM or an external manager. Beginning in 1989, GAM extended its investment process to pioneer the development of the multi-manager concept. An in-house team of investment professionals is responsible for managing the various internally managed mandates or funds. Members of this team also create multi-manager mandates using a quantitative database of 50,000 funds, and by carefully scrutinizing all aspects of external managers employing a qualitative database of 6,000 investment managers. The investment objective of multi- manager funds or mandates is diversifying risk by employing complementary managers using different strategies. The range of funds and mandates extends from traditional equity and bond funds to a comprehensive range of alternative investment funds. UBS Warburg UBS Warburg is composed of four business units: - - Corporate and Institutional Clients -- Securities and investment banking products and services for institutional and corporate clients. - - UBS Capital -- Investment of UBS and third-party funds in a diverse range of private, and occasionally public, companies on a global basis. - - Private Clients -- Onshore private banking services for high net worth individuals worldwide, outside of Switzerland. - - e-services -- Personalized investment and advisory services at competitive fees for affluent clients in Europe, delivered via a multi-channel structure that integrates internet, call centers and investment centers. Corporate and Institutional Clients. The Corporate and Institutional Clients business unit is one of the leading global investment banks. It provides wholesale financial and investment products and advisory services globally to a diversified client base, which includes institutional investors (including institutional asset managers and broker-dealers), corporations, sovereign governments and supranational organizations. Corporate and Institutional Clients also manages cash and collateral trading and interest rate risks on behalf of UBS and executes the vast majority of UBS's retail securities, derivatives and foreign currency exchange transactions. Corporate and Institutional Clients's headquarters are in London and, at 30 June 2000, it employed about 13,000 people in over 40 countries throughout the world. In the 1998 merger, the investment banking businesses of the two banks came together to form what is now the Corporate and Institutional Clients business unit. Within Union Bank of Switzerland, securities trading began in New York and London in the 1970s and grew in the 1980s with the - -------------------------------------------------------------------------------- 35 37 UBS - -------------------------------------------------------------------------------- acquisition of Phillips & Drew in 1985. Within Swiss Bank Corporation, the acquisition of O'Connor & Associates in 1992 and the investment banking businesses of S.G. Warburg Group p.l.c. in 1995 led to the formation of SBC Warburg as a global investment bank, which was further strengthened in the United States with the 1997 acquisition of Dillon Read & Co., Inc. Corporate and Institutional Clients has a large corporate client financing and advisory business and is one of the top-ranked investment banking businesses engaged in institutional client business. The business area has achieved industry-wide recognition for its performance in the following areas: - - equity sales and trading (ranked number two globally in the first quarter of 2000 based on equity commission revenues based on an independent survey); - - cash and derivative fixed income sales and trading with institutional investors (ranked number four globally in 1999 based on information compiled and classified by the Securities Data Company and other publicly available information); - - eurobond trading (named Best Foreign Bond Firm in the Eurozone, the United Kingdom and Australia in July 2000 by Euromoney); - - global foreign exchange (ranked number four in May 2000 by Euromoney FX poll, which ranks investment banks and banks on a global basis by market share); - - research, with a global research sales team that includes about 630 specialist analysts based in over 30 countries and covering over 4,600 companies (ranked fourth in Institutional Investor Global Research in December 1999 and third in European Research in February 2000 as well as receiving Euromoney's award in October 1999 for best overall Asian research); - - debt and equity capital markets (1999, ranked number five in international equity; number three in international equity-linked issuances; number two in eurobond origination; and number one in its target franchise segments of international bonds by Bondware. Corporate and Institutional Clients's target franchise markets exclude asset-backed, self-issuance and U.S. agencies); and - - privatizations (including its role as lead manager in the Swisscom privatization, which was named privatization of the year by Institutional Investor and International Financing Review in 1998). Set forth below is summary information, based on management accounting data, relating to Corporate and Institutional Clients, which is discussed in greater detail under "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations by Business Unit--UBS Warburg--Corporate and Institutional Clients."
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - -------------------------------------------------------------------------------------------- Operating income before credit loss expense.......... 9,909 6,966 12,729 6,906 Credit loss expense.................................. 113 171 330 500 Personnel, general and administrative expenses....... 6,601 4,972 9,290 6,816 Depreciation and amortization........................ 330 393 763 692 ------ ------ ------ ------ Operating profit (loss) before tax................... 2,865 1,430 2,346 (1,102) ====== ====== ====== ====== (at period end) Average regulatory equity used....................... 9,850 10,750 10,050 13,300 Number of employees.................................. 12,730 13,148 12,694 13,794
- ------------ (1) Certain amounts have been restated to conform to the 2000 presentation. - -------------------------------------------------------------------------------- 36 38 UBS - -------------------------------------------------------------------------------- Business Areas. At 30 June 2000, Corporate and Institutional Clients operated four main business areas that have been organized by the type of products and services offered and their risk exposure. These four business areas consist of Equities, Fixed Income, Corporate Finance and Treasury Products. The Corporate Finance business area works with the Equities and Fixed Income business areas through the Equity Capital Markets Group, the Debt Capital Markets Group and Leveraged Finance to originate new equities capital markets business, fixed income capital markets business and leveraged finance business. Consequently, operating income from the Equity Capital Markets Group is shared between Equities and Corporate Finance and operating income from the Debt Capital Markets Group and Leveraged Finance is shared between Fixed Income and Corporate Finance. The table below sets forth the operating income before credit loss expense attributable to each of Corporate and Institutional Clients's main business areas for the years ended 31 December 1999 and 1998:
FOR THE YEAR ENDED 31 DECEMBER(1) 1999 1998 (CHF in millions) - --------------------------------------------------------------------------------- Equities.................................................... 5,724 3,253 Fixed Income................................................ 2,464 (267) Corporate Finance........................................... 2,054 1,665 Treasury Products........................................... 1,805 2,351 Non-core business........................................... 682 (96) ------ ----- Total.................................................. 12,729 6,906 ====== =====
- ------------ (1) Certain amounts have been restated to conform to the 2000 presentation. Equities. Equities is a leader in equity, equity-linked and equity derivative products in primary markets and a large cross-border trader in secondary equity markets. Equities' secondary market business represented over 60% of the operating income from Equities in 1999. Equities' primary areas of responsibility include: - - researching companies, industry sectors, geographic markets and macro and economic trends; - - sales and trading of cash and derivative equity securities and equity structured products; and - - structuring, originating, distributing and trading newly issued equity, equity-linked and equity derivative products. Through UBS's branches and affiliates, UBS is a member of most major stock exchanges, including New York, London, Tokyo and Zurich. UBS also participates in a number of electronic exchange ventures, including Tradepoint, through its equity investment in TP Group Limited, and NYFIX Millennium L.L.C. Fixed Income. Fixed Income structures, originates, trades and distributes a variety of fixed income, banking and structured products. It also is responsible for loan syndication and core-loan portfolio functions. Fixed Income serves a broad client base consisting of investors and borrowers and offers a range of fixed income products and services, including: - - interest rate based credit products, including loans and government bonds; - - a variety of banking products, such as structured finance and leveraged finance products; - - principal finance services, which involves the purchase, origination and securitization of credit products; - -------------------------------------------------------------------------------- 37 39 UBS - -------------------------------------------------------------------------------- - - investment grade, high-yield and emerging market bonds; - - credit-structured vehicles and credit derivatives, including credit-linked notes and total return swaps; - - various derivative products; and - - structured products to meet clients' risk management needs. Corporate Finance. Corporate Finance manages the relationships with UBS's large supranational, corporate and sovereign clients. It provides a variety of advisory services in areas such as mergers and acquisitions, strategic advisory and restructuring. Corporate Finance also provides capital markets and leveraged financing services in conjunction with the Equity Capital Markets Group, the Debt Capital Markets Group and Leveraged Finance, as described above. Utilizing UBS's existing resources, Corporate Finance's strategy is to further expand its presence in targeted global sectors in the areas of mergers and acquisitions and primary capital markets activities, including targeted sectors in the United States. Corporate Finance's responsibilities include: - - mergers and acquisitions; - - country and global sector coverage; - - equity and equity-linked capital offerings, initial public offerings and other public and private equity offerings in conjunction with the Equity Capital Markets Group; - - investment grade and high-yield debt offerings in conjunction with the Debt Capital Markets Group; - - leveraged debt offerings in conjunction with Leveraged Finance; and - - structured finance. Treasury Products. Treasury Products serves institutional investors, banks, sovereigns, corporate clients, as well as other retail and wholesale clients of UBS's other divisions. Treasury Products' primary areas of responsibility include: - - sales and trading of foreign exchange (spot and derivatives), precious metals, short-term interest rate cash and derivative products and exchange-traded derivatives; - - collateral trading, securities lending and repurchase agreements; - - bank note sales and distribution; - - foreign currency research; and - - UBS's alternative asset management business. Clients. Corporate and Institutional Clients has a diverse global client base, including institutional investors, corporations, governments and supranational organizations. This diversity has allowed UBS to establish itself as a leading investment bank headquartered in Europe and the leading distributor of non-U.S. investment products to United States investors. The table below sets forth the percentage of operating income attributable to each category of clients for 1999 and 1998. The total operating income used to calculate the percentage of operating income by client type includes only operating income generated from or attributed to clients. - -------------------------------------------------------------------------------- 38 40 UBS - --------------------------------------------------------------------------------
FOR THE YEAR ENDED 31 DECEMBER 1999 1998 (% of total) - -------------------------------------------------------------------------- Corporations................................................ 26% 39% Institutional investors..................................... 70% 55% Governments and supranational organizations................. 4% 6% --- --- Total............................................. 100% 100% === ===
e-commerce/Product Initiatives. The institutional client business worldwide is rapidly moving to an electronic basis. UBS believes Corporate and Institutional Clients is well positioned to capitalize on this trend. Recent e-commerce initiatives include: - Investment Banking On-Line (IBOL). IBOL provides extensive client desktop capability from a single home page with direct access to prices, research, trade ideas and analytical tools for Corporate and Institutional Clients' equities, fixed income and treasury products businesses. Corporate and Institutional Clients delivers electronic research to over 5,000 clients and has signed up over 10,000 users. UBS intends to expand IBOL to include wireless and video links. - Electronic Transactions for Securities (ETS) and Electronic Transactions for OTC Products (ETOP). ETS and ETOP provide a further rollout of on-line order routing and trading capabilities for all securities, foreign exchange and derivatives products. 30% of all institutional orders are sent via the internet and 90% of all retail orders are executed using straight through processing, or "STP." - Corporate Finance On-Line (CFOL). The CFOL initiative is intended to establish a secure connection for the exchange of transactional and pricing information with corporate clients to support the execution and origination of advisory mandates, as well as to create on-line connectivity for capital markets participants. - Debtweb. Using Debtweb, about 25% of all new bond issue volume in the first quarter of 2000 volume was delivered on-line. - DealKey. Designed for primary equity investors, it uses the web as an additional channel for the distribution of value-added information relating to current equity and equity-linked offerings. - Transactional Websites. UBS has established transactional websites for euro commercial paper and euro medium-term notes, including consolidated site information links to euro credit markets, credit indices and bond analytics. - New Web Services. Other new web services include: - KeyLink Web, which provides secure international electronic banking for cash, foreign exchange and securities; - Adviser Web, which relates to Australian equities; and - Global eHelp Service Desk, which provides support for clients 24 hours a day, 6 days a week. Providing superior advice and maintaining contacts with clients will be key to Corporate and Institutional Clients' future success. UBS believes its e-commerce initiatives will enhance its ability to add value to clients, as well as allow it to extract value from the processing power and scale of its core business processes and development standards, in order to maximize the benefits it can achieve from - -------------------------------------------------------------------------------- 39 41 UBS - -------------------------------------------------------------------------------- technological innovations. Corporate and Institutional Clients already processes 100,000 domestic and cross-border securities trades per day automatically, and has the capacity to increase this amount five-fold within the existing infrastructure. Loan Portfolio. In 1998, UBS decided that Corporate and Institutional Clients' loans and commitments that were (1) not part of the loan trading portfolio, (2) not issued in conjunction with leveraged finance transactions or (3) not directly supporting its core client relationships, would be separated from the core activities of Corporate and Institutional Clients and wound down. As a result of this initiative, Corporate and Institutional Clients' total loans and committed and undrawn lines of credit have been reduced. The following table sets forth information regarding the Corporate and Institutional Clients loan portfolio before allowance for loan loss at 31 December 1999 and 1998.
AS OF 31 DECEMBER 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------- Due from banks.............................................. 25,891 62,272 Loans to customers.......................................... 56,374 72,425 ------ ------- Total loans............................................... 82,265 134,697 ====== =======
See "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Analysis of Risks--Credit Risk" for a more in-depth review of UBS's credit portfolio and business, including a discussion of its impaired and non-performing loans. UBS Capital. The UBS Capital business unit of UBS Warburg is the private equity business of UBS. UBS Capital has increased the value of its investments substantially in recent years with the book value of its investments increasing from about CHF 400 million at 31 December 1994 to about CHF 3.8 billion at 30 June 2000. Until earlier this year, UBS Capital was managed as an independent division within UBS. Following UBS's realignment, UBS Capital now operates within the UBS Warburg business group. This is expected to further strengthen the business synergies between the investment banking and private equity businesses, while maintaining strong links between UBS Capital and UBS Switzerland. UBS Capital has a local presence throughout major industrialized regions in Europe, North America, Latin America and the Asia-Pacific region, with about 113 employees as of 30 June 2000. UBS Capital has offices in London, Zurich, New York, Sao Paolo, Buenos Aires, Paris, The Hague, Munich, Milan, Singapore, Hong Kong, Seoul, Sydney and Tokyo. As a private equity group, UBS Capital's business involves investing in unlisted companies, managing these investments over a medium-term time horizon to increase their value, and "exiting" the investment in a manner that will maximize the capital gain. UBS Capital seeks to make both majority and minority equity investments in established and emerging unlisted companies, either with UBS's own capital or through sponsored investment funds. Although the main focus of UBS's investments is late-stage financing, such as management buyouts, expansion or replacement capital, a minority of the portfolio targets early stage investments in the technology and telecommunications sectors. UBS Capital generally targets medium-sized businesses with enterprise values in the range of CHF 75 million to CHF 1.5 billion. In addition to its international specialization, UBS Capital endeavors to differentiate itself from its competitors by creating and adding value by working together with an investee company's - -------------------------------------------------------------------------------- 40 42 UBS - -------------------------------------------------------------------------------- management over a three- to six-year period to develop the business and optimize the company's performance. Set forth below is summary information, based on management accounting data, relating to UBS Capital, which is discussed in greater detail under "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations by Business Unit--UBS Warburg--UBS Capital."
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------------- Operating income................................. 151 120 315 585 Personnel, general and administrative expenses... 76 60 151 156 Depreciation and amortization.................... 4 3 7 1 ----- ----- ----- ----- Operating profit before tax...................... 71 57 157 428 ===== ===== ===== ===== Average regulatory equity used................... 500 300 340 250 (at period end) Investments (at book value)...................... 3,765 2,422 2,993 1,784 Number of employees.............................. 113 111 116 122
- ------------ (1) Certain amounts have been restated to conform to the 2000 presentation. Competitive Position. Superior returns and the widespread recognition of private equity as an alternative asset class has led to a substantial growth in the number of private equity funds raised in recent years. The number and amount of private equity funds raised has exceeded the number and amount of attractive and available private equity investments. This has led to increased competition among investment banks, investment funds and insurance companies and decreased returns for private equity investors. In spite of the changing environment, UBS believes that opportunities for profitable investment will continue to arise in the private equity business. UBS believes this potential will be enhanced by a number of factors working in combination to produce a favorable business environment for astute market participants. These factors include the introduction of the euro, the worldwide trend of industrial consolidation, a growing awareness of the importance of shareholder value and the increasing need to solve succession issues in family-owned businesses. Organizational Structure. UBS Capital is structured on a country and sector approach and, as of 30 June 2000, had fourteen individual teams covering around 30 countries. UBS believes that UBS Capital's established local presence and expertise, coupled with the global reach of its operations, generates the early identification of opportunities and their timely and effective development. UBS Capital's teams are divided geographically between Western Europe, Asia and the Americas, which includes Latin America. UBS Capital's presence in the Asia-Pacific region started in Singapore and now includes Australia and its new offices in South Korea and Hong Kong. Last year, UBS Capital established two private equity investment funds in the Americas. One of these investment funds makes private equity investments primarily in North America, while the other investment fund makes private equity investments in Latin America. UBS is the largest beneficial investor in each of the North America and Latin America funds. In connection with the establishment of the new funds, UBS and the team managing the investments of UBS Capital in the Americas formed two limited liability company advisors, one to advise each fund. - -------------------------------------------------------------------------------- 41 43 UBS - -------------------------------------------------------------------------------- Each fund's advisor is jointly owned by the managers and principals of the management team and by UBS. Effective 31 December 1999, the managers and principals of the management team resident in the United States are no longer employed by UBS and are not employed by either advisor. The remaining employees of UBS Capital in the Americas are either members or employees of the respective advisors. Investment Portfolio. UBS Capital's investment portfolio had a book value of approximately CHF 3.8 billion and an estimated fair value of approximately CHF 5.2 billion at 30 June 2000. To augment its competitive strengths, UBS Capital plans to gradually increase its annual investment rate, targeting a portfolio book value of CHF 5 billion in committed capital from UBS and CHF 5 billion from third parties. UBS Capital has designed its portfolio to reduce UBS's exposure to risk by: - - geographically diversifying its portfolio and minimizing concentration of investment in specific locations; - - diversifying by industry sector to obtain a good mix between manufacturing and services sectors; - - investing a minority of the portfolio in earlier stage growth opportunities, such as technology and telecommunications; and - - focusing on later-stage investments, such as management buy-outs of existing businesses. The following table provides information regarding UBS Capital's investment portfolio by geographic region, by industry sector and by age of investment at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions; all amounts are book values) - -------------------------------------------------------------------------------------------------- GEOGRAPHIC REGION (BY HEADQUARTERS OF INVESTEE) North America............................... 1,538 1,389 939 Europe...................................... 1,650 1,153 689 Latin America............................... 238 217 123 Asia-Pacific................................ 339 234 33 ------ ------ ------ 3,765 2,993 1,784 ------ ------ ------ ------ ------ ------
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions; all amounts are book values) - -------------------------------------------------------------------------------------------------- INDUSTRY SECTOR (BY INDUSTRY CLASSIFICATION CODE) Consumer related............................ 820 610 400 Diversified industrials..................... 638 587 376 Transportation.............................. 768 605 186 Communications.............................. 369 326 208 Computer related............................ 353 282 109 Energy...................................... 190 167 153 Other electronics related................... 127 38 32
- -------------------------------------------------------------------------------- 42 44 UBS - --------------------------------------------------------------------------------
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions; all amounts are book values) - -------------------------------------------------------------------------------------------------- Other manufacturing......................... 67 45 53 Chemicals and materials..................... 21 23 52 Industrial products and services............ 84 48 60 Others...................................... 328 262 155 ------ ------ ------ 3,765 2,993 1,784 ------ ------ ------ ------ ------ ------
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions; all amounts are book values) - -------------------------------------------------------------------------------------------------- AGING (BY DATE OF INITIAL INVESTMENT) Pre-1994.................................... 70 89 112 1994........................................ 220 199 195 1995........................................ 310 308 282 1996........................................ 190 204 183 1997........................................ 492 496 450 1998........................................ 709 718 562 1999........................................ 1,071 979 -- 2000........................................ 703 -- -- ------ ------ ------ 3,765 2,993 1,784 ------ ------ ------ ------ ------ ------
At 30 June 2000, approximately 74% of the investment portfolio was three years old or less. Generally, investments are sold, and operating income recognized, between the third and the sixth year after the initial investment. Investment Process. At 30 June 2000, 85% of the book value of UBS Capital's investments were late-stage at the time of its investment. The following table provides information about UBS Capital's investment portfolio by investment stage, at 30 June 2000 and 31 December 1999 and 1998, as determined at the time of UBS Capital's investment.
30 JUNE 2000 31 DECEMBER 1999 (CHF in millions) 31 DECEMBER 1998 - ------------------------------------------------------------------------------------------ Early stage............................. 582 488 49 Late stage.............................. 3,183 2,505 1,735 ------ ------ ------ 3,765 2,993 1,784 ------ ------ ------ ------ ------ ------
Investment opportunities originate from a variety of sources, including from UBS Switzerland and UBS Warburg. UBS Capital's investment policy concentrates on five "value drivers": - - negotiate an attractive entry price; - - increase the company's efficiency; - - implement a sales growth strategy; - - repay company debt and reduce leverage; and - - achieve an exit at a higher multiple than the entry price, or what UBS Capital calls "multiple arbitrage." - -------------------------------------------------------------------------------- 43 45 UBS - -------------------------------------------------------------------------------- Where appropriate, UBS Capital tries to participate actively with the management of its investee companies in developing their businesses over the medium term (three to six years) in order to optimize their performance. UBS Capital's exit strategies for the businesses include direct sales to strategic buyers, initial public offerings, leveraged recapitalizations and sales to other financial sponsors. More recently, given the industry trend toward larger sized transactions, UBS Capital has also begun to concentrate on the formation of four regional funds -- Europe, North America, Latin America and Asia -- including the two investment funds in the Americas referred to above. In late 1999, UBS Capital launched the $1 billion investment fund targeting North America to which it has committed up to $500 million. In late 1999, UBS Capital also launched the $500 million fund targeting Latin America, which UBS has committed to fund fully with the option to permit third-party investors to commit up to 25% of such funds. In addition to these funds, two new funds were launched in Europe during 1999. Phildrew Ventures V, a United Kingdom private equity fund with a fund size of GBP 330 million, and CapVis Equity Partners, which is Switzerland's largest private equity fund with a fund size of CHF 300 million. Phildrew Ventures is UBS Capital's vehicle for investing in the United Kingdom and Ireland and CapVis Equity Partners is UBS Capital's vehicle for investing in Switzerland and Austria. A European fund and an Asian fund are expected to be launched in the near future. Private Clients. UBS Warburg's Private Clients business unit provides onshore private banking services for high net worth individuals in key markets worldwide. Private Clients' target markets include Germany, France, Italy, Spain, the United Kingdom, the United States, Japan, Australia and Taiwan. Private Clients had CHF 37 billion of assets under management at 30 June 2000 and 1,277 employees. In the first half of 2000, Private Clients earned revenues after credit loss expense of CHF 133 million. The business is mainly in the relatively early stages of start-up operations and, with the exception of Germany and Australia, where the businesses are based around an established private bank and an existing domestic brokerage business, Private Clients' franchise is small.
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - --------------------------------------------------------------------------------------- Operating income after credit loss expense........ 133 93 194 190 Personnel, general and administrative expenses.... 365 216 481 294 Depreciation and amortization..................... 14 18 40 29 ----- ----- ----- ---- Operating loss before tax......................... (246) (141) (327) (133) ===== ===== ===== ==== Average regulatory equity used.................... 340 282 289 229 (at period end) Assets under management (CHF in billions)......... 37 29 36 27 Number of employees............................... 1,277 1,167 1,386 722
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Organizational Structure. The offshore Private Clients business was moved to UBS Warburg in February 2000. UBS Warburg aims to take advantage of the considerable growth potential resulting from putting investment banking and investment services activities for private clients under one roof. - -------------------------------------------------------------------------------- 44 46 UBS - -------------------------------------------------------------------------------- The decision to bring Private Clients and the e-services business, described below, closer together offers many potential synergies including the ability to enrich the private banking offering with a full complement of online investment information and execution capabilities. Significant savings are possible in the medium term from a shared information technology platform as well as shared operations and infrastructure and a coordinated sales and distribution process. Products and Services. Private Clients will focus on delivering a sophisticated product offering to its high net worth client base, including the specifically targeted executive and entrepreneur segments. Traditional private banking services will be combined with investment banking innovation. For example, Private Clients will further develop its innovative products allowing clients to release value from own-company shareholdings or options. UBS believes that on-line capabilities should be an integrated part of the service offering. As such, the e-services initiative described below, which will target affluent, advice-seeking private investors, is moving towards an integrated product and infrastructure approach with Private Clients in Europe. Private Clients also will increasingly collaborate with UBS Warburg's Corporate Finance team for client introductions and support on clients' corporate needs. e-services. e-services is a new business initiative started in the third quarter of 1999. e-services intends to offer personalized investment and advisory services targeted at affluent European individuals, and will be launched progressively in Germany and thereafter in the United Kingdom and other European countries, starting in late 2000. e-services plans to implement an integrated multi-channel "clicks and mortar" distribution concept, including online channels, call centers and investment centers. e-services had 226 employees at 30 June 2000. e-services intends to deliver a distinctive set of services, including advanced financial planning and asset allocation, and investment products such as UBS and third-party funds, securities and pension products. Organizational Structure. e-services continues to build its organizational structure and establish critical elements of its infrastructure, marketing approach and product offering. The infrastructure component has long lead times and e-services has made significant progress. e-services has formed major alliances with major information technology vendors, including Siebel Systems Incorporated, Broadvision Incorporated and Artificial Life Incorporated, which have accelerated time-to-market considerably. e-services has completed the full deployment of its technical platform and software infrastructure and has established customer call centers in Edinburgh, Scotland and Maastricht, Holland. Total expenditures for e-services were CHF 144 million in the first half of 2000 and are expected to reach CHF 310 million this year, and comparable amounts over the next few years, although future costs will depend on the exact roll-out schedule, and the possibility of partnering to share cost. e-services does not expect to record revenues until 2001. Target Clients. e-services will target advice-seeking, affluent investors in major European markets. The value proposition is tailored to investors with a need for quick access, quality advice and flawless execution. The business will use online channels, telephone service centers and investment centers to provide multi-channel client service. Products and Services. The e-services product offering will be based around a central cash management account, with capabilities for a broad base of products, services and advice using a sophisticated array of tools covering financial planning, financial analysis, asset allocation and decision support. - -------------------------------------------------------------------------------- 45 47 UBS - -------------------------------------------------------------------------------- e-services is adopting an open architecture model, integrating and distributing third-party content where this will enrich the service offering. Marketing and Distribution. A key focus on acquiring clients will be directed at establishing deeper relationships with intermediaries and aggregators. These companies, be they full-service brokers, online discount brokers, online banks, private banks or independent financial advisors, are increasingly faced with greater demands for investment services and products in an intensively competitive environment. UBS is strongly positioned to act as a lead supplier of content, products, platforms and market access to these companies. Through this channel UBS expects to be able to increase its order flow, generate incremental revenues, improve its understanding of the mass market segment, and further brand UBS Warburg as a leading supplier of investment advisory content and investment products. Corporate Center In the context of a global integrated investment services firm, the role of Corporate Center is to contribute to the long-term maximization of shareholder value by: - - competitively positioning UBS in growing market places with an optimal business model and adequate resources; - - maintaining an appropriate balance between risk and profit to provide financial stability on a Group-wide basis; and - - ensuring that the divisions, while being accountable for their results, operate as a coherent and effective Group with a common set of values and principles. To perform its role, Corporate Center establishes standards and principles to be applied by the divisions, thereby permitting UBS to minimize staffing levels within Corporate Center. The following functions are part of Corporate Center: - - Group internal audit, which reports directly to the Chairman of the Board of Directors in order to ensure its operational independence; - - functions reporting to the Chief Executive Officer, including human resources policies and standards, communications with staff, public and media, marketing and brand management, and the Group's general counsel; and - - functions reporting to the Chief Financial Officer, including risk control, credit risk management, financial control and management, Group Treasury, Group Strategy and communications with regulators, rating agencies, investors and analysts. Additionally, the Corporate Center plays an active role with regard to funding, capital and balance sheet management and management of foreign currency earnings. Competition UBS operates in a highly competitive environment in all of its businesses and markets. Many large financial services groups compete with UBS in the provision of sophisticated banking, investment banking and investment management services to corporate, institutional and individual customers on a global basis, while local banks and other financial services companies, which may be of substantial size, often provide significant competition within national markets. UBS also competes with other banks, money market funds and mutual funds for deposits, investments, and other sources of funds. In - -------------------------------------------------------------------------------- 46 48 UBS - -------------------------------------------------------------------------------- some jurisdictions, many of UBS's competitors are not subject to the same regulatory restrictions that apply to UBS. Employees At 30 June 2000, UBS had 47,744 employees. Set forth below are the number of employees of UBS broken down by its eight business units and Corporate Center at 30 June 2000 and 31 December 1999 and 1998.
AS OF AS OF AS OF 30 JUNE 31 DECEMBER 31 DECEMBER 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Private and Corporate Clients........................... 22,270 24,098 24,043 Private Banking......................................... 7,447 7,256 6,546 Institutional Asset Management.......................... 1,712 1,653 1,497 Investment Funds/GAM.................................... 1,038 923 366 Corporate and Institutional Clients..................... 12,730 12,694 13,794 UBS Capital............................................. 113 116 122 Private Clients......................................... 1,277 1,386 722 e-services.............................................. 226 70 0 Corporate Center........................................ 931 862 921 ------- ----------- ----------- Total.............................................. 47,744 49,058 48,011 ======= =========== ===========
The decrease in headcount in the first half of 2000 was mainly attributable to the transfer of the Systor business, an IT services provider, from Private and Corporate Clients to become a venture capital investment of UBS Capital and to 1998 merger-related savings in Private and Corporate Clients. These were partly offset by increases due to the continuing build up of the e-services business, which will launch later this year, and to investment in growth initiatives in the Investment Funds business area. The increase in headcount in 1999 was mainly attributable to expansion of UBS Warburg's Private Clients business unit, the onshore private banking business outside Switzerland, and by the acquisitions of Global Asset Management and Allegis Realty Investors LLC in December 1999, partially offset by decreases in UBS Warburg's Corporate and Institutional Clients business unit, relating to the winding down of non-core businesses and 1998 merger-related reductions. UBS has not experienced any significant strike, work stoppage or labor dispute in recent years. UBS considers its relations with employees to be good. Regulation and Supervision UBS's operations throughout the world are regulated and supervised by the relevant central banks and regulatory authorities in each of the jurisdictions in which it has offices, branches and subsidiaries. These authorities impose reserve and reporting requirements and controls on banks, including those relating to capital adequacy, depositor protection and prudential supervision. In addition, a number of countries in which UBS operates impose additional limitations on, or that affect, foreign or foreign-owned or controlled banks and financial institutions, including: - - restrictions on the opening of local offices, branches or subsidiaries and the types of banking and non-banking activities that may be conducted by those local offices, branches or subsidiaries; - - restrictions on the acquisition of local banks or requiring a specified percentage of local ownership; and - -------------------------------------------------------------------------------- 47 49 UBS - -------------------------------------------------------------------------------- - - restrictions on investment and other financial flows entering or leaving the country. Changes in the supervisory and regulatory regimes of the countries where UBS operates will determine to some degree its ability to expand into new markets, the services and products that it will be able to offer in those markets and how it structures specific operations. The most important jurisdictions that regulate and supervise UBS's activities are Switzerland, the United Kingdom and the United States. Regulation and Supervision in Switzerland. UBS is regulated in Switzerland under a system established by the Swiss Federal Law Relating to Banks and Savings Banks of 8 November 1934, as amended, and the related Implementing Ordinance of 17 May 1972, as amended, or the "FBL." Under the FBL, banks in Switzerland are permitted to engage in a full range of financial services activities, including commercial banking, investment banking and funds management. Banking groups may also engage in insurance activities, but these must be undertaken through a separate subsidiary. The FBL establishes a framework for supervision by the Federal Banking Commission, or "FBC." The FBC implements this framework through the issuance of Ordinances or Circular Letters to the banks that it supervises. In addition, the regulatory framework in Switzerland relies on self-regulation through the Swiss Bankers Association, or "SBA." The SBA issues guidelines to banks on conduct of business issues. Recent examples of such guidelines include: - - The Due Diligence Convention, which established know your customer standards to protect against money laundering; - - Risk Management Guidelines for Trading and for the Use of Derivatives, which set out standards based on the recommendations on this subject from the Group of Thirty, The Basel Committee on Banking Supervision and The International Organization of Securities Commissions; and - - Portfolio Management Guidelines, which set standards for banks when managing customers funds and administering assets on their behalf. Mandatory Annual Audits. The approach to supervising banks in Switzerland places a particular emphasis on the role of the external auditor. UBS's auditors, who must be approved by the FBC to perform this role, are required to submit an annual report to the FBC that assesses UBS's financial situation as well as its compliance with the regulations and self-regulatory guidelines that are applicable to its business. If the audit reveals violations or other irregularities, the independent auditors must (1) inform the FBC if a correction is not carried out within a designated time limit or (2) inform the FBC immediately in the case of serious violations or irregularities. The FBC may issue directives as necessary to require a bank to address any issues identified by the auditors and may also appoint an expert to act as an observer of a bank if the claims of the bank's creditors appear to be seriously jeopardized. Supervision by the FBC. Since July 1999, the FBC has established a dedicated unit called the Large Banking Groups Department which focuses solely on the supervision of UBS AG and the Credit Suisse Group. The group, which consists of experts covering all the main business activities in which UBS operates, supervises UBS directly through regular meetings with management as well as on-site visits. The group also coordinates the activities of the FBC with those of UBS's main overseas supervisors as well as with those of the external auditors. Capital Requirements. For purposes of complying with Swiss capital requirements, bank capital is divided into three main categories: - - core (or Tier 1) capital, - - supplementary (or Tier 2) capital, and - -------------------------------------------------------------------------------- 48 50 UBS - -------------------------------------------------------------------------------- - - additional (or Tier 3) capital. Tier 1 capital primarily includes paid-in share capital, reserves (defined to include retained earnings) and capital participations of minority shareholders in fully consolidated subsidiaries, and is reduced by, among other items, the bank's holdings of its own shares. Tier 1 capital is supplemented, for capital adequacy purposes, by Tier 2 capital, which consists of, among other things, two categories of subordinated debt instruments that may be issued by a bank, and by Tier 3 capital, which consists of certain subordinated debt obligations. The use of Tier 2 and Tier 3 capital in complying with capital ratio requirements is, however, subject to limitations. Under Swiss law, a bank must maintain a minimum capital ratio of 8%, calculated by dividing adjusted core and supplementary capital by aggregate risk-weighted assets. This standard must be met on both a consolidated and an unconsolidated basis. UBS is required to file a statement of its required and existing capital resources, together with its annual statement of condition and interim balance sheet, with both the FBC and the Swiss National Bank. Liquidity Requirements. Under Swiss law, banks are required to maintain specified measures of primary and secondary liquidity. Primary liquidity is measured by comparing Swiss franc-denominated liabilities to liquid assets in Swiss francs. For this purpose, liabilities are defined as balances due to banks, due on demand or due within three months, as well as 20% of deposits in savings and similar accounts. Under current law, UBS's liquid assets must be maintained at the level of at least 2.5% of these kinds of liabilities. To measure secondary liquidity, assets maturing within one month which are readily marketable and suitable for offsetting are subtracted from the short-term and suitable for offsetting liabilities due to banks on demand or maturing within one month, time deposits repayable within one month and certain other liabilities maturing within one month (such as debentures, cash bonds and cash certificates). Any excess of such liabilities remaining after this calculation is then added to the sum of 50% of demand deposits and certain other deposit accounts that have no restrictions on withdrawal, and 15% of thrift, deposit and savings book accounts as well as similar accounts that are subject to restrictions on withdrawal. The total of UBS's liquid and readily marketable assets must be at least equal to 33% of the short-term liabilities as calculated above. UBS is required to file monthly statements reflecting its primary liquidity position and quarterly statements reflecting its secondary liquidity position. Disclosures to the Swiss National Bank. Although the primary responsibility for supervision of banks under the FBL lies with the FBC, UBS also submits an annual statement of condition and detailed monthly interim balance sheets to the Swiss National Bank. The Swiss National Bank may require further disclosures from UBS concerning its financial condition as well as other information relevant to regulatory oversight by the Swiss National Bank. Regulation and Supervision in the United States. Banking Regulation. UBS's operations in the United States are subject to a variety of regulatory regimes. UBS maintains branches in California, Connecticut, Illinois and New York and agencies in Florida and Texas. UBS refers to these as its U.S. "banking offices." UBS's California branches are located in Los Angeles and San Francisco and are licensed by the Office of the Comptroller of the Currency. Each of UBS's other U.S. banking offices is licensed by the state banking authority of the state in which it is located. Each U.S. banking office is subject to regulation and examination by its licensing authority. In addition, the Board of Governors of the Federal Reserve System exercises examination and regulatory authority over UBS's state-licensed U.S. banking offices. None of UBS's U.S. banking offices are insured by the Federal Deposit Insurance Corporation. The regulation of UBS's - -------------------------------------------------------------------------------- 49 51 UBS - -------------------------------------------------------------------------------- U.S. banking offices imposes restrictions on the activities of those offices, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, including UBS subsidiaries. The licensing authority of each U.S. banking office has the authority to take possession of the business and property of the office it licenses in certain circumstances. Such circumstances generally include violations of law, unsafe business practices and insolvency. So long as UBS maintains one or more federal branches, such as its California branches, state insolvency regimes that would otherwise be applicable to its state licensed offices may be preempted by U.S. federal law. As a result, if the Office of the Comptroller of the Currency exercised its authority over UBS's U.S. banking offices pursuant to federal law in the event of a UBS insolvency, all of UBS's U.S. assets would be applied first to satisfy creditors of its U.S. banking offices as a group, and then made available for application pursuant to any Swiss insolvency proceeding. In addition to the direct regulation of its U.S. banking offices, operating its U.S. banking offices subjects UBS to regulation by the Board of Governors of the Federal Reserve System under various laws, including the International Banking Act of 1978, as amended, and the Bank Holding Company Act of 1956, as amended. The Bank Holding Company Act imposes significant restrictions on UBS's U.S. nonbanking operations and on its worldwide holdings of equity in companies operating in the United States. Historically, UBS's U.S. nonbanking activities were principally limited to activities that the Board of Governors of the Federal Reserve System found to be so "closely related to banking as to be a proper incident thereto." Moreover, prior approval by the Board of Governors of the Federal Reserve System has been required to engage in new activities and to make acquisitions in the United States. The Gramm-Leach-Bliley Financial Modernization Act of 1999 was recently enacted, liberalizing the restrictions on the nonbanking activities of banking organizations, including non-U.S. banks operating U.S. Banking Offices. The Gramm-Leach-Bliley Act: - - allows bank holding companies meeting management, capital and, in the case of companies owning FDIC-insured banks, Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than previously was permissible, including insurance underwriting and making merchant banking investments; - - allows insurers and other financial services companies to acquire banks; - - removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and - - revised the overall regulatory structure applicable to bank holding companies, including those that also engage in insurance and securities operations. This part of the Gramm-Leach-Bliley Act became effective on 11 March 2000. On 10 April 2000, UBS AG was designated a "financial holding company" under the Gramm-Leach-Bliley Act, which generally permits it to exercise the new powers granted by that act. The Gramm-Leach-Bliley Act will also modify other current financial laws, including laws related to the conduct of securities activities by U.S. banks and U.S. banking offices. As a result, UBS may relocate certain activities now conducted by its U.S. banking offices to a UBS subsidiary or elsewhere. Other. In the United States, UBS's U.S. registered broker-dealer is regulated by the SEC as a registered broker-dealer. Broker-dealers are subject to regulations that cover all aspects of the securities business, including: - - sales methods, - - trade practices among broker-dealers, - -------------------------------------------------------------------------------- 50 52 UBS - -------------------------------------------------------------------------------- - - use and safekeeping of customers' funds and securities, - - capital structure, - - record-keeping, - - the financing of customers' purchases, and - - the conduct of directors, officers and employees. In addition, UBS's U.S. registered broker-dealer is a member of and regulated by the New York Stock Exchange and is regulated by the individual state securities authorities in the states in which it operates. These U.S. government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or its directors, officers or employees. UBS's U.S. commodities-related businesses are subject to similar regulation. Regulation and Supervision in the United Kingdom. UBS operates in the United Kingdom under a regulatory regime that is undergoing comprehensive restructuring aimed at implementing the Financial Services Authority as the United Kingdom's unified regulator. Through 1999, UBS was regulated by the Securities and Futures Authority Limited in respect of its investment banking, individual asset management, brokerage and principal trading activities, and by the Investment Management Regulatory Organization in respect of its institutional asset management and fund management activities. Commencing in 2000, however, the responsibilities of the Securities and Futures Authority Limited and Investment Management Regulatory Organization have been taken over by the Financial Services Authority. Some of UBS's subsidiaries and affiliates are also regulated by the London Stock Exchange and other United Kingdom securities and commodities exchanges of which UBS is a member. The investment services that are subject to oversight by United Kingdom regulators are regulated in accordance with European Union directives requiring, among other things, compliance with certain capital adequacy standards, customer protection requirements and conduct of business rules. These standards, requirements and rules are similarly implemented, under the same directives, throughout the European Union and are broadly comparable in scope and purpose to the regulatory capital and customer protection requirements imposed under applicable U.S. law. DESCRIPTION OF PROPERTY At 30 June 2000, UBS operated about 1,230 offices and branches worldwide, of which about 82.7% were in Switzerland. Of the remaining 17.3%, 8.6% were in Europe, 5.8% were in the Americas and 2.9% were in Asia. Approximately 43% of the offices and branches in Switzerland are owned directly by UBS with the remainder, along with most of UBS's offices outside Switzerland, being held under commercial leases. The premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for UBS's current and anticipated operations. LEGAL PROCEEDINGS Except as described below, there are no legal or arbitration proceedings pending or threatened of which UBS is aware involving UBS which may have or have had a significant effect on the financial position of UBS taken as a whole. In the United States, several class action lawsuits, in relation to what is known as the Holocaust affair, have been brought against UBS, as legal successor to Swiss Bank Corporation and Union Bank of Switzerland, in the United States District Court for the Eastern District of New York (Brooklyn). These - -------------------------------------------------------------------------------- 51 53 UBS - -------------------------------------------------------------------------------- lawsuits were initially filed in October 1996. Credit Suisse Group has been designated as a defendant alongside UBS. On 12 August 1998, a settlement was reached between the parties. This settlement provides for a payment by the defendant banks to the plaintiffs, under certain terms and conditions, of an aggregate amount of $1.25 billion. UBS agreed to contribute up to two-thirds of this amount. To the extent that other Swiss companies agreed to participate in this fund, and to the extent of applicable payments to beneficiaries of eligible dormant accounts, UBS's share was to be reduced. For these purposes, dormant accounts are defined as accounts with banks and other financial institutions prior to 9 May 1945 which are part of the settlement agreement. In Switzerland, dormant or abandoned accounts remain on the books of the bank in perpetuity, until claimed or settled. Therefore, if such dormant or abandoned accounts are identified as balances that should be used to fund the settlement, the payment of cash to claimants causes the account to be liquidated from the company's records, thereby reducing cash and reducing the dormant account liability, as well as the remaining settlement amount liability. Accordingly, to the extent that such accounts are identified at institutions other than UBS, UBS's exposure to this matter will be reduced. Based on UBS's estimate of such expected contributions, UBS provided a reserve of $610 million (CHF 842 million) in 1998 and an additional $95 million (CHF 154 million) in 1999. During the second quarter of 2000, as part of the continuing review of this matter, UBS recognized that the amounts in dormant accounts attributable to Holocaust victims at UBS as well as at other Swiss banks are vastly below the initially expected level, and that UBS needed to adjust its reserve. In addition, on 26 July 2000, Judge Korman, the presiding judge in this matter, approved the settlement agreement. The final settlement approved by the judge describes a new mechanism to include Holocaust-related insurance claims for insurance companies. As a consequence, contributions by insurance companies will not serve to offset the banks' liabilities, contrary to UBS's previous understanding. As a result, in the second quarter of 2000, UBS provided an additional reserve of $122 million (CHF 200 million), bringing the total provision to $827 million (CHF 1,196 million). The difference between the amount accrued and the maximum potential liability of $833 million represents amounts specifically identified in UBS's customer accounts that are eligible for offset. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS There are no restrictions under UBS's Articles of Association or Swiss law, presently in force, that limit the right of non-resident or foreign owners to hold UBS's securities freely or, when entitled, as described under "Description of UBS Ordinary Shares--Voting Rights," to vote UBS's securities freely. There are currently no Swiss foreign exchange controls or laws restricting the import or export of capital. In addition, there are currently no restrictions under Swiss law affecting the remittance of dividends, interest or other payments to non-resident holders of UBS securities. CONTROL OF UBS As far as UBS is aware, UBS is neither directly nor indirectly owned nor controlled by another corporation or any government and there are no arrangements in place the operation of which may result in a change in control. As of 31 August 2000, UBS's directors and executive officers as a group beneficially held 2,368,412 of UBS's issued and outstanding ordinary shares. For the purposes of this analysis, UBS's executive officers are the members of the UBS Group Managing Board. The Group Managing Board consists of the seven members of the Group Executive Board, and 26 members who hold senior positions at the top level of UBS's organization in the Business Groups and Corporate Center. See also "-- Options to Purchase Securities from UBS" on page 126 for a discussion of options and warrants issued by UBS. - -------------------------------------------------------------------------------- 52 54 UBS - -------------------------------------------------------------------------------- NATURE OF TRADING MARKET The company preferred securities are not listed on any national exchange or traded in any established market. We have applied to list the trust preferred securities on the Luxembourg Stock Exchange which is not a trading market. DIRECTORS AND OFFICERS OF UBS The UBS Board of Directors has ultimate responsibility for the strategic direction of UBS's business and the supervision and control of UBS's executive management. The Board of Directors consists exclusively of non-executive directors in accordance with the Swiss Banking Law. Each member of the Board is elected at the annual general meeting of shareholders for a four-year term. However, at the initial annual general meeting, the terms varied between one and four years to provide for staggered terms for Board members. In order to ensure its independence, the Chief Executive Officer of UBS is not permitted to be a member of the Board of Directors. The UBS Articles of Association and the UBS Organizational Regulations prescribe the presentation of information on UBS's affairs to the members of the Board of Directors. The UBS Group Executive Board is UBS's most senior executive body. It assumes overall responsibility for the development of UBS's strategies, and the implementation of the results of these strategies. The UBS Group Executive Board is comprised of seven members, namely the UBS Chief Executive Officer, the Chief Executive Officer of the three Business Groups, the Private Banking business unit and of UBS Capital, and the UBS Chief Financial Officer. The UBS Group Executive Board normally convenes bi-weekly. Information concerning the members of the Board of Directors is set forth in the table below.
EXPIRATION OF YEAR OF INITIAL CURRENT TERM NAME POSITION HELD APPOINTMENT OF OFFICE - ---------------------------------------------------------------------------------------------------- Alex Krauer Chairman Member of the Audit Supervisory Board 1998 2002 Alberto Togni Vice Chairman Chairman of the Audit Supervisory Board 1998 2001 Markus Kundig Vice Chairman Member of the Audit Supervisory Board 1998 2002 Peter Bockli Chairman of the Audit Committee 1998 2003 Rolf A. Meyer Member of the Audit Committee 1998 2003 Hans Peter Ming Board Member 1998 2004 Andreas Reinhart Member of the Audit Committee 1998 2004 Eric Honegger Board Member 1999 2003
- -------------------------------------------------------------------------------- 53 55 UBS - -------------------------------------------------------------------------------- Information concerning the members of the Group Executive Board is set forth below:
YEAR OF INITIAL NAME POSITION HELD APPOINTMENT - ------------------------------------------------------------------------------------------------------------- Marcel Ospel President and Group Chief Executive Officer 1998 Luqman Arnold Chief Financial Officer 1999 Georges Gagnebin Chief Executive Officer of Private Banking Business 2000 Unit Markus Granziol Chairman and Chief Executive of UBS Warburg 1999 Stephan Haeringer Chief Executive Officer of UBS Switzerland and of 1998 Private and Corporate Clients Business Unit Pierre De Weck Chief Executive Officer of UBS Capital 1998 Peter A. Wuffli Chief Executive Officer of UBS Asset Management 1998
COMPENSATION OF DIRECTORS AND OFFICERS The aggregate compensation paid by UBS to its directors and officers as a group in 1998 was approximately CHF 102.8 million, including bonus compensation and approximately CHF 10.3 million in accrued pension benefits. The aggregate compensation paid by UBS to its directors and officers as a group in 1999 was approximately CHF 193.1 million, including bonus compensation and approximately CHF 2.7 million in accrued pension benefits. For the purposes of this analysis, UBS's executive officers are the members of the UBS Group Managing Board, as described above under "-- Control of Registrant." OPTIONS TO PURCHASE SECURITIES FROM UBS UBS offers employees options on UBS ordinary shares under five plans, as described below: Under the UBS Employee Ownership Plan and Senior Management Compensation Program, key personnel are awarded that portion of their performance-related compensation in excess of a predetermined amount in UBS ordinary shares, warrants or options, which are restricted for a specified number of years. Under the UBS Employee Investment Plan, employees have the option to invest part or all of their annual bonus in UBS ordinary shares, warrants or other derivatives on UBS ordinary shares. A certain holding period applies during which the instruments cannot be sold or exercised. Under the UBS Long Term Incentive and Key Award plans, long-term stock options are granted to key employees. UBS considers the key employee's performance, potential, years of service and the performance of the division in which the employee works in determining the amount of the award. The options are blocked for a certain period of time during which they cannot be exercised. For the 1997 options and certain of the 1998 options, one half of each grant is subject to an acceleration clause after which certain forfeiture provisions lapse. One option gives the right to purchase one registered share at the option's strike price. The following table provides information concerning options to purchase UBS ordinary shares at 31 August 2000. - -------------------------------------------------------------------------------- 54 56 UBS - --------------------------------------------------------------------------------
WEIGHTED-AVERAGE EXERCISE PRICE WEIGHTED-AVERAGE INSTRUMENT TYPE NUMBER ISSUED (IN CHF) EXPIRATION (IN YEARS) - ------------------------------------------------------------------------------------- Options.................. 14,004,159 199 4.4 Warrants................. 6,257,804 227 2.3 Total............... 21,251,398 208 3.7
The total number of UBS ordinary shares subject to issuance under such options and warrants held by officers and directors of UBS as of 31 August 2000 is 3,230,612. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS Mortgages receivable from members of the UBS Board of Directors, the UBS Group Executive Board, the UBS Group Managing Board, close family members of these individuals and enterprises controlled by these individuals were as follows:
CHF MILLION 1999 - ------------------------------------------------------------------- Mortgages at 1 January...................................... 27 Additions................................................... 6 Reductions.................................................. 5 Mortgages at 31 December.................................... 28
Members of the UBS Board of Directors, UBS Group Executive Board and UBS Group Managing Board are granted mortgages at the same terms and conditions as other employees. Terms and conditions are based on third party terms, excluding the credit margin. In addition, fully secured personal loans totalling approximately CHF 3.6 million have been extended to members of this group, all of which are due and payable within 24 months. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with UBS's consolidated financial statements and the related notes included elsewhere in this document. UBS's consolidated financial statements have been prepared in accordance with International Accounting Standards, or "IAS," which differ in certain significant respects from U.S. GAAP. Please refer to Note 42 of UBS's consolidated financial statements for a description of the significant differences between IAS and U.S. GAAP and the reconciliation of shareholders' equity and net profit (loss) to U.S. GAAP. Unless otherwise stated, all of UBS's financial information presented in this document is presented on a consolidated basis under IAS. All references to 1999, 1998 and 1997 refer to UBS's fiscal years ended 31 December 1999, 1998 and 1997, respectively. The financial statements for each of these periods have been audited by ATAG Ernst & Young, as described in the "Report of Independent Auditors" on page F-1. - -------------------------------------------------------------------------------- 55 57 UBS - -------------------------------------------------------------------------------- For comparative purposes, 1999 and 1998 figures have been restated to conform to the 2000 presentation, which gives effect to certain accounting changes, including: - - the removal from net trading income of profit on UBS ordinary shares held for trading purposes; - - the treatment of these shares as treasury shares, reducing both the number of shares and the shareholders' equity used in ratio calculations; - - the reclassification of trading-related interest revenues from net trading income to net interest income; - - the removal of the credit to net interest income and matching debit to net trading income for the cost of funding trading positions; and - - the capitalization of costs relating to the in-house development of software. Note 1(t) of UBS's consolidated financial statements includes a complete explanation of these accounting changes. Additional Disclosure This section identifies, for easy reference, some of the new information about UBS that is disclosed in this document and that has not previously been disclosed in UBS's reported financial data. The information in this section is intended as a guide to the new disclosure items, but is not intended to indicate which items may be most significant to you or to a decision about purchasing the trust preferred securities or company preferred securities. We strongly urge that you read this document in its entirety. Financial Statements. Information about the financial performance of UBS has been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation. While some of these restated financial statements have appeared in previous quarterly reports to shareholders, the full year results for 1998 have been restated for the first time. See Note 1 to UBS's consolidated financial statements, beginning on page F-7. In addition, the results for UBS's constituent business units are presented according to the new business group structure introduced in 2000. Again, this regrouping has been presented for some periods previously, but results for 1998 have been regrouped for the first time. See "--Description of Business" and this "--Management's Discussion and Analysis of Financial Condition and Results of Operations." The reconciliation of UBS's financial statements to U.S. GAAP as of 30 June 2000 is provided for the first time, see pages 191 to 212. Other Additional Disclosure. In general, the other additional disclosure contained in this document is the same type of information that was disclosed in UBS's Annual Report on Form 20-F for the year ended 31 December 1999, but has been updated to show values at 30 June 2000.
ITEM PAGE(S) - ---------------------------------------------------------------------------- Private and Corporate Clients Loan Portfolio, percentage of original recovery portfolio worked out at 30 June 2000.... 25 Additional breakdown of the Private and Corporate Clients Loan Portfolio at 30 June 2000............................ 25 UBS Capital Investment Portfolio -- Investments by Sector at 30 June 2000 and Investment Portfolio aging at 30 June 2000...................................................... 42 - 43
- -------------------------------------------------------------------------------- 56 58 UBS - --------------------------------------------------------------------------------
ITEM PAGE(S) - ---------------------------------------------------------------------------- Additional detail on property at 30 June 2000............... 51 Additional information on country risk exposure at 30 June 2000...................................................... 42 More detailed information on non-performing loans and credit loss allowance and provisions at 30 June 2000............. 105 - 108, 124 - 125, and F-75
Introduction UBS is a global, integrated investment services firm and operates through three business groups, which are divided into eight operating business units, and its Corporate Center. The business units within each of the three business groups, share senior management, infrastructure and other resources. The three business groups are: - - UBS Switzerland, which is made up of two business units: Private and Corporate Clients and Private Banking; - - UBS Asset Management, which consists of two business units: Institutional Asset Management and Investment Funds/GAM; and - - UBS Warburg, which is composed of four business units: Corporate & Institutional Clients, UBS Capital, Private Clients and e-services. The following table sets forth the contributions to operating profit before tax from each of the three business groups, and the eight business units within them, and for the Corporate Center.
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------------- UBS SWITZERLAND: Private and Corporate Clients.................... 1,018 621 1,271 908 Private Banking.................................. 1,980 1,537 2,937 4,415 ----- ----- ----- ------ UBS Switzerland................................ 2,998 2,158 4,208 5,323 UBS ASSET MANAGEMENT: Institutional Asset Management................... 138 148 325 437 Investment Funds/GAM............................. 64 24 112 65 ----- ----- ----- ------ UBS Asset Management........................... 202 172 437 502
- -------------------------------------------------------------------------------- 57 59 UBS - --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------------- UBS WARBURG: Corporate and Institutional Clients.............. 2,865 1,430 2,346 (1,102) UBS Capital...................................... 71 57 157 428 Private Clients.................................. (246) (141) (327) (133) e-services....................................... (158) 0 (39) 0 ----- ----- ----- ------ UBS Warburg.................................... 2,532 1,346 2,137 (807) CORPORATE CENTER................................. (172) 1,355 1,111 (1,147) ----- ----- ----- ------ Total....................................... 5,560 5,031 7,893 3,871 ===== ===== ===== ======
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. The 1998 merger of Swiss Bank Corporation and Union Bank of Switzerland, which was completed on 29 June 1998, was accounted for under the "pooling-of-interests" method of accounting. Under the pooling-of-interests method, a single uniform set of accounting policies was adopted and applied retrospectively for the restatement of comparative information. After the 1998 merger was effected, UBS began the process of integrating the operations of the two banks. This process involved streamlining operations, eliminating duplicate information technology infrastructure, consolidating banking premises and various other measures to bring the two banks together. At the time of the 1998 merger, UBS established a restructuring provision of CHF 7 billion to cover its expected restructuring costs associated with the 1998 merger. An additional pre-tax restructuring charge of CHF 300 million in respect of the 1998 merger, representing about 4% of the original CHF 7 billion provision, was recognized in December 1999. The majority of the extra provision was due to revised estimates of the cost of lease breaks and property disposals. UBS has now largely completed the integration and restructuring process relating to the 1998 merger and, at 30 June 2000, has used approximately CHF 6.1 billion of the CHF 7.3 billion restructuring provision. In addition, during the last three and a half years, a number of other events occurred that also had a significant effect on UBS's results of operations during these periods. These events included: - - During 1999, UBS recognized pre-tax gains of CHF 1,490 million on the sale of its 25% stake in Swiss Life/Rentenanstalt; CHF 110 million on Julius Baer registered shares; CHF 200 million on the sale of its international Global Trade Finance business; and CHF 38 million on Long Term Capital Management, L.P. - - During the first half of 1998, UBS divested Banca della Svizzera Italiana, or "BSI," and Adler & Co. Ltd. to satisfy a condition of the Swiss Competition Commission in connection with the 1998 merger. UBS recognized pre-tax gains of CHF 1,058 million on these sales. - - During 1998, due to extremely volatile market conditions, UBS incurred losses of CHF 1,160 million relating to the write-down of its trading and investment positions in Long Term Capital Management, L.P. and CHF 762 million relating to its Global Equity Derivatives portfolio. - - As of 31 December 1998, UBS established a provision of CHF 842 million in connection with the claims relating to the matter known as the Holocaust affair. UBS recognized additional pre-tax provisions of CHF 154 million relating to this claim in 1999 and CHF 200 million in 2000. - - In the fourth quarter of 1999, UBS recognized a one-time credit of CHF 456 million in connection with excess pension fund employer prepayments, recorded in accordance with IAS. - -------------------------------------------------------------------------------- 58 60 UBS - -------------------------------------------------------------------------------- As a global financial services firm, UBS's businesses are affected by the external environment in the markets in which it operates. In particular, the results of UBS's business in Switzerland, and notably the results of its credit-related activities, would be adversely affected by any deterioration in the state of the Swiss economy because of the impact this would have on UBS's customers' creditworthiness. More generally, economic and political conditions in different countries can also impact UBS's results of operations and financial position by affecting the demand for UBS's products and services and the credit quality of UBS's borrowers and counterparties. Similarly, any prolonged weakness in international securities markets would affect UBS's business revenues through its effect on UBS's clients' investment decisions and the value of portfolios under management, which would in turn reduce UBS's revenues from its private banking and asset management businesses. Competitive Forces. UBS faces intense competition in all aspects of its business. UBS competes with asset management entities, retail and commercial banks, investment banking firms, merchant banks, broker-dealers and other investment services firms. In addition, the trend toward consolidation in the global financial services industry is enhancing the competitive position of some of UBS's competitors by broadening the range of their product and service offerings and increasing their access to capital. These competitive pressures could result in increased pricing pressure on a number of UBS's products and services, particularly as competitors seek to win market share. Fluctuations in Currency Exchange Rates and Interest Rates. Because UBS prepares its accounts in Swiss francs, changes in currency exchange rates, particularly between the Swiss franc and the U.S. dollar and the Swiss franc and the British pound, may have an effect on the earnings that it reports. UBS's approach to managing the risk is explained below under "--Asset and Liability Management--Currency Management." In addition, changes in exchange rates can affect UBS's business earnings. For example, the establishment of the euro during 1999 has started to have an effect on the foreign exchange markets in Europe by reducing the extent of foreign exchange dealings among member countries and generating more harmonized financial products. Movements in interest rates can also affect UBS's results. As interest rates decline, UBS's interest rate margins generally come under pressure and mortgage borrowers may seek to repay their borrowings early, which can affect UBS's net interest income. Interest rate movements can also affect UBS's fixed income trading portfolio and the investment performance of its asset management businesses. Operational Risks. UBS's businesses are dependent on its ability to process a large number of complex transactions across numerous and diverse markets in different currencies and subject to many different legal and regulatory regimes. UBS's systems and processes are designed to ensure that the risks associated with UBS's activities are appropriately controlled, but UBS recognizes that any weaknesses in these systems could have a negative impact on its results of operations during the affected period. As a result of these and other factors beyond its control, UBS's revenues and operating profit have been and are likely to continue to be subject to a measure of variability from period to period. Therefore UBS's revenues and operating profit for any particular fiscal period may not be indicative of sustainable results, may vary from year to year and may impact UBS's ability to achieve its strategic objectives. Nevertheless, UBS's risk management and control procedures have been designed to keep the risk of such variability at an acceptably low level. For further discussion of UBS's risk management and control see "--Analysis of Risks--Consequential Risks." - -------------------------------------------------------------------------------- 59 61 UBS - -------------------------------------------------------------------------------- Consolidated Results of Operations The following table sets forth UBS's consolidated results of operations for the half years ended 30 June 2000 and 1999 and for the years ended 31 December 1999 and 1998.
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------------------- OPERATING INCOME: Interest income............................. 24,079 16,293 35,604 37,442 Interest expense............................ 19,753 13,540 29,695 32,424 ------ ------ ------ ------ Net interest income...................... 4,326 2,753 5,909 5,018 Credit loss expense......................... (83) 635 956 951 ------ ------ ------ ------ Net interest income after credit loss expense................................ 4,409 2,118 4,953 4,067 Net fee and commission income............... 7,835 6,184 12,607 12,626 Net trading income.......................... 5,669 4,460 7,719 3,313 Other income, including income from disposal of associates and subsidiaries........... 644 2,340 3,146 2,241 ------ ------ ------ ------ Total operating income................... 18,557 15,102 28,425 22,247 ------ ------ ------ ------ OPERATING EXPENSES: Personnel................................... 8,876 6,819 12,577 9,816 General and administrative.................. 3,174 2,388 6,098 6,735 Depreciation and amortization............... 947 864 1,857 1,825 ------ ------ ------ ------ Total operating expenses................. 12,997 10,071 20,532 18,376 Operating profit before tax and minority interests................................... 5,560 5,031 7,893 3,871 Tax expense................................. 1,257 1,151 1,686 904 ------ ------ ------ ------ Net profit before minority interests..... 4,303 3,880 6,207 2,967 Minority interests.......................... (35) (21) (54) 5 ------ ------ ------ ------ Net profit............................. 4,268 3,859 6,153 2,972 ====== ====== ====== ======
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Net interest income increased by CHF 1,573 million, or 57.1%, from CHF 2,753 million in the first half of 1999 to CHF 4,326 million in the first half of 2000. This was principally the result of higher coupon income, in line with an increase of interest bearing instruments in the trading portfolio. As a result of the significant recovery of the Swiss economy in the first half of 2000 and especially its effect on the real estate and real estate construction markets, UBS was able to write back CHF 237 million of domestic credit loss provisions in the first half of 2000. These writebacks were offset by additional provisions on the international portfolio of CHF 154 million, leading to a net credit of CHF 83 million in the credit loss expense line for the first half of 2000, compared to an expense of CHF 635 million in the first half of 1999. - -------------------------------------------------------------------------------- 60 62 UBS - -------------------------------------------------------------------------------- Net fee and commission income increased by CHF 1,651 million, or 26.7%, from CHF 6,184 million in the first half of 1999 to CHF 7,835 million in the first half of 2000, as the result of increased client activity, driven by strong markets, especially in the first quarter of 2000. The following table sets forth UBS's net fee and commission income for the first half of 2000 and 1999.
FOR THE SIX MONTHS ENDED 30 JUNE 2000 1999(1) (CHF in millions) - -------------------------------------------------------------------------------- CREDIT-RELATED FEES AND COMMISSIONS......................... 145 215 SECURITY TRADING AND INVESTMENT ACTIVITY FEES: Underwriting and corporate finance fees................... 1,069 826 Brokerage fees............................................ 2,979 1,882 Fiduciary fees............................................ 175 162 Custodian fees............................................ 726 788 Portfolio and other management and advisory fees.......... 1,913 1,476 Investment fund fees...................................... 1,360 925 Other..................................................... 29 53 ----- --------- Total.................................................. 8,251 6,112 ----- --------- COMMISSION INCOME FROM OTHER SERVICES....................... 391 367 ----- --------- TOTAL FEE AND COMMISSION INCOME...................... 8,787 6,694 ----- --------- FEE AND COMMISSION EXPENSE: Brokerage fees paid....................................... 582 359 Other..................................................... 370 151 ----- --------- Total.................................................. 952 510 ----- --------- NET FEE AND COMMISSION INCOME............................... 7,835 6,184 ===== =========
- ------------ (1) Certain amounts have been restated to conform to the 2000 presentation. Credit-related fees and commissions decreased in the first half of 2000 as a result of the sale of UBS's International Global Trade Finance business in the second half of 1999. Underwriting and corporate finance fees increased by 29% over the first half of 1999 with strong results in both equity and fixed income underwriting, and continuing increases in corporate finance revenues. Brokerage fees were 58.3% higher in the first half of 2000 than in the first half of 1999 as a result of high levels of client activity in the context of strong market volumes. The increase in investment fund fees from the first half of 1999 to the first half of 2000 resulted from higher volumes and the inclusion in the first half of 2000 of GAM, which was acquired in the fourth quarter of 1999. Portfolio and other management and advisory fees increased CHF 437 million due to higher asset-related fees in the first half of 2000. Net trading income increased CHF 1,209, or 27.1%, to CHF 5,669 million for the first half of 2000, compared to CHF 4,460 million for the first half of 1999, driven by strong growth in equity trading - -------------------------------------------------------------------------------- 61 63 UBS - -------------------------------------------------------------------------------- income and through increased client activity, particularly in the first quarter of 2000. The following table sets forth UBS's net trading income by major business area for the first half of 2000 and 1999.
FOR THE SIX MONTHS ENDED 30 JUNE 2000 1999(1) (CHF in millions) - -------------------------------------------------------------------------------- Foreign exchange(2)......................................... 680 718 Fixed income................................................ 643 1,303 Equities.................................................... 4,346 2,439 ----- --------- Total............................................. 5,669 4,460 ===== =========
- ------------ (1) Certain amounts have been restated to conform to the 2000 presentation. (2) Includes other trading income such as banknotes, precious metals and commodities. Net trading income from foreign exchange decreased CHF 38 million, or 5.3%, from the first half of 1999 to the first half of 2000 in difficult trading conditions, with lower levels of market activity and narrowing margins on derivative products. Net trading income from fixed income decreased CHF 660 million, or 50.7%, from the first half of 1999 to CHF 643 million in the first half of 2000. The fixed income component of net trading income does not represent the full revenue picture of the Fixed Income business area within the Corporate and Institutional Clients business unit. In particular, coupon income is managed as an integral part of the trading portfolio. The relative revenue contributions of mark-to-market gains, coupon income and other factors are somewhat volatile, because they depend on trading strategies and the instrument composition. In the first half of 2000, while fixed income trading income fell, coupon income, which is reported in net interest income, rose substantially. The sum of the two results suggests significantly more stable revenue development than either component standing alone. In total, in the first half of 2000, revenues in the Fixed Income business area of Corporate and Institutional Clients rose 13.8% over the first half of 1999. Net trading income from equities increased CHF 1,907 million, or 78.2%, from the first half of 1999 to the first half of 2000. Positive markets led to an exceptionally good first quarter of 2000, with record client volumes and strong performances in European, U.S., U.K. and Japanese equities. Performance in the second quarter fell slightly in more mixed market conditions, but was still well ahead of second quarter of 1999. Other income, including income from disposal of associates and subsidiaries, decreased CHF 1,696 million, or 72.5%, from CHF 2,340 million in the first half of 1999 to CHF 644 million in the first half of 2000. Total disposal-related pre-tax gains were CHF 1,778 million in the first half of 1999 compared to CHF 23 million in the first half of 2000. The first half of 1999 included pre-tax gains of CHF 1,490 from the sale of UBS's stake in Swiss Life/Rentenanstalt, CHF 200 million from the disposal of the Global Trade Finance business and CHF 110 million from the sale of Julius Baer registered shares. Excluding income from disposal of associates and subsidiaries, other income increased CHF 59 million due to increased income from the disposal of private equity investments and the consolidation of Klinik Hirslanden AG's results in the first half of 2000 but not in the first half of 1999, offset by a reduction of income from investments in associates and losses from the revaluation of properties held for resale. Personnel expense increased CHF 2,057 million, or 30.2%, from CHF 6,819 million in the first half of 1999 to CHF 8,876 million in the first half of 2000, despite an almost unchanged headcount of - -------------------------------------------------------------------------------- 62 64 UBS - -------------------------------------------------------------------------------- 47,744 at 30 June 2000, compared to 48,066 at 30 June 1999. This is primarily attributable to higher performance-related compensation based on the very strong results in the first half of 2000. In addition, CHF 567 million of the increase is the result of adverse currency movements and CHF 182 million is due to the consolidation of Klinik Hirslanden AG's results in the first half of 2000 but not in the first half of 1999 and the inclusion of GAM, acquired in the fourth quarter of 1999. General and administrative expenses increased CHF 786 million, or 32.9%, from CHF 2,388 million in the first half of 1999 to CHF 3,174 million in the first half of 2000. General and administrative expenses in the first half of 2000 includes a final provision of CHF 200 million related to the U.S. global settlement of Holocaust-related claims and CHF 110 million from the consolidation of Klinik Hirslanden AG and the inclusion of GAM. Marketing and public relations costs increased by CHF 102 million in the first half of 2000, mainly due to the corporate re-branding program. CHF 146 million of the increase relates to information technology outsourcing charges for work that was previously carried out in-house. Depreciation and amortization increased CHF 83 million, or 9.6%, from CHF 864 million in the first half of 1999 to CHF 947 million in the first half of 2000, mainly as a result of the acquisition of GAM and Allegis in the fourth quarter of 1999. Tax expense increased CHF 106 million, or 9.2%, from CHF 1,151 million in the first half of 1999 to CHF 1,257 million in the first half of 2000, principally due to increased operating profit. The effective tax rate of 22.6% in the first half of 2000 is very slightly lower than the 22.9% rate in the first half of 1999. Year to 31 December 1999 Compared to Year to 31 December 1998. Net interest income increased by CHF 891 million, or 17.8%, from CHF 5,018 million in 1998 to CHF 5,909 million in 1999. Increased trading-related interest income and higher interest margins in the domestic loan portfolio in 1999 from more consistent application of UBS's risk-adjusted pricing model were partially offset by the sale of business activities which had contributed to net interest income in 1998, as well as the impact of lower returns on invested equity and the reduction of the international loan portfolio. Credit loss expense had a slight increase of CHF 5 million from CHF 951 million in 1998 to CHF 956 million in 1999. During 1999, UBS experienced general improvements in the economy and in the credit performance of its loan portfolio, and a reduction in impaired loans in the aggregate. Although impaired loans decreased, additional provisions were required for some of the impaired domestic loans remaining in the portfolio. Net fee and commission income decreased by CHF 19 million from CHF 12,626 million in 1998 to CHF 12,607 million in 1999. Excluding the effect of divestments in 1998, the decrease was roughly 1%. The following table sets forth UBS's net fee and commission income for each of the years ended 31 December 1999 and 1998.
FOR THE YEAR ENDED 31 DECEMBER(1) 1999 1998 (CHF in millions) - ----------------------------------------------------------------------------------- CREDIT-RELATED FEES AND COMMISSIONS......................... 372 559 SECURITY TRADING AND INVESTMENT ACTIVITY FEES: Underwriting and corporate finance fees................... 1,831 1,694 Brokerage fees............................................ 3,934 3,670 Fiduciary fees............................................ 317 349 Custodian fees............................................ 1,583 1,386
- -------------------------------------------------------------------------------- 63 65 UBS - --------------------------------------------------------------------------------
FOR THE YEAR ENDED 31 DECEMBER(1) 1999 1998 (CHF in millions) - ----------------------------------------------------------------------------------- Portfolio and other management and advisory fees.......... 2,984 3,335 Investment fund fees...................................... 1,915 1,778 Other..................................................... 57 110 ------ ------ Total.................................................. 12,621 12,322 ------ ------ COMMISSION INCOME FROM OTHER SERVICES....................... 765 776 ------ ------ TOTAL FEE AND COMMISSION INCOME........................ 13,758 13,657 ------ ------ FEE AND COMMISSION EXPENSE: Brokerage fees paid....................................... 795 704 Other..................................................... 356 327 ------ ------ Total.................................................. 1,151 1,031 ------ ------ NET FEE AND COMMISSION INCOME............................... 12,607 12,626 ====== ======
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Credit-related fees and commissions decreased in line with reduced emerging market exposures and the sale of UBS's international Global Trade Finance operations. As a result of strong results in mergers and acquisitions in 1999, underwriting and corporate finance fees increased 8% relative to exceptionally strong performance in 1998. Brokerage fees were higher in 1999 than in 1998 mainly due to strong volumes in the U.K., U.S. and Asia. A CHF 137 million increase in investment fund fees was attributable to higher volumes and pricing adjustments from the integration of the two pre-1998 merger product platforms. Strong increases in custodian fees reflected higher custodian assets and a new pricing model. Net trading income increased CHF 4,406 million, or 133%, from CHF 3,313 million in 1998 to CHF 7,719 million in 1999. The following table sets forth UBS's net trading income by major business area for each of the years ended 31 December 1999 and 1998.
FOR THE YEAR ENDED 31 DECEMBER(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------- Foreign exchange(2)......................................... 1,108 1,992 Fixed income................................................ 2,603 162 Equities.................................................... 4,008 1,159 ----- ------ Total..................................................... 7,719 3,313 ===== ======
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. (2) Includes other trading income such as banknotes, precious metals and commodities. Net trading income from foreign exchange decreased CHF 884 million, or 44.4%, from 1998 to 1999 mostly as a result of lower volumes in key markets. The reduced levels of activity resulted from the introduction of the euro and narrowing margins from increased competition in global markets. Net trading income from fixed income increased CHF 2,441 million from 1998 to 1999. During 1998, net trading income from fixed income was negatively impacted by the pre-tax approximately CHF 790 million write-down of UBS's trading position in Long Term Capital Management, L.P., or "LTCM," - -------------------------------------------------------------------------------- 64 66 UBS - -------------------------------------------------------------------------------- and approximately CHF 690 million in losses in UBS's emerging markets trading portfolios. Excluding those write downs from the 1998 results, net trading income from fixed income increased approximately 58% in 1999 over 1998. Fixed income trading revenues were strong across all major products during 1999, led by swaps and options and investment grade debt. Net trading income from equities increased CHF 2,849 million from 1998 to 1999. During 1998, net trading income was negatively impacted by pre-tax CHF 762 million in losses from the Global Equities Derivatives positions. In 1999, net trading income benefited from very strong customer volumes in equity products globally. Other income, including income from disposal of associates and subsidiaries, increased CHF 905 million, or 40.4%, from CHF 2,241 million in 1998 to CHF 3,146 million in 1999. Total disposal-related pre-tax gains were CHF 1,821 million in 1999 compared to disposal-related pre-tax gains of CHF 1,119 million in 1998. The first-time consolidation of Klinik Hirslanden in 1999 resulting in other income of CHF 395 million was partially offset by less income from investments in associates as a result of the divestments as well as lower income from other properties. The approximately CHF 370 million portion of the LTCM write-down negatively impacted other income in 1998. Personnel expense increased CHF 2,761 million, or 28.1%, from CHF 9,816 million in 1998 to CHF 12,577 million in 1999, despite only a minor increase in headcount from 48,011 at 31 December 1998 to 49,058 at 31 December 1999. At the end of 1997, UBS foresaw the probability of a shortfall in profit in its investment banking business as a result of the then-pending 1998 merger. In order to protect its investment banking franchise, UBS realized it would probably need to make payments to personnel in excess of amounts determined by normal compensation methodologies. An amount of approximately CHF 1 billion was recorded as part of the merger-related restructuring reserve for this purpose. By the end of 1998, this shortfall had materialized, and CHF 1,007 million of accrued payments to personnel were charged against the restructuring reserve in 1998 as planned. The shortfall in profits noted above was aggravated by losses associated with LTCM and the Global Equity Derivatives, or "GED," portfolio. Adjusting the prior year for the CHF 1,007 million, personnel expenses in 1999 increased by 16%, which was primarily attributable to higher performance-related compensation based on the good investment banking result in 1999. Personnel expense in 1999 was reduced by the recognition of CHF 456 million in pre-paid employer pension contributions. General and administrative expenses decreased CHF 637 million, or 9.5%, from CHF 6,735 million in 1998 to CHF 6,098 million in 1999. General and administrative expenses in 1998 includes the provision of CHF 842 million for the settlement related to the Holocaust litigation. In 1999, the following were included: - the additional restructuring provision of CHF 300 million; - an additional provision of CHF 154 million for the U.S. global settlement of Holocaust-related claims; and - CHF 130 million from the first-time consolidation of Klinik Hirslanden. Excluding the impact of these items in 1998 and 1999, general and administrative expenses decreased 6.4% year-on-year reflecting stringent cost reduction programs. Depreciation and amortization increased CHF 32 million, or 1.8%, from CHF 1,825 million 1998 to CHF 1,857 million in 1999. Excluding the impact of the first-time consolidation of Klinik Hirslanden in 1999, depreciation and amortization remained flat. Tax expense increased CHF 782 million, or 86.5%, from CHF 904 million in 1998 to CHF 1,686 million in 1999, principally due to increased operating profit. The effective tax rate of 21.4% is lower than 23.4%, the rate in 1998, primarily due to the utilization of tax loss carry forwards. - -------------------------------------------------------------------------------- 65 67 UBS - -------------------------------------------------------------------------------- Year Ended 31 December 1998 Compared to Year Ended 31 December 1997. The following figures have not been restated for the changes in accounting policy and restructuring of the UBS business groups that have been introduced during 2000, as such a restatement of the 1997 data was not practicable. As a result of the differences in the reporting by the predecessor banks' accounting and reporting policies, the unavailability of certain data, and the shut down and modification of significant computer systems as a result of the 1998 merger and to address Year 2000 issues, there is insufficient information to permit UBS to restate the 1997 results for the changes in accounting policy.
31 DECEMBER 1998 1997 (CHF in millions) - -------------------------------------------------------------------------------- OPERATING INCOME: Interest income........................................... 22,835 23,669 Interest expense.......................................... 16,173 16,733 ------ ------ Net interest income.................................. 6,662 6,936 Credit loss expense....................................... 951 1,278 ------ ------ Total................................................ 5,711 5,658 Net fee and commission income............................. 12,626 12,234 Net trading income........................................ 1,750 5,491 Other income, including income from disposal of associates and subsidiaries....................................... 2,241 1,497 ------ ------ Operating income..................................... 22,328 24,880 ------ ------ OPERATING EXPENSES: Personnel................................................. 9,816 11,559 General and administrative................................ 6,617 5,315 Depreciation and amortization............................. 1,825 1,762 ------ ------ Operating expenses..................................... 18,258 18,636 ------ ------ Operating profit before tax.......................... 4,070 6,244 Restructuring costs....................................... -- 7,000 Tax expense (benefit)..................................... 1,045 (105) ------ ------ Net profit (loss) before minority interests.......... 3,025 (651) Minority interests........................................ 5 (16) ------ ------ Net profit (loss).................................... 3,030 (667) ====== ======
Net interest income decreased CHF 274 million, or 4.0%, from CHF 6,936 million in 1997 to CHF 6,662 million in 1998. The decrease primarily resulted from lower variable-rate mortgage volumes and the elimination of operations in 1998 that generated interest income during 1997. Lower variable rate mortgage volumes during 1998 more than offset an increase in fixed-rate mortgages. In addition, although lower savings and deposit accounts reduced interest expense in 1998, it also resulted in lower interest income from deposits during the year. UBS's credit loss expense decreased CHF 327 million, or 25.6%, from CHF 1,278 million in 1997 to CHF 951 million in 1998. Credit loss expense improved because of positive developments in the overall Swiss economy. This was offset in part by the rapid deterioration of emerging market economies, most notably in Latin America and Southeast Asia. This caused an approximately CHF 275 million net increase in country provisions from 1997 to 1998 and other increases in individual - -------------------------------------------------------------------------------- 66 68 UBS - -------------------------------------------------------------------------------- counterparty allowances. The largest provisions in the emerging markets economies were as follows at 31 December 1998 and 1997.
1998 1997 (CHF in millions) - -------------------------------------------------------------------------------- Brazil...................................................... 276 55 Indonesia................................................... 168 29 South Korea................................................. 186 19
Net fee and commission income increased CHF 392 million, or 3.2%, from CHF 12,234 million in 1997 to CHF 12,626 million in 1998. Increases in underwriting and corporate finance fees, custodian fees, portfolio and other management and advisory fees, and fees from investment funds resulting from strong markets, growth in assets under management and the acquisition of Dillon Read & Co., Inc. in late 1997 all contributed to this net increase. These increases were partially offset by a decrease in credit-related fees and commissions and brokerage fees. Net trading income decreased CHF 3,741 million, or 68.1%, from CHF 5,491 million in 1997 to CHF 1,750 million in 1998. The decrease primarily resulted from the CHF 790 million write-down of UBS's trading position in LTCM, the CHF 762 million loss on UBS's Global Equities Derivatives portfolio and approximately CHF 810 million of losses on UBS's emerging markets trading portfolios. Net trading income from foreign exchange and bank notes decreased by CHF 541 million primarily reflecting losses in foreign exchange trading that were partially offset by unusually strong results in UBS's cash and collateral trading business. In addition, net trading income from precious metals and commodities decreased by CHF 216 million, or 89%, from CHF 244 million in 1997 to CHF 28 million in 1998 due primarily to the wind-down of some of these businesses and difficult trading conditions. Other income, including income from disposal of associates and subsidiaries, increased CHF 744 million, or 49.7%, from CHF 1,497 million in 1997 to CHF 2,241 million in 1998. The increase primarily reflected CHF 1,058 million gains on the sales of BSI and Adler and gains in UBS's real estate and private equity activities, partially offset by the CHF 370 million write-down of UBS's investment in LTCM attributable to other income. Personnel expense decreased CHF 1,743 million, or 15.1%, from CHF 11,559 million in 1997 to CHF 9,816 million in 1998, reflecting reduced headcount of 13.0% from 55,176 people as of 31 December 1997 to 48,011 people as of 31 December 1998. The headcount reduction primarily resulted from efficiencies gained from the 1998 merger and divestments of specific businesses. As discussed above, CHF 1,007 million of accrued payments to personnel were charged against the restructuring reserve in 1998. Adjusting 1998 for this amount, personnel expenses decreased 6.4% in 1998 compared to 1997. General and administrative expenses increased CHF 1,302 million, or 24.5%, from CHF 5,315 million in 1997 to CHF 6,617 million in 1998. This increase primarily resulted from a CHF 842 million charge taken in 1998 for the settlement of the claim relating to the Holocaust litigation and approximately CHF 397 million in expenses recorded in 1998 associated with preparing for implementation of the euro and for Year 2000 readiness. Depreciation and amortization increased CHF 63 million, or 3.6%, from CHF 1,762 million in 1997 to CHF 1,825 million in 1998. Increased amortization of goodwill and other intangible assets primarily resulting from additional goodwill recorded in 1998 on Brinson Partners, the acquisition of Dillon Read & Co., Inc. in September 1997 and the accelerated amortization of goodwill on Russian and Brazilian subsidiaries due to the worsening markets in these countries in 1998 were the primary reasons for the increase from 1997 to 1998. These increases were offset by a decrease in depreciation from the disposal of property and equipment. - -------------------------------------------------------------------------------- 67 69 UBS - -------------------------------------------------------------------------------- Tax expense increased CHF 1,150 million, from a tax benefit in 1997 of CHF 105 million to a tax expense in 1998 of CHF 1,045 million. In 1997, UBS recognized a total current and deferred tax benefit of approximately CHF 1,600 million related to the CHF 7,000 million restructuring provision. Excluding the restructuring reserve, operating profit before tax would have been CHF 6,244 million in 1997 and UBS would have accrued tax expenses of CHF 1,395 million. Operational Reserves. UBS maintains operational reserves to provide for losses associated with existing transaction errors in processing and other operational losses. The reserves cover probable losses that exist in the portfolio as of the balance sheet date, and are subject to senior management review and approval within the specific business unit, functional operations and financial control management and at the Group Executive Board. UBS experienced an overall increase in the level of these reserves during 1999, primarily related to UBS's continuing program of integrating the two predecessor banks' domestic operations. As planned, this integration is taking longer than the integration of operations outside Switzerland. There has been no significant change in the level of these reserves in the first half of 2000. Restructuring Provision. At the announcement of the 1998 merger in 1997, UBS estimated the costs it believed would result from integrating and restructuring the operations of the two pre-existing banks and recorded a charge of CHF 7 billion. The charge included estimates for personnel-related costs, costs for the elimination of duplicate infrastructures and the merging of bank premises, and other 1998 merger-related restructuring costs. An additional pre-tax restructuring charge of CHF 300 million in respect of the 1998 merger, representing about 4% of the original CHF 7 billion provision, was recognized in December 1999. The majority of the extra charge was taken to provide for revised estimates of the cost of lease breaks and property disposals. UBS has now largely completed the integration and restructuring process and, at 30 June 2000, has used approximately CHF 6.1 billion of the CHF 7.3 billion restructuring provision. During 1998, CHF 4,027 million of the restructuring provision was utilized including: - CHF 2 billion for personnel-related expenses, - CHF 797 million for information technology integration projects and write-offs of equipment that management had committed to dispose of, - CHF 267 million for merging premises, and - CHF 939 million for costs associated with the exit of specific businesses, as well as merger administration costs. Included in the CHF 2 billion of personnel-related expenses are severance payments and payments required to maintain stability in the workforce during the 1998 merger-related integration period, as well as some performance-related compensation as discussed above. During 1999, CHF 1,844 million of the restructuring provision was utilized, bringing the total utilization to CHF 5,871 million at 31 December 1999. The transition to one common technology platform and parallel operation of the systems in UBS Switzerland's Private and Corporate Clients business unit and the merger of bank premises, including related moving, outfitting and vacancy costs, recognized in Corporate Center, were the primary uses of the provision in 1999. - -------------------------------------------------------------------------------- 68 70 UBS - -------------------------------------------------------------------------------- During the first half of 2000, the main use of the restructuring provision related to premises costs in Corporate Center, including moving, outfitting and vacancy costs that were charged against the provision, and also to costs relating to the early retirement plan in Private and Corporate Clients. The following table analyzes the use of the restructuring provision through the first half of 2000.
USAGE IN 2000 30 JUNE 31 DECEMBER PERSONNEL IT PREMISES OTHER 2000 1999 1998 (CHF in millions) - ----------------------------------------------------------------------------------------------------- Private and Corporate Clients............ 53 14 1 20 88 794 717 Private Banking.......................... 0 5 0 0 5 122 104 --------- --- -------- ----- ------- ----- ----- UBS Switzerland........................ 53 19 1 20 93 916 821 Institutional Asset Management........... 1 0 0 0 1 9 18 Investment Funds/GAM..................... 0 0 0 0 0 6 4 --------- --- -------- ----- ------- ----- ----- UBS Asset Management................... 1 0 0 0 1 15 22 Corporate and Institutional Clients...... 0 0 0 0 0 316 2,382 UBS Capital.............................. 0 0 0 0 0 3 2 Private Clients.......................... 0 0 0 0 0 29 39 e-Services............................... 0 0 0 0 0 0 0 --------- --- -------- ----- ------- ----- ----- UBS Warburg............................ 0 0 0 0 0 348 2,423 Corporate Center......................... 3 0 91 3 97 565 761 --------- --- -------- ----- ------- ----- ----- Total.......................... 57 19 92 23 191 1,844 4,027 ========= === ======== ===== ======= ===== =====
The substantial majority of the remaining restructuring reserve balance is also attributed to employees and real estate located in Switzerland. UBS estimates that the balance of the reserve will be used in the second half of 2000 and in 2001. UBS has achieved 1998 merger-related cost savings of CHF 2 billion per year, including savings related to headcount reductions of CHF 1.6 billion and savings for other costs estimated to be around CHF 0.4 billion per year, including approximately CHF 75 million in eliminated depreciation expenses and other costs related to real estate. Since the 1998 merger was announced, UBS Warburg has essentially completed its integration including the reduction of personnel and the integration of information technology platforms. As expected, most of the cost savings over the past two years have been attributable to UBS Warburg. UBS Asset Management has also essentially completed its integration, while in the Corporate Center UBS expects the write-off or sale of the remaining redundant real estate to proceed in 2000 and 2001. Within UBS Switzerland, Private Banking's integration is essentially complete. Private and Corporate Clients, meanwhile, has been rapidly integrating its business in line with a detailed timetable and project schedule. For example, the branch network has been reduced by 36%, or 200 branches. In addition, now that the integration of the technology platforms has been completed and in line with employee association agreements made in 1998, redundancy plans will gain momentum during 2000 and 2001. As with any merger, cost savings attributable directly to the 1998 merger are becoming increasingly difficult to track. Across all divisions, normal organic business growth, new investments and initiatives, and at least three acquisitions and six divestitures have clouded underlying developments since the time of the 1998 merger. - -------------------------------------------------------------------------------- 69 71 UBS - -------------------------------------------------------------------------------- For example, UBS Warburg's Private Clients business unit has invested heavily over the past two years in building up its onshore private banking business outside Switzerland. Additionally, in 1999, UBS formed the e-services business area, which will experience further significant investment. More information on various divisional initiatives can be found in the respective business descriptions. UBS is also implementing general cost control initiatives across all divisions, which extend well beyond merger-related savings. These initiatives are already well-structured at UBS Warburg's Corporate and Institutional Clients business unit and UBS Switzerland's Private and Corporate Clients business unit. Corporate and Institutional Clients is continuing to focus on cost management with emphasis on improving overall efficiency such that revenue growth exceeds any growth in non-personnel costs. In addition, the Corporate and Institutional Clients Investment Committee has carried out a rigorous review process to ensure that investments in the business unit's infrastructure are fully aligned with the strategy of the business. Within the UBS Switzerland Private and Corporate Clients business unit, the Strategic Projects Portfolio is expected to enhance revenues and reduce costs, including the ongoing realization of the remaining merger-related cost savings. This portfolio is well on track and is expected to yield a significant improvement in net profit by 2002. In the third quarter of 1998, UBS realized a post-tax loss of CHF 984 million as a result of a write-down of its investment in Long Term Capital Management, L.P., or LTCM, and a post-tax loss of CHF 919 million as a result of unrealized losses in the value of its Global Equity Derivatives, or GED, portfolio. Long Term Capital Management. In the case of LTCM, the loss arose from a structured transaction in which UBS sold an option that gave the optionholder the right to purchase shares in LTCM at a predetermined price over a seven-year period. In order to hedge the risk of this option, UBS held $800 million of LTCM shares to create an incrementally risk neutral position. Separate from the structured transaction, UBS also made a further direct equity investment of $266 million in LTCM. In normal market conditions, the structured transaction would have behaved in a controlled manner. However, the structured transaction could not be effectively hedged, particularly in the event of extreme market movements. As a result of the structured transaction, UBS was exposed to a sudden and severe downward movement in the value of LTCM equity, and had very limited scope to hedge this exposure. LTCM's equity was not traded and was valued only periodically based on the underlying instruments held by LTCM. Moreover, LTCM did not provide detailed information about its investment results. Consequently, UBS could not hedge with any precision against adverse moves in the value of LTCM's equity. In particular, when LTCM was faced by a sharp adverse move in market prices relating to certain specific investment strategies, UBS was unable to hedge this risk itself as it had no knowledge of the details of these strategies. At the time of the recapitalization of LTCM in 1998, UBS wrote down its initial investment in LTCM and also agreed to provide a further $300 million (out of $3.6 billion provided by a group of financial institutions) of "consortium" equity in order to avoid a forced liquidation of LTCM and to enable LTCM's portfolio to be managed under the oversight of a management board that would oversee the orderly winding down of LTCM's portfolio. On 24 November 1999, at the release of its nine month 1999 results, UBS reported that its initial investment, which was written down to $106 million, had been bought back by LTCM, with an immaterial impact on UBS's income statement. That position is now closed. In addition, as part of UBS's "consortium" investment, four cash payments totaling $296 million were received by UBS by 31 December 1999. Of these cash repayments, $271 million were treated as a return of its $300 - -------------------------------------------------------------------------------- 70 72 UBS - -------------------------------------------------------------------------------- million investment, to leave a remaining balance of $29 million, and $25 million was recorded as income. Global Equity Derivatives (GED) Portfolio. The other major contributory factor to the third-quarter 1998 losses related to the GED portfolio. This portfolio consists of a number of structured equity derivative transactions. This portfolio was analyzed at the time of the merger and it was recognized that it contained a number of positions that possessed the potential for significant short-term variance. Consequently, when equity market volatilities increased significantly as a result of the market turmoil in the third quarter of 1998, an unrealized loss of about CHF 728 million on the value of the portfolio arose. Over the next 12 months, as volatilities fell and positions were reduced, income from the portfolio of approximately CHF 306 million was recognized. UBS continues to manage the exposure associated with this portfolio in order to minimize the risk of further adverse effects on earnings. The positions have now been included in UBS's standard equity risk management platform and are subject to its normal risk control and stress loss processes. UBS has been reducing the market risk associated with the portfolio and will continue to do so through specific hedges, close-outs and the passage of time. These positions, including the associated hedges, are all carried at fair value. However, given that the average maturity of the transactions in the portfolio is about two years, it will take some time to wind down this exposure, and during this time the portfolio will continue to be exposed to adverse moves in equity markets. Reconciliation of IAS to U.S. GAAP. UBS's consolidated results of operations are prepared in accordance with IAS, which differs in certain respects from U.S. GAAP. A reconciliation of the effects on shareholders' equity and net profit/(loss) to U.S. GAAP for the years ended 31 December 1999 and 1998 is included in Note 42 of UBS's consolidated financial statements. Results of Operations by Business Unit UBS's management reporting system and policies were used to determine the revenues and expenses directly attributable to each business unit. Internal charges and transfer pricing adjustments have been reflected in the performance of each business unit. The basis of the reporting reflects UBS's current management structure (UBS Warburg, UBS Asset Management, UBS Switzerland and Corporate Center), rather than the management structure that existed during 1999 and during 1998, following the 1998 merger (UBS Asset Management, UBS Private Banking, UBS Capital, UBS Private and Corporate Clients, UBS Warburg and Corporate Center). Inter-business unit revenues and expenses include transfers between business units and between geographical locations. Inter-business unit expense charges are recorded as a reduction to expenses in the business unit providing the service. Corporate Center expenses are allocated to the operating business units, to the extent possible, whereby the business unit controlling the process that is driving the expense bears the expense. The credit loss expense included in the business unit results is a statistically derived adjusted annual expected loan loss that reflects the inherent counterparty and country risks in the respective portfolios. The expected loss is based on assumptions about developments covering a full economic cycle and on cumulative loss probabilities over the entire life of the loan portfolio. In determining the inherent counterparty and country risk in the portfolio, UBS takes into consideration the statistical probability of default by the customer and the severity of loss. As each business unit is ultimately responsible for its credit decisions, the difference between actual credit losses and annual expected loan loss will eventually be charged or credited back to the business unit in order to ensure that the risks and rewards of credit decisions are fully reflected in its results. The difference between the statistically adjusted expected loss that is charged to the management - -------------------------------------------------------------------------------- 71 73 UBS - -------------------------------------------------------------------------------- accounts of the business unit and the credit loss expense that is recorded in the financial accounts in accordance with IAS is included in Corporate Center results. The following table compares the expected credit loss charged to the management accounts to the credit loss expense calculated in accordance with IAS, broken down by business unit for the half years to 30 June 2000 and 1999 and for the years ended 31 December 1999 and 1998.
EXPECTED IAS CREDIT LOSS CREDIT EXPENSE EXPECTED CREDIT LOSS IAS CREDIT EXPENSE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 2000 1999 2000 1999 1999 1998 1999 1998 (CHF in millions) (CHF in millions) - -------------------------------------------------------------------------------------------------------------------- UBS Switzerland...... 423 560 (237) 617 1,071 1,186 985 445 UBS Asset Management......... 0 0 0 0 UBS Warburg.......... 115 171 154 14 333 510 (20) 506 Corporate Center..... (621) (96) 4 (448) (745) (9) 0 ----- ---- ----- ---- ------ ------ ---- ---- Total................ (83) 635 (83) 635 956 951 956 951 ----- ---- ----- ---- ------ ------ ---- ---- ----- ---- ----- ---- ------ ------ ---- ----
Business unit results are presented according to the current management structure and current accounting treatment for the following periods: - - Six months ended 30 June 2000 compared to six months ended 30 June 1999; and - - Year ended 31 December 1999 compared to year ended 31 December 1998. Results for the year ended 31 December 1998 compared to the year ended 31 December 1997 are presented in terms of the business divisions through which UBS was managed at that time, namely UBS Private Banking, UBS Private and Corporate Clients, UBS Warburg, UBS Capital, UBS Asset Management and Corporate Center. As a result of the differences in the reporting by the predecessor banks' accounting and reporting policies, the unavailability of certain data, and the shut down and modification of significant computer systems as a result of the 1998 merger and to address Year 2000 issues, there is insufficient information to permit UBS to restate these results in terms of the current business group and business unit structure. The principal differences between the structure in 1997 and the current structure are that the UBS Asset Management Investment Funds business unit and the UBS Warburg Private Clients business unit were part of the Private Banking Division, and their results are included within that Division. In addition, UBS Warburg's UBS Capital business unit was an autonomous division, and UBS Warburg itself consisted only of what is now the UBS Warburg Corporate and Institutional Clients business unit. In addition the comparison of the year ended 31 December 1998 with the year ended 31 December 1997 is based on results which are presented without restatement for new accounting policies introduced in 2000. The principal effect of this is within UBS Warburg. For further details, see Note 1(t) to UBS's consolidated financial statements. In considering these results it is important to bear in mind the following representations with regard to the factors that may affect the operating income of each business unit. INTRODUCTION. UBS SWITZERLAND. Private and Corporate Clients. Private and Corporate Clients derives its operating income principally from: - - interest income on its loan portfolio; - - fees for investment and asset management services; - -------------------------------------------------------------------------------- 72 74 UBS - -------------------------------------------------------------------------------- - - transaction fees; and - - investment income from deposits. As a result, Private and Corporate Clients' operating income is affected by movements in interest rates, fluctuations in assets under management, client activity, investment performance and changes in market conditions. Private Banking. Private Banking derives its operating income from: - - fees for financial planning and wealth management services; - - fees for discretionary services; and - - transaction-related fees. Private Banking's fees are based on the market value of assets under management and the level of transaction-related activity. As a result, Private Banking's operating income is affected by such factors as fluctuations in assets under management, changes in market conditions, investment performance and inflows and outflows of client funds. UBS Asset Management. Prior to the reorganization of UBS in February 2000, UBS Asset Management generated most of its revenue from the asset management services it provides to institutional clients. In 2000 this has become more evenly divided between institutional and non-institutional sources due to the addition of GAM and the Investment Funds business area. Fees charged to institutional clients and on investment funds are based on the market value of assets under management. As a result, UBS Asset Management's revenues are affected by changes in market conditions as well as new and lost business. UBS WARBURG. Corporate and Institutional Clients. Corporate and Institutional Clients generates operating income from: - - commissions on agency transactions and spreads or markups on principal transactions, - - fees from debt and equity capital markets transactions, leverage finance and structuring derivatives and complex transactions; - - mergers and acquisitions advisory fees; - - interest income on principal transactions and from the loan portfolio; and - - gains and losses on market making, proprietary and arbitrage positions. As a result, Corporate and Institutional Clients's operating income is affected by movements in market conditions, interest rate swings, the level of trading activity in primary and secondary markets and the extent of merger and acquisition activity. These and other factors outside the control of Corporate and Institutional Clients have had and may in the future have a significant impact on its results of operations from year to year. UBS Capital. UBS Capital's primary source of operating income is capital gains from the disposition or sale of its investments, which are recorded at the time of ultimate divestment. As a result, appreciation in fair market value is recognized as operating income only at the time of sale. The level of annual operating income from UBS Capital is directly affected by the level of investment dispositions that take place during the course of a year. With the formation of regional funds, UBS Capital has begun to receive management fees from funds UBS manages and sponsors, which are recorded as operating income. - -------------------------------------------------------------------------------- 73 75 UBS - -------------------------------------------------------------------------------- Private Clients. Private Clients derives its operating income from: - - fees for financial planning and wealth management services; - - fees for discretionary services; and - - transaction-related fees. Private Clients' fees are based on the market value of assets under management and the level of transaction-related activity. As a result, Private Clients' operating income is affected by such factors as fluctuations in assets under management, changes in market conditions, investment performance and inflows and outflows of client funds. e-services. The e-services business unit has not yet generated revenues, but expects to generate revenues from fees for financial planning and wealth management services, fees for discretionary services and transaction related fees. It is expected that these fees will be based on the market value of assets under management and the level of transaction-related activity. As a result, e-services' operating income will be affected by such factors as fluctuations in assets under management, changes in market conditions, investment performance and inflows and outflows of client funds. In addition, e-services is a new business with no existing clients and an as yet unproven business model. e-services' possible future income will be affected by its ability to attract clients and by the success or failure of its business model. UBS Switzerland. The business group UBS Switzerland is made up of two business units: - - Private and Corporate Clients, the leading retail and commercial bank in Switzerland; and - - Private Banking, which covers all Swiss and international high net worth clients who bank in Switzerland or offshore centers. Private and Corporate Clients. The following table sets forth the results of Private and Corporate Clients for the half years ended 30 June 2000 and 30 June 1999 and the years ended 31 December 1999 and 1998.
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE(1) 31 DECEMBER(2) 2000 1999(2) 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------------------- OPERATING INCOME: Individual clients........................... 4,553 4,785 Corporate clients............................ 1,855 1,728 Risk transformation and capital management... 330 -- Operations................................... 313 448 Other........................................ 142 64 ------- ------- Total operating income before credit loss expense................................. 3,803 3,599 7,193 7,025 Credit loss expense.......................... 412 554 1,050 1,170 ------- ------- ------- ------- Operating income........................... 3,391 3,045 6,143 5,855 ------- ------- ------- -------
- -------------------------------------------------------------------------------- 74 76 UBS - --------------------------------------------------------------------------------
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE(1) 31 DECEMBER(2) 2000 1999(2) 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel, general and administrative expenses................................... 2,154 2,224 4,486 4,263 Depreciation and amortization................ 219 200 386 684 ------- ------- ------- ------- Operating expenses......................... 2,373 2,424 4,872 4,947 ------- ------- ------- ------- Operating profit before tax............. 1,018 621 1,271 908 ------- ------- ------- ------- (at period end) Assets under management (CHF in billions).... 439 443 439 434 ------- ------- ------- ------- Total loans............................. 162,752 167,004 164,743 164,840 ======= ======= ======= =======
- ------------ (1) Income by business area is only reported at year end. (2) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating income before credit loss expense increased CHF 204 million, or 5.7%, from CHF 3,599 million in the first half of 1999 to CHF 3,803 million in the first half of 2000. This improvement was primarily due to increased brokerage revenues in the strong market conditions, particularly in the first quarter of 2000. Private and Corporate Clients' results are dependent on interest-related businesses, which contribute almost 60% of operating income. Private and Corporate Clients' credit loss expense decreased CHF 142 million, or 26%, from CHF 554 million in the first half of 1999 to CHF 412 million in the second half of 2000 as a result of improved asset quality and increased collateral values. Personnel, general and administrative expenses decreased CHF 70 million, or 3.1%, from CHF 2,224 million in the first half of 1999 to CHF 2,154 million in the first half of 2000. This decrease was due primarily to continued reduction in personnel expense, in line with headcount reductions as a result of the 1998 merger. General and administrative expenses increased by 1%, or CHF 6 million, from CHF 501 million in the first half of 1999 to CHF 507 million in the first half of 2000, while personnel expenses fell 4% or CHF 76 million to CHF 1,647 million in the first half of 2000. Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income before credit loss expense increased CHF 168 million, or 2.4%, from CHF 7,025 million in 1998 to CHF 7,193 million in 1999. This improvement was primarily due to higher margins on interest-related business, such as mortgages, as well as the first full-year impact of the amalgamation and repricing of products from the two former banks. In conjunction with the creation of the Risk Transformation and Capital Management business area in October 1999, the business areas within Private and Corporate Clients were realigned in 1999. These realignments and the resulting effects on 1999 operating income were as follows: - - The Business Client segment was transferred from Individual Clients to Corporate Clients resulting in a decrease in operating income from Individual Clients from 1998 to 1999. - - Operating income from Corporate Clients increased from 1998 to 1999 primarily due to the transfer in of the Business Client segment, the transfer in of the Swiss Global Trade Finance business from UBS Warburg and improving interest margins. The transfer out of the Recovery portfolio to Risk Transformation and Capital Management partially offset these increases. - -------------------------------------------------------------------------------- 75 77 UBS - -------------------------------------------------------------------------------- - - Operating income from Operations decreased compared to 1998. This was the net effect of the transfer of emerging market bank activities from UBS Warburg into UBS Private and Corporate Clients and the transfer of industrialized bank activities to UBS Warburg during 1999. UBS's credit loss expense decreased CHF 120 million, or 10.3%, from CHF 1,170 million in 1998 to CHF 1,050 million in 1999 as a result of the accelerated reduction of impaired positions and the movement to higher quality businesses. This was partially offset by increased loss expectations primarily resulting from the transfer of the remainder of the Swiss Global Trade Finance business from UBS Warburg during 1999. Personnel, general and administrative expenses increased CHF 223 million, or 5.2%, from CHF 4,263 million in 1998 to CHF 4,486 million in 1999. This increase was due primarily to merger related IT integration work, work relating to the Year 2000 transition and the costs associated with the shift of the Swiss Trade Finance business from UBS Warburg. This business, with approximately 400 professionals, was transferred from UBS Warburg in early 1999. These increases were partially offset by cost savings resulting from the closure of redundant branches. Depreciation and amortization expense decreased CHF 298 million, or 43.6%, from CHF 684 million in 1998 to CHF 386 million in 1999, primarily due to reduced assets employed subsequent to the merger. Private Banking. The following table sets forth the results of Private Banking for the half years ended 30 June 2000 and 30 June 1999 and the years ended 31 December 1999 and 1998.
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - -------------------------------------------------------------------------------------------- OPERATING INCOME: Operating income before credit loss expense..... 3,471 2,728 5,568 6,933 Credit loss expense............................. 11 6 21 16 ------ ------ ------ ------ Operating income.............................. 3,460 2,722 5,547 6,917 ------ ------ ------ ------ OPERATING EXPENSES: Personnel, general and administrative expenses...................................... 1,425 1,147 2,513 2,411 Depreciation and amortization................... 55 38 97 91 ------ ------ ------ ------ Operating expenses............................ 1,480 1,185 2,610 2,502 ------ ------ ------ ------ Operating profit before tax................ 1,980 1,537 2,937 4,415 ====== ====== ====== ====== (at period end) ASSETS UNDER MANAGEMENT (CHF IN BILLIONS): Advisory........................................ 533 470 501 437 Discretionary................................... 150 160 170 142 ------ ------ ------ ------ Total......................................... 683 630 671 579 ====== ====== ====== ======
- ------------ (1) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating before credit loss expense income increased CHF 743 million, or 27.2%, from CHF 2,728 million in the first half of 1999 to CHF 3,471 million in the first half of 2000. This increase principally reflected higher transaction-based revenues due to higher levels of client transaction activity and asset growth since 30 June 1999. - -------------------------------------------------------------------------------- 76 78 UBS - -------------------------------------------------------------------------------- Assets under management increased CHF 53.0 billion, or 8.4%, from 30 June 1999 to 30 June 2000, with most of the increase due to positive performance trends, partially offset by a net decline of CHF 3 billion in new money. Operating expenses increased 24.8%, or CHF 295 million, to CHF 1,480 million from the first half of 1999 to the first half of 2000, mainly due to increased general and administrative expense. Personnel, general and administrative expenses increased CHF 278 million, or 24.2%, from CHF 1,147 million in the first half of 1999 to CHF 1,425 million in the first half of 2000. Personnel costs increased 16.5%, or CHF 109 million, to CHF 769 million in the first half of 2000, due to increased performance-related compensation in line with strong first half 2000 results and an increase in headcount. Headcount went up by 750 from 6,697 at 30 June 1999 to 7,447 at 30 June 2000 as Private Banking expanded its front line staff and strengthened its logistics. General and administrative expenses increased 34.7%, or CHF 169 million, from the first half of 1999 to the first half of 2000 due to increases in IT and marketing expenses and higher intra-Group cost recoveries, driven by higher transaction levels. Goodwill amortization increased CHF 9 million, or 112.5%, to CHF 17 million in the first half of 2000 as a result of the acquisition of Bank of America's international private banking business, which took place in the second quarter of 1999. Depreciation increased CHF 8 million, or 26.6%, from CHF 30 million in the first half of 1999 to CHF 38 million in the first half of 2000. Year to 31 December 1999 Compared to Year to 31 December 1998. In March 1999, UBS acquired Bank of America's international private banking operations in Europe and Asia, thereby increasing the assets under management in UBS Private Banking by approximately CHF 5 billion as of 31 December 1999. The remainder of the increase was principally performance related. Operating income before credit loss expense decreased CHF 1,365 million, or 19.7%, from CHF 6,933 million in 1998 to CHF 5,568 million in 1999. This significant decrease principally reflected lower transaction-based revenues due to lower levels of client transaction activity. CHF 1,058 million gains from the divestitures of BSI and Adler, as well as CHF 268 million of operating income relating to BSI's operations, are included in operating income for 1998 and did not recur in 1999. Excluding the disposal related income, operating income from UBS Private Banking increased 2.3% from 1998 to 1999. Notwithstanding the decrease in operating income, assets under management increased during 1999 by CHF 92 billion, or 15.9%. Strong markets, especially in Europe, the United States and in the technology sector, as well as the stronger U.S. dollar, led to a performance increase of CHF 80 billion for 1999. In addition, the acquisition of the international private banking operations of Bank of America accounted for an additional CHF 5 billion while interdivisional transfers resulted in another CHF 6 billion. This increase was partially offset, however, by decreased volumes from existing clients during the second half of 1999. Operating expenses, adjusting for CHF 125 million in divestiture-related operating expenses, increased 4.3%, or CHF 108 million, to CHF 2,610 million in 1999, to a large extent as a result of UBS's expansion in the front-line staff as well as infrastructure related investments. Personnel, general and administrative expenses increased CHF 102 million, or 4.2%, from CHF 2,411 million in 1998 to CHF 2,513 million 1999. Personnel costs increased 9.7%, or CHF 118 million, to CHF 1,328 million, in 1999 due to an increase in headcount of 710 from 6,546 at 31 December 1998 to 7,256 at 31 December 1999. Headcount growth resulted from the acquisition in 1999 of Bank of America's international private banking operations, enhancement of UBS's logistics capabilities and support for the introduction of new portfolio monitoring and advisory capabilities. Operating expenses in 1998 also included CHF 125 million related to BSI that did not occur in 1999. - -------------------------------------------------------------------------------- 77 79 UBS - -------------------------------------------------------------------------------- As a result of the acquisition of the international private banking operations of Bank of America, goodwill amortization increased to CHF 21 million in 1999. Depreciation decreased CHF 15 million, or 16.5%, from CHF 91 million in 1998 to CHF 76 million in 1999. UBS Asset Management. Institutional Asset Management. The following table sets forth the results of Institutional Asset Management for the half years ended 30 June 2000 and 30 June 1999 and the years ended 31 December 1999 and 1998.
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------------- OPERATING INCOME........................................ 638 542 1,099 1,163 OPERATING EXPENSES: Personnel, general and administrative expenses.......... 402 331 636 619 Depreciation and amortization........................... 98 63 138 107 --- --- ----- ----- Operating expenses.................................... 500 394 774 726 --- --- ----- ----- Operating profit before tax........................ 138 148 325 437 === === ===== ===== (at period end) Assets under management (CHF in billions):.............. 525 563 574 531
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Assets under management decreased 6.7% or CHF 38 billion, from CHF 563 million at 30 June 1999 to CHF 525 billion at 30 June 2000, with increases in non-institutional assets under management more than offset by losses in institutional assets under management. Non-institutional assets under management increased primarily because of market performance, while institutional assets under management declined mainly due to client losses, as a result of performance issues in equity related mandates, offset by the effect of currency movements and the acquisition of Allegis Realty Investors LLC in December 1999. Operating income increased CHF 96 million, or 17.5%, from CHF 542 million in the first half of 1999 to CHF 638 million in the first half of 2000. Despite the decrease in assets under management, operating income increased as a result of the acquisition of Allegis, the addition of the O'Connor alternative asset management business formed in June 2000 and positive currency movements, partially offset by lost revenue from client losses. Personnel, general and administrative expenses increased CHF 71 million, or 21.5%, from CHF 331 million in the first half of 1999 to CHF 402 million in the first half of 2000. Headcount increased 13.6% from 1,507 as of 30 June 1999 to 1,712 as of 30 June 2000, primarily as a result of the acquisition of Allegis in December 1999 and the creation of the O'Connor business in June 2000. Personnel expenses increased 18.7% from CHF 252 million in the first half of 1999 to CHF 299 million in the first half of 2000 due to the acquisition of Allegis, the addition of the O'Connor business and currency movements. General and administrative expenses increased 30.4% to CHF 103 million in the period as a result of the acquisition of Allegis and currency movements. Depreciation and amortization expense increased CHF 35 million, or 56%, from CHF 63 million in the first half of 1999 to CHF 98 million in the first half of 2000, reflecting the acquisition of Allegis. - -------------------------------------------------------------------------------- 78 80 UBS - -------------------------------------------------------------------------------- Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income decreased CHF 64 million, or 5.5%, from CHF 1,163 million in 1998 to CHF 1,099 million in 1999. Assets under management increased 8.1%, or CHF 43 billion, to CHF 574 billion at 31 December 1999, with increases in both institutional and non-institutional categories year-on-year. Despite the 4.4% increase in institutional assets under management, which primarily resulted from investment performance, the acquisition of Allegis and growth in private client mandates, institutional revenues decreased. This decrease from CHF 968 million in 1998 to CHF 903 million in 1999 reflects a slight decline in average institutional assets under management from 1998 to 1999, as gains from performance and currency were offset by loss of clients and performance issues in certain mandate types. Average non-institutional assets increased by 18% during 1999; however, non-institutional revenues declined slightly to CHF 193 million as a result of new interdivisional fee arrangements with UBS Private Banking. Personnel, general and administrative expenses increased CHF 17 million, or 2.7%, from CHF 619 million in 1998 to CHF 636 million in 1999. Headcount increased from 1,497 as of 31 December 1998 to 1,653 as of 31 December 1999, primarily as a result of the acquisition of Allegis in December 1999. Personnel expenses decreased slightly from CHF 465 million in 1998 to CHF 458 million in 1999 reflecting decreased incentive compensation. General and administrative expenses increased 15.6% to CHF 178 million in 1999 as a result of revisions in cost-sharing arrangements between Institutional Asset Management and other divisions of UBS. Depreciation and amortization expense increased CHF 31 million, or 29%, from CHF 107 million in 1998 to CHF 138 million in 1999, reflecting increased goodwill amortization related to the buy-out of UBS's joint venture with the Long-Term Credit Bank of Japan. Investment Funds/GAM. The following table sets forth the results of Investment Funds/GAM for the half years ended 30 June 2000 and 1999 and the years ended 31 December 1999 and 1998.
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------------------------- OPERATING INCOME........................................... 334 102 270 195 OPERATING EXPENSES: Personnel, general and administrative expenses............. 215 75 151 124 Depreciation and amortization.............................. 55 3 7 6 --- --- --- --- Operating expenses....................................... 270 78 158 130 --- --- --- --- Operating profit before tax.............................. 64 24 112 65 === === === === (at period end) Assets under management (CHF in billions).................. 225 190 225 175
- ------------ (1) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Assets under management increased 18.4%, or CHF 35 billion, from CHF 190 million at 30 June 1999 to CHF 225 billion at 30 June 2000, as a result of the acquisition of GAM, which had CHF 24 billion assets under management at 31 December 1999, and positive market performance. Operating income increased CHF 232 million, or 227.5%, from CHF 102 million in the first half of 1999 to CHF 334 million in the first half of 2000. This was a result of the GAM acquisition and increases in Investment Fund fees from higher asset levels. - -------------------------------------------------------------------------------- 79 81 UBS - -------------------------------------------------------------------------------- Personnel, general and administrative expenses increased CHF 140 million, or 187%, from CHF 75 million in the first half of 1999 to CHF 215 million in the first half of 2000. Headcount increased 165% from 392 as of 30 June 1999 to 1,038 as of 30 June 2000, primarily as a result of the acquisition of GAM and an increase of about 100 people to support increased marketing and distribution initiatives in Investment Funds. Personnel expenses increased 321% from CHF 29 million in the first half of 1999 to CHF 122 million in the first half of 2000 due to the acquisition of GAM. General and administrative expenses increased 102.2% from 30 June 1999 to CHF 93 million at 30 June 2000 as a result of the acquisition of GAM and marketing and distribution initiatives in Investment Funds. Depreciation and amortization expense increased CHF 52 million, or 1,733% from CHF 3 million in the first half of 1999 to CHF 55 million in the first half of 2000, reflecting goodwill amortization following the acquisition of GAM. Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income increased CHF 75 million, or 38.5%, from CHF 195 million in 1998 to CHF 270 million in 1999. This was principally due to higher Investment Funds assets and the transfer from Private Banking of some client responsibility and related income. The acquisition of GAM did not impact income or expenses in 1999. Assets under management increased 28.1%, or CHF 50 billion, to CHF 225 billion at 31 December 1999. CHF 24 billion of this increase was due to the acquisition of GAM in December 1999. The remainder was mainly due to positive investment performance. Personnel, general and administrative expenses increased CHF 27 million, or 21.7%, from CHF 124 million in 1998 to CHF 151 million in 1999. Headcount increased from 366 as of 31 December 1998 to 923 as of 31 December 1999, primarily as a result of the acquisition of GAM in December 1999. Excluding GAM, headcount increased by 69, as a result of efforts to build the Investment Funds business, including the launching of new funds and expansion of distribution efforts. Personnel expenses increased 16% from CHF 50 million in 1998 to CHF 58 million in 1999 in line with the increase in headcount. General and administrative expenses increased 25.7% to CHF 93 million in 1999 reflecting increased investment in international distribution and the costs of launching new funds, offset by synergies from the 1998 merger, including reduced fees for market data systems and the combination of fund valuation and management systems. Depreciation and amortization expense increased CHF 1 million, or 16.7%, from CHF 6 million in 1998 to CHF 7 million in 1999, as a result of changes in the holding structure of some of the business unit's real estate funds. UBS Warburg. Corporate and Institutional Clients. The Corporate Finance business area within Corporate and Institutional Clients provides both advisory services and financing services. The financing services include both equity and fixed-income offerings undertaken in cooperation with the Equity Capital Markets, Debt Capital Markets and Leveraged Finance groups. Accordingly, a portion of operating income associated with these equity and fixed-income financing services is allocated to Corporate Finance and the remaining operating income is allocated to the Equities business area or Fixed Income business area as appropriate. - -------------------------------------------------------------------------------- 80 82 UBS - -------------------------------------------------------------------------------- The following table sets forth the results of Corporate and Institutional Clients for the half years ended 30 June 2000 and 1999 and the years ended 31 December 1999 and 1998.
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1)(2) 1999 1998 (CHF in millions) - ----------------------------------------------------------------------------------------------- OPERATING INCOME: Equities......................................... 5,724 3,253 Fixed Income..................................... 2,464 (267) Corporate Finance................................ 2,054 1,665 Treasury Products................................ 1,805 2,351 Non-Core Business................................ 682 (96) ------ ------ Total operating income before credit loss expense........................................ 9,909 6,966 12,729 6,906 Credit loss expense.............................. 113 171 330 500 ------ ------ ------ ------ Operating income............................... 9,796 6,795 12,399 6,406 ------ ------ ------ ------ OPERATING EXPENSES: Personnel, general and administrative............ 6,601 4,972 9,290 6,816 Depreciation and amortization.................... 330 393 763 692 ------ ------ ------ ------ Operating expenses............................. 6,931 5,365 10,053 7,508 ------ ------ ------ ------ Operating profit (loss) before tax.......... 2,865 1,430 2,346 (1,102) ====== ====== ====== ======
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. (2) Income by business area is only reported at year end. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating income increased CHF 3,001, or 44.2% from CHF 6,795 in the first half of 1999 to CHF 9,796 in the first half of 2000. Corporate Finance revenues increased in the first half of 2000 with a strong performance in mergers and acquisitions, and both Equities and Fixed Income produced record revenues reflecting active markets and record levels of client commissions, offset by slightly weaker performances by Treasury Products. Credit loss expense decreased CHF 58 million, or 33.9%, from CHF 171 million in the first half of 1999 to CHF 113 million in the first half of 2000. This reflected a decrease in expected credit losses due primarily to the continued wind-down of the non-core loan portfolio and the sale of the international Global Trade Finance business in mid-1999. Personnel, general and administrative expenses increased CHF 1,629 million, or 32.8%, from CHF 4,972 million in the first half of 1999 to CHF 6,601 million in the first half of 2000. Despite a slight reduction in headcount of 418 from 13,148 at 30 June 1999 to 12,730 at 30 June 2000, personnel expenses increased CHF 1,464 million, or 37.6%, to CHF 5,362 in the first half of 2000, due primarily to performance-related compensation tied directly to the strong results for the half. General and administrative expenses increased by CHF 165 million, or 15.4%, from the first half of 1999 to the first half of 2000, mainly driven by increased investments in e-commerce and technology. Depreciation and amortization decreased CHF 63 million, or 16%, from CHF 393 million in the first half of 1999 to CHF 330 million in the first half of 2000, as the depreciation impact of 1998 merger-related IT and premises projects diminished. - -------------------------------------------------------------------------------- 81 83 UBS - -------------------------------------------------------------------------------- Year to 31 December 1999 Compared to Year to 31 December 1998. In October and November 1998, UBS's Board of Directors mandated and undertook a review of UBS's risk profile and risk management as well as UBS's control processes and procedures. The review placed particular emphasis on the Fixed Income business area, which had experienced losses on credit exposures in certain emerging market assets. Each of the business areas selected for review was assessed as to whether it supported the UBS and UBS Warburg franchises and, if so, whether the expected return as compared to the estimated risk justified a continuation of the business. Corporate and Institutional Clients used the review to define its core and non-core business areas, and decided to wind down over time the identified non-core businesses. The businesses identified as non-core in late 1998 are: - Lease Finance; - Commodities Trading (energy, base metals, electricity); - Non-structured Asset-Backed Finance; - Distressed Debt Trading; - Global Trade Finance, with the exception of the Swiss corporate business; - Conduit Finance; - Non-core loans -- loans and commitments that are not part of UBS's tradeable asset portfolio, that are not issued in conjunction with UBS's Leveraged Finance business or that are credit exposures UBS wishes to reduce; and - Project Finance. The identified non-core businesses are being wound down over time and will be disposed of as appropriate. While UBS considers all of its non-core businesses to be held for sale (including those listed above), none of these businesses constitutes a segment to be treated as a discontinued operation, as defined by U.S. GAAP. Businesses designated as non-core businesses remain consolidated for purposes of both IAS and U.S. GAAP unless and until such businesses are actually sold or otherwise disposed of. Most of UBS's international Global Trade Finance business was sold during the first quarter of 1999 and its Conduit Finance business was sold during the third quarter of 1999. UBS's non-core loan portfolio decreased approximately CHF 46 billion, or 54.1%, from approximately CHF 85 billion as of 31 December 1998 to CHF 39 billion as of 31 December 1999. Negotiations for the sale of the Project Finance portfolio and residual Global Trade Finance positions were completed in December 1999 for proceeds approximating their carrying values. As a result, no material losses were realized. Certain aspects of UBS's Global Equities Derivatives portfolio previously identified at the time of the 1998 merger as inconsistent with UBS's risk profile were also designated as a non-core business during late 1998 in order to segregate this activity from the rest of its Equities business. UBS accrued CHF 154 million as a restructuring reserve for this portion of the portfolio. In 1999, Corporate and Institutional Clients' operating income before credit loss expense from core businesses amounted to CHF 12,047 million and its operating income before credit loss expense from non-core businesses was CHF 682 million. Operating income from Equities increased CHF 2,471 million, or 76%, from CHF 3,253 million in 1998 to CHF 5,724 million in 1999. This increase was primarily due to continued strong growth throughout 1999 compared to weaker results and losses in 1998 that did not recur. Equities performed well during the six months ended 30 June 1998, but experienced a more difficult trading environment in the second half of 1998 as a result of higher volatility levels in equity markets. In 1999, Equities - -------------------------------------------------------------------------------- 82 84 UBS - -------------------------------------------------------------------------------- performed strongly in all major markets. Continuing strong secondary cash and derivatives business with institutional and corporate clients contributed significantly to the positive results. Operating income from Fixed Income increased CHF 2,731 million from CHF (267) million in 1998 to CHF 2,464 million in 1999. The improvement in Fixed Income largely reflected particularly strong performance in swaps and options and investment grade corporate debt products during 1999. Strong client flows drove both investor and issuer activities, resulting in increased revenues. Weaker than expected results in Fixed Income in 1998 were due primarily to significant losses in the Group's emerging market portfolio, which were largely attributable to Corporate and Institutional Clients and a write-down of CHF 790 million in the division's LTCM trading position. Operating income from Corporate Finance increased CHF 389 million, or 23.4%, from CHF 1,665 million in 1998 to CHF 2,054 million in 1999. Strong performance in mergers and acquisitions, resulting in higher advisory fees, and contributions from UBS's Equity and Debt Capital Markets Groups were the primary drivers of the increase. Operating income from Treasury Products decreased CHF 546 million, or 23.2%, from CHF 2,351 million in 1998 to CHF 1,805 million in 1999. Foreign exchange trading, while continuing to be profitable, was adversely affected by diminished volumes in key markets in 1999. The reduced levels of activity resulted from the introduction of the euro and narrowing margins from increased competition in the global markets. Corporate and Institutional Clients' precious metals business was adversely impacted by the dramatic volatility in the gold market in the fourth quarter of 1999. Operating income from the non-core business as identified above increased CHF 778 million from CHF (96) million in 1998 to CHF 682 million in 1999. In 1998, Equities recognized losses of CHF 762 million from the Global Equity Derivatives portfolio as compared to 1999, during which this portfolio generated CHF 99 million in positive revenues. The losses recognized in 1998 were partially offset by CHF 498 million in revenues generated by Global Trade Finance. In addition, during 1999 the Global Trade Finance business was sold for a CHF 200 gain after generating approximately CHF 160 million in revenues in 1999. Credit loss expense decreased CHF 170 million, or 34.0%, from CHF 500 million in 1998 to CHF 330 million in 1999. This reflected a decrease in expected credit losses due primarily to the continued wind-down of the non-core loan portfolio and the sale of the international Global Trade Finance business in mid-1999. See "--UBS Switzerland--Private and Corporate Clients" for a discussion of the impact of the transfer of UBS's Swiss Global Trade Finance business to Private and Corporate Clients. The non-core loan portfolio will continue to be wound-down. Personnel, general and administrative expenses increased CHF 2,474 million, or 36.3%, from CHF 6,816 million in 1998 to CHF 9,290 million in 1999. Despite a reduction in headcount of 1,100, or 8%, from 13,794 at 31 December 1998 to 12,694 at 31 December 1999, personnel expenses increased CHF 2,528 million, or 58.3%, to CHF 6,861 in 1999, due primarily to performance-related compensation tied directly to the strong divisional results for the year. In addition, in 1998, CHF 1,007 million of accrued payments to personnel was charged against the restructuring reserve. At the end of 1997, UBS foresaw the probability of a shortfall in profit in its investment banking business as a result of the merger. In order to protect its investment banking franchise, UBS realized it would probably need to make payments to personnel in excess of amounts determined by normal compensation methodologies. An amount of approximately CHF 1 billion was recorded as part of the merger-related restructuring reserve for this purpose. By the third quarter of 1998, this shortfall had materialized, and the CHF 1,007 million of accrued payments to personnel were charged against the restructuring reserve as planned. The shortfall in profits noted above was aggravated by losses associated with LTCM and the Global Equity Derivatives portfolio. After adjusting 1998 for the - -------------------------------------------------------------------------------- 83 85 UBS - -------------------------------------------------------------------------------- amount charged to the restructuring reserve, personnel expenses in 1999 increased 28.5% against the comparative prior period. General and administrative expenses remained relatively flat from 1998 to 1999. Depreciation and amortization increased CHF 71 million, or 10.3%, from CHF 692 million in 1998 to CHF 763 million in 1999, primarily reflecting accelerated amortization of the goodwill on a Latin American subsidiary. UBS Capital. The following table sets forth the results of UBS Capital for the half years ended 30 June 2000 and 1999 and the years ended 31 December 1999 and 1998.
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------- OPERATING INCOME.................................... 151 120 315 585 OPERATING EXPENSES: Personnel, general and administrative............... 76 60 151 156 Depreciation and amortization....................... 4 3 7 1 --- --- --- --- Operating expenses.................................. 80 63 158 157 --- --- --- --- Operating profit before tax......................... 71 57 157 428 === === === ===
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating income increased CHF 31 million, or 25.8% from CHF 120 million in the first half of 1999 to CHF 151 million in the first half of 2000. This reflects an increase in realized gains resulting from an increased number of sales of investments in the first half of 2000 as compared to 1999, partially offset by write-downs of the value of some under-performing companies in the portfolio. Personnel, general and administrative expenses increased by CHF 16 million, or 26.7%, from CHF 60 million in the first half of 1999 to CHF 76 million in the first half of 2000. This was mainly driven by bonus expenses. Bonuses are accrued when an investment is successfully exited, so personnel expenses increase when divestments occur. UBS Capital made approximately CHF 0.8 billion of new investments and add-ons between 31 December 1999 and 30 June 2000, compared to CHF 0.6 billion in the equivalent period in 1999. UBS Capital is gradually increasing its annual investment rate, as demonstrated by the higher investment rate in the first half of 2000 as compared to the first half of 1999. UBS Capital has a target portfolio book value of approximately CHF 5 billion from its own investments and CHF 5 billion from third-party funds. Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income decreased CHF 270 million, or 46.2%, from CHF 585 million in 1998 to CHF 315 million in 1999. This reflects a decrease in realized gains resulting from a reduced number of sales of investments in 1999 as compared to 1998. In 1999, operating income included CHF 13 million of management fees paid by funds that UBS manages and sponsors. Personnel, general and administrative expenses decreased slightly by CHF 5 million, or 3.2%, from CHF 156 million in 1998 to CHF 151 million 1999. These expenses remained stable despite the business unit's expansion into new regions and sectors, the recruitment of new professionals, the high level of investment activity during 1999 and the associated investment costs. As part of the - -------------------------------------------------------------------------------- 84 86 UBS - -------------------------------------------------------------------------------- restructuring related to the 1998 merger, one team from UBS Capital moved to another business unit effective 1 January 1999. This resulted in a lower headcount during most of 1999 when compared to 1998, and therefore personnel costs decreased 13.2% from CHF 121 million in 1998 to CHF 105 million in 1999. General and administrative expenses increased CHF 11 million, or 31.4%, to CHF 46 million in 1999 mainly due to deal-related expenses. UBS Capital made approximately CHF 1.4 billion of new investments and add-ons during 1999. Private Clients. The following table sets forth the results of Private Clients for the half years ended 30 June 2000 and 1999 and the years ended 31 December 1999 and 1998.
FOR THE SIX MONTHS FOR THE ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999(1) 1999 1998 (CHF in millions) - ----------------------------------------------------------------------------------------------- OPERATING INCOME............................................ 133 93 194 190 OPERATING EXPENSES: Personnel, general and administrative....................... 365 216 481 294 Depreciation and amortization............................... 14 18 40 29 ---- ---- ---- ---- Operating expenses........................................ 379 234 521 323 ---- ---- ---- ---- Operating loss before tax.............................. (246) (141) (327) (133) ==== ==== ==== ==== (at period end) Assets under management (CHF in billions)................... 37 29 36 27
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 compared to Half Year to 30 June 1999. Operating income increased CHF 40 million, or 43%, from CHF 93 million in the first half of 1999 to CHF 133 million in the first half of 2000. Revenues have increased as assets under management have grown and a wider range of products and services has been offered to clients. With the exception of its business activities in Germany and Australia, UBS Warburg's Private Clients business is in the relatively early stages of development and its client relationships have not yet delivered their full revenue potential. Private Clients opened new offices in Rome, Madrid, Barcelona and Marbella in January 1999 and in Stuttgart and Paris in June 1999. Assets under management increased by CHF 8 billion, or 27.6%, from 30 June 1999 to 30 June 2000, driven primarily by market performance. Operating expenses increased 62%, or CHF 145 million, from CHF 234 million in the first half of 1999 to CHF 379 million in the first half of 2000, mainly due to the expansion of Private Clients' offices during the year. This included a restructuring charge of CHF 93 million taken as a result of scaling back operations in certain markets, subsequent to integration of Private Clients into UBS Warburg in February 2000. CHF 60 million of the charge relates to personnel costs, the remainder to general and administrative expenses. Personnel, general and administrative expenses increased CHF 149 million, or 69.0%, from CHF 216 million in the first half of 1999 to CHF 365 million in the first half of 2000. Personnel costs increased 86.6%, or CHF 116 million, to CHF 250 million in the first half of 2000, versus the first half of 1999, including the restructuring charge of CHF 60 million as explained above. Excluding this restructuring charge, personnel expenses increased 41.8% in line with increases in headcount, and bonus accruals increased in line with improved revenue performance. General and administrative - -------------------------------------------------------------------------------- 85 87 UBS - -------------------------------------------------------------------------------- expenses increased CHF 33 million, or 40%, from the first half of 1999 to the first half of 2000, due to the restructuring provision explained above. Excluding this provision, general and administrative expenses were unchanged, reflecting continued close management of non-personnel costs in the context of a growing business. Year to 31 December 1999 Compared to Year to 31 December 1998. Results for the year ended 31 December 1998 are driven by a business consisting primarily of the private banking operations of Schroder Munchmeyer Hengst, a German private bank acquired by the former Union Bank of Switzerland in August 1997, domestic private banking activities in Australia, and limited onshore private banking activities conducted in the United States and Italy, established by the former Union Bank of Switzerland. Operating income increased CHF 4 million, or 2%, from CHF 190 million in 1998 to CHF 194 million in 1999. Assets under management increased during 1999 by CHF 9 billion, or 33%. Operating expenses increased 61%, or CHF 198 million, to CHF 521 million in 1999, as a result of expansion in front-line and support staff, office locations, and infrastructure related investments. Personnel, general and administrative expenses increased CHF 187 million, or 64%, from CHF 294 million in 1998 to CHF 481 million in 1999. Personnel costs increased 57%, or CHF 107 million, to CHF 294 million in 1999 due to an increase in headcount of 664, or 92%, from 722 at 31 December 1998 to 1,386 at 31 December 1999. General and administrative expenses increased CHF 80 million, or 75%, from 1998 to CHF 187 million in 1999, due to increases in information technology, property and other infrastructure costs to support the new offices and increased headcount. e-services. UBS Group established the e-services project in the third quarter of 1999. The following table sets forth the results of e-services for the half year ended 30 June 2000 and the year ended 31 December 1999.
FOR THE FOR THE SIX MONTHS YEAR ENDED ENDED 30 JUNE 31 DECEMBER 2000 1999(1) (CHF in millions) - -------------------------------------------------------------------------------------------- OPERATING INCOME............................................ 0 0 OPERATING EXPENSES: Personnel, general and administrative....................... 144 36 Depreciation and amortization............................... 14 3 ------------- ----------- Operating expenses........................................ 158 39 ------------- ----------- Operating loss before tax.............................. (158) (39) ============= ===========
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. e-services has yet to be launched to the public. Accordingly, there have been no revenues. Operating expenses were CHF 158 million in the first half of 2000, mainly related to the hiring of front-line staff as well as infrastructure-related investments in core technologies. Personnel, general and administrative expenses were CHF 144 million in the first half of 2000 and CHF 36 million in 1999, - -------------------------------------------------------------------------------- 86 88 UBS - -------------------------------------------------------------------------------- of which CHF 84 million and CHF 18 million were personnel costs. These expenses are primarily related to - - the hiring of the management team across a broad range of functions, - - the establishment of the operations infrastructure, including new call centers in Maastricht and Edinburgh, - - the installation and testing of systems platforms, and - - the testing of the marketing concept. Corporate Center. The following table sets forth the results of Corporate Center for the half years ended 30 June 2000 and 1999 and the years ended 31 December 1999 and 1998.
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER(1) 2000 1999 1999 1998 (CHF in millions) - ---------------------------------------------------------------------------------------------- OPERATING INCOME: Operating income before credit loss expense......... 33 1,587 2,010 191 Credit loss expense................................. (621) (96) (448) (745) ---- ----- ----- ------ Operating income.................................. 654 1,683 2,458 936 ---- ----- ----- ------ OPERATING EXPENSES: Personnel general and administrative expenses....... 668 182 931 1,868 Depreciation and amortization....................... 158 146 416 215 ---- ----- ----- ------ Operating expenses................................ 826 328 1,347 2,083 ---- ----- ----- ------ Operating profit (loss) before tax............. (172) 1,355 1,111 (1,147) ==== ===== ===== ======
- --------------- (1) Certain amounts have been restated to conform to the 2000 presentation. Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating income before credit loss expense decreased CHF 1,554 million from CHF 1,587 million in the first half of 1999 to CHF 33 million in the first half of 2000, primarily due to one-time gains on the divestitures of the stake in Swiss Life/Rentenanstalt of CHF 1,490 million and of Julius Baer registered shares of CHF 110 million included in the first half of 1999. Operating income before credit loss expense included CHF 214 million in the first half of 2000, due to the consolidation of Klinik Hirslanden AG. Other gains and losses attributable to Corporate Center arise from funding, capital and balance sheet management, the management of corporate real estate and the management of foreign currency earnings activities undertaken by Group Treasury. Credit loss expense in Corporate Center reconciles the difference between management accounting and financial accounting, that is between the adjusted expected losses charged to the divisions and the actual credit loss expense recognized in the Group financial accounts. The Swiss economy has been strong in the first half of 2000 and has led to lower than expected credit losses, and a write back of credit loss provisions of CHF 208 million, resulting in a credit of CHF 621 million in this line. Personnel, general and administrative expenses increased CHF 486 million, or 267%, from CHF 182 million in the first half of 1999 to CHF 668 million in the first half of 2000. Personnel costs increased CHF 208 million, or 254%, in the first half of 2000 from CHF 82 million in the first half of 1999 to CHF 290 in the first half of 2000. This increase is largely attributable to the first-time consolidation of Klinik Hirslanden AG beginning in the second half of 1999. - -------------------------------------------------------------------------------- 87 89 UBS - -------------------------------------------------------------------------------- General and administrative expenses increased 278%, or CHF 278 million, to CHF 378 million in the first half of 2000 from CHF 100 million in the first half of 1999, primarily as a result of the following items, which were included in general and administrative expenses for the first half of 2000: - - an additional charge of CHF 200 million for the U.S. global settlement of Holocaust-related claims; and - - expenses of Klinik Hirslanden AG as a result of the consolidation of this entity in the first half of 2000, but not in the first half of 1999. Depreciation and amortization increased CHF 12 million, or 8.2%, from CHF 146 million in the first half of 1999 to CHF 158 million in 1999, principally reflecting the inclusion of Klinik Hirslanden AG in the first half of 2000. The remaining portion of depreciation and amortization includes depreciation of workstations and information technology equipment, goodwill and other intangible assets as well as depreciation of other fixed assets. Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income before credit loss expense increased CHF 1,819 million, or 952%, from CHF 191 million in 1998 to CHF 2,010 million in 1999, primarily due to the following: - - gains on the divestments of Swiss Life/Rentenanstalt of CHF 1,490 million and of UBS's interest in Julius Baer registered shares of CHF 110 million included in 1999; - - approximately CHF 380 million due to the first time consolidation of Klinik Hirslanden AG included in 1999; and - - negative impact on 1998 operating income due to the loss of CHF 370 million from LTCM. In addition, revenues attributable to Corporate Center arise from the funding, capital and balance sheet management, and the management of foreign currency earnings activities undertaken by Group Treasury. Personnel, general and administrative expenses decreased CHF 937 million, or 50.2%, from CHF 1,868 million in 1998 to CHF 931 million in 1999. Personnel costs decreased 56.6% to CHF 92 million in 1999 from CHF 212 million in 1998 primarily as a result of the recognition in 1999 of pre-paid employer pension contributions of CHF 456 million. This represents the difference between previously recorded and actuarially determined pension expenses and was recognized in 1999 after the resolution of certain legal and regulatory issues. Excluding the recognition of this benefit, personnel expenses increased from 1998 to 1999 despite a slight decrease in headcount from 921 in 1998 to 862 in 1999. This increase year-on-year is largely attributable to the first-time consolidation of Klinik Hirslanden AG in 1999. General and administrative expenses decreased CHF 817 million, or 49.3%, to CHF 839 million in 1999 from CHF 1,656 million in 1998, primarily as a result of a charge for the U.S. global settlement of Holocaust-related claims of CHF 842 million in 1998. In addition, the following items were included in general and administrative expenses for 1999: - - an additional charge of CHF 154 million related to the settlement of Holocaust-related claims in the United States; - - an additional pre-tax restructuring charge of CHF 300 million in respect of the 1998 merger; and - - expenses of Klinik Hirslanden AG as a result of the first-time consolidation of this entity in 1999. In addition, total operating expenses in Corporate Center were reduced from 1998 to 1999 mainly due to a further refinement of service level agreements with the business groups. - -------------------------------------------------------------------------------- 88 90 UBS - -------------------------------------------------------------------------------- Depreciation and amortization increased CHF 201 million, or 93.5%, from CHF 215 million in 1998 to CHF 416 million in 1999, principally as a result of a reclassification of certain items which appeared in general and administrative expenses in 1998. Divisional Results for Year Ended 31 December 1998 Compared to Year Ended 31 December 1997 Results for the year ended 31 December 1998 compared to year ended 31 December 1997 are shown in terms of the old divisional structure which existed at that time, and without taking account of the accounting changes implemented during 2000. The principal differences from the current structure were that the UBS Asset Management Investment Funds business unit and the UBS Warburg Private Clients business unit were part of the Private Banking Division, and their results are included within that division. In addition, UBS Warburg's UBS Capital business unit was an autonomous division, and UBS Warburg itself consisted only of what is now the UBS Warburg Corporate and Institutional Clients business unit. The e-services business did not exist in 1998 or 1997. Private and Corporate Clients. The following table sets forth the results of Private and Corporate Clients for the years ended 31 December 1998 and 1997.
AS OF YEAR ENDED 31 DECEMBER 1998 1997(1) (CHF in millions) - -------------------------------------------------------------------------------- OPERATING INCOME: Individual clients........................................ 4,785 Corporate clients......................................... 1,728 Operations................................................ 448 Other..................................................... 64 ------- Total operating income............................ 7,025 7,005 Credit loss expense....................................... 1,170 1,092 ------- ------- Operating income.................................. 5,855 5,913 ------- ------- OPERATING EXPENSES: Personnel, general and administrative expenses............ 4,263 4,497 Depreciation and amortization............................. 684 660 ------- ------- Operating expenses..................................... 4,947 5,157 ------- ------- Operating profit before tax....................... 908 756 ======= ======= (at year end) Assets under management (CHF in billions)................... 434 398 Total loans................................................. 164,840 N/A(2) ------- -------
- --------------- (1) Prior to the 1998 merger, the businesses were reported under different management reporting structures. A breakdown of 1997 operating income in accordance with UBS's current management reporting structure is, therefore, not possible. (2) Total loans are not available for dates prior to the 1998 merger. Total operating income before credit loss expense increased slightly from CHF 7,005 million in 1997 to CHF 7,025 million in 1998. Included in operating income in 1997 was a CHF 97 million pre-tax gain on the sale of Bank Aufina AG. Included in operating income in 1998 were total gains from the sales of Boss Lab SA, a technology company, and Bank Prokredit AG, a leasing and consumer credit company, of CHF 50 million. The small increase in operating income before credit loss expense from - -------------------------------------------------------------------------------- 89 91 UBS - -------------------------------------------------------------------------------- 1997 to 1998 excluding the gains from the divestitures was primarily attributable to improved margins resulting from risk-adjusted pricing. Private and Corporate Clients' credit loss expenses increased CHF 78 million, or 7.1%, from CHF 1,092 million in 1997 to CHF 1,170 million in 1998, reflecting increased loss expectations. Personnel, general and administrative expense decreased CHF 234 million, or 5.2%, from CHF 4,497 million in 1997 to CHF 4,263 million in 1998. This decrease primarily reflected reduced costs due to a reduction in headcount from 25,641 in 1997 to 24,043 in 1998 resulting from the sales of Boss Lab SA and Bank Prokredit AG and additional reductions from the closing of redundant branches. Private Banking. The following table sets forth the results of Private Banking for the years ended 31 December 1998 and 1997.
FOR THE YEAR ENDED 31 DECEMBER 1998 1997 (CHF in millions) - -------------------------------------------------------------------------------- OPERATING INCOME: Operating income before credit loss expense............... 7,223 6,215 Credit loss expense....................................... 26 59 ----- ----- Operating income.................................. 7,197 6,156 ===== ===== OPERATING EXPENSES: Personnel, general and administrative expenses............ 2,735 2,869 Depreciation and amortization............................. 126 122 ----- ----- Operating expenses................................ 2,861 2,991 ===== ===== Operating profit before tax (at period end)................. 4,336 3,165 ===== ===== ASSETS UNDER MANAGEMENT (CHF IN BILLIONS): Advisory.................................................. 458 470 Discretionary............................................. 149 140 ----- ----- Total............................................. 607 610 ===== =====
Operating income increased CHF 1,041 million, or 16.9%, from CHF 6,156 million in 1997 to CHF 7,197 million in 1998. This increase primarily reflected non-recurring gains of CHF 1,058 million realized on the sales of BSI and Adler. Excluding these gains from 1998 operating income, operating income decreased marginally from 1997 to 1998. The decrease primarily reflected adverse market conditions in the second half of 1998. Despite this difficult environment and the occurrence of the 1998 merger on 29 June 1998, Private Banking was able to maintain relatively stable performance, with assets under management decreasing only slightly from CHF 610 billion at 31 December 1997 to CHF 607 billion at 31 December 1998. Personnel, general and administrative expenses decreased CHF 134 million, or 4.7%, from CHF 2,869 million in 1997 to CHF 2,735 million in 1998. Headcount decreased 2.9% from 7,862 at 31 December 1997 to 7,634 at 31 December 1998. Headcount in Switzerland, along with related personnel costs, decreased primarily from the sales of BSI and Adler. This decrease was partially offset by an increase in headcount outside of Switzerland due to the development of UBS's private banking business outside of Switzerland. - -------------------------------------------------------------------------------- 90 92 UBS - -------------------------------------------------------------------------------- Depreciation and amortization increased slightly, from CHF 122 million in 1997 to CHF 126 million in 1998. UBS Asset Management. The following table sets forth the results of UBS Asset Management for the years ended 31 December 1998 and 1997:
FOR THE YEAR ENDED 31 DECEMBER 1998 1997 (CHF in millions) - -------------------------------------------------------------------------------- OPERATING INCOME............................................ 1,163 1,040 OPERATING EXPENSES: Personnel, general and administrative expense............. 608 542 Depreciation and amortization............................. 107 95 ----- ----- Operating expenses..................................... 715 637 ----- ----- Operating profit before tax....................... 448 403 ===== ===== (at period end): ASSETS UNDER MANAGEMENT (CHF IN BILLIONS): Institutional............................................. 360 373 Non-institutional......................................... 171 131 ----- ----- Total............................................. 531 504 ===== =====
Operating income increased CHF 123 million, or 11.8%, from CHF 1,040 million in 1997 to CHF 1,163 million in 1998, reflecting growth in assets under management from UBS Asset Management's acquisition in Japan and positive market performance. Non-institutional assets under management, including assets from Private Banking, increased CHF 40 billion, or 30.5%, from 1997 to 1998. These positive developments were partially offset by a decline in the U.K. business's operating income and assets under management due to short-term performance issues and a very competitive U.K. marketplace. Personnel, general and administrative expenses increased CHF 66 million, or 12.2%, from CHF 542 million in 1997 to CHF 608 million in 1998. This increase reflects the expansion in Europe and the acquisition of Long-Term Credit Bank of Japan's asset management business during 1998. Principally as a result of these expansions, headcount increased 9.8% from 1,364 at 31 December 1997 to 1,497 at 31 December 1998. Depreciation and amortization increased CHF 12 million, or 12.6%, from CHF 95 million in 1997 to CHF 107 million in 1998. This increase reflects an increase in goodwill amortization due to additional goodwill recorded in 1998 upon the payment of the remaining obligation to the previous owners of Brinson Partners. UBS Warburg, The following table sets forth the results of UBS Warburg for the years ended 31 December 1998 and 1997:
31 DECEMBER 1998 1997(1) (CHF in millions) - -------------------------------------------------------------------------------- OPERATING INCOME: Equities.................................................. 3,334 Fixed income.............................................. (267) Corporate Finance......................................... 1,665
- -------------------------------------------------------------------------------- 91 93 UBS - --------------------------------------------------------------------------------
31 DECEMBER 1998 1997(1) (CHF in millions) - -------------------------------------------------------------------------------- Treasury Products......................................... 2,351 Non-core Business......................................... (96) ------ Total operating income before credit loss expense........................................ 6,987 10,888 Credit loss expense....................................... 500 300 ------ ------ Operating income.................................. 6,487 10,588 ------ ------ OPERATING EXPENSES: Personnel, general and administrative..................... 6,816 8,641 Depreciation and amortization............................. 692 668 ------ ------ Operating expenses................................ 7,508 9,309 ------ ------ Operating profit (loss) before restructuring costs and tax............................... (1,021) 1,279 ====== ======
- ------------ (1) Prior to the 1998 merger, these businesses were reported under different management reporting structures. A breakdown of 1997 operating income in accordance with UBS's current management reporting structure in effect for 1998 was, therefore, not possible. Total operating income before credit loss expense decreased CHF 3,901 million, or 35.8%, from CHF 10,888 million in 1997 to CHF 6,987 million in 1998, with decreases recognized across all business areas. Equities experienced a difficult trading environment in the second half of 1998 in addition to recognizing net losses on the Global Equity Derivatives portfolio of CHF 762 million, although this was offset somewhat by high commission levels and income from new issues. Fixed Income's operating income decreased from 1997 to 1998 due to the writedown in 1998 of UBS's holdings in LTCM by CHF 790 million and CHF 725 million in emerging markets. This emerging markets loss consisted of CHF 455 million in losses in Russia, CHF 215 million in Latin America and CHF 55 million in Asia and other Eastern European countries. These losses were somewhat offset by strong primary and secondary bond activity. Corporate Finance exceeded expectations in 1998 resulting from strong mergers and acquisitions activity and improved results from equity and equity-linked issues. In 1997 and 1998, Treasury Products performed well in cash and collateral trading, as well as in foreign exchange. Credit loss expense increased CHF 200 million, or 66.7%, from CHF 300 million in 1997 to CHF 500 million in 1998. This increase resulted from increased exposures from the start-up of the leveraged finance business in early 1998 and an increase in over-the-counter derivatives exposures due primarily to counterparty and country rating downgrades resulting from the Asian and Russian crises. Personnel, general and administrative expenses decreased CHF 1,825 million, or 21.1%, from CHF 8,641 million in 1997 to CHF 6,816 million in 1998. This primarily reflected a reduction in personnel related costs resulting from a reduction in headcount by 25.9% from 18,620 at 31 December 1997 to 13,794 at 31 December 1998 as a result of the merger. Merger integration for UBS Warburg in connection with the 1998 merger was substantially completed during 1998. As discussed above, CHF 1,007 million of accrued payments to personnel were charged against the restructuring reserve in 1998. Adjusting 1998 for this amount, personnel expenses decreased from 1997 by 6.4%. Depreciation and amortization increased CHF 24 million, or 3.6%, from CHF 668 million in 1997 to CHF 692 million in 1998. This reflected increased goodwill amortization in 1998 due to the acquisition of Dillon Read & Co., Inc. in September 1997 and the accelerated amortization of - -------------------------------------------------------------------------------- 92 94 UBS - -------------------------------------------------------------------------------- goodwill on Russian and Brazilian subsidiaries of CHF 35 million due to weak market conditions in these countries in 1998. UBS Capital. The following table sets forth the results of UBS Capital for the years ended 31 December 1998 and 1997:
31 DECEMBER 1998 1997 (CHF in millions) - -------------------------------------------------------------------------------- OPERATING INCOME............................................ 585 492 ----- ----- OPERATING EXPENSES: Personnel, general and administrative expense............. 156 110 Depreciation and amortization............................. 1 1 ----- ----- Operating expenses..................................... 157 111 ----- ----- Operating profit before tax.......................... 428 381 ===== ===== (at period end) Investments (at book value)................................. 1,748 1,080
Operating income increased CHF 93 million, or 18.9%, from CHF 492 million in 1997 to CHF 585 million in 1998, reflecting generally favorable conditions in Western markets allowing for the disposals of investments in Switzerland, the United States, and the Benelux and Nordic region. UBS Capital's portfolio in 1998 was, and it continued to be during 1999, primarily focused on the United States and Western Europe with minor exposure to Latin America and Asia. Therefore, the emerging markets crises which took place during 1998 had little impact on the division's performance. Personnel, general and administrative expenses increased CHF 46 million, or 41.8%, from CHF 110 million in 1997 to CHF 156 million in 1998. Higher performance-related compensation in 1998 than in 1997 primarily resulted from the stronger performance in 1998. Staff losses due to the merger were minimal. UBS Capital made investments totaling approximately CHF 800 million during 1998 compared to approximately CHF 600 million during 1997, further demonstrating steady growth in its investment rate. Corporate Center. The following table sets forth the results of Corporate Center for the years ended 31 December 1998 and 1997.
31 DECEMBER 1998 1997 (CHF in millions) - --------------------------------------------------------------------------------- OPERATING INCOME: Operating income before credit loss expense............... 296 518 ------ ---- Credit loss expense....................................... (745) (173) ------ ---- Operating income....................................... 1,041 691 ------ ---- OPERATING EXPENSES: Personnel, general and administrative expenses............ 1,855 215 Depreciation and amortization............................. 215 216 ------ ---- Operating expenses..................................... 2,070 431 ------ ---- Operating profit (loss) before restructuring costs and tax........................................... (1,029) 260 ====== ====
Operating income before credit loss expense from Corporate Center activities decreased CHF 222 million, or 42.9%, from CHF 518 million in 1997 to CHF 296 million in 1998, reflecting a CHF 370 - -------------------------------------------------------------------------------- 93 95 UBS - -------------------------------------------------------------------------------- million charge resulting from the write-down in 1998 of UBS's investment in LTCM. In addition, revenues attributable to Corporate Center arise from the funding, capital and balance sheet management, and the management of foreign currency earnings activities undertaken by Group Treasury. Personnel, general and administrative expenses increased CHF 1,640 million, or 763%, from CHF 215 million in 1997 to CHF 1,855 million in 1998, primarily resulting from a CHF 842 million provision taken in 1998, for the settlement in the United States of the Holocaust-related litigation, additional provisions for litigation and adjustments to the pricing of interdivisional allocations on the basis of service level agreements. Depreciation and amortization decreased CHF 1 million, or 0.5%, from CHF 216 million in 1997 to CHF 215 million in 1998. This represented the charge for depreciation on goodwill and intangibles, information technology infrastructure, real estate and other fixed assets. UBS Financial Targets UBS focuses on four key financial targets. These targets are to achieve: - - A pre-goodwill return on equity, or "RoE," averaging between 15% and 20%, across periods of varying market conditions. - - Double-digit average annual growth in pre-goodwill earnings per share, across periods of varying market conditions. - - Focus and downward pressure on UBS's cost/income ratio. - - Strong growth in net new money in UBS's private client businesses. Adjusted for the final provision of CHF 200 million relating to the U.S. global settlement, UBS's annualized pre-goodwill return on equity for the first six months of 2000 was 31.9%. Pre-goodwill earnings per share grew 98% over the first six months of 1999, adjusted for divestments and one-off provisions, reaching UBS's target of double-digit growth. UBS's cost/income ratio is well below that of the first half of 1999. After a positive start to the year, net new money in the private client businesses was slightly negative in the second quarter of 2000, against a more muted market background for asset growth than the first quarter. UBS's performance against its performance targets for the six months ended 30 June 2000 and the year ended 31 December 1999 are as follows: - -------------------------------------------------------------------------------- 94 96 UBS - -------------------------------------------------------------------------------- UBS PERFORMANCE AGAINST TARGETS
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 30 JUNE 2000 31 DECEMBER 1999 - ----------------------------------------------------------------------------------------------- ROE (%, ANNUALIZED) As reported.............................................. 29.5 22.4 Before goodwill amortization and adjusted for significant financial events (1, 2)................................ 31.9 18.2 BASIC EPS (CHF) (3) As reported.............................................. 10.91 15.20 Before goodwill amortization and adjusted for significant financial events (1,2)................................. 12.01 12.37 COST/INCOME RATIO (%) As reported.............................................. 70.4 69.9 Before goodwill amortization and adjusted for significant financial events (1,2)................................. 67.8 73.3 NET NEW MONEY FOR PRIVATE CLIENT BUSINESSES (4).......... 4 5
- ------------ (1) The amortization of goodwill and other purchased intangible assets are excluded from the calculation. (2) Significant financial events are excluded from the calculation. In 1999, these events included the disposal of the registered shares of Julius Baer, the sale of UBS's 25% stake in Swiss Life/Rentenanstalt, the sale of UBS's international Global Trade Finance business, and the pre-tax gains on Long Term Capital Management, L.P., the one-time credit recognized during the fourth quarter of 1999 in connection with excess pension fund employer prepayments, the additional provisions recognized in 1999 in connection with the U.S. global settlement and the utilization of the restructuring provision relating to the 1998 merger. In the first six months of 2000, these events included the further provision recognized in relation to the U.S. global settlement. (3) The 1999 figures are restated for the two-for-one stock split relating to the UBS ordinary shares, which became effective on 8 May 2000. (4) For this purpose, Private Client Businesses consist of the UBS Warburg Private Clients business unit and the UBS Switzerland Private Banking business unit. Excludes interest and dividend income. THERE CAN BE NO ASSURANCE THAT UBS WILL BE ABLE TO ACHIEVE ITS FINANCIAL TARGETS, AND THESE TARGETS ARE SUBJECT TO CHANGE AT THE DISCRETION OF UBS'S MANAGEMENT. A VARIETY OF FACTORS COULD PREVENT UBS FROM ACHIEVING THESE TARGETS, INCLUDING THE FACTORS REFERRED TO UNDER "CAUTIONARY NOTE REGARDING FORWARD- LOOKING INFORMATION." Liquidity and Capital Resources Group liquidity and capital management is undertaken at UBS by Group Treasury as an integral asset and liability management function. For a detailed discussion of UBS's asset and liability management, see "--Asset and Liability Management" and for a detailed discussion of UBS's liquidity risk management, see "--Asset and Liability Management--Liquidity and Funding Management." Consolidated Cash Flows. In the half year to 30 June 2000, cash equivalents decreased CHF 13,788 million, principally as a result of operating activities. UBS's net profit of CHF 4,268 million was more than offset by a high net cash outflow for repurchase and reverse repurchase agreements, cash collateral on securities borrowed and lent and for investments in trading positions. Negative cash flow of CHF 2,293 million from investing activities was principally due to the purchase of financial - -------------------------------------------------------------------------------- 95 97 UBS - -------------------------------------------------------------------------------- investments. Net cash inflow from financing activities of CHF 14,507 million was principally generated by the issuance of CHF 20,754 million in money market paper and CHF 7,452 million in long-term debt, offset by the repayment of CHF 10,794 million of long-term debt, dividend payments of CHF 2,164 million and treasury share transactions. UBS generated significant positive cash flow during the year ended 31 December 1999 resulting in a net increase in cash equivalents of CHF 18,599 million. Operating activities provided a net cash flow of CHF 3,338 million during the year ended 31 December 1999. The strong positive results and reduction in UBS's customers' loan exposures at UBS Warburg during the year, offset in part by a net cash outflow from trading-related balances, generated the net positive cash flow from operating activities. Net cash from investing activities included cash outflows due to the purchase of property and equipment and investments in subsidiaries and associates, which were more than offset by positive cash flows generated from the sale of subsidiaries and associates, property and equipment and financial investments. The net cash inflow from financing activities was principally due to the issuance of CHF 13,128 million in money market paper and CHF 12,661 million in long-term debt which was partially offset by the payment of dividends, treasury share transactions, the repayment of CHF 7,801 million in long-term debt and minority interests. During the year ended 31 December 1998, UBS's net cash outflows from operating and financing activities more than offset its net cash inflow from investing activities resulting in a decrease in UBS's cash equivalents of CHF 8,675 million. The main contributor to the net decrease in cash equivalents was the negative cash flow from financing activities of CHF 12,335 million. This negative cash flow was primarily due to the repayment of long-term debt, the reduction in money market paper outstanding, the payment of dividends and treasury share transactions, partially offset by the issuance of long-term debt. Positive net cash flow from investing activities resulted primarily from the sale and maturity of financial investments. During the year ended 31 December 1997, UBS's net cash outflows of CHF 35,895 million from operating and investing activities more than offset UBS's net cash inflow from financing activities of CHF 29,015 million resulting in a decrease in cash equivalents of CHF 7,451 million. UBS's operating activities generated negative net cash flow principally due to a net increase in its trading related balances which was only partially offset by strong operating results before the restructuring reserve. Investing activities generated a net cash outflow of CHF 1,671 million during the period primarily due to the purchase of property and equipment and financial investments. Net cash inflow from financing activities resulted principally from the issuance of long-term debt and money market paper. Capital Resources. Capital management is undertaken at UBS by Group Treasury as an integral asset and liability management function. UBS does not have any material commitments for capital expenditures as of 30 June 2000. UBS's overall capital needs are continually reviewed to ensure that its capital base can appropriately support the anticipated needs of the divisions as well as the regulatory capital requirements. See "--Asset and Liability Management." The Bank for International Settlements, or "BIS," is an international organization fostering the cooperation of central banks and international financial institutions. Among other activities, it provides guideline formulas for evaluating capital adequacy. As the following table shows, UBS's BIS Tier 1 Ratio increased from 9.3% at 31 December 1998 to 10.6% at 31 December 1999 primarily resulting from a significant increase in retained earnings coupled with a reduction in risk weighted assets. The decrease in risk weighted assets is principally a result of reduced positive replacement values, off balance sheet contingent liabilities and the reduction in the size of the international loan book. - -------------------------------------------------------------------------------- 96 98 UBS - -------------------------------------------------------------------------------- UBS's BIS Tier 1 Ratio has continued to increase, from 10.6% at 31 December 1999 to 12.1% at 30 June 2000. The effect of UBS's share buy back program was more than offset by a significant increase in UBS's the retained earnings as well as a further reduction in risk weighted assets.
PRO FORMA(1) 30 JUNE 30 JUNE 31 DECEMBER 2000 2000 1999 1998 (CHF in millions except ratios) - ------------------------------------------------------------------------------------------------ BIS Tier 1 Capital.......................... 24,982 31,904 28,952 28,220 BIS Tier 1 and Tier 2 Capital............... 35,921 42,173 39,682 40,306 BIS Tier 1 Capital Ratio.................... 8.51% 12.1% 10.6% 9.3% BIS Tier 1 and Tier 2 Capital Ratio......... 12.24% 15.9% 14.5% 13.2% Balance sheet risk-weighted assets.......... 239,359 210,538 214,011 237,042 Off balance sheet and other positions....... 41,718 41,718 48,282 50,659 Market risk positions....................... 12,450 12,450 10,813 16,018 ------- ------- ------- ------- Total BIS risk-weighted assets.............. 293,527 264,706 273,106 303,719 ======= ======= ======= =======
- ------------ (1) Gives effect to the combined pro forma financial position of UBS and PaineWebber. The ratios measure capital adequacy by comparing UBS's eligible capital with the risk-weighted asset positions, which include balance sheet assets, the net positions in securities not held in the trading portfolio, off-balance sheet transactions converted into their credit equivalents and market risk positions at a weighted amount to reflect their relative risk. See Note 33c in UBS's consolidated financial statements for additional information on capital adequacy. The calculation of capital requirements applicable to UBS under the Swiss Federal Banking Commission's regulations differs in certain respects from the calculation under the BIS guidelines. Most importantly: - - where the BIS currently does not apply risk weightings above 100% to any asset category, the Swiss Federal Banking Commission applies risk weightings of greater than 100% to certain kinds of assets (for example, real estate, bank premises, other fixed assets, equity securities and unconsolidated participations); and - - where the BIS guidelines apply a 20% risk weighting to obligations of OECD banks, the Swiss Federal Banking Commission's regulations apply risk weightings of 25% to 75% (depending upon maturities) to obligations of OECD banks. As a result of these differences, UBS's risk-adjusted assets are higher, and its ratios of total capital and Tier 1 capital are lower, when calculated pursuant to the Swiss Federal Banking Commission's regulations as compared to the BIS guidelines. However, since the BIS and Swiss Federal Banking Commission first implemented their risk-based capital guidelines and regulations in 1987, UBS and its predecessor banks have always had total capital and Tier 1 capital in excess of the minimum requirements of both the BIS and the Swiss Federal Banking Commission. For the years ended 31 December 1998 and 31 December 1999 and the six-months ended 30 June 2000, UBS has maintained significant levels of total capital and Tier 1 capital in excess of the minimum requirements of both the BIS and the Swiss Federal Banking Commission. Although no assurance can be given that UBS will continue to have total capital and Tier 1 capital in excess of the minimum requirements of both the BIS and the Swiss Federal Banking Commission, UBS does not expect that credit losses, risk-weighted asset growth and similar events will eliminate UBS's excess total capital or Tier 1 capital. - -------------------------------------------------------------------------------- 97 99 UBS - -------------------------------------------------------------------------------- UBS is committed to maintaining a strong capitalization and rating as a distinguishing characteristic of UBS for both clients and shareholders. On 12 March 1999, UBS introduced a treasury stock buy-back program, which was intended to run for a period of two years. At 31 December 1998, UBS held 8,300,300 shares, as adjusted for the two-for-one stock split that became effective on 8 May 2000, or 2% of its outstanding shares, as treasury stock. As of 31 December 1999, a total of 15,660,220 shares, as adjusted for the two-for-one stock split, or 3.6%, had been acquired as treasury stock. This amount includes 1,053,082 shares that are at the disposal of UBS's Board of Directors. The objective of the buy-back program was to utilize the shares for acquisitions and the employee stock ownership program. UBS has subsequently concluded that this program was too limited for its purposes because of the continuous increase in capital that was projected to arise from on-going retained earnings, the selective reduction in the risk profile and increasing capital efficiency. For this reason, UBS announced in December 1999 that it would replace the treasury stock buy-back program with a Swiss-specific program targeted at Swiss institutional shareholders, which is the only tax-efficient means that has been identified to achieve cancellation. This is called a "second trading line" program. At UBS's annual shareholders' meeting on 18 April 2000, shareholders approved the repurchase of shares up to a maximum amount of CHF 4 billion, through the second trading line program. The second trading line program was implemented in January 2000 and concluded on 28 June 2000. During this time UBS repurchased 18,421,783 shares, representing 4.3% of its share capital, at an average price of CHF 217.00. The final cancellation of the shares bought back through the second trading line requires shareholders' approval which the board of directors will seek at the annual general meeting scheduled for April 2001. Balance Sheet. UBS maintains a significant percentage of liquid assets, including collateralized receivables and trading portfolios that can be converted into cash on relatively short notice and with a limited impact on UBS's results in order to meet short-term funding needs. Collateralized receivables include reverse repurchase agreements and cash collateral on securities borrowed which are secured by U.S. government and agency securities, and marketable corporate debt and equity securities and a portion of UBS's loans and due from banks which are secured primarily by real estate. The value of UBS's collateralized receivables and trading portfolio will fluctuate depending on market conditions and client business. The individual components of UBS's total assets may vary significantly from period to period due to changing client needs, economic and market conditions and trading strategies. Total assets increased CHF 47,419 million, or 5.3%, at 30 June 2000 compared to total assets at 31 December 1999. This was principally a result of an increase in cash collateral on securities borrowed, reverse repurchase and trading portfolio assets, which was partially offset by significant decreases in cash and balances with central banks and money market paper as liquidity levels were adjusted following Y2K, a reduction in positive replacement values resulting from decreases in derivative products, and decreases in amounts due from banks. Total liabilities increased CHF 46,151 million, or 5.3%, at 30 June 2000, compared to total liabilities at 31 December 1999, principally due to a significant increase in amounts due under repurchase agreements, cash collateral on securities lent and trading portfolio liabilities and an increase in money market paper issued, offset in part by a decrease in negative replacement values resulting from decreases in derivative products. In the course of the first half of 2000, UBS's long-term debt portfolio decreased from CHF 56.3 billion at 31 December 1999 to CHF 53.0 billion at 30 June 2000. During this half year CHF 7,452 billion of long-term securities were issued while CHF 10,794 billion matured. UBS believes the maturity profile of the long-term debt portfolio is well balanced with slight bias towards shorter-term maturities to match the maturity profile of UBS's assets. - -------------------------------------------------------------------------------- 98 100 UBS - -------------------------------------------------------------------------------- The following table sets forth information regarding total shareholders' equity at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 31 DECEMBER 2000 1999 1998 (CHF in millions, except ratios) - ------------------------------------------------------------------------------------------ Total shareholders' equity............................. 31,876 30,608 28,794 Total shareholders' equity to total assets............. 3.4% 3.4% 3.3%
Shareholders' equity increased CHF 1,268 million, or 4.1%, from 31 December 1999 to 30 June 2000. The increase in treasury shares was more than offset by the increase in net income, resulting in a steady increase in total shareholders' equity. Credit Ratings. UBS uses the debt capital markets to fund a significant portion of its operations. The cost and availability of debt financing is influenced by UBS's credit ratings. Credit ratings are also important in certain markets and in entering into certain transactions, such as derivative transactions. A reduction in UBS's credit ratings could increase its borrowing costs and limit its access to the capital markets. UBS has been able to maintain strong credit ratings over the past few years, even during periods of a difficult trading environment. The following table sets forth UBS's credit ratings on its long-term debt as of 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 31 DECEMBER 2000 1999 1998 - ------------------------------------------------------------------------------------- Moody's, New York........................................... Aa1 Aa1 Aa1 Fitch/IBCA, London.......................................... AAA AAA AAA Standard & Poor's, New York................................. AA+ AA+ AA+ Thomson BankWatch, New York................................. AA AA AA
Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of such rating may be obtained only from such rating agency. There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency, if in such rating agency's judgment, circumstances so warrant. Moody's announced on 28 April 2000 that it had changed its outlook for its long-term rating of UBS AG from stable to negative. Recent Accounting Developments For a discussion of recent accounting developments, including those that have not yet been adopted, see Note 1 to UBS's consolidated financial statements, which are included elsewhere in this document. Risk Management The risk management process is an integral part of UBS's commitment to providing consistent high quality returns for its shareholders. UBS believes that the delivery of superior shareholder returns depends on achieving an appropriate balance between risk and return. This requires a management process that gives appropriate focus to risk as well as returns and which integrates this approach with the management of UBS's balance sheet and capital. For this reason, UBS restructured the Corporate Center in the course of 1999 to establish an integrated group-wide function under the Chief Financial Officer, or "CFO," to address all aspects of finance, strategic planning, risk control and balance sheet and capital management. - -------------------------------------------------------------------------------- 99 101 UBS - -------------------------------------------------------------------------------- The approach to risk management and control at UBS recognizes that risk is integral to its business. UBS's risk processes, which have evolved over a number of years, seek to limit the scope for adverse variations in UBS's earnings and in particular to protect UBS from the risk of loss in the event of unlikely, but possible, stress scenarios arising from any of the material risks which it faces. UBS's Risk Policy Framework focuses on the procedures for managing and controlling the risks that can affect the volatility of earnings from period to period, and distinguishes between the following three types of risk: - - Primary risks: risks inherent in the businesses that UBS undertakes. The principal primary risks are credit risk and market risk. - - Group risks: risks that UBS faces at the Group level in managing its business and balance sheet. Principal group risks are tax risk, liquidity and funding risk and residual balance sheet related interest rate risk. - - Consequential risks: risks that UBS faces as a consequence of the operational activities it undertakes to provide services to customers. This is sometimes referred to as "operational risk." Principal consequential risks are transaction processing risk, legal risk, compliance risk, liability risk and security risk. UBS's risk framework recognizes that an effective risk management and control process depends on sound processes to identify risks, and to establish and maintain limits and procedures to control these risks. UBS's Chief Risk Officer, or "CRO," has overall responsibility for ensuring that the limits and procedures are appropriate and are adhered to for risks other than credit risk. The Chief Credit Officer, or "CCO," has overall responsibility for ensuring that the limits and procedures are appropriate and are adhered to for credit risk. Credit risk remains the single largest risk that UBS faces. The limits and procedures are designed to keep UBS's risk exposures within the parameters determined by the UBS Board of Directors. These limits and procedures take into account not only the external environment that UBS faces, but also UBS's internal capabilities to manage the risk, including issues such as the availability of appropriate information processing systems and the availability of suitably qualified staff to manage and control the risk. The Board of Directors establishes the risk parameters within which UBS operates and reviews a report on UBS's risk profile from the CCO and the CRO on at least a quarterly basis. The Board of Directors establishes two limits: normal earnings volatility and potential losses under a stress scenario. UBS's risk appetite defines the amount of earnings volatility that the Board of Directors deems to be acceptable in normal market conditions in order to achieve divisional growth targets. This potential volatility is measured by the risk control organization using measures that estimate statistically possible losses. Value at risk, or "VaR," methodology is the principal quantitative measure UBS uses for evaluating risk. UBS's risk bearing capacity seeks to establish a limit to the potential scale of the loss that UBS might face in unlikely but possible stress situations. Stress loss limits are set by the Board of Directors taking into account UBS's overall earnings capacity. They are set in order to protect UBS from unacceptable damage to annual earnings, dividend paying capability, business viability and reputation. UBS currently adopts this approach to risk limits in the context of its trading activities and its country risk credit exposure. In addition, the Board of Directors approves UBS's key risk policies and the Chairman's office maintains an ongoing oversight of the integrity of the risk management and control processes through UBS's internal audit function. The responsibility for implementing the risk framework on a day to day basis is delegated by the Board of Directors to the Group Executive Board, which allocates risk limits to the divisions and monitors UBS's aggregate risk profile on an ongoing basis. The Group Executive Board, together with - -------------------------------------------------------------------------------- 100 102 UBS - -------------------------------------------------------------------------------- the CRO and CCO, constitutes itself as UBS's Risk Council and usually meets twice a month to review outstanding risk issues, large exposures and significant transactions. In addition, the Group Executive Board has established a Group Risk Committee and a Group Governance Committee. These committees, which meet quarterly, consist of representatives of the risk control organization at the Corporate Center and from the business groups and consider issues relating to the implementation and development of the risk framework. Each business group also has a risk management and control structure in place which is appropriate to its particular business profile. The CRO and CCO have risk control staff who are located in each business group and who are responsible for ensuring that the business group implements the Group-wide risk policies and procedures appropriately. They ensure that all risks are adequately taken into account in assessing the risk profile of the business groups' business activities. The focus is on identifying those infrequent events with a potentially severe impact. In addition, each business group has its own structure of risk management and governance committees. This is designed to ensure that there is an ongoing review of the risk profile that the business group faces in new business initiatives and in large and complex transactions and that any requirement for amendments to risk policies or limits is identified and, where appropriate, is escalated in a timely manner to the Group Executive Board. Analysis of Risks Within UBS's risk framework, UBS has identified a number of risk factors as being of particular importance to its business. The following section summarizes the main trends and developments in the key risks that UBS faces. Credit Risk. Credit risk is the risk of loss resulting from the default of an obligor or counterparty. UBS's definition of credit risk includes counterparty and country transfer risk, as well as settlement risk. Credit risk is inherent in traditional banking products, such as loans and commitments to lend money in the future or contracts to support clients' obligations to third parties, such as letters of credit. Credit risk is also inherent in derivative contracts and other traded products, such as bonds and equity investments. In view of the significance of credit risk for UBS, the approval and monitoring of new transactions giving rise to credit risk plays a central part in UBS's risk control process. Credit approval authorities are exercised independently from the business units. Credit authority is dependent on the amount involved, quality, security and tenor of the transaction as well as on the experience and competence of the credit professionals entrusted with this function. In order to manage UBS's exposure to credit risk effectively, and in particular to encourage appropriate pricing of transactions involving credit, UBS measures its exposure to credit risk using a forward looking statistical estimate of the expected loss based on the estimated probability of default of UBS's counterparties. Such estimates are based on the volume and type of exposure, the value of potential collateral or support, and the quality of each counterparty. The quality of the counterparty is expressed in a rating with a specific default probability. For this purpose, UBS classifies all counterparties into a 14 point rating scale and the transfer risk into a 15 point country rating scale. Composition of Credit Risk. Credit risk is assumed, as an integral part of their business, by UBS Warburg and UBS Switzerland. The composition of UBS's credit exposure differs appreciably between these two business groups. At 30 June 2000, a substantial majority of UBS Warburg's counterparties fell into the internal counterparty rating categories C1-C5 both with respect to banking products (83%) and the traded products portfolio (97%). UBS's internal rating classes C1-C5 compare to Moody's Investor Services ratings Aaa to Baa3 and are considered investment grade. UBS Warburg's counterparties are primarily sovereigns, insurance companies, financial institutions, multi-national corporate clients and investment - -------------------------------------------------------------------------------- 101 103 UBS - -------------------------------------------------------------------------------- funds. UBS Warburg's exposure to lower rated customers is generally collateralized or otherwise structurally supported. UBS's aggregate, unsecured exposure to hedge funds measured in terms of net replacement value amounted to USD 5 million at 30 June 2000 compared to USD 55 million at 31 December 1999 and USD 81 million at 31 December 1998. By contrast, the largest single component of the loan portfolio within UBS Switzerland consists of residential mortgage lending in Switzerland, over half of which is classified within UBS's lowest internal investment grade rating class of C5. The rating of the remainder of the Swiss portfolio, excluding mortgages, is fairly widely spread with the largest concentration being in rating classes C3-C5 comparable to Moody's rating of A2 to Baa3. Credits to Private Clients are predominately extended against the pledge of marketable securities and against single-family real estate property. The continued improvement in the Swiss economy and property markets has aided in the overall improvement in the quality of this portfolio. UBS Switzerland's largest exposure at 30 June 2000 was to private households in Switzerland. Loan Portfolio. The UBS Warburg loan portfolio remained unchanged during the first half of 2000. In 1999 this portfolio had been significantly reduced. This was a continuation of the strategy that began immediately after the 1998 merger with the objective of improving the risk/reward profile of the international lending business. This initiative included the shift in focus away from Emerging Markets and into high quality credits in the major OECD (Organization for Economic Cooperation and Development) countries and the sale of the non-Swiss portion of the Global Trade Finance business. The overall impact of this shift has been a reduction in UBS Warburg's international banking portfolio (consisting of loans and unfunded commitments to corporates and institutional clients, excluding banks) from over CHF 250 billion at June 1998 to CHF 96 billion by 30 June 2000 (CHF 99 billion by 31 December 1999). The following table shows UBS's loan portfolio and related allowances and provisions by business groups at 30 June 2000 and 31 December 1999.
UBS ASSET CORPORATE UBS SWITZERLAND MANAGEMENT UBS WARBURG CENTER TOTAL ---------------- --------------- --------------- --------------- ---------------- ALL AMOUNTS IN CHF MILLIONS JUNE 00 DEC 99 JUNE 00 DEC 99 JUNE 00 DEC 99 JUNE 00 DEC 99 JUNE 00 DEC 99 - ------------------------------------------ ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Loans to Banks (Gross).................... 11,673 8,780 352 181 14,442 21,481 93 343 26,560 30,785 Loans to Customers (Gross)................ 188,579 191,180 59 32 54,758 55,670 1,022 347 244,418 247,229 ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Loans, Gross............................. 200,252 199,960 411 213 69,200 77,151 1,115 690 270,978 278,014 ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Counterparty Allowance.................... 9,267 10,447 -- -- 1,764 1,550 6 6 11,037 12,003 Country Allowance......................... -- -- -- -- 1,166 1,246 -- -- 1,166 1,246 ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Allowances for Loan Losses(1)............ 9,267 10,447 -- -- 2,930 2,796 6 6 12,203 13,249 ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Loans, Net of Allowances............... 190,985 189,513 411 213 66,270 74,355 1,109 684 258,775 264,765 ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Counterparty Provision for Contingent Claims................................... 12 -- -- -- 24 19 -- -- 36 19 Country Provision for Contingent Claims... -- -- -- -- 151 130 -- -- 151 130 ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Total Provisions(2)...................... 12 -- -- -- 175 149 -- -- 187 149 ======= ======= ======= ====== ======= ====== ======= ====== ======= ======= Summary: Allowances & Provisions for Counterparty Risk..................................... 9,279 10,447 -- -- 1,788 1,569 6 6 11,073 12,022 Allowances & Provisions for Country Risk..................................... -- -- -- -- 1,317 1,376 -- -- 1,317 1,376 ------- ------- ------- ------ ------- ------ ------- ------ ------- ------- Total Allowances & Provisions............ 9,279 10,447 -- -- 3,105 2,945 6 6 12,390 13,398 ------- ------- ------- ------ ------- ------ ------- ------ ------- -------
- --------------- (1) Deducted from assets. (2) Booked as liabilities. - -------------------------------------------------------------------------------- 102 104 UBS - -------------------------------------------------------------------------------- See "--Selected Statistical Information--Loans" for a breakdown of the loan exposure by type of borrower. Over-the-Counter Derivative Contracts. A significant proportion of UBS Warburg's credit risk arises from its trading activities, including its trading of derivative products. The provision of risk management solutions that involve the use of derivative products is a core service that UBS offers to its clients. Derivative products by their nature are particularly sensitive to changes in market prices and consequently UBS pays close attention to the management and control of these risks. UBS's credit standards for entering into unsecured derivative contracts are very high and particular emphasis is placed on the maturity profile. Ninety-seven percent of UBS Warburg's credit risk on derivative products falls within UBS's internal rating classes C1-C5. Transactions with counterparties of lower quality are generally conducted only on a secured basis. A new system has been introduced in February 2000 to monitor credit risk exposure to derivative contracts on the basis of a statistically calculated potential exposure, or Potential Credit Exposure or "PLE," which will allow an even more precise valuation of the credit equivalents. Settlement Risk. Due to UBS's international business, UBS is also exposed to settlement risk. Settlement risk arises in transactions involving the exchange of values where a counterparty fails to honor its obligation to deliver cash or securities. This risk is particularly significant in relation to foreign exchange and precious metals transactions. UBS limits its exposure to settlement risk by tolerance levels assigned to each counterparty in relation to its rating. In addition, UBS monitors this risk on a permanent basis and seeks to shorten, as much as practicable, the period during which UBS is exposed. UBS has also been an active participant in an industry initiative to establish a new organization, called CLS Bank, which is being established in order to substantially reduce settlement risk between major international financial institutions. Participation in regulated payment and securities clearing systems also reduces settlement exposure. Country Risk Exposure. UBS's definition of country risk comprises all cross-border exposures from loans, derivative products and trading products. This definition includes its own intracompany cross-border positions, which amounted to CHF 419 billion at 30 June 2000, about 49% of the total non- emerging market country risk exposure of CHF 851 billion. At 30 June 2000, 98.0% of UBS's country risk exposure was included in its three highest internal ratings classes. This portion of UBS's country risk exposure was with OECD countries where the risk of default is judged to be negligible. The following table summarizes UBS's country transfer risk exposure grouped by rating classes as of30 June 2000 compared to 31 December 1999 and 31 December 1999 compared to 31 December 1998.
BANKING TRADED TRADABLE PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL COUNTRY CATEGORIES (CHF IN MILLIONS) - ------------------------------------------------------------------------------------------------- Industrialized Countries COUNTRIES RATED S0 - S2......................... 496,212 183,839 170,784 850,835 Change from December 1999..................... -8,512 27,738 -48,711 -29,485 Change December 1999/December 1998............ 28,270 -23,380 26,207 31,097
- -------------------------------------------------------------------------------- 103 105 UBS - --------------------------------------------------------------------------------
BANKING TRADED TRADABLE PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL COUNTRY CATEGORIES (CHF IN MILLIONS) - ------------------------------------------------------------------------------------------------- Emerging Markets COUNTRIES RATED S3 - S14........................ 11,020 3,478 2,941 17,439 Change from December 1999..................... -5,610 -1,967 414 -7,163 Change December 1999/December 1998............ -7,533 -1,794 1,500 -7,827 TOTAL........................................... 507,232 187,317 173,725 868,274 Change from December 1999..................... -14,122 25,771 -48,297 -36,648 Change December 1999/December 1998............ 20,737 -25,174 27,707 23,270
- ------------ (1) Traded products consists of derivative instruments and repurchase agreements. (2) Tradeable assets consist of equity and fixed income financial instruments held for trading purposes, which are marked to market on a daily basis. The remaining 2.0%, or CHF 17.4 billion, of UBS's country risk exposure is to emerging markets that are classified in rating classes S3 to S14. This exposure has decreased as a result of the restructuring of the international loan portfolio and the exit from the non-Swiss Global Trade Finance business in 1999. Total exposure to the emerging markets group of countries fell by CHF 7.2 billion between 31 December 1999 and 30 June 2000 -- a reduction of 29% -- and by CHF 15.0 billion between 31 December 1998 and 30 June 2000 -- a reduction of 46%. In view of the higher risk associated with emerging markets, UBS closely monitors this exposure on an ongoing basis within the country limits approved by the Board of Directors. All significant new transactions in emerging and distressed markets require approval from the respective country risk manager in addition to the standard counterparty credit approval. The country risk limit operates as the primary limit for such transactions and extension of credit may be denied on the basis of a country risk limit even though adequate counterparty limits may be available for the customer concerned. The following table analyzes the emerging markets exposures by the major geographical areas as of 30 June 2000 compared to 31 December 1999 and 31 December 1999 compared to December 1998.
BANKING TRADED TRADABLE PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL REGION (CHF IN MILLIONS) - --------------------------------------------------------------------------------------------------- EMERGING EUROPE.................................... 711 210 351 1,272 Change from December 1999........................ -208 -38 -68 -314 Change from December 1999/December 1998.......... -402 -6 239 -169 EMERGING ASIA...................................... 5,152 1,657 1,257 8,066 Change from December 1999........................ 149 -2,216 78 -1,989 Change from December 1999/December 1998.......... -4,230 -971 850 -4,351 LATIN AMERICA...................................... 3,168 998 1,267 5,433 Change from December 1999........................ -5,001 333 454 -4,214 Change from December 1999/December 1998.......... -1,649 -603 371 -1,881 AFRICA/MIDDLE EAST................................. 1,989 613 66 2,668 Change from December 1999........................ -550 -46 -50 -646 Change from December 1999/December 1998.......... -1,252 -214 40 -1,426
- -------------------------------------------------------------------------------- 104 106 UBS - --------------------------------------------------------------------------------
BANKING TRADED TRADABLE PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL REGION (CHF IN MILLIONS) - --------------------------------------------------------------------------------------------------- TOTAL.............................................. 11,020 3,478 2,941 17,439 Change from December 1999........................ -5,610 -1,967 414 -7,163 Change from December 1999/December 1998.......... -7,533 -1,794 1,500 -7,827
- ------------ (1) Traded products consists of derivative instruments and repurchase agreements. (2) Tradeable assets consist of equity and fixed income financial instruments held for trading purposes, which are marked to market on a daily basis. Impaired loans were reduced from 31 December 1998 to 31 December 1999 by approximately CHF 1.4 billion and non-performing loans by about CHF 1 billion. See "--Selected Statistical Information--Cross-Border Outstandings" for additional details on UBS's country risk exposures. Impaired and Non-Performing Loans. UBS classifies a loan as impaired when it determines that there is a high probability that UBS will suffer a partial or full loss. A provision is then made with respect to the probable loss to be incurred for the loan in question. Within this category, non-performing loans are defined as loans where payment of interest, principal or fees is overdue for 90 days. The following table provides a breakdown by business groups of the impaired and non-performing loans as of 30 June 2000 and 31 December 1999. UBS Asset Management did not have any impaired loans or non-performing loans in any of the periods presented.
UBS SWITZERLAND UBS WARBURG CORPORATE CENTER UBS GROUP --------------------- --------------------- --------------------- --------------------- 30 JUNE 31 DECEMBER 30 JUNE 31 DECEMBER 30 JUNE 31 DECEMBER 30 JUNE 31 DECEMBER 2000 1999 2000 1999 2000 1999 2000 1999 (CHF in millions) - -------------------------------------------------------------------------------------------------------------------------------- IMPAIRED LOANS: Total impaired loans............. 16,658 19,166 4,310 3,226 43 64 21,011 22,456 Allocated allowances............. 9,267 10,447 2,279 2,018 6 6 11,552 12,471 ------- ----------- ------- ----------- ------- ----------- ------- ----------- Impaired loans, net of allowances..................... 7,391 8,719 2,031 1,208 37 58 9,459 9,985 ------- ----------- ------- ----------- ------- ----------- ------- ----------- NON-PERFORMING LOANS: Total non-performing loans....... 10,270 11,416 1,772 1,594 43 63 12,085 13,073 Allocated allowances............. 6,486 7,315 1,383 1,341 5 5 7,874 8,661 ------- ----------- ------- ----------- ------- ----------- ------- ----------- Non-performing loans, net of allowances..................... 3,784 4,101 389 253 38 58 4,211 4,412 ------- ----------- ------- ----------- ------- ----------- ------- -----------
Non-performing loans have decreased to CHF 12,085 million at 30 June 2000 from CHF 13,073 million at 31 December 1999. This positive result was principally due to the unexpectedly strong performance of the economy in Switzerland, especially in the second quarter. Previous provisions were established against a background of several years of relatively low growth in the Swiss economy and relatively high credit losses. Since the beginning of this year, the Swiss economy started improving, and accelerated further during the last quarter, with the Swiss National Bank recently raising its 2000 growth forecast from 1.8% to 3.0%. In particular, this turnaround has affected real estate values and the real estate construction market, which has led to recoveries of provisions against loans in these portfolios. UBS expects to recognize additional recoveries if current economic trends continue. Non-performing loans decreased to CHF 13,073 million at 31 December 1999 from CHF 16,113 million at 31 December 1998. The reduction reflects an accelerated writedown in the Swiss domestic portfolio, a substantial reduction in UBS's emerging markets exposure, a significant improvement in the macroeconomic situation in Switzerland and a faster than expected recovery in key Asian economies. - -------------------------------------------------------------------------------- 105 107 UBS - -------------------------------------------------------------------------------- The following table provides a breakdown of impaired loans by type at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - -------------------------------------------------------------------------------------------------- Loans (Gross)............................... 270,978 278,014 330,964 ============ ================ ================ Impaired Loans: Counterparties: Non-performing loans...................... 11,625 12,649 15,717 Other impaired loans...................... 8,677 9,096 9,884 ------------ ---------------- ---------------- Sub-total.............................. 20,302 21,745 25,601 Country: Non-performing loans...................... 460 424 397 Other impaired loans...................... 249 287 449 ------------ ---------------- ---------------- Sub-total.............................. 709 711 846 ------------ ---------------- ---------------- Total impaired loans...................... 21,011 22,456 26,447 ============ ================ ================ Ratios: Impaired loans as a percentage of gross loans..................................... 7.8% 8.1% 8.0% Non-performing loans as a percentage of gross loans............................... 4.5% 4.7% 4.9%
See "--Selected Statistical Information--Impaired, Non-Performing and Restructured Loans" for further information on impaired and non-performing loans. Allowances and Provisions. The adequacy of the allowances and provisions that UBS makes for impaired loans is assessed by the Credit Risk Management and Control function which is independent from the business units. Allowances and provisions are determined based upon an individual assessment of counterparties and countries and their creditworthiness as well as the amount of collateral available to UBS to offset against the probable loss. UBS believes that the probable losses in its portfolio are adequately covered by its allowances and provisions. The following table provides a breakdown of allowances and provisions by type at 30 June 2000 and 31 December 1999 and 1998.
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - -------------------------------------------------------------------------------------------------- Counterparties: Allowances for non-performing loans....... 7,435 8,243 9,609 Allowances for other impaired loans....... 3,602 3,760 3,484 ------------ ---------------- ---------------- Subtotal allowances and provisions for counterparty risk.................... 11,037 12,003 13,093 Country: Allowances for non-performing loans....... 439 418 397 Allowances for other impaired loans....... 76 50 92 ------------ ---------------- ---------------- Subtotal allowances and provisions for country risk......................... 515 468 489
- -------------------------------------------------------------------------------- 106 108 UBS - --------------------------------------------------------------------------------
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998 (CHF in millions) - -------------------------------------------------------------------------------------------------- Allowances and provisions for country risk...................................... 802 908 961 Allowances for contingent liabilities....... 36 19 435 ------------ ---------------- ---------------- Total allowances and provisions for credit losses.................................... 12,390 13,398 14,978 ============ ================ ================ Allowances and provisions for credit losses as a percentage of gross loans............ 4.6% 4.8% 4.5% Allowances and provisions for credit losses as a percentage of impaired loans......... 58.9% 59.7% 56.6%
The following analysis provides an overview of UBS's credit loss experience for 30 June 2000 and 31 December 1999 and 1998:
FOR THE SIX FOR THE YEAR FOR THE YEAR MONTHS ENDED ENDED 30 DECEMBER ENDED 30 DECEMBER 30 JUNE 2000 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------------------------ Balance at beginning of period.......... 13,398 14,978 16,213 Net write-offs........................ (1,142) (3,210) (2,265) Increase (Decrease) in credit loss allowances......................... (83) 956 951 Other Adjustments (primarily net foreign exchange and provisions for doubtful interest)................. 217 674 79 ------------ ----------------- ----------------- Balance at end of period................ 12,390 13,398 14,978 ============ ================= =================
The allowances and provisions for credit losses decreased CHF 1,008 million, or 7.5%, from CHF 13,398 million at 31 December 1999 to CHF 12,390 million at 30 June 2000. During the first half of 2000, UBS realized a decrease in credit loss allowances of CHF 83 million compared to an increase of CHF 956 million for 1999. This positive result was essentially due to the continuous strong economy in Switzerland, where recoveries and write-backs of previously established provisions by far exceeded new provisioning requirements. The Swiss economy is expanding at the fastest rate in a decade and accelerated further during the quarter. The growth is broadly supported, especially in the domestic sector, and was markedly higher than what could have been expected in 1999. The development of the total credit loss expense in 1998 and 1999 includes the effect of allocations from the special reserve pools that had been established in 1996, prior to the 1998 merger, by both Union Bank of Switzerland and Swiss Bank Corporation totaling some CHF 5.5 billion. These reserves were established in recognition of the fact that there might be a further deterioration in the quality of their loan portfolios as a result of adverse economic conditions particularly in Switzerland. These reserves totaled CHF 3.6 billion at the beginning of 1998. CHF 3.3 billion was applied against specific loan exposures during 1998 and the balance of CHF 300 million was used or reversed in 1999. Following these allocations, the credit loss expense incurred in 1998 amounted to CHF 951 million and in 1999 to CHF 956 million. UBS does not believe there is a current need for such allowances. See "--Selected Statistical Information--Summary of Movements in Allowances and Provisions for Credit Losses" for a further analysis of credit losses. The allowance and provisions for credit losses include a component for country risk. UBS's approach to country risk provisioning follows the guidelines of the Swiss Bankers' Association, which allows banks to establish provisions based on their own portfolio scenarios. UBS establishes country-specific scenarios, which are reviewed and used on an ongoing basis to evaluate the current and future probability of default due to country risk incidents or country-specific systemic risks. The appropriate allowances and provisions are then determined by evaluating the type of credit exposure and the loss - -------------------------------------------------------------------------------- 107 109 UBS - -------------------------------------------------------------------------------- severities that have been attributed to each exposure type. Total provisions and allowances for emerging market-related exposures stood at CHF 1,317 million at 30 June 2000, CHF 1,376 million at 31 December 1999 and CHF 1,450 million at 31 December 1998, reflecting both the reduction in the overall size of UBS's emerging market exposure and reallocation of provisions from Asia to Latin America during 1999. See "--Selected Statistical Information -- Summary of Movements in Allowances and Provisions for Credit Losses" and "--Selected Statistical Information -- Allocation of the Allowances and Provisions for Credit Losses" for further analyses of the allowances and provisions for credit risk and related credit losses. Market Risk. Market risk is the risk UBS faces as a result of adverse movements in the value of foreign exchange, commodities, equity market and interest rates positions. UBS incurs market risk mainly through its trading activities, which are centered in UBS Warburg, although market risk also arises -- to a substantially lesser extent -- in relation to other activities, notably in the context of balance sheet management activities. UBS Warburg's primary market risk exposure relates to its business activities in equities, fixed income products and foreign exchange. The risk that UBS Warburg assumes is primarily related to the need to facilitate its customers' activities in the major OECD markets. UBS measures its exposure to market risk using the framework of expected loss, statistical loss and stress loss, as follows: - - In the context of market risk, expected losses are the value adjustments made to the portfolio to adjust for price uncertainties resulting from a lack of market liquidity or the absence of a reliable market price for a particular instrument. - - One-day loss is measured based on a value at risk, or "VaR," methodology. VaR is a forward-looking estimate of potential loss. One-day VaR looks forward one trading day, while 10-day VaR looks forward ten days. UBS calculates VaR using a 99% confidence level. In other words, under normal market conditions, UBS would expect over the course of a day a loss of more than its 1-day VaR to occur 1 in 100 times. - - Stress scenario loss is defined as the risk of an extreme market move affecting particular predefined market variables. In order to keep its exposure to market risk within acceptable boundaries, the UBS Board of Directors has set limits on UBS's exposure to both statistical loss by reference to the VaR exposures as well as to stress scenario loss by placing limits in relation to particular stress scenarios. UBS calculates the VaR associated with its exposure to market risk and consequently also its regulatory market risk capital requirement using the historical simulation technique, based on five years of data. VaR is calculated both on a 1-day 99% confidence interval and a 10-day 99% confidence interval, and the latter is used both for internal limits setting and for calculating regulatory market risk capital. The calculation incorporates both the risk from general market moves, such as moves in foreign exchange rates, equity indices and market interest rates, as well as the risk from price movements that are specific to an individual issuer. During 1999 and in the first six months of 2000, UBS Warburg operated within a CHF 450 million 10-day VaR limit. The Swiss Federal Banking Commission, or "FBC," approved the use of UBS's VaR model to compute regulatory capital requirements for market risks in 1999. While a VaR measure is the principal measure of UBS's exposure to day-to-day movements in market prices, UBS's risk control process is specifically focused on tail risks (or the risk of a loss on UBS's portfolios significantly larger than the VaR number as a result of large movements in the risk factors, - -------------------------------------------------------------------------------- 108 110 UBS - -------------------------------------------------------------------------------- such as equity indices, foreign exchange rates and interest rates). UBS has a consistent set of predefined large price movements, or shocks, and risk limits, which apply to all the major risk factors to which UBS is exposed as a basis to prevent risk concentration. This is the primary protection against any extreme event. In addition to this first level protection, a stress loss limit has been introduced as a portfolio control for all the trading activities that are concentrated within UBS Warburg. The potential stress loss is calculated with respect to eight base scenarios which are supplemented by ad hoc analyses depending on external developments or specific portfolio concentrations such as Year 2000, which UBS added to its stress test analysis in the third quarter of 1999. This ensures that both historical crises as well as forward-looking extreme scenarios are incorporated in the analysis. Implementing this stress loss limit is a way of protecting UBS's earnings during periods of extreme market stress. UBS Warburg Market Risk Developments. Market risk exposure as measured by the 10-day 99% confidence VaR was generally higher over 1999 and the first half of 2000. However, utilization remained well within the limits. The main market risk drivers continued to be Equity and Interest Rate risk. SUMMARY OF 10-DAY 99% CONFIDENCE VAR UTILIZATION FOR UBS WARBURG
SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER MIN. MAX. AVERAGE 2000 MIN. MAX. AVERAGE 1999 (CHF in millions) - ----------------------------------------------------------------------------------------------------------- RISK TYPE Equities............. 169.5 245.9 210.2 189.6 121.8 207.6 162.5 172.8 Interest Rates....... 127.0 181.2 152.5 133.7 87.7 187.6 140.2 140.1 Foreign Exchange..... 8.7 97.5 41.0 9.5 9.5 144.7 57.5 76.1 Precious Metals...... 4.3 27.4 12.2 12.1 5.3 35.8 21.0 27.8 Diversification Effect............. -- -- (159.8) (113.6) -- -- (168.2) (193.2) ----- ------ ------- ---------------- ----- ------ ------- ----------- UBS Warburg.......... 214.6 296.1 256.1 231.3 176.6 275.7 213.1 223.6 ----- ------ ------- ---------------- ----- ------ ------- -----------
All VaR models, while forward-looking, are based on past events and are dependent upon the quality of available market data. In order to evaluate the VaR model, actual revenues are compared with the 1-day VaR on a daily basis, a process known as "backtesting," with losses greater than the VaR estimate being known as "exceptions." As the chart below shows, UBS Warburg's backtesting results showed no exceptions over the last 12 months. In addition, there were no exceptions during 1999. - -------------------------------------------------------------------------------- 109 111 UBS - -------------------------------------------------------------------------------- [UBS Warburg Backtesting Results Graph] Market Risk in the Other Business Groups. Although UBS assumes almost all of its active market risk in UBS Warburg, the Group-wide VaR utilization includes all sources of market risk. This includes a small amount of risk that is assumed in order to facilitate customer business by UBS Private Banking in Switzerland as well as the risk associated with the structural foreign exchange and interest rate hedge positions managed by Corporate Center, which are discussed below under "-- Asset and Liability Management." However, market risk exposure at the UBS group level continues to be dominated by the UBS Warburg positions. SUMMARY OF 10-DAY 99% CONFIDENCE VAR UTILIZATION FOR YEAR ENDED 31 DECEMBER UBS GROUP
SIX MONTHS ENDED YEAR ENDED 30 JUNE 31 DECEMBER 2000 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------------ DIVISION: UBS Warburg................................................ 231.3 223.6 259.9 UBS Switzerland............................................ 3.8 4.3 5.4 Corporate Center........................................... 62.8 59.8 79.2 Diversification Effect..................................... (69.2) (55.5) (62.0) ----- ----- ----- UBS Group.................................................. 228.7 232.2 282.5 ===== ===== =====
Consequential Risks. In addition to credit and market risks that UBS assumes as an integral part of its business activities, UBS also assumes a number of consequential risks -- often referred to as "operational risk" -- which arise as a consequence of its business activities. These risks include: - - operations or transactions processing risk; - - legal risk; - - compliance risk; - - liability risk; and - - security risk. - -------------------------------------------------------------------------------- 110 112 UBS - -------------------------------------------------------------------------------- UBS is addressing the measurement of its consequential risks through the introduction of a generic operational risk-modeling framework. This framework groups risks into predetermined risk categories and identifies the factors behind the risk exposure. Operational risk scenarios are developed to stress UBS's processes and procedures underlying the exposure. This helps UBS to measure the risk of loss from the identified exposure in a similar manner to the statistical loss measurements of its credit and/or market risk exposures. This framework is relatively new and is periodically reviewed and enhanced so that risks are accurately assessed and are in accordance with UBS's risk appetite and risk-bearing capacity. Year 2000 Issue. An important element of UBS's operational risks over the past two years has been the need to address the Year 2000 issue. UBS recognized early the potential problems that could arise from computer systems failing to properly recognize the change of date from 1999 to 2000. To combat this problem, starting in 1996, UBS and each of its operating divisions established and implemented a program responsible for addressing the Year 2000 issue. UBS has not experienced any material problems related to the Year 2000 date change. The total cost to UBS of the Year 2000 program was CHF 493 million in 1998 and CHF 279 million in 1999. Asset and Liability Management UBS's asset and liability management processes are designed to manage all balance sheet related risks on a coordinated Group-wide basis. The procedures and policies cover Group liquidity, Group funding and capital management, and the management of non-trading foreign exchange and interest rate risk. UBS recognizes that the market and credit risk framework that is set out above cannot be fully applied to its asset and liability management activities. Consequently, specific processes and policies have been established for managing these risks. UBS's asset and liability management function is undertaken at the Corporate Center by the Group Treasury department, which reports directly to the CFO. Group Treasury is responsible for establishing and effectively managing the processes in relation to these risks in accordance with policies that have been approved by the Board of Directors. The overriding goals of all processes within the asset and liability management activities are: - - efficient management of the bank's non-trading interest rate and foreign exchange exposures; - - sustainable and cost-efficient funding of the bank's balance sheet; - - optimal liquidity management in order to generate cash when required; and - - compliance with legal and regulatory requirements. Interest Rate Management. Interest rate risk is inherent to most of UBS's businesses. Interest rate risks arise from a variety of factors, including differences in the timing between the contractual maturity or repricing of assets, liabilities and derivative instruments. Net interest income is affected by changes in market interest rates, given that the repricing characteristics of loans and other interest earning assets do not necessarily match those of deposits, other borrowings and capital. In the case of floating rate assets and liabilities, UBS is also exposed to basis risk, which is the difference in repricing characteristics of two floating rate indices, such as the savings rate and six-month LIBOR. In addition, certain products have embedded options that affect their pricing and principal. UBS adopts a comprehensive Group-wide approach to managing interest rate risk, and allocates the responsibility for managing this risk to a limited number of business areas. Under this approach, interest rate risk is clearly segregated into trading and non-trading risk. All interest rate risks arising from non-trading business activities are captured at the point of business origination and transferred either to UBS Warburg's Cash and Collateral Trading book -- or "CCT" -- or to the Corporate - -------------------------------------------------------------------------------- 111 113 UBS - -------------------------------------------------------------------------------- Center's Bank Book through a Group-wide transfer pricing mechanism. The risk is then managed centrally in accordance with the relevant risk policy. In the case of transactions with a fixed maturity, the interest rate risk is transferred from the relevant business area to CCT on a transaction by transaction basis. This means that products with fixed maturities immediately become part of the trading book in UBS Warburg and the business locks in an interest-rate-risk-free margin on such products, thereby relieving them of any residual interest rate risk. As a result of this process, UBS benefits fully from the netting potential between its balance sheet and trading products. In the case of client business, such as savings accounts or current accounts, which have no contractual maturity date or directly market-linked customer rate, the interest rate risk is transferred from the business areas by pooled transactions to the Bank Book. Since these products effectively contain various embedded options in respect of withdrawal/prepayment and rate-setting, they cannot be hedged by single back-to-back transactions. Consequently, Group Treasury manages the inherent interest rate risk in these products in the Bank Book through the establishment of replicating portfolios of revolving fixed-rate transactions of predefined maturities, which approximate the average cash flow behavior of these positions. Group Treasury then hedges the overall risk in the Bank Book by means of internal transactions with CCT. As a result of this process, all interest rate risks arising from client business are transferred either directly or indirectly via the Bank Book to CCT. In addition to the interest rate risk associated with client business, a significant amount of interest rate risk arises in relation to non-business balance sheet items, such as in the refinancing of the bank's real estate portfolio, equity investments in associated companies and the investment of UBS's own equity. The refinancing of real estate and equity investments and the investment of equity are all strategic decisions that implicitly create non-trading interest rate exposures. The interest rate risks inherent in these balance sheet items are managed in the Bank Book by representing them as replicating portfolios, on the basis of decisions taken by the Group Executive Board as to the appropriate effective maturities. Here, too, the risk is hedged by means of internal transactions with CCT. All the replicating portfolios that are contained in the Bank Book are updated monthly by replacing maturing tranches with new aggregate tranches that reflect the changes in the balance sheet over the period. By their nature, the staggered tranches that constitute each replicating portfolio reduce the volume that must be hedged by the Bank Book at each monthly rollover. However, due to the extent of the underlying portfolio volumes, the new aggregate tranches are nevertheless of such a size that they cannot be hedged instantly. The Bank Book therefore assumes intramonth interest rate exposure until it can execute all the necessary offsetting hedges with CCT. The exposure of the Bank Book, which thus tends to fluctuate between monthly rollovers and the profits or losses arising out of the Bank Book, are reported on an accrual basis in the financial statements and constitute an integral part of the Group's net interest income. The Board of Directors has approved risk management policies, risk limits and the control framework for the entire interest rate risk management process including the establishment of a VaR limit for the interest rate exposure of the Bank Book. Market Risk Control monitors the risk in both CCT and in the Bank Book on a daily basis as part of the Group's overall market risk in order to ensure the integrity of the interest rate risk management process and UBS's compliance with the defined risk limits. UBS's approach to managing the interest rate risks inherent in the Bank Book complies with the regulatory framework recently introduced by the FBC. In the course of the year 2000, it will become mandatory for all Swiss banks to report to the Swiss National Bank the interest rate sensitivity of the Bank Book on a quarterly basis. Additionally, the specific composition of the underlying replicating - -------------------------------------------------------------------------------- 112 114 UBS - -------------------------------------------------------------------------------- portfolios used to manage individual balance sheet items must also be disclosed in order to assist the regulators to identify 'outliers' in terms of their interest rate risk profiles. The following table shows the interest rate sensitivity of the Bank Book as at 30 June 2000 measured in terms of the potential impact of a one basis point (0.01%) parallel rise in interest rates on the market value of each balance sheet item.
WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5 MONTH MONTHS MONTHS YEARS YEARS TOTAL (CHF thousand per basis point) - --------------------------------------------------------------------------------------------- CHF.................................. 6 (5) 55 212 (627) (359) USD.................................. 8 (34) (29) (119) 505 331 EUR.................................. 0 (3) 3 106 192 298 GBP.................................. 0 0 (47) 288 531 772 JPY.................................. 0 0 0 1 (6) (5) Others............................... 0 0 0 0 0 0 ----- --- ---- -- -- -- TOTAL................................ 14 (42) (18) 488 595 1,037 Of which Replicated Equity: CHF.................................. 16 23 237 6,990 1,710 8,976 Bank Book without Replicated Equity: TOTAL................................ (2) (65) (255) (6,502) (1,115) (7,939)
The most significant component of the Bank Book sensitivity stems from the investment of UBS's equity. At 30 June 2000, this was invested in a portfolio of fixed-rate CHF deposits with an average duration of 2.5 years and a sensitivity of CHF (9.0) million per basis point, in line with the strategic investment targets set by the Group Executive Board. In order to ensure that these Group Executive Board targets are met, UBS's equity is represented as a liability position by a replication portfolio reflecting this target benchmark. UBS's equity becomes then automatically invested according to the Group Executive Board's strategic targets so as to offset the interest rate risk associated with this equity replication portfolio. The interest rate sensitivity of these investments indicates the extent to which their marked-to-market value would be affected by an upward move in interest rates. This in turn is directly related to the investment duration chosen by the Group Executive Board. However, when measured against the equity replication portfolio itself, the residual interest rate risk is negligible. Moreover, any reduction in this measure of the interest rate sensitivity relating to the investment of UBS's equity would inevitably require investing at significantly shorter maturities, which would lead to a higher volatility of UBS's interest earnings. In addition to the above standard sensitivity to a one basis point rise in rates, UBS uses the following two measures to help to monitor the risk inherent in the Bank Book: - - Net interest income at risk, which is defined as the exposure of the net interest income arising in the Bank Book to an adverse movement in interest rates over the next twelve months. Given the fact that all client business with fixed maturities is "match funded" with UBS Warburg, these transactions are not affected by changes in interest rates. Therefore only net interest income positions resulting from replicating portfolios may be exposed to market changes. This measure estimates the impact of different changes in the level of interest rates using shock scenarios as well as gradual changes in interest rates over a period of time. All of the scenarios are compared with a scenario in which current market rates are held constant for the next twelve months. - -------------------------------------------------------------------------------- 113 115 UBS - -------------------------------------------------------------------------------- - - The economic value sensitivity, which is defined as the potential change in market value of the Bank Book resulting from changes in interest rates. This estimates the effect of an immediate interest rate shock on the net position in the Bank Book. The net interest income at risk measure on the Bank Book considers such variables as: - - repricing characteristics of assets and liabilities; - - rate barrier effects, such as caps and floors, on assets and liabilities; - - maturity effects of replicating portfolios; and - - behavior of competitors. Both measures are based on the Bank Book's interest rate position excluding the liability position relating to the "equity replication portfolio." The methodology is designed to highlight the effects of market changes in interest rates on existing balance sheet positions; it ignores future changes in the asset and liability mix and therefore it is not by itself a measure of future net interest income. The two methodologies provide different measures of the level of interest rate risk. The economic value sensitivity measure provides a longer term view, since this considers the present value of all future cash flows generated from the existing balance sheet positions. The net interest income at risk measure provides a shorter term view, as it considers the repricing effect of all maturing positions over the next twelve months. The table below shows the change in risk under both measures at 30 June 2000, 31 December 1999 and 1998.
30 JUNE 31 DECEMBER 2000 1999 1998 (CHF in millions) - ------------------------------------------------------------------------------------- Net interest income at risk................................. (188) (355) (265) Economic value sensitivity.................................. (787) (555) (493)
Among various scenarios that have been analyzed the net interest income at risk figure shown is the worst case and relates to an interest rate shock (parallel shift) of -200 basis points. At 31 December 1998, the difference to the constant market rate scenario represents -4.07% of UBS's 1998 total net interest income, - -5.6% at 31 December 1999 and -3.0% at 30 June 2000. In this extreme scenario the largest part of the decrease would occur due to lower margins on deposit accounts and lower returns on the investment of UBS's equity. The economic value sensitivity shows the effect of a 100 basis point adverse interest rate shock, implying that the bank had an exposure of CHF (493) million to rising interest rates at 31 December 1998, CHF (555) million at 31 December 1999 and CHF (787) million at 30 June 2000. Liquidity and Funding Management. UBS's approach to liquidity management seeks to ensure that UBS will always have sufficient liquidity to meet its liabilities in a timely manner while preserving the option of exploiting potential strategic market opportunities. UBS's centralized approach to liquidity management encompasses the entire network of branches and all subsidiaries and ensures that the liquidity position is more than adequate to cover short-term liabilities at all times. UBS's liquidity management is based on an integrated framework that incorporates an assessment of all known cash flows within UBS as well as the availability of high grade collateral that could be used to secure additional funding if required. The liquidity position is prudently managed under different potential scenarios taking stress factors into due consideration. UBS's Board of Directors has approved a policy that establishes the core principles for liquidity management and has defined an appropriate contingency plan. A first set of principles relates to the establishment of liquidity risk limits, such as a net overnight funding limit. The risk limits are set by - -------------------------------------------------------------------------------- 114 116 UBS - -------------------------------------------------------------------------------- the Group Executive Board and monitored by the Group Treasury Committee, or "GTC," which is chaired by the Group Treasurer and meets on a monthly basis in order to assess the bank's liquidity exposure. A second set of principles concentrates on liquidity crisis management for which detailed contingency plans have been worked out. Regional committees constantly monitor the markets in which UBS operates for potential threats and regularly report their findings to the GTC. If a liquidity crisis occurs, regional crisis task forces will perform all necessary contingency actions under the command of senior management. The liquidity management process is undertaken jointly by Group Treasury and CCT. Group Treasury's function is to establish a comprehensive framework of directives and risk limits, while CCT undertakes the operational cash and collateral management transactions within the established parameters. UBS's centralized cash and collateral business management structure facilitates a tight control on both the global cash position and the stock of highly liquid and rediscountable securities. UBS's funding strategy seeks to ensure that business activities are funded at the lowest possible costs. With a broad diversification (by market, product and currency) of funding sources UBS maintains a well balanced portfolio of liabilities which generate a stable flow of financing and additionally provides protection in the event of market disruptions. In this context UBS's strong domestic retail business is a very valuable, cost efficient and reliable source of funding. Through the establishment of short-, medium- and long-term funding programs in Europe, in the US and in Asia, UBS can raise funds globally in a very efficient manner and minimize its dependence on any particular source of funding. See "--Liquidity and Capital Resources" for additional information. Currency Management. UBS's corporate currency management activities are designed to protect UBS's equity and the expected future foreign currency cash-flows from adverse currency movements against the Swiss franc while preserving the option of exploiting any market opportunities which may arise. The following principles guide the approach to managing this risk: - - UBS's equity must be invested in Swiss francs (translation risk management); and - - Recognized foreign currency exposures must be hedged proactively for the whole financial year, which represents the cycle of financial accounting (transaction risk management). Translation (Balance Sheet) Currency Risk. UBS aims to maintain the flexibility to allow foreign assets (a business unit or a non-financial asset) to be divested at any time without adverse currency impacts. To limit these undesired foreign exchange impacts on investments and divestments of these assets, foreign currency assets are match funded in the relevant currency. The match-funding principle is also applied to the financing of foreign investments, including foreign equity investments. This strategy, together with the repatriation into Swiss francs of foreign currency dividends and capital, ensures that UBS's equity is always fully invested in Swiss francs. Transaction (Revenues/Costs) Currency Risk. UBS's transaction risk currency management process is designed to protect the budgeted annual foreign currency net profits against adverse currency movements during the relevant reporting period. Foreign currency net profits are actively managed by Group Treasury on behalf of UBS in accordance with the instructions of the Group Executive Board and subject to the VaR limit that has been established for this risk. The budgeted net profits are treated as long forward foreign exchange exposures in the local reporting currency against the Swiss franc. The non-trading foreign currency exposures are hedged mainly with foreign exchange forward contracts, although foreign exchange options are also used particularly where there is a measure of uncertainty about the magnitude of the underlying income. The net position of the budgeted net profits and the corresponding hedges is the basis for the VaR calculation on Group Treasury's non-trading - -------------------------------------------------------------------------------- 115 117 UBS - -------------------------------------------------------------------------------- currency position. During the year, actual results are continuously monitored. Major budget deviations must be communicated to Group Treasury for potential additional hedge transactions. The VaR analysis, which is performed daily, is based on the same 10-day 99% confidence level as applies in UBS Warburg. The validity of the VaR measurement is evaluated by conducting backtests, which compare the estimated VaR amount with the actual shift of the positions' profit or loss due to exchange rate movements. The following table summarizes the VaR usage during the second half of 1998, 1999 and the first half of 2000.
MINIMUM MAXIMUM AVERAGE LAST VALUE OF PERIOD VAR (CHF in millions) - ------------------------------------------------------------------------------------------------ 1 JULY -- 31 DECEMBER 1998............... 37.2 133.7 77.5 79.2 1999..................................... 1.4 77.8 37.1 59.7 1 JANUARY -- 30 JUNE 2000................ 11.7 113.4 52.2 12.2
The principal contributors to UBS's non-trading currency exposure are the operations in the UK and the US. In general, the VaR position is highest at the beginning of the year when the budgeted net profits are transferred to Group Treasury and is gradually reduced during the year depending on the exact hedge strategy being used. The underlying policy is to keep the VaR of the non-trading currency position as low as practicable. Capital Management. Capital management is undertaken at UBS by Group Treasury as an integral asset and liability management function. UBS's overall capital needs are continually reviewed to ensure that its capital base can appropriately support the anticipated needs of the divisions as well as regulatory capital requirements. See "--Liquidity and Capital Resources--Capital Resources" for further details. Performance Measurement. UBS is in the process of implementing a comprehensive value based management approach intended to support management in key tasks like planning, investments, capital allocation, performance appraisal and compensation, strategic risk management and communication to investors and analysts. Divisional business plans, planned acquisitions, investments and divestments are evaluated and approved on the basis of their expected contribution to shareholder value. Actual performance is appraised using division specific hurdle rates and according to the contribution to value creation. The implicit costs of risk tolerance as well as the consumption of regulatory equity and risk control efforts are therefore considered in an appropriate way. Selected Statistical Information The tables below set forth selected statistical information regarding UBS's banking operations. Unless otherwise indicated, average balances for the year ended 31 December 1999 are calculated from monthly data and averages for the years ended 31 December 1998 and 1997 are calculated from quarterly data. The distinction between domestic and foreign generally is based on the domicile of the booking location. For loans, this method is not significantly different from an analysis based on domicile of the borrower. Disclosures for the years ended 31 December 1996 and 1995, where applicable, are presented for Union Bank of Switzerland and Swiss Bank Corporation individually. Combined data is not presented for these periods because differences between accounting policies of the predecessor banks were significant or could not be quantified, or because significant inter-company balances could not be identified and eliminated. For purposes of this selected statistical information, "UBS" refers to Union Bank of Switzerland and "SBC" refers to Swiss Bank Corporation. - -------------------------------------------------------------------------------- 116 118 UBS - -------------------------------------------------------------------------------- Average Balances and Interest Rates. The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average rates, for the years ended 31 December 1999, 1998 and 1997.
1999 1998 1997 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) (CHF in millions, except percentages) - ---------------------------------------------------------------------------------------------------------------------- ASSETS Money market paper Domestic........... 2,798 27 1.0% 4,002 70 1.7% 6,768 181 2.7% Foreign............ 48,179 1,144 2.4% 20,679 763 3.7% 27,416 1,133 4.1% Due from banks Domestic........... 19,451 705 3.6% 22,703 916 4.0% 22,823 926 4.1% Foreign............ 28,999 1,269 4.4% 43,705 2,852 6.5% 33,003 2,278 6.9% Securities borrowed and reverse repurchase agreements Domestic........... 3,265 117 3.6% 7,751 89 1.2% -- -- -- Foreign............ 223,962 11,305 5.0% 275,549 10,290 3.7% 257,090 11,328 4.4% Trading portfolio Domestic........... 36,269 72 0.2% 78,211 78 0.1% 19,915 139 0.7% Foreign............ 124,564 4,460 3.6% 119,629 3,802 3.2% 153,211 4,059 2.6% Loans Domestic........... 200,111 7,733 3.9% 207,937 8,839 4.3% 216,114 10,646 4.9% Foreign............ 58,634 3,326 5.7% 72,445 5,440 7.5% 61,110 5,400 8.8% Financial investments Domestic........... 2,066 74 3.6% 3,481 104 3.0% 3,819 119 3.1% Foreign............ 3,737 85 2.3% 7,105 268 3.8% 9,491 379 4.0% Net interest on swaps.............. -- 2,132 -- -- 1,701 -- -- 725 -- ------- ------ --------- ------ ------- ------ Total interest-earning assets............. 752,035 32,449 4.3% 863,197 35,212 4.1% 810,760 37,313 4.6% Non-interest-earning assets Positive replacement values........... 146,036 164,708 124,224 Fixed assets....... 8,824 11,316 12,628 Other.............. 34,957 33,897 32,846 ------- --------- ------- TOTAL AVERAGE ASSETS............. 941,852 1,073,118 980,458 ======= ========= ======= LIABILITIES AND EQUITY Money market paper issued Domestic........... 146 1 0.7% 255 2 0.8% 625 12 1.9% Foreign............ 57,956 2,394 4.1% 51,435 2,557 5.0% 42,565 1,920 4.5% Due to banks Domestic........... 37,581 1,303 3.5% 69,140 2,772 4.0% 76,269 1,749 2.3% Foreign............ 41,583 1,704 4.1% 51,209 3,205 6.3% 63,498 4,155 6.5%
- -------------------------------------------------------------------------------- 117 119 UBS - --------------------------------------------------------------------------------
1999 1998 1997 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) (CHF in millions, except percentages) - ---------------------------------------------------------------------------------------------------------------------- Securities loaned and repurchase agreements Domestic........... 12,830 106 0.8% 12,261 71 0.6% -- -- -- Foreign............ 144,837 8,340 5.8% 186,819 7,472 4.0% 177,128 9,660 5.5% Trading portfolio Domestic........... -- -- -- -- -- -- -- -- -- Foreign............ 48,560 2,070 4.3% 65,677 1,741 2.7% 40,541 1,492 3.7% Due to customers Domestic........... 155,887 1,920 1.2% 161,688 2,613 1.6% 169,514 3,030 1.8% Foreign............ 122,411 5,593 4.6% 132,338 7,275 5.5% 121,305 6,505 5.4% Long-term debt Domestic........... 16,241 979 6.0% 21,267 1,138 5.4% 29,010 1,481 5.1% Foreign............ 37,963 2,130 5.6% 31,024 1,348 4.3% 23,788 1,055 4.4% ------- ------ --------- ------ ------- ------ Total interest-bearing liabilities........ 675,995 26,540 3.9% 783,113 30,194 3.9% 744,243 31,059 4.2% Non-interest-bearing liabilities Negative replacement values........... 171,800 187,934 136,151 Other.............. 60,946 69,184 66,755 ------- --------- ------- Total liabilities.... 908,741 1,040,231 947,149 Shareholders' equity............. 33,111 32,887 33,309 ------- --------- ------- TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY............. 941,852 1,073,118 980,458 ======= ========= ======= NET INTEREST INCOME.. 5,909 5,018 6,254 NET YIELD ON INTEREST-EARNING ASSETS............. 0.8% 0.6% 0.8%
All assets and liabilities are translated into Swiss francs at uniform month-end rates. Income and expenses are translated at monthly average rates. Average rates earned and paid on assets and liabilities can change from period to period based on the changes in interest rates in general, but also are affected by changes in the currency mix included in the assets and liabilities. This is especially true for foreign assets and liabilities. Tax exempt income is not recorded on a tax-equivalent basis. For all three years presented, it is considered to be insignificant and therefore the impact from such income is negligible. Interest income and expense on certain accounts are reported as trading income in UBS's 1997 consolidated financial statements, but are reported against those accounts in the table. These accounts include: money market paper, securities borrowed and lent, reverse repurchase and repurchase agreements, and trading assets and liabilities. Also, the interest expense in UBS's 1997 consolidated financial statements is reduced by an amount for funding costs for trading positions, which is not - -------------------------------------------------------------------------------- 118 120 UBS - -------------------------------------------------------------------------------- reflected in the preceding table. The following table reconciles net interest on interest-earnings assets as shown in the table above to net interest income in UBS's 1997 consolidated financial statements.
1997 (CHF in millions) - ----------------------------------------------------------------------- Net interest on interest-earning assets..................... 6,254 Money market paper........................................ -- Securities borrowed and reverse repurchase agreements..... (11,328) Trading portfolio assets.................................. (4,198) Securities loaned and repurchase agreements............... 9,660 Trading portfolio liabilities............................. 1,492 Funding costs for trading positions....................... 5,056 ------- NET INTEREST PER FINANCIAL STATEMENTS....................... 6,936 =======
- -------------------------------------------------------------------------------- 119 121 UBS - -------------------------------------------------------------------------------- Analysis of Changes in Interest Income and Expense. The following tables allocate, by categories of interest-earning assets and interest-bearing liabilities, the changes in interest income and expense due to changes in volume and interest rates for the year ended 31 December 1999 compared to the year ended 31 December 1998, and for the year ended 31 December 1998 compared to the year ended 31 December 1997. Volume and rate variances have been calculated on movements in average balances and changes in interest rates. Changes due to a combination of volume and rate have been allocated proportionally.
1999 OVER 1998 1998 OVER 1997 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO CHANGES IN CHANGES IN AVERAGE AVERAGE VOLUME AVERAGE RATE NET CHANGE VOLUME AVERAGE RATE NET CHANGE (CHF in millions) - -------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Money market paper Domestic................... (21) (22) (43) (74) (37) (111) Foreign.................... 1,014 (633) 381 (278) (92) (370) Due from banks Domestic................... (131) (80) (211) (5) (4) (9) Foreign.................... (960) (623) (1,583) 739 (165) 574 Securities borrowed and reverse repurchase agreements Domestic................... (52) 79 27 89 -- 89 Foreign.................... (1,926) 2,941 1,015 813 (1,851) (1,038) Trading portfolio Domestic................... (42) 36 (6) 407 (468) (61) Foreign.................... 157 501 658 (890) 633 (257) Loans Domestic................... (333) (773) (1,106) (403) (1,404) (1,807) Foreign.................... (1,037) (1,077) (2,114) 1,002 (962) 40 Financial investments Domestic................... (13) (17) (30) (11) (4) (15) Foreign.................... (126) (57) (183) (95) (16) (111) ------- ------- ------- ------- ------- ------- Interest income Domestic................... (592) (777) (1,369) 3 (1,917) (1,914) Foreign.................... (2,878) 1,053 (1,825) 1,291 (2,453) (1,162) ------- ------- ------- ------- ------- ------- Total interest-earning assets..................... (3,470) 276 (3,194) 1,294 (4,370) (3,076) ------- ------- ------- ------- ------- ------- Net interest on swaps........ 431 976 ------- ------- Total interest income........ (2,763) (2,100) ------- ------- ------- -------
- -------------------------------------------------------------------------------- 120 122 UBS - --------------------------------------------------------------------------------
1999 OVER 1998 1998 OVER 1997 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO CHANGES IN CHANGES IN AVERAGE AVERAGE VOLUME AVERAGE RATE NET CHANGE VOLUME AVERAGE RATE NET CHANGE (CHF in millions) - -------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Money market paper issued Domestic................... (1) (0) (1) (7) (3) (10) Foreign.................... 324 (487) (163) 400 237 637 Due to banks Domestic................... (1,265) (204) (1,469) (164) 1,187 1,023 Foreign.................... (602) (899) (1,501) (804) (146) (950) Securities loaned and repurchase agreements Domestic................... 3 32 35 71 -- 71 Foreign.................... (1,679) 2,547 868 529 (2,717) (2,188) Trading portfolio Domestic................... -- -- -- -- -- -- Foreign.................... (454) 783 329 926 (677) 249 Due to customers Domestic................... (94) (599) (693) (140) (277) (417) Foreign.................... (546) (1,136) (1,682) 592 178 770 Long-term debt Domestic................... (269) 110 (159) (395) 52 (343) Foreign.................... 302 480 782 321 (28) 293 ------- ------------ ---------- ------- ------------ ---------- Interest expense Domestic................... (1,626) (661) (2,287) (635) 959 324 Foreign.................... (2,655) 1,288 (1,367) 1,964 (3,153) (1,189) ------- ------------ ---------- ------- ------------ ---------- Total interest-bearing liabilities................ (4,281) 627 (3,654) 1,329 (2,194) (865) ======= ============ ========== ======= ============ ==========
- -------------------------------------------------------------------------------- 121 123 UBS - -------------------------------------------------------------------------------- Deposits. The following table analyzes average deposits and the average rates on each deposit category listed below at and for the years ended 31 December 1999, 1998 and 1997. The geographic allocation is based on the location of the office or branch where the deposit is made.
1999 1998 1997 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE DEPOSIT RATE (%) DEPOSIT RATE (%) DEPOSIT RATE (%) (CHF in millions except percentages) - -------------------------------------------------------------------------------------------------- BANKS Domestic offices: Demand deposits........... 12,736 0.9% 11,890 0.6% 9,856 0.8% Time deposits............. 6,715 4.8% 10,813 4.7% 12,967 2.5% ------- ------- ------- Total domestic offices.... 19,451 2.2% 22,703 2.6% 22,823 1.8% ------- ------- ------- Foreign offices: Interest-bearing deposits(1)............. 28,999 4.1% 43,705 6.3% 33,003 6.5% ------- ------- ------- TOTAL DUE TO BANKS............. 48,450 3.4% 66,408 5.0% 55,826 4.6% ======= ======= ======= CUSTOMER ACCOUNTS Domestic offices: Demand deposits........... 49,261 0.6% 44,569 0.7% 41,411 0.8% Savings deposits.......... 80,543 1.1% 82,561 1.6% 85,027 1.8% Time deposits............. 26,083 2.8% 34,558 2.9% 43,076 2.7% ------- ------- ------- Total domestic offices.... 155,887 1.2% 161,688 1.6% 169,514 1.8% ------- ------- ------- Foreign offices: Demand deposits........... 122,411 4.6% 132,338 5.5% 121,305 5.4% ------- ------- ------- TOTAL DUE TO CUSTOMERS......... 278,298 2.7% 294,026 3.4% 290,819 3.3% ======= ======= =======
- ------------ (1) Includes mostly time deposits. At 31 December 1999, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies, was as follows.
AT 31 DECEMBER 1999 DOMESTIC FOREIGN (CHF in millions) - --------------------------------------------------------------------------------- Within 3 months............................................. 32,466 117,260 3 to 12 months.............................................. 4,620 7,784 1 to 5 years................................................ 1,027 978 Over 5 years................................................ 429 2,333 ------ ------- TOTAL TIME DEPOSITS......................................... 38,542 128,355 ====== =======
- -------------------------------------------------------------------------------- 122 124 UBS - -------------------------------------------------------------------------------- Short-Term Borrowings. The following table presents UBS's period-end, average and maximum month-end outstanding amounts for short-term borrowings, along with the average rates and period-end rates at and for the years ended 31 December 1999, 1998 and 1997.
MONEY MARKET PAPER ISSUED DUE TO BANKS REPURCHASE AGREEMENTS 1999 1998 1997 1999 1998 1997 1999 1998 1997 (CHF in millions) - --------------------------------------------------------------------------------------------------------------- Period-end balance...... 64,655 51,527 55,600 40,580 10,361 84,952 217,736 137,617 191,792 Average balance......... 58,103 51,690 43,190 30,714 53,941 83,941 149,071 177,298 153,028 Maximum month-end balance............... 76,368 53,710 55,600 64,562 89,072 105,332 217,736 202,062 191,792 Average interest rate during the period..... 4.1% 5.0% 4.5% 4.5% 4.9% 4.0% 4.8% 3.6% 5.3% Average interest rate at period-end............ 4.6% 4.6% 4.5% 4.8% 4.4% 4.2% 3.9% 4.9% 4.5%
Loans. UBS's loans are widely dispersed over customer categories both within and outside of Switzerland. No one concentration of loans, with the exceptions of private households in Switzerland and foreign commercial and manufacturing, accounted for more than 10% of the total loan portfolio. For further discussion of UBS's loan portfolio, see "--Analysis of Risks--Credit Risk." The following table illustrates the diversification of the loan portfolio among customer categories at 31 December 1999, 1998, 1997, 1996 and 1995. The industry categories presented are consistent with the classification of loans for reporting to the Swiss Federal Banking Commission and Swiss National Bank.
1996 1995 1999 1998 1997 UBS SBC UBS SBC (CHF in millions) - ---------------------------------------------------------------------------------------------------- Domestic: Banks.................. 5,802 4,543 17,751 15,039 2,532 2,700 2,467 Financial institutions......... 9,387 10,240 11,371 14,465 6,752 12,865 6,673 Construction........... 6,577 7,897 9,627 6,022 4,556 3,737 4,644 Services (1)........... 14,862 11,582 13,083 7,841 6,383 6,011 6,401 Retail and wholesale... 10,904 8,912 10,512 7,220 6,602 6,772 6,323 Hotels and restaurants.......... 4,259 4,129 4,668 4,815 2,200 4,311 2,219 Real estate and rentals (2).................. 19,835 21,231 22,915 N/A N/A N/A N/A Manufacturing.......... 11,377 13,505 16,440 9,650 9,019 10,113 9,788 Public authorities..... 5,277 5,858 6,354 3,271 4,972 2,727 4,484 Private households..... 93,846 97,664 109,044 55,088 59,098 48,935 56,732 Other.................. 1,818 1,662 1,862 1,156 694 1,629 747 ------- ------- ------- ------- ------- ------- ------- Total domestic........... 183,944 187,223 223,627 124,567 102,808 99,800 100,478 Foreign: Banks.................. 24,983 65,000 49,559 25,048 70,758 88,586 42,689 Other loans (3)........ 69,087 78,741 80,054 33,412 34,758 55,188 29,814 ------- ------- ------- ------- ------- ------- ------- Total foreign............ 94,070 143,741 129,613 58,460 105,516 143,774 72,503 ------- ------- ------- ------- ------- ------- ------- TOTAL GROSS LOANS........ 278,014 330,964 353,240 183,027 208,324 243,574 172,981 ======= ======= ======= ======= ======= ======= =======
- --------------- (1) Includes transportation, communication, health and social work, education and other social and personal service activities. (2) Includes real estate development, buying, selling and leasing of real estate, agency activities and real estate management. The Swiss National Bank introduced this category in 1997; prior years' balances cannot be restated. (3) Includes commercial and manufacturing (52%), financial institutions (25%), commodities (8%) and other (15%) at 31 December 1999. - -------------------------------------------------------------------------------- 123 125 UBS - -------------------------------------------------------------------------------- The following table analyzes UBS's mortgage portfolio by geographic origin of the customer and type of mortgage at 31 December 1999, 1998, 1997, 1996 and 1995. Mortgages are included in the aforementioned industry categories.
1996 1995 1999 1998 1997 UBS SBC UBS SBC (CHF in millions) - ----------------------------------------------------------------------------------------------------------- Mortgages: Domestic................................ 126,677 138,306 142,919 68,534 70,966 67,200 67,098 Foreign................................. 1,310 2,479 3,883 1,657 2,266 1,306 2,372 ------- ------- ------- ------ ------ ------ ------ Total gross mortgages..................... 127,987 140,785 146,802 70,191 73,232 68,506 69,470 ======= ======= ======= ====== ====== ====== ====== Mortgages: Residential............................. 91,408 106,093 105,926 48,508 49,794 48,711 46,083 Commercial.............................. 36,579 34,692 40,876 21,683 23,438 19,795 23,387 ------- ------- ------- ------ ------ ------ ------ Total gross mortgages..................... 127,987 140,785 146,802 70,191 73,232 68,506 69,470 ======= ======= ======= ====== ====== ====== ======
Loan Maturities. The following table discloses loans by maturity at 31 December 1999. The determination of maturities is based on contract terms. Information on interest rate sensitivities can be found in Note 33 of UBS's consolidated financial statements.
WITHIN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS TOTAL (CHF in millions) - --------------------------------------------------------------------------------------------------- Domestic: Banks.................................. 5,756 21 25 5,802 Mortgages.............................. 66,787 57,582 2,308 126,677 Other loans............................ 39,665 9,304 2,496 51,465 ------------- ------------ ------------ ------- Total domestic........................... 112,208 66,907 4,829 183,944 ------------- ------------ ------------ ------- Foreign: Banks.................................. 24,286 453 244 24,983 Mortgages.............................. 802 287 221 1,310 Other loans............................ 62,140 4,124 1,513 67,777 ------------- ------------ ------------ ------- Total foreign............................ 87,228 4,864 1,978 94,070 ------------- ------------ ------------ ------- Total gross loans........................ 199,436 71,771 6,807 278,014 ============= ============ ============ =======
Impaired, Non-Performing and Restructured Loans. UBS classifies a loan as impaired when it is determined that there is a high probability that the bank will suffer a partial or full loss. A provision is then made with respect to the probable loss to be incurred for the loan in question. Within the category are non-performing loans, for which the contractual payments of principal and/or interest are in arrears for 90 days or more. After the 90-day period, UBS no longer recognizes interest income on the loan and takes a charge for the unpaid and accrued interest receivable. Unrecognized interest related to non-performing loans amounted to CHF 409 million, CHF 423 million and CHF 450 million for the years ended 31 December 1999, 1998 and 1997, respectively. The table below provides an analysis of the Group's non-performing and restructured loans at 31 December 1999, 1998, 1997, 1996 and 1995. For further discussion of impaired and non-performing loans, see "--Analysis of Risks--Credit Risk." - -------------------------------------------------------------------------------- 124 126 UBS - --------------------------------------------------------------------------------
1996 1995 1999 1998 1997 UBS SBC UBS SBC (CHF in millions) - ----------------------------------------------------------------------------------------------------- Non-performing loans: Domestic......................... 11,435 14,023 15,238 7,171 9,587 7,787 10,582 Foreign.......................... 1,638 2,091 1,426 414 1,446 424 1,703 ------ ------ ------ ----- ------ ----- ------ TOTAL NON-PERFORMING LOANS......... 13,073 16,114 16,664 7,585 11,033 8,211 12,285 ====== ====== ====== ===== ====== ===== ====== FOREIGN RESTRUCTURED LOANS(1)...... 287 449 638 473 289 439 301 ====== ====== ====== ===== ====== ===== ======
- --------------- (1) Amounts presented for 1999 and 1998 include only performing foreign restructured loans. Amounts presented for prior years include both performing and non-performing foreign restructured loans. UBS does not, as a matter of policy, typically restructure loans to accrue interest at rates different from the original contractual terms or reduce the principal amount of loans. Instead, specific loan allowances are established as necessary. Unrecognized interest related to the foreign restructured loans was not material to the results of operations during these periods. In addition to the data above analyzing non-performing loans, at 31 December 1999 UBS had CHF 9,383 million in "other impaired loans." These are loans that are current, or less than 90 days in arrears, with respect to payment of principal or interest; however, UBS's credit officers have expressed doubts as to the ability of the borrowers to repay the loans, and specific allowances of CHF 3,810 million have been established against them. These loans are primarily domestic. Cross-Border Outstandings. Cross-border outstandings consist of general banking products such as loans and deposits with third parties, credit equivalents of over-the-counter derivatives and repurchase agreements, and the market value of the inventory of securities. The outstandings are monitored and reported on an ongoing basis by the credit risk management organization with a dedicated country risk information system. With the exception of the 27 most developed economies, the exposures are rigorously limited. Claims that are secured by third-party guarantees are recorded against the guarantor's country of domicile. Outstandings that are secured by collateral are recorded against the country where the asset could be liquidated. This follows the "Guidelines for the Management of Country Risk," which are applicable to all banks that report to the Swiss Federal Banking Commission as their supervisory body. The following tables list those countries for which UBS's cross-border outstandings exceeded 0.75% of total assets at 31 December 1999, 1998 and 1997. At 31 December 1999, there were no outstandings that exceeded 0.75% of total assets in any country currently facing liquidity problems that the bank expects would materially affect the country's ability to service its obligations. For more information on cross-border outstandings, see "--Analysis of Risks--Credit Risk--Country Risk Exposure." - -------------------------------------------------------------------------------- 125 127 UBS - --------------------------------------------------------------------------------
AT 31 DECEMBER 1999 BANKING PRODUCTS TRADED TRADEABLE % OF TOTAL BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS (CHF in millions) - --------------------------------------------------------------------------------------------------- United States.............. 3,202 2,508 41,970 48,012 95,692 9.7% Japan...................... 1,117 965 7,153 69,194 78,429 8.0% United Kingdom............. 3,417 3,193 11,273 58,300 76,183 7.8% Germany.................... 4,455 3,174 41,422 8,181 57,232 5.8% Italy...................... 2,462 762 6,803 8,708 18,735 1.9% Netherlands................ 1,932 1,149 6,648 4,993 14,722 1.5% France..................... 1,200 1,395 7,324 4,379 14,298 1.5% Australia.................. 2,688 409 6,342 3,735 13,174 1.3% Canada..................... 866 492 5,233 807 7,398 0.8%
AT 31 DECEMBER 1998 BANKING PRODUCTS TRADED TRADEABLE % OF TOTAL BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS (CHF in millions) - --------------------------------------------------------------------------------------------------- United States............ 13,882 2,292 27,922 65,543 109,639 11.6% United Kingdom........... 4,006 2,583 10,912 32,348 49,849 5.3% Japan.................... 1,633 768 7,879 38,133 48,413 5.1% Germany.................. 7,850 2,500 20,666 15,903 46,919 5.0% France................... 2,490 1,420 10,037 8,521 22,468 2.4% Italy.................... 2,174 1,201 8,236 9,394 21,005 2.2% Australia................ 6,749 543 3,097 4,760 15,149 1.6% Netherlands.............. 1,221 1,086 6,134 6,363 14,804 1.6% Sweden................... 449 812 3,710 8,091 13,062 1.4% Canada................... 755 549 5,162 3,479 9,945 1.1% Austria.................. 769 82 1,513 5,436 7,800 0.8% Spain.................... 913 350 2,495 3,701 7,459 0.8% Belgium.................. 1,248 162 2,393 3,599 7,402 0.8% Luxembourg............... 1,212 2,130 1,723 2,195 7,260 0.8%
UBS AT 31 DECEMBER 1997 BANKING TRADED TRADEABLE % OF TOTAL PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL ASSETS (CHF in millions) - --------------------------------------------------------------------------------------------------- United States........................ 8,306 10,063 -- 18,369 3.2% France............................... 7,338 3,450 -- 10,788 1.9% Germany.............................. 5,074 4,704 -- 9,778 1.7% United Kingdom....................... 2,741 6,963 -- 9,704 1.7% Italy................................ 6,088 1,748 -- 7,836 1.4% Singapore............................ 5,930 739 -- 6,669 1.2% Luxembourg........................... 4,832 1,123 -- 5,955 1.0% Japan................................ 1,641 4,101 -- 5,742 1.0% Netherlands.......................... 3,524 1,114 -- 4,638 0.8%
- -------------------------------------------------------------------------------- 126 128 UBS - --------------------------------------------------------------------------------
SBC AT 31 DECEMBER 1997 BANKING TRADED TRADEABLE % OF TOTAL PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL ASSETS (CHF in millions) - --------------------------------------------------------------------------------------------------- United States........................ 23,084 11,432 26,170 60,686 13.8% Germany.............................. 4,790 10,404 8,768 23,962 5.5% Japan................................ 2,022 6,555 11,870 20,447 4.7% France............................... 1,271 5,150 2,900 9,321 2.1% Netherlands.......................... 2,621 4,009 2,379 9,009 2.1% Italy................................ 2,419 2,541 3,988 8,948 2.0% Sweden............................... 1,144 2,096 1,254 4,494 1.0% Belgium.............................. 365 1,664 2,035 4,064 0.9% Canada............................... 655 2,531 818 4,004 0.9% Australia............................ 73 1,982 1,671 3,726 0.8% Cayman Islands....................... 771 1,443 1,328 3,542 0.8%
- --------------- (1) Traded products consist of derivative instruments and repurchase agreements. (2) Tradeable assets consist of equity and fixed income financial instruments held for trading purposes, which are marked to market on a daily basis. Summary of Movements in Allowances and Provisions for Credit Losses. The following table provides an analysis of movements in allowances and provisions for credit losses for the years ended 31 December 1999, 1998, 1997, 1996 and 1995. As a result of Swiss bankruptcy laws, banks write off loans against allowances only upon final settlement of bankruptcy proceedings, the sale of the underlying asset and/or in case of the forgiveness of debt. Under Swiss law, a creditor can continue to collect from a debtor who has emerged from bankruptcy, unless the debt has been forgiven through a formal agreement. - -------------------------------------------------------------------------------- 127 129 UBS - --------------------------------------------------------------------------------
1996 1995 --------------- --------------- 1999 1998 1997 UBS SBC UBS SBC (CHF in millions) - ------------------------------------------------------------------------------------------------------------- Balance at beginning of year................... 14,978 16,213 18,135 6,413 6,700 6,412 7,403 Writeoffs: Domestic: Banks...................................... (4) (2) (5) -- -- (3) -- Financial institutions..................... (92) (66) (226) (32) (284) (57) (88) Construction............................... (296) (228) (408) (103) (140) (447) (166) Services(1)................................ (315) (116) (229) (220) (54) (283) (100) Retail and wholesale....................... (210) (178) (227) (108) (46) (192) (68) Hotels and restaurants..................... (137) (98) (138) (28) (37) (46) (35) Real estate and rentals(2)................. (823) (610) (871) (561) (263) (386) (278) Manufacturing.............................. (242) (214) (514) (179) (111) (197) (171) Public authorities......................... -- (2) (19) -- (3) -- (2) Private households......................... (598) (534) (1,214) (306) (389) (220) (867) Other...................................... (41) (15) (29) (85) (35) (155) (28) ------ ------ ------ ------ ------ ------ ------ Total domestic............................... (2,758) (2,063) (3,880) (1,622) (1,362) (1,986) (1,803) Foreign...................................... (517) (261) (240) (49) (350) (73) (339) ------ ------ ------ ------ ------ ------ ------ Total writeoffs................................ (3,275) (2,324) (4,120) (1,671) (1,712) (2,059) (2,142) Recoveries: Domestic..................................... 54 59 406 438 71 354 78 Foreign...................................... 11 -- 36 25 20 8 -- ------ ------ ------ ------ ------ ------ ------ Total recoveries............................... 65 59 442 463 91 362 78 ------ ------ ------ ------ ------ ------ ------ Net writeoffs.................................. (3,210) (2,265) (3,678) (1,208) (1,621) (1,697) (2,064) Increase in credit loss allowances............. 956 951 1,432 1,272 1,018 1,084 874 Special provisions(3).......................... -- -- -- 2,289 2,480 711 -- Other adjustments(4)........................... 674 79 324 140 652 (97) 487 ------ ------ ------ ------ ------ ------ ------ Balance at end of year......................... 13,398 14,978 16,213 8,906 9,229 6,413 6,700 ====== ====== ====== ====== ====== ====== ======
- --------------- (1) Includes transportation, communication, health and social work, education and other social and personal service activities. (2) Includes real estate development, buying, selling and leasing of real estate, agency activities and real estate management. (3) The 1996 UBS amount includes a special provision of CHF 3,000 million for credit risks and the release of a CHF 711 million provision for general banking risks from the prior year. (4) Includes the following for 1999, 1998 and 1997:
1999 1998 1997 (CHF in millions) - ---------------------------------------------------------------------------- Doubtful interest..................................... 409 423 450 Net foreign exchange.................................. 351 (98) 91 Subsidiaries sold and other........................... (86) (246) (217) --- ---- ---- Total adjustments..................................... 674 79 324 === ==== ====
- -------------------------------------------------------------------------------- 128 130 UBS - -------------------------------------------------------------------------------- Allocation of the Allowances and Provisions for Credit Losses. The following tables provide an analysis of the allocation of the allowances and provisions for credit losses by customer categories and geographic location at 31 December 1999, 1998, 1997, 1996 and 1995. For a description of the bank's procedures with respect to allowances and provisions for credit losses, see "--Analysis of Risks--Credit Risk."
1996 1995 ------------- ------------- 1999 1998 1997 UBS SBC UBS SBC (CHF in millions) - ----------------------------------------------------------------------------------------------------------- Domestic: Banks.......................................... 41 49 34 9 39 43 32 Financial institutions......................... 342 668 510 152 403 132 370 Construction................................... 1,247 1,671 1,449 716 539 602 471 Services(1).................................... 934 766 661 429 160 440 157 Retail and wholesale........................... 779 825 723 371 263 318 212 Hotels and restaurants......................... 690 657 512 172 135 113 112 Real estate and rentals(2)..................... 2,696 3,333 2,591 1,286 1,335 1,314 1,163 Manufacturing.................................. 1,223 1,331 1,036 603 438 547 385 Public authorities............................. 40 107 59 1 66 1 47 Private households............................. 2,350 2,741 2,264 970 1,459 976 1,396 Other.......................................... 141 71 52 40 19 19 34 ------ ------ ------ ----- ----- ----- ----- Total domestic................................... 10,483 12,219 9,891 4,749 4,856 4,505 4,379 ------ ------ ------ ----- ----- ----- ----- Foreign........................................ 1,539 1,309 1,399 353 1,286 340 1,539 Country provisions............................. 1,376 1,450 1,175 804 404 857 559 ------ ------ ------ ----- ----- ----- ----- Total foreign(3)................................. 2,915 2,759 2,574 1,157 1,690 1,197 2,098 ------ ------ ------ ----- ----- ----- ----- Unallocated allowances(4)...................... -- -- 3,748 3,000 2,683 711 223 ------ ------ ------ ----- ----- ----- ----- TOTAL ALLOWANCES AND PROVISIONS FOR CREDIT LOSSES......................................... 13,398 14,978 16,213 8,906 9,229 6,413 6,700 ====== ====== ====== ===== ===== ===== =====
- --------------- (1) Includes transportation, communication, health and social work, education and other social and personal service activities. (2) Includes real estate development, buying, selling and leasing of real estate, agency activities and real estate management. (3) The 1999 and 1998 amounts include CHF 149 million and CHF 435 million of provisions and commitments for contingent liabilities, respectively. (4) The 1997 amount includes a provision for commitments and contingent liabilities of CHF 472 million. In addition, the 1996 SBC amount includes CHF 603 million of provisions for commitments and contingent liabilities. The 1995 UBS and SBC amounts represent provisions for general banking risks and commitments and contingent liabilities, respectively. The following table presents the percentage of loans in each category to total loans at 31 December 1999, 1998, 1997, 1996 and 1995. This table can be read in conjunction with the preceding table showing the breakdown of the allowances and provisions for credit losses by loan categories to evaluate the credit risks in each of the categories.
1996 1995 -------------- -------------- 1999 1998 1997 UBS SBC UBS SBC - ------------------------------------------------------------------------------------------------------ Domestic: Banks.................................. 2.1% 1.4% 5.0% 8.2% 1.2% 1.1% 1.4% Financial institutions................. 3.4% 3.1% 3.2% 7.9% 3.2% 5.3% 3.9% Construction........................... 2.4% 2.4% 2.7% 3.3% 2.2% 1.5% 2.7% Services............................... 5.3% 3.5% 3.7% 4.3% 3.1% 2.5% 3.7% Retail and wholesale................... 3.9% 2.7% 3.0% 3.9% 3.2% 2.8% 3.6% Hotels and restaurants................. 1.5% 1.2% 1.3% 2.6% 1.0% 1.8% 1.3% Real estate and rentals................ 7.1% 6.4% 6.5% 0.0% 0.0% 0.0% 0.0%
- -------------------------------------------------------------------------------- 129 131 UBS - --------------------------------------------------------------------------------
1996 1995 -------------- -------------- 1999 1998 1997 UBS SBC UBS SBC - ------------------------------------------------------------------------------------------------------ Manufacturing.......................... 4.1% 4.1% 4.7% 5.3% 4.3% 4.1% 5.7% Public authorities..................... 1.9% 1.8% 1.8% 1.8% 2.4% 1.1% 2.6% Private households..................... 33.8% 29.5% 30.9% 30.1% 28.4% 20.1% 32.8% Other.................................. 0.7% 0.5% 0.5% 0.6% 0.3% 0.7% 0.4% ----- ----- ----- ----- ----- ----- ----- Total domestic........................... 66.2% 56.6% 63.3% 68.0% 49.3% 41.0% 58.1% ----- ----- ----- ----- ----- ----- ----- Foreign: Banks.................................. 9.0% 19.6% 14.0% 13.7% 34.0% 36.4% 24.7% Other loans............................ 24.8% 23.8% 22.7% 18.3% 16.7% 22.6% 17.2% ----- ----- ----- ----- ----- ----- ----- Total foreign............................ 33.8% 43.4% 36.7% 32.0% 50.7% 59.0% 41.9% ----- ----- ----- ----- ----- ----- ----- TOTAL GROSS LOANS........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== ===== =====
Loss History Statistics. The following is a summary of UBS's loan loss history at 30 June 2000 and 31 December 1999, 1998, 1997, 1996 and 1995.
1996 1995 ----------------- ----------------- 30 JUNE 2000 1999 1998 1997 UBS SBC UBS SBC (CHF in millions except percentages) - ------------------------------------------------------------------------------------------------------------- Gross loans.............. 270,978 278,014 330,964 353,240 183,027 208,324 243,574 172,981 Impaired loans........... 21,011 22,456 26,447 N/A N/A N/A N/A N/A Non-performing loans..... 11,552 13,073 16,114 16,664 7,585 11,033 8,211 12,285 Allowances and provisions for credit losses...... 12,390 13,398 14,978 16,213 8,906 9,229 6,413 6,700 Net writeoffs............ 1,142 3,210 2,265 3,678 1,208 1,621 1,697 2,064 Credit loss expense...... (83) 956 951 1,432 1,272 1,018 1,084 874 RATIOS: Impaired loans/Gross loans.................. 7.8% 8.1% 8.0% N/A N/A N/A N/A N/A Non-performing loans/ Gross loans............ 4.3% 4.7% 4.9% 4.7% 4.1% 5.3% 3.4% 7.1% Allowance and provisions for credit losses as a percentage of: Gross loans............ 4.6% 4.8% 4.5% 4.6% 4.9% 4.4% 2.6% 3.9% Impaired loans......... 58.9% 59.7% 56.6% N/A N/A N/A N/A N/A Non-performing loans... 107.3% 102.5% 93.0% 97.3% 117.4% 83.6% 78.1% 54.5% Net writeoffs as a percentage of: Gross loans............ 0.4% 1.2% 0.7% 1.0% 0.7% 0.8% 0.7% 1.2% Allowance and provisions for credit losses............... 9.2% 24.0% 15.1% 22.7% 13.6% 17.6% 26.5% 30.8% Allowance and provisions for credit losses as a multiple of net writeoffs.............. 10.85 4.17 6.61 4.41 7.37 5.69 3.78 3.25
- --------------- N/A = Not Available QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Analysis of Risks--Market Risk." - -------------------------------------------------------------------------------- 130 132 UBS - -------------------------------------------------------------------------------- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The accompanying unaudited pro forma financial statements on pages 135 to 154 present the condensed consolidated balance sheet of UBS and PaineWebber as of 30 June 2000 and the related condensed consolidated income statements for the six-month period ended 30 June 2000 and the year ended 31 December 1999, as if the merger had occurred on 1 January 1999. The presentation is made both on the basis of IAS and U.S. GAAP. In order to present this information and show the reader the source of the information, several schedules are required. The first set of schedules included present the unaudited pro forma financial statements on the basis of IAS, in Swiss francs (CHF). This is achieved by presenting in the first two columns the financial statements of PaineWebber in accordance with IAS in U.S. Dollars (USD), and then showing the translation into CHF. The third column presents the IAS financial statements of UBS in CHF. We then present accounting entries to reflect the results of the merger, each of which is explained in a footnote, and the final resulting column presents the unaudited pro forma condensed consolidated financial statements. Since IAS will be the primary accounting framework of the consolidated company, we present this information first. PaineWebber presents its financial statements on the basis of U.S. GAAP rather than IAS. The second set of schedules shows the restatement of the U.S. GAAP financial statements of PaineWebber into IAS. The first column presents the U.S. GAAP financial statements of PaineWebber, after reflecting certain reclassification entries required to conform to the UBS presentation. These reclassification entries do not affect net income or shareholders' equity, and are therefore not presented separately in this document. The next column presents the accounting entries required to restate the financial statements on the basis of IAS, and each entry is explained in a footnote. The final resulting column presents the PaineWebber financial statements in accordance with IAS, and is the same as the first column in the first set of schedules described in the preceding paragraph. The third set of schedules presents the unaudited pro forma condensed consolidated financial statements in accordance with U.S. GAAP. In much the same way that UBS is required to present a reconciliation of its primary financial statements from IAS to U.S. GAAP, we have also presented this reconciliation. The first column presents the IAS unaudited pro forma condensed consolidated financial statements and is the same as the next to last column in the first set of schedules described two paragraphs above. The next two columns present the accounting entries required to restate the unaudited pro forma financial statements for UBS and PaineWebber, respectively, in accordance with U.S. GAAP. Each of the entries is described in a footnote. The final column presents the unaudited pro forma condensed consolidated financial statements in accordance with U.S. GAAP. - -------------------------------------------------------------------------------- 131 133 UBS - -------------------------------------------------------------------------------- UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 The following unaudited pro forma condensed consolidated balance sheet and income statement as of and for the six months ended 30 June 2000 is derived from the unaudited consolidated financial statements of UBS as of and for the six month period then ended and PaineWebber's unaudited condensed consolidated financial statements as of and for the same period, as adjusted to IAS and translated into Swiss francs, after giving effect to the pro forma adjustments described in the notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement below. These adjustments have been made as if the merger took place on 1 January 1999, the first day of the earliest period presented in the UBS and PaineWebber unaudited pro forma condensed consolidated financial information. This information has been prepared from, and should be read together with, the respective unaudited consolidated financial statements and related notes of UBS and the unaudited condensed consolidated financial statements of PaineWebber, which are included in this document and publicly available, respectively. These statements have been prepared in accordance with IAS. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2000
CONVENIENCE TRANSLATION UBS AND UBS AND UBS AND PAINEWEBBER PAINEWEBBER PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED PAINEWEBBER UBS COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA (IN MILLIONS) US$ CHF(1) CHF CHF CHF REFERENCE(2) CHF US$(3) - ------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME Interest income....... 2,056 3,410 24,079 27,489 27,489 16,820 Interest expense...... 1,729 2,868 19,753 22,621 299 e,g 22,920 14,024 ----- ----- ------- ----------- ------------- ----------- ----------- Net interest income... 327 542 4,326 4,868 (299) 4,569 2,796 Credit loss expense... -- -- (83) (83) (83) (51) ----- ----- ------- ----------- ------------- ----------- ----------- Net interest income after credit loss expense............. 327 542 4,409 4,951 (299) 4,652 2,847 Net fee and commission income.............. 2,025 3,359 7,835 11,194 11,194 6,850 Net trading income.... 473 784 5,669 6,453 6,453 3,948 Other income, including income from disposal of associates and subsidiaries........ 81 134 644 778 778 475 ----- ----- ------- ----------- ------------- ----------- ----------- Total operating income.............. 2,906 4,819 18,557 23,376 (299) 23,077 14,120 ----- ----- ------- ----------- ------------- ----------- ----------- OPERATING EXPENSES Personnel............. 1,781 2,955 8,876 11,831 166 h 11,997 7,340 General and administrative...... 605 1,003 3,174 4,177 4,177 2,556 Depreciation and amortization........ 63 104 947 1,051 372 d,k 1,423 871 ----- ----- ------- ----------- ------------- ----------- ----------- Total operating expense............. 2,449 4,062 12,997 17,059 538 17,597 10,767 ----- ----- ------- ----------- ------------- ----------- ----------- OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS........... 457 757 5,560 6,317 (837) 5,480 3,353 ----- ----- ------- ----------- ------------- ----------- ----------- Tax expense........... 166 274 1,257 1,531 (169) l 1,362 834 ----- ----- ------- ----------- ------------- ----------- ----------- NET PROFIT BEFORE MINORITY INTERESTS........... 291 483 4,303 4,786 (668) 4,118 2,519 ----- ----- ------- ----------- ------------- ----------- ----------- Minority interests.... 0 0 35 35 111 f 146 89 ----- ----- ------- ----------- ------------- ----------- ----------- NET PROFIT............ 291 483 4,268 4,751 (779) 3,972 2,430 ----- ----- ------- ----------- ------------- ----------- ----------- Basic earnings per share............... 3.32 10.91 9.15 5.60 ----- ------- ----------- ----------- Diluted earnings per share............... 3.15 10.79 9.03 5.52 ----- ------- ----------- -----------
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 132 134 UBS - -------------------------------------------------------------------------------- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF 30 JUNE 2000
CONVENIENCE TRANSLATION UBS AND UBS AND UBS AND PAINEWEBBER PAINEWEBBER PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED PAINEWEBBER UBS COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA (IN MILLIONS) US$ CHF(1) CHF CHF CHF REFERENCE(2) CHF US$(3) - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and balances with central banks.......... -- -- 3,457 3,457 3,457 2,115 Money market paper....... 4,284 7,002 61,504 68,506 68,506 41,918 Due from banks........... 1,682 2,749 25,761 28,510 28,510 17,445 Cash collateral on securities borrowed.... 10,517 17,188 146,199 163,387 163,387 99,974 Reverse repurchase agreements............. 17,622 28,800 164,866 193,666 193,666 118,501 Trading portfolio assets................. 15,939 26,048 215,649 241,697 241,697 147,891 Positive replacement values................. 190 310 57,758 58,068 58,068 35,531 Loans, net of allowance for credit losses...... 11,108 18,152 233,015 251,167 251,167 153,685 Financial investments.... 862 1,408 9,504 10,912 50 b 10,962 6,708 Accrued income and prepaid expenses....... 575 940 5,817 6,757 776 h 7,533 4,610 Investments in associates............. -- -- 818 818 818 501 Property and equipment... 723 1,182 8,216 9,398 9,398 5,750 Intangible assets and goodwill............... 676 1,105 3,545 4,650 12,669 b,c,d,k 17,319 10,597 Other assets............. 1,408 2,301 10,198 12,499 1,601 b,l 14,100 8,628 ------ ------- ------- ----------- ------------- ----------- ----------- TOTAL ASSETS............. 65,586 107,185 946,307 1,053,492 15,096 1,068,588 653,854 ------ ------- ------- ----------- ------------- ----------- ----------- LIABILITIES Money market paper issued................. 1,157 1,890 85,409 87,299 87,299 53,417 Due to banks............. 1,496 2,445 75,172 77,617 7,724 a 85,341 52,219 Cash collateral on securities lent........ 7,249 11,847 15,334 27,181 27,181 16,632 Repurchase agreements.... 28,825 47,109 230,565 277,674 277,674 169,904 Trading portfolio liabilities............ 4,239 6,928 60,279 67,207 67,207 41,123 Negative replacement values................. 320 523 77,926 78,449 78,449 48,002 Due to customers......... 10,228 16,716 279,915 296,631 296,631 181,503 Accrued expenses and deferred income........ 2,197 3,591 14,492 18,083 802 e 18,885 11,555 Long-term debt........... 5,603 9,157 52,990 62,147 (307) b,g 61,840 37,839 Other liabilities........ 1,121 1,829 21,950 23,779 303 b,f,l 24,082 14,736 ------ ------- ------- ----------- ------------- ----------- ----------- TOTAL LIABILITIES........ 62,435 102,045 914,032 1,016,067 8,522 1,024,589 626,930 ------ ------- ------- ----------- ------------- ----------- ----------- MINORITY INTERESTS....... -- -- 399 399 2,478 a 2,877 1,761 ------ ------- ------- ----------- ------------- ----------- ----------- TOTAL SHAREHOLDERS' EQUITY................. 3,151 5,150 31,876 37,026 4,096 a,b,c,f,h,j 41,122 25,163 ------ ------- ------- ----------- ------------- ----------- ----------- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY... 65,586 107,185 946,307 1,053,492 15,096 1,068,588 653,854 ====== ======= ======= =========== ============= =========== ===========
The notes to the UBS AG and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 133 135 UBS - -------------------------------------------------------------------------------- UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 1999 The following unaudited pro forma condensed consolidated income statement for the year ended 31 December 1999 is derived from the audited consolidated financial statements of UBS for the year then ended and from the audited consolidated financial statements of PaineWebber for the year then ended as adjusted to IAS and translated into Swiss francs, after giving effect to the pro forma adjustments described in the notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement. These adjustments have been determined as if the merger took place on 1 January 1999, the first day of the earliest financial period presented in the UBS and PaineWebber unaudited pro forma condensed consolidated financial information. This information has been prepared from, and should be read together with, the respective historical consolidated financial statements of UBS and PaineWebber, which are included in this document and publicly available, respectively. These statements have been prepared in accordance with IAS. FOR THE YEAR ENDED 31 DECEMBER 1999
CONVENIENCE TRANSLATION UBS AND UBS AND UBS AND PAINEWEBBER PAINEWEBBER PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED PAINEWEBBER UBS AG COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA (IN MILLIONS) US$ CHF(1) CHF CHF CHF REF(2) CHF US$(3) - -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME Interest income............... 3,123 4,694 35,604 40,298 40,298 24,658 Interest expense.............. 2,647 3,979 29,695 33,674 545 e,g 34,219 20,938 ----- ----- ------ ----------- ------------- ----------- ----------- Net interest income........... 476 715 5,909 6,624 (545) 6,079 3,720 Credit loss expense........... -- -- 956 956 956 585 ----- ----- ------ ----------- ------------- ----------- ----------- Net interest income after credit loss expense......... 476 715 4,953 5,668 (545) 5,123 3,135 Net fee and commission income...................... 3,343 5,024 12,607 17,631 17,631 10,788 Net trading income............ 1,090 1,638 7,719 9,357 9,357 5,726 Other income, including income from disposal of associates and subsidiaries............ 171 257 3,146 3,403 3,403 2,082 ----- ----- ------ ----------- ------------- ----------- ----------- Total operating income........ 5,080 7,634 28,425 36,059 (545) 35,514 21,731 ----- ----- ------ ----------- ------------- ----------- ----------- OPERATING EXPENSES Personnel..................... 3,069 4,613 12,577 17,190 331 h 17,521 10,721 General and administrative.... 1,016 1,526 6,098 7,624 7,624 4,665 Depreciation and amortization................ 98 147 1,857 2,004 746 d,k 2,750 1,683 ----- ----- ------ ----------- ------------- ----------- ----------- Total operating expenses...... 4,183 6,286 20,532 26,818 1,077 27,895 17,069 ----- ----- ------ ----------- ------------- ----------- ----------- OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS...... 897 1,348 7,893 9,241 (1,622) 7,619 4,662 ----- ----- ------ ----------- ------------- ----------- ----------- Tax expense................... 366 550 1,686 2,236 (306) l 1,930 1,181 ----- ----- ------ ----------- ------------- ----------- ----------- NET PROFIT BEFORE MINORITY INTERESTS................... 531 798 6,207 7,005 (1,316) 5,689 3,481 ----- ----- ------ ----------- ------------- ----------- ----------- Minority interests............ -- -- 54 54 223 f 277 169 ----- ----- ------ ----------- ------------- ----------- ----------- NET PROFIT.................... 531 798 6,153 6,951 (1,539) 5,412 3,312 ----- ----- ------ ----------- ------------- ----------- ----------- Basic earnings per share...... 5.51 15.20 12.10 7.40 ----- ------ ----------- ----------- Diluted earnings per share.... 5.21 15.07 11.97 7.32 ----- ------ ----------- -----------
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement are an integral part of this information. - -------------------------------------------------------------------------------- 134 136 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND FOR THE YEAR ENDED 31 DECEMBER 1999 1. TRANSLATION OF PAINEWEBBER FINANCIAL STATEMENTS PaineWebber presents its financial statements on a U.S. GAAP basis and in U.S. dollars. These financial statements have been restated into IAS. The restated income statement of PaineWebber has been translated into Swiss francs at the average rate of CHF 1.66 per U.S. $1.00 for the six months ended 30 June 2000 and CHF 1.50 per U.S. $1.00 for the year ended 31 December 1999. The restated PaineWebber balance sheet has been translated into Swiss francs at the spot rate of CHF 1.63 per U.S. $1.00 at 30 June 2000 and CHF 1.59 per U.S. $1.00 at 31 December 1999. These translations should not be taken as assurances that the CHF amounts currently represent U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated or at any other rate, at any time. 2. PRO FORMA ACQUISITION ADJUSTMENTS The unaudited pro forma condensed consolidated financial information records the merger as being accounted for as an acquisition with the excess of the fair value of the consideration over the fair value of net assets acquired being allocated to goodwill. See the discussion below for information related to recording the issuance of UBS ordinary shares, trust preferred securities and debt to effect the purchase, the related retirement of shares of PaineWebber common stock, the adjustment of PaineWebber's assets and liabilities to fair value, and the recording of the resulting goodwill. Issuance of UBS Securities and the Retirement of PaineWebber Securities The unaudited pro forma condensed consolidated financial information assumes a total purchase price of $12,696 million (CHF 20,970 million). Pursuant to the terms of the merger agreement, UBS will issue approximately 42.7 million UBS ordinary shares, equivalent to $6,348 million (CHF 10,485 million), and pay $6,348 million (CHF 10,485 million) in cash in exchange for 172.8 million shares of PaineWebber common stock at an exchange ratio of 0.4954. The total purchase price assumed is based on the closing price of UBS ordinary shares on the New York Stock Exchange on 11 July 2000, which was $148.75 (CHF 245.70). Additional costs relevant to the merger include estimated professional fees of $90 million (CHF 149 million) (primarily legal, investment bankers' and accountants' fees) to be accounted for as acquisition costs. For purposes of determining the number of PaineWebber shares to be canceled, it is assumed that, in addition to the 146.8 million shares outstanding as of 11 July 2000, PaineWebber employee stock options and convertible debt representing approximately 33.6 million shares will be exercised or converted at an aggregate strike price of $908 million (CHF 1,500 million), at a range of $6.69 to $48.56, or CHF 11.05 to CHF 80.21, per share, and reduced by approximately 7.6 million shares of PaineWebber common stock that may be repurchased from employees at $73.50 (CHF 121.42) per share for a total price of $562 million (CHF 928 million) to satisfy their individual tax withholding requirements. a. This entry records the cash consideration of $6,348 million (CHF 10,485 million) to be paid in the merger, on the basis of the assumptions noted in this footnote. We have assumed, for purposes of these pro forma financial statements, that UBS will issue, directly or indirectly through subsidiaries, $1,500 million (CHF 2,478 million) in trust preferred securities during the third and fourth quarters of 2000. Although it has not yet been determined how the proceeds of these trust preferred securities will - -------------------------------------------------------------------------------- 135 137 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED) be applied by UBS, we have assumed, solely for the purposes of these pro forma financial statements, that the cash consideration in the merger will be financed from the proceeds of those trust preferred securities and through the issuance of short-term debt instruments. UBS will also enter into certain interest rate swap transactions in order to produce the effect of issuing medium- to long-term debt. - -------------------------------------------------------------------------------- 136 138 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED) The pro forma net cash requirement relating to the merger, including additional cost considerations and sources of funding, are shown below.
US$ CHF (in millions) (in millions) - -------------------------------------------------------------------------------------------- Cash consideration.......................................... 6,348 10,485 Professional fees........................................... 90 149 ----- ------ Purchase price net cash requirement......................... 6,438 10,634 Additional funding: 1. Purchase of PaineWebber shares for tax withholding (see b)..................................................... 562 928 2. Employee retention program (see h)..................... 19 31 3. Proceeds from PaineWebber employee stock options (see i)..................................................... (908) (1,500) 4. Swiss assessment for issuance of UBS ordinary shares (see j)................................................ 66 109 ----- ------ Total cash required to fund the merger...................... 6,177 10,202 ===== ====== Sources of funding: Short-term debt........................................... 4,677 7,724 Issuance of trust preferred securities.................... 1,500 2,478 ----- ------ 6,177 10,202 ===== ======
Fair Value and Book Value Adjustments b. This entry records the adjustments to state the net assets of PaineWebber at their fair market values and additional book value adjustments as of 30 June 2000. A preliminary allocation of the purchase price has been performed for purposes of the unaudited pro forma condensed consolidated financial information based on initial appraisal estimates and other valuation studies which are in process and on certain assumptions that UBS believes are reasonable. The final allocation is subject to completion of these studies, which is expected to be within the next twelve months. However, UBS does not expect the differences between the preliminary and final allocations to have a material impact on shareholders' equity or net profit for the periods. A summary, in accordance with IAS, is shown on the following page. Certain financial and non-financial assets, long-term debt and corresponding hedging derivatives, and pension obligations have been adjusted to reflect their estimated fair values. All remaining assets and liabilities are reported in the historical accounts at approximately their respective fair values. The fair value adjustments have been shown pre-tax, with an aggregate tax effect, based on a 35% effective tax rate, disclosed. PaineWebber vested and non-vested options and convertible debt outstanding as of 11 July 2000 are assumed to be fully exercised or converted prior to the merger. The resulting proceeds, related tax benefit and redemption of shares of PaineWebber common stock in satisfaction of employees' tax withholding requirements have been reflected in the adjustments. - -------------------------------------------------------------------------------- 137 139 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
US$ CHF (in millions) (in millions) - -------------------------------------------------------------------------------------------- Book value of PaineWebber net assets in accordance with IAS....................................................... 3,151 5,205 Proceeds upon exercise of existing PaineWebber stock options................................................... 908 1,500 Tax benefit upon exercise/conversion of existing PaineWebber stock options/convertible debt and net tax benefit upon vesting of (restricted) shares............................ 714 1,179 Redemption of shares in satisfaction of employees' individual tax withholding requirements................... (562) (928) Fair value adjustments: 1. Elimination of existing goodwill....................... (660) (1,090) 2. Revaluation of financial assets........................ 30 50 3. Revaluation of non-financial assets.................... 39 64 4. Recognition of fair value of lease obligations......... 145 240 5. Revaluation of long-term debt and associated hedging derivatives............................................ 85 141 6. Revaluation of pension obligations..................... (21) (35) Tax effect of fair value adjustments........................ 134 221 ===== ====== Fair value of net assets acquired........................... 3,962 6,545 ===== ======
Determination of Goodwill c. This entry records payment of the total purchase consideration, the elimination of PaineWebber's equity accounts, and the recognition of the resulting goodwill.
US$ CHF (in millions) (in millions) - -------------------------------------------------------------------------------------------- Share consideration Share capital............................................. 635 1,049 Share premium............................................. 5,713 9,436 ------ ------ Total share consideration................................... 6,348 10,485 Cash consideration.......................................... 6,348 10,485 Acquisition costs........................................... 90 149 ------ ------ Total purchase consideration................................ 12,786 21,119 Less: Fair value of net assets acquired (see above)......... 3,962 6,545 ------ ------ Goodwill.................................................... 8,824 14,574 ====== ======
The purchase consideration and pro forma adjustments shown above are based in part on the assumption that all of the 33.6 million PaineWebber employee stock options and convertible debt are exercised/converted and the resulting shares (net of shares repurchased by PaineWebber) are tendered as part of the share exchange. UBS stock options will be issued to replace PaineWebber options and convertible debt that are not exercised/converted. If none of the PaineWebber stock options/convertible debt were exercised/converted, 16.7 million UBS options would be issued, with a fair value of $1,845 - -------------------------------------------------------------------------------- 138 140 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED) million. (CHF 3,048 million). This would change the pro forma information presented in this document as follows:
US$ CHF (IN MILLIONS (IN MILLIONS EXCEPT FOR EXCEPT FOR EARNINGS PER EARNINGS PER % SHARE) SHARE) CHANGE - ------------------------------------------------------------------------------------------------- Decrease in purchase price............................... (184) (305) (1.5%) Decrease in cash consideration........................... (1,014) (1,675) (16.0%) Decrease in net assets acquired.......................... (1,096) (1,810) (27.7%) Increase in goodwill..................................... 911 1,505 10.3% Change in pro forma net profit and EPS: 6 months ended 30 June 2000 Net profit.......................................... (9.56) (15.67) (0.4%) Basic EPS........................................... 0.07 0.11 1.2% Diluted EPS......................................... (0.08) (0.14) (1.5%) Year ended 31 December 1999 Net profit.......................................... (19.12) (35.48) (0.7%) Basic EPS........................................... 0.08 0.11 0.9% Diluted EPS......................................... (0.21) (0.33) (2.8%)
d. This entry records the amortization of goodwill of $221 million (CHF 364 million) in the six months ended 30 June 2000, and $441 million (CHF 729 million) in the year ended 31 December 1999. Other Merger-Related Adjustments e. This entry records interest expense accrued on $4,677 million (CHF 7,724 million) of merger-related short-term debt. The interest expense assumes a weighted average rate of 6.85% on the short-term debt and a 0.50% rate on swaps used to hedge the short-term debt, for a total interest rate of 7.35%. The resulting adjustment to interest expense is $172 million (CHF 285 million) for the six months ended 30 June 2000, and $344 million (CHF 517 million) for the year ended 31 December 1999. The effect of a 1/8% increase in interest rates would be to increase interest expense by $3 million (CHF 5 million) for the six months ended 30 June 2000 and by $6 million (CHF 9 million) for the year ended 31 December 1999. f. This entry records the distributions accrued on $1,500 million (CHF 2,478 million) of trust preferred securities issued, assuming a distribution rate of 9%. The distributions accrued are $68 million (CHF 111 million) for the six months ended 30 June 2000, and $135 million (CHF 223 million) for the year ended 31 December 1999. The effect of a 1/8% increase in rates would be to increase distributions by $1 million (CHF 2 million) for the six months ended 30 June 2000 and by $2 million (CHF 3 million) for the year ended 31 December 1999. g. This entry records amortization of net discount resulting from fair market valuation of PaineWebber long-term debt and associated hedging swaps. The amortization period is a straight line period of 5 years (the average maturity of the long-term debt). The amounts amortized are $9 million (CHF 14 million) for the six months ended 30 June 2000 and $17 million (CHF 28 million) for the year ended 31 December 1999. h. This entry records the establishment of an employee retention bonus program. For purposes of this pro forma presentation, it is assumed that approximately 5 million restricted UBS ordinary shares, 2 million UBS stock options and $37.5 million (CHF 62 million) cash, with an aggregate value of - -------------------------------------------------------------------------------- 139 141 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED) $875 million (CHF 1,446 million), subject to vesting restrictions of 2 to 4 years, will be awarded to certain employees of PaineWebber. It is further assumed that the options will be issued with strike prices equivalent to the current market value of UBS ordinary shares. No compensation expense is recorded for the options. The assumed issuance of restricted UBS ordinary shares results in incremental compensation expense of $94 million (CHF 156 million) for the six months ended 30 June 2000 and $188 million (CHF 310 million) for the year ended 31 December 1999. The related deferred compensation expense at the end of such periods is $470 million (CHF 776 million) and $564 million (CHF 931 million), respectively. The cash component of the award results in compensation expense of $6 million (CHF 10 million) for the six months ended 30 June 2000 and $13 million (CHF 21 million) for the year ended 31 December 1999. For purposes of computing the cash requirements in a. above, initial funding of the cash awards includes the total amount expensed through the periods ending 30 June 2000, $19 million (CHF 31 million). i. This entry records PaineWebber's recognition of $908 million (CHF 1,500 million) in proceeds from the exercise of existing PaineWebber employee stock options as a reduction in short term borrowings used to fund the merger. j. This entry records the payment of $66 million (CHF 109 million) in Swiss assessments required upon the issuance of new UBS ordinary shares in the merger. For purposes of this entry, we have assumed the entire stock component of the purchase consideration will be newly issued shares. The actual amount of newly issued shares may differ if UBS issues shares from treasury stock or enters into stock borrow transactions as a funding source. k. This entry records the amortization of the fair market valuation of lease obligations. The amortization period is a straight line period of 14 years (the average economic life of existing lease obligations, to be fair valued). The amortization expense is $5 million (CHF 8 million) for the six months ended 30 June 2000 and $10 million (CHF 17 million) for 31 December 1999. l. This entry records the tax effects of the relevant pro forma adjustments arising from the acquisition at the assumed effective rate of 35%, for both balance sheet and income statement purposes, resulting in a net tax benefit of $102 million (CHF 169 million) for the six months ended 30 June 2000 and $203 million (CHF 306 million) for the year ended 31 December 1999. 3. CONVENIENCE TRANSLATION 30 June 2000 and 31 December 1999 CHF amounts have been translated into U.S. dollars at the exchange rate of one US$=CHF 1.63, the exchange rate on 30 June 2000. 4. PAINEWEBBER EARNINGS PER SHARE The EPS amounts presented for PaineWebber reflect pro forma IAS adjustments to income and effects of currency translation and will thus differ from those presented in PaineWebber's historical audited and unaudited consolidated financial statements. 5. PROPOSED DIVIDEND At the extraordinary general meeting of UBS AG, held on 7 September 2000, the UBS shareholders approved the UBS Board of Directors proposal that a partial dividend be paid to UBS shareholders on record as of 2 October 2000. The payment, which is to be made on 5 October 2000, relates to the first nine months of the year 2000. The payment of $2.75 (CHF 4.50) per share will total approximately $1.1 billion (CHF 1.8 billion). This proposed dividend has not been reflected in the assumptions made for purposes of presenting pro forma financial information. - -------------------------------------------------------------------------------- 140 142 UBS - -------------------------------------------------------------------------------- PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT CONVERSION FROM U.S. GAAP TO IAS AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 The following unaudited condensed consolidated statement of financial condition and income statement as of and for the six months ended 30 June 2000 is derived from the historical unaudited condensed consolidated statement of financial condition and income statement of PaineWebber as of and for the six months then ended, after giving effect to the unaudited IAS adjustments described in the notes to the PaineWebber unaudited pro forma condensed consolidated statement of financial condition and income statement: conversion from U.S. GAAP to IAS. This information has been prepared from, and should be read together with, the unaudited condensed consolidated financial statements and related notes from PaineWebber's 10-Q for the six months ended 30 June 2000, which are publicly available. INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2000
PAINE WEBBER (IN US$ MILLIONS) U.S. GAAP(1) IAS ADJUSTMENT(2) REFERENCE(2) IAS - ---------------------------------------------------------------------------------------------------- OPERATING INCOME Interest income........................ 2,056 2,056 Interest expense....................... 1,713 16 i 1,729 ------ ---- ------ Net interest income.................... 343 (16) 327 Credit loss expense.................... -- -- ------ ---- ------ Net interest income after credit loss expense.................... 343 (16) 327 Net fee and commission income.......... 2,093 (68) j,k 2,025 Net trading income..................... 491 (18) f,j 473 Other income, including income from disposal of associates and subsidiaries......................... 81 81 ------ ---- ------ Total operating income................. 3,008 (102) 2,906 ------ ---- ------ OPERATING EXPENSES Personnel.............................. 1,789 (8) f 1,781 General and administrative............. 653 (48) j 605 Depreciation and amortization.......... 64 (1) a,d 63 ------ ---- ------ Total operating expenses............... 2,506 (57) 2,449 ------ ---- ------ OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS................... 502 (45) 457 ------ ---- ------ Tax expense............................ 182 (16) g 166 ------ ---- ------ NET PROFIT BEFORE MINORITY INTERESTS... 320 (29) 291 ------ ---- ------ Minority interests..................... 16 (16) i 0 ------ ---- ------ NET PROFIT............................. 304 (13) 291 ------ ---- ------ Basic earnings per share............... 2.09 2.00 ------ ------ Diluted earnings per share............. 1.98 1.90 ------ ------
The notes to the PaineWebber unaudited pro forma condensed consolidated statement of financial condition and income statement conversion from U.S. GAAP to IAS are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 141 143 UBS - -------------------------------------------------------------------------------- STATEMENT OF FINANCIAL CONDITION AS OF 30 JUNE 2000
(IN USD MILLIONS) US GAAP(1) IAS ADJ(2) REF(2) IAS - ------------------------------------------------------------------------------------------------- ASSETS Cash and balances with central banks............... -- -- Money market paper................................. 4,302 (18) f 4,284 Due from banks..................................... 1,682 1,682 Securities received as collateral.................. 907 (907) c -- Cash collateral on securities borrowed............. 10,517 10,517 Reverse repurchase agreements...................... 15,313 2,309 c 17,622 Trading portfolio assets........................... 18,194 (2,255) c,e,f 15,939 Positive replacement values........................ 190 190 Loans, net of allowance for credit losses.......... 11,108 11,108 Financial investments.............................. 892 (30) k 862 Accrued income and prepaid expenses................ 575 575 Investments in associates.......................... -- -- Property and equipment............................. 748 (25) a 723 Intangible assets and goodwill..................... 693 (17) d 676 Other assets....................................... 1,282 126 b 1,408 ---------- ------ ------ TOTAL ASSETS....................................... 66,403 (817) 65,586 ---------- ------ ------ LIABILITIES Money market paper issued.......................... 1,157 1,157 Due to banks....................................... 2,393 (897) e 1,496 Cash collateral on securities lent................. 7,249 7,249 Obligation to return securities received as collateral....................................... 907 (907) c -- Repurchase agreements.............................. 27,918 907 c 28,825 Trading portfolio liabilities...................... 4,081 158 c,e 4,239 Negative replacement values........................ 194 126 b 320 Due to customers................................... 10,228 10,228 Accrued expenses and deferred income............... 2,197 2,197 Long-term debt..................................... 5,209 394 i 5,603 Other liabilities.................................. 1,285 (164) f,g 1,121 ---------- ------ ------ TOTAL LIABILITIES.................................. 62,818 (383) 62,435 ---------- ------ ------ MINORITY INTERESTS................................. 394 (394) i -- ---------- ------ ------ TOTAL SHAREHOLDERS' EQUITY......................... 3,191 (40) a,d,g 3,151 ---------- ------ ------ TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY............................. 66,403 (817) 65,586 ---------- ------ ------
The notes to the PaineWebber unaudited pro forma condensed consolidated statement of financial condition and income statement: conversion from US GAAP to IAS are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 142 144 UBS - -------------------------------------------------------------------------------- PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT CONVERSION FROM U.S. GAAP TO IAS FOR THE YEAR ENDED 31 DECEMBER 1999 The following unaudited condensed consolidated income statement for the year ended 31 December 1999 is derived from the historical audited consolidated income statement of PaineWebber for the year then ended, after giving effect to the unaudited IAS adjustments described in the notes to the PaineWebber unaudited pro forma condensed consolidated statement of financial condition and income statement: conversion from U.S. GAAP to IAS. This information has been prepared from, and should be read together with, the historical consolidated financial statements and related notes of PaineWebber, which are publicly available from PaineWebber's 10-K for the year ended 31 December 1999. FOR THE YEAR ENDED 31 DECEMBER 1999
IAS (IN US$ MILLIONS) U.S. GAAP(1) ADJUSTMENT(2) REFERENCE(2) IAS - ----------------------------------------------------------------------------------------------------- OPERATING INCOME Interest income................................ 3,123 3,123 Interest expense............................... 2,532 115 h,i 2,647 ------------ ----------------- ----- Net interest income............................ 591 (115) 476 Credit loss expense............................ -- -- ------------ ----------------- ----- Net interest income after credit loss expense...................................... 591 (115) 476 Net fee and commission income.................. 3,418 (75) j 3,343 Net trading income............................. 1,110 (20) j 1,090 Other income, including income from disposal of associates and subsidiaries.................. 171 171 ------------ ----------------- ----- Total operating income......................... 5,290 (210) 5,080 ------------ ----------------- ----- OPERATING EXPENSES Personnel...................................... 3,050 19 a 3,069 General and administrative..................... 1,105 (89) a,j 1,016 Depreciation and amortization.................. 100 (2) a,d 98 ------------ ----------------- ----- Total operating expense........................ 4,255 (72) 4,183 ------------ ----------------- ----- OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS.................................... 1,035 (138) 897 ------------ ----------------- ----- Tax expense.................................... 374 (8) g 366 ------------ ----------------- ----- NET PROFIT BEFORE MINORITY INTERESTS........... 661 (130) 531 ------------ ----------------- ----- Minority interests............................. 32 (32) i -- ------------ ----------------- ----- NET PROFIT..................................... 629 (98) 531 ------------ ----------------- ----- Dividends and amortization of discount on preferred stock.............................. 83 (83) h -- ------------ ----------------- ----- NET PROFIT APPLICABLE TO COMMON SHARES......... 546 (15) 531 ------------ ----------------- ----- Basic earnings per share....................... 3.77 3.67 ------------ ----- Diluted earnings per share..................... 3.56 3.47 ------------ -----
The notes to the PaineWebber unaudited pro forma condensed consolidated statement of financial condition and income statement: conversion from U.S. GAAP to IAS are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 143 145 UBS - -------------------------------------------------------------------------------- NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT CONVERSION FROM U.S. GAAP TO IAS AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND THE YEAR ENDED 31 DECEMBER 1999 1. RECLASSIFICATION TO CONFORM PAINEWEBBER ACCOUNTS WITH UBS FINANCIAL PRESENTATION Reclassifications have been made to the PaineWebber historical financial information presented under U.S. GAAP to conform to UBS's presentation under IAS. The principal income statement reclassifications relate to: 1. Commission revenue, Asset management revenue, and Investment banking revenue have been reclassified as Net fees and commission revenue. 2. Compensation and benefits expense has been reclassified into the Personnel balance. 3. Office and equipment expense, Communication expense, Business development expense, Professional services expense, and Other expenses have been reclassified into the General and administrative and Depreciation and Amortization expense balances. The principal balance sheet reclassifications relate to: 1. Cash and cash equivalents, Cash and securities segregated and on deposit for federal and other regulations, and Receivables from broker dealers have been reclassified into Due from banks. 2. Treasury bills and money market securities have been removed from Financial instruments owned and moved into Money market paper. 3. Positive and negative replacement values on derivatives have been separated from Financial instruments owned or sold, not yet purchased into their own respective line items. 4. Receivables from clients have been reclassified to Loans, net of allowances for credit losses. 5. Dividend and interest receivables and Fees and other receivables have been reclassified into Accrued income and prepaid expenses. 6. Intangible assets and goodwill have been removed from Other assets and classified into their own line item. 7. Commercial and money market paper issued by PaineWebber have been removed from Short term borrowings and reclassified into Money market paper issued. 8. Short term borrowings, excluding those removed above, and Payables to broker dealers have been reclassified into Due to banks. 9. Dividends and interest payable and Other liabilities and accrued expenses have been reclassified into Accrued expenses and deferred income. 10. Accrued compensation and benefits have been reclassified into Other liabilities. 11. Company-obligated mandatorily redeemable preferred securities of subsidiary trusts have been reclassified into Minority interest. 12. Certain investments were reclassified from Financial instruments owned to Financial investments and all other Financial instruments owned have been reclassified into Trading portfolio assets. None of these reclassification adjustments has an impact on net income or shareholders' equity. 2. U.S. GAAP TO IAS ADJUSTMENTS Accounting principles generally accepted in the United States differ in material respects from IAS. The differences that are material to restating the historical consolidated financial statements of PaineWebber to comply with IAS are described below. - -------------------------------------------------------------------------------- 144 146 UBS - -------------------------------------------------------------------------------- NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT CONVERSION FROM U.S. GAAP TO IAS -- (CONTINUED) Adjustments to Historical PaineWebber Financial Statements: a. Software Capitalization IAS 38, Intangible Assets, became effective 1 January 2000 for entities reporting on a calendar year basis. This standard requires that companies capitalize certain costs of acquiring or developing internal use software. Prior to 1 January 2000, these costs were expensed. Under U.S. GAAP, PaineWebber early adopted SOP 98-1, Accounting for the Costs of Software Developed or Obtained for Internal Use, and capitalized such costs beginning in 1998. For purposes of the pro forma presentation, the effects of capitalization and related amortization prior to 1 January 2000 are reversed and costs are instead recognized in expense as incurred. b. Hedge Accounting Under U.S. GAAP, unrealized gains and losses on derivatives that qualify for hedge accounting are not recognized on the face of the balance sheet. Under IAS, the replacement value of all derivative products, including those qualifying for hedge accounting, are recognized on the balance sheet. For purposes of the pro forma presentation, positive and negative replacement values for derivatives qualifying for hedge accounting are reported on the face of the balance sheet, with the net offset reported as other assets. c. Repurchase, Resale, and Securities Lending Transactions Under IAS, repurchase agreements and securities borrowed are accounted for as collateralized borrowings. Reverse repurchase agreements and securities lending are accounted for as collateralized lending transactions. Cash collateral is reported on the balance sheet at amounts equal to the collateral advanced or received. Under U.S. GAAP, securities lending and repurchase transactions are also generally accounted for as collateralized borrowing and lending transactions. However, certain such transactions may be deemed sale or purchase transactions under specific circumstances. The accounting for these transactions has been reversed for purposes of the IAS presentation. Additionally, under U.S. GAAP, when specific control conditions exist, securities collateral controlled is recognized as an asset with an offsetting obligation to return such securities collateral. For purposes of IAS presentation, such controlled securities collateral has been de-recognized. d. Goodwill and Other Intangibles Under IAS, amortization of goodwill and other intangible assets is generally limited to a maximum period of 20 years. U.S. GAAP provides that goodwill and other intangibles are amortizable over their useful economic life with a maximum life of 40 years. For purposes of the pro forma presentation, the amortization of PaineWebber's goodwill and other intangibles has been restated using the maximum 20 year period. e. Trade Date v. Settlement Date UBS follows a settlement date convention of accounting for inventory in its trading portfolio, for balance sheet presentation purposes. PaineWebber recognizes purchases and sales of inventory on its statement of financial condition at their trade date. For purpose of pro forma presentation PaineWebber's statement of financial condition has been restated as if it followed settlement date accounting. - -------------------------------------------------------------------------------- 145 147 UBS - -------------------------------------------------------------------------------- NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT CONVERSION FROM U.S. GAAP TO IAS -- (CONTINUED) f. Rabbi Trusts PaineWebber has transferred certain compensation related assets into "Rabbi Trusts." U.S. GAAP requires consolidation of the assets and liabilities of a Rabbi Trust. IAS, however, applies a "controls" approach in determining whether an entity should be consolidated. Under this approach the Rabbi Trusts would not be consolidated and therefore, for purposes of the pro forma presentation, such assets and liabilities and their related income and expenses have been eliminated from the statement of financial condition and income statement, respectively. g. Income Taxes Records the tax effect pertaining to the conversion from U.S. GAAP to IAS on the unaudited consolidated statement of financial condition and income statement of PaineWebber, assuming an effective tax rate of 37.3%. h. Redemption of Mandatorily Redeemable Preferred Stock Under IAS, preferred shares having mandatory redemption features are classified as debt with associated dividends recognized in interest expense. For purposes of pro forma presentation, the Unamortized discount charged to equity on redemption of preferred stock and Dividends and amortization of discount on preferred stock, thereon, have been reclassified as Interest expense. i. Trust Preferred Securities Under IAS, trust preferred securities having mandatory redemption features are classified as debt with associated dividends recognized in interest expense. For purposes of pro forma presentation, Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts have been reclassified to Long-term debt and the related Minority interest expense to Interest expense. j. Brokerage, Clearing and Exchange Fees PaineWebber records certain brokerage, clearing and exchange fees as separate components of expense for purposes of its U.S. GAAP financial statements. Under IAS, expenses directly connected with a transaction are charged against revenues. k. Private Equity Investments PaineWebber carries private equity related investments for which there exist trading restrictions at estimated net realizable value under U.S. GAAP. UBS records similar investments at cost, less writedowns for impairments in value. This adjustment reverses unrealized gains on such investments reflected in the PaineWebber accounts. - -------------------------------------------------------------------------------- 146 148 UBS - -------------------------------------------------------------------------------- UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT CONVERSION FROM IAS TO U.S. GAAP AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 The following unaudited pro forma condensed consolidated balance sheet and income statement as of and for the six months ended 30 June 2000 is derived from the unaudited consolidated balance sheet and income statements of UBS and PaineWebber as of and for the six months then ended, after giving effect to the U.S. GAAP adjustments described in the notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement: conversion from IAS to U.S. GAAP and the pro forma adjustments presented in the notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement. This information has been prepared from, and should be read together with, the respective unaudited consolidated financial statements and related notes of UBS and of PaineWebber, which are included in this document and publicly available, respectively. INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2000
CONVENIENCE TRANSLATION UBS AND UBS AND PAINEWEBBER UBS AND PAINEWEBBER CONSOLIDATED UBS PAINEWEBBER PAINEWEBBER CONSOLIDATED PRO FORMA U.S. GAAP U.S. GAAP CONSOLIDATED PRO FORMA IAS ADJUSTMENT(1) REFERENCE(1) ADJUSTMENT U.S. GAAP U.S. GAAP (IN MILLIONS) CHF CHF CHF CHF US$(2) - ----------------------------------------------------------------------------------------------------------------------- OPERATING INCOME Interest income................ 27,489 (91) a 27,398 16,764 Interest expense............... 22,920 (15) a (27) 22,878 13,999 ------- ------ --- ------ ------- Net interest income............ 4,569 (76) 27 4,520 2,765 Credit loss expense............ (83) (83) (51) ------- ------ --- ------ ------- Net interest income after credit loss expense.......... 4,652 (76) 27 4,603 2,816 Net fee and commission income....................... 11,194 112 11,306 6,918 Net trading income............. 6,453 (1,270) c 30 5,213 3,190 Other income, including income from disposal of associates and subsidiaries............. 778 25 d 803 493 ------- ------ --- ------ ------- Total operating income......... 23,077 (1,321) 169 21,925 13,417 ------- ------ --- ------ ------- OPERATING EXPENSES Personnel...................... 11,997 (7) e,f,g 13 12,003 7,344 General and administrative..... 4,177 27 b 79 4,283 2,621 Depreciation and amortization................. 1,423 839 a,h 3 2,265 1,386 ------- ------ --- ------ ------- Restructuring costs............ -- 130 b 130 80 Total operating expenses....... 17,597 989 95 18,681 11,431 ------- ------ --- ------ ------- ------- ------ --- ------ ------- OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS........... 5,480 (2,310) 74 3,244 1,986 ------- ------ --- ------ ------- Tax expense.................... 1,362 (71) a 26 1,317 807 ------- ------ --- ------ ------- NET PROFIT BEFORE MINORITY INTERESTS.................... 4,118 (2,239) 48 1,927 1,179 ------- ------ --- ------ ------- Minority interests............. 146 27 173 106 ------- ------ --- ------ ------- NET PROFIT..................... 3,972 (2,239) 21 1,754 1,073 ------- ------ --- ------ ------- Other comprehensive income..... -- 34 o 34 21 ------- ------ --- ------ ------- COMPREHENSIVE INCOME........... 3,972 (2,205) 21 1,788 1,094 ------- ------ --- ------ ------- Basic earnings per share....... 9.15 4.04 ------- ------ --- ------ ------- Diluted earnings per share..... 9.03 3.99 ------- ------ --- ------ -------
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement: conversion from IAS to U.S. GAAP are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 147 149 UBS - -------------------------------------------------------------------------------- BALANCE SHEET AS OF 30 JUNE 2000
CONVENIENCE TRANSLATION UBS AND UBS AND PAINEWEBBER UBS AND PAINEWEBBER CONSOLIDATED UBS PAINEWEBBER PAINEWEBBER CONSOLIDATED PRO FORMA U.S. GAAP U.S. GAAP CONSOLIDATED PRO FORMA IAS ADJUSTMENT(1) ADJUSTMENT U.S. GAAP U.S. GAAP (IN MILLIONS) CHF CHF REFERENCE(1) CHF CHF US$(2) - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and balances with central banks........................... 3,457 3,457 2,115 Money market paper................ 68,506 30 68,536 41,936 Due from banks.................... 28,510 18,866 a,j 741 48,117 9,442 Cash collateral on securities borrowed........................ 163,387 163,387 99,974 Reverse repurchase agreements..... 193,666 (3,773) 189,893 116,192 Trading portfolio assets.......... 241,697 (10,307) g,i,j 3,685 235,075 143,839 Positive replacement values....... 58,068 (380) i 57,688 35,298 Loans, net of allowance for credit losses.......................... 251,167 8,787 a,j 741 60,695 159,515 Financial investments............. 10,962 (5,880) d (1,458) 3,624 2,217 Accrued income and prepaid expenses........................ 7,533 7,533 4,609 Investments in associates......... 818 818 501 Property and equipment............ 9,398 878 a,h 41 10,317 6,313 Intangible assets and goodwill.... 17,319 16,965 a,h 59 34,343 21,014 Other assets...................... 14,100 15,025 c,d,e,f 1,253 30,378 18,588 ----------- ------- ------ ----------- --------- TOTAL ASSETS...................... 1,068,588 43,954 1,319 1,113,861 681,553 ----------- ------- ------ ----------- --------- LIABILITIES Money market paper issued......... 87,299 87,299 53,417 Due to banks...................... 85,341 18,104 j 2,206 105,651 64,649 Cash collateral on securities lent............................ 27,181 27,181 16,632 Repurchase agreements............. 277,674 (15,703) j (1,482) 260,489 159,389 Trading portfolio liabilities..... 67,207 (259) 66,948 40,964 Negative replacement values....... 78,449 (378) i (205) 77,866 47,645 Due to customers.................. 296,631 18,519 a,j 741 315,891 193,288 Accrued expenses and deferred income.......................... 18,885 18,885 11,555 Long-term debt.................... 61,840 130 a,g (644) 61,326 37,524 Other liabilities................. 24,082 4,212 a,b,c,d,g,i,j 250 28,544 17,466 ----------- ------- ------ ----------- --------- TOTAL LIABILITIES................. 1,024,589 24,884 607 1,050,080 642,526 ----------- ------- ------ ----------- --------- MINORITY INTERESTS................ 2,877 644 3,521 2,154 ----------- ------- ------ ----------- --------- TOTAL SHAREHOLDERS' EQUITY........ 1,122 19,070 68 60,260 36,873 ----------- ------- ------ ----------- --------- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY.......................... 1,068,588 43,954 1,319 1,113,861 681,553 ----------- ------- ------ ----------- ---------
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement: conversion from IAS to U.S. GAAP are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 148 150 UBS - -------------------------------------------------------------------------------- UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT CONVERSION FROM IAS TO U.S. GAAP FOR THE YEAR ENDED 31 DECEMBER 1999 The following unaudited pro forma condensed consolidated income statement for the year ended 31 December 1999 is derived from the audited consolidated income statement of UBS for the year then ended and from the unaudited pro forma condensed consolidated income statement of PaineWebber for the year then ended, after giving effect to the U.S. GAAP adjustments described in the notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement: conversion from IAS to U.S. GAAP and the pro forma adjustments presented in the notes to the UBS and PaineWebber unaudited pro forma condensed consolidated income statement. This information has been prepared from, and should be read together with, the respective consolidated financial statements and related notes of UBS and PaineWebber, which are included in this document and publicly available, respectively. FOR THE YEAR ENDED 31 DECEMBER 1999
CONVENIENCE TRANSLATION UBS AND UBS AND PAINEWEBBER UBS AND PAINEWEBBER CONSOLIDATED UBS PAINEWEBBER PAINEWEBBER CONSOLIDATED PRO FORMA U.S. GAAP U.S. GAAP CONSOLIDATED PRO FORMA IAS ADJUSTMENT(1) ADJUSTMENT U.S. GAAP U.S. GAAP (IN MILLIONS) CHF CHF REFERENCE CHF CHF US$(2) - -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME Interest income....................... 40,298 (200) a 40,098 24,536 Interest expense...................... 34,219 (35) a (173) 34,011 20,811 ------- ------ ---- ------- ------- Net interest income................... 6,079 (165) 173 6,087 3,725 Credit loss expense................... 956 956 585 ------- ------ ---- ------- ------- Net interest income after credit loss expense............................. 5,123 (165) 173 5,131 3,140 Net fee and commission income......... 17,631 113 17,744 10,857 Net trading income.................... 9,357 (545) a,b,c 30 8,842 5,411 Other income, including income from disposal of associates and subsidiaries........................ 3,403 36 a,d 3,439 2,104 ------- ------ ---- ------- ------- Total operating income................ 35,514 (674) 316 35,156 21,512 ------- ------ ---- ------- ------- OPERATING EXPENSES Personnel............................. 17,521 (94) a,b,e,f,g,h (29) 17,398 10,646 General and administrative............ 7,624 566 a,b,h 134 8,324 5,093 Depreciation and amortization......... 2,750 1,597 a,h 3 4,350 2,662 ------- ------ ---- ------- ------- Restructuring costs................... -- 750 b 750 459 Total operating expenses.............. 27,895 2,819 108 30,822 18,860 ------- ------ ---- ------- ------- OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS.................. 7,619 (3,493) 208 4,334 2,652 ------- ------ ---- ------- ------- Tax expense........................... 1,930 (177) a 12 1,765 1,080 ------- ------ ---- ------- ------- NET PROFIT BEFORE MINORITY INTERESTS........................... 5,689 (3,316) 196 2,569 1,572 ------- ------ ---- ------- ------- Minority interests.................... 277 48 325 199 ------- ------ ---- ------- ------- NET PROFIT............................ 5,412 (3,316) 148 2,244 1,373 ------- ------ ---- ------- ------- Dividends and amortization of discount on preferred stock.................. -- 125 125 76 ------- ------ ---- ------- ------- NET PROFIT/(LOSS) APPLICABLE TO COMMON SHARES.............................. 5,412 (3,316) 23 2,119 1,297 ------- ------ ---- ------- ------- Basic earnings per share.............. 12.10 4.74 ------- ------ ---- ------- ------- Diluted earnings per share............ 11.97 4.69 ------- ------ ---- ------- -------
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and income statement: conversion from IAS to U.S. GAAP are an integral part of this pro forma information. - -------------------------------------------------------------------------------- 149 151 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT CONVERSION FROM IAS TO U.S. GAAP AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND FOR THE YEAR ENDED 31 DECEMBER 1999 1. IAS TO U.S. GAAP ADJUSTMENTS IAS accounting principles differ in material respects from accounting principles generally accepted in the U.S. The differences which are material to restating the historical consolidated financial statements of UBS and PaineWebber to comply with U.S. GAAP, are described below. ADJUSTMENTS TO UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS AND INCOME STATEMENTS The differences which are material to restating the UBS unaudited pro forma consolidated balance sheets and income statements to U.S. GAAP relate to purchase accounting, restructuring provisions, derivatives held for non-trading purposes, financial investments, retirement and benefit plans, other employee benefits, equity participation plans, software capitalization, settlement date vs. trade date accounting and repurchase, resale and securities lending transactions as described in notes (a), (b), (c), (d), (e), (f), (g), (h), (i) and (j), respectively. PaineWebber's IAS to U.S. GAAP adjustments have been documented in the notes to the PaineWebber unaudited pro forma condensed consolidated statement of financial condition and income statement: conversion from U.S. GAAP to IAS, note #2: U.S. GAAP to IAS adjustments. In addition, for purposes of conforming PaineWebber's accounts to UBS's presentation under U.S. GAAP, certain investments have been reclassified from financial investments to Other Assets. a. Purchase Accounting General Under IAS, UBS accounted for the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation under the pooling of interests method. The balance sheets and income statements of the banks were combined and no adjustments to the carrying values of the assets and liabilities were made. Under U.S. GAAP, the business combination creating UBS is accounted for under the purchase method with Union Bank of Switzerland being considered the accounting acquirer. Under the purchase method, the cost of acquisition is measured at fair value and the acquirer's interests in identifiable tangible assets and liabilities of the acquiree are restated to fair values at the date of acquisition. Any excess consideration paid over the fair value of net tangible assets acquired is allocated, first to identifiable intangible assets based on their fair values, if determinable, with the remainder allocated to goodwill. Goodwill Under U.S. GAAP, goodwill and other intangible assets acquired are capitalized and amortized over the expected periods to be benefited with adjustments, if any, for impairment. For purposes of the U.S. GAAP reconciliation, the excess of the consideration paid for Swiss Bank Corporation over the fair value of the net tangible assets received has been recorded as Goodwill and is being amortized on a straight line basis over a weighted average life of 13 years beginning 29 June 1998. - -------------------------------------------------------------------------------- 150 152 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED) Other Purchase Accounting Adjustments For purposes of the U.S. GAAP reconciliation, the restatement of Swiss Bank Corporation's net assets to fair value resulted in decreasing net tangible assets by CHF 1,077 million. This amount will be amortized over a period ranging from 2 years to 20 years depending upon the nature of the restatement. b. Restructuring Provision Under IAS, restructuring provisions are recognized when a legal or constructive obligation has been incurred. In 1997, UBS recognized a CHF 7,000 million restructuring provision to cover personnel, information technology ("IT"), premises and other costs associated with combining and restructuring the merged Group. An additional CHF 300 million provision was recognized in the fourth quarter of 1999, reflecting the impact of increased precision in the estimation of certain leased and owned property costs. Under U.S. GAAP, restructuring provisions for business combinations are not recognized prior to the consummation date of the business combination. Also, the criteria for establishing liabilities of this nature are more stringent than under IAS. Established restructuring provisions are required to be periodically reviewed for appropriateness and revised if necessary. For purposes of the U.S. GAAP reconciliation, the aggregate CHF 7,300 million restructuring provision was reversed. As a result of the business combination with Swiss Bank Corporation, the decision to combine and streamline certain activities of the banks for the purpose of reducing costs and improving efficiencies, Union Bank of Switzerland recognized a restructuring provision of CHF 1,575 million during 1998 for purposes of the U.S. GAAP reconciliation. CHF 759 million of this provision related to estimated costs for restructuring the operations and activities of Swiss Bank Corporation and such amount was recorded as a liability of the acquired business. The remaining CHF 816 million of estimated costs were charged to restructuring expense during 1998. Adjustments of CHF 130 million and 600 million to the restructuring provision were recognized in the six months ended 30 June 2000 and in the year ended 31 December 1999, respectively, for purposes of the U.S. GAAP reconciliation. The reserve is expected to be substantially exhausted by the end of 2001. The restructuring provision initially included CHF 756 million for employee termination benefits, CHF 332 million for the closure and write downs of owned and leased premises, and CHF 487 million for professional fees, IT costs, miscellaneous transfer taxes and statutory fees. The usage of the U.S. GAAP restructuring provision was as follows:
BALANCE BALANCE JAN-JUN JAN-JUN 1 JANUARY 1999 1999 31 DECEMBER 2000 2000 BALANCE (CHF MILLIONS) 1999 USAGE REVISION 1999 USAGE REVISION 30 JUNE 2000 - ------------------------------------------------------------------------------------------------------------- Personnel............ 382 (254) 553 681 57 70 694 Premises............. 305 (244) 179 240 98 45 187 IT................... 25 (5) 7 27 3 -- 24 Other................ 313 (45) (139) 129 6 15 138 ------ ----- ----- ------ ---- ---- ------ Total........... 1,025 (548) 600 1,077 164 130 1,043 ------ ----- ----- ------ ---- ---- ------ ------ ----- ----- ------ ---- ---- ------
Additionally, for purposes of the U.S. GAAP reconciliation, nil and CHF 150 million of restructuring costs were expensed as incurred in the six months ended 30 June 2000 and the year ended 31 December 1999, respectively. - -------------------------------------------------------------------------------- 151 153 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED) c. Derivatives Instruments Held or Issued for Non-Trading Purposes Under IAS, UBS recognizes transactions in derivative instruments hedging non-trading positions in the income statement using the accrual or deferral method, which is generally the same accounting as the underlying item being hedged. U.S. GAAP requires that derivatives be reported at fair value with changes in fair value recorded in income unless specified criteria are met to obtain hedge accounting treatment (accrual or deferral method). UBS is not required to comply with all of the criteria necessary to obtain hedge accounting treatment under U.S. GAAP. Accordingly, for purposes of the U.S. GAAP reconciliation, derivative instruments held or issued for non-trading purposes that did not meet U.S. GAAP hedging criteria have been carried at fair value with changes in fair value recognized as adjustments to net trading income. d. Financial Investments Under IAS, financial investments are classified as either current investments or long-term investments. UBS considers current financial investments to be held for sale and carried at lower of cost or market value. UBS accounts for long-term financial investments at cost, less any permanent impairment. Under U.S. GAAP, investments are classified as either held to maturity (essentially debt securities), which are carried at amortized cost, or available for sale (debt and marketable equity securities), which are carried at fair value with changes in fair value recorded as a separate component of shareholders' equity. Realized gains and losses are recognized in net profit in the period sold. For purposes of the U.S. GAAP reconciliation, amounts reflected in Other income for the changes in market values of held for sale investments are reclassified as a component of Shareholders' equity. Held to maturity investments that do not meet U.S. GAAP criteria are reclassified to the available for sale category. Unrealized gains or unrealized losses relating to these investments are recorded as a component of Shareholders' equity. e. Retirement Benefit Plans Under IAS, UBS has recorded pension expense based on a specific method of actuarial valuation of projected plan liabilities for accrued service including future expected salary increases and expected return on plan assets. Plan assets are held in a separate trust to satisfy plan liabilities. Plan assets are recorded at fair value. The recognition of a prepaid asset on the books of UBS is subject to certain limitations. These limitations generally cause amounts recognized as expense to equal amounts funded in the same period. Any amount not recognized as a prepaid asset and the corresponding impact on pension expense has been disclosed in the financial statements. Under U.S. GAAP, pension expense, generally, is based on the same method of valuation of liabilities and assets as under IAS. Differences in the levels of expense and liabilities (or prepaid assets) exist due to the different transition date rules and the stricter provisions of IAS as well as industry practice under IAS for recognition of a prepaid asset. As a result of the merger of the retirement benefit plans of Union Bank of Switzerland and Swiss Bank Corporation after the 1998 merger, there was a one time increase of the vested plan benefits for the beneficiaries of such plans. This had the effect of increasing the defined benefit obligation at this date by CHF 3,020 million. Under IAS this resulted in a one-time charge to income which was offset by the recognition of assets (previously unrecognized due to certain limitations under IAS). Under U.S. GAAP, in a business combination that is accounted for under the purchase method, the assignment of the purchase price to individual assets acquired and liabilities assumed must include a - -------------------------------------------------------------------------------- 152 154 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED) liability for the projected plan liabilities in excess of plan assets or an asset for plan assets in excess of the projected plan liabilities, thereby recognizing any previously existing unrecognized net gains or losses, unrecognized prior service cost, or unrecognized net liabilities or assets. For purposes of the U.S. GAAP reconciliation, UBS recorded a prepaid asset for the Union Bank of Switzerland plans as of 1 January 1998. Swiss Bank Corporation recorded a purchase price adjustment to recognize its prepaid asset at 29 June 1998. The recognition of these assets impacts the pension expense recorded under U.S. GAAP versus IAS. The pension expense for the year ended 31 December 1999 is also impacted by the different treatment of the merger of the plans under IAS versus U.S. GAAP. The assets recognized under IAS (which had been previously unrecognized due to certain limitations under IAS) were already recognized under U.S. GAAP due to the absence of such limitations under U.S. GAAP. f. Other Employee Benefits Under IAS, UBS has recorded expenses and liabilities for post-retirement benefits determined under a methodology similar to that described above under retirement benefit plans. Under U.S. GAAP, expenses and liabilities for post-retirement benefits would be determined under a similar methodology as under IAS. Differences in the levels of expenses and liabilities have occurred due to different transition date rules and the treatment of the merger of Union Bank of Switzerland and Swiss Bank Corporation under the purchase method. g. Equity participation plans IAS does not specifically address the recognition and measurement requirements for equity participation plans. U.S. GAAP permits the recognition of compensation cost on the grant date for the estimated fair value of equity instruments issued (Statement of Financial Accounting Standards No. 123) or based on the intrinsic value of equity instruments issued (Accounting Principles Board Opinion No. 25), with the disclosure of the pro forma effects of equity participation plans on net profit and earnings per share, as if the fair value had been recorded on the grant date. UBS recognized only intrinsic values at the grant date with subsequent changes in value not recognized. For purposes of the U.S. GAAP reconciliation, certain of UBS's option awards have been determined to be variable, primarily because they may be settled in cash or UBS has offered to hedge their value. Additional compensation expense from these options awards for the six months ended 30 June and the year ended 31 December 1999, is CHF 44 million and CHF 41 million, respectively. In addition, certain of UBS's equity participation plans provide for deferral of the awards, and the instruments are held in trusts for the participants. Certain of these trusts are recorded on UBS's balance sheet for U.S. GAAP presentation, the effect of which is to increase assets by CHF 1,070 million and CHF 655 million, liabilities by CHF 1,162 million and CHF 717 million, and decrease shareholders' equity by CHF 92 million and CHF 62 million (for UBS shares held by the trusts, which are treated as treasury shares) at 30 June 2000 and 31 December 1999, respectively. h. Software capitalization Under IAS, effective 1 January 2000, certain costs associated with the acquisition or development of internal use software are required to be capitalized. Once the software is ready for its intended use, the costs capitalized are amortized to the income statement over estimated lives. Under U.S. GAAP, the same principal applies; however this standard was effective beginning 1 January 1999. For purposes of the U.S. GAAP reconciliation, the costs associated with the acquisition or development of internal use - -------------------------------------------------------------------------------- 153 155 UBS - -------------------------------------------------------------------------------- NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED) software that met the U.S. GAAP software capitalization criteria in 1999 have been reversed from Operating expenses and amortized over a life of 2 years. From 1 January 2000, the only remaining reconciliation item is the amortization of software capitalized in 1999 for U.S. GAAP purposes. i. Settlement Date vs. Trade Date Accounting UBS's transactions from securities activities are recorded on the settlement date for balance sheet and on the trade date for income statement purposes. This results in recording an off-balance sheet forward transaction during the period between the trade date and the settlement date. Forward positions relating to trading activities are revalued to fair value and any unrealized profits and losses are recognized in Net profit. Under U.S. GAAP, trade date accounting is required for purchases and sales of securities. For purposes of U.S. GAAP presentation, all purchases and sales of securities previously recorded on settlement date have been recorded as of trade date for balance sheet purposes. Trade date accounting has resulted in receivables and payables to broker-dealers and clearing organizations recorded in Other assets and Other liabilities. j. Repurchase, Resale and Securities Lending Transactions Under IAS, UBS's repurchase agreements and securities borrowed are accounted for as collateralized borrowings. Reverse repurchase agreements and securities lending are accounted for as collateralized lending transactions. Cash collateral is reported on the balance sheet at amounts equal to the collateral advanced or received. Under U.S. GAAP, securities lending and repurchase transactions are also generally accounted for as collateralized borrowing and lending transactions. However, certain such transactions may be deemed sale or purchase transactions under specific circumstances. Additionally, under U.S. GAAP, UBS is required to recognize securities collateral controlled and an offsetting obligation to return such securities collateral on certain financing transactions, when specific control conditions exist. For purposes of U.S. GAAP presentation, securities collateral recognized under financing transactions is reflected in Due from banks or loans, net of allowance for credit losses, depending on the counterparty. The related obligation to return the securities collateral is reflected in the balance sheet in Due to banks or Due to customers, as appropriate. 2. CONVENIENCE TRANSACTION 30 June 2000 and 31 December 1999 CHF amounts have been translated into U.S. dollars at the exchange rate of one US$ = CHF 1.63, the exchange rate on 30 June 2000. 3. PROPOSED DIVIDEND At the extraordinary general meeting of UBS AG, held on 7 September 2000, the UBS shareholders approved the UBS Board of Directors proposal that a partial dividend be paid to UBS shareholders on record as of 2 October 2000. The payment, which is to be made on 5 October 2000, relates to the first nine months of the year 2000. The payment of $2.75 (CHF 4.50) per share will total approximately $1.1 billion (CHF 1.8 billion). This proposed dividend has not been reflected in the assumptions made for purposes of presenting pro forma financial information. - -------------------------------------------------------------------------------- 154 156 - -------------------------------------------------------------------------------- Capitalization of UBS The following table sets forth the consolidated capitalization of UBS in accordance with International Accounting Standards and translated into U.S. dollars, both actual and as adjusted to give effect to this offering (based upon expected proceeds of this offering of $1,500,000,000) and the use of the proceeds from this offering as described under "Use of Proceeds."
30 JUNE 2000 ACTUAL AS ADJUSTED CHF U.S.$ CHF U.S.$ (in millions) - ------------------------------------------------------------------------------------------ Debt Money market paper issued................. 85,409 52,263 85,409 52,263 Due to banks.............................. 75,172 45,999 75,172 45,999 Cash collateral on securities lent........ 15,334 9,383 15,334 9,383 Due to customers.......................... 279,915 171,286 279,915 171,286 Long-term debt............................ 52,990 32,426 52,990 32,426 -------- -------- -------- -------- Total Debt................................ 508,820 311,357 508,820 311,357 Minority Interest........................... 0 0 2,442 1,494 Shareholders' Equity........................ 31,876 19,506 31,876 19,506 -------- -------- Total capitalization........................ 540,696 330,863 543,138 332,357 ======== ======== ======== ========
CHF amounts have been translated into United States dollars at the rate of CHF 1 = $0.6119 - -------------------------------------------------------------------------------- 155 157 - -------------------------------------------------------------------------------- UBS Preferred Funding Trust I UBS Preferred Funding Trust I is a statutory business trust that UBS AG created under the Delaware Business Trust Act, as amended, on 18 September 2000 pursuant to an initial trust agreement entered into by UBS AG and by the filing of a certificate of trust with the Secretary of State of the State of Delaware. We will continue UBS Preferred Funding Trust pursuant to an Amended and Restated Trust Agreement between UBS Preferred Funding Company, as grantor, and Wilmington Trust Company, as trustee. We will qualify the Amended and Restated Trust Agreement as an indenture under the Trust Indenture Act of 1939, as amended. UBS Preferred Funding Trust will be treated as a grantor trust for U.S. federal income tax purposes, meaning that investors in trust preferred securities will generally be treated as if they owned their proportionate shares of the company preferred securities owned by UBS Preferred Funding Trust. We have formed UBS Preferred Funding Trust for the purpose of: - issuing the trust preferred securities, - investing the proceeds of the trust preferred securities in the company preferred securities, which benefit from the related UBS AG subordinated guarantee, and - engaging in any related or incidental activities. The only assets of UBS Preferred Funding Trust will be the company preferred securities and the related rights of UBS Preferred Funding Trust under the UBS AG subordinated guarantee. The Amended and Restated Trust Agreement will not permit UBS Preferred Funding Trust to acquire any other assets, issue any other equity securities or any debt securities, or engage in any other activities. All expenses and liabilities of UBS Preferred Funding Trust will be paid by the Stamford branch of UBS AG, except that if the trustee of UBS Preferred Funding Trust incurs fees, charges or expenses at the request of a holder of trust preferred securities or other person for which UBS Preferred Funding Trust is not otherwise liable under the Amended and Restated Trust Agreement, that holder or other person will be liable for such fees, charges and expenses. The total pro forma capitalization of UBS Preferred Funding Trust, as adjusted to give effect to this offering (based on expected proceeds of $1,500,000,000 before deduction of expenses) and the use of the proceeds from this offering, is $1,500,000,000. Upon completion of the offering, the authorized and issued capital of UBS Preferred Funding Trust will consist of trust preferred securities having an aggregate liquidation amount of $1,500,000,000, issuable in denominations of $1,000 liquidation amount per trust preferred security and integral multiples of $1,000. The Amended and Restated Trust Agreement will provide that, to the fullest extent permitted by law, without the need for any other action of any person, including the trustee or any other holder of trust preferred securities, each holder of trust preferred securities will be entitled to enforce, in the name of UBS Preferred Funding Trust, the rights of UBS Preferred Funding Trust under the company preferred securities and the UBS AG subordinated guarantee represented by the trust preferred securities held by such holder. A holder of trust preferred securities may at any time upon written notice withdraw and hold directly the underlying company preferred securities represented by such trust preferred securities, in which case such holder will be entitled to directly enforce its rights under the UBS AG subordinated guarantee. The principal executive offices of UBS Preferred Funding Trust are c/o Wilmington Trust Company, 1100 North Market Street, Wilmington, DE 19890. - -------------------------------------------------------------------------------- 156 158 - -------------------------------------------------------------------------------- UBS Preferred Funding Company LLC I INTRODUCTION UBS Preferred Funding Company LLC I is a limited liability company that UBS AG formed under the Delaware Limited Liability Company Act, as amended, on 18 September 2000 pursuant to an initial limited liability company agreement entered into by UBS AG and by filing a certificate of formation with the Secretary of State of the State of Delaware. We will continue UBS Preferred Funding Company pursuant to an Amended and Restated Limited Liability Company Agreement, which we sometimes refer to as the LLC Agreement. UBS Preferred Funding Company will be treated as a partnership for U.S. federal income tax purposes. We have formed UBS Preferred Funding Company for the purpose of : - issuing the company common securities to UBS AG, - issuing the company preferred securities, initially to UBS Preferred Funding Trust, - investing the proceeds of the company common securities and the company preferred securities in (1) initially, subordinated notes issued by the Cayman Islands branch of UBS AG with an aggregate principal amount of $1,500,000,000 and (2) other securities issued by UBS AG acting through a branch, agency or other office located outside of the United States or by a non-U.S. branch of a non-U.S. subsidiary of UBS AG (together, "eligible investments"), and - engaging in any related or incidental activities. The total pro forma capitalization of UBS Preferred Funding Company, as adjusted to give effect to this offering (based on expected proceeds of $1,500,000,000 before deduction of expenses) and the use of proceeds from this offering, is $1,500,002,000. Upon completion of this offering, the authorized and issued capital of UBS Preferred Funding Company will consist of company common securities representing securityholders' equity of $2,000 and company preferred securities with an aggregate liquidation preference of $1,500,000,000, issuable in denominations of $1,000 liquidation preference per company preferred security and integral multiples of $1,000. UBS Preferred Funding Company will have no outstanding debt after giving effect to this offering and the use of the proceeds from this offering. UBS Preferred Funding Company will apply the income generated by the subordinated notes and other eligible investments to pay dividends to UBS Preferred Funding Trust, as holder of company preferred securities, and UBS AG, as holder of the company common securities. UBS Preferred Funding Trust will then pass the dividends it receives on the company preferred securities through to the holders of trust preferred securities as distributions on the trust preferred securities. UBS AG is purchasing all of the company common securities for $2,000. UBS intends to treat the company preferred securities as Tier 1 capital for purposes of the relevant regulatory capital guidelines of the Swiss Federal Banking Commission. UBS AG will agree with UBS Preferred Funding Company in the LLC Agreement that, as long as any company preferred securities are outstanding, UBS AG will continue to own, directly or indirectly, 100% of the outstanding company common securities. UBS Preferred Funding Company will also covenant to maintain "UBS" as part of its name for as long as any trust preferred securities of UBS Preferred Funding Trust remain outstanding unless, because of a merger or other business combination involving UBS AG or a change by UBS AG of its own name, inclusion of "UBS" as part of UBS Preferred Funding Company's name is no longer appropriate. UBS AG will also agree in the LLC Agreement that it will from time to time either (i) contribute (or cause others, including the Stamford branch of UBS AG, to contribute) to UBS Preferred Funding Company such additional funds as are necessary in order to enable UBS Preferred Funding Company - -------------------------------------------------------------------------------- 157 159 UBS PREFERRED FUNDING COMPANY LLC I - -------------------------------------------------------------------------------- to pay its operating expenses on or before any date when any such operating expenses are due or (ii) directly pay UBS Preferred Funding Company's operating expenses then due and payable and not otherwise paid. "Operating expenses" generally means all expenses and obligations of UBS Preferred Funding Company, but does not include any payments on the company preferred securities or company common securities. The principal executive offices of UBS Preferred Funding Company are located at The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. ACTIVITIES OF UBS PREFERRED FUNDING COMPANY GENERAL UBS Preferred Funding Company's principal business objective is to acquire and hold eligible investments, which include: - initially, subordinated notes issued by the Cayman Islands branch of UBS AG with an aggregate principal amount of $1,500,000,000, and - other securities issued by UBS AG acting through a branch, agency or other office located outside of the United States or by a non-U.S. branch of a non-U.S. subsidiary of UBS AG. UBS Preferred Funding Company will apply the net income generated by the subordinated notes and other eligible investments to pay dividends to UBS Preferred Funding Trust, as holder of company preferred securities, and UBS AG, as holder of the company common securities. UBS Preferred Funding Trust will then pass through the dividends it receives on the company preferred securities to the holders of trust preferred securities as distributions on the trust preferred securities. Although UBS Preferred Funding Company may (with the consent of the holders of two-thirds (based on the aggregate liquidation preference) of the company preferred securities and company parity preferred securities, voting together as a single class) issue additional preferred securities as described under "Description of Company Preferred Securities," UBS Preferred Funding Company has no present intention to do so. DIVIDENDS UBS Preferred Funding Company currently expects to pay an aggregate amount of dividends with respect to its outstanding company common securities and company preferred securities equal to approximately 100% of the interest and other income it receives on the subordinated notes and any other eligible investments. The LLC Agreement of UBS Preferred Funding Company will: - preclude UBS Preferred Funding Company from incurring any indebtedness for borrowed money (and UBS Preferred Funding Company does not anticipate having any material liabilities), and - require approval of holders of at least 66 2/3% of the outstanding company preferred securities and any outstanding company parity preferred securities (based on the aggregate liquidation preference), voting together as a single class, before dividends on the company preferred securities can be paid out of any source other than interest income received on the subordinated notes or interest or dividend income received on other eligible investments. Under the Delaware Limited Liability Company Act, UBS Preferred Funding Company may not pay dividends or other distributions on company common securities or company preferred securities--even if such payments are "mandatory"--if, after making the distributions, UBS Preferred Funding Company's liabilities would exceed the fair value of its assets. However, UBS Preferred Funding Company does not expect to have any material liabilities, so UBS Preferred Funding Company does - -------------------------------------------------------------------------------- 158 160 UBS PREFERRED FUNDING COMPANY LLC I - -------------------------------------------------------------------------------- not anticipate that this restriction will affect its ability to pay dividends on the company preferred securities. Dividends on the company preferred securities will in any event be required to be paid up to the mandatory dividend payment amount on any mandatory dividend payment date, unless there is a capital limitation on such date. See "Description of Company Preferred Securities--Dividends--Mandatory Dividends." INVESTMENT POLICIES UBS Preferred Funding Company's initial investment policies will be established pursuant to the LLC Agreement. Under its investment policies, UBS Preferred Funding Company may not hold or invest in any securities other than eligible investments as described above under "--Introduction." The investment policies require that: - the terms of any eligible investments other than the subordinated notes purchased by UBS Preferred Funding Company be established in good faith and, to the extent deemed advisable by UBS AG, reflect arm's-length terms at the time of purchase, and the purchase by UBS Preferred Funding Company of such eligible investments be approved by the affirmative vote of a majority of its entire board of directors, and - UBS Preferred Funding Company maintain its assets in a manner that will not require UBS Preferred Funding Company to be registered as an investment company under the Investment Company Act of 1940. The investment policies of UBS Preferred Funding Company may be amended only by the affirmative vote of holders of at least 66 2/3% of the outstanding company preferred securities and any outstanding company parity preferred securities (based on the aggregate liquidation preference), voting together as a single class. Although UBS AG and UBS Preferred Funding Company do not anticipate that UBS Preferred Funding Company will sell the subordinated notes (and no market for them is expected to develop), were UBS Preferred Funding Company to do so, UBS Preferred Funding Company would be required to invest the proceeds of the sale in accordance with UBS Preferred Funding Company's investment policies as they exist at the time of such sale. ADMINISTRATION AGREEMENT Before issuing the company preferred securities, UBS Preferred Funding Company will enter into an administration agreement with the Stamford branch of UBS AG, under which the Stamford branch will provide (or cause others to provide) accounting, legal, tax and other support services to UBS Preferred Funding Company, assist UBS Preferred Funding Company in complying with pertinent U.S. and Swiss local, state and federal laws, and provide administrative, record keeping and secretarial services to UBS Preferred Funding Company. Under the administration agreement, UBS Preferred Funding Company will agree to reimburse the provider of these services for the value of services provided by such provider to UBS Preferred Funding Company on an arm's-length basis. UBS Preferred Funding Company will maintain company records that are separate from those of UBS AG or any of its affiliates. None of the officers, employees or directors of UBS Preferred Funding Company will have any direct or indirect pecuniary interest in any security to be acquired or disposed of by UBS Preferred Funding Company or in any transaction in which UBS Preferred Funding Company has an interest. - -------------------------------------------------------------------------------- 159 161 UBS PREFERRED FUNDING COMPANY LLC I - -------------------------------------------------------------------------------- MANAGEMENT OF UBS PREFERRED FUNDING COMPANY DIRECTORS AND EXECUTIVE OFFICERS The LLC Agreement of UBS Preferred Funding Company provides that its board of directors will at all times include not less than three and not more than five members. Initially, the board of directors will include three members. The directors will be designated as "managers" of UBS Preferred Funding Company within the meaning of the Delaware Limited Liability Company Act. The directors will serve until their successors are duly elected and qualified. UBS Preferred Funding Company has no present intention to alter the number of directors comprising the board of directors. UBS Preferred Funding Company will have three officers when the company preferred securities are issued. The directors and executive officers of UBS Preferred Funding Company initially will be:
NAME POSITION AND OFFICES HELD - ------------------------------------------------------------- Robert Mills Managing Director and President Per Dyrvik Director and Treasurer Robert Dinerstein Director and Secretary
Each of the initial directors and officers of UBS Preferred Funding Company is an individual who is an officer or employee of UBS AG or its affiliates. UBS Preferred Funding Company currently anticipates that all officers of UBS Preferred Funding Company will also be officers or employees of UBS AG or its affiliates. ADDITIONAL DIRECTORS If at any time the aggregate of unpaid dividends on the company preferred securities or any company parity preferred securities equals or exceeds an amount equal to three semi-annual dividend payments, the holders of company preferred securities and any company parity preferred securities, voting together as a single class, will have the exclusive right to elect two additional directors. Holders of a majority (based on the aggregate liquidation preference) of company preferred securities and company parity preferred securities may exercise this right by written consent or at a meeting of such holders called for such purpose. The LLC Agreement of UBS Preferred Funding Company will provide that this meeting may be called at the request of any holder of company preferred securities or company parity preferred securities. This right will continue either until all unpaid dividends have been paid in full or until full dividends have been paid on the company preferred securities for two consecutive dividend periods. While this right continues, any vacancy in the office of the additional directors may be filled only by the holders of company preferred securities and company parity preferred securities voting as described above. INDEMNIFICATION AND INSURANCE FOR DIRECTORS The LLC Agreement of UBS Preferred Funding Company will provide that: - its directors have no personal liability to UBS Preferred Funding Company or the holders of company common securities or company preferred securities for monetary damages (i) for voting not to take enforcement action with respect to the subordinated notes or any other eligible investments owned by UBS Preferred Funding Company, or (ii) at any time for breach of any such director's fiduciary duty, if any, except for such director's gross negligence or willful misconduct, - UBS Preferred Funding Company will indemnify any director or officer for any liability and related expenses, including reasonable counsel's fees, arising out of such director's or officer's status as a director or officer of UBS Preferred Funding Company, except for liability determined by a court of competent jurisdiction to have arisen out of such director's or officer's gross negligence or willful misconduct, - -------------------------------------------------------------------------------- 160 162 UBS PREFERRED FUNDING COMPANY LLC I - -------------------------------------------------------------------------------- - the right to indemnification is a contract right and the LLC Agreement will set forth certain procedural and evidentiary standards applicable to the enforcement of a claim under the LLC Agreement of UBS Preferred Funding Company, and - UBS Preferred Funding Company may purchase and maintain insurance to protect any director or officer against any liability asserted against, or incurred by, him or her, arising out of his or her status as a director or officer. COMMON SECURITIES OF UBS PREFERRED FUNDING COMPANY Holders of company common securities will receive dividends out of interest payments received by UBS Preferred Funding Company on the subordinated notes and other eligible investments, if any, not required to be applied to fund dividends with respect to the company preferred securities or expenses of UBS Preferred Funding Company. However, as long as the company preferred securities or the company parity preferred securities are outstanding, no dividends or other distributions (including redemptions and purchases) may be made with respect to company common securities unless full dividends on all series of the company preferred securities have been paid (except as otherwise described under "Description of Company Preferred Securities--Ranking and Liquidation Preference"). See "Description of Company Preferred Securities--Dividends." Subject to the rights, if any, of the holders of company preferred securities (to the limited extent described herein) and any other series of the company parity preferred securities, all voting rights are vested in the company common securities. Holders of company common securities are entitled to vote in proportion to the stated amounts represented by their company common securities. All issued and outstanding shares of company common securities are currently, and upon consummation of the offering will still be, held by UBS AG. If UBS Preferred Funding Company dissolves, liquidates or winds up (whether voluntary or involuntary) after all debts and liabilities of UBS Preferred Funding Company have been satisfied and there have been paid or set aside for the holders of company preferred securities the full preferential amounts to which such holders are entitled, the holders of the company common securities will be entitled to share equally and ratably in any assets remaining. PREFERRED SECURITIES OF UBS PREFERRED FUNDING COMPANY Subject to limitations prescribed by Delaware law and UBS Preferred Funding Company's LLC Agreement, the board of directors of UBS Preferred Funding Company or, if then constituted, a duly authorized committee of the board of directors is authorized to issue (with the consent of the holders of two-thirds (based on the aggregate liquidation preference) of the company preferred securities and company parity preferred securities, voting together as a single class), from the authorized but unissued capital shares of UBS Preferred Funding Company, additional series of preferred securities of the UBS Preferred Funding Company ranking on a parity with the company preferred securities in such series as the board of directors (or committee) may determine and to establish, from time to time, the number or amount by aggregate liquidation preference of shares (if applicable) of such series to be included in any such series and to fix the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the securities of any such series, and such other subjects or matters as may be fixed by resolution of the board of directors. However, UBS Preferred Funding Company's LLC Agreement precludes: - the issuance of any other classes or series of equity securities that are senior to the company preferred securities, either as to dividends or as to rights upon dissolution, liquidation or winding up of UBS Preferred Funding Company, without the approval of each holder of company preferred securities, and - -------------------------------------------------------------------------------- 161 163 UBS PREFERRED FUNDING COMPANY LLC I - -------------------------------------------------------------------------------- - the issuance of any company parity preferred securities without the approval of 66 2/3% of the holders of company preferred securities and unless the UBS AG subordinated guarantee is amended so that such additional company parity preferred securities benefit from the UBS AG subordinated guarantee in substantially the same manner as the company preferred securities without any adverse effect on the holders of company preferred securities. See "Description of Company Preferred Securities--Voting Rights." No additional payments will be required pursuant to the Delaware Limited Liability Company Act for the company parity preferred securities to represent limited liability company interests in UBS Preferred Funding Company upon issuance against full payment of the purchase price for the company parity preferred securities. The specific terms of a particular series of the company parity preferred securities will be described in the certificate of designation (as defined in UBS Preferred Funding Company's LLC Agreement) to be incorporated into UBS Preferred Funding Company's LLC Agreement relating to that series, except in the case of shares of the company preferred securities where the terms thereof are set forth in UBS Preferred Funding Company's LLC Agreement. LEGAL PROCEEDINGS UBS Preferred Funding Company is not the subject of any litigation. None of UBS Preferred Funding Company, UBS AG or any of its affiliates is currently involved in nor, to UBS Preferred Funding Company's knowledge, currently threatened with any litigation with respect to the subordinated notes or any aspect of UBS Preferred Funding Company's operations. - -------------------------------------------------------------------------------- 162 164 - -------------------------------------------------------------------------------- Use of Proceeds UBS Preferred Funding Trust will use the proceeds of $1,500,000,000 from the sale of the trust preferred securities to purchase the company preferred securities. UBS Preferred Funding Company will use the proceeds of $1,500,000,000 from the sale of the company preferred securities to UBS Preferred Funding Trust to acquire $1,500,000,000 aggregate principal amount of subordinated notes issued by the Cayman Islands branch of UBS AG. See "UBS Preferred Funding Company LLC I--Activities of UBS Preferred Funding Company." UBS AG will use the proceeds of $1,500,000,000 from the sale of the subordinated notes issued by its Cayman Island branch for general corporate purposes, including paying certain expenses related to the offering and possibly funding a portion of the purchase price of PaineWebber. - -------------------------------------------------------------------------------- 163 165 - -------------------------------------------------------------------------------- Description of Trust Preferred Securities UBS Preferred Funding Trust will issue the trust preferred securities under the terms of its Amended and Restated Trust Agreement. We will qualify the Amended and Restated Trust Agreement as an indenture under the Trust Indenture Act. The terms of the trust preferred securities will include both those stated in the Amended and Restated Trust Agreement and the Delaware Business Trust Act and those made part of the Amended and Restated Trust Agreement by the Trust Indenture Act. The following summary of the material terms and provisions of the trust preferred securities is not complete and is subject to, and qualified in its entirety by reference to, the Amended and Restated Trust Agreement, the Delaware Business Trust Act and the Trust Indenture Act. We have filed a copy of the Amended and Restated Trust Agreement as an exhibit to the registration statement of which this prospectus is a part. GENERAL The trust preferred securities are certificates of beneficial interest in the assets of UBS Preferred Funding Trust, the terms of which are set forth in the Amended and Restated Trust Agreement. The trust preferred securities will be issued in denominations of $1,000 liquidation amount and whole-number multiples of $1,000. The aggregate liquidation amount of the trust preferred securities offered by this prospectus is $1,500,000,000. Each trust preferred security represents a corresponding amount of the company preferred securities, together with related rights under the UBS AG subordinated guarantee. The trustee of UBS Preferred Funding Trust will hold the company preferred securities and the related rights under the UBS AG subordinated guarantee deposited in UBS Preferred Funding Trust for the benefit of the holders of trust preferred securities. The Amended and Restated Trust Agreement provides that, to the fullest extent permitted by law, without the need for any other action of any person, including the trustee or any other holder of trust preferred securities, each holder of trust preferred securities will be entitled to enforce, in the name of UBS Preferred Funding Trust, the rights of UBS Preferred Funding Trust under the company preferred securities and the related rights under the UBS AG subordinated guarantee represented by the trust preferred securities held by such holder. The trust preferred securities may be exchanged for the underlying company preferred securities as described under "--Withdrawal of the Company Preferred Securities." The funds of UBS Preferred Funding Trust available for distribution to the holders of trust preferred securities will be limited to payments received from UBS Preferred Funding Company as dividends, redemption payments and liquidation payments on the company preferred securities and to payments received from UBS AG pursuant to the UBS AG subordinated guarantee of those payments. See "Description of Company Preferred Securities." UBS Preferred Funding Trust will distribute such payments, upon their receipt, to the holders of trust preferred securities on a pro rata basis. If UBS Preferred Funding Company does not pay any semi-annual dividend on the company preferred securities when it is required to and UBS AG does not perform its obligations under the UBS AG subordinated guarantee, UBS Preferred Funding Trust will not have sufficient funds to make the related semi-annual distribution payment on the trust preferred securities. We have applied to list the trust preferred securities on the Luxembourg Stock Exchange. DISTRIBUTIONS Each trust preferred security will represent a corresponding amount of the company preferred securities, together with the related rights under the UBS AG subordinated guarantee. UBS Preferred Funding Trust will make semi-annual or quarterly distributions or other mandatory distributions on - -------------------------------------------------------------------------------- 164 166 DESCRIPTION OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- the trust preferred securities concurrently with, and in the same amount as, the semi-annual or quarterly dividends or special dividends on the company preferred securities. See "Description of Company Preferred Securities--Dividends." Accordingly, to the extent that dividends are paid on the company preferred securities, distributions on the trust preferred securities will be paid on the liquidation amount of the trust preferred securities as follows: - semi-annually in arrears on the dividend payment dates regularly scheduled to occur in April and October of each year, commencing -- October 2000, for each dividend period through the dividend period ending on the dividend payment date in October 2010, at a fixed rate per annum equal to --% (calculated on the basis of a 360-day year consisting of twelve 30-day months), and - thereafter, quarterly in arrears on the dividend payment dates regularly scheduled to occur in January, April, July and October of each year, at a floating rate per annum equal to --% above three-month LIBOR (calculated on the basis of the actual number of days elapsed in a 360-day year). Whenever, and to the extent, UBS Preferred Funding Trust receives any cash payments representing a semi-annual dividend, special dividend or redemption payment on the company preferred securities, UBS Preferred Funding Trust will distribute such amounts to the holders of trust preferred securities in proportion to their liquidation amounts. Each semi-annual, quarterly or special distribution on the trust preferred securities will be payable to holders of record as they appear on the securities register of UBS Preferred Funding Trust on the corresponding record date. The record dates for the trust preferred securities will be the fifteenth day (whether or not a business day) prior to the relevant semi-annual, quarterly or other distribution date. If any distribution would be payable on a day that is not a business day, that distribution will instead be made on the next business day. No interest or other payment will be due as a result of any such delay. If dividends are not payable on company preferred securities on any dividend payment date for the reasons described in "Description of Company Preferred Securities--Dividends," then the holders of trust preferred securities will not be entitled to receive a distribution on that date. REDEMPTION The trust preferred securities can be redeemed only upon redemption of the company preferred securities. If UBS Preferred Funding Company redeems the company preferred securities in accordance with its LLC Agreement as described under "Description of Company Preferred Securities--Redemption," then UBS Preferred Funding Company must give the trustee at least 30 days' prior notice before doing so. The trustee will mail the notice of redemption not less than 25 days prior to the date fixed for redemption of the company preferred securities to the holders of trust preferred securities as provided under "--Notices." On the date of redemption of the company preferred securities, so long as UBS Preferred Funding Company or UBS AG has deposited with Wilmington Trust Company, the paying agent, on behalf of UBS Preferred Funding Trust the aggregate amount payable upon redemption of all the company preferred securities held by UBS Preferred Funding Trust to be redeemed, the paying agent on behalf of UBS Preferred Funding Trust will irrevocably deposit with The Depositary Trust Company ("DTC") funds sufficient to pay the redemption price and give DTC irrevocable instructions to pay the redemption price to the holders of trust preferred securities to be redeemed. See "Book-Entry Issuance of Trust Preferred Securities." Once the paying agent has received this deposit, all rights of the holders of trust preferred securities called for redemption will end, except their right to receive the redemption price, without interest. If any date fixed for redemption of the trust preferred securities is not a - -------------------------------------------------------------------------------- 165 167 DESCRIPTION OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- business day, then the redemption price will instead be paid on the next business day, except that if that business day falls in the next calendar year, the redemption price will be paid on the preceding business day. No interest or other payment will be due as a result of any such adjustment. If only some of the outstanding trust preferred securities are to be redeemed, the trust preferred securities to be redeemed will be selected in accordance with DTC's procedures. See "Book-Entry Issuance of Trust Preferred Securities--DTC's Procedures for Notices, Voting and Payments." If the trust preferred securities do not remain registered in the name of DTC or its nominee and only some of the outstanding trust preferred securities are to be redeemed, the trust preferred securities will be redeemed proportionately or selected for redemption pursuant to the rules of any securities exchange on which the trust preferred securities are listed at that time. UBS Preferred Funding Company will promptly notify the registrar and transfer agent for the trust preferred securities, in writing, of the trust preferred securities selected for redemption. WITHDRAWAL OF THE COMPANY PREFERRED SECURITIES Any beneficial owner of the trust preferred securities may withdraw all, but not less than all, of the company preferred securities represented by such trust preferred securities by providing a written notice to the trustee, with evidence of beneficial ownership in form satisfactory to the trustee and providing to UBS Preferred Funding Company such documents or information as UBS Preferred Funding Company may request for tax reporting purposes. The holder's notice will also be deemed to be such beneficial owner's agreement to be subject to the terms of UBS Preferred Funding Company's LLC Agreement applicable to the rights of the holders of company preferred securities. Within a reasonable period after such a request has been properly made, the trustee must instruct DTC to reduce the trust preferred securities represented by the global certificate by the corresponding amount of the company preferred securities to be so withdrawn by the withdrawing owner. UBS Preferred Funding Company will issue to the withdrawing owner a certificate representing the amount of the company preferred securities withdrawn, and the trustee will reduce the amount of the trust preferred securities represented by the global certificate accordingly. The company preferred securities will be issued only in certificated fully-registered form and will not be eligible to be held through DTC, Euroclear or Clearstream. Under U.S. tax reporting rules, holders of company preferred securities will thereafter receive an annual Form K-1 instead of the Form 1099 that holders of trust preferred securities will receive. See "Certain U.S. Tax Considerations--Information Reporting and Backup Withholding Tax." Any holder of company preferred securities may redeposit withdrawn company preferred securities by delivering to the trustee the certificates for the company preferred securities to be deposited, which are (i) if required by the trustee, properly endorsed or accompanied by a properly executed instrument of transfer or endorsement in form satisfactory to the trustee and in compliance with the terms of UBS Preferred Funding Company's LLC Agreement and (ii) accompanied by all such certifications as may be required by the trustee in its sole discretion and in accordance with the provisions of the Amended and Restated Trust Agreement. Within a reasonable period after such deposit is properly made, the trustee will instruct DTC to increase the amount of the trust preferred securities represented by the global certificate accordingly. - -------------------------------------------------------------------------------- 166 168 DESCRIPTION OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- VOTING RIGHTS If at any time, the holders of company preferred securities are entitled to vote under UBS Preferred Funding Company's LLC Agreement, the trustee will: - notify the holders of trust preferred securities of such right, - request specific direction from each holder of trust preferred securities as to the vote with respect to the company preferred securities represented by such trust preferred securities, and - vote the relevant company preferred securities only in accordance with such specific direction. Upon receiving notice of any meeting at which the holders of company preferred securities are entitled to vote, the trustee will, as soon as practicable, mail to the holders of trust preferred securities a notice as provided under "--Notices." UBS Preferred Funding Company will provide the form of notice to the trustee to be forwarded to the holders of trust preferred securities. The notice will contain: - all the information that is contained in the notice announcing the meeting of the company preferred securities, - a statement that the holders of trust preferred securities will be entitled, subject to any applicable provision of law, to direct the trustee specifically as to the exercise of the voting rights pertaining to the number of the company preferred securities represented by their respective trust preferred securities, and - a brief description of the manner in which the holders may give such specific directions. If the trust receives a written direction from a holder of trust preferred securities, the trustee will vote, or cause to be voted, the amount of the company preferred securities represented by such trust preferred securities in accordance with the instructions set forth in the direction. If the trustee does not receive specific instructions from the holder of any trust preferred securities, the trustee will abstain from voting the company preferred securities represented by those trust preferred securities. UBS Preferred Funding Company and the trustee may, without the consent of the holders of the trust preferred securities, enter into one or more agreements supplemental to the Amended and Restated Trust Agreement, in form satisfactory to the trustee, for any of the following purposes: - to evidence the succession of another partnership, corporation or other entity to UBS Preferred Funding Company and the assumption by any such successor of the covenants of UBS Preferred Funding Company under the Amended and Restated Trust Agreement, - to add to the covenants of UBS Preferred Funding Company for the benefit of the holders of the trust preferred securities, or to surrender any right or power herein conferred upon UBS Preferred Funding Company, - to correct or supplement any provision of the Trust Agreement which may be defective or inconsistent with any other provision therein, - to make any other provisions with respect to matters or questions arising under the Amended and Restated Trust Agreement, provided that any such action does not materially adversely affect the interests of the holders of the trust preferred securities, or - to cure any ambiguity or correct any mistake. Any other amendment or agreement supplemental to the Amended and Restated Trust Agreement must be in writing and approved by holders of 66 2/3% of the then outstanding trust preferred securities. - -------------------------------------------------------------------------------- 167 169 DESCRIPTION OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- TRANSFER AND ISSUE OF DEFINITIVE TRUST PREFERRED SECURITIES TRANSFER, ISSUE AND DELIVERY If trust preferred securities are issued in definitive form ("definitive trust preferred securities") in the limited circumstances described in "Book-Entry Issuance of Trust Preferred Securities--Termination of and Changes to Depositary Arrangements," those trust preferred securities may be transferred in any whole-number multiples of $1,000 by surrendering the definitive trust preferred securities certificates together with the form of transfer endorsed on it, duly completed and executed at the office of the transfer agent. The initial transfer agent will be Wilmington Trust Company. If only part of a definitive trust preferred securities certificate is transferred, a new definitive trust preferred securities certificate representing the securities that are not transferred will be issued to the transferor within three business days after the transfer agent receives the certificate. The new certificate representing the trust preferred securities that were not transferred will be delivered to the transferor by uninsured mail at the risk of the transferor, to the address of the transferor that appears in the records of UBS Preferred Funding Trust. The new certificate representing the trust preferred securities that were transferred will be sent to the transferee within three business days after the trustee receives the certificate transferred, by uninsured mail at the risk of the holder entitled to the trust preferred securities represented by the certificate, to the address specified in the form of transfer. FORMALITIES FREE OF CHARGE Registration of transfers of definitive trust preferred securities will be made without charge by UBS Preferred Funding Trust, but the transferor must pay any tax or other governmental charges that may be imposed in relation to the transfer, together with any indemnity that UBS Preferred Funding Trust, UBS AG or the transfer agent may require. CLOSED PERIODS No holder may require the transfer of the trust preferred securities to be registered during the period of 15 days ending on the due date for any payment of principal on the trust preferred securities. UBS Preferred Funding Trust will not be required to register, or cause others to register, the transfer of trust preferred securities after such trust preferred securities have been called for redemption. REGULATIONS CONCERNING TRANSFER AND REGISTRATION All transfers of definitive trust preferred securities and entries must be made as provided in the agency agreement relating to the trust preferred securities. The provisions of this agreement that govern transfers may be changed by UBS Preferred Funding Trust with the prior written approval of the trustee. REGISTRAR AND TRANSFER AGENT Wilmington Trust Company will act as registrar and transfer agent for the trust preferred securities. As long as the trust preferred securities are listed on the Luxembourg Stock Exchange, UBS Preferred Funding Trust will also maintain a transfer agent in Luxembourg. The initial Luxembourg transfer agent will be BNP Paribas. PAYMENTS AND PAYING AGENT As long as the trust preferred securities are in book-entry form, payments on the trust preferred securities will be made to DTC, which will credit the relevant accounts at DTC on the scheduled payment dates. The payments will be distributed to participants, indirect participants and beneficial owners of the trust preferred securities as described under "Book-Entry Issuance of Trust Preferred Securities--DTC's Procedures for Notices, Voting and Payments." - -------------------------------------------------------------------------------- 168 170 DESCRIPTION OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- If definitive trust preferred securities are issued in the limited circumstances described above, payments on the trust preferred securities will be made by check mailed to the address of the holder entitled to receive the payment, as the address appears in UBS Preferred Funding Trust's register. UBS Preferred Funding Trust will maintain a paying agent with respect to the trust preferred securities which will initially be Wilmington Trust Company. The paying agent will be permitted to resign as paying agent upon 30 days' written notice to the trustee. If Wilmington Trust Company resigns as paying agent, the trustee will appoint another bank or trust company to act as paying agent. As long as the trust preferred securities are listed on the Luxembourg Stock Exchange, UBS Preferred Funding Trust will also maintain a paying agent in Luxembourg. The initial Luxembourg paying agent will be BNP Paribas. TERMINATION OF AMENDED AND RESTATED TRUST AGREEMENT The Amended and Restated Trust Agreement will terminate upon the earliest to occur of the redemption of all of the trust preferred securities, the delivery of a final distribution of the company preferred securities to the holders of trust preferred securities, withdrawal of all the company preferred securities from UBS Preferred Funding Trust (as described under "--Withdrawal of the Company Preferred Securities") or dissolution of UBS Preferred Funding Trust as described in the following paragraph. UBS Preferred Funding Company may instruct the trustee to dissolve UBS Preferred Funding Trust and distribute the company preferred securities on a pro rata basis to the holders of trust preferred securities in the case of either a Tax Event as to UBS Preferred Funding Trust or an Investment Company Act Event as to UBS Preferred Funding Trust, as each is defined under "Description of Company Preferred Securities--Redemption." Any company preferred securities held in definitive fully registered form will not be eligible to be held through DTC, Euroclear or Clearstream. EXPENSES OF UBS PREFERRED FUNDING TRUST All charges or expenses of UBS Preferred Funding Trust, including the charges and expenses of the trustee, will be paid by the Stamford branch of UBS AG, except that, if the trustee incurs fees, charges or expenses, for which it is not otherwise liable under the Amended and Restated Trust Agreement, at the request of a holder of trust preferred securities or other person, such holder or other person will be liable for such fees, charges and expenses. RESIGNATION AND REMOVAL OF THE TRUSTEE UBS Preferred Funding Trust will at all times have a trustee that is a bank that has its principal place of business in the State of Delaware and a combined capital and surplus of $50,000,000. If the trustee ceases to be eligible, it must resign. The trustee may resign as trustee under the Amended and Restated Trust Agreement at any time by giving notice of its resignation to UBS Preferred Funding Company. The trustee may be removed by UBS Preferred Funding Company at any time by notice of such removal delivered to the trustee. Any resignation or removal of the trustee will take effect upon the appointment of a qualified successor trustee and the successor's acceptance of such appointment. If the trustee shall resign or be removed, UBS Preferred Funding Company shall, within 45 days after the delivery of the notice of resignation or removal, as the case may be, appoint a successor trustee, which shall be a bank or trust company, or an affiliate of a bank or trust company, having its - -------------------------------------------------------------------------------- 169 171 DESCRIPTION OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- principal office in the State of Delaware and having a combined capital and surplus of at least $50,000,000. INFORMATION CONCERNING THE TRUSTEE Wilmington Trust Company is the trustee. The trustee is required to perform only those duties that are specifically set forth in the Amended and Restated Trust Agreement, except when a default has occurred and is continuing with respect to the trust preferred securities. After a default, the trustee must exercise the same degree of care a prudent person would exercise under the circumstances in the conduct of his or her own affairs. Subject to these requirements, the trustee is under no obligation to exercise any of the powers vested in it by the Amended and Restated Trust Agreement at the request of any holder of trust preferred securities, unless the holder offers the trustee reasonable indemnity against the costs, expenses and liabilities that might be incurred by exercising those powers. NOTICES Notices to the holders of trust preferred securities will be given by delivery of the relevant notice to DTC, Euroclear, Clearstream and any other relevant securities clearing system for communication by each of them to entitled participants, and, as long as the trust preferred securities are listed on one or more stock exchanges and the rules of such stock exchange(s) so require, notices will also be published in the manner that the rules of such stock exchange(s) may require. In addition, for as long as the rules of the Luxembourg Stock Exchange so require, notices will be published in one English language daily newspaper of general circulation in London (which is expected to be the Financial Times) and in a daily newspaper of general circulation in Luxembourg (which is expected to be the Luxembourger Wort). If the trust preferred securities are no longer held in the name of DTC or its nominee, notice to the holders of trust preferred securities will be mailed by first-class mail, postage prepaid, to the holders' addresses appearing in the records of UBS Preferred Funding Trust. GOVERNING LAW The Trust Agreement and the trust preferred securities are governed by the laws of the State of Delaware. - -------------------------------------------------------------------------------- 170 172 - -------------------------------------------------------------------------------- Description of Company Preferred Securities UBS Preferred Funding Company will issue the company preferred securities under the terms of its Amended and Restated Limited Liability Company Agreement. The following summary of the material terms and provisions of the company preferred securities is not complete and is subject to and qualified in its entirety by reference to the LLC Agreement of UBS Preferred Funding Company and the Delaware Limited Liability Company Act. We have filed a copy of the LLC Agreement of UBS Preferred Funding Company as an exhibit to the registration statement of which this prospectus is a part. GENERAL The company preferred securities are preferred limited liability company interests in UBS Preferred Funding Company, the terms of which are set forth in UBS Preferred Funding Company's LLC Agreement. The company preferred securities are intended to provide holders with rights to distributions and redemption and liquidation payments that are similar to those to which holders would be entitled if they had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. When issued, the company preferred securities will be validly issued, and no additional payments will be required for such securities to represent limited liability company interests in UBS Preferred Funding Company. Holders of company preferred securities will have no preemptive rights with respect to any other securities of UBS Preferred Funding Company. The company preferred securities will not be convertible into company common securities or any other interests in UBS Preferred Funding Company and will not be subject to any sinking fund or other obligation of UBS Preferred Funding Company for their repurchase or retirement. The company preferred securities will be issued in certificated form only in denominations of $1,000 liquidation preference and whole-number multiples of $1,000. The aggregate liquidation preference of the company preferred securities offered pursuant to this prospectus is $1,500,000,000. UBS Preferred Funding Company has the power to create and issue additional preferred limited liability company interests (i) that are junior to the company preferred securities as to payment of dividends and payments of amounts upon dissolution, liquidation or winding up of UBS Preferred Funding Company ("company junior securities") or (ii) that are on a parity with the company preferred securities as to those payments ("company parity preferred securities"). As long as any company preferred securities remain outstanding, no company parity preferred securities may be issued unless the holders of at least 66 2/3% of the outstanding company preferred securities and company parity preferred securities, if any (based on the aggregate liquidation preference), voting together as a single class, approve or unless the UBS AG subordinated guarantee is amended so that such company parity preferred securities benefit from the UBS AG subordinated guarantee in the same manner as the company preferred securities without any adverse effect on the holders of company preferred securities. See "--Voting Rights." The LLC Agreement of UBS Preferred Funding Company will preclude UBS Preferred Funding Company from issuing, without the consent of each holder of company preferred securities, any company parity preferred securities or any other classes or series of equity securities that are senior to the company preferred securities as to dividend rights or rights upon dissolution, liquidation or winding up of UBS Preferred Funding Company. - -------------------------------------------------------------------------------- 171 173 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- DIVIDENDS GENERAL Dividends on the company preferred securities will be payable from the date of initial issuance on a noncumulative basis, semi-annually in arrears on April -- and October -- of each year through October 2010 and thereafter quarterly in arrears on January --, April --, July -- and October -- each year (each a "dividend payment date") for the dividend period then ending, but only if UBS Preferred Funding Company has legally available funds for such purpose and satisfies the other qualifications described below. Each period from and including a dividend payment date or the date of initial issuance, as applicable, to but not including the next dividend payment date is a "dividend period". Dividends will be payable on the liquidation preference: - for each dividend period through the dividend period ending on the dividend payment date in October 2010, at a fixed rate per annum equal to --% (calculated on the basis of a year of twelve 30-day months), and - for each dividend period commencing on such dividend payment date and thereafter, at a floating rate per annum equal to --% above three-month LIBOR (calculated on the basis of the actual number of days elapsed in a 360-day year). Dividends will be mandatorily due and payable on a dividend payment date with respect to the related dividend period and special dividends will be mandatorily due and payable on other dates in the circumstances described under "--Mandatory Dividends," except that dividends will never be mandatorily due and payable or be paid when the capital limitation (described below under "--Capital Limitation") applies. If dividends are neither mandatorily due and payable on a dividend payment date nor prohibited by application of the capital limitation, then: - payment of dividends on the company preferred securities will be limited by UBS AG's available distributable profits (see "--Distributable Profits Limitation"), and - if UBS AG delivers, on or before the tenth business day immediately preceding the dividend payment date, an instruction (a "no dividend instruction") to UBS Preferred Funding Company not to pay dividends on that dividend payment date or to pay less than full dividends on that dividend payment date, dividends payable on the related dividend payment date will be limited as provided in the no dividend instruction (see "--No Dividend Instruction"). If any dividends will be payable on the company preferred securities on a day that is not a business day, those dividends will instead be paid on the next business day. No interest or other payment will be due as a result of any such adjustment. LIBOR, with respect to a determination date (as defined below), means the rate (expressed as a percentage per annum) for deposits in U.S. dollars for a three-month period commencing on the second London banking day (as defined below) immediately following that determination date that appears on Telerate Page 3750 (as defined below) as of 11:00 a.m. (London time) on that determination date. If such rate does not appear on Telerate Page 3750, LIBOR will be determined on the basis of the rates which deposits in U.S. dollars for a three-month period commencing on the second London banking day immediately following that determination date and in a principal amount of not less than $1,000,000 are offered to prime banks in the London interbank market by four major banks in the London interbank market selected by the calculation agent (as defined below), after consultation with UBS Preferred Funding Company, at approximately 11:00 a.m., London time, on that determination date. The calculation agent will request the principal London office of each of such banks to provide a quotation at its rate. If at least two such quotations are provided, LIBOR with respect to that determination date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, LIBOR with respect to that determination date will be the arithmetic mean of the rates - -------------------------------------------------------------------------------- 172 174 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- quoted by three major money center banks in New York City selected by the calculation agent, after consultation with UBS Preferred Funding Company, at approximately 11:00 a.m., New York City time, on that determination date for loans in U.S. dollars to leading European banks for a three-month period commencing on the second London banking day immediately following that determination date and in a principal amount of not less than $1,000,000. However, if the banks selected by the calculation agent to provide quotations are not quoting as described in this paragraph, LIBOR for the applicable period will be the same as LIBOR as determined on the previous determination date. As used in this prospectus: "calculation agent" means the London branch of UBS AG. "determination date" for a dividend period or interest period (as applicable) means two London banking days preceding the first day of that dividend period or interest period (as applicable). "London banking day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "Telerate Page 3750" means the display designated as "Page 3750" on the Bridge/Telerate Service (or such other page as may replace Page 3750) on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits. All percentages resulting from any calculations on the company preferred securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). MANDATORY DIVIDENDS UBS Preferred Funding Company will be required to pay dividends on the company preferred securities in three circumstances, as follows: (i) If UBS AG declares or pays dividends or makes any other payment or distribution on any UBS AG junior obligations, and provided that the capital limitation does not apply, then UBS Preferred Funding Company will be required to pay full dividends on the company preferred securities during the one-year period beginning on and including the earlier of the date on which such dividend was declared or the date on which such dividend or other payment was made. (ii) If UBS AG or any of its subsidiaries redeems, repurchases or otherwise acquires any UBS AG parity securities or UBS AG junior obligations for any consideration, except by conversion into or exchange for shares of UBS AG or UBS AG junior obligations and except as described below (and provided that the capital limitation does not apply), then UBS Preferred Funding Company will be required to pay dividends on the company preferred securities during the one-year period beginning on and including the date on which such redemption, repurchase or other acquisition occurred. (iii) If (x) UBS AG or any of its subsidiaries pays any dividends or makes any other payment or distribution on any UBS AG parity securities on any date and (y) during the relevant period (as defined below) ending on and including that date there occurred a dividend payment date as to which UBS Preferred Funding Company paid no dividends or less than full dividends on the company preferred securities, and provided that the capital limitation does not apply, then on that date UBS Preferred Funding Company will be required to pay a special dividend on - -------------------------------------------------------------------------------- 173 175 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- the company preferred securities. The special dividend will be payable on that date whether or not that date is otherwise a dividend payment date and, if it is a dividend payment date, will be in addition to any other dividends required to be paid on that dividend payment date. The special dividend will be in an amount that, when taken together with dividends previously paid on the company preferred securities during the relevant period, represents the same proportion of full dividends on the company preferred securities for all dividend payment dates during the relevant period that the dividend on UBS AG parity securities paid during that relevant period bears to full dividends on such UBS AG parity securities for that relevant period. Notwithstanding paragraph (ii) above, UBS Preferred Funding Company will not be required to pay dividends solely as a result of: - repurchases, redemptions or other acquisitions of UBS AG parity securities or UBS AG junior obligations in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or shareholder share purchase plan or in connection with the issuance of UBS AG parity securities or UBS AG junior obligations (or securities convertible into or exercisable for such UBS AG parity securities or UBS AG junior obligations) as consideration in an acquisition transaction, - market-making in the UBS AG parity securities or UBS AG junior obligations as part of the securities business of UBS AG or any of its subsidiaries, - the purchase of fractional interests in UBS AG parity securities or UBS AG junior obligations pursuant to the conversion or exchange provisions of such UBS AG parity securities or UBS AG junior obligations or the security being converted or exchanged, - any declaration of a dividend in connection with any shareholder's rights plan, or the issuance of rights, shares or other property under any shareholder's rights plan, or the redemption or repurchase of rights pursuant to any such plan, or - any dividend in the form of shares, warrants, options or other rights where the dividend shares or the shares issuable upon exercise of such warrants, options or other rights are the same shares as that on which the dividend is being paid or ranks equally with or junior to such shares. Any dividend payment date or other date on which dividends on the company preferred securities are required to be paid as described in clause (i), (ii) or (iii) of the second paragraph above is a "mandatory dividend payment date." The amount of dividends required to be paid on any mandatory dividend payment date (after giving effect to the capital limitation, if applicable) is called the "mandatory dividend payment amount." If a dividend payment date or other date is a mandatory dividend payment date, UBS Preferred Funding Company will be required to pay the mandatory dividend payment amount as dividends on that date whether or not there are available distributable profits and whether or not interest is paid on the subordinated notes. For purposes of this prospectus: "UBS AG junior obligations" means (i) ordinary shares of UBS AG, (ii) each class of preferred or preference shares or similar securities of UBS AG that ranks junior to the most senior ranking preferred or preference shares or similar securities of UBS AG, and (iii) any indebtedness, guarantee or support agreement or similar undertaking of UBS AG in respect of any subsidiary securities that rank junior to the UBS AG subordinated guarantee. - -------------------------------------------------------------------------------- 174 176 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- "UBS AG parity securities" means (i) each class of preferred or preference shares or similar securities of UBS AG that ranks equally with the most senior ranking preferred or preference shares or similar securities of UBS AG and (ii) any securities issued by any subsidiaries of UBS AG and entitled to the benefit of any guarantee or support agreement or similar undertaking of UBS AG that ranks equally with the UBS AG subordinated guarantee. "relevant period" means (i) in the case of UBS AG parity securities that pay dividends less frequently than semi-annually, one year and (ii) in the case of UBS AG parity securities that pay dividends semi-annually or more frequently than semi-annually, six months (in each case ending on or including the date on which the related dividend on a parity security is paid but not including the corresponding day in the month that is twelve or six months prior thereto). CAPITAL LIMITATION The prohibition on the payment of dividends on the company preferred securities as described below is called the "capital limitation." Unless the Swiss Federal Banking Commission expressly permits otherwise, UBS Preferred Funding Company will not pay dividends on the company preferred securities on any dividend payment date (whether or not it is a mandatory dividend payment date) if on such date UBS AG is not in compliance, or because of a distribution by UBS AG or any of its subsidiaries of profits of UBS AG (including a payment of dividends on the company preferred securities) would not be in compliance, with the Swiss Federal Banking Commission's minimum capital adequacy requirements applicable to UBS AG as then in effect. For a discussion of UBS's capital resources relative to applicable guidelines, see "UBS--Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Resources." DISTRIBUTABLE PROFITS LIMITATION The limitation or prohibition on the payment of dividends on the company preferred securities as described below is called the "distributable profits limitation." The distributable profits limitation will not limit or prohibit payment of mandatory dividends on a mandatory dividend payment date. The effect of the distributable profits limitation is to limit the amount of non-mandatory dividends that UBS Preferred Funding Company may pay on the company preferred securities to the amount of dividends that UBS AG would have been legally able to pay on such securities had they been issued directly by UBS AG as non-cumulative preference shares of UBS AG. On or before the dividend payment date in April of each year, UBS AG will deliver a certificate to UBS Preferred Funding Company (a "distributable profits limitation certificate") specifying: - the distributable profits (as defined below) of UBS AG for the financial year ending on the preceding December 31, and - the available distributable profits (as defined below) for payment of dividends on the company preferred securities on the dividend payment dates in the then current year. Unless UBS Preferred Funding Company is required to pay mandatory dividends: - the aggregate amount of dividends on the company preferred securities that UBS Preferred Funding Company may pay on the dividend payment date in April of the current year may not exceed the lesser of full dividends and the available distributable profits set forth in such distributable profits limitation certificate, and - the aggregate amount of dividends on the company preferred securities that UBS Preferred Funding Company may pay on any subsequent dividend payment date in the current year (or in January of the following year in the case of dividend payment dates occurring after October - -------------------------------------------------------------------------------- 175 177 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- 2010) may not exceed the lesser of full dividends and the remaining amount of such available distributable profits (after giving effect to the payment of dividends pursuant to this bullet point or the bullet point immediately above). For purposes of this prospectus: "distributable profits" means, for any financial year of UBS AG, profit that may be distributed in accordance with Swiss law then applicable. Currently, for any financial year of UBS AG, distributable profits are equal to profit brought forward, plus profit for the period, minus appropriation to general statutory reserve, plus other reserves, each as shown in the audited unconsolidated balance sheet and statement of appropriation of retained earnings of UBS AG and as determined in accordance with accounting standards applicable under Swiss law. The "appropriation to general statutory reserve" is equal to up to 5% of annual profit to the extent the general reserves of UBS AG do not equal 20% of the paid-in share capital plus 10% of the amount distributed as a dividend from profit for the period in excess of 5% of the par value of the UBS common shares. UBS AG's distributable profits for 1999 were approximately CHF 12 billion. "available distributable profits" means, for any financial year of UBS AG: - if there are no UBS AG parity securities outstanding, distributable profits for the immediately preceding financial year of UBS AG, and - if there are UBS AG parity securities outstanding, then an amount determined as the product of: (x) distributable profits for the immediately preceding financial year of UBS AG, and (y) a ratio (I) the numerator of which is the aggregate amount of full dividends on the company preferred securities to be paid on the dividend payment dates that occur during the then current financial year (but excluding dividends paid on January of the current year and including dividends to be paid on January of the following year, in the case of calculations occurring after October 2010) and (II) the denominator of which is equal to the amount determined pursuant to clause (I) plus the aggregate amount of full dividends on the UBS AG parity securities to be paid on dividend payment dates which occur during the then current financial year. NO DIVIDEND INSTRUCTION Except for the mandatory dividend payment amounts required to be paid on mandatory dividend payment dates: - dividends on the company preferred securities will not be payable on a dividend payment date if, on or before the tenth business day immediately preceding such dividend payment date, UBS AG delivers a no dividend instruction to UBS Preferred Funding Company instructing it not to pay dividends on that dividend payment date, and - if, on or before the tenth business day immediately preceding such dividend payment date, UBS AG delivers a no dividend instruction to UBS Preferred Funding Company limiting but not prohibiting the payment of dividends on such dividend payment date, dividends on the company preferred securities will be payable on that dividend payment date only to the extent permitted by such no dividend instruction. If a no dividend instruction is given, then UBS Preferred Funding Company must promptly give notice to the holders of company preferred securities in the manner described under "--Notices" of the fact - -------------------------------------------------------------------------------- 176 178 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- that it has received a no dividend instruction and the amount of dividends, if any, that will be paid on the related dividend payment date. ADDITIONAL AMOUNTS If UBS Preferred Funding Company or UBS Preferred Funding Trust is required to withhold any taxes, duties or other governmental charges with respect to any dividend payment on the trust preferred securities or the company preferred securities, UBS Preferred Funding Company will be required to pay, as additional amounts included in the dividend payment (and UBS AG will be required to include in any related payment made by it under the UBS AG subordinated guarantee), an amount sufficient that the net amount received by the holder of company preferred securities or trust preferred securities, as applicable, after the withholding, will not be less than the dividend payment amount. However, UBS Preferred Funding Company will not be required to pay any such additional amounts to the extent that the taxes, duties or other governmental charges are imposed or levied by Switzerland or the Cayman Islands because the holder or beneficial owner of trust preferred securities or company preferred securities: - has some connection with Switzerland or the Cayman Islands, as applicable, other than being a holder or beneficial owner of those trust preferred securities or company preferred securities, or - has not made a declaration of non-residence in, or other lack of connection with, Switzerland or the Cayman Islands, as applicable, or any similar claim for exemption, if UBS Preferred Funding Company has given the beneficial owner of those trust preferred securities or company preferred securities or its nominee at least 60 days' prior notice of an opportunity to make the declaration or claim. RANKING AND LIQUIDATION PREFERENCE The company preferred securities ordinarily will rank senior to the company common securities as to the payment of dividends. However, UBS AG has the right to shift the dividend preference of the company preferred securities to the company common securities on any dividend payment date to the extent that the mandatory dividend payment amount then required to be paid as dividends on the company preferred securities (if any) is less than full dividends on the company preferred securities. If UBS AG shifts the dividend preference to the company common securities, the interest payment received by UBS Preferred Funding Company on the subordinated notes will be returned as dividends to UBS AG, as the holder of company common securities, before any dividends are paid on the company preferred securities. As long as any company preferred securities are outstanding, UBS AG will agree in UBS Preferred Funding Company's LLC Agreement that it will take no voluntary action to cause UBS Preferred Funding Company to dissolve or liquidate unless UBS AG also liquidates. UBS Preferred Funding Company's LLC Agreement will provide that UBS Preferred Funding Company will be liquidated if UBS AG is liquidated. If UBS Preferred Funding Company dissolves, liquidates or winds up, then after the claims of any creditors of UBS Preferred Funding Company are satisfied, the holders of company preferred securities will be entitled to receive, before any distribution of assets is made to the holders of company common securities or any other class of shares ranking junior to the company preferred securities upon liquidation, liquidating distributions in respect of the company preferred securities in the amount of: - the liquidation preference of the company preferred securities, plus - an amount equal to unpaid dividends, if any, on the company preferred securities with respect to the current dividend period accrued on a daily basis to the date of liquidation, plus - -------------------------------------------------------------------------------- 177 179 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- - an amount equal to unpaid definitive dividends for any prior dividend period, without interest and without accumulation of unpaid nondefinitive dividends for any prior dividend period. For purposes of this prospectus: "definitive dividends" means, as to a dividend payment date and related dividend period, dividends that are due and payable because (i) they are not limited by the capital limitation and (ii) either (x) they are mandatory dividends or (y) a no dividend instruction was not delivered and they are not limited by the distributable profit limitation. "nondefinitive dividends" means, as to a dividend payment date and related dividend period, dividends that are not definitive dividends. If UBS AG is liquidated, whether voluntarily or involuntarily, (i) UBS Preferred Funding Company will be liquidated and (ii) under the UBS AG Subordinated Guarantee Agreement, the holders of company preferred securities (whether through UBS Preferred Funding Trust or as direct holders who have withdrawn their company preferred securities from UBS Preferred Funding Trust) will have a claim entitling them to substantially the same liquidating distributions in the liquidation of UBS AG that they would have been entitled to if they had purchased preferred shares of UBS AG having an aggregate liquidation preference equal to the aggregate liquidation preference of the company preferred securities and bearing dividends at the rate of dividends applicable to the company preferred securities. The UBS AG Subordinated Guarantee Agreement and UBS Preferred Funding Company's LLC Agreement, taken together, will provide that the holders of company preferred securities may not receive liquidating distributions in a liquidation of UBS Preferred Funding Company and payments under the UBS AG subordinated guarantee that, taken together, exceed the liquidating distributions to which they would have been entitled had they instead owned preferred shares of UBS AG with equivalent terms as described above. VOTING RIGHTS Except as expressly required by applicable law, or except as indicated below, the holders of company preferred securities will not be entitled to vote. If the holders of company preferred securities are entitled to vote as indicated below, each $1,000 liquidation preference of the company preferred securities will be entitled to one vote on matters on which the holders of company preferred securities are entitled to vote. If at any time the aggregate of unpaid dividends equals or exceeds an amount equal to three semi-annual dividend payments, the holders of company preferred securities and any company parity preferred securities, voting together as a single class, will have the exclusive right to elect two additional directors of their choosing. Holders of a majority (based on the aggregate liquidation preference) of the company preferred securities and any company parity preferred securities may exercise this right by written consent or at a meeting of such holders called for such purpose. This right will continue either until all unpaid dividends have been paid in full or until full dividends have been paid on the company preferred securities for two consecutive dividend periods. While this right continues, any vacancy in the office of the additional directors may be filled only by the holders of company preferred securities and company parity preferred securities voting as described above. UBS Preferred Funding Company's LLC Agreement will provide that a meeting will be called at the request of holders of 25% (based on the aggregate liquidation preference) of the company preferred securities and any company parity preferred securities. As long as any company preferred securities are outstanding, UBS Preferred Funding Company may not, without the consent or vote of holders of at least 66 2/3% of the outstanding company preferred - -------------------------------------------------------------------------------- 178 180 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- securities and company parity preferred securities, if any (based on the aggregate liquidation preference), voting together as a single class: - change or remove any provision of UBS Preferred Funding Company's LLC Agreement (including the terms of the company preferred securities), issue any company parity preferred securities, redeem or repurchase any company common securities, or consent to a change in the booking location of the issuance of the subordinated notes to a branch or other office of UBS AG other than the Cayman Islands branch of UBS AG, in each case, if such action would materially and adversely affect the rights, preferences, powers or privileges of the company preferred securities and such company parity preferred securities, - to the fullest extent permitted by law, liquidate, dissolve or terminate UBS Preferred Funding Company without the concurrent liquidation of UBS AG, - amend or modify UBS Preferred Funding Company's investment policies, or - merge, convert, consolidate, reorganize or effect any other business combination involving UBS Preferred Funding Company, unless the resulting entity will have no class or series of equity securities either authorized or outstanding that ranks ahead of the company preferred securities as to dividends or as to the distribution of assets upon liquidation, dissolution or winding up, except the same number of shares of such equity securities with the same preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions or redemption as the shares of equity securities of UBS Preferred Funding Company that are authorized and outstanding immediately prior to such transaction, and each holder of company preferred securities immediately prior to such transaction shall receive securities with the same preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions or redemption of the resulting entity as the company preferred securities held by such holder immediately prior to the transaction. As long as any company preferred securities are outstanding, UBS Preferred Funding Company may not, without the consent of the holders of each outstanding company preferred security, authorize, create or increase the authorized amount of, or issue any class or series of, any equity securities of UBS Preferred Funding Company, or any warrants, options or other rights convertible or exchangeable into any class or series of any equity securities of UBS Preferred Funding Company, ranking prior to the company preferred securities, either as to dividend rights or rights on dissolution, liquidation or winding up of UBS Preferred Funding Company. Notwithstanding any of the foregoing, without consent of any holder of company preferred securities, UBS AG may amend or supplement the UBS AG Subordinated Guarantee Agreement to correct or supplement any provision in the UBS AG Subordinated Guarantee Agreement which may be defective or inconsistent with any other provision therein, or to make any other provisions with respect to matters or questions arising under the UBS AG Subordinated Guarantee Agreement, so long as any such action shall not materially adversely affect the interests of the holders of company preferred securities. See "Description of UBS AG Subordinated Guarantee--Amendments." Notwithstanding the foregoing, without the consent of any holder of company preferred securities, UBS AG may amend or supplement the UBS Preferred Funding Company's LLC Agreement: - to correct or supplement any provision in the UBS Preferred Funding Company's LLC Agreement which may be defective or inconsistent with any other provision therein, or to make any other provisions with respect to matters or questions arising under the UBS Preferred Funding Company's LLC Agreement, so long as any such action shall not materially adversely affect the interests of the holders of company preferred securities, or - -------------------------------------------------------------------------------- 179 181 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- - to cure any ambiguity or correct any mistake. REDEMPTION The company preferred securities may not be redeemed before the dividend payment date scheduled to occur in October 2010 unless a Tax Event, an Investment Company Act Event or a Capital Event occurs, in which case UBS Preferred Funding Company may redeem the company preferred securities in whole (but not in part) at any time on not less than 30 nor more than 60 days' notice. On or after the dividend payment date regularly scheduled to occur in October 2010, UBS Preferred Funding Company may redeem the company preferred securities on any dividend payment date for cash, in whole or in part, on not less than 30 nor more than 60 days' notice. The redemption price for such redemptions on or after the regularly scheduled dividend payment date in October 2010 will be: - 100% of the liquidation preference of the company preferred securities being redeemed, plus - an amount equal to unpaid dividends, if any, on the company preferred securities with respect to the current dividend period (whether or not declared) accrued on a daily basis to the date fixed for redemption, plus - an amount equal to unpaid definitive dividends for any prior dividend period, without interest and without accumulation of unpaid nondefinitive dividends for any prior dividend period. UBS Preferred Funding Company will also have the right to redeem the company preferred securities in whole (but not in part) at any time prior to the dividend payment date regularly scheduled to occur in October 2010, upon the occurrence of a Tax Event, an Investment Company Act Event or a Capital Event. The redemption price for a redemption arising out of a Tax Event resulting from a Change in Tax Law (as defined below) and relating to the: - imposition of tax on UBS Preferred Funding Trust or UBS Funding Company, or - the imposition of withholding tax on UBS Preferred Funding Company's payment of dividends on the company preferred securities, on UBS Preferred Funding Trust's payment of dividends on the trust preferred securities, on UBS AG's payment of interest on the subordinated notes or on UBS AG's payment under the subordinated guarantee (which are the events described in clauses (A), (B) and (C) of the definition of "Tax Event") will be the redemption price described above for optional redemptions. Otherwise, the redemption price for such redemptions will be: - the Make Whole Amount (as defined below), plus - an amount equal to unpaid dividends, if any, on the company preferred securities with respect to the current dividend period (whether or not declared) accrued on a daily basis to the date fixed for redemption, plus - an amount equal to unpaid definitive dividends for any prior dividend period, without interest and without accumulation of unpaid nondefinitive dividends for any prior dividend period. UBS Preferred Funding Company will have until the dividend payment date regularly scheduled to occur in October 2010 after the occurrence of a Tax Event, an Investment Company Act Event or a Capital Event to exercise its right to redeem the company preferred securities. Any redemption of the company preferred securities must comply with applicable regulatory requirements, including the prior approval of the Swiss Federal Banking Commission if then required under applicable guidelines or policies of the Swiss Federal Banking Commission. The Swiss Federal - -------------------------------------------------------------------------------- 180 182 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- Banking Commission in its discretion may impose conditions on its approval of any proposed redemption of the company preferred securities. If dividends on any company preferred securities are unpaid, no company preferred securities may be redeemed unless all outstanding company preferred securities are redeemed, and UBS Preferred Funding Company may not purchase or otherwise acquire any company preferred securities, except pursuant to a purchase or exchange offer made on the same terms to the holders of all outstanding company preferred securities. The company preferred securities will not be subject to any sinking fund or mandatory redemption and will not be convertible into any other securities of UBS Preferred Funding Company or any securities of UBS AG. As long as any company preferred securities are outstanding, other company parity preferred securities may not be redeemed or repurchased unless UBS Preferred Funding Company concurrently redeems an approximately equal proportion of the aggregate liquidation preference of the outstanding company preferred securities or each rating agency then rating the company preferred securities informs UBS Preferred Funding Company in writing that the redemption or repurchase of such company parity preferred securities would not result in a reduction or withdrawal of the rating then assigned by that rating agency to the company preferred securities. If fewer than all outstanding company preferred securities are to be redeemed, the amount of the company preferred securities to be redeemed will be determined by the board of directors of UBS Preferred Funding Company, and the securities to be redeemed will be determined by lot or pro rata as the board of directors in its sole discretion determines to be equitable. UBS Preferred Funding Company will promptly notify the registrar and transfer agent for the company preferred securities in writing of the securities selected for redemption and, in the case of any partial redemption, the liquidation preference to be redeemed. Any company preferred securities redeemed will be canceled. There will be no prescription period in respect of uncollected dividends on the company preferred securities. As used in this prospectus: "administrative action" means any judicial decision, official administrative pronouncement, published or private ruling, regulatory procedure, notice or announcement (including any notice or announcement of intent to adopt such procedures or regulations) by any legislative body, court, governmental authority or regulatory body having appropriate jurisdiction. "Capital Event" means the determination by UBS AG after consultation with the Swiss Federal Banking Commission that the company preferred securities cannot be included in calculating the Tier 1 capital of UBS AG on a consolidated basis. "Change in Tax Law" means the receipt by UBS AG of an opinion of a nationally recognized law firm or other tax advisor (which may be an accounting firm) in Switzerland, the United States or the Cayman Islands, as appropriate, experienced in such matters to the effect that an event of the type described in clause (A), (B) or (C) of the definition of "Tax Event" has occurred or will occur as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or treaties (or any regulations under any laws or treaties) of the United States, Switzerland or the Cayman Islands or any political subdivision or taxing authority of or in the United States, Switzerland or the Cayman Islands affecting taxation or (ii) any administrative action or any amendment to, clarification of, or change in the official position of or UBS AG interpretation of any administrative action or any interpretation or pronouncement that provides for a position with respect to any administrative action that differs from the previously generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, regardless of the manner in which such amendment, clarification, change, - -------------------------------------------------------------------------------- 181 183 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- interpretation or pronouncement is made known, which amendment, clarification, change or administrative action is effective or which interpretation or pronouncement is announced on or after the date of issuance of the company preferred securities. "Investment Company Act Event" means the receipt by UBS AG of an opinion of a nationally recognized law firm in the United States experienced in such matters to the effect that there is more than an insubstantial risk that UBS Preferred Funding Company or UBS Preferred Funding Trust is an "investment company" within the meaning of the Investment Company Act of 1940. "Make Whole Amount" as applied to a redemption of the company preferred securities means the greater of (i) 100% of the liquidation preference of the company preferred securities and (ii) as determined by a quotation agent (as defined below), the sum of the present value of the liquidation preference of the company preferred securities together with the present values of scheduled payments of dividends accrued from the date of redemption to the dividend payment date in October 2010 (the "remaining life"), in each case discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the adjusted treasury rate. For purposes of determining the Make Whole Amount: "adjusted treasury rate" means, with respect to any redemption date, the treasury rate plus .75. "comparable treasury issue" means with respect to any redemption date the United States Treasury security selected by the quotation agent as having a maturity comparable to the remaining life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining life. If no United States Treasury security has a maturity that is within a period from three months before to three months after the interest payment date and dividend payment date in October 2010, the two most closely corresponding United States Treasury securities will be used as the comparable treasury issue, and the treasury rate will be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "comparable treasury price" means (A) the average of five reference treasury dealer quotations for such redemption date, after excluding the highest and lowest of such reference treasury dealer quotations, or (B) if the quotation agent obtains fewer than five such reference treasury dealer quotations, the average of all such quotations. "quotation agent" means UBS Warburg LLC and its successors, except that if UBS Warburg LLC ceases to be a primary U.S. Government securities dealer in New York City (a "primary treasury dealer"), UBS Preferred Funding Company will designate another primary treasury dealer. "reference treasury dealer" means (i) the quotation agent and (ii) any other primary treasury dealer selected by the quotation agent after consultation with UBS Preferred Funding Company. "reference treasury dealer quotations" means, with respect to each reference treasury dealer and any redemption date, the average, as determined by the quotation agent, of the bid and asked prices for the comparable treasury issue (expressed in each case as a percentage of its principal amount) quoted in writing to the quotation agent by such reference treasury dealer at 5:00 p.m., New York City time, on the third business day preceding such redemption date. - -------------------------------------------------------------------------------- 182 184 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- "treasury rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the redemption date, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the remaining life (or, if no maturity is within three months before or after the remaining life, yields for the two published maturities most closely corresponding to the remaining life will be determined and the treasury rate will be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the comparable treasury issue, calculated using a price for the comparable treasury issue (expressed as a percentage of its principal amount) equal to the comparable treasury price for such redemption date. The treasury rate will be calculated on the third business day preceding the redemption date. "Tax Event" means the receipt by UBS AG of an opinion of a nationally recognized law firm or other tax advisor (which may be an accounting firm) in Switzerland or the United States, as appropriate, experienced in such matters to the effect that, as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or treaties (or any regulations under any laws or treaties) of the United States, Switzerland or the Cayman Islands or any political subdivision or taxing authority of or in the United States, Switzerland or the Cayman Islands affecting taxation or (ii) any administrative action or any amendment to, clarification of, or change in the official position or the interpretation of any administrative action or any interpretation or pronouncement that provides for a position with respect to any administrative action that differs from the theretofore generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, irrespective of the manner in which such amendment, clarification, change, interpretation or pronouncement is made known, which amendment, clarification, change or administrative action is effective or which interpretation pronouncement or decision is announced on or after the date of issuance of the company preferred securities, there is more than an insubstantial risk that (A) UBS Preferred Funding Company or UBS Preferred Funding Trust is or will be subject to more than a de minimis amount of additional taxes, duties or other governmental charges, (B) UBS AG is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to payments of interest or principal on the subordinated notes and with respect to any payments on the trust preferred securities, (C) UBS Preferred Funding Company is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to payments of dividends on the company preferred securities or UBS Preferred Funding Trust is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to distributions on the trust preferred securities, or (D) the treatment of any of UBS Preferred Funding Company's items of income, gain, loss, deduction or expense, or the treatment of any item of income, gain, loss, deduction or expense of UBS AG related to the subordinated notes or its ownership of UBS Preferred Funding Company, in each case as reflected on the tax returns (including estimated returns) filed (or to be filed) by UBS Preferred Funding Company or UBS AG, will not be respected by a taxing authority, as a result of which UBS Preferred Funding Company or UBS AG is or will be subject to more than a de minimis amount of additional taxes, duties or other governmental charges or civil liabilities, the effect of which cannot be avoided by UBS Preferred Funding Company or UBS AG taking reasonable measures available to it without any adverse effect on or material cost to UBS AG or UBS Preferred Funding Company (as determined by UBS AG in its sole discretion). - -------------------------------------------------------------------------------- 183 185 DESCRIPTION OF COMPANY PREFERRED SECURITIES - -------------------------------------------------------------------------------- REGISTRAR AND TRANSFER AGENT Wilmington Trust Company, or any other entity that UBS AG designates, will act as registrar and transfer agent for the company preferred securities. Registration of transfers of the company preferred securities will be effected without charge by or on behalf of UBS Preferred Funding Company, but upon payment of any tax or other governmental charges that may be imposed in connection with any transfer or exchange. UBS Preferred Funding Company will not be required to register or cause to be registered the transfer of the company preferred securities after such company preferred securities have been called for redemption. The LLC Agreement of UBS Preferred Funding Company provides that, in the event of a partial redemption of the company preferred securities that would result in a delisting of the trust preferred securities from any securities exchange on which the trust preferred securities are then listed, UBS Preferred Funding Company will redeem the company preferred securities in whole. NOTICES Notices to the holders of company preferred securities will be mailed by first-class mail, postage prepaid, to the holders' addresses appearing in UBS Preferred Funding Company's records. GOVERNING LAW The LLC Agreement of UBS Preferred Funding Company and the company preferred securities are governed by the laws of the State of Delaware. - -------------------------------------------------------------------------------- 184 186 - -------------------------------------------------------------------------------- Book-entry Issuance of Trust Preferred Securities The trust preferred securities will initially be issued to investors only in book-entry form. The total aggregate amount of the trust preferred securities will be represented by a permanent global security in fully registered form (a "global certificate") and deposited with a custodian for, and registered in the name of The Depository Trust Company ("DTC") or its nominee. The global certificate will initially be deposited with Wilmington Trust Company, as the custodian for DTC, and registered in the name of Cede & Co., as the nominee of DTC. Except as described below, the global certificate may be transferred, in whole and not in part, only to another nominee of DTC or a successor of DTC or its nominee. Beneficial interests in the global certificate may not be exchanged for the trust preferred securities in certificated form except in the limited circumstances described below. Persons that acquire beneficial ownership interests in the global certificate will hold their interests through either (i) DTC in the United States or (ii) Clearstream Banking or Euroclear System in Europe if such persons are participants of systems, or indirectly through organizations that are participants in those systems. Clearstream and Euroclear will hold omnibus positions on behalf of their participants through customers' securities accounts in Clearstream's and Euroclear's names on the books of their respective depositaries, which in turn will hold those positions in customers' securities accounts in the depositaries' names on the books of DTC. Unless and until certificated securities are issued, the only "holder" of trust preferred securities will be Cede & Co., as nominee of DTC, or the nominee of a successor depositary. Beneficial owners will be permitted to exercise their rights only indirectly through DTC, Clearstream, Euroclear and their participants. WITHDRAWAL OF THE COMPANY PREFERRED SECURITIES REPRESENTED BY THE TRUST PREFERRED SECURITIES Any beneficial owner of the trust preferred securities may withdraw and hold directly a corresponding amount of the company preferred securities as described under "Description of Trust Preferred Securities--Withdrawal of the Company Preferred Securities." Within a reasonable period after such request has been properly made, the trustee of UBS Preferred Funding Trust will instruct DTC to reduce the number of trust preferred securities represented by the global certificate by the amount of the company preferred securities to be so withdrawn by the withdrawing owner. The company preferred securities that are withdrawn will be issued only in definitive, fully-registered form and will not be eligible to be held through DTC, Euroclear or Clearstream, and the holders of such company preferred securities will receive an annual Form K-1 instead of the Form 1099 that is received by the holders of trust preferred securities. See "Certain U.S. Tax Considerations--Information Reporting and Backup Withholding Tax." Any holder of company preferred securities may redeposit, the company preferred securities as described under "Description of Trust Preferred Securities--Withdrawal of the Company Preferred Securities." Within a reasonable period after such deposit is properly made, the trustee of UBS Preferred Funding Trust will instruct DTC to increase the number of trust preferred securities represented by the global certificate accordingly. THE DEPOSITORY TRUST COMPANY The Depository Trust Company, or DTC, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York - -------------------------------------------------------------------------------- 185 187 BOOK-ENTRY ISSUANCE OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds securities that its participants deposit with DTC. DTC also facilitates the settlement among its participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in its participants' accounts, eliminating the need for physical movement of securities certificates. Participants in DTC include Clearstream and Euroclear, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its participants and by the New York Stock Exchange, the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to DTC is also available to others, such as securities brokers and dealers, banks and trust companies, that clear through or maintain a custodial relationship with a DTC participant, either directly or indirectly. The rules applicable to DTC and its participants are on file with the SEC. In March 1999, DTC announced plans to merge with the National Securities Clearing Corporation, subject to regulatory approvals. Upon consummation of the merger, DTC is expected to be managed as a separate operating subsidiary. CLEARSTREAM BANKING Clearstream Banking societe anonyme, or Clearstream, is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participating organizations and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants, eliminating the need for physical movement of certificates. Transactions may be settled in Clearstream in any of 28 currencies, including United States dollars. Clearstream provides to its participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Monetary Institute. Clearstream participants are recognized financial institutions around the world, including securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant, either directly or indirectly. EUROCLEAR SYSTEM Euroclear System, or Euroclear, was created in 1968 to hold securities for its participants and to clear and settle transactions between its participants through simultaneous electronic book-entry delivery against payment, eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Transactions may be settled in any of 32 currencies, including United States dollars. Euroclear includes various other services, including securities lending and borrowing and interfaces with domestic markets in several countries generally similar to the arrangements for cross-market transfers with DTC described in this prospectus. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New York, the Euroclear Operator, under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the cooperative. All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the cooperative. The cooperative establishes policy for Euroclear on behalf of Euroclear participants. - -------------------------------------------------------------------------------- 186 188 BOOK-ENTRY ISSUANCE OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- Euroclear participants include banks, including central banks, securities brokers and dealers and other professional financial intermediaries. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly. The Euroclear Operator is the Belgian branch of a New York trust company that is a member bank of the Federal Reserve System. As such, it is regulated and examined by the Federal Reserve and the New York State Banking Department, as well as the Belgian Banking Commission. Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, collectively, the Euroclear Terms and Conditions, and applicable Belgian law. The Euroclear Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Euroclear Terms and Conditions only on behalf of Euroclear participants, and has no record of or relationship with persons holding through Euroclear participants. PARTICIPANTS AND BENEFICIAL OWNERS Purchases of the trust preferred securities within the DTC system must be made by or through DTC participants, which will receive a credit for the trust preferred securities on DTC's records and on the records of Clearstream or Euroclear, if applicable. The ownership interest of each actual purchaser of the trust preferred securities, which is that of a beneficial owner of an interest in a global certificate, is in turn to be recorded on the DTC participants' and indirect participants' records. Beneficial owners of interests in a global certificate will not receive written confirmation from DTC of their purchases, but beneficial owners of an interest in a global certificate are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the DTC participants or indirect participants through which the beneficial owners of an interest in a global certificate purchased their ownership interests in the trust preferred securities. Transfers of ownership interests in the trust preferred securities will be accomplished by entries made on the books of DTC participants and indirect participants acting on behalf of beneficial owners of an interest in a global certificate. Beneficial owners of interests in a global certificate will not receive certificates representing their ownership interests in the trust preferred securities, unless use of the book-entry system for the trust preferred securities is discontinued. TRANSFERS AMONG DTC, CLEARSTREAM AND EUROCLEAR Transfers between DTC participants will occur in accordance with the rules of DTC. Transfers between Clearstream and Euroclear participants will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream or Euroclear participants, on the other, will be effected in DTC in accordance with the rules of DTC on behalf of the relevant European international clearing system by the relevant European depositary. However, those cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in that system in accordance with its rules and procedures and within its established deadlines, European time. The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to the relevant European depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment - -------------------------------------------------------------------------------- 187 189 BOOK-ENTRY ISSUANCE OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- in accordance with normal procedures for same-day funds settlement applicable to DTC. Clearstream and Euroclear participants may not deliver instructions directly to the European depositaries. Because of time zone differences, credits of the trust preferred securities received in Clearstream or Euroclear as a result of a transaction with a person that does not hold the trust preferred securities through Clearstream or Euroclear will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Those credits or any transactions in those securities settled during that processing will be reported to the relevant Euroclear or Clearstream participants on that business day. Cash received in Clearstream or Euroclear as a result of sales of the trust preferred securities by or through a Clearstream or Euroclear participant to a DTC participant will be received with value on the DTC settlement date, but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC. LIMITATIONS ON RESPONSIBILITIES OF DTC, CLEARSTREAM AND EUROCLEAR DTC, Clearstream and Euroclear have no knowledge of the actual beneficial owners of interests in a global certificate representing the trust preferred securities. DTC's records reflect only the identity of the DTC participants, including Clearstream and Euroclear, to whose accounts those trust preferred securities are credited, which may or may not be the beneficial owners of interests in a global certificate. Similarly, the records of Clearstream and Euroclear reflect only the identity of the Clearstream or Euroclear participants to whose accounts those trust preferred securities are credited, which also may or may not be the beneficial owners of interests in a global certificate. DTC, Clearstream and Euroclear participants and indirect participants will remain responsible for keeping account of their holdings on behalf of their customers. DTC'S PROCEDURES FOR NOTICES, VOTING AND PAYMENTS So long as DTC, or its nominee, is the registered owner or holder of a global certificate, DTC or that nominee, as the case may be, will be considered the sole owner or holder of trust preferred securities represented by the global certificate for all purposes under the Amended and Restated Trust Agreement. No beneficial owner of an interest in a global certificate will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Amended and Restated Trust Agreement. DTC has advised UBS AG, as provider of the UBS AG subordinated guarantee, that it will take any action permitted to be taken by a holder of trust preferred securities, including the presentation of the trust preferred securities for exchange as described below, only at the direction of one or more of its participants to whose account the DTC interests in the global certificates are credited and only in respect of that portion of the aggregate liquidation amount of the trust preferred securities as to which that participant or participants has or have given the direction. Conveyance of notices and other communications by DTC to its participants, by those participants to its indirect participants, and by participants and indirect participants to beneficial owners of interests in a global certificate will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. The trustee will send redemption notices in respect of the trust preferred securities held in book-entry form to Cede & Co., and will also give those notices in the manner indicated under "Description of Trust Preferred Securities--Notices." If less than all the trust preferred securities are being redeemed, DTC will determine the amount of the interest of each DTC participant to be redeemed in accordance with its procedures. - -------------------------------------------------------------------------------- 188 190 BOOK-ENTRY ISSUANCE OF TRUST PREFERRED SECURITIES - -------------------------------------------------------------------------------- Although voting with respect to the trust preferred securities is limited, in those cases where a vote is required, neither DTC nor Cede & Co. will itself consent or vote with respect to the trust preferred securities. Under its usual procedures, DTC will mail an Omnibus Proxy to UBS Preferred Funding Trust as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights of those participants to whose accounts the trust preferred securities are allocated on the record date identified in a listing attached to the Omnibus Proxy. Distributions on the trust preferred securities held in book-entry form will be made to DTC in immediately available funds. DTC's practice is to credit its participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on that payment date. Payments by DTC's participants and indirect participants to beneficial owners of interests in a global certificate will be governed by standing instructions and customary practices. Such payments will be the responsibility of those participants and indirect participants and not of DTC, UBS Preferred Funding Trust or UBS AG, as the guarantor, subject to any statutory or regulatory requirements that may be in effect from time to time. Payment of any dividends or other amounts to DTC is the responsibility of UBS Preferred Funding Trust, disbursement of such payments to participants is the responsibility of DTC, and disbursement of those payments to the beneficial owner of an interest in a global certificate is the responsibility of participants and indirect participants. Except as described in this prospectus, a beneficial owner of an interest in a global certificate will not be entitled to receive physical delivery of the trust preferred securities. Accordingly, each beneficial owner of an interest in a global certificate must rely on the procedures of DTC to exercise any rights under the trust preferred securities. TERMINATION OF AND CHANGES TO DEPOSITARY ARRANGEMENTS A global certificate is exchangeable for the trust preferred securities in registered certificated form if DTC: - notifies UBS Preferred Funding Trust that it is unwilling or unable to continue as depositary for the global certificates and UBS Preferred Funding Trust does not appoint a successor depositary, or - has ceased to be a clearing agency registered under the Securities Exchange Act of 1934. Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of interests in the global certificates among participants, none is under any obligation to perform or continue to perform those procedures, and those procedures may be discontinued at any time. Neither UBS AG nor UBS Preferred Funding Trust will have any responsibility for the performance by DTC, Clearstream, Euroclear or their participants or indirect participants under the rules and procedures governing them. DTC, Clearstream and Euroclear may discontinue providing their services as securities depositary with respect to the trust preferred securities at any time by giving notice to UBS Preferred Funding Trust. Under those circumstances, definitive trust preferred security certificates would be delivered as described under "Description of Trust Preferred Securities--Transfer and Issue of Definitive Trust Preferred Securities." LIMITATIONS ON RIGHTS RESULTING FROM BOOK-ENTRY FORM The laws of some jurisdictions require that certain purchasers of securities take physical delivery of securities in definitive form. These laws may impair the ability to transfer beneficial interests in the global trust preferred securities as represented by a global certificate. - -------------------------------------------------------------------------------- 189 191 - -------------------------------------------------------------------------------- Description of UBS AG Subordinated Guarantee At or prior to the issuance of the trust preferred securities and the company preferred securities, UBS AG and Wilmington Trust Company, as guarantee trustee, will execute the UBS AG Subordinated Guarantee Agreement. We will qualify the UBS AG Subordinated Guarantee Agreement as an indenture under the Trust Indenture Act. The terms of the UBS AG subordinated guarantee will include both those stated in the UBS AG Subordinated Guarantee Agreement and those made part of the UBS AG Subordinated Guarantee Agreement by the Trust Indenture Act. The following summary of the material terms and provisions of the UBS AG subordinated guarantee is not complete and is subject to, and qualified in its entirety by reference to, the UBS AG Subordinated Guarantee Agreement and the Trust Indenture Act. We have filed a copy of the UBS AG Subordinated Guarantee Agreement as an exhibit to the registration statement of which this prospectus is a part. GUARANTEED OBLIGATIONS In the UBS AG Subordinated Guarantee Agreement, UBS AG will unconditionally guarantee, on a subordinated basis, the payment by UBS Preferred Funding Company of the following, without duplication: - any dividends on the company preferred securities that are due and payable on any mandatory dividend payment date in an amount equal to the mandatory dividend payment; - any discretionary dividends on the company preferred securities that become definitive because UBS AG does not deliver a no dividend instruction; - the redemption price payable with respect to any company preferred securities called for redemption by UBS Preferred Funding Company; - the liquidating distribution on each company preferred security payable upon liquidation of UBS Preferred Funding Company; and - any additional amounts payable by UBS Preferred Funding Company as described under "Description of Company Preferred Securities--Additional Amounts". Subject to the subordination provisions described below, UBS AG will be obligated to make such payments as and when due, regardless of any defense, right of set-off or counterclaim that UBS Preferred Funding Company may have or assert, other than the defense of payment, and whether or not UBS Preferred Funding Company has legally available funds for the guaranteed payments. UBS AG's obligations under the UBS AG Subordinated Guarantee Agreement are several and independent of the obligations of UBS Preferred Funding Company with respect to the company preferred securities. See "Description of Company Preferred Securities--Dividends" for a description of circumstances when dividend on the company preferred securities are mandatory, "Description of Company Preferred Securities--Redemption" for a description of the company preferred securities' redemption provisions, and "Description of Company Preferred Securities--Ranking and Liquidation Preference" for a description of the liquidation claim to which the holders are entitled in a liquidation of UBS Preferred Funding Company. - -------------------------------------------------------------------------------- 190 192 DESCRIPTION OF UBS AG SUBORDINATED GUARANTEE - -------------------------------------------------------------------------------- SUBORDINATION The UBS AG subordinated guarantee is a general and unsecured obligation of UBS AG and, in liquidation of UBS AG, will rank, both as to payment and in liquidation: - subordinate and junior to all deposits and other liabilities (including those in respect of bonds, notes and debentures of UBS AG) that do not expressly rank equally with the obligations of UBS AG under the UBS AG Subordinated Guarantee Agreement, and - senior to the ordinary shares of UBS AG and any other securities or shares of UBS AG expressed to rank junior to the most senior preference shares of UBS AG (if any) from time to time outstanding. The foregoing liabilities that rank senior to the UBS AG subordinated guarantee are collectively called "UBS AG senior liabilities." Payments under the UBS AG subordinated guarantee (other than payments upon a winding-up or dissolution, by bankruptcy or otherwise, in Switzerland of UBS AG as provided below) are conditional upon UBS AG not being in default in the payment of UBS AG senior liabilities and being solvent at the time of payment. A report as to the insolvency of UBS AG by two persons, each being a managing director, director or other authorized officer or agent of UBS AG or employees of the independent accountants of UBS AG will, in the absence of manifest error be treated and accepted by UBS AG, the holders of company preferred securities and all other interested parties as correct and sufficient evidence thereof. If UBS AG is liquidated, whether voluntarily or involuntarily, (i) UBS Preferred Funding Company will be liquidated and (ii) under the UBS AG Subordinated Guarantee Agreement, the holders of company preferred securities (whether through UBS Preferred Funding Trust or as direct holders who have withdrawn their company preferred securities from UBS Preferred Funding Trust) will have a claim entitling them to substantially the same liquidating distributions in the liquidation of UBS AG that they would have been entitled to if they had purchased preferred shares of UBS AG having an aggregate liquidation preference equal to the aggregate liquidation preference of the company preferred securities and bearing dividends at the rate of dividends applicable to the company preferred securities. The UBS AG Subordinated Guarantee Agreement and UBS Preferred Funding Company's LLC Agreement, taken together, will provide that the holders of company preferred securities will not receive liquidating distributions in a liquidation of UBS Preferred Funding Company and payments under the UBS AG subordinated guarantee that, taken together, exceed the liquidating distributions to which they would have been entitled had they instead owned non-cumulative perpetual preferred shares of UBS AG with equivalent terms as described above. The subordination provisions set out above are irrevocable. UBS AG may not create or permit to exist any charge or other security interest over its assets to secure its obligations in respect of the UBS AG subordinated guarantee. The obligations of UBS AG in respect of the UBS AG subordinated guarantee are, prior to the winding up or dissolution of UBS AG, conditional upon UBS AG being solvent immediately before and after payment by the Cayman Islands branch. If this condition is not satisfied, any amounts that might otherwise have been allocated in or towards payment in respect of the UBS AG subordinated guarantee may be used to absorb losses of UBS AG. If a capital loss (as defined below) occurs, the board of directors of UBS AG is required by Article 725 paragraph 1 of the Swiss Code of Obligations to call a general meeting of the shareholders of UBS AG and propose at such meeting measures for a financial reorganization of UBS AG. Holders of trust preferred securities and company preferred securities will not have any right to attend or take any - -------------------------------------------------------------------------------- 191 193 DESCRIPTION OF UBS AG SUBORDINATED GUARANTEE - -------------------------------------------------------------------------------- action at any such meeting because they are not shareholders of UBS AG. Neither the calling of such a meeting nor the proposal of such financial organization will itself affect the obligations of UBS AG under the UBS AG Subordinated Guarantee Agreement. If at any time UBS AG's unconsolidated unsubordinated liabilities exceed its unconsolidated total assets (valued at the higher of their going-concern and their liquidation value), as calculated based on the most recent unconsolidated interim balance sheet of UBS AG, the board of directors of UBS AG is required by Article 725 paragraph 2 of the Swiss Code of Obligations to notify the competent court of such excess, unless unsubordinated creditors of UBS AG agree to subordinate their claims to the extent that such unsubordinated liabilities exceed such assets. Upon any such notification, such court must declare the bankruptcy of UBS AG in accordance with Article 725a paragraph 1 of the Swiss Code of Obligations and Article 35 paragraph 2 of the Swiss Banking Law. In the past, however, the Swiss Federal Banking Commission has usually exercised the broad discretion granted to it under Swiss banking law before the occurrence of such an excess when it has perceived the interests of creditors of a Swiss bank to be at risk. In such cases, the Swiss Federal Banking Commission has generally withdrawn the banking license of the affected bank, which has then been required to go into liquidation (pursuant to Article 23 quinquies of the Swiss Banking Law). As used in this prospectus: "assets" means the consolidated gross assets of UBS AG. A "capital loss" is deemed to occur if UBS AG's assets are less than the sum of (i) its liabilities and (ii) one-half of its share capital and statutory reserves, each as shown on and as calculated based on the latest published annual unconsolidated balance sheet of UBS AG. The sum of UBS AG's unconsolidated share capital and statutory reserves at 31 December 1999 was CHF 18,837 millions. "liabilities" means the consolidated gross liabilities of UBS AG, all as shown by the latest published audited consolidated balance sheet of UBS AG as adjusted for contingencies and for subsequent events, all valued in such manner as UBS AG or any liquidator (as the case may be) may determine and calculated in accordance with IAS. "solvent" means (i) UBS AG is able to pay its debts as they fall due and (ii) UBS AG's assets exceed its liabilities (other than its liabilities to persons who are not senior creditors). Subject to applicable law, no beneficiary of the UBS AG subordinated guarantee may exercise, claim or plead any right of set-off, compensation or retention in respect of any amount owed to it by UBS AG arising under or in connection with the UBS AG subordinated guarantee and each beneficiary of the UBS AG subordinated guarantee shall, by virtue of being a beneficiary of the UBS AG subordinated guarantee, be deemed to have waived all such rights to set-off, compensation or retention. ADDITIONAL AMOUNTS UBS AG will make all payments under the UBS AG subordinated guarantee without withholding or deducting for, or on account of, any present or future tax, duties, assessments or governmental charges imposed or levied by Switzerland or the jurisdiction of residence of the issuer of any subordinated notes held by UBS Preferred Funding Company or from which any payment on such notes is made or any authority of any of those jurisdictions that has the power to tax, unless UBS AG is required by law to withhold or deduct the present or future tax, duties, assessments or governmental charges. If UBS AG is required to withhold or deduct any portion of a payment, UBS AG will pay additional amounts in order to cause the net amounts received by the holders of trust preferred securities and company preferred securities to be the same as the holders would have received in the absence of the withholding or deduction, subject to the same limitations or additional amounts payable by UBS - -------------------------------------------------------------------------------- 192 194 DESCRIPTION OF UBS AG SUBORDINATED GUARANTEE - -------------------------------------------------------------------------------- Preferred Funding Company as described above under "Description of Company Preferred Securities--Additional Amounts." If payment of the amounts described above cannot be made by reason of any limitation referred to above, those amounts will be payable in proportion to the amounts that would have been payable but for that limitation. OTHER PROVISIONS The guarantee trustee, on behalf of the holders of company preferred securities, may enforce the UBS AG subordinated guarantee directly against UBS AG if UBS AG defaults under the UBS AG subordinated guarantee. The UBS AG Subordinated Guarantee Agreement provides that, to the fullest extent permitted by law, without the need for any other action of any person, including the guarantee trustee or any other holder of the trust preferred securities or company preferred securities, each holder of trust preferred securities or company preferred securities will be entitled to enforce the rights of the holders of the company preferred securities under the UBS AG Subordinated Guarantee Agreement represented by the trust preferred securities or company preferred securities held by such holder. CERTAIN COVENANTS OF UBS AG AND UBS PREFERRED FUNDING COMPANY ISSUANCE AND GUARANTEE OF PREFERENCE SHARES UBS AG will not issue any preferred or preference shares with liquidation rights effectively ranking senior to its obligations under the UBS AG subordinated guarantee or give any guarantee in respect of any of its preferred shares or preferred shares issued by any of its subsidiaries if the guarantee would rank senior to the UBS AG subordinated guarantee unless the UBS AG subordinated guarantee is amended to give the holders of company preferred securities and the trust preferred securities the same rights and entitlements as are contained in or attached to the other guarantees so that the UBS AG subordinated guarantee ranks equally with those guarantees and, from a financial point of view, effectively, with those preferred shares. Except to the extent described above, the UBS AG subordinated guarantee does not limit the incurrence or issuance of other secured or unsecured debt or other obligations of UBS. PAYMENT OF DIVIDENDS UBS AG will agree in the UBS AG subordinated guarantee that if any amount required to be paid under the UBS AG subordinated guarantee in respect of any dividends on the trust preferred securities or company preferred securities payable in respect of the most recent dividend period has not been paid, UBS AG will pay that amount before paying any dividend or other payment on any UBS AG junior obligations, except dividends in the form of the ordinary shares. NO ASSIGNMENT UBS AG may not assign its obligations under the UBS AG subordinated guarantee, except in the case of merger, consolidation or sale of substantially all of its assets where UBS AG is not the surviving entity. TERMINATION The UBS AG subordinated guarantee will terminate on the earlier of: - the payment of the redemption price for all company preferred securities or purchase and cancellation of all company preferred securities, - full payment of the liquidating distribution on all company preferred securities. - -------------------------------------------------------------------------------- 193 195 DESCRIPTION OF UBS AG SUBORDINATED GUARANTEE - -------------------------------------------------------------------------------- However, the UBS AG subordinated guarantee will continue to be effective or will be reinstated, as the case may be, if the holder is required to return any payment made under the company preferred securities or the UBS AG subordinated guarantee. AMENDMENTS Any changes to the provisions of the UBS AG subordinated guarantee that establish the amount and timing of the payments under the UBS AG subordinated guarantee must be approved by each holder of company preferred securities. Any other provision of the UBS AG subordinated guarantee may be modified only with the prior approval of the holders of not less than two-thirds (based on the aggregate liquidation preference) of the company preferred securities. Notwithstanding the foregoing, without the consent of any holder of company preferred securities, UBS AG may amend or supplement the UBS AG Subordinated Guarantee Agreement: - to evidence the succession of another entity to UBS AG and the assumption by any such successor of the covenants of UBS AG in the UBS AG Subordinated Guarantee Agreement, - to add to the covenants of UBS AG for the benefit of the holders of company preferred securities, or to surrender any right or power conferred upon UBS AG under the UBS AG Subordinated Guarantee Agreement, - to correct or supplement any provision in the UBS AG Subordinated Guarantee Agreement which may be defective or inconsistent with any other provision therein, or to make any other provisions with respect to matters or questions arising under the UBS AG Subordinated Guarantee Agreement, so long as any such action shall not materially adversely affect the interests of the holders of company preferred securities, or - to cure any ambiguity or correct any mistake. INFORMATION CONCERNING THE GUARANTEE TRUSTEE Wilmington Trust Company is the guarantee trustee. The guarantee trustee is required to perform only those duties that are specifically set forth in the UBS AG subordinated guarantee, except when a default has occurred and is continuing with respect to the UBS AG subordinated guarantee. After a default, the guarantee trustee must exercise the same degree of care a prudent person would exercise under the circumstances in the conduct of his or her own affairs. Subject to these requirements, the guarantee trustee is under no obligation to exercise any of the powers vested in it by the UBS AG subordinated guarantee at the request of any holder of company preferred securities or any holder of trust preferred securities, as the case may be, unless the holder offers the guarantee trustee reasonable indemnity against the costs, expenses and liabilities that might be incurred by exercising those powers. GOVERNING LAW The UBS AG subordinated guarantee will be governed by and construed in accordance with the laws of the State of New York. - -------------------------------------------------------------------------------- 194 196 - -------------------------------------------------------------------------------- Description of Subordinated Notes of UBS AG The following summary of the material terms and provisions of the subordinated notes is not complete and is subject to, and qualified in its entirety by reference to, the terms and provisions of the subordinated notes. We have filed a copy of the form of subordinated note as an exhibit to the registration statement of which this prospectus is a part. GENERAL UBS Preferred Funding Company will apply the proceeds of the company preferred securities and company common securities to purchase from the Cayman Islands branch of UBS AG newly issued subordinated notes of the Cayman Islands branch. The subordinated notes will be undated perpetual obligations of UBS AG, acting through the Cayman Islands branch, and have an aggregate principal amount of $1,500,000,000. Interest on the subordinated notes will be payable from the date of initial issuance, semi-annually in arrears on April -- and October -- of each year through October 2010 and thereafter quarterly in arrears on January --, April --, July -- and October -- of each year (or, if any such day is not a business day, the next business day, but without any additional interest or other payment in respect of such delay) (each an "interest payment date" and the period from and including an interest payment date, or the date of initial issuance, as applicable, to but not including the next interest payment date, an "interest period") as follows: - for each interest period through the interest period ending on the interest payment date in October 2010, at a fixed rate per annum equal to --% (calculated on the basis of a 360-day year consisting of twelve 30-day months), and - for each interest period ending after October 2010, at a floating rate per annum equal to --% above three-month LIBOR (calculated on the basis of the actual number of days elapsed in a 360-day year). The calculation of LIBOR is described under "Description of Company Preferred Securities--Dividends." Interest due on an interest payment date will be deferrable at the option of UBS AG's Cayman Islands branch to the extent that dividends on the company preferred securities due on the corresponding dividend payment date would constitute nondefinitive dividends. Interest deferred in this manner will not itself bear interest. REDEMPTION The subordinated notes will be redeemable with the consent of the Swiss Federal Banking Commission and at the option of the Cayman Islands branch of UBS AG: - on the interest payment date in October 2010 or any interest payment date occurring after that date, in whole or in part, at a redemption price equal to 100% of their principal amount plus interest accrued but unpaid to the date fixed for redemption, - prior to the interest payment date in October 2010, in whole but not in part, if a Tax Event resulting from a Change in Tax Law (and relating to an event described in clauses (A), (B) or (C) of the definition of "Tax Event") occurs at a redemption price equal to 100% of their principal amount plus interest accrued but unpaid to the date fixed for redemption, or - prior to the interest payment date in October 2010, in whole but not in part, if a Tax Event not resulting from a Change in Tax Law relating to an event described in clause (A), (B) or (C) of the definition of "Tax Event", an Investment Company Act Event or a Capital Event occurs at a redemption price equal to interest accrued but unpaid to the date fixed for redemption plus a make whole amount calculated in substantially the same manner as the Make Whole Amount applicable to the company preferred securities. - -------------------------------------------------------------------------------- 195 197 DESCRIPTION OF SUBORDINATED NOTES OF UBS AG - -------------------------------------------------------------------------------- ADDITIONAL AMOUNTS If the Cayman Islands branch of UBS AG is required to withhold any taxes, duties or other governmental charges with respect to any payment in respect of the subordinated notes, the Cayman Islands branch will pay such additional amounts as shall be required so that the amount received by UBS Preferred Funding Company under the subordinated notes shall not be reduced as a result of any such additional taxes, duties or other governmental charges. SUBORDINATION The subordinated notes are a general and unsecured obligation of UBS AG and, in liquidation of UBS AG, will rank, both as to payment and in liquidation: - subordinate and junior to UBS AG senior liabilities, as defined under "Description of UBS AG Subordinated Guarantee--Subordination," and - senior to the ordinary shares of UBS AG and any other securities or shares of UBS AG expressed to rank junior to the most senior preference shares of UBS AG (if any) from time to time outstanding. Payments under the subordinated notes (other than payments upon a winding-up or dissolution, by bankruptcy or otherwise, in Switzerland of UBS AG) are conditional upon UBS AG not being in default in the payment of UBS AG senior liabilities, and being solvent, as defined under "Description of UBS AG Subordinated Guarantee--Subordination," at the time of payment. A report as to the insolvency of UBS AG by two persons, each being a managing director, director or other authorized officer or agent of UBS AG or employees of the independent accountants of UBS AG will, in the absence of manifest error be treated and accepted by UBS AG, the holders of the company preferred securities and all other interested parties as correct and sufficient evidence thereof. ENFORCEMENT OF THE SUBORDINATED NOTES Any consent, notice or other action (including any enforcement action) given or taken by or on behalf of UBS Preferred Funding Company with respect to the subordinated notes may be given or taken at the discretion of a majority of the entire board of directors of UBS Preferred Funding Company. TRANSFER OF THE SUBORDINATED NOTES The subordinated notes will be represented by a single definitive note registered in the name of UBS Preferred Funding Company. UBS Preferred Funding Company's LLC Agreement will provide that UBS Preferred Funding Company may sell the subordinated notes only upon the affirmative vote of both a majority of the board of directors of UBS Preferred Funding Company and the holders of two-thirds (based on the aggregate liquidation preference) of the company preferred securities and other company parity preferred securities (if any), voting together as a single class. Although UBS Preferred Funding Company may sell the subordinated notes subject to the requirements of the Securities Act of 1933 and other applicable laws and the foregoing requirements, UBS AG and UBS Preferred Funding Company do not anticipate that UBS Preferred Funding Company will sell the subordinated notes and there is no expectation that a market will develop or exist for the subordinated notes. The subordinated notes, by their terms, will provide that they may be sold in whole and not in part and may not be divided into denominations of less than $1,000. - -------------------------------------------------------------------------------- 196 198 DESCRIPTION OF SUBORDINATED NOTES OF UBS AG - -------------------------------------------------------------------------------- EVENTS OF DEFAULT The subordinated notes will not provide for acceleration if the Cayman Islands branch of UBS AG fails to make a payment when due. If the Cayman Islands branch fails to make a payment when due of an installment of interest on the subordinated notes, UBS Preferred Funding Company will be entitled to seek to enforce payment only of the defaulted installment but not in respect of any failure to pay interest due under the subordinated notes that was deferred because the dividends on the company preferred securities on the corresponding dividend payment date would have constituted nondefinitive dividends. A "default" under the subordinated notes will occur if the Cayman Islands branch fails to make a payment when due of an installment of principal or interest. MODIFICATION AND AMENDMENT OF THE SUBORDINATED NOTES The subordinated notes may be modified or amended only by the written agreement of the Cayman Islands branch of UBS AG and UBS Preferred Funding Company. However, UBS Preferred Funding Company's LLC Agreement will provide that UBS Preferred Funding Company may not agree to any such modification or amendment for so long as any company preferred securities or other company parity preferred securities, if any, are outstanding unless holders of two-thirds (based on the aggregate liquidation preference) of the company preferred securities and other company parity preferred securities, if any, voting as a class, consent to such modification or amendment (except that such consent of the holders of company preferred securities and any other company parity preferred securities shall not be required if (a) the proposed amendment or modification would not materially and adversely affect the rights, preferences, powers or privileges of UBS Preferred Funding Company and (b) UBS Preferred Funding Company has received a letter from each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services to the effect that such amendment will not result in a downgrading of its respective rating then assigned to the company preferred securities). GOVERNING LAW The subordinated notes will be governed by the laws of the State of New York. - -------------------------------------------------------------------------------- 197 199 - -------------------------------------------------------------------------------- Certain U.S. Tax Considerations In the opinion of Sullivan & Cromwell, the following accurately describes the material United States federal income tax (and, where specifically noted, United States federal estate tax) consequences of the purchase of the trust preferred securities and the ownership and disposition of the trust preferred securities and the company preferred securities. YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST PREFERRED SECURITIES OR THE COMPANY PREFERRED SECURITIES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES. This discussion addresses only the tax consequences to a person that acquires the trust preferred securities on their original issue at their original offering price and that holds the trust preferred securities, and any company preferred securities received in exchange for the trust preferred securities, as capital assets. It does not address all tax consequences that may be applicable to a beneficial owner of the trust preferred securities, nor does it address the tax consequences to: - persons that may be subject to special treatment under United States federal income tax law, such as tax exempt entities, certain insurance companies, broker-dealers, traders in securities that elect to mark to market, persons liable for alternative minimum tax or persons that actually or constructively own 10% or more of the voting stock of UBS AG, - persons that will hold the trust preferred securities or the company preferred securities as part of a larger transaction, such as a "straddle" or a "hedging" or "conversion" transaction, or - persons whose functional currency is not the United States dollar. This discussion is based upon the Internal Revenue Code of 1986, as amended, Treasury regulations, Internal Revenue Service rulings and pronouncements and judicial decisions as of the date hereof, all of which are subject to change, possibly with retroactive effect. CLASSIFICATION OF UBS PREFERRED FUNDING TRUST AND UBS PREFERRED FUNDING COMPANY Under current law, and assuming compliance with the terms of the Amended and Restated Trust Agreement, UBS Preferred Funding Trust will be treated as a grantor trust and not as a partnership or an association taxable as a corporation for United States federal income tax purposes. As a result, each beneficial owner of the trust preferred securities will be considered the beneficial owner of a pro rata portion of the company preferred securities held by UBS Preferred Funding Trust. Under current law, and assuming compliance with the LLC Agreement, UBS Preferred Funding Company will be treated as a partnership for United States federal income tax purposes. A partnership is not a taxable entity and incurs no United States federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss and deduction of the partnership in computing its United States federal income tax liability, regardless of whether distributions are made to the partner. These items generally will be treated as if realized by the partner directly from the same source realized by UBS Preferred Funding Company. - -------------------------------------------------------------------------------- 198 200 CERTAIN U.S. TAX CONSIDERATIONS - -------------------------------------------------------------------------------- UNITED STATES HOLDERS You are a "United States Holder" if you are a beneficial owner of the trust preferred securities and you are: - an individual citizen or resident of the United States, - a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia, - an estate, and your income is subject to United States federal income tax regardless of source, or - a trust, and - a United States court is able to exercise primary supervision over your administration, and - no non-United States person has the authority to control any of your substantial decisions. INCOME FROM THE TRUST PREFERRED SECURITIES Under the LLC Agreement, upon the declaration, or deemed declaration, of dividends on the company preferred securities, a like amount of UBS Preferred Funding Company's ordinary income will be allocated to the holders of company preferred securities. Regardless of when dividends on the trust preferred securities are actually paid, income allocated to the holders of company preferred securities will be includable as ordinary income by a United States Holder for its taxable year that includes December 31 of the calendar year in which the income is allocated, except that if the United States Holder disposes of its entire holding of the trust preferred securities and the company preferred securities (if any), the amount allocated for the calendar year of that disposition will be includable for the United States Holder's taxable year that includes the date of that disposition. Assuming compliance with the terms of the Amended and Restated Trust Agreement, UBS Preferred Funding Trust will distribute, on a semi-annual basis, an amount of cash equal to all of the income that is allocated to it as a holder of company preferred securities. As a consequence, a United States Holder will not recognize income in respect of the trust preferred securities without receiving the corresponding cash distribution, unless the United States Holder sells or otherwise disposes of those trust preferred securities between the declaration date of dividends on the company preferred securities and the corresponding record date for dividends on the trust preferred securities. In the case of a sale between those dates, a United States Holder will recognize ordinary income in an amount equal to the dividends on the company preferred securities, which would increase the United States Holder's basis in the trust preferred securities and reduce the gain, or increase the loss, recognized on the sale or other disposition. A United States Holder's allocated share of UBS Preferred Funding Company's income from the initial subordinated notes will be foreign source income for purposes of determining the limitation on any allowable foreign tax credit. The overall limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, a United States Holder's allocated share of UBS Preferred Funding Company's income from the initial subordinated notes generally will constitute "passive income" or, in the case of certain United States Holders, "financial services income." If, with respect to any distribution to a United States Holder, additional amounts are paid by UBS Preferred Funding Company as a result of withholding taxes imposed on the distribution, those additional amounts will be taxable to the United States Holder as foreign source income. However, withholding taxes in the amount of those additional amounts will generally be treated as foreign income taxes eligible for credit against that United States Holder's United States federal income - -------------------------------------------------------------------------------- 199 201 CERTAIN U.S. TAX CONSIDERATIONS - -------------------------------------------------------------------------------- tax liability, subject to generally applicable limitations and conditions or, at the election of that United States Holder, for deduction in computing the United States Holder's taxable income. No portion of the income derived by a United States Holder from the trust preferred securities will be eligible for the dividends-received deduction generally available to United States corporations in respect of dividends received from other United States corporations. UBS AG believes that it is not a "passive foreign investment company" (sometimes known as a "PFIC") for United States federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change. A United States Holder might be subject to special rules with respect to certain amounts earned by UBS Preferred Funding Company with respect to the initial subordinated notes if UBS AG were treated as a PFIC for United States federal income tax purposes. RECEIPT OF THE COMPANY PREFERRED SECURITIES UPON LIQUIDATION OF UBS PREFERRED FUNDING TRUST Under certain circumstances, the company preferred securities may be distributed to the trust preferred securityholders in exchange for their trust preferred securities and in liquidation of UBS Preferred Funding Trust. Unless the liquidation of UBS Preferred Funding Trust occurs as a result of UBS Preferred Funding Trust being subject to United States federal income taxes, such a distribution to a United States Holder would be treated, for United States federal income tax purposes, as a non-taxable event. Each United States Holder would receive an aggregate tax basis in the company preferred securities equal to the United States Holder's aggregate tax basis in its trust preferred securities and the United States Holder's holding period in the company preferred securities received would include the period during which the trust preferred securities were held by the United States Holder. If, however, the liquidation of UBS Preferred Funding Trust were to occur because UBS Preferred Funding Trust is subject to United States federal income taxes, the distribution of the company preferred securities to United States Holders by UBS Preferred Funding Trust would likely be a taxable event to each United States Holder, and a United States Holder would recognize gain or loss as if the United States Holder had exchanged its trust preferred securities for the company preferred securities it received. The gain or loss would be equal to the difference between the United States Holder's aggregate tax basis in its trust preferred securities surrendered in the exchange and the aggregate fair market value of the company preferred securities received in the exchange. If the company preferred securities are distributed to the holders of trust preferred securities in liquidation of UBS Preferred Funding Trust, U.S. tax information will be provided to beneficial owners of the trust preferred securities and to the Internal Revenue Service on Schedule K-1, rather than in the manner described below under "--Information Reporting and Backup Withholding Tax". DISPOSITION OF THE TRUST PREFERRED SECURITIES OR THE COMPANY PREFERRED SECURITIES A United States Holder will recognize gain or loss on a sale, exchange or other taxable disposition of the trust preferred securities or the company preferred securities in an amount equal to the difference between the United States Holder's adjusted tax basis and the amount realized on the disposition. A United States Holder's adjusted tax basis in the trust preferred securities generally will equal the amount paid for the trust preferred securities, increased by the amount of income allocated to the United States holder and reduced by the amount of any cash, and the fair market value of any other property, distributed to the United States Holder. Any gain or loss so recognized generally will be capital gain or loss, will be long-term capital gain or loss if the United States Holder's holding period is more than one year and will be U.S. source income or loss for purposes of determining the - -------------------------------------------------------------------------------- 200 202 CERTAIN U.S. TAX CONSIDERATIONS - -------------------------------------------------------------------------------- limitation on any allowable foreign tax credit. In the case of a non-corporate United States Holder, long-term capital gains are generally subject to tax at preferential rates. The trust preferred securities may trade at a price that does not fully reflect the value of income that may have been allocated to a United States Holder with respect to the United States Holder's trust preferred securities. A United States Holder that disposes of the trust preferred securities between the declaration date of dividends on the company preferred securities and the corresponding record date for dividends on the trust preferred securities will be required to include as ordinary income an amount equal to dividends on the company preferred securities and to add the amount of that income to its adjusted tax basis in the trust preferred securities. Accordingly, such a United States Holder will recognize a capital loss to the extent that the selling price is less than the United States Holder's adjusted tax basis. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. NON-UNITED STATES HOLDERS You are a "Non-United States Holder" if you are a beneficial owner of the trust preferred securities or the company preferred securities and you are not a United States Holder. UBS Preferred Funding Company intends to operate so that it will not be engaged in a trade or business within the United States for United States federal income tax purposes. Moreover, UBS Preferred Funding Company intends to invest in securities the income from which will be either generally exempt from United States federal withholding tax or exempt from United States federal withholding tax to the extent allocable to a Non-United States Holder. A Non-United States Holder will not be subject to United States federal income or withholding tax on any allocated share of UBS Preferred Funding Company's income or gain, or any gain realized on the sale or exchange of the trust preferred securities, unless, in the case of gains, the Non-United States Holder is an individual who was present in the United States for 183 days or more in the taxable year in which the gain is realized and certain other conditions are met. A Non-United States Holder will not be subject to backup withholding provided certain certification requirements are satisfied as described under "--Information Reporting and Backup Withholding Tax." The treatment of the trust preferred securities and the company preferred securities for United States federal estate tax purposes is unclear. If you are an individual Non-United States Holder, you should consult your tax advisor about the possibility that the trust preferred securities or the company preferred securities will be includable in your gross estate for purposes of the United States federal estate tax. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX The amount of income paid or accrued on the trust preferred securities generally will be reported to United States Holders on Internal Revenue Service Form 1099. "Backup" withholding at a rate of 31% will apply to payments made within the United States to a beneficial owner of the trust preferred securities, other than a corporation or another exempt United States Holder, unless the beneficial owner of the trust preferred securities certifies as to its non-United States status or furnishes its taxpayer identification number in the manner prescribed in applicable Treasury regulations, certifies that the number is correct, certifies as to no loss of exemption from backup withholding and meets certain other conditions. Payment of the proceeds from the disposition of the trust preferred securities within the United States is subject to information reporting and backup withholding unless the beneficial owner of the trust preferred securities certifies its non-United States status or otherwise establishes an exemption. - -------------------------------------------------------------------------------- 201 203 CERTAIN U.S. TAX CONSIDERATIONS - -------------------------------------------------------------------------------- Payments of the proceeds from the disposition of the trust preferred securities will not be subject to information reporting or backup withholding if made to or through a foreign office of a broker, except that information reporting may apply, unless the beneficial owner of the trust preferred securities certifies its non-United States status or otherwise establishes an exemption, if the broker is: - a United States person, - a controlled foreign corporation for United States tax purposes, - a foreign person 50% or more of whose gross income is effectively connected with a United States trade or business for a specified three-year period, or - with respect to payments made after 31 December 2000, a foreign partnership, if at any time during its tax year, one or more of its partners are United States persons, as defined in United States Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership or if, at any time during its tax year, the foreign partnership is engaged in a United States trade or business. Any amounts withheld from a beneficial owner of the trust preferred securities under the backup withholding rules will be allowed as a refund or as a credit against the beneficial owner's United States federal income tax liability, so long as the required information is furnished to the IRS. - -------------------------------------------------------------------------------- 202 204 Certain Tax Considerations Under the Laws of Switzerland GENERAL The tax information set forth below is based on the opinion of ATAG Ernst & Young AG, Switzerland, dated 7 August 2000, and has been approved by them for its accuracy. The following is a summary of the material Swiss tax consequences related to the acquisition, ownership and disposition of the trust preferred securities. The summary is based on legislation as of the date of this prospectus and does not aim to be a comprehensive description of all the tax considerations that may be relevant to a decision to invest in the trust preferred securities. The tax treatment for each shareholder depends on the particular situation of the shareholder and prospective investors are therefore advised to consult with their professional tax advisors as to the respective tax consequences of the purchase, ownership and disposition of the trust preferred securities. Furthermore, this summary does not address the tax treatment of the holders of trust preferred securities subject to special tax rules. HOLDERS WHO ARE NOT RESIDENTS OR DOMICILIARIES OF SWITZERLAND AND HAVE NO PERMANENT ESTABLISHMENT OR REPRESENTATIVE IN SWITZERLAND Holders of trust preferred securities who are not residents or domiciliaries of Switzerland and have no permanent establishment or permanent representative in Switzerland to which or to whom the shares are attributable or to which or to whom the trust preferred securities belong, will not be subject to Swiss corporate or individual income and capital tax or capital gains tax on the holding and disposition of the trust preferred securities. Furthermore, there will be no inheritance or gift tax imposed in Switzerland on the trust preferred securities if the holder is an individual who is not domiciled in Switzerland. ISSUANCE STAMP TAX The issuance of the trust preferred securities will not be a taxable event for Swiss issuance stamp tax purposes. SECURITIES TURNOVER TAX On the sale or purchase of the trust preferred securities through a registered Swiss securities dealer a turnover tax of 0.15% will be imposed on each party. No turnover tax will be imposed on transactions that are not through a registered Swiss securities dealer. HOLDERS WHO ARE RESIDENTS OR DOMICILIARIES OF SWITZERLAND OR HAVE A PERMANENT ESTABLISHMENT OR REPRESENTATIVE IN SWITZERLAND The following summary of the treatment of the holders of trust preferred securities who are residents or domiciliaries of, or who have a permanent establishment or residence in Switzerland, is based upon the conclusion that for Swiss tax purposes the trust preferred securities are shareholder's equity rather than debt. WITHHOLDING TAX No Swiss withholding tax is levied on dividend payments on the trust preferred securities. DIVIDENDS Dividends received by a Swiss resident company or by an individual on the trust preferred securities are subject to Swiss income tax. Dividends received by a Swiss resident company qualify for the participation exemption, if the recipient of the dividend owns at least 20% of the shares of the distributing corporation or if the - -------------------------------------------------------------------------------- 203 205 CERTAIN TAX CONSIDERATIONS UNDER THE LAWS OF SWITZERLAND - -------------------------------------------------------------------------------- recipient holds shares with a market value of at least CHF 2 million. Moreover, an investment in the trust preferred securities may qualify as a participation for determining the holder privilege. CAPITAL GAINS Capital gains or losses realized by legal entities on the disposal or exchange of the trust preferred securities are treated as ordinary income or expense. The basis for determining the gain or loss is the tax value, which is generally the book value. As a result of a recent change of the Federal Tax Law, a corporation that controls a participation of 20% or more in another corporation may claim the participation relief for capital gains. Nonbusiness capital gains realized by individuals are not taxed in Switzerland. Individuals are only taxed on capital gains if they qualify as professional securities dealers, or if the trust preferred securities are attributable to a business carried on in Switzerland. REDEMPTION OF CAPITAL The amount distributed to individual shareholders in excess of the nominal share capital is regarded as a dividend, which is subject to Swiss income tax. For the trust preferred securities attributed to a business in Switzerland or a legal entity, the principles of taxation of capital gains apply. INHERITANCE AND GIFT TAXES Almost all cantons levy separate inheritance and gift taxes. No inheritance or gift taxes are imposed on the federal level. Inheritance and gift taxes are only imposed on individuals. No corporate inheritance or gift tax is levied. The tax is due on the transfer of the trust preferred securities by way of gift or upon the death of a holder, provided the holder is domiciled in Switzerland. The tax is based on the fair market value of the trust preferred securities. - -------------------------------------------------------------------------------- 204 206 Certain ERISA Considerations If you are a fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act ("ERISA"), you should review the fiduciary standards of ERISA and the plan's particular circumstances before deciding to invest in the trust preferred securities. You should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and whether the investment would be consistent with the terms of the plan and the other agreements which apply to plan investments. A fiduciary of a plan subject to ERISA, as well as a person investing on behalf of an individual retirement account or a pension or profit-sharing plan for one or more self-employed persons, should also consider whether an investment in the trust preferred securities could result in a prohibited transaction. ERISA and the Internal Revenue Code of 1986, as amended, prohibit plans and individual retirement accounts from engaging in certain transactions involving plan assets with persons who are parties in interest under ERISA or disqualified persons under the Internal Revenue Code of 1986, as amended, with respect to the plan or individual retirement account. A violation of these rules may result in a substantial excise tax under the Internal Revenue Code of 1986, as amended, and other liabilities under ERISA. Employee benefit plans that are governmental plans, foreign plans or church plans generally are not subject to the prohibited transaction rules or the fiduciary standards of ERISA. The assets of UBS Preferred Funding Trust would be treated as plan assets for purposes of the prohibited transaction rules under a U.S. Department of Labor regulation if plans and individual retirement accounts purchase trust preferred securities, unless an exception under the regulation applies. The regulation provides an exception if the trust preferred securities are considered to be publicly-offered securities. The underwriters expect that the trust preferred securities will be publicly-offered securities under the regulation because: - the underwriters expect that the trust preferred securities will be purchased initially by at least 100 persons who are independent of us and each other, - the trust preferred securities can be transferred freely, - the trust preferred securities are being sold through this prospectus which is part of an effective registration statement filed with the SEC, and - the trust preferred securities will be timely registered with the SEC under Securities Exchange Act of 1934. If we are a party in interest or a disqualified person with respect to a plan or individual retirement account that buys the trust preferred securities, either directly or because we own banking or other subsidiaries, the sale could be treated as a prohibited transaction unless an administrative exemption issued by the Department of Labor applies. The Department of Labor has issued class exemptions that may apply to exempt transactions resulting from the purchase or holding of the trust preferred securities. Among those class exemptions are: - 96-23, for transactions determined by in-house asset managers; - 95-60, for transactions involving insurance company general accounts; - 91-38, for transactions involving bank collective investment funds; - 90-1, for transactions involving insurance company separate accounts; and - 84-14, for transactions determined by independent qualified asset managers. These rules are very complicated and the penalties that may be imposed upon persons involved in prohibited transactions can be substantial. This makes it very important that fiduciaries or other persons considering purchasing the trust preferred securities on behalf of a benefit plan investor consult with their lawyer regarding what could happen if the assets of UBS Preferred Funding Trust were - -------------------------------------------------------------------------------- 205 207 CERTAIN ERISA CONSIDERATIONS - -------------------------------------------------------------------------------- deemed to be plan assets and if the investor can use one of the above class exemptions or another applicable exemption. Before relying on any of these exemptions, a purchaser must conclude that the exemption provides the necessary relief for all potential prohibited transactions arising from the purchase of and from holding the trust preferred securities. Neither the underwriters, UBS AG nor any of their respective affiliates, agents or representatives have or can represent that these exemptions apply with respect to any purchase of trust preferred securities by any holder. - -------------------------------------------------------------------------------- 206 208 - -------------------------------------------------------------------------------- Underwriting Subject to the terms and conditions set forth in the underwriting agreement, dated as of the date of this prospectus, among UBS AG, UBS Preferred Funding Company, UBS Preferred Funding Trust and each of the underwriters, UBS AG and UBS Preferred Funding Company have agreed that UBS Preferred Funding Company will cause UBS Preferred Funding Trust to issue, and each of the underwriters has severally agreed to underwrite, the respective liquidation amount of the trust preferred securities set forth opposite its name below:
UNDERWRITERS THE TRUST PREFERRED SECURITIES - ------------------------------------------------------------------------------------------- (by liquidation amount) UBS Warburg LLC............................................ $ PaineWebber Incorporated................................... Credit Suisse First Boston................................. Goldman, Sachs & Co. ...................................... Merrill Lynch & Co. ....................................... Morgan Stanley Dean Witter................................. Salomon Smith Barney....................................... -------- Total...................................................... $-- ========
Under the terms and conditions of the underwriting agreement, the underwriters are committed to take and pay for all the trust preferred securities offered hereby, if any are taken. The underwriting agreement entitles the underwriters to terminate the underwriting agreement in certain circumstances before payment is made to UBS Preferred Funding Trust. The purchase price for the trust preferred securities will be the initial offering price set forth on the cover page of this prospectus. UBS AG will pay the underwriters a commission of $-- for each trust preferred security. The underwriting agreement provides that UBS AG will reimburse the underwriters for certain expenses of the offering. The underwriters propose to offer shares of the trust preferred securities at the offering price. After the trust preferred securities are released for sale, the offering price and other selling terms may be varied from time to time by the underwriters. During a period of 30 days from the date of the prospectus, neither UBS Preferred Funding Trust nor UBS Preferred Funding Company nor any other subsidiary of UBS AG that is similar to UBS Preferred Funding Trust or UBS Preferred Funding Company will, without the prior written consent of the underwriters, directly or indirectly, sell, offer to sell, grant any option for sale of, or otherwise dispose of, any trust preferred securities or any company preferred securities or any security convertible into or exchangeable into or exercisable for the trust preferred securities or the company preferred securities. We have applied to list the trust preferred securities on the Luxembourg Stock Exchange. In connection with that application, a legal notice relating to the issue of the trust preferred securities and a copy of the Trust Agreement will be deposited with the Registrar of the District Court of Luxembourg (Greffier en Chef du Tribunal d'Arrondissement a Luxembourg), where those documents may be examined and copies obtained. In connection with the offering, the underwriters may purchase and sell the trust preferred securities in the open market. These transactions may include stabilizing transactions and purchases to cover short positions created by the underwriters, and the imposition of a penalty bid, in connection with the offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the trust preferred securities; and short positions created by the underwriters involve the sale by the underwriters of a greater number of the trust preferred - -------------------------------------------------------------------------------- 207 209 UNDERWRITING - -------------------------------------------------------------------------------- securities than they are required to purchase from UBS Preferred Funding Company in the offering. The underwriters also may impose a penalty bid, whereby selling concessions allowed to broker-dealers in respect of the trust preferred securities sold in the offering may be reclaimed by the underwriters if such trust preferred securities are repurchased by the underwriters in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the trust preferred securities, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected in the over-the-counter market or otherwise. Each underwriter has agreed that: - it has not offered or sold and before the date six months after the date of issue of the trust preferred securities will not offer or sell any trust preferred securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments as principal or agent, for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, - it has complied and will comply with all the applicable provisions of the Financial Services Act of 1986 with respect to anything done by it in relation to the trust preferred securities in, from or otherwise involving the United Kingdom, and - it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the trust preferred securities to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996, or is a person to whom the document may otherwise lawfully be issued or passed on. Because the NASD considers this offering an offering of interests in a "direct participation program" as that term is defined in Rule 2810(a)(4) of the NASD, the offering is being conducted in accordance with Rule 2810 of the NASD. Pursuant to Rule 2810 of the NASD and with regard to the trust preferred securities, no NASD member will (i) execute transactions in any discretionary account without the prior written approval of the customer, nor (ii) recommend to a customer the purchase, sale or exchange of a trust preferred security without reasonable grounds to believe, on the basis of information obtained from the customer concerning his investment objectives, other investments, financial situation and needs, and any other information known by the member or associated person including whether (a) the customer is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in this prospectus; (b) the customer has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and (c) the program is otherwise suitable for the customer. Also pursuant to Rule 2810 of the NASD, NASD members participating in the offering will maintain in the files of the member documents disclosing the basis upon which the determination of suitability was reached as to each customer. In the aggregate, underwriters affiliated with UBS AG have severally agreed to purchase approximately % of the shares offered in the offering. If any of the shares underwritten by these affiliates are sold by them at a price less than the initial public offering price, the net proceeds from the offerings to UBS AG on a consolidated basis will be reduced because these affiliates and UBS AG are accounted for on a consolidated basis. Following the initial distribution of the trust preferred securities, UBS Warburg LLC and PaineWebber Incorporated may offer and sell the trust preferred securities in the course of their business as broker- - -------------------------------------------------------------------------------- 208 210 UNDERWRITING - -------------------------------------------------------------------------------- dealers, subject to obtaining any necessary approvals for any such offers and sales. UBS Warburg LLC and PaineWebber Incorporated may act as principals or agents in these transactions. This prospectus may be used by UBS Warburg LLC and PaineWebber Incorporated in connection with these transactions. These sales, if any, will be made at varying prices related to prevailing market prices at the time of sale or otherwise. Neither UBS Warburg LLC nor PaineWebber Incorporated is obligated to make a market in the trust preferred securities and either of them may discontinue market-making at any time without notice. No assurance can be given as to the liquidity of the trading market for the trust preferred securities. UBS AG does not expect that UBS Warburg LLC nor PaineWebber Incorporated will pay any proceeds from these market-making resales to UBS AG. Unless UBS AG or an agent informs you in your confirmation of sale that your trust preferred security is being purchased in its original offering and sale, you may assume that you are purchasing your trust preferred security in a market-making transaction. UBS Preferred Funding Company and UBS AG have agreed to indemnify the underwriters against, or contribute to payments that the underwriters may be required to make in respect of, certain liabilities, including liabilities under the Securities Act of 1933, as amended. The underwriters and/or their affiliates have provided investment banking, commercial banking and financial advisory services to UBS AG or its affiliates in the past, for which they have received customary compensation and expense reimbursement, and may do so again in the future. Purchasers of the trust preferred securities may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price. - -------------------------------------------------------------------------------- 209 211 - -------------------------------------------------------------------------------- Validity of the securities Certain matters of Delaware law relating to the validity of the trust preferred securities and the company preferred securities will be passed upon by Richards, Layton & Finger, P.A., special Delaware counsel to UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company. The validity of the subordinated notes and the UBS AG Subordinated Guarantee Agreement will be passed upon for UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company by Sullivan & Cromwell. The validity of the subordinated notes and the UBS AG Subordinated Guarantee Agreement will be passed upon for the underwriters by Davis Polk & Wardwell. Sullivan & Cromwell and Davis Polk & Wardwell will rely upon the opinion of Richards, Layton & Finger, P.A., as to matters of Delaware law and the opinion of Bar & Karrer, Swiss counsel to UBS AG, as to matters of Swiss law. Certain matters relating to United States federal income tax considerations will be passed upon for UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company by Sullivan & Cromwell. Experts The consolidated financial statements of UBS at 31 December 1999 and 1998 and for each of the three years in the period ended 31 December 1999 appearing in this document have been audited by ATAG Ernst & Young Ltd., independent auditors as set forth in their report thereon appearing elsewhere in this prospectus, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Limitations on enforcement of U.S. laws against UBS AG, its management and others UBS AG is a Swiss bank. Many of its directors and executive officers, including all of the persons who signed the registration statement of which this prospectus is a part, and certain experts named in this prospectus, are resident outside the United States, and all or a substantial portion of our assets and the assets of such persons are located outside the United States. As a result, it may be difficult for you to serve legal process on UBS AG or its management or have any of them appear in a U.S. court. We have been advised by Bar & Karrer, Swiss counsel to UBS AG, that there is doubt as to enforceability in Switzerland, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities based solely on the federal securities laws of the United States. - -------------------------------------------------------------------------------- 210 212 - -------------------------------------------------------------------------------- General Information LISTING We have applied to list the trust preferred securities on the Luxembourg Stock Exchange. In connection with the listing on the Luxembourg Stock Exchange, a notice relating to the issue of the trust preferred securities (Notice Legale) and the LLC Agreement of UBS Preferred Funding Company have been filed with the Chief Registrar of the District Court of Luxembourg (Greffier en Chef du Tribunal d'Arrondissement de et a Luxembourg), where such documents are available for inspection and copies of such documents will be obtainable upon request. For listing purposes, the trust preferred securities will be considered as debt instruments and will appear under the heading "emprunts ordinaires." CLEARING SYSTEMS The trust preferred securities have been accepted for clearance by Clearstream and Euroclear. The Common Code for the trust preferred securities is -- and the International Security Identification Number (ISIN) for the trust preferred securities is US90262PAA66. AUTHORIZATION The transactions constituting the formation of UBS Preferred Funding Company were authorized by a resolution of the board of directors of UBS AG passed on 14 September 2000 and the issue of the company preferred securities was authorized by UBS Preferred Funding Company as of 18 September 2000. DOCUMENTS As long as any trust preferred securities are outstanding, copies of UBS Preferred Funding Company's LLC Agreement, the Amended and Restated Trust Agreement of UBS Preferred Funding Trust and the UBS AG subordinated guarantee will be available for inspection during usual business hours at the specified office of the paying agent in Luxembourg. As long as any trust preferred securities are outstanding, a copy of the English translation of the statutes and by-laws of UBS AG will be available for inspection at the specified office of the paying agent in Luxembourg. Copies of the latest annual report of UBS Preferred Funding Company and copies in the English language of the latest annual report on a consolidated and an unconsolidated basis and the published consolidated semi-annual financial statements of UBS AG will be available at the specified office of the paying agent in Luxembourg, so long as any trust preferred securities are outstanding. Neither UBS Preferred Funding Trust nor UBS Preferred Funding Company currently publish interim financial statements. UBS Preferred Funding Trust and UBS Preferred Funding Company do not intend to publish non-consolidated financial statements. UBS Preferred Funding Trust will make available in Luxembourg any separate financial information about it made publicly available in the United States, Switzerland or elsewhere. MATERIAL ADVERSE CHANGE Except as disclosed in this prospectus, there has been no material adverse change in the financial position of UBS AG since 30 June 2000 and in the financial position of UBS Preferred Funding Trust or UBS Preferred Funding Company since 18 September 2000. - -------------------------------------------------------------------------------- 211 213 GENERAL INFORMATION - -------------------------------------------------------------------------------- LITIGATION None of UBS Preferred Funding Trust, UBS Preferred Funding Company or UBS AG are involved in any litigation or arbitration proceedings relating to claims or amounts that are material in the context of the issue of the trust preferred securities nor, so far as UBS Preferred Funding Trust, UBS Preferred Funding Company or UBS AG are aware, is any such litigation or arbitration pending or threatened. GOVERNING LAW The LLC Agreement of UBS Preferred Funding Company, the company preferred securities, the Amended and Restated Trust Agreement and the trust preferred securities will be governed by the laws of the State of Delaware without regard to any conflicts of laws principles that would require the application of the laws of a jurisdiction other than the State of Delaware. The subordinated notes and the UBS AG Subordinated Guarantee Agreement will be governed by the laws of the State of New York. - -------------------------------------------------------------------------------- 212 214 - -------------------------------------------------------------------------------- Where You Can Find More Information UBS files periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that UBS files with the SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. You may also inspect UBS's SEC reports and other information at the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. We have filed a registration statement on Form F-1 under the Securities Act of 1933, as amended, with the SEC covering the trust preferred securities, the company preferred securities and the UBS AG subordinated guarantee. For further information on the trust preferred securities, the company preferred securities, the UBS AG subordinated guarantee, UBS Preferred Funding Trust, UBS Preferred Funding Company and UBS AG, you should review our registration statement and its exhibits. This prospectus summarizes material provisions of the contracts and other documents that we refer you to. Since this prospectus may not contain all the information that you may find important, you should review the full text of these documents. We have included copies of these documents as exhibits to our registration statement. Presentation of Financial Information UBS's financial statements have been prepared in accordance with International Accounting Standards and are denominated in Swiss francs, or "CHF," the legal tender of Switzerland. For convenience, 31 December 1999 CHF amounts have been translated into United States dollars, or "$," at the rate of CHF 1=$0.6277, which was the noon buying rate on 31 December 1999, and 31 June 2000 CHF amounts have been translated into United States dollars at the rate of CHF 1=$0.6129, which was the noon buying rate on 30 June 2000. This translation should not be construed as a representation that the Swiss franc amounts actually denote such United States dollar amounts or have been, could have been or could be, converted into United States dollars at the rate indicated. The table below sets forth, for the periods and dates indicated, information concerning the noon buying rate for the Swiss franc, expressed in United States dollars per one Swiss franc. The "noon buying rate" is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.
HIGH LOW AVERAGE RATE(1) YEAR ENDED 31 DECEMBER ($ per 1 CHF) AT PERIOD END - ------------------------------------------------------------------------------------------------- 1995....................................... 0.8951 0.7616 0.8466 0.8666 1996....................................... 0.8641 0.7399 0.8090 0.7468 1997....................................... 0.7446 0.6510 0.6890 0.6845 1998....................................... 0.7731 0.6485 0.6894 0.7281 1999....................................... 0.7361 0.6244 0.6605 0.6277 2000 (through August 31)................... 0.7539 0.6442 0.6023 0.7510
- ------------ (1) The average of the noon buying rates on the last business day of each full month during the relevant period. - -------------------------------------------------------------------------------- 213 215 TABLE OF CONTENTS FINANCIAL STATEMENTS OF UBS AUDITED YEAR-END FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-1 UBS Group Income Statement.................................. F-3 UBS Group Balance Sheet..................................... F-4 UBS Group Statement of Changes in Equity.................... F-5 UBS Group Statement of Cash Flows........................... F-6 UBS Group Notes to the Financial Statements................. F-7 UNAUDITED INTERIM FINANCIAL STATEMENTS UBS Group Income Statement.................................. F-86 UBS Group Balance Sheet..................................... F-87 UBS Group Statement of Changes in Equity.................... F-88 UBS Group Statement of Cash Flows........................... F-89 UBS Group Notes to the Financial Statements................. F-90
- -------------------------------------------------------------------------------- F- i 216 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Group Executive Board UBS AG: We have audited the accompanying consolidated balance sheets of UBS AG and subsidiaries as of 31 December 1999 and 1998, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended 31 December 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UBS AG as of 31 December 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended 31 December 1999, in conformity with International Accounting Standards ("IAS") and comply with Swiss Law. IAS vary in certain significant respects from accounting principles generally accepted in the United States of America. Application of accounting principles generally accepted in the United States of America would have affected shareholders' equity as of 31 December 1999 and 1998 and the results of operations for the two years then ended to the extent summarized in Note 42 of the Notes to the Financial Statements. Basel, 8 March 2000, except for Note 38, as to which the date is 18 April 2000 and Note 1(t) as to which the date is 17 August 2000 ATAG Ernst & Young Ltd. /s/ ROGER K. PERKIN /s/ PETER HECKENDORN - --------------------------------- --------------------------------- Roger K. Perkin Peter Heckendorn Chartered Accountant lic. oec. in charge of the audit in charge of the audit
- -------------------------------------------------------------------------------- F- 1 217 CONSOLIDATED FINANCIAL STATEMENTS UBS GROUP YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997 - -------------------------------------------------------------------------------- F- 2 218 UBS GROUP INCOME STATEMENT
FOR THE YEAR ENDED NOTE 31.12.1999(1) 31.12.1998(1) 31.12.1997 - ------------------ ---- ------------- ------------- ---------- CHF MILLION, EXCEPT PER SHARE DATA OPERATING INCOME Interest income................................. 4 35,604 37,442 23,669 Interest expense................................ 4 (29,695) (32,424) (16,733) ------- ------- ------- Net interest income............................. 5,909 5,018 6,936 Credit loss expense............................. 12b (956) (951) (1,278) ------- ------- ------- Net interest income after credit loss expense... 4,953 4,067 5,658 ------- ------- ------- Net fee and commission income................... 5 12,607 12,626 12,234 Net trading income.............................. 6 7,719 3,313 5,491 Income from disposal of associates and subsidiaries.................................. 7 1,821 1,119 198 Other income.................................... 8 1,325 1,122 1,299 ------- ------- ------- Total operating income.......................... 28,425 22,247 24,880 OPERATING EXPENSES Personnel....................................... 9 12,577 9,816 11,559 General and administrative...................... 9 6,098 6,735 5,315 Depreciation and amortization................... 9 1,857 1,825 1,762 ------- ------- ------- Total operating expenses........................ 20,532 18,376 18,636 ------- ------- ------- OPERATING PROFIT BEFORE RESTRUCTURING COSTS, TAX AND MINORITY INTERESTS........................ 7,893 3,871 6,244 ------- ------- ------- Restructuring costs............................. 7,000 ------- OPERATING PROFIT/(LOSS) BEFORE TAX AND MINORITY INTERESTS..................................... 7,893 3,871 (756) ------- ------- ------- Tax expense/(benefit)........................... 25 1,686 904 (105) ------- ------- ------- NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS..... 6,207 2,967 (651) ------- ------- ------- Minority interests.............................. 26 (54) 5 (16) ------- ------- ------- NET PROFIT/(LOSS)............................... 6,153 2,972 (667) ======= ======= ======= Basic earnings per share (CHF).................. 10 15.20 7.33 (1.59) Diluted earnings per share (CHF)................ 10 15.07 7.20 (1.59) ------- ------- -------
- --------------- (1) The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 3 219 UBS GROUP BALANCE SHEET
31.12.1999(1) 31.12.1998(1) NOTE ------------- ------------- CHF MILLION ASSETS Cash and balances with central banks................. 5,073 3,267 Money market paper................................... 11 69,717 18,390 Due from banks....................................... 12a 29,907 68,495 Cash collateral on securities borrowed............... 13 113,162 91,695 Reverse repurchase agreements........................ 14 132,474 141,285 Trading portfolio assets............................. 15 212,440 159,179 Positive replacement values.......................... 27 64,698 90,511 Loans, net of allowance for credit losses............ 12a 234,858 247,926 Financial investments................................ 16 7,039 6,914 Accrued income and prepaid expenses.................. 5,167 6,627 Investments in associates............................ 17 1,102 2,805 Property and equipment............................... 18 8,701 9,886 Intangible assets and goodwill....................... 19 3,543 2,210 Other assets......................................... 20 11,007 12,092 ------------- ------------- TOTAL ASSETS......................................... 898,888 861,282 ============= ============= Total subordinated assets............................ 600 496 ------------- ------------- LIABILITIES Money market paper issued............................ 64,655 51,527 Due to banks......................................... 21 76,365 85,716 Cash collateral on securities lent................... 13 12,832 19,171 Repurchase agreements................................ 14 196,914 137,617 Trading portfolio liabilities........................ 15 54,586 47,033 Negative replacement values.......................... 27 95,786 125,847 Due to customers..................................... 21 279,960 274,850 Accrued expenses and deferred income................. 12,040 11,232 Long-term debt....................................... 22 56,332 50,783 Other liabilities.................................... 23,24,25 18,376 27,722 ------------- ------------- TOTAL LIABILITIES.................................... 867,846 831,498 ------------- ------------- MINORITY INTERESTS................................... 26 434 990 ------------- ------------- SHAREHOLDERS' EQUITY Share capital........................................ 4,309 4,300 Share premium account................................ 14,437 13,617 Foreign currency translation......................... (442) (456) Retained earnings.................................... 20,327 16,224 Treasury shares...................................... (8,023) (4,891) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY........................... 30,608 28,794 ------------- ------------- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY............................... 898,888 861,282 ============= ============= Total subordinated liabilities....................... 14,801 13,652 ------------- -------------
- --------------- (1) The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 4 220 UBS GROUP STATEMENT OF CHANGES IN EQUITY
31.12.1999(1) 31.12.1998(1) 31.12.1997 FOR THE YEAR ENDED ------------- ------------- ---------- CHF MILLION ISSUED AND PAID UP SHARE CAPITAL Balance at the beginning of the year................ 4,300 4,296 4,255 Issue of share capital.............................. 9 4 41 ------------- ------------- ------ BALANCE AT THE END OF THE YEAR(2)................... 4,309 4,300 4,296 ============= ============= ====== SHARE PREMIUM Balance at the beginning of the year as previously reported.......................................... 13,740 13,260 13,001 Change in accounting policy......................... (123) 1406(4) 0 Balance at the beginning of the year (restated)..... 13,617 14,666 13,001 Premium on shares issued, and warrants exercised.... 45 111 130 Own equity derivatives.............................. 526 (1,598) 0 Net premium on treasury share and own equity derivative activity............................... 249 438 129 ------------- ------------- ------ BALANCE AT THE END OF THE YEAR...................... 14,437 13,617 13,260 ============= ============= ====== FOREIGN CURRENCY TRANSLATION Balance at the beginning of the year................ (456) (111) (155) Movements during the year........................... 14 (345) 44 ------------- ------------- ------ BALANCE AT THE END OF THE YEAR...................... (442) (456) (111) ============= ============= ====== RETAINED EARNINGS Balance at the beginning of the year as previously reported.......................................... 16,293 15,464 16,931 Change in accounting policy......................... (69) 0 0 Balance at the beginning of the year (restated)..... 16,224 15,464 16,931 Net profit/(loss) for the year restated............. 6,153 2,972 (667) Dividends paid restated............................. (2,050) (2,212) (800) ------------- ------------- ------ BALANCE AT THE END OF THE YEAR...................... 20,327 16,224 15,464 ============= ============= ====== TREASURY SHARES, AT COST Balance at the beginning of the year as previously reported.......................................... (1,482) (1,982) (702) Change in accounting policy......................... (3,409) (2,345)(4) 0 Balance at the beginning of the year (restated)..... (4,891) (4,327) (702) Acquisitions restated............................... (6,595) (3,860) (3,172) Disposals restated.................................. 3,463 3,296 1,892 ------------- ------------- ------ BALANCE AT THE END OF THE YEAR(3)................... (8,023) (4,891) (1,982) ============= ============= ====== TOTAL SHAREHOLDERS' EQUITY.......................... 30,608 28,794 30,927 ============= ============= ======
- --------------- (1) The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). (2) Comprising 430,893,162 ordinary shares at 31 December 1999; 429,952,612 ordinary shares at 31 December 1998; and 428,724,700 ordinary shares at 31 December 1997 (as restated for the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation), at CHF 10 each, fully paid. (3) Comprising 36,873,714 shares at 31 December 1999; 24,456,698 shares at 31 December 1998; and 11,692,326 shares at 31 December 1997. (4) Opening balance sheet adjustment to 1 January 1998, with no restatement to 1997. In addition to the Treasury shares, a maximum of 1,057,908 unissued shares (conditional capital) (1,998,458 at 31 December 1998 and 2,884,672 at 31 December 1997) can be issued without the approval of the shareholders. This amount consists of unissued and reserved shares for the former Swiss Bank Corporation employee share ownership plan and optional dividend warrants. The optional dividend warrants were the warrants granted in lieu of a cash dividend by the former Swiss Bank Corporation in February 1996 (at the option of the shareholder). - -------------------------------------------------------------------------------- F- 5 221 UBS GROUP STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31.12.1999(1) 31.12.1998(1) 31.12.1997 CHF MILLION ------------- ------------- ---------- CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES Net profit/(loss)........................................... 6,153 2,972 (667) ADJUSTMENTS TO RECONCILE TO CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES Non cash items included in net profit/(loss) and other adjustments: Depreciation and amortization............................. 1,857 1,825 1,762 Provision for credit losses............................... 956 951 1,278 Income from associates.................................... (211) (377) (231) Deferred tax expense/(benefit)............................ 479 491 (1,035) Restructuring provision................................... 0 0 7,000 Net gain from investing activities........................ (2,282) (1,803) (967) Net increase/(decrease) in operating assets: Net due from/to banks..................................... (5,298) (65,172) 22,503 Reverse repurchase agreements, cash collateral on securities borrowed..................................... (12,656) 66,031 (52,440) Trading portfolio including net replacement values........ (49,956) 45,089 (38,388) Loans due to/from customers............................... 17,222 (5,626) 2,865 Accrued income, prepaid expenses and other assets......... 2,545 2,107 (350) Net increase/(decrease) in operating liabilities: Repurchase agreements, cash collateral on securities lent.................................................... 52,958 (49,145) 24,594 Accrued expenses and other liabilities.................... (7,366) 1,686 1,037 Income taxes paid......................................... (1,063) (733) (1,185) ------------- ------------- ------- NET CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES........... 3,338 (1,704) (34,224) ============= ============= ======= CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES Investments in subsidiaries and associates.................. (1,720) (1,563) (1,550) Disposal of subsidiaries and associates..................... 3,782 1,858 1,294 Purchase of property and equipment.......................... (2,820) (1,813) (1,785) Disposal of property and equipment.......................... 1,880 1,134 1,101 Net (investment)/divestment in financial investments........ 356 6,134 (731) ------------- ------------- ------- NET CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES........... 1,478 5,750 (1,671) ============= ============= ======= CASH FLOW FROM/(USED IN) FINANCING ACTIVITIES Money market paper issued................................... 13,128 (4,073) 23,303 Net movements in treasury shares and treasury share contract activity.................................................. (2,312) (2,552) (1,151) Capital issuance............................................ 9 4 408 Capital repayment........................................... 0 0 (795) Dividends paid.............................................. (2,050) (2,212) (800) Issuance of long term debt.................................. 12,661 5,566 17,155 Repayment of long term debt................................. (7,112) (9,068) (9,105) Repayment of minority interests............................. (689) 0 0 ------------- ------------- ------- NET CASH FLOW FROM/(USED IN) FINANCING ACTIVITIES........... 13,635 (12,335) 29,015 Effects of exchange rate differences........................ 148 (386) (571) ============= ============= ======= NET INCREASE/(DECREASE) IN CASH EQUIVALENTS................. 18,599 (8,675) (7,451) Cash and cash equivalents, beginning of year................ 83,678 92,353 99,805 ------------- ------------- ------- Cash and cash equivalents, end of year...................... 102,277 83,678 92,354 ============= ============= ======= CASH AND CASH EQUIVALENTS COMPRISE: Cash and cash balances with central banks................... 5,073 3,267 4,638 Money market paper.......................................... 69,717 18,390 36,353 Bank deposits maturing in less than 3 months................ 27,487 62,021 51,363 ------------- ------------- ------- TOTAL....................................................... 102,277 83,678 92,354 ============= ============= =======
- --------------- (1) The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 6 222 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of accounting UBS AG and subsidiaries ("UBS" or the "Group") provides a broad range of financial services such as advisory, underwriting, financing, market making, asset management, brokerage, and retail banking on a global level. The Group was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland merged. The merger was accounted for using the pooling of interests method of accounting. Due to the merger, the Group harmonized its accounting policies, which have been retrospectively applied for the presentation of comparative information. The Group adopted new International Accounting Standards ("IAS") and changed the presentation of certain financial information effective 1 January 2000. The consolidated financial statements have been restated, where practicable, to give retroactive effect to these changes -- see t) below. The consolidated financial statements are stated in Swiss francs, the currency of the country in which UBS AG is incorporated. They are prepared in accordance with International Accounting Standards. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported. Actual results could differ from such estimates and the differences may be material to the consolidated financial statements. b) Consolidation The consolidated financial statements comprise those of the parent company (UBS AG), its subsidiaries and its special purpose entities, presented as a single economic entity. Subsidiaries and special purpose entities which are directly or indirectly controlled by the Group are consolidated. Subsidiaries acquired are consolidated from the date control passes. Companies which are acquired and held with a view to their subsequent disposal are recorded as financial investments. The effects of intra-group transactions are eliminated in preparing the Group financial statements, except for certain intercompany derivatives for which hedge accounting is used. Equity and net income attributable to minority interests are shown separately in the balance sheet and income statement respectively. c) Offsetting Assets and liabilities are offset only when the Group has a legal right to offset amounts with the same counterparty and transactions are expected to be settled on a net basis. d) Trade date/settlement date accounting When the Group becomes party to a contract in its trading activities it recognizes from that date ("trade date") any unrealized profits and losses arising from revaluing that contract to fair value. These unrealized profits and losses are recognized in the income statement. On a date subsequent to the trade date, the terms of spot and forward trading transactions are fulfilled ("settlement date") and a resulting financial asset or liability is recognized on the balance sheet at the fair value of the consideration given or received. e) Foreign currency translation Foreign currency transactions are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are reported - -------------------------------------------------------------------------------- F- 7 223 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) using the closing exchange rate. Exchange differences arising on the settlement of transactions at rates different from those at the date of the transaction, and unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities, are recognized in the income statement. Assets and liabilities of foreign entities are translated at the exchange rates at the balance sheet date, while income statement items and cash flows are translated at average rates over the year. Differences resulting from the use of these different exchange rates are recognized directly in foreign currency translation within shareholders' equity. f) Business and geographical segments The Group is organized on a worldwide basis into five major operating divisions and Corporate Center. These divisions are the basis upon which the Group reports its primary segment information. Segment revenue, segment expenses and segment performance include transfers between business segments and between geographical segments. Such transfers are accounted for at competitive prices charged to unaffiliated customers for similar services. g) Securities borrowing and lending Securities borrowed and lent that are collateralized by cash are included in the balance sheet at amounts equal to the collateral advanced or received. Income arising from the securities lending and borrowing business is recognized in the income statement on an accrual basis. h) Repurchase and reverse repurchase transactions The Group enters into purchases of securities under agreements to resell and sales of securities under agreements to repurchase substantially identical securities. Securities which have been sold subject to repurchase agreements continue to be recognized in the balance sheet and are measured in accordance with the accounting policy for trading balances or financial assets as appropriate. The proceeds from sale of these securities are treated as liabilities and included in repurchase agreements. Securities purchased subject to commitments to resell at a future date are treated as loans collateralized by the security and are included in reverse repurchase agreements. Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognized as interest income and interest expense respectively over the life of each agreement. i) Trading portfolio The trading portfolio consists of debt and equity securities as well as of precious metals held to meet the financial needs of our customers and to take advantage of market opportunities. The trading portfolio is carried at fair value. Short positions in securities are reported as trading portfolio liabilities. Realized and unrealized gains and losses, net of related transaction expenses, are recognized as net trading income. Net trading income also includes interest and dividend income on trading assets as well as the funding costs for holding these positions. j) Loans and allowance for credit losses Loans are initially recorded at cost. For loans originated by the Group, the cost is the amount lent to the borrower. For loans acquired from a third party the cost is the fair value at the time of acquisition. - -------------------------------------------------------------------------------- F- 8 224 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Interest income on an unimpaired loan is recognized on an accrual basis. Interest includes the amount of amortization of any discount or premium between the cost of a loan and its amount at maturity and the amortization of any loan fees and costs. The allowance for credit losses provides for risks of losses inherent in the credit extension process, including loans and lending-related commitments. Such commitments include letters of credit, guarantees and commitments to extend credit. Counterparties are individually rated and periodically reviewed and analyzed. The allowance is adjusted for impairments identified on a loan-by-loan basis. If there are indications that there are significant probable losses in the portfolio that have not specifically been identified, allowances would also be provided for on a portfolio basis. Impairments in loans are recognized when it becomes probable that the Group will not be able to collect all amounts due according to the contractual terms of the loans. The carrying amounts of the loans are reduced to their estimated realizable value through a specific allowance. The impairment is recognized as an expense for the period. Loans are stated at their principal amount net of any allowance for credit losses. This management process has resulted in the following components of the overall allowance: Counterparty-specific: Probable losses from individual credit exposures are evaluated based upon the borrower's character, overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. Impairment is measured and allowances are established based on discounted expected cash flows. Country-specific: Probable losses resulting from exposures in countries experiencing political and transfer risk, countrywide economic distress, or problems regarding the legal enforceability of contracts are assessed using country specific scenarios and taking into consideration the nature of the individual exposures and their importance for the economy. Specific country allowances exclude exposures addressed in counterparty-specific allowances. Specific reserve pools: Specific risk reserve pools were established in 1996 to absorb probable losses not specifically identified at that time, but which experience indicated were present in the portfolio. These pools subsequently have been applied to specific loans based on the analysis of individual credit exposures. The Group does not believe there is a current need for such allowances. A loan is classified as non-performing when the contractual payments of principal and/or interest are in arrears for 90 days or more. After the 90 day period the recognition of interest income ceases and a charge is recognized for the unpaid and accrued interest receivable. A write-off is made when all or part of a loan is deemed uncollectible or in the case of debt forgiveness. Write-offs are charged against previously established allowances and reduce the principal amount of a loan. k) Financial investments Financial investments are debt and equity securities held for the accretion of wealth through distributions, such as interest and dividends, and for capital appreciation. Financial investments also include real estate held for sale. Debt securities held to maturity are carried at amortized cost. If necessary, the carrying amount is reduced to its estimated realizable value. Interest income on debt securities, including amortization of premiums and discounts, is recognized on an accrual basis and reported as net interest income. - -------------------------------------------------------------------------------- F- 9 225 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Financial investments held for sale are carried at the lower of cost or market value. Reductions to market value and reversals of such reductions as well as gains and losses on disposal are included in other income. Interest earned and dividends received are included in net interest income. Private equity investments are carried at cost less write-downs for impairments in value. Reductions of the carrying amount and reversals of such reductions as well as gains and losses on disposal are included in other income. l) Investments in associates Investments in associates in which the Group has a significant influence are accounted for by the equity method. Investments in which the Group has a significant influence, but which are acquired and held with a view to their subsequent disposal are included in financial investments (see the reference to private equity investments in the paragraph above). Investments in companies where the parent company does not hold a significant influence are recorded at cost less value adjustments for less than temporary declines in value. m) Property and equipment Property and equipment includes land, buildings, furnishings, fixtures, leasehold improvements, computer, telecommunications and other equipment. Property and equipment is carried at cost less accumulated depreciation and is periodically reviewed for impairment. Property and equipment is depreciated on a straight-line basis over their estimated useful lives as follows: - - Buildings Not exceeding 50 years - - Furnishings and Not exceeding 10 years fixtures - - Leasehold improvements Not exceeding 10 years - - Equipment Not exceeding 5 years
n) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired subsidiary or associate at the date of acquisition. Goodwill and intangibles resulting from the acquisition of client franchises are recognized as an asset and are amortized using the straight-line basis over their estimated useful economic life, not exceeding 20 years. At each balance sheet date, goodwill is reviewed for indications of impairment. If such indications exist an analysis is performed including an assessment of future cash flows to determine if a write-down is necessary. Goodwill and fair value adjustments arising on the acquisition of foreign subsidiaries are treated as local currency balances and are translated into Swiss francs at the closing rate at subsequent balance sheet dates. o) Income taxes Income tax payable on profits, based on the applicable tax laws in each jurisdiction, is recognized as an expense in the period in which profits arise. The tax effects on income tax losses available for carry-forward are recognized as an asset when it is probable that future taxable profit will be available against which those losses can be utilized. - -------------------------------------------------------------------------------- F- 10 226 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the Group balance sheet and their amounts as measured for tax purposes, which will result in taxable amounts in future periods. Deferred tax assets are recognized for temporary differences which will result in deductible amounts in future periods, but only to the extent it is probable that sufficient taxable profits will be available against which these differences can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period in which the asset will be realized or the liability will be settled. Current and deferred tax assets and liabilities are offset when they arise from the same tax reporting group and relate to the same tax authority and when the legal right to offset exists. p) Own shares, own bonds and derivatives on own shares In the normal course of its trading and market making activities, the Group buys and sells own shares, own bonds and derivatives on own shares. In 1997, these instruments were held in the trading portfolio similar to other trading instruments, and carried at fair value. Changes in fair value and dividends received on UBS AG shares and interest on own bonds in the trading portfolio were recognized as net trading income (See Note t). The Group also holds its own shares for non-trading purposes for instance employee compensation schemes and other strategic purposes. These shares are recorded within treasury shares and are deducted from shareholders' equity. The difference between the proceeds of the sale of treasury shares and their cost basis is recognized in share premium. Dividends relating to treasury shares are not recognized. q) Retirement benefits The Group sponsors a number of retirement benefit plans for its employees worldwide. These plans include both defined benefit and defined contribution plans and various other retirement benefits such as post-employment medical benefit. As of 1 January 1999, the Group adopted IAS 19, Employee Benefits (revised 1998) ("IAS 19") to account for such plans. Under IAS 19, Group contributions to defined contribution plans are expensed when employees have rendered services in exchange for such contributions, generally in the year of contribution. In accordance with IAS 19, the Group uses the projected unit credit actuarial method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. The principal actuarial assumptions made by the actuary are set out in Note 35. The Group recognizes a portion of its actuarial gains and losses as income or expenses if the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceeded the greater of: a) 10% of the present value of the defined benefit obligation at that date (before deducting plan assets); and b) 10% of the fair value of any plan assets at that date. The unrecognized actuarial gains and losses exceeding the greater of the two values are recognized in the income statement over the expected average remaining working lives of the employees participating in the plans. - -------------------------------------------------------------------------------- F- 11 227 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) r) Derivative instruments Derivative instruments are carried at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate. The fair values of derivative instruments are shown in the balance sheet as positive and negative replacement values. Realized and unrealized gains and losses are recognized in net trading income. Valuation adjustments to cover credit and market liquidity risks have been made. Transactions in derivative instruments entered into for hedging of non-trading positions are recognized in the income statement on the same basis as to the underlying item being hedged. s) Comparability Certain amounts have been reclassified from previous years to conform to the 1999 presentation. The prior year financial statements reflect the requirements of the following revised or new International Accounting Standards, which the Group implemented in 1999: - - IAS 1 Presentation of Financial Statements - - IAS 14 Segment Reporting - - IAS 17 Accounting for Leases - - IAS 19 Employee Benefits - - IAS 36 Impairment of Assets.
The implementation of the above standards had no material impact for the Group. t) Retroactive application of accounting changes adopted 1 January 2000 The consolidated financial statements as of and for the years ended 31 December 1999 and 1998 have been restated to reflect retroactively changes in accounting policy arising from newly applicable IAS and changes in presentation adopted 1 January 2000, as discussed below. 1997 financial information has not been restated due to unavailability of certain pre-merger data and different organizational structures. The following notes to the financial statements also have been revised to reflect the changes referred to in this Note: Notes 2, 3, 4, 6, 10, 14, 15, 25, 27, 33, 34, 41, 42 and 43. Standing Interpretations Committee ("SIC") 16, Share Capital -- Reacquired Own Equity Instruments (Treasury Shares) In May 1999, the International Accounting Standards Committee ("IASC") issued Interpretation SIC 16, Share Capital -- Reacquired Own Equity Instruments (Treasury Shares) which the Group adopted as of 1 January 2000. The Interpretation provides guidance for the recognition, presentation, and disclosure of Treasury shares. SIC 16 applies to own shares and derivatives on own shares held for trading and non-trading purposes. SIC 16 requires own shares and derivatives on own shares to be presented as Treasury shares and deducted from Shareholders' equity. Gains and losses relating to the sale of own shares and derivatives on own shares are not recognized in the income statement but rather as a change in Shareholders' equity. As a result of the retroactive application of Interpretation SIC 16, net trading income was reduced by CHF 196 million and CHF 81 million, and income tax expense was reduced by CHF 49 million and CHF 23 million for the years ended 31 December 1999 and 1998, respectively; these amounts were recorded in shareholders' equity. Shareholders' equity and total assets were reduced by CHF 4,227 million and CHF 3,601 million as of 31 December 1999 and 1998, respectively, to reflect the - -------------------------------------------------------------------------------- F- 12 228 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) reclassification of own shares and derivatives on own shares held at those dates. Of the CHF 4,227 million for 31 December 1999, CHF 4,561 million was a reduction in trading portfolio assets and the remaining CHF 334 million was an increase in positive replacement values. Of the CHF 3,601 million for 31 December 1998, CHF 3,409 million was a reduction to trading portfolio assets and the remaining CHF 192 million was a reduction to positive replacement values. In addition, shareholders' equity was adjusted as of 1 January 1998. Offsetting of Amounts Related to Certain Contracts In order to improve comparability with its main competitors, the Group has offset positive and negative replacement values and reverse repurchase agreements and repurchase agreements with the same counter-party for transactions covered by legally enforceable master netting agreements. Positive and negative replacement values have been reduced by CHF 66,136 million and CHF 79,233 million as of 31 December 1999 and 1998, respectively. Reverse repurchase and repurchase agreements have been reduced by CHF 12,322 million as of 31 December 1999. Interest and Dividend Income and Expense on Trading Assets and Liabilities In prior periods, interest and dividend income and expense on trading assets and liabilities were included in net trading income. In order to improve comparability with its main competitors, the Group has included interest and dividend income on trading assets and interest expense on trading liabilities in interest income and interest expense, respectively, and has discontinued the allocation of funding costs to net trading income. Interest income was increased by CHF 17,281 million and CHF 14,607 million for the years ended 31 December 1999 and 1998, respectively. Interest expense was increased by CHF 17,728 million and CHF 16,251 million for the years ended 31 December 1999 and 1998, respectively. Net trading income was increased by CHF 447 million and CHF 1,644 million for the years ended 31 December 1999 and 1998, respectively. Tax Expense Capital taxes were included in tax expense. The Group has reclassified CHF 80 million and CHF 118 million in Capital taxes from tax expense to General and administrative expenses for the years ended 31 December 1999 and 1998, respectively. Segment Information In the first half of 2000, the Group reorganized its business divisions. The segment reporting for the year ended 31 December 1999 and 1998 has been restated to reflect the new Group structure. The following IAS were adopted as of 1 January 2000, but this adoption had no material impact on the prior periods presented herein. IAS 37, Provisions, Contingent Liabilities and Contingent Assets In July 1998, the IASC issued IAS 37, Provisions, Contingent Liabilities and Contingent Assets, which is required to be adopted for the Group's financial statements as of 1 January 2000. The Standard provides accounting and disclosure requirements for contingent liabilities and contingent assets. IAS 37 also provides recognition and measurement requirements for provisions. - -------------------------------------------------------------------------------- F- 13 229 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) IAS 38, Intangible Assets In July 1998, the IASC issued IAS 38, Intangible Assets, which is required to be adopted prospectively for the Group's financial statements as of 1 January 2000. The Standard requires the capitalization and amortization of intangible assets, if it is probable that the future economic benefits that are attributable to the assets will flow to the enterprise and the cost of the asset can be measured reliably. The amortization period for recognized intangible assets should not exceed 20 years. If adopted in 1999 this standard would have increased operating profit by approximately CHF 300 million. IAS 10 (revised), Events After the Balance Sheet Date In May 1999, the IASC issued IAS 10 (revised), Events After the Balance Sheet Date, which is required to be adopted for the Group's financial statements as of 1 January 2000. IAS 10 (revised) establishes requirements for the recognition and disclosure of events after the balance sheet date. u) Recent accounting standards not yet adopted IAS 39, Recognition and Measurement of Financial Instruments In December 1998, the IASC issued IAS 39, Recognition and Measurement of Financial Instruments, which is required to be adopted for the Group's financial statements as of 1 January 2001 on a prospective basis. The Standard provides comprehensive guidance on accounting for financial instruments. Financial instruments include conventional financial assets and liabilities and derivatives. IAS 39 requires that all financial instruments should be recognized on the balance sheet. Most financial instruments should be carried at fair value. IAS 39 also establishes hedge accounting criteria and guidelines. While the specific impact on earnings and financial position of IAS 39 has not been determined, the activities that will be most affected by the new Standard have been identified. Specifically, the use of derivatives to hedge loans, deposits, and issuance of debt, primarily hedge of interest rate risk, will be affected by IAS 39. Management is currently evaluating the impact of IAS 39. The actual assessment of the impact of IAS 39 on the Group's earnings and financial position will be based on the 1 January 2001 financial position, among other things, in accordance with the Standard. - -------------------------------------------------------------------------------- F- 14 230 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 SEGMENT REPORTING BY BUSINESS GROUP The business group results have been presented on a management reporting basis. Consequently, internal charges and transfer pricing adjustments have been reflected in the performance of each business. The basis of the reporting reflects the management of the business within the Group. Total revenue includes income which is directly attributable to a business group whether from sales to external customers or from transactions with other segments. Revenue sharing agreements are used to allocate external customer revenues to a business group on a reasonable basis. Transactions between business groups are conducted at arms length.
UBS UBS ASSET UBS CORPORATE UBS FOR THE YEAR ENDED 31 DECEMBER 1999(2) SWITZERLAND MANAGEMENT WARBURG CENTER GROUP - ------------------------------------------ ----------- ---------- ------- --------- ------- CHF MILLION Revenues.................................. 12,761 1,369 13,241 2,010 29,381 Credit loss expense(1).................... (1,071) 0 (333) 448 (956) ------- ------ ------- -------- ------- Total operating income.................... 11,690 1,369 12,908 2,458 28,425 ------- ------ ------- -------- ------- Personnel expenses........................ 4,691 516 7,278 92 12,577 General and administrative expenses....... 2,308 271 2,680 839 6,098 Depreciation.............................. 460 32 659 366 1,517 Amortization of goodwill and other intangible assets....................... 23 113 154 50 340 ------- ------ ------- -------- ------- Total operating expenses.................. 7,482 932 10,771 1,347 20,532 ------- ------ ------- -------- ------- SEGMENT PERFORMANCE BEFORE TAX............ 4,208 437 2,137 1,111 7,893 Tax expense............................... 1,686 ------- NET PROFIT BEFORE MINORITY INTERESTS...... 6,207 Minority interests........................ (54) ------- NET PROFIT................................ 6,153 ======= OTHER INFORMATION AS OF 31.12.1999 Total assets(3)........................... 254,577 10,451 721,900 (88,040) 898,888 Total liabilities(3)...................... 270,137 4,614 695,965 (102,436) 868,280
- --------------- (1) In order to show the relevant business group performance over time, adjusted expected loss figures rather than the net credit loss expense are reported for all business groups. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the net credit loss expense for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss expense for financial reporting purposes of CHF 956 million for the year ended 31 December 1999 is as follows: UBS Switzerland CHF 985 million, UBS Warburg CHF (20) million, Corporate Center CHF (9) million. (2) The 1999 figures have been restated to reflect the new Group structure and retroactive changes in accounting policy and changes in presentation (see Note 1: Basis of Accounting). (3) The funding surplus/requirement is reflected in each business group and adjusted in Corporate Center. - -------------------------------------------------------------------------------- F- 15 231 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UBS UBS ASSET UBS CORPORATE UBS FOR THE YEAR ENDED 31 DECEMBER 1998(2) SWITZERLAND MANAGEMENT WARBURG CENTER GROUP - -------------------------------------- ----------- ---------- ------- --------- ------- CHF MILLION - ----------- Revenues................................... 13,958 1,358 7,691 191 23,198 Credit loss expense(1)..................... (1,186) 0 (510) 745 (951) ------- ----- ------- ------- ------- Total operating income..................... 12,772 1,358 7,181 936 22,247 ------- ----- ------- ------- ------- Personnel expenses......................... 4,448 515 4,641 212 9,816 General and administrative expenses........ 2,226 228 2,625 1,656 6,735 Depreciation............................... 771 35 549 128 1,483 Amortization of goodwill and other intangible assets........................ 4 78 173 87 342 ------- ----- ------- ------- ------- Total operating expenses................... 7,449 856 7,988 2,083 18,376 ------- ----- ------- ------- ------- SEGMENT PERFORMANCE BEFORE TAX............. 5,323 502 (807) (1,147) 3,871 Tax expense................................ 904 ------- NET PROFIT BEFORE MINORITY INTERESTS....... 2,967 Minority interests......................... 5 ------- NET PROFIT................................. 2,972 ======= OTHER INFORMATION AS OF 31.12.1998 Total assets(3)............................ 217,215 7,266 662,006 (25,205) 861,282 Total liabilities(3)....................... 228,583 2,848 637,676 (36,619) 832,488
- --------------- (1) In order to show the relevant divisional performance over time, adjusted expected loss figures rather than the net credit loss expense are reported for all business divisions. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the net credit loss expense for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss expense for financial reporting purposes of CHF 951 million as of 31 December 1998 is as follows: UBS Private Banking CHF 48 million, UBS Warburg CHF 506 million, UBS Private & Corporate Clients CHF 397 million. (2) The 1998 figures have been restated to reflect the new Group structure and retroactive changes in accounting policy and changes in presentation (see Note 1: Basis of Accounting). (3) The funding surplus/requirement is reflected in each division and adjusted in Corporate Center. - -------------------------------------------------------------------------------- F- 16 232 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UBS UBS PRIVATE PRIVATE UBS & CORPORATE UBS ASSET UBS CORPORATE UBS FOR THE YEAR ENDED 31 DECEMBER 1997 BANKING WARBURG CLIENTS MANAGEMENT CAPITAL CENTER GROUP - ----------------------------------- ------- ------- ----------- ---------- ------- --------- ----- CHF MILLION Revenues........................... 6,215 10,888 7,005 1,040 492 518 26,158 Credit loss expense(1)............. (59) (300) (1,092) 0 0 173 (1,278) ----- ------ ------ ----- --- --- ------ Total operating income............. 6,156 10,588 5,913 1,040 492 691 24,880 ----- ------ ------ ----- --- --- ------ Personnel, general and administrative expenses.......... 2,869 8,641 4,497 542 110 215 16,874 Depreciation and amortization...... 122 668 660 95 1 216 1,762 ----- ------ ------ ----- --- --- ------ Total operating expenses........... 2,991 9,309 5,157 637 111 431 18,636 ----- ------ ------ ----- --- --- ------ SEGMENT PERFORMANCE BEFORE TAX..... 3,165 1,279 756 403 381 260 6,244 Tax expense........................ 1,395 ------ NET PROFIT BEFORE MINORITY INTERESTS........................ 4,849 Minority interests................. 16 ------ NET PROFIT BEFORE RESTRUCTURING COSTS............................ 4,833 ======
- --------------- (1) Basically the same methodology as for the year 1998 segment reporting is applied. Due to the unavailability of certain pre-1998 merger data and different organizational structures, the divisional breakdown of the financially booked net credit loss expense is not available. The 1997 results do not take into account the 1998 merger provision and the impact of the 1998 merger on taxes. The net loss for the Group including these items was CHF (667) million. Due to the unavailability of certain pre-merger (1998 merger) data, 1997 assets and liabilities by business group are not presented. - -------------------------------------------------------------------------------- F- 17 233 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 SEGMENT REPORTING BY GEOGRAPHICAL LOCATION The geographical analysis of total assets is based on customer domicile whereas operating income and capital investment is based on the location of the office in which the transactions and assets are recorded. Because of the global nature of financial markets the Group's business is managed on an integrated basis world-wide, with a view to profitability by product line. The geographical analysis of operating income, total assets, and capital investment is provided in order to comply with International Accounting Standards, and does not reflect the way the Group is managed. Management believes that analysis by business division, as shown in Note 2 to these financial statements, is a more meaningful representation of the way in which the Group is managed.
FOR THE YEAR ENDED 31 DECEMBER 1999 - ------------------ ---------------------------------------------------------------- TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT ---------------------- ----------------- ------------------- CHF M SHARE % CHF M SHARE % CHF M SHARE % -------- --------- ------- ------- ------- --------- Switzerland............................. 14,976 52 227,821 25 1,990 70 Europe.................................. 7,626 27 243,427 27 356 13 Americas................................ 3,861 14 316,363 35 386 14 Asia/Pacific............................ 1,945 7 103,703 12 87 3 Africa/Middle East...................... 17 0 7,574 1 1 0 ------ --- ------- --- ---- --- TOTAL................................... 28,425 100 898,888 100 2,820 100 ====== === ======= === ==== ===
FOR THE YEAR ENDED 31 DECEMBER 1998 - ------------------ ---------------------------------------------------------------- TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT ---------------------- ----------------- ------------------- CHF M SHARE % CHF M SHARE % CHF M SHARE % -------- --------- ------- ------- ------- --------- Switzerland............................. 16,757 75 221,945 26 234 13 Europe.................................. 1,655 8 322,841 38 765 42 Americas................................ 2,548 11 216,989 25 513 28 Asia/Pacific............................ 1,251 6 95,402 11 304 17 Africa/Middle East...................... 36 0 4,105 0 2 0 ------ --- ------- --- ----- --- Total................................... 22,247 100 861,282 100 1,818 100 ====== === ======= === ===== ===
NOTE 4 NET INTEREST INCOME
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(1) ------------------ ---------- ---------- ------------- CHF MILLION INTEREST INCOME Interest earned on loans and advances to banks.......... 6,105 7,687 4,031 Interest earned on loans and advances to customers...... 12,077 14,111 17,565 Interest from finance leasing........................... 49 60 90 Interest earned on securities borrowed and reverse repurchase agreements................................. 11,422 10,380 0 Interest and dividend income from financial investments........................................... 160 372 498 Interest and dividend income from trading portfolio..... 5,598 3,901 0 Other................................................... 193 931 1,485 ------ ------ ------ Total................................................... 35,604 37,442 23,669 ------ ------ ------
- -------------------------------------------------------------------------------- F- 18 234 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(1) ------------------ ---------- ---------- ------------- CHF MILLION INTEREST EXPENSE Interest on amounts due to banks........................ 5,515 8,205 7,247 Interest on amounts due to customers.................... 8,330 9,890 10,074 Interest on securities lent and repurchase agreements... 8,446 7,543 0 Interest on medium and long term debt................... 5,334 5,045 4,468 Interest and dividend expense from trading portfolio.... 2,070 1,741 0 Funding costs for trading positions..................... 0 0 (5,056) ------ ------ ------ Total................................................... 29,695 32,424 16,733 ------ ------ ------ NET INTEREST INCOME..................................... 5,909 5,018 6,936 ====== ====== ======
- --------------- (1) Interest and dividends derived from the securities and derivative product portfolios held for trading are included within net trading income. The funding costs of holding these assets are charged to net trading income and credited to interest expense. NOTE 5 NET FEE AND COMMISSION INCOME
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997 - ------------------ ---------- ---------- ---------- CHF MILLION CREDIT-RELATED FEES AND COMMISSIONS....................... 372 559 793 ------ ------ ------ SECURITY TRADING AND INVESTMENT ACTIVITY FEES Underwriting and corporate finance fees................... 1,831 1,694 1,645 Brokerage fees............................................ 3,934 3,670 4,145 Investment fund fees...................................... 1,915 1,778 1,457 Fiduciary fees............................................ 317 349 375 Custodian fees............................................ 1,583 1,386 1,188 Portfolio and other management and advisory fees.......... 2,984 3,335 2,549 Other..................................................... 57 110 233 ------ ------ ------ Total..................................................... 12,621 12,322 11,592 ------ ------ ------ COMMISSION INCOME FROM OTHER SERVICES..................... 765 776 784 TOTAL FEE AND COMMISSION INCOME...................... 13,758 13,657 13,169 ------ ------ ------ FEE AND COMMISSION EXPENSE Brokerage fees paid....................................... 795 704 694 Other..................................................... 356 327 241 ------ ------ ------ Total..................................................... 1,151 1,031 935 ------ ------ ------ NET FEE AND COMMISSION INCOME............................. 12,607 12,626 12,234 ====== ====== ======
- -------------------------------------------------------------------------------- F- 19 235 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 NET TRADING INCOME
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(2) - ------------------ ---------- ---------- ------------- CHF MILLION Foreign exchange(1)..................................... 1,108 1,992 2,550 Fixed income............................................ 2,603 162 1,843 Equities................................................ 4,008 1,159 1,098 ------ ----- ----- NET TRADING INCOME...................................... 7,719 3,313 5,491 ====== ===== =====
- --------------- (1) Includes other trading income such as banknotes, precious metals and commodities. (2) Interest and dividends derived from the securities and derivative product portfolios held for trading are included within net trading income. The funding costs of holding these assets are charged to net trading income and credited to interest expense. NOTE 7 NET GAINS/(LOSSES) FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997 - ------------------ ---------- ---------- ---------- CHF MILLION Net income from disposal of consolidated subsidiaries..... 8 1,149 154 Net gains/(losses) from disposal of investments in associates.............................................. 1,813 (30) 44 ----- ----- ----- NET GAINS FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES.... 1,821 1,119 198 ===== ===== =====
While the 1999 figure represents mainly the disposal gains from our investments in Swiss Life/ Rentenanstalt and Julius Baer registered shares, the 1998 number is mainly attributable to the disposal of the BSI - Banca della Svizzera Italiana. NOTE 8 OTHER INCOME
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997 - ------------------ ---------- ---------- ---------- CHF MILLION INVESTMENTS IN FINANCIAL ASSETS (DEBT AND EQUITY) Net income from disposal of private equity investments.... 374 587 418 Net income from disposal of other financial assets........ 180 398 338 Net gains/(losses) from revaluation of financial assets... (102) (556) (16) ----- ----- ----- Total..................................................... 452 429 740 ----- ----- ----- INVESTMENTS IN PROPERTY Net income from disposal of properties held for resale.... 78 33 20 Net gains/(losses) from revaluation of properties held for resale.................................................. (49) (106) (90) Net income from other properties.......................... (20) 328 99 ----- ----- ----- Total..................................................... 9 255 29 ----- ----- ----- EQUITY INCOME FROM INVESTMENTS IN ASSOCIATES.............. 211 377 231 ----- ----- ----- OTHER..................................................... 653 61 299 ----- ----- ----- TOTAL OTHER INCOME........................................ 1,325 1,122 1,299 ===== ===== =====
- -------------------------------------------------------------------------------- F- 20 236 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9 OPERATING EXPENSES
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997 - ------------------ ---------- ---------- ---------- CHF MILLION PERSONNEL EXPENSES Salaries and bonuses...................................... 9,872 7,082(1) 8,932 Contractors............................................... 886 535 365 Insurance and social contributions........................ 717 542(1) 536 Contributions to retirement benefit plans................. 8(2) 614 580 Employee share plans...................................... 151 201 143 Other personnel expenses.................................. 943 842 1,003 ------ ------ ------ TOTAL..................................................... 12,577 9,816 11,559 ====== ====== ====== GENERAL AND ADMINISTRATIVE EXPENSES Occupancy................................................. 847 822 830 Rent and maintenance of machines and equipment............ 410 390 460 Telecommunications and postage............................ 756 820 819 Administration............................................ 784 759 794 Marketing and public relations............................ 335 262 306 Travel and entertainment.................................. 552 537 528 Professional fees, including IT outsourcing............... 1,815 1,792 1,464 Other..................................................... 599 1,353 114 ------ ------ ------ TOTAL..................................................... 6,098 6,735 5,315 ====== ====== ====== DEPRECIATION AND AMORTIZATION Property and equipment.................................... 1,517 1,483 1,623 Goodwill and other intangible assets...................... 340 342 139 ------ ------ ------ TOTAL..................................................... 1,857 1,825 1,762 ====== ====== ====== TOTAL OPERATING EXPENSES.................................. 20,532 18,376 18,636 ====== ====== ======
- --------------- (1) CHF 121 million of bonus related social contribution costs have been reclassified from Salaries and bonuses to Insurance and social contributions. (2) Includes CHF 456 million prepaid employer contributions. - -------------------------------------------------------------------------------- F- 21 237 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 EARNINGS PER SHARE
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997 - ------------------ ----------- ----------- ----------- BASIC EARNINGS/(LOSS) PER SHARE CALCULATION Net profit/(loss) for the year (CHF million).... 6,153 2,972 (667) Weighted average shares outstanding: Registered ordinary shares...................... 430,497,026 429,710,128 426,994,240 Treasury shares................................. (25,754,544) (24,487,833) (7,724,236) ----------- ----------- ----------- WEIGHTED AVERAGE SHARES FOR BASIC EARNINGS PER SHARE......................................... 404,742,482 405,222,295 419,270,004 ----------- ----------- ----------- BASIC EARNINGS/(LOSS) PER SHARE (CHF)........... 15.20 7.33 (1.59) =========== =========== =========== DILUTED EARNINGS/(LOSS) PER SHARE CALCULATION Net profit/(loss) for the period (CHF million)...................................... 6,153 2,972 (667) Weighted average shares for basic earnings per share......................................... 404,742,482 405,222,295 419,270,004 Potential dilutive ordinary shares resulting from outstanding options, warrants and convertible debt securities................... 3,632,670 7,658,746 576,290 ----------- ----------- ----------- WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE......................................... 408,375,152 412,881,041 419,846,294 ----------- ----------- ----------- DILUTED EARNINGS/(LOSS) PER SHARE (CHF)......... 15.07 7.20 (1.59) =========== =========== ===========
The weighted average number of shares is calculated based upon the average outstanding shares at the end of each month. 1999 share figures are restated for the two-for-one stock split, approved at the shareholder meeting of 18 April 2000. NOTE 11 MONEY MARKET PAPER
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- Government treasury notes and bills......................... 32,724 9,568 Money market placements..................................... 36,540 8,262 Other bills and cheques..................................... 453 560 ------ ------ TOTAL MONEY MARKET PAPER.................................... 69,717 18,390 ====== ====== thereof eligible for discount at central banks.............. 64,671 16,512
- -------------------------------------------------------------------------------- F- 22 238 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12A DUE FROM BANKS AND LOANS TO CUSTOMERS The composition of due from banks, the loan portfolio and the allowances for credit losses by type of exposure at the end of the year was as follows:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Banks....................................................... 30,785 69,543 Allowance for credit losses................................. (878) (1,048) ------- ------- Net due from banks.......................................... 29,907 68,495 ------- ------- Loans to customers: Mortgages................................................. 127,987 140,785 Other loans............................................... 119,242 120,636 ------- ------- Subtotal.................................................... 247,229 261,421 Allowance for credit losses................................. (12,371) (13,495) ------- ------- Net loans to customers...................................... 234,858 247,926 ------- ------- NET DUE FROM BANKS AND LOANS TO CUSTOMERS................... 264,765 316,421 ======= ======= thereof subordinated........................................ 86 133 ------- -------
The composition of due from banks and loans to customers by geographical region based on the location of the borrower at the end of the year was as follows:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Switzerland................................................. 183,944 187,223 Europe...................................................... 44,796 53,013 Americas.................................................... 31,285 44,556 Asia/Pacific................................................ 13,451 43,142 Africa/Middle East.......................................... 4,538 3,030 ------- ------- Subtotal.................................................... 278,014 330,964 Allowance for credit losses................................. (13,249) (14,543) ------- ------- NET DUE FROM BANKS AND LOANS TO CUSTOMERS................... 264,765 316,421 ======= =======
The composition of due from banks and loans to customers by type of collateral at the end of the year was as follows:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Secured by mortgages........................................ 130,835 145,247 Collateralized by securities................................ 19,061 13,185 Guarantees and other collateral............................. 28,725 27,953 Unsecured................................................... 99,393 144,579 ------- ------- Subtotal.................................................... 278,014 330,964 Allowance for credit losses................................. (13,249) (14,543) ------- ------- NET DUE FROM BANKS AND LOANS TO CUSTOMERS................... 264,765 316,421 ======= =======
- -------------------------------------------------------------------------------- F- 23 239 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12B ALLOWANCE AND PROVISION FOR CREDIT LOSSES The allowance and provision for credit losses developed as follows:
TOTAL SPECIFIC COUNTRY RISK ------------------------ CHF MILLION ALLOWANCE PROVISION 31.12.1999 31.12.1998 - ----------- --------- ------------ ---------- ---------- Balance at the beginning of the year.......... 13,528 1,450 14,978 16,213 Write-offs.................................... (3,271) (4) (3,275) (2,324) Recoveries.................................... 65 0 65 59 Increase/(decrease) in credit loss allowance and provision............................... 1,122 (166) 956 951 Net foreign exchange and other adjustments(1).............................. 578 96 674 79 ------ ----- ------ ------ BALANCE AT THE END OF THE YEAR................ 12,022 1,376 13,398 14,978 ====== ===== ====== ======
- --------------- (1) Includes allowance for doubtful interest of CHF 409 million at 31 December 1999 and CHF 423 million at 31 December 1998. At the end of the year the aggregate allowances and provisions were apportioned and displayed as follows:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- As a reduction of due from banks............................ 878 1,048 As a reduction of loans to customers........................ 12,371 13,495 ------ ------ Subtotal.................................................... 13,249 14,543 Included in other liabilities related to commitments and contingent liabilities.................................... 149 435 ------ ------ TOTAL ALLOWANCE AND PROVISION FOR CREDIT LOSSES............. 13,398 14,978 ====== ======
NOTE 12C NON-PERFORMING LOANS An analysis of changes in non-performing loans is presented in the following table:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Non-performing loans at beginning of year................... 16,113 16,664 Net additions............................................... (638) 2,258 Write-offs and disposals.................................... (2,402) (2,809) ------ ------ NON-PERFORMING LOANS AT THE END OF THE YEAR................. 13,073 16,113 ====== ======
The non-performing loans by type of exposure at the end of the year, were as follows:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Banks....................................................... 499 477 ------ ------ Loans to customers: Mortgages................................................. 7,105 9,280 Other..................................................... 5,469 6,356 ------ ------ Subtotal.................................................... 12,574 15,636 ------ ------ TOTAL NON-PERFORMING LOANS.................................. 13,073 16,113 ====== ======
- -------------------------------------------------------------------------------- F- 24 240 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The non-performing loans by geographical region based on the location of the borrower were as follows:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Switzerland................................................. 11,435 14,022 Europe...................................................... 223 405 Americas.................................................... 697 1,156 Asia/Pacific................................................ 373 281 Africa/Middle East.......................................... 345 249 ------ ------ TOTAL NON-PERFORMING LOANS.................................. 13,073 16,113 ====== ======
When principal and interest are overdue by 90 days, loans are classified as non-performing, the recognition of interest income ceases and a charge is recognized against income for the unpaid interest receivable. Allowances are provided for non-performing loans to reflect their net estimated recoverable amount. Unrecognized interest related to such loans totaled CHF 409 million for the year ended 31 December 1999 and CHF 423 million for the year ended 31 December 1998. NOTE 13 CASH COLLATERAL ON SECURITIES BORROWED AND LENT
31.12.1999 31.12.1998 ------------------------ ------------------------ SECURITIES SECURITIES SECURITIES SECURITIES CHF MILLION BORROWED LENT BORROWED LENT - ----------- ---------- ---------- ---------- ---------- CASH COLLATERAL BY COUNTERPARTIES Banks.............................................. 99,810 8,926 68,186 5,337 Customers.......................................... 13,352 3,906 23,509 13,834 ------- ------ ------ ------ TOTAL CASH COLLATERAL ON SECURITIES BORROWED AND LENT............................................. 113,162 12,832 91,695 19,171 ======= ====== ====== ======
NOTE 14 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
31.12.1999 31.12.1998 ------------------------ ------------------------ REVERSE REVERSE REPURCHASE REPURCHASE REPURCHASE REPURCHASE CHF MILLION AGREEMENTS AGREEMENTS AGREEMENTS AGREEMENTS - ----------- ---------- ---------- ---------- ---------- AGREEMENTS BY COUNTERPARTIES Banks........................................ 93,161 125,054 107,565 77,942 Customers.................................... 39,313 71,860 33,720 59,675 ------- ------- ------- ------- TOTAL REPURCHASE AND REVERSE REPURCHASE AGREEMENTS................................. 132,474 196,914 141,285 137,617 ======= ======= ======= =======
NOTE 15 TRADING PORTFOLIO Trading assets and liabilities are carried at fair value. The following table presents the carrying value of trading assets and liabilities at the end of the year.
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- TRADING PORTFOLIO ASSETS DEBT INSTRUMENTS Swiss government and government agencies.................... 7,391 13,448 U.S. Treasury and government agency......................... 21,821 9,969
- -------------------------------------------------------------------------------- F- 25 241 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Other government............................................ 65,821 62,639 Corporate listed instruments................................ 13,646 8,519 Other unlisted instruments.................................. 8,439 8,100 ------- ------- TOTAL....................................................... 117,118 102,675 ------- ------- EQUITY INSTRUMENTS Listed instruments (excluding own shares)................... 87,227 49,848 Unlisted instruments........................................ 2,968 841 ------- ------- TOTAL....................................................... 90,195 50,689 ------- ------- PRECIOUS METALS............................................. 5,127 5,815 ------- ------- TOTAL TRADING PORTFOLIO ASSETS.............................. 212,440 159,179 ======= ======= TRADING PORTFOLIO LIABILITIES DEBT INSTRUMENTS Swiss government and government agencies.................... 0 96 U.S. Treasury and government agency......................... 24,535 4,455 Other government............................................ 11,917 34,979 Corporate listed instruments................................ 6,459 3,154 ------- ------- TOTAL....................................................... 42,911 42,684 ------- ------- LISTED EQUITY INSTRUMENTS................................... 11,675 4,349 ------- ------- TOTAL TRADING PORTFOLIO LIABILITIES......................... 54,586 47,033 ======= =======
The Group trades debt, equity, precious metals, foreign currency and derivatives to meet the financial needs of its customers and to generate revenue through its trading activities. Note 27 provides a description of the various classes of derivatives together with the related volumes used in the Group's trading activities, whereas Notes 13 and 14 provide further details about cash collateral on securities borrowed and lent and repurchase and reverse repurchase agreements. NOTE 16 FINANCIAL INVESTMENTS
CHF MILLION 31.12.1999 12.31.1998 ----------- ---------- ---------- DEBT INSTRUMENTS Listed...................................................... 1,357 1,880 Unlisted.................................................... 609 547 ----- ----- Total....................................................... 1,966 2,427 ----- ----- EQUITY INVESTMENTS Listed...................................................... 356 400 Unlisted.................................................... 557 1,048 ----- ----- Total....................................................... 913 1,448 ----- ----- PRIVATE EQUITY INVESTMENTS.................................. 3,001 1,759 PROPERTIES HELD FOR RESALE.................................. 1,159 1,280 ----- ----- TOTAL FINANCIAL INVESTMENTS................................. 7,039 6,914 ===== ===== thereof eligible for discount at central banks.............. 563 544
- -------------------------------------------------------------------------------- F- 26 242 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The following table gives additional disclosure in respect of the valuation methods used.
31.12.1999 31.12.1998 ------------------------ ------------------------ CHF MILLION BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE ----------- ---------- ---------- ---------- ---------- VALUED AT AMORTIZED COST Debt instruments................................ 677 687 1,530 1,551 ----- ----- ----- ----- VALUED AT THE LOWER OF COST OR MARKET VALUE Debt instruments................................ 1,289 1,314 897 907 Equity instruments.............................. 913 939 1,448 1,552 Properties held for resale...................... 1,159 1,194 1,280 1,369 ----- ----- ----- ----- Total........................................... 3,361 3,447 3,625 3,828 ----- ----- ----- ----- VALUED AT COST LESS ADJUSTMENTS FOR IMPAIRMENTS Private equity investments...................... 3,001 4,146 1,759 2,574 ----- ----- ----- ----- TOTAL FINANCIAL INVESTMENTS..................... 7,039 8,280 6,914 7,953 ===== ===== ===== =====
NOTE 17 INVESTMENTS IN ASSOCIATES
CARRYING CARRYING AMOUNT AS OF AMOUNT AS OF CHF MILLION 31.12.1998 INCOME ADDITIONS DISPOSALS 31.12.1999 ----------- ------------ ------ --------- --------- ------------ Total investments in associates...... 2,805 211 47 (1,961) 1,102 ===== === == ====== =====
The figure of CHF 1,961 million for disposals for the year ended 31 December 1999 primarily consists of the sale of Swiss Life/Rentenanstalt. NOTE 18 PROPERTY AND EQUIPMENT
ACCUMULATED CARRYING CARRYING ACCUMULATED AMORTIZATION AMOUNT AMOUNT DEPRECIATION HISTORICAL AS OF AS OF DEPRECIATION, AS OF AS OF CHF MILLION COST 31.12.1998 31.12.1998 ADDITIONS DISPOSALS WRITE-OFFS 31.12.1999 31.12.1999(3) ----------- ---------- ------------ ---------- --------- --------- ------------- ---------- ------------- Bank premises.......... 10,668 (4,096) 6,572 292 (1,050) (354) 5,460 (3,625) Other properties....... 1,802 (656) 1,146 705 (325) (59) 1,467 (539) Equipment and furniture............ 6,035 (3,867) 2,168 1,823 (525) (1,692) 1,774 (4,345) ------ ------ ----- ----- ------ ------ ----- ------ TOTAL PROPERTY AND EQUIPMENT(1)......... 18,505 (8,619) 9,886 2,820 (1,900) (2,105)(2) 8,701 (8,509) ====== ====== ===== ===== ====== ====== ===== ======
- --------------- (1) Fire insurance value of property and equipment is CHF 15,004 million (1998: CHF 14,941 million). (2) Depreciation, write-offs of CHF 2,105 million include a charge of CHF 588 million that was charged against the restructuring provision. (3) After elimination of CHF 2,215 million accumulated depreciation relating to disposals. - -------------------------------------------------------------------------------- F- 27 243 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19 INTANGIBLE ASSETS AND GOODWILL
ACCUMULATED CARRYING CARRYING ACCUMULATED AMORTIZATION AMOUNT AMOUNT AMORTIZATION HISTORICAL AS OF AS OF AMORTIZATION, AS OF AS OF CHF MILLION COST 31.12.1998 31.12.1998 ADDITIONS(1) WRITE-OFFS 31.12.1999 31.12.1999(2) ----------- ---------- ------------ ---------- ------------ ------------- ---------- ------------- Intangible assets............ 553 (301) 252 55 (42) 265 (40) Goodwill..................... 2,447 (489) 1,958 1,618 (298) 3,278 (951) ----- ---- ----- ----- ---- ----- ---- TOTAL INTANGIBLE ASSETS AND GOODWILL................... 3,000 (790) 2,210 1,673 (340) 3,543 (991) ===== ==== ===== ===== ==== ===== ====
- --------------- (1) Including currency translation differences. (2) After elimination of CHF 139 million accumulated amortization relating to intangible assets fully written off and no longer used. NOTE 20 OTHER ASSETS
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- Deferred tax assets(1)...................................... 742 1,205 Settlement and clearing accounts............................ 4,911 5,543 VAT and other tax receivables............................... 702 839 Other receivables........................................... 4,652 4,505 ------ ------ TOTAL OTHER ASSETS.......................................... 11,007 12,092 ====== ======
- --------------- (1) Additional tax information is provided in Note 25. NOTE 21 DUE TO BANKS AND CUSTOMERS
31.12.1999 31.12.1998 CHF MILLION ---------- ---------- Due to banks................................................ 76,365 85,716 Due to customers in savings and investment accounts......... 78,640 79,723 Amounts due to customers on demand and time................. 201,320 195,127 ------- ------- Total due to customers...................................... 279,960 274,850 ------- ------- TOTAL DUE TO BANKS AND CUSTOMERS............................ 356,325 360,566 ======= =======
NOTE 22 LONG-TERM DEBT
31.12.1999 CHF MILLION ----------- Total bond issues........................................... 48,305 Shares in bond issues of the Swiss Regional or Cantonal Banks' Central Bond Institutions.......................... 2,055 Medium term notes........................................... 5,972 ------ TOTAL LONG-TERM DEBT........................................ 56,332 ======
- -------------------------------------------------------------------------------- F- 28 244 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
----------------------------------------------------------------------- UBS AG (PARENT) SUBSIDIARIES --------------------- --------------------- FLOATING FLOATING TOTAL TOTAL FIXED RATE RATE FIXED RATE RATE 31.12.1999 31.12.1998 CHF MILLION ---------- -------- ---------- -------- ---------- ---------- CONTRACTUAL MATURITY DATE 2000................................. 13,395 524 818 0 14,737 8,208 2001................................. 7,866 121 1,354 0 9,341 7,803 2002................................. 5,313 270 2,158 399 8,140 8,368 2003................................. 3,093 147 129 0 3,369 6,534 2004................................. 2,316 47 286 1,705 4,354 3,772 2005-2009............................ 9,795 208 581 1,378 11,962 12,562 Thereafter........................... 3,476 32 921 0 4,429 3,536 ------ ----- ----- ----- ------ ------ TOTAL................................ 45,254 1,349 6,247 3,482 56,332 50,783 ====== ===== ===== ===== ====== ======
The Group issues both CHF and non-CHF denominated fixed and floating rate debt. Publicly placed fixed rate debt pays interest at rates up to 16%. Floating rate debt pays interest based on the three-month or six-month London Interbank Offered Rate ("LIBOR"). Subordinated debt securities are unsecured obligations of the Group and are subordinated in right of payment to all present and future senior indebtedness and certain other obligations of the Group. At 31 December 1999 and 31 December 1998, the Group had CHF 13,106 million and CHF 12,071 million, respectively, in subordinated debt excluding convertible and exchangeable debt and notes with warrants which have been included in the following paragraph. Subordinated debt usually pays interest annually and provides for single principal payments upon maturity. At 31 December 1999 and 31 December 1998, the Group had CHF 41,093 million and CHF 36,379 million, respectively, in unsubordinated debt. The Group issues convertible obligations that can be exchanged for ordinary shares of UBS AG and notes with warrants attached on UBS AG shares. Furthermore, the Group issues notes exchangeable into common stock or preferred stock of other companies, or repaid based on the performance of an index or group of securities. At 31 December 1999 and 31 December 1998, the Group had CHF 2,133 million and CHF 2,333 million, respectively, in convertible and exchangeable debt and notes with warrants attached outstanding. The Group, as part of its interest-rate risk management process, utilizes derivative instruments to modify the repricing and maturity characteristics of the notes/bonds issued. The Group also utilizes other derivative instruments to manage the foreign exchange impact of certain long-term debt obligations. Interest rate swaps are utilized to convert the economic characteristics of fixed rate debt to those of floating rate debt. The Group issues credit-linked notes generally through private placements. The credit-linked notes are usually senior unsecured obligations of UBS AG, acting through one of its branches, and can be subject to early redemption at the option of the Group or in the event of a defined credit event. Payment of interest and/or principal is dependent upon the performance of a reference entity or security. The rate of interest on each credit-linked note is either floating and determined by reference to LIBOR plus a spread or fixed. Medium-term and credit-linked notes have been included in the amounts disclosed above as unsubordinated debt. - -------------------------------------------------------------------------------- F- 29 245 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 23 OTHER LIABILITIES
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- Provision, including restructuring provision(1)............. 5,995 7,094 Provision for commitments and contingent liabilities........ 149 435 Current tax liabilities..................................... 1,747 875 Deferred tax liabilities.................................... 994 1,012 VAT and other tax payables(2)............................... 888 1,010 Settlement and clearing accounts............................ 4,789 9,502 Other payables.............................................. 3,814 7,794 ------ ------ TOTAL OTHER LIABILITIES..................................... 18,376 27,722 ====== ======
- --------------- (1) Further details to business risk and restructuring provisions are provided in Note 24. (2) Additional information regarding income tax is provided in Note 25. NOTE 24 PROVISIONS, INCLUDING RESTRUCTURING PROVISION
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- BUSINESS RISK PROVISION Balance at the beginning of the year........................ 4,121 1,142 New provisions charged to income............................ 539 3,133 Provisions applied.......................................... (705) (484) Recoveries and adjustments.................................. 611 330 ------ ------ BALANCE AT THE END OF THE YEAR.............................. 4,566 4,121 ------ ------ RESTRUCTURING PROVISION Balance at the beginning of the year........................ 2,973 7,000 Addition.................................................... 300 0 Applied(1) Personnel................................................. (378) (2,024) IT........................................................ (642) (797) Premises.................................................. (673) (267) Other..................................................... (151) (939) ------ ------ Total utilized during the year.............................. (1,844) (4,027) ------ ------ BALANCE AT THE END OF THE YEAR.............................. 1,429 2,973 ------ ------ TOTAL PROVISIONS, INCLUDING RESTRUCTURING PROVISION......... 5,995 7,094 ====== ======
- --------------- (1) The expense categories refer to the nature of the expense rather than the income statement expense line. PROVISION FOR RESTRUCTURING COSTS: At the time of the 1998 merger, it was announced that the merged banks' operations in various locations would be combined, resulting in vacant properties, reductions in personnel, elimination of redundancies in the information technology platforms, exit costs and other costs. As a result, the individual banks estimated that the cost of the post-merger (1998 merger) restructuring would be approximately CHF 7 billion, to be expended over a period of four years. By the end of December 1999, the Group had utilized CHF 6 billion of the provision. - -------------------------------------------------------------------------------- F- 30 246 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) As of today, many of the actions under these plans are completed or near completion. As a result of the real estate lease breaks or disposals which have been identified, the Group recognized an additional restructuring provision of CHF 300 million in 1999. NOTE 25 INCOME TAXES
FOR THE YEAR ENDED - ---------------------------------------------------------- 31.12.1999 31.12.1998 31.12.1997 CHF MILLION ---------- ---------- ---------- FEDERAL AND CANTONAL Current payable......................................... 849 213 511 Deferred................................................ 511 463 (191) FOREIGN Current payable......................................... 359 200 419 Deferred................................................ (33) 28 (844) ----- ----- ---- TOTAL INCOME TAX EXPENSE (BENEFIT)........................ 1,686 904 (105) ===== ===== ====
The Group made net tax payments, including domestic federal, cantonal and foreign taxes, of CHF 1,063 million and CHF 733 million for the full year of 1999 and 1998, respectively. The components of operating profit/(loss) before tax, and the differences between income tax expense/(benefit) reflected in the financial statements and the amounts calculated at the statutory rate of 25% are as follows:
FOR THE YEAR ENDED - ---------------------------------------------------------- 31.12.1999 31.12.1998 31.12.1997 CHF MILLION ---------- ---------- ---------- Operating profit/(loss) before tax........................ 7,893 3,871 (756) Domestic................................................ 6,957 10,287 1,202 Foreign................................................. 936 (6,416) (1,958) ----- ------ ------ Income taxes at statutory rate of 25%..................... 1,973 968 (189) Increase/(decrease) resulting from: Applicable tax rates differing from statutory rate........ 55 88 (3) Tax losses not recognized................................. 39 1,436 310 Previously unrecorded tax losses now recognized........... (215) (142) (201) Lower taxed income........................................ (278) (1,849) (333) Non-deductible expenses................................... 132 172 171 Adjustments related to prior years........................ (112) 7 (27) Capital taxes............................................. 0 0 96 Change in deferred tax valuation allowance................ 92 224 71 ----- ------ ------ Income tax expense (benefit).............................. 1,686 904 (105) ===== ====== ======
As of 31 December 1999 the Group had accumulated unremitted earnings from foreign subsidiaries on which deferred taxes had not been provided as the undistributed earnings of these foreign subsidiaries are indefinitely reinvested. In the event these earnings were distributed it is estimated that Swiss taxes of approximately CHF 35 million would be due. - -------------------------------------------------------------------------------- F- 31 247 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Group's deferred income tax assets and liabilities (gross) are as follows:
CHF MILLION 31.12.1999 31.12.1998 31.12.1997 - ----------- ---------- ---------- ---------- DEFERRED TAX ASSETS Compensation and benefits................................. 316 114 106 Restructuring provision................................... 316 718 1,100 Allowance for credit losses............................... 138 370 573 Net operating loss carryforwards.......................... 2,194 1,610 672 Others.................................................... 237 170 270 ------ ------ ----- Total..................................................... 3,201 2,982 2,721 Valuation allowance....................................... (2,459) (1,777) (647) ------ ------ ----- NET DEFERRED TAX ASSETS................................... 742 1,205 2,074 ====== ====== ===== DEFERRED TAX LIABILITIES Property and equipment.................................... 342 484 602 Investments in associates................................. 153 299 287 Other provisions.......................................... 142 109 501 Unrealized gains on investment securities................. 93 103 69 Others.................................................... 264 17 36 ------ ------ ----- TOTAL..................................................... 994 1,012 1,495 ====== ====== =====
The change in the balance of the net deferred tax asset (liability) at 31 December 1999, 31 December 1998 and 31 December 1997 does not equal the deferred tax expense (benefit) in those years. This is due to the effect of foreign currency rate changes on tax assets and liabilities denominated in currencies other than CHF. Certain foreign branches and subsidiaries of the Group have deferred tax assets related to net operating loss carryforwards and other items. Because recognition of these assets is uncertain, the Group has established valuation allowances of CHF 2,459 million, CHF 1,777 million and CHF 647 million at 31 December 1999, 1998 and 1997, respectively. Net operating loss carryforwards totaling CHF 9,149 million at 31 December 1999 are available to reduce future taxable income of certain branches and subsidiaries. The carryforwards have lives as follows:
31.12.1999 ---------- One year.................................................... 15 2 to 4 years................................................ 215 More than 4 years........................................... 8,919 ----- Total....................................................... 9,149 =====
- -------------------------------------------------------------------------------- F- 32 248 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 26 MINORITY INTERESTS
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- Minority interests in profit/(loss)......................... 54 (5) Preferred stock(1).......................................... 0 689 Minority interests in equity................................ 380 306 --- --- TOTAL MINORITY INTERESTS.................................... 434 990 === ===
- --------------- (1) Represents Auction Market Preferred Stock, issued by UBS Inc., New York, a subsidiary whose ordinary share capital is completely owned by UBS AG. NOTE 27 DERIVATIVE INSTRUMENTS Derivatives held or issued for trading purposes Most of the Group's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers at competitive prices to enable them to transfer, modify or reduce current or expected risks. Trading involves market-making, positioning and arbitrage activities. Market-making involves quoting bid and offer prices to other market participants with the intention of generating revenues based on spread and volume. Positioning involves managing market risk positions with the expectation of profiting from favorable movements in prices, rates or indices. Arbitrage activities involve identifying and profiting from price differentials between markets and products. Derivatives held or issued for non-trading purposes The Group also uses derivatives as part of its asset/liability management activities. The majority of derivative positions used in UBS's asset and liability management activities are established via intercompany transactions with independently managed UBS dealer units within the Group. When the Group purchases assets and issues liabilities at fixed interest rates it subjects itself to fair value fluctuations as market interest rates change. These fluctuations in fair value are managed by entering into interest rate contracts, mainly interest rate swaps which change fixed rate instruments into variable rate instruments. When the Group purchases foreign currency denominated assets, issues foreign currency denominated debt or has foreign net investments, it subjects itself to changes in value as exchange rates move. These fluctuations are managed by entering into currency swaps and forwards. Type of derivatives The Group uses the following derivative financial instruments for both trading and non-trading purposes: Swaps Swaps are transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period. Interest rate swap contracts generally represent the contractual exchange of fixed and floating rate payments of a single currency, based on a notional amount and an interest reference rate. - -------------------------------------------------------------------------------- F- 33 249 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Cross currency interest rate swaps generally involve the exchange of payments which are based on the interest reference rates available at the inception of the contract on two different currency principal balances that are exchanged. The principal balances are re-exchanged at an agreed upon rate at a specified future date. Interest rate swaps subject the Group to market risks associated with changes in interest rates and possibly foreign exchange rates. Exposure to the credit risk associated with counterparty default also exists. Forwards and futures Forwards and futures are contractual obligations to buy or sell a financial instrument on a future date at a specified price. Forward contracts are effectively tailor-made agreements that are transacted between counterparties in the over-the-counter market (OTC), whereas futures are standardized contracts that are transacted on regulated exchanges. Varying levels of credit risk and market risk exist with respect to these instruments. For futures contracts closed prior to settlement, the cash receipt or payment is limited to the change in value of the underlying instrument. Futures contracts allow for daily cash settlement, therefore the credit risk is generally limited to one day's variation margin. Forward contracts are settled at maturity by the exchange of notional amounts specified under the contracts. Forwards generally have a greater degree of credit risk since daily cash settlements are not required. Options Options are contractual agreements under which the seller (writer) grants the purchaser the right, but not the obligation, either to buy (call option) or sell (put option) by or at a set date, a specified amount of a financial instrument at a predetermined price. The seller receives a premium from the purchaser for this right. For options purchased, the Group is subject to credit and market risk to the extent of the carrying value of the options. For options sold, the Group is subject to market risk in excess of the carrying values but is not subject to credit risk, except that for put options sold, credit risk may arise from the underlying instrument that the Group may be obligated to buy. Notional amounts and replacement values The table below provides the notional amounts and the positive and negative replacement values of the Group's derivative transactions. The notional amount is the amount of a derivative's underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. It provides an indication of the volume of business transacted by the Group but does not provide any measure of risk. Some derivatives are standardized in terms of their nominal amounts and settlement dates, and these are designed to be bought and sold in active markets (exchange traded). Others are packaged specifically for individual customers and are not exchange traded although they may be bought and sold between counterparties at negotiated prices (over-the-counter or OTC instruments). Positive replacement value represents the cost to the Group of replacing all transactions with a receivable amount if all the Group's counterparties were to default. This measure is the industry standard for the calculation of current credit exposure. Positive replacement values represent current credit risk without giving effect to any possible reductions due to master netting agreements, collateral, or other security. Negative replacement value is the cost to the Group's counterparties of replacing all the Group's transactions with a commitment if the Group were to default. The total positive and negative replacement values are reported separately on the balance sheet on a net by counterparty basis. - -------------------------------------------------------------------------------- F- 34 250 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31.12.1999 ---------------------------------------------------------------------------------------------------- TERM TO MATURITY ---------------------------------------------------------------------------------------------------- TOTAL WITHIN NOTIONAL 3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL TOTAL AMOUNT --------------- --------------- --------------- --------------- ------- ------- -------- PRV(1) NRV(2) PRV NRV PRV NRV PRV NRV PRV(4) NRV(4) CHF BN ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------- CHF MILLION INTEREST RATE CONTRACTS Over the counter (OTC) contracts Forward contracts........ 34 55 68 19 6 1 0 0 108 75 554.0 Swaps.................... 5,386 2,100 3,163 2,871 22,843 24,168 35,942 30,301 67,334 59,440 2,650.9 Options.................. 108 27 47 742 268 12 4 2,018 427 2,799 1,877.0 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 0 0 0 0 0 0 0 0 0 0 774.1 Options.................. 0 0 0 0 0 0 0 0 0 0 54.4 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= TOTAL...................... 5,528 2,182 3,278 3,632 23,117 24,181 35,946 32,319 67,869 62,314 5,910.4 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= FOREIGN EXCHANGE CONTRACTS Over the counter (OTC) contracts Forward contracts........ 9,669 14,264 3,661 7,008 445 851 25 37 13,800 22,160 1,077.1 Interest and currency swaps.................. 622 520 2,036 1,826 529 6,076 2,567 1,518 5,754 9,940 252.3 Options.................. 3,344 2,708 3,934 3,138 8,883 411 30 10 16,191 6,267 813.5 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 0 1 0 0 0 0 0 0 0 1 3.5 Options.................. 0 1 4 1 0 0 0 0 4 2 3.7 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= TOTAL...................... 13,635 17,494 9,635 11,973 9,857 7,338 2,622 1,565 35,749 38,370 2,150.1 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= PRECIOUS METALS CONTRACTS Over the counter (OTC) contracts Forward contracts........ 1,112 1,047 53 62 80 60 0 0 1,245 1,169 30.0 Options.................. 277 215 594 466 1,168 1,059 117 130 2,156 1,870 82.9 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 0 0 0 0 0 0 0 0 0 0 0.8 Options.................. 0 5 5 8 0 10 0 0 5 23 4.9 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= TOTAL...................... 1,389 1,267 652 536 1,248 1,129 117 130 3,406 3,062 118.6 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= EQUITY/INDEX CONTRACTS Over the counter (OTC) contracts Forward contracts........ 526 1,721 1,148 2,044 503 5,325 1,762 2,787 3,939 11,877 149.4 Options.................. 1,941 1,611 4,013 10,021 10,146 27,182 439 2,985 16,539 41,799 264.7 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 74 46 0 0 0 0 0 0 74 46 25.1 Options.................. 1,395 304 1,744 4,047 72 63 0 0 3,211 4,414 79.8 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= TOTAL...................... 3,936 3,682 6,905 16,112 10,721 32,570 2,201 5,772 23,763 58,136 519.0 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= COMMODITY CONTRACTS Over the counter (OTC) contracts Forward contracts........ 32 25 0 0 0 0 0 0 32 25 167.9 Options.................. 15 15 0 0 0 0 0 0 15 15 79.7 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= TOTAL...................... 47 40 0 0 0 0 0 0 47 40 247.6 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= TOTAL DERIVATIVE INSTRUMENTS 31.12.1999... 24,535 24,665 20,470 32,253 44,943 65,218 40,886 39,786 130,834 161,922 -- ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
- --------------- (1) PRV Positive replacement value. (2) NRV Negative replacement value. (3) Exchange-traded products include proprietary trades only. (4) The figures above are presented on a gross by counterparty basis for disclosure purposes, but shown net in the balance sheet (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 35 251 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31.12.1998 ---------------------------------------------------------------------------------------------------- TERM TO MATURITY ---------------------------------------------------------------------------------------------------- TOTAL WITHIN NOTIONAL 3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL TOTAL AMOUNT --------------- --------------- --------------- --------------- ------- ------- -------- PRV(1) NRV(2) PRV NRV PRV NRV PRV NRV PRV(4) NRV(4) CHF BN ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------- CHF MILLION INTEREST RATE CONTRACTS Over the counter (OTC) contracts Forward contracts........ 783 932 309 271 45 29 42 23 1,179 1,255 217.7 Swaps.................... 3,488 4,502 6,657 6,024 36,464 35,799 38,056 34,758 84,665 81,084 3,722.5 Options.................. 233 327 465 615 2,947 4,476 3,207 4,427 6,852 9,845 2,519.2 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 12 7 0 1 2 0 0 0 14 7 732.3 Options.................. 0 0 0 0 0 0 0 0 0 0 77.8 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- TOTAL...................... 4,516 5,768 7,431 6,911 39,458 40,304 41,305 39,208 92,710 92,191 7,269.5 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= FOREIGN EXCHANGE CONTRACTS Over the counter (OTC) contracts Forward contracts........ 3,439 498 6,493 9,455 278 261 164 237 10,375 10,451 888.4 Interest and currency swaps.................. 2,456 3,009 1,718 2,683 4,626 5,202 4,974 5,097 13,775 15,991 235.4 Options.................. 4,718 17,168 10,123 218 1,945 619 604 604 17,390 18,610 921.9 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 0 0 0 0 0 0 0 0 0 0 2.5 Options.................. 156 120 193 0 0 5 0 0 348 124 5.2 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- TOTAL...................... 10,769 20,795 18,527 12,356 6,849 6,087 5,742 5,938 41,888 45,176 2,053.4 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= PRECIOUS METALS CONTRACTS Over the counter (OTC) contracts Forward contracts........ 4,539 4,633 216 295 75 60 10 0 4,840 4,988 47.7 Options.................. 2,840 2,915 24 6 41 0 0 0 2,905 2,921 56.2 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 0 0 0 0 0 0 0 0 0 0 1.2 Options.................. 4 0 15 0 2 0 0 0 21 0 5.0 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- TOTAL...................... 7,383 7,548 255 301 118 60 10 0 7,766 7,909 110.1 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= EQUITY/INDEX CONTRACTS Over the counter (OTC) contracts Forward contracts........ 279 383 325 608 791 2,421 159 446 1,554 3,858 57.3 Options.................. 8,220 15,347 4,619 8,480 8,700 25,726 1,687 4,598 23,227 54,151 939.6 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 3 15 0 0 0 0 0 0 3 15 17.7 Options.................. 128 242 703 392 754 305 75 9 1,659 948 62.0 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- TOTAL...................... 8,630 15,987 5,647 9,480 10,245 28,452 1,921 5,053 26,443 58,972 1,076.6 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= COMMODITY CONTRACTS Over the counter (OTC) contracts Forward contracts........ 114 52 244 214 325 359 65 66 749 691 8.9 Options.................. 8 0 62 70 24 0 5 0 99 70 3.0 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Exchange-traded contracts(3) Futures.................. 0 0 85 65 0 0 0 0 85 65 2.2 Options.................. 0 0 0 7 2 0 0 0 2 7 0.9 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- TOTAL...................... 122 52 391 356 351 359 70 66 935 823 15.0 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= TOTAL DERIVATIVE INSTRUMENTS 31.12.1998... 31,420 50,150 32,251 29,404 57,022 75,262 49,048 50,265 169,742 205,081 -- ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
- --------------- (1) PRV Positive replacement value. (2) NRV Negative replacement value. (3) Exchange-traded products include proprietary trades only. (4) The figures above are presented on a gross by counterparty basis for disclosure purposes, but shown net in the balance sheet (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 36 252 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 28 PLEDGED ASSETS ASSETS PLEDGED OR ASSIGNED AS SECURITY FOR LIABILITIES AND ASSETS SUBJECT TO RESERVATION OF TITLE
31.12.1999 31.12.1998 --------------------- --------------------- CARRYING RELATED CARRYING RELATED AMOUNT LIABILITY AMOUNT LIABILITY CHF MILLION -------- --------- -------- --------- Money market paper..................................... 35,578 707 6,981 5 Mortgage loans......................................... 2,536 1,736 2,955 2,047 Securities(1).......................................... 23,837 585 13,902 5,636 Property and equipment................................. 170 91 147 71 Other.................................................. 2,110 0 0 0 ------ ----- ------ ----- TOTAL PLEDGED ASSETS................................... 64,231 3,119 23,985 7,759 ====== ===== ====== =====
- --------------- (1) Excluding securities pledged in respect of securities borrowing and repurchase agreements. Assets are pledged as collateral for collateralized credit lines with central banks, loans from central mortgage institutions, deposit guarantees for savings banks, security deposits relating to stock exchange membership and mortgages on the Group's property. These assets are also segregated pursuant to certain regulatory requirements. NOTE 29 FIDUCIARY TRANSACTIONS
31.12.1999 31.12.1998 CHF MILLION ---------- ---------- Placements with third parties............................... 60,221 60,612 Fiduciary credits and other fiduciary financial transactions.............................................. 1,438 652 ------ ------ TOTAL FIDUCIARY TRANSACTIONS................................ 61,659 61,264 ====== ======
Fiduciary placements represents funds which customers have instructed the Group to place in foreign banks. The Group is not liable to the customer for any default by the foreign bank nor do creditors of the Group have a claim on the assets placed. NOTE 30 COMMITMENTS AND CONTINGENT LIABILITIES Commitments and contingencies represent potential future liabilities of the Group resulting from credit facilities available to clients, but not yet drawn upon by them. They are subject to expiration at fixed dates. The Group engages in providing open credit facilities to allow clients quick access to funds required to meet their short-term obligations as well as their long-term financing needs. The credit facilities can take the form of guarantees, whereby the Group might guarantee repayment of a loan taken out by a client with a third party; standby letters of credit, which are credit enhancement facilities enabling the client to engage in trade finance at lower cost; documentary letters of credit, which are trade finance-related payments made on behalf of a client; commitments to enter into repurchase agreements; note issuance facilities and revolving underwriting facilities, which allow clients to issue money market paper or medium term notes when needed without engaging in the normal underwriting process each time. The figures disclosed in the accompanying tables represent the amounts at risk should clients draw fully on all facilities and then default, and there is no collateral. Determination of the creditworthiness - -------------------------------------------------------------------------------- F- 37 253 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) of the clients is part of the normal credit risk management process, and the fees charged for maintenance of the facilities reflect the various credit risks.
31.12.1999 31.12.1998 ---------- ---------- CHF MILLION CONTINGENT LIABILITIES Credit guarantees and similar instruments(1)................ 18,822 22,697 Sub-participations.......................................... (3,665) (5,217) ------ ------- Total....................................................... 15,157 17,480 ====== ======= Performance guarantees and similar instruments(2)........... 6,782 12,092 Sub-participations.......................................... (42) (216) ------ ------- Total....................................................... 6,740 11,876 ====== ======= Irrevocable commitments under documentary credits........... 2,704 2,942 Sub-participations.......................................... 0 (39) ------ ------- Total....................................................... 2,704 2,903 ====== ======= GROSS CONTINGENT LIABILITIES................................ 28,308 37,731 SUB-PARTICIPATIONS.......................................... (3,707) (5,472) ------ ------- NET CONTINGENT LIABILITIES.................................. 24,601 32,259 ====== ======= IRREVOCABLE COMMITMENTS Undrawn irrevocable credit facilities....................... 65,693 82,337 Sub-participations.......................................... (1,836) (26) ------ ------- Total....................................................... 63,857 82,311 ====== ======= Liabilities for calls on shares and other equities.......... 57 109 ------ ------- GROSS IRREVOCABLE COMMITMENTS............................... 65,750 82,446 SUB-PARTICIPATIONS.......................................... (1,836) (26) ------ ------- NET IRREVOCABLE COMMITMENTS................................. 63,914 82,420 ====== ======= GROSS COMMITMENTS AND CONTINGENT LIABILITIES................ 94,058 120,177 SUB-PARTICIPATIONS.......................................... (5,543) (5,498) NET COMMITMENTS AND CONTINGENT LIABILITIES.................. 88,515 114,679 ====== =======
- --------------- (1) Credit guarantees in the form of bill of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit, endorsement liabilities from bills rediscounted, advance payment guarantees and similar facilities. (2) Bid bonds, performance bonds, builders' guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and similar facilities. - -------------------------------------------------------------------------------- F- 38 254 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE OTHER CHF MILLION COLLATERAL COLLATERAL UNSECURED TOTAL ----------- ---------- ---------- --------- ------- OVERVIEW OF COLLATERAL Gross contingent liabilities...................... 191 11,356 16,761 28,308 Gross irrevocable committments.................... 386 8,774 56,533 65,693 Liabilities for calls on shares and other equities........................................ 0 0 57 57 --- ------ ------ ------- TOTAL 31.12.1999.................................. 577 20,130 73,351 94,058 === ====== ====== ======= TOTAL 31.12.1998.................................. 389 33,363 86,425 120,177 === ====== ====== =======
NOTE 31 OPERATING LEASE COMMITMENTS Our minimum commitments for non-cancellable leases of premises and equipment are presented as follows:
CHF MILLION 31.12.1999 ----------- ----------- OPERATING LEASES DUE: 2000........................................................ 247 2001........................................................ 202 2002........................................................ 184 2003........................................................ 187 2004........................................................ 153 2005 and thereafter......................................... 1,919 ----- TOTAL COMMITMENTS FOR MINIMUM PAYMENTS UNDER OPERATING LEASES.................................................... 2,892 =====
Operating expenses include CHF 742 million and CHF 797 million in respect of operating lease rentals for the year ended 31 December 1999 and for the year ended 31 December 1998 respectively. NOTE 32 LITIGATION In the United States, several class actions, in relation to what is known as the Holocaust affair, have been brought against UBS AG (as legal successor to Swiss Bank Corporation and Union Bank of Switzerland) in the United States District Court for the Eastern District of New York (Brooklyn). These lawsuits were initially filed in October 1996. Another Swiss bank has been designated as a defendant alongside us. On 12 August 1998, however, a settlement was reached between the parties. This settlement provides for a payment by the defendant banks to the plaintiffs, under certain terms and conditions, of an aggregate amount of USD 1.25 billion. UBS agreed to contribute up to two-thirds of this amount. To the extent that other Swiss companies agreed to participate in this fund, and to the extent of applicable payments to beneficiaries of eligible dormant accounts, our share was to be reduced. Based on our estimate of such expected contributions, we provided a reserve of USD 610 million in 1998 and an additional USD 95 million in 1999. A number of persons have elected to opt out of the settlement and not participate in the class action. It is expected that a decision approving the settlement will be issued in 2000, which will be followed by hearings on the allocation of the settlement amount. We will continue to monitor the contributions of other Swiss companies, in order to determine whether we will need an adjustment to the reserve. In addition, UBS AG and other companies within the Group are subject to various claims, disputes and legal proceedings, as part of the normal course of business. The Group makes provision for such matters when, in the opinion of management and its professional advisors, it is probable that a - -------------------------------------------------------------------------------- F- 39 255 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) payment will be made by the Group, and the amount can be reasonably estimated. All litigation provisions are included under Business risk provision within Other liabilities in the accompanying Group Balance Sheet. In respect of the further claims asserted against the Group of which management is aware (which, according to the principles outlined above, have not been provided for), it is the opinion of management that such claims are either without merit, can be successfully defended or will result in exposure to the Group which is immaterial to both financial position and results of operations. OTHER INFORMATION NOTE 33 FINANCIAL INSTRUMENTS RISK POSITION OVERALL RISK POSITION The Group manages risk in a number of ways, including the use of a value at risk model combined with a system of trading limits. This section presents information about the results of the Group's management of the risks associated with the use of financial instruments. (a) Interest Rate Risk Interest rate risk is the potential impact of changes in market interest rates on the fair values of assets and liabilities on the balance sheet and on the annual interest income and expense in the income statement. Interest rate sensitivity One commonly used method to present the potential impact of market movements is to show the effect of a one basis point (0.01%) change in interest rates on the fair values of assets and liabilities, analyzed by time bands within which the Group is committed. This type of presentation, described as a sensitivity analysis, is set out below. Interest rate sensitivity is one of the inputs to the value at risk model used by the Group to manage its overall market risk, of which interest rate risk is a part. The following sets out the extent to which the Group was exposed to interest rate risk at 31 December 1999 and 31 December 1998. The tables show the potential impact of a one basis point (0.01%) increase in market interest rates which would influence the fair values of both assets and liabilities that are subject to fixed interest rates. The impact of such an increase in rates depends on the net asset or net liability position of the Group in each category, currency and time band in the table. A negative amount in the table reflects a potential loss to the Group due to the changes in fair values as a result of an increase in interest rates. A positive amount reflects a potential gain as a result of an increase in interest rates. Both primary and derivative instruments in trading and non-trading activities, as well as off-balance-sheet commitments, are included in the table. - -------------------------------------------------------------------------------- F- 40 256 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Interest rate sensitivity position
INTEREST SENSITIVITY BY TIME BANDS AS AT 31.12.1999 ---------------------------------------------------------- 3 TO WITHIN 1 1 TO 3 12 1 TO 5 OVER 5 MONTH MONTHS MONTHS YEARS YEARS TOTAL -------- ------ ------ ------ ------ ------ CHF THOUSAND PER BASIS POINT CHF Trading..................... 171 (902) 466 506 (417) (176) Non-trading................. (30) (8) (398) (6,204) (1,220) (7,860) ---- ------ ---- ------ ------ ------ USD Trading..................... (411) 1,018 386 (109) (908) (24) Non-trading................. 3 (33) (10) 83 1,207 1,250 ---- ------ ---- ------ ------ ------ EUR Trading..................... (39) (239) 113 600 (1,406) (971) Non-trading................. 0 (3) 3 30 210 240 ---- ------ ---- ------ ------ ------ GBP Trading..................... 1 43 10 (34) (77) (57) Non-trading................. 0 5 (39) 77 815 858 ---- ------ ---- ------ ------ ------ JPY Trading..................... 484 (1,708) 927 (101) 135 (263) Non-trading................. 0 0 0 (1) (4) (5) ---- ------ ---- ------ ------ ------ OTHERS Trading..................... (34) 46 50 (195) 24 (109) Non-trading................. 0 0 0 0 0 0 ==== ====== ==== ====== ====== ======
INTEREST SENSITIVITY BY TIME BANDS AS AT 31.12.1998 ---------------------------------------------------------- 3 TO WITHIN 1 1 TO 3 12 1 TO 5 OVER 5 MONTH MONTHS MONTHS YEARS YEARS TOTAL -------- ------ ------ ------ ------ ------ CHF THOUSAND PER BASIS POINT CHF Trading...................... 189 (672) 450 (322) (464) (819) Non-trading.................. (23) 6 (350) (7,522) (546) (8,435) --- ---- ---- ------ ----- ------ USD Trading...................... (28) 93 8 (575) 1,254 752 Non-trading.................. 1 (21) 7 72 1,502 1,561 --- ---- ---- ------ ----- ------ EUR Trading...................... (34) (22) (158) (559) 339 (434) Non-trading.................. 0 (8) 0 48 256 296 --- ---- ---- ------ ----- ------ GBP Trading...................... 10 (214) 560 (919) 491 (72) Non-trading.................. 0 2 (18) 130 876 990 --- ---- ---- ------ ----- ------ JPY Trading...................... (32) (698) (402) 1,002 263 133 Non-trading.................. 0 3 (5) 6 146 150 --- ---- ---- ------ ----- ------ OTHERS Trading...................... 11 (98) 47 (158) (152) (350) Non-trading.................. 0 0 0 0 0 0 === ==== ==== ====== ===== ======
Trading The major part of the trading related interest rate risk is generated in fixed income securities trading, fixed income derivatives trading, trading in currency forward contracts and money market trading and is being managed within the Value at Risk model. Interest rate sensitivity arising from trading activities is quite sizeable in USD and Euro as these are still the predominantly traded currencies in the global interest rate markets. It should be noted that it is management's view that an interest rate sensitivity analysis at a particular point in time has limited relevance with respect to trading positions, which can vary significantly on a daily basis. - -------------------------------------------------------------------------------- F- 41 257 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Non-trading The interest rate risk related to client business with undefined maturities and non-interest bearing business including the strategic management of overall balance sheet interest rate exposure is managed by the Corporate Center. Significant contributors to the overall USD and GBP interest rate sensitivity were strategic long-term subordinated note issues which are intentionally unswapped since they are regarded as constituting a part of the Group's equity for asset and liability management purposes. At 31 December 1999, the Group's equity was invested in a portfolio of fixed rate CHF deposits with an average duration of 2.16 years. As this equity investment is the most significant component of the CHF book, this results in the entire book having an interest rate sensitivity of CHF (7.9) million, which is reflected in the table above. This is in line with the duration and sensitivity targets set by the Group Executive Board. Investing in shorter-term or variable rate instruments would mean exposing the earnings stream (interest income) to higher fluctuations. (b) Credit Risk Credit risk is the risk of loss from the default by an obligor or counterparty. This risk is managed primarily based on reviews of the financial status of each specific counterparty. Credit risk is greater when counterparties are concentrated in a single industry or geographical region. This is because a group of otherwise unrelated counterparties could be adversely affected in their ability to repay their obligations because of economic developments affecting their common industry or region. Concentrations of credit risk exist if a number of clients are engaged in similar activities, or are located in the same geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the bank's performance to developments affecting a particular industry or geographic location. (b)(i) On-balance sheet assets As of 31 December 1999, due from banks and loans to customers amounted to CHF 278 billion (as of 31 December 1998 CHF 331 billion). 66.2% (56.6%) of the loans were with clients domiciled in Switzerland. Please refer to Note 12 for a breakdown by region. (b)(ii) Off-balance sheet financial instruments Credit commitments and contingent liabilities Of the CHF 94 billion in credit commitment and contingent liabilities as of 31 December 1999 (as of 31 December 1998 CHF 120 billion), 11% (11%) relate to clients domiciled in Switzerland, 36% (21%) in Europe (excluding Switzerland) and 42% (55%) in North America. Derivatives Credit risk represents the current replacement value of all outstanding derivative contracts in a gain position without factoring in the impact of master netting agreements or the value of any collateral. Positive replacement values amounted to CHF 130 billion as at 31 December 1999 (CHF 169 billion as at 31 December 1998), before applying any master netting agreements. Based on the location of the ultimate counterparty, 4% (8%) of this credit risk amount relates to Switzerland, 49% (47%) to Europe (excluding Switzerland) and 37% (33%) to North America. 71% (76%) of the positive replacement values are with other banks. - -------------------------------------------------------------------------------- F- 42 258 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (b)(iii) Credit risk mitigation techniques Credit risk associated with derivative instruments is mitigated by the use of master netting agreements. A further method of reducing credit exposure arising from derivatives transactions is to use collateralization arrangements. Master netting agreements eliminate risk to the extent that only the net claim is due to be settled in the case of a default of the counterparty. The impact of master netting agreements as at 31 December 1999 is to mitigate credit risk on derivative instruments by approximately CHF 66 billion (as of 31 December 1998 CHF 79 billion). The impact can change substantially over short periods of time, because the exposure is affected by each transaction subject to the arrangement. The Group subjects its derivative-related credit risks to the same credit approval, limit and monitoring standards that it uses for managing other transactions that create credit exposure. This includes evaluation of counterparties as to creditworthiness, and managing the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with established limits on a continual basis and is subject to a standard exception reporting process. (c) Currency Risk The Group views itself as a Swiss entity, with the Swiss franc as its reporting currency. Hedging transactions are used to manage risks in other currencies. Breakdown of assets and liabilities by currencies
31.12.1999 31.12.1998 ------------------------------- ----------------------- CHF USD EUR OTHER CHF USD OTHER CHF BILLION ----- ----- ---- ----- ----- ----- ----- ASSETS Cash and balances with central banks.... 3.4 0.2 0.5 1.0 2.4 0.3 0.6 Money market paper...................... 1.5 38.6 0.7 28.9 2.2 10.3 5.9 Due from banks.......................... 7.5 7.7 5.3 9.4 12.7 13.3 42.5 Cash collateral on securities borrowed.............................. 0.1 106.4 1.1 5.6 0.2 74.5 17.0 Reverse repurchase agreements........... 2.0 42.5 37.9 50.1 0.2 38.3 102.8 Trading portfolio assets................ 29.5 77.4 26.9 78.6 21.4 40.0 97.8 Positive replacement values............. 8.3 5.7 0.6 50.1 9.5 11.1 69.9 Loans, net of allowance for credit losses................................ 166.4 35.0 5.3 28.2 173.5 40.0 34.4 Financial investments................... 2.5 2.9 0.7 0.9 2.6 2.5 1.8 Accrued income and prepaid expenses..... 1.7 1.8 0.5 1.2 1.2 1.8 3.6 Investments in associates............... 0.9 0.1 0.0 0.1 2.6 0.0 0.2 Property and equipment.................. 7.4 0.5 0.1 0.7 8.5 0.6 0.8 Intangible assets and goodwill.......... 1.2 2.2 0.0 0.1 0.3 1.7 0.2 Other assets............................ 3.1 1.9 2.5 3.5 4.9 3.1 4.1 ----- ----- ---- ----- ----- ----- ----- TOTAL ASSETS............................ 235.5 322.9 82.1 258.4 242.2 237.5 381.6 ===== ===== ==== ===== ===== ===== ===== LIABILITIES Money market paper issued............... 1.0 55.7 0.3 7.7 1.0 38.5 12.0 Due to banks............................ 8.1 36.3 14.5 17.5 25.4 33.6 26.7 Cash collateral on securities lent...... 0.1 6.5 1.0 5.2 0.1 5.9 13.2 Repurchase agreements................... 16.5 91.3 27.8 61.3 10.7 74.3 52.6 Trading portfolio liabilities........... 0.0 38.2 5.4 11.0 0.2 8.1 38.7 Negative replacement values............. 12.8 6.9 2.0 74.0 16.8 12.1 97.0
- -------------------------------------------------------------------------------- F- 43 259 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
31.12.1999 31.12.1998 ------------------------------- ----------------------- CHF USD EUR OTHER CHF USD OTHER CHF BILLION ----- ----- ---- ----- ----- ----- ----- Due to customers........................ 127.5 93.8 23.7 35.0 138.0 80.2 56.7 Accrued expenses and deferred income.... 3.1 4.9 0.5 3.6 3.3 2.6 5.3 Long-term debt.......................... 23.7 17.6 3.1 11.9 23.4 16.9 10.5 Other liabilities....................... 9.1 4.0 0.8 4.5 14.6 6.1 7.0 Minority interests...................... 0.3 0.0 0.0 0.1 1.0 0.0 0.0 Shareholders' equity.................... 30.6 0.0 0.0 0.0 28.8 0.0 0.0 ----- ----- ---- ----- ----- ----- ----- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY.................. 232.8 355.2 79.1 231.8 263.3 278.3 319.7 ===== ===== ==== ===== ===== ===== =====
(d) Liquidity Risk Maturity analysis of assets and liabilities
DUE DUE ON SUBJECT TO DUE WITHIN BETWEEN 3 BETWEEN 1 DUE AFTER 5 DEMAND NOTICE(1) 3 MTHS AND 12 MTHS AND 5 YEARS YEARS TOTAL CHF BILLION ------ ---------- ---------- ----------- ----------- ----------- ----- ASSETS Cash and balances with central banks... 5.1 -- -- -- -- -- 5.1 Money market paper..................... -- -- 67.8 1.9 -- -- 69.7 Due from banks......................... 8.4 -- 19.1 1.6 0.5 0.3 29.9 Cash collateral on securities borrowed............................. -- -- 112.7 -- 0.5 -- 113.2 Reverse repurchase agreements.......... -- -- 130.6 1.9 -- -- 132.5 Trading portfolio assets............... 212.4 -- -- -- -- -- 212.4 Positive replacement values............ 64.7 -- -- -- -- -- 64.7 Loans, net of allowance for credit losses............................... -- 53.4 64.9 39.2 70.8 6.6 234.9 Financial investments.................. 5.0 -- 0.1 0.2 0.9 0.8 7.0 Accrued income and prepaid expenses.... 5.2 -- -- -- -- -- 5.2 Investments in associates.............. -- -- -- -- -- 1.1 1.1 Property and equipment................. -- -- -- -- -- 8.7 8.7 Intangible assets and goodwill......... -- -- -- -- -- 3.5 3.5 Other assets........................... 11.0 -- -- -- -- -- 11.0 ----- ---- ----- ---- ---- ---- ----- TOTAL 31.12.1999....................... 311.8 53.4 395.2 44.8 72.7 21.0 898.9 ===== ==== ===== ==== ==== ==== ===== TOTAL 31.12.1998....................... 293.8 59.9 375.8 43.5 66.0 22.3 861.3 ===== ==== ===== ==== ==== ==== ===== LIABILITIES Money market paper issued.............. -- -- 24.3 40.4 -- -- 64.7 Due to banks........................... 10.1 1.1 60.2 4.4 0.3 0.3 76.4 Cash collateral on securities lent..... -- -- 12.8 -- -- -- 12.8 Repurchase agreements.................. -- -- 185.6 11.3 -- -- 196.9 Trading portfolio liabilities.......... 54.6 -- -- -- -- -- 54.6 Negative replacement values............ 95.7 -- -- -- -- -- 95.7 Due to customers....................... 58.6 82.1 127.0 8.1 1.7 2.5 280.0
- -------------------------------------------------------------------------------- F- 44 260 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DUE DUE ON SUBJECT TO DUE WITHIN BETWEEN 3 BETWEEN 1 DUE AFTER 5 DEMAND NOTICE(1) 3 MTHS AND 12 MTHS AND 5 YEARS YEARS TOTAL CHF BILLION ------ ---------- ---------- ----------- ----------- ----------- ----- Accrued expenses and deferred income... 12.0 -- -- -- -- -- 12.0 Long-term debt......................... -- 0.4 6.3 8.4 28.0 13.2 56.3 Other liabilities...................... 18.4 -- -- -- -- -- 18.4 ----- ---- ----- ---- ---- ---- ----- TOTAL 31.12.1999....................... 249.4 83.6 416.2 72.6 30.0 16.0 867.8 ===== ==== ===== ==== ==== ==== ===== Total 31.12.1998....................... 288.7 83.5 371.1 42.2 29.7 16.3 831.5 ===== ==== ===== ==== ==== ==== =====
- --------------- (1) Deposits without a fixed term, on which notice of withdrawal or termination has not been given. (Such funds may be withdrawn by the depositor or repaid by the borrower subject to an agreed period of notice.) (e) Capital adequacy Risk-weighted assets (BIS)
31.12.1999 31.12.1998 --------------------- --------------------- BALANCE BALANCE SHEET/ RISK- SHEET/ RISK- NOTIONAL WEIGHTED NOTIONAL WEIGHTED AMOUNT AMOUNT AMOUNT AMOUNT CHF MILLION --------- -------- --------- -------- BALANCE SHEET ASSETS Due from banks and other collateralized lendings................................... 229,794 9,486 244,246 13,845 Net positions in securities(1)............... 77,858 5,805 28,109 7,334 Positive replacement values.................. 64,698 18,175 90,511 29,494 Loans, net of allowances for credit losses and other collateralized lendings.......... 292,928 159,835 305,155 164,113 Accrued income and prepaid expenses.......... 5,167 3,164 6,627 3,190 Property and equipment(2).................... 8,701 9,860 9,886 11,166 Other assets................................. 11,007 7,686 12,092 7,900 --------- ------- --------- ------- OFF-BALANCE SHEET AND OTHER POSITIONS Contingent liabilities....................... 28,308 14,459 37,731 19,471 Irrevocable commitments...................... 65,693 17,787 82,337 18,197 Forward and swap contracts(3)................ 4,881,483 13,213 5,177,912 7,130 Purchased options(3)......................... 406,208 2,823 489,005 5,861 --------- ------- --------- ------- MARKET RISK POSITIONS(4)..................... -- 10,813 -- 16,018 --------- ------- --------- ------- TOTAL RISK-WEIGHTED ASSETS................... -- 273,106 -- 303,719 ========= ======= ========= =======
- --------------- (1) Excluding positions in the trading book, these are included in market risk positions. (2) Including CHF 1,159 million (1998: CHF 1,280 million) foreclosed properties and properties held for disposal, which are recorded in the balance sheet under financial investments. (3) The risk-weighted amount corresponds to the security margin (add-on) of the contracts. (4) Value at risk according to the internal model multiplied by a factor of 12.5 to create the risk-weighted amount of the market risk positions in the trading book. - -------------------------------------------------------------------------------- F- 45 261 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) BIS Capital ratios
31.12.1999 31.12.1998 ---------------- ---------------- CAPITAL BIS % CAPITAL BIS % ------- ----- ------- ----- Tier 1.................................................. 28,952 10.6% 28,220 9.3% Tier 2.................................................. 10,730 -- 12,086 -- ------ ---- ------ ---- Total BIS............................................... 39,682 14.5% 40,306 13.2% ====== ==== ====== ====
Among other measures UBS monitors the adequacy of its capital using ratios established by the Bank for International Settlements (BIS). The Group has maintained all BIS and Swiss capital adequacy rules for all periods presented. These ratios measure capital adequacy by comparing the Group's eligible capital with its risk-weighted positions which include balance sheet assets, net positions in securities not held in the trading book, off-balance sheet transactions converted into their credit equivalents and market risk positions at a weighted amount to reflect their relative risk. The capital adequacy rules require a minimum amount of capital to cover credit and market risk exposures. For the calculation of the capital required for credit risk the balance sheet assets are weighted according to broad categories of notional credit risk, being assigned a risk weighting according to the amount of capital deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50%, 100%) are applied; for example cash, claims collateralized by cash or claims collateralized by OECD central-government securities have a zero risk weighting, which means that no capital is required to be held in respect of these assets. Uncollateralized loans granted to corporate or private customers carry a 100% risk weighting, meaning that they must be supported by capital equal to 8% of the carrying amount. Other asset categories have weightings of 20% or 50%, which require 1.6% or 4% capital. The net positions in securities not held in the trading book reflect the Group's exposure to an issuer of securities arising from its physical holdings and other related transactions in that security. For contingent liabilities and irrevocable facilities granted, the credit equivalent is calculated by multiplying the nominal value of each transaction by its corresponding credit conversion factor. The resulting amounts are then weighted for credit risk using the same percentage as for balance sheet assets. In the case of OTC forward contracts and purchased options, the credit equivalent is computed on the basis of the current replacement value of the respective contract plus a security margin (add-on) to cover the future potential credit risk during the remaining duration of the contract. UBS calculates its capital requirement for market risk positions, which includes interest-rate instruments and equity securities in the trading book as well as positions in foreign exchange and commodities throughout the Group, using an internal Value at Risk (VaR) model. This approach was introduced in the BIS 1996 market risk amendment to the Basel Accord of July 1988 and incorporated in the Swiss capital adequacy rules of the Banking Ordinance. The BIS proposal requires that the regulators perform tests of the bank internal models before giving permission for these models to be used to calculate the market risk capital. Based on extensive checks, the use of the Group internal models was accepted by the Swiss Federal Banking Commission (FBC) in July 1999. Tier 1 capital consists of permanent shareholders' equity and retained earnings less goodwill and investments in unconsolidated subsidiaries. Tier 2 capital includes the Group's subordinated long-term debt. - -------------------------------------------------------------------------------- F- 46 262 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 34 FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the fair value of on- and off-balance sheet financial instruments based on the following valuation methods and assumptions. It is presented because not all financial instruments are reflected in the financial statements at fair value. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction. A market price, where an active market (such as a recognized stock exchange) exists, is the best evidence of the fair value of a financial instrument. However, market prices are not available for a significant number of the financial assets and liabilities held and issued by the Group. Therefore, for financial instruments where no market price is available, the fair values presented in the following table have been estimated using present value or other estimation and valuation techniques based on market conditions existing at balance sheet date. The values derived using these techniques are significantly affected by underlying assumptions concerning both the amounts and timing of future cash flows and the discount rates used. The following methods and assumptions have been used: (a) trading assets, derivatives and other transactions undertaken for trading purposes are measured at fair value by reference to quoted market prices when available. If quoted market prices are not available, then fair values are estimated on the basis of pricing models, or discounted cash flows. Fair value is equal to the carrying amount for these items; (b) the fair value of liquid assets and other assets maturing within 12 months is assumed to approximate their carrying amount. This assumption is applied to liquid assets and the short-term elements of all other financial assets and financial liabilities; (c) the fair value of demand deposits and savings accounts with no specific maturity is assumed to be the amount payable on demand at the balance sheet date; (d) the fair value of variable rate financial instruments is assumed to approximate their carrying amounts; and (e) the fair value of fixed rate loans and mortgages is estimated by comparing market interest rates when the loans were granted with current market rates offered on similar loans. Changes in the credit quality of loans within the portfolio are not taken into account in determining gross fair values as the impact of credit risk is recognized separately by deducting the amount of the allowance for credit losses from both book and fair values. The assumptions and techniques have been developed to provide a consistent measurement of fair value for the Group's assets and liabilities. However, because other institutions may use different methods and assumptions, such fair value disclosures cannot necessarily be compared from one financial institution to another. - -------------------------------------------------------------------------------- F- 47 263 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments
31.12.1999 31.12.1998 ------------------------------------ ------------------------------------ UNREALIZED UNREALIZED CARRYING GAIN/ CARRYING GAIN/ VALUE FAIR VALUE (LOSS) VALUE FAIR VALUE (LOSS) CHF BILLION -------- ---------- ---------- -------- ---------- ---------- ASSETS Cash and balances with central banks............. 5.0 5.0 0.0 3.3 3.3 0.0 Money market paper.......... 69.7 69.7 0.0 18.4 18.4 0.0 Due from banks.............. 30.0 30.0 0.0 68.6 68.7 0.1 Cash collateral on securities borrowed....... 113.2 113.2 0.0 91.7 91.7 0.0 Reverse repurchase agreements................ 132.5 132.5 0.0 141.3 141.3 0.0 Trading portfolio assets.... 212.4 212.4 0.0 159.2 159.2 0.0 Positive replacement values.................... 64.7 64.7 0.0 90.5 90.5 0.0 Loans, net of allowance for credit losses............. 235.1 235.3 0.2 248.3 250.7 2.4 Financial investments....... 5.9 7.1 1.2 5.7 6.5 0.8 ----- ----- ---- ----- ----- ---- LIABILITIES Money market paper issued... 64.7 64.7 0.0 51.5 51.5 0.0 Due to banks................ 76.9 76.9 0.0 86.1 86.1 0.0 Cash collateral on securities lent........... 12.8 12.8 0.0 19.2 19.2 0.0 Repurchase agreements....... 196.9 196.9 0.0 137.6 137.6 0.0 Trading portfolio liabilities............... 54.6 54.6 0.0 47.0 47.0 0.0 Negative replacement values.................... 95.8 95.8 0.0 125.8 125.8 0.0 Due to customers............ 280.1 280.1 0.0 275.3 275.6 (0.3) Long-term debt.............. 56.4 57.6 (1.2) 51.0 53.3 (2.3) Fair value effect on income of hedging derivatives recorded on the accrual basis..................... 0.5 1.0 ---- ---- Net difference between carrying value and fair value..................... 0.7 1.7 ==== ====
The table does not reflect the fair values of non-financial assets and liabilities such as property (including those properties carried as financial investments), equipment, prepayments and non-interest accruals. The interest amounts accrued to date for respective financial instruments are included, for purposes of the above fair value disclosure, in the carrying value of the financial instruments. Substantially all of the Group's commitments to extend credit are at variable rates. Accordingly, the Group has no significant exposure to fair value fluctuations related to these commitments. Changes in the fair value of the Group's fixed rate loans, long and medium term notes and bonds issued are hedged by derivative instruments, mainly interest rate swaps. The interest rate risk inherent in the balance sheet positions with no specific maturity is also hedged with derivative instruments based on the management view on the economic maturity of the products. - -------------------------------------------------------------------------------- F- 48 264 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The hedging derivative instruments are carried at fair value on the balance sheet and are part of the replacement values in the above table. The difference between the total amount of valuation gains and losses and the amortized amount is deferred and shown net in the table as fair value effect on income of hedging derivatives recorded on accruals basis. During 1999, the interest rate level of leading economies increased substantially. The biggest move in rates was noted in Switzerland, where in particular mid- and long-term rates increased. These moves in rates had a direct impact on the fair value calculation of fixed term transactions. As the bank has an excess volume of fixed rate long-term assets over fixed rate long-term liabilities, the net fair value unrealized gain is reduced substantially. In addition to fixed rate balance sheet positions, the bank has a number of retail products traditionally offered in Switzerland such as variable mortgage loans and customer savings and deposits. These instruments have no maturity or have a contractual repricing maturity of less than one year. Based on the assumptions and the guidance under IAS, they are excluded from the fair value calculations of the table above. The exclusion of the above traditional banking products from the fair value calculation leads to certain fair value swings. By calculating the fair value differences based on the economic maturity of the non-maturity liabilities, such as savings and deposits, in an environment of raising interest rates, they would generate fair value gains which may offset most of the fair value loss reported for fixed term transactions. NOTE 35 RETIREMENT BENEFIT PLANS AND OTHER EMPLOYEE BENEFITS The Group has established various pension plans inside and outside of Switzerland. The major plans are located in Switzerland, the UK, the U.S. and Germany. Independent actuarial valuations are performed for the plans in those locations. Swiss Pension Plans until 30 June 1999 The pension funds of the Group are set up as trusts, domiciled in Basel and Zurich. All domestic employees are covered. The pension funds are defined benefit plans. The pension plan benefits exceed the minimum benefits required under the Swiss law. Contributions are paid for by the Group and the employees. The employee contributions are calculated as a percentage of the insured annual salary and are deducted monthly. The percentages deducted from the salary depend on age and vary between 8% and 12%. The Group contributions are variable and amount from 125% to 250% of the employees contributions depending on the financial situation of the pension fund. The pension plan formula is based on years of contributions and final covered salary. The benefits covered include retirement benefits, disability, death and survivor pension. Swiss Pension Plans starting 1 July 1999 The pension plans of both former banks in Switzerland are in the process of being liquidated and a new foundation with domicile in Zurich was created as of 21 January 1999. The new pension scheme became operational as of 1 July 1999. As a result of the merger of the plans of the former banks in Switzerland, on 1 July 1999 there was a one-time increase of vested plan benefits for the beneficiaries of such plans. This had the effect of increasing the defined benefit obligation at this date by CHF 3,525 million. In accordance with IAS 19 (revised 1998) this resulted in a one-time charge to income which was offset by the recognition of - -------------------------------------------------------------------------------- F- 49 265 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) assets (previously unrecognized due to the paragraph 58(b) limitation of IAS 19 (revised 1998)) used to fund this increase in benefits. The pension plan covers practically all employees in Switzerland and exceeds the minimum benefits requirements under the Swiss law. Contributions for the pension plan are paid for by the employees and the Group. The employee contributions are calculated as a percentage of the insured annual salary and are deducted monthly. The percentages deducted from the salary for the full benefit coverage (including risk benefits) depend on age and vary between 7% and 10%. The Group pays a variable contribution that ranges between 150% and 220% of the sum of the employees' contributions. The pension plan formula is based on years of contributions and final covered salary. The benefits covered include retirement benefits, disability, death and survivor pension. The Group booked an amount of CHF 456 million in 1999 related to the recognition of "Excess Employer Contributions." These assets were recognized in the fourth quarter as certain legal and regulatory issues related to the Group's ability to utilize these assets for future funding purposes were resolved.
31.12.1999 31.12.1998 31.12.1997 CHF MILLION ---------- ---------- ---------- SWISS PENSION PLANS Defined benefit obligation................................ (17,011) (14,944) (14,431) Plan assets at fair value................................. 18,565 17,885 17,224 ------- ------- ------- PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION............... 1,554 2,941 2,793 Unrecognized net actuarial (gains)/losses................. (724) (385) (385) Unrecognized assets....................................... (374) (2,556) (2,408) ------- ------- ------- Prepaid pension cost...................................... 456 0 0 ======= ======= ======= ADDITIONAL DETAILS TO FAIR VALUE OF PLAN ASSETS Own financial instruments and securities lent to UBS included in plan assets................................. 6,785 2,761 2,202 Any assets used by the bank included in plan assets....... 187 176 176 ------- ------- ------- RETIREMENT BENEFITS EXPENSE Current service cost...................................... 464 535 524 Interest cost............................................. 636 726 705 Expected return on plan assets............................ (883) (856) (756) Adjustment to limit prepaid pension cost.................. (150) 148 22 Amortization of unrecognized prior service costs.......... 172 6 (8) Employee contributions.................................... (180) (185) (194) ------- ------- ------- ACTUARIALLY DETERMINED NET PERIODIC PENSION COST.......... 59 374 293 ======= ======= ======= Actual return on plan assets.............................. 11.9% 6.7% 15.5% PRINCIPAL ACTUARIAL ASSUMPTIONS USED (%) Discount rate............................................. 4.0 5.0 5.0 Expected rate of return on assets p.a..................... 5.0 5.0 5.0 Expected rate of salary increase.......................... 2.0-3.0 3.5-5.5 3.5-5.5 Rate of pension increase.................................. 1.5 2.0 2.0 ======= ======= =======
- -------------------------------------------------------------------------------- F- 50 266 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Foreign Pension Plans The foreign locations of UBS operate various pension schemes in accordance with local regulations and practices. Among these schemes are defined contribution plans as well as defined benefit plans. The locations with defined benefit plans of a material nature are in the UK, the U.S. and Germany. These locations, together with Switzerland, cover nearly 90% of the active workforce. Certain of these schemes permit employees to make contributions and earn matching or other contributions from the Group. The retirement plans provide benefits in the event of retirement, death, disability or employment termination. The plans' retirement benefits depend on age, contributions and level of compensation. The principal plans are financed in full by the Group. The funding policy for these plans is consistent with local government and tax requirements. The assumptions used in foreign plans take into account local economic conditions. The amounts shown for foreign plans reflect the net funded positions of the major foreign plans. Postretirement Medical and Life Plans The Group in the U.S. and the UK offers retiree medical benefits that contribute to the health care coverage of the employees and beneficiaries after retirement. In addition to retiree medical, the U.S. also provides retiree life insurance benefits. The benefit obligation in excess of plan assets for those plans amounts to CHF 113 million as of 31 December 1999 (1998 CHF 93 million, 1997 CHF 100 million) and the total unfunded accrued postretirement liabilities to CHF 83 million (1998 CHF 62 million, 1997 CHF 50 million). The actuarially determined net postretirement cost amounts to CHF 17 million for 1999 (1998 CHF 17 million, 1997 CHF 14 million).
CHF MILLION 31.12.1999 31.12.1998 31.12.1997 - ----------- ---------- ---------- ---------- PENSION PLANS ABROAD Defined benefit obligation............................. (2,444) (2,009) (1,950) Plan assets at fair value.............................. 2,880 2,173 2,187 --------- --------- --------- PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION............ 436 164 237 Unrecognized net actuarial (gains)/losses.............. (474) (63) (160) Unrecognized transition amount......................... 1 2 (17) Unrecognized past service cost......................... 2 0 0 Unrecognized assets.................................... (28) (60) (24) --------- --------- --------- (Unfunded accrued)/Prepaid pension cost................ (63) 43 36 ========= ========= ========= MOVEMENT OF NET (LIABILITY)/ASSET Prepaid pension cost/(benefit) at the beginning of the year................................................. 43 36 (12) Net periodic pension cost.............................. (123) (33) 9 Employer contributions................................. 22 43 39 Currency adjustment (5) (3) --------- --------- --------- (Unfunded accrued)/Prepaid pension cost at the end of the year............................................. (63) 43 36 ========= ========= =========
- -------------------------------------------------------------------------------- F- 51 267 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
CHF MILLION 31.12.1999 31.12.1998 31.12.1997 - ----------- ---------- ---------- ---------- RETIREMENT BENEFITS EXPENSE Current service cost................................... 118 116 114 Interest cost.......................................... 123 140 115 Expected return on plan assets......................... (195) (191) (147) Amortization of net transition (assets)/liability...... 0 2 (85) Adjustment to limit prepaid pension cost............... 21 2 0 Immediate recognition of transition assets under IAS 8.................................................... 0 (23) 0 Amortization of unrecognized prior service costs....... 77 7 0 Amortization of unrecognized net (gain)/losses......... (6) (3) 0 Effect of any curtailment or settlement................ 0 (8) 0 Employee contributions................................. (15) (9) (6) --------- --------- --------- ACTUARIALLY DETERMINED NET PERIODIC PENSION COST....... 123 33 (9) ========= ========= ========= Actual return on plan assets........................... 15.3% 5.2% 21.4% PRINCIPAL ACTUARIAL ASSUMPTIONS USED (%) Discount rate.......................................... 5.75-7.50 6.50-7.50 6.50-7.50 Expected rates of return on assets p.a................. 8.00-8.50 8.50-8.75 8.50-8.75 Expected rate of salary increase....................... 3.50-5.60 3.50-9.00 3.50-9.00 Rate of pension increase............................... 0.00-2.50 0.00-3.75 0.00-3.75 ========= ========= =========
NOTE 36 EQUITY PARTICIPATION PLANS UBS AG has established various equity participation plans in the form of stock plans and stock option plans to further align the long-term interests of managers, staff and shareholders. Key personnel are awarded a portion of their performance-related compensation in UBS AG shares or options, which are restricted for a specified number of years. Long-term stock options are granted to key employees under another plan. A number of awards under these plans are made in notional shares or options, which generally are settled in cash and are treated as liabilities. Participation in both plans is mandatory. Long-term stock options are blocked for three or five years, during which they cannot be exercised. For the 1997 options and certain of the 1998 options, one half of each award is subject to an acceleration clause after which certain forfeiture provisions lapse. One option gives the right to purchase one registered UBS AG share at the option's strike price. Neither the fair value nor the intrinsic value of the options granted is recognized as an expense in the financial statements. Other employees have the choice to invest part of their annual bonus in UBS AG shares or in options or derivatives on UBS AG shares, which may be exercised or settled in cash. A number of awards under these plans are made in notional shares or instruments, which generally are settled in cash. A holding period, generally three years, applies during which the instruments cannot be sold or exercised. In addition, participants in the plan receive a restricted matching contribution of additional UBS AG shares or derivatives. Shares awarded under the plan are purchased or hedged in the market. Under another plan, employees in Switzerland are entitled to purchase a specified number of UBS AG shares at a predetermined discounted price each year (the discount is recorded as compensation expense). The number of shares that can be purchased depends primarily on years of service and rank. Any such shares purchased must be held for a specified period of time. Information on shares available for issuance under these plans is included in the Group Statement of Changes in Equity. - -------------------------------------------------------------------------------- F- 52 268 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The Group's policy is to recognize expense as of the date of grant for equity participation instruments (stock, warrants, options and other derivatives for which the underlying is the Group's own shares). The amount of expense recognized is equal to the intrinsic value of the instrument at such date. Options in UBS AG Shares
WEIGHTED- WEIGHTED- WEIGHTED- NUMBER OF AVERAGE EXERCISE NUMBER OF AVERAGE EXERCISE NUMBER OF AVERAGE EXERCISE OPTIONS PRICE (IN CHF) OPTIONS PRICE (IN CHF) OPTIONS PRICE (IN CHF) 31.12.1999 31.12.1999 31.12.1998 31.12.1998 31.12.1997 31.12.1997 ---------- ---------------- ---------- ---------------- ---------- ---------------- Outstanding, at the beginning of the year............... 7,202,786 177 1,899,924 186 0 -- Granted during the year............... 3,439,142 237 5,811,778 182 1,899,924 186 Exercised during the year............... (71,766) 179 (22,970) 178 0 -- Forfeited during the year............... (431,700) 190 (485,946) 268 0 -- ---------- --- --------- --- --------- --- Outstanding, at the end of the year.... 10,138,462 197 7,202,786 177 1,899,924 186 ---------- --- --------- --- --------- --- Exercisable, at the end of the year.... 650,640 186 0 0 0 -- ========== === ========= === ========= ===
Of the total options outstanding at 31 December 1999: 9,974,770 options (650,640 of which were exercisable) had exercise prices ranging from CHF 170 to CHF 237, or CHF 196 on average, and had a weighted-average remaining contractual life of 4.58 years; and 163,692 options (none of which were exercisable) had exercise prices ranging from CHF 255 to CHF 270, or CHF 261 on average, and had a weighted-average remaining contractual life of 4.45 years. NOTE 37 RELATED PARTIES Related parties include the Board of Directors, the Group Executive Board, the Group Managing Board, close family members and enterprises which are controlled by these individuals. Total remuneration of related parties recognized in the income statement during the year amounted to CHF 193.1 million and CHF 102.8 million for the year ended 1998. The number of long-term stock options outstanding from equity plans was 274,616 at 31 December 1999 and 255,000 at 31 December 1998. This scheme is further explained in Note 36. Total amount of shares and warrants held by members of the Board of Directors, Group Executive Board and Group Managing Board were 2,456,092 and 22,849,028 as of 31 December 1999 and 4,635,804 and 6,178,748 as of 31 December 1998. Total loans and advances receivable (mortgages only) from related parties were as follows:
CHF MILLION 31.12.1999 - ----------- ----------- Mortgages at the beginning of the year...................... 27 Additions................................................... 6 Reductions.................................................. (5) -- MORTGAGES AT THE END OF THE YEAR............................ 28 ==
- -------------------------------------------------------------------------------- F- 53 269 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Members of the Board of Directors, Group Executive Board and Group Managing Board are granted mortgages at the same terms and conditions as other employees. Terms and conditions are based on third party conditions excluding credit margin. Loans and advances to significant associated companies were as follows:
CHF MILLION 31.12.1999 - ----------- ----------- Loans and advances at the beginning of the year............. 165 Additions................................................... 42 Reductions.................................................. (145) ---- LOANS AND ADVANCES AT THE END OF THE YEAR................... 62 ====
Note 39 provides a list of significant associates. NOTE 38 POST BALANCE SHEET EVENTS There have been no material post-balance sheet events which would require disclosure or adjustment to the December 1999 financial statements except as follows: at the annual general meeting of shareholders held on 18 April 2000, a two-for-one stock split was approved to be effective 8 May 2000. Accordingly, the share, per share, stock options and exercise price information have been adjusted to retroactively reflect the stock split. NOTE 39 SIGNIFICANT SUBSIDIARIES AND ASSOCIATES Significant Subsidiaries
EQUITY SHARE INTEREST REGISTERED CAPITAL ACCUMULATED COMPANY OFFICE DIVISION IN MILLIONS IN % - ------- ------------ -------- ------------ ----------- Armand von Ernst & Cie AG Bern PB(1) CHF 5.0 100.0 Aventic AG Zurich PCC(2) CHF 30.0 100.0 Bank Ehinger & Cie AG Basel PB CHF 6.0 100.0 BDL Banco di Lugano Lugano PB CHF 50.0 100.0 Brinson Partners Inc. Chicago AM(3) USD -- 100.0 Brunswick Warburg Limited Georgetown WA(4) USD 50.0 50.0 Cantrade Privatbank AG Zurich PB CHF 10.0 100.0 Cantrade Private Bank Switzerland (CI) Ltd St Helier PB GBP 0.7 100.0 Credit Industriel SA Zurich CAP(5) CHF 10.0 100.0 EIBA "Eidgenossische Bank" Zurich CAP CHF 14.0 100.0 Factors AG Zurich PCC CHF 5.0 100.0 Ferrier Lullin & Cie SA Geneva PB CHF 30.0 100.0 Global Asset Management Ltd Hamilton AM USD 2.0 100.0 HYPOSWISS, Schweizerische Hypotheken- und Handelsbank Zurich PB CHF 26.0 100.0 IL Immobilien-Leasing AG Opfikon PCC CHF 5.0 100.0
- -------------------------------------------------------------------------------- F- 54 270 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY SHARE INTEREST REGISTERED CAPITAL ACCUMULATED COMPANY OFFICE DIVISION IN MILLIONS IN % - ------- ------------ -------- ------------ ----------- Indelec Holding AG Basel CAP CHF 10.0 100.0 Intrag Zurich PB CHF 10.0 100.0 Klinik Hirslanden AG Zurich CC(6) CHF 22.5 91.2 NYRE Holding Corp Wilmington WA USD 102.9(7) 100.0 Phillips & Drew Fund Management Limited London AM GBP -- 100.0 Phillips & Drew Limited London AM GBP 8.0 100.0 PT Warburg Dillon Read Indonesia Jakarta WA IDR 11000.0 85.0 SBC Equity Partners AG Opfikon CAP CHF 71.7 100.0 Schroder Munchmeyer Hengst AG Hamburg PB DEM 100.0 100.0 SG Warburg & Co International BV Amsterdam WA GBP 148.0(7) 100.0 SG Warburg Securities SA Geneva WA CHF 14.5 100.0 Solothurner Bank SoBa Solothurn PCC CHF 50.0 100.0 Systor AG Zurich PCC CHF 5.0 100.0 Thesaurus Continentale Effekten- Gesellschaft Zurich Zurich CAP CHF 30.0 100.0 UBS Investment Management Pte Ltd Singapore WA SGD 0.5 90.0 UBS (Bahamas) Ltd Nassau PB USD 4.0 100.0 UBS (Cayman Islands) Ltd Georgetown PB USD 5.6 100.0 UBS (France) SA Paris WA EUR 10.0 100.0 UBS (Italia) SpA Milan PB ITL 43000.0 100.0 UBS (Luxembourg) SA Luxembourg PB CHF 150.0 100.0 UBS (Monaco) SA Monte Carlo PB EUR 9.2 100.0 UBS (Panama) SA Panama PB USD 6.0 100.0 UBS (Sydney) Limited Sydney WA AUD 12.7 100.0 UBS (Trust and Banking) Ltd Tokyo PB JPY 10500.0 100.0 UBS (USA), Inc. Delaware WA USD 763.3(7) 100.0 UBS Australia Holdings Ltd Sydney WA AUD 11.7 100.0 UBS Australia Ltd Sydney WA AUD 15.0 100.0 UBS Bank (Canada) Toronto PB CAD 90.4(7) 100.0 UBS Beteiligungs-GmbH & Co KG Frankfurt WA EUR 398.8 100.0 UBS Brinson Asset Management Co. Ltd Tokyo AM JPY 800.0 100.0 UBS Brinson Inc. New York AM USD 72.7(7) 100.0 UBS Brinson Investment GmbH Frankfurt AM DEM 10.0 100.0 UBS Brinson Limited London AM GBP 8.8 100.0 UBS Brinson Ltd Sydney AM AUD 8.0 100.0 UBS Brinson Pte Ltd Singapore AM SGD 4.0 100.0
- -------------------------------------------------------------------------------- F- 55 271 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY SHARE INTEREST REGISTERED CAPITAL ACCUMULATED COMPANY OFFICE DIVISION IN MILLIONS IN % - ------- ------------ -------- ------------ ----------- UBS Brinson SA Paris AM EUR 0.8 100.0 UBS Capital AG Zurich CAP CHF 0.5 100.0 UBS Capital Asia Pacific Ltd Georgetown CAP USD 5.0 100.0 UBS Capital BV The Hague CAP EUR 104.1(7) 100.0 UBS Capital GmbH Frankfurt CAP EUR -- 100.0 UBS Capital II LLC Delaware CAP USD 2.7 100.0 UBS Capital LLC New York CAP USD 18.6(7) 100.0 UBS Capital Partners Ltd London CAP GBP 6.7 100.0 UBS Capital S.p.A Milan CAP ITL 50000.0 100.0 UBS Card Center AG Glattbrugg PCC CHF 40.0 100.0 UBS Espana SA Madrid PB EUR 35.3 100.0 UBS Finance (Cayman Islands) Limited Georgetown CC USD 0.5 100.0 UBS Finance (Curacao) NV Curacao CC USD 0.1 100.0 UBS Finance (Delaware) LLC Wilmington WA USD 37.3(7) 100.0 UBS Finanzholding AG Zurich CC CHF 10.0 100.0 UBS Fund Holding (Luxembourg) SA Luxembourg PB CHF 42.0 100.0 UBS Fund Holding (Switzerland) AG Basel PB CHF 18.0 100.0 UBS Fund Management (Japan) Co. Ltd Tokyo PB JPY 1000.0 100.0 UBS Fund Management (Switzerland) AG Basel PB CHF 1.0 100.0 UBS Fund Services (Luxembourg) S.A. Luxembourg PB CHF 2.5 100.0 UBS Futures & Options Limited London WA GBP 2.0 100.0 UBS Immoleasing AG Zurich PCC CHF 3.0 100.0 UBS Inc. New York WA USD 308.7(7) 100.0 UBS International Holdings BV Amsterdam CC CHF 5.5 100.0 UBS Invest Kapitalanlagegesellschaft mbH Frankfurt PB DEM 5.0 64.0 UBS Lease Finance LLC New York WA USD 16.7 100.0 UBS Leasing AG Brugg PCC CHF 10.0 100.0 UBS Limited London WA GBP 10.0 100.0 UBS Overseas Holding BV Amsterdam CAP EUR 18.1(7) 100.0 UBS Securities (Hong Kong) Ltd Hong Kong WA HKD 20.0 100.0 UBS Securities Limited London WA GBP 10.0 100.0 UBS International Limited London WA GBP 10.0 100.0 UBS Services (Japan) Ltd London WA JPY 41,358.5 100.0 UBS Services Limited London WA GBP -- 100.0 UBS Trust (Canada) Toronto PB CAD 10.0 100.0 UBS UK Holding Ltd London WA GBP 5.0 100.0
- -------------------------------------------------------------------------------- F- 56 272 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY SHARE INTEREST REGISTERED CAPITAL ACCUMULATED COMPANY OFFICE DIVISION IN MILLIONS IN % - ------- ------------ -------- ------------ ----------- UBS UK Limited London WA GBP 609.0 100.0 Warburg Dillon Read (Asia) Ltd Hong Kong WA HKD 20.0 100.0 Warburg Dillon Read (Australia) Corporation Pty Limited Sydney WA AUD 50.4(7) 100.0 Warburg Dillon Read (Espana) SA Madrid WA EUR 1.2 100.0 Warburg Dillon Read (France) SA Paris WA EUR 22.9 100.0 Warburg Dillon Read (Hong Kong) Ltd Hong Kong WA HKD 30.0 100.0 Warburg Dillon Read (Italia) S.I.M. SpA Milan WA EUR 1.8 100.0 Warburg Dillon Read (Japan) Ltd Georgetown WA JPY 30000.0 50.0 Warburg Dillon Read (Malaysia) Sdn. Bhd Kuala Lumpur WA MYR 0.5 100.0 Warburg Dillon Read (Nederland) BV Amsterdam WA EUR 10.9 100.0 Warburg Dillon Read AG Frankfurt WA EUR 155.7 100.0 Warburg Dillon Read Australia Ltd Sydney WA AUD 571.5(7) 100.0 Warburg Dillon Read Derivatives Ltd Hong Kong WA HKD 20.0 100.0 Warburg Dillon Read Futures Inc. Chicago WA USD 14.3(7) 100.0 Warburg Dillon Read International Limited London WA GBP 18.0 100.0 Warburg Dillon Read LLC New York WA USD 535.0(7) 100.0 Warburg Dillon Read Pte. Ltd Singapore WA SGD 3.0 100.0 Warburg Dillon Read Securities (Espana) SVB SA Madrid WA EUR 13.4 100.0 Warburg Dillon Read Securities (India) Private Ltd Mumbai WA INR 0.4 75.0 Warburg Dillon Read Securities (Philippines) Inc Makati WA PHP 120.0 100.0 Warburg Dillon Read Securities (South Africa) (Pty) Ltd Sandton WA ZAR 22.0 100.0 Warburg Dillon Read Securities Co. Ltd Bangkok WA THB 400.0 100.0 Warburg Dillon Read Securities Ltd London WA GBP 140.0 100.0
- --------------- (1) PB: UBS Private Banking. (2) PCC: UBS Private and Corporate Clients. (3) AM: UBS Asset Management. (4) WA: UBS Warburg. (5) CAP: UBS Capital. (6) CC: Corporate Center. (7) Share Capital + share premium. - -------------------------------------------------------------------------------- F- 57 273 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) SIGNIFICANT ASSOCIATES
EQUITY SHARE CAPITAL COMPANY INTEREST IN MILLIONS - ------- -------- ------------- Giubergia Warburg SIM SpA, Milan............................ 50.0% ITL 29,000 Motor Columbus AG, Baden.................................... 35.6% CHF 253 National Versicherung AG, Basel............................. 28.4% CHF 35 Telekurs Holding AG, Zurich................................. 33.3% CHF 45 Swiss Financial Services Group AG, Zurich................... 30.7% CHF 26
None of the above investments carry voting rights that are significantly different from the proportion of shares held. Consolidated Companies: Changes in 1999 New companies Global Asset Management Ltd., Hamilton Klinik Hirslanden AG, Zurich UBS Brinson Realty Investors LLC, Hartford (formerly Allegis Realty Investors LLC) UBS Capital AG, Zurich UBS Espana SA. Madrid UBS (France) SA, Paris UBS Trustees (Channel Island) Ltd., Jersey (formerly Bankamerica Trust Company)
Deconsolidated companies
NAME REASON FOR DECONSOLIDATION - ---- -------------------------- UBS (East Asia) Ltd., Singapore Deregistered UBS Securities (Singapore) Pte Ltd., Singapore Deregistered
NOTE 40 SIGNIFICANT FOREIGN CURRENCY TRANSLATION RATES The following table shows the significant rates used to translate the financial statements of foreign entities into Swiss francs.
SPOT RATE AVERAGE RATE -------------------------------------- -------------------------------------- 31.12.1999 31.12.1998 31.12.1997 31.12.1999 31.12.1998 31.12.1997 ---------- ---------- ---------- ---------- ---------- ---------- 1 EUR................. 1.61 -- -- 1.60 -- -- 1 GBP................. 2.58 2.29 2.41 2.43 2.41 2.37 1 USD................. 1.59 1.38 1.46 1.50 1.45 1.45 100 DEM............... 82.07 82.19 81.24 81.88 82.38 83.89 100 JPY............... 1.56 1.22 1.12 1.33 1.11 1.19
- -------------------------------------------------------------------------------- F- 58 274 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 41 SWISS BANKING LAW REQUIREMENT The significant differences between International Accounting Standards (IAS), which are the principles followed by the Group, and the accounting for banks under Swiss laws and regulations, are as follows: Securities borrowing and lending Under IAS, only the cash collateral delivered or received is recognized in the balance sheet. There is no recognition or derecognition for the securities received or delivered. The Swiss requirement is to recognize the securities received or delivered in the balance sheet along with any collateral in respect of those securities for which control is transferred. Treasury shares Treasury shares is the term used to describe the holding by an enterprise of its own equity instruments. In accordance with IAS, treasury shares are presented in the balance sheet as a deduction from equity. No gain or loss is recognized in the income statement on the sale, issuance, or cancellation of those shares. Consideration received is presented in the financial statement as a change in equity. Under Swiss requirements, treasury shares and derivatives on treasury shares would be carried in the balance sheet as financial investments with gains and losses on the sale, issuance, or cancellation of treasury shares reflected in the income statement. Extraordinary income and expense Under IAS, most items of income and expense arise in the course of ordinary business, and extraordinary items are expected to be rare. Under the Swiss requirements, income and expense not directly related with the core business activities of the enterprise (e.g., sale of fixed assets or bank premises) are recorded as extraordinary income or expense.
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- DIFFERENCES IN THE BALANCE SHEET Securities borrowing and lending Assets Trading portfolio assets/Money market paper...................................... 47,401 97,907 Due from banks/customers..................... 273,093 40,915 Liabilities Due to banks/customers....................... 375,080 185,855 Trading portfolio liabilities................ (54,586) (47,033) Treasury shares Assets.......................................... Trading portfolio assets..................... 4,561 3,409 Positive replacement values.................. 334 192 Financial investments........................ 3,136 1,482
- -------------------------------------------------------------------------------- F- 59 275 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997 - ------------------ ---------- ---------- ---------- CHF MILLION DIFFERENCES IN THE INCOME STATEMENT Treasury shares........................................... (36) 427 129 RECLASSIFICATION OF EXTRAORDINARY INCOME AND EXPENSE Other income, including income from associates............ (1,726) (1,350) (162) General and administrative expenses....................... (519) (1,235) (114) DIFFERENCES IN THE SHAREHOLDERS' EQUITY Treasury shares........................................... 7,543 5,025 1,982
NOTE 42 DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 42.1 VALUATION AND INCOME RECOGNITION DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements of the Group have been prepared in accordance with IAS. The principles of IAS differ in certain respects from United States Generally Accepted Accounting Principles ("U.S. GAAP"). The following is a summary of the significant accounting and valuation differences between IAS and U.S. GAAP. a. Purchase accounting Under IAS, the Group accounted for the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation under the pooling of interests method. The balance sheets and income statements of the banks were combined and no adjustments to the carrying values of the assets and liabilities were made. Under U.S. GAAP, the business combination creating UBS AG is being accounted for under the purchase method with Union Bank of Switzerland being considered the accounting acquirer. Under the purchase method, the cost of acquisition is measured at fair value and the acquirer's interests in identifiable tangible assets and liabilities of the acquiree are restated to fair values at the date of acquisition. Any excess consideration paid over the fair value of net tangible assets acquired is allocated, first to identifiable intangible assets based on their fair values, if determinable, with the remainder allocated to goodwill. Goodwill Under U.S. GAAP, goodwill and other intangible assets acquired are capitalized and amortized over the expected periods to be benefited with adjustments, if any, for impairment. For purposes of the U.S. GAAP reconciliation, the excess of the consideration paid for Swiss Bank Corporation over the fair value of the net tangible assets received has been recorded as goodwill and is being amortized on a straight line basis over a weighted average life of 13 years beginning 29 June 1998. In 1999, goodwill was reduced by CHF 118 million due to the recognition of deferred tax assets of Swiss Bank Corporation which had previously been subject to valuation reserves.. - -------------------------------------------------------------------------------- F- 60 276 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Other purchase accounting adjustments Under U.S. GAAP, the results of operations of Swiss Bank Corporation would have been included in the Group's consolidated financial statements beginning 29 June 1998. For purposes of the U.S. GAAP reconciliation, Swiss Bank Corporation's Net profit for the six-month period ended 29 June 1998 has been excluded from the Group's Net profit. For purposes of the U.S. GAAP reconciliation, the restatement of Swiss Bank Corporation's net assets to fair value resulted in decreasing net tangible assets by CHF 1,077 million. This amount will be amortized over a period ranging from 2 years to 20 years depending upon the nature of the restatement. b. Harmonization of accounting policies The business combination noted above was accounted for under the pooling of interests method under IAS. Under the pooling of interests method of accounting, a single uniform set of accounting policies was adopted and applied to all periods presented. This resulted in a restatement of 1997 Shareholders' equity and Net loss. U.S. GAAP requires that accounting changes be accounted for in the income statement in the period the change is made. For purposes of the U.S. GAAP reconciliation the accounting policy harmonization recorded in 1997 was reversed because the business contribution noted above is being accounted for under the purchase method and the impact of the accounting changes was recorded in 1998. The income statement effects of this conforming adjustment was as follows:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Depreciation policies....................................... (20) (338) Credit risk adjustments on derivatives...................... 0 (193) Policies for other real estate owned........................ 0 (140) Retirement benefit and equity participation plans........... 0 (47) Settlement-risk adjustments on derivatives.................. 0 (33) --- ---- Total....................................................... (20) (751) === ====
c. Restructuring provision Under IAS, restructuring provisions are recognized when a legal or constructive obligation has been incurred. In 1997, the Group recognized a CHF 7,000 million restructuring provision to cover personnel, information technology ("IT"), premises and other costs associated with combining and restructuring the merged Group. An additional CHF 300 million provision was recognized in the fourth quarter of 1999, reflecting the impact of increased precision in the estimation of certain leased and owned property costs. Under U.S. GAAP, restructuring provisions for business combinations are not recognized prior to the consummation date of the business combination. Also, the criteria for establishing liabilities of this nature are more stringent than under IAS. Established restructuring provisions are required to be periodically reviewed for appropriateness and revised if necessary. For purposes of the U.S. GAAP reconciliation, the aggregate CHF 7,300 million restructuring provision was reversed. As a result of the business combination with Swiss Bank Corporation, and the decision to combine and streamline certain activities of the banks for the purpose of reducing costs and improving efficiencies, Union Bank of Switzerland recognized a restructuring provision of CHF 1,575 million during 1998 for purposes of the U.S. GAAP reconciliation. CHF 759 million of this provision related to estimated costs for restructuring the operations and activities of Swiss Bank Corporation and - -------------------------------------------------------------------------------- F- 61 277 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) such amount was recorded as a liability of the acquired business. The remaining CHF 816 million of estimated costs were charged to restructuring expense during 1998. A CHF 600 million adjustment to the restructuring provision was recognized in 1999 for purposes of the U.S. GAAP reconciliation. The reserve is expected to be substantially exhausted by the end of 2001. The restructuring provision initially included CHF 756 million for employee termination benefits, CHF 332 million for the closure and write downs of owned and leased premises, and CHF 487 million for professional fees, IT costs, miscellaneous transfer taxes and statutory fees. The usage of the U.S. GAAP restructuring provision was as follows:
1998 1998 BALANCE 1999 1999 BALANCE PROVISION USAGE 31.12.1998 USAGE PROVISION 31.12.1999 CHF MILLION --------- ----- ---------- ----- --------- ---------- Personnel....................... 756 (374) 382 (254) 553 681 Premises........................ 332 (27) 305 (244) 179 240 IT.............................. 93 (68) 25 (5) 7 27 Other........................... 394 (81) 313 (45) (139) 129 ---- ---- ----- ---- ---- ----- Total........................... 1,575 (550) 1,025 (548) 600 1,077 ==== ==== ===== ==== ==== =====
Additionally, for purposes of the U.S. GAAP reconciliation, CHF 150 million and CHF 273 million of restructuring costs were expensed as incurred in 1999 and 1998, respectively. d. Derivatives instruments held or issued for non-trading purposes Under IAS, the Group recognizes transactions in derivative instruments hedging non-trading positions in the income statement using the accrual or deferral method, which is generally the same accounting as the underlying item being hedged. U.S. GAAP requires that derivatives be reported at fair value with changes in fair value recorded in income unless specified criteria are met to obtain hedge accounting treatment (accrual or deferral method). The Group is not required to comply with all of the criteria necessary to obtain hedge accounting treatment under U.S. GAAP. Accordingly, for purposes of the U.S. GAAP reconciliation, derivative instruments held or issued for non-trading purposes that did not meet U.S. GAAP hedging criteria have been carried at fair value with changes in fair value recognized as adjustments to net trading income. e. Own shares and derivatives on own shares -- trading As of 1 January 2000, upon adoption of SIC 16 "Share Capital -- Reacquired Own Equity Instruments (Treasury Shares)" for IAS, all own shares are treated as treasury shares and reduce total shareholders' equity. This applies also to the number of shares outstanding. Derivatives on own shares are classified as assets, liabilities or in shareholders' equity depending upon the manner of settlement. As a result of this adoption, there is no difference between IAS and U.S. GAAP. For 1999 and 1998, figures have been retroactively restated (see Note 1(t)). f. Financial investments Under IAS, financial investments are classified as either current investments or long-term investments. The Group considers current financial investments to be held for sale and carried at lower of cost or market value. The Group accounts for long-term financial investments at cost, less any permanent impairments. - -------------------------------------------------------------------------------- F- 62 278 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Under U.S. GAAP, investments are classified as either held to maturity (essentially debt securities) which are carried at amortized cost or available for sale (debt and marketable equity securities), which are carried at fair value with changes in fair value recorded as a separate component of shareholders' equity. Realized gains and losses are recognized in net profit in the period sold. For purposes of the U.S. GAAP reconciliation, amounts reflected in Other income for the changes in market values of held for sale investments are reclassified as a component of Shareholders' equity. Held to maturity investments that do not meet U.S. GAAP criteria are reclassified to the available for sale category. Unrealized gains or unrealized losses relating to these investments are recorded as a component of Shareholders' equity. g. Retirement benefit plans Under IAS, the Group has recorded pension expense based on a specific method of actuarial valuation of projected plan liabilities for accrued service including future expected salary increases and expected return on plan assets. Plan assets are held in a separate trust to satisfy plan liabilities. Plan assets are recorded at fair value. The recognition of a prepaid asset on the books of the Group is subject to certain limitations. These limitations generally cause amounts recognized as expense to equal amounts funded in the same period. Any amount not recognized as a prepaid asset and the corresponding impact on pension expense has been disclosed in the financial statements. Under U.S. GAAP, pension expense, generally, is based on the same method of valuation of liabilities and assets as under IAS. Differences in the levels of expense and liabilities (or prepaid assets) exist due to the different transition date rules and the stricter provisions as well as industry practice under IAS for recognition of a prepaid asset. As a result of the merger of the benefit plans of Union Bank of Switzerland and Swiss Bank Corporation, there was a one time increase of the vested plan benefits for the beneficiaries of such plans. This had the effect of increasing the defined benefit obligation at this date by CHF 3,020 million. Under IAS this resulted in a one time charge to income which was offset by the recognition of assets (previously unrecognized due to certain limitations under IAS). Under U.S. GAAP, in a business combination that is accounted for under the purchase method, the assignment of the purchase price to individual assets acquired and liabilities assumed must include a liability for the projected plan liabilities in excess of plan assets or an asset for plan assets in excess of the projected plan liabilities, thereby recognizing any previously existing unrecognized net gains or losses, unrecognized prior service cost, or unrecognized net liabilities or assets. For purposes of the U.S. GAAP reconciliation, the Group recorded a prepaid asset for the Union Bank of Switzerland plans as of 1 January 1998. Swiss Bank Corporation recorded a purchase price adjustment to recognize its prepaid asset at 29 June 1998. The recognition of these assets impacts the pension expense recorded under U.S. GAAP versus IAS. The pension expense for the year ended 31 December 1999 is also impacted by the different treatment of the merger of the plans under IAS versus U.S. GAAP. The assets recognized under IAS (which had been previously unrecognized due to certain limitations under IAS) were already recognized under U.S. GAAP due to the absence of such limitations under U.S. GAAP. h. Other employee benefits Under IAS, the Group has recorded expenses and liabilities for post-retirement benefits determined under a methodology similar to that described above under retirement benefit plans. - -------------------------------------------------------------------------------- F- 63 279 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Under U.S. GAAP, expenses and liabilities for post-retirement benefits would be determined under a similar methodology as under IAS. Differences in the levels of expenses and liabilities have occurred due to different transition date rules and the treatment of the merger of Union Bank of Switzerland and Swiss Bank Corporation under the purchase method. i. Equity participation plans IAS does not specifically address the recognition and measurement requirements for equity participation plans. U.S. GAAP permits the recognition of compensation cost on the grant date for the estimated fair value of equity instruments issued (Statement of Financial Accounting Standard ("SFAS") No. 123) or based on the intrinsic value of equity instruments issued (APB No. 25), with the disclosure of the pro forma effects of equity participation plans on net profit and earnings per share, as if the fair value had been recorded on the grant date. The Group recognized only intrinsic values at the grant date with subsequent changes in value not recognized. For purposes of the U.S. GAAP reconciliation, certain of the Group's option awards have been determined to be variable, primarily because they may be settled in cash or the Group has offered to hedge their value. Additional compensation expense from these options awards for the years ended 31 December 1999 and 31 December 1998 is CHF 41 million and CHF 1 million, respectively. In addition, certain of the Group's equity participation plans provide for deferral of the awards, and the instruments are held in trusts for the participants. Certain of these trusts are recorded on the Group's balance sheet for U.S. GAAP presentation. The effect of recording these asset and liabilities is a debit to expense of CHF 8 million and CHF nil for the years ended 31 December 1999 and 31 December 1998, respectively. j. Software capitalization Costs associated with the acquisition or development of internal use software are recorded as Operating expenses as incurred by the Group. Under U.S. GAAP, effective 1 January 1999, certain costs associated with the acquisition or development of internal use software are required to be capitalized. Once the software is ready for its intended use, the costs capitalized are amortized to the Income statement over estimated lives. For purposes of the U.S. GAAP reconciliation, costs associated with the acquisition or development of internal use software that meet U.S. GAAP software capitalization criteria have been reversed from Operating expenses and amortized over a period of 2 years. k. Credit loss expense The allowance for credit losses provides for risks of losses inherent in the credit extension process. Counterparties are individually rated and continuously reviewed and analyzed. The allowance is adjusted for impairments identified on a loan-by-loan basis. If there are indications that there are significant probable losses in the portfolio that have not specifically been identified allowances would also be provided for on a portfolio basis. As described in Note 1(j), "Loans and allowance for credit losses," the allowance for credit losses has three components: counterparty-specific, country-specific, and specific reserve pools. Specific reserve pools were established in 1996 to absorb losses not specifically identified at that time but which experience indicated were present in the portfolio. These pools have been applied to specific loans based on the analysis of individual credit exposures. The utilization of the unallocated specific - -------------------------------------------------------------------------------- F- 64 280 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) reserve pools was periodically reviewed by the Group. At 31 December 1999 there were no specific reserve pools and none were required. Under U.S. GAAP, the allowance for loan losses also is an accounting estimate of credit losses inherent in a company's loan portfolio that have been incurred as of the balance-sheet date. The practice of using a procedural discipline in determining all components of the allowance for loan losses to be reported is followed under U.S. GAAP. The Group's evaluation of the specific reserve pools at 30 September 1999 did not follow a procedural discipline and therefore is not in full compliance with U.S. GAAP. An adjustment to the U.S. GAAP reconciliation was made at 30 September 1999 but not required at 31 December 1999. l. Recently issued US accounting standards ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the US Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which, as amended, is required to be adopted for financial statements as of 1 January 2001. The standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. While the specific impact on earnings and financial position of SFAS No. 133 has not been determined, the activities that will be most affected by the new Standard have been identified. Specifically, UBS Warburg and Corporate Center use derivatives to hedge loans, deposits, and issuance of debt, primarily to hedge interest rate risk. The Group's lending activities use credit derivatives to hedge credit risk, and to a lesser extent, use other derivatives to hedge interest rate risk. Management is currently evaluating the impact of SFAS No. 133 on the Group's hedging strategies. The actual assessment of the impact on the Group's earnings and financial position will be based on the 1 January 2001 positions in accordance with the Standard. - -------------------------------------------------------------------------------- F- 65 281 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 42.2 RECONCILIATION OF IAS SHAREHOLDERS' EQUITY AND NET PROFIT/(LOSS) TO U.S. GAAP
SHAREHOLDERS' EQUITY NET PROFIT/(LOSS)} ----------------------- ------------------------ 31.12.1999 31.12.1998 31.12.1999 31.12.1998 CHF MILLION ---------- ---------- ---------- ---------- AMOUNTS DETERMINED IN ACCORDANCE WITH IAS:...... 30,608 28,794 6,153 2,972 Adjustments in respect of: a. SBC purchase accounting: Goodwill................................... 19,765 21,612 (1,729) (864) Other purchase accounting adjustments...... (858) (895) 37 (2,415) b. Harmonization of accounting policies....... 0 20 (20) (751) c. Restructuring provision.................... 350 1,948 (1,598) (3,982) d. Derivative instruments held or issued for non-trading purposes....................... 507 1,052 (545) (405) f. Financial investments...................... 52 108 36 23 g. Retirement benefit plans................... 1,839 1,858 (19) 88 h. Other employee benefits.................... (24) (26) 2 (20) i. Equity participation plans................. (113) (40) (47) (1) j. Software capitalization.................... 389 0 389 0 k. Credit loss expense........................ 0 0 0 0 l. Tax adjustments............................ (682) 330 178 1,690 ------ ------ ------ ------ Total adjustments............................... 21,225 25,967 (3,316) (6,637) ------ ------ ------ ------ AMOUNTS DETERMINED IN ACCORDANCE WITH U.S. GAAP:......................................... 51,833 54,761 2,837 (3,665) ====== ====== ====== ======
- -------------------------------------------------------------------------------- F- 66 282 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 42.3 EARNINGS PER SHARE Under IAS and U.S. GAAP, basic earnings per share ("EPS") is computed by dividing income available to common shareholders' by the weighted average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares that were outstanding during the period. The computation of basic and diluted EPS for the years ended 31 December 1999 and 31 December 1998 are presented in the following table:
31.12.1999 31.12.1998 ----------- ------------ Net profit/(loss) available for ordinary shares (CHF million): IAS....................................................... 6,153 2,972 U.S. GAAP................................................. 2,837 (3,665) Weighted average shares outstanding: IAS....................................................... 404,742,482 405,222,295 U.S. GAAP................................................. 404,742,482 414,609,886 Diluted weighted average shares outstanding: IAS....................................................... 408,375,152 412,881,041 U.S. GAAP................................................. 408,375,152 414,609,886 Basic earnings/(loss) per share (CHF): IAS....................................................... 15.20 7.33 U.S. GAAP................................................. 7.01 (8.84) Diluted earnings/(loss) per share (CHF): IAS....................................................... 15.07 7.20 U.S. GAAP................................................. 6.95 (8.84)
The following are adjustments to the calculation of weighted average outstanding common shares which result from valuation and presentation differences between IAS and U.S. GAAP:
WEIGHTED AVERAGE SHARES OUTSTANDING: 31.12.1999 31.12.1998 - ------------------------------------ ----------- ----------- Basic weighted-average ordinary shares (IAS)................ 404,742,482 405,222,295 add: Treasury shares adjustments.......................... 0 9,387,591(2) ----------- ----------- Basic weighted-average ordinary shares (U.S. GAAP).......... 404,742,482 414,609,886 ----------- ----------- Diluted weighted-average ordinary shares (IAS).............. 408,375,152 0(1) ----------- ----------- Diluted weighted-average ordinary shares (U.S. GAAP)........ 408,375,152 414,609,886 ----------- -----------
- --------------- (1) No potential ordinary shares may be included in the computation of any diluted per-share amount when a loss from continuing operations exists. (2) This adjustment is due to the difference in weighted average shares calculated under purchase accounting for U.S. GAAP versus the pooling method under IAS for the Union Bank of Switzerland merger with Swiss Bank Corporation on 29 June 1998. There is otherwise no difference between IAS and U.S. GAAP for the calculation of weighted average shares for EPS. - -------------------------------------------------------------------------------- F- 67 283 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 42.4 PRESENTATION DIFFERENCES BETWEEN IAS AND U.S. GAAP In addition to the differences in valuation and income recognition, other differences, essentially related to presentation, exist between IAS and U.S. GAAP. Although these differences do not cause differences between IAS and U.S. GAAP reported shareholders' equity and net profit, it may be useful to understand them to interpret the financial statements presented in accordance with U.S. GAAP. The following is a summary of presentation differences that relate to the basic IAS financial statements. 1. Purchase accounting As described in Note 42.1, under U.S. GAAP the business combination creating UBS AG was accounted for under the purchase method with Union Bank of Switzerland being considered the accounting acquirer. In the U.S. GAAP Condensed Consolidated Balance Sheet, the assets and liabilities of Swiss Bank Corporation have been restated to fair value at the date of acquisition (29 June 1998). In addition, the following table presents summarized financial results of SBC for the period from 1 January to 29 June 1998 which, under U.S. GAAP, would be excluded from the U.S. GAAP condensed consolidated Income statement for the year ended 31 December 1998: OPERATING INCOME Interest income............................................. 8,205 Less: interest expense...................................... 6,630 ----- Net interest income......................................... 1,575 Less: Credit loss expense................................... 164 ----- Total....................................................... 1,411 ----- Net fee and commission income............................... 3,701 Net trading income.......................................... 2,135 Income from disposal of associates and subsidiaries......... 1,035 Other income................................................ 364 ----- Total....................................................... 8,646 ----- OPERATING EXPENSES Personnel................................................... 3,128 General and administrative.................................. 1,842 Depreciation and amortization............................... 511 ----- Total....................................................... 5,481 ----- OPERATING PROFIT BEFORE TAXES AND MINORITY INTERESTS........ 3,165 ----- Tax expense................................................. 552 ----- PROFIT...................................................... 2,613 ----- Less: Minority interests.................................... (1) ----- NET PROFIT.................................................. 2,614 =====
2. Settlement date vs. trade date accounting The Group's transactions from securities activities are recorded on the settlement date for balance sheet and on the trade date for income statement purposes. This results in recording an off-balance sheet forward transaction during the period between the trade date and the settlement date. Forward - -------------------------------------------------------------------------------- F- 68 284 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) positions relating to trading activities are revalued to fair value and any unrealized profits and losses are recognized in Net profit. Under U.S. GAAP, trade date accounting is required for purchases and sales of securities. For purposes of U.S. GAAP presentation, all purchases and sales of securities previously recorded on settlement date have been recorded as of trade date for balance sheet purposes. Trade date accounting has resulted in receivables and payables to broker-dealers and clearing organizations recorded in Other assets and Other liabilities. 3. Repurchase, resale and securities lending transactions Under IAS, the Group's repurchase agreements and securities borrowed are accounted for as collateralized borrowings. Reverse repurchase agreements and securities lending are accounted for as collateralized lending transactions. Cash collateral is reported on the balance sheet at amounts equal to the collateral advanced or received. Under U.S. GAAP, securities lending and repurchase transactions are also generally accounted for as collateralized borrowing and lending transactions. However, certain such transactions may be deemed sale or purchase transactions under specific circumstances. Additionally, under U.S. GAAP, the Group is required to recognize securities collateral controlled and an offsetting obligation to return such securities collateral on certain financing transactions, when specific control conditions exist. For purposes of U.S. GAAP presentation, securities collateral recognized under financing transactions is reflected in Due from banks or Due from customers, depending on the counterparty. The related obligation to return the securities collateral is reflected in the Balance sheet in Due to banks or Due to customers, as appropriate. 4. Financial investments Under IAS, the Group's private equity investments, real estate held for sale and non-marketable equity financial investments have been included in Financial investments. Under U.S. GAAP, private equity investments, real estate held for sale and non-marketable financial investments generally are reported in Other assets or reported as a separate caption in the Balance sheet. For purposes of U.S. GAAP presentation, private equity investments are reported as a separate caption in the Balance sheet and real estate held for sale and non-marketable equity financial investments are reported in Other assets. 5. Net trading income The Group has implemented a change in accounting policy for interest and dividend income and expenses on trading related assets and liabilities (see Note 1(t)). For the years ended 31 December 1999 and 31 December 1998, figures have been retroactively restated. As a result of this change, there is no longer a difference between IAS and U.S. GAAP. 6. Equity participation plans Certain of the Group's equity participation plans provide for deferral of the awards, and the instruments are held in trusts for the participants. Certain of these trusts are recorded on the Group's balance sheet for U.S. GAAP presentation, the effect of which is to increase assets by CHF 655 million and CHF 197 million, liabilities by CHF 717 million and CHF 236 million, and decrease shareholders' - -------------------------------------------------------------------------------- F- 69 285 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) equity by CHF 62 million and CHF 39 million (for UBS AG shares held by the trusts which are treated as treasury shares) at 31 December 1999 and 31 December 1998, respectively. 7. Own bonds -- trading Under IAS, the Group's own bonds held for trading are carried at fair value similar to other trading assets and liabilities. Changes in fair value and interest on own bonds held for trading are recognized as Net trading income Under U.S. GAAP, all own bonds are treated as Long-term debt and a reduction to the amount of own bonds outstanding. For purposes of U.S. GAAP presentation, own bond positions included in the Trading portfolio and Trading portfolio liabilities have been reclassified to Long-term debt. 42.5 CONSOLIDATED INCOME STATEMENT The following is a Consolidated Income Statement of the Group, for the years ended 31 December 1999 and 31 December 1998, restated to reflect the impact of valuation and income recognition differences and presentation differences between IAS and U.S. GAAP.
31.12.1999 31.12.1998 ----------------- ----------------- CHF MILLION US GAAP IAS US GAAP IAS - ----------- REFERENCE ------- ------ ------- ------ OPERATING INCOME Interest income.................. a, 1 35,404 35,604 29,136 37,442 Less: interest expense........... a, 1 29,660 29,695 25,773 32,424 ------ ------ ------ ------ Net interest income.............. 5,744 5,909 3,363 5,018 Less: Credit loss expense........ 1 956 956 787 951 ------ ------ ------ ------ Total............................ 4,788 4,953 2,576 4,067 ------ ------ ------ ------ Net fee and commission income.... 1 12,607 12,607 8,925 12,626 Net trading income............... b, c, d, 1 7,174 7,719 455 3,313 Net gains from disposal of associates and subsidiaries.... 1 1,821 1,821 84 1,119 Other income..................... b, f, 1 1,361 1,325 641 1,122 ------ ------ ------ ------ Total............................ 27,751 28,425 12,681 22,247 ------ ------ ------ ------ OPERATING EXPENSES Personnel........................ b, c, g, h, i, j, 1 12,483 12,577 7,938 9,816 General and administrative....... a, c, j, 1 6,664 6,098 6,259 6,735 Depreciation and amortization.... a, b, j, 1 3,454 1,857 2,403 1,825 Restructuring costs.............. c 750 0 1,089 0 ------ ------ ------ ------ Total............................ 23,351 20,532 17,689 18,376 ------ ------ ------ ------
- -------------------------------------------------------------------------------- F- 70 286 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
31.12.1999 31.12.1998 ----------------- ----------------- CHF MILLION US GAAP IAS US GAAP IAS - ----------- REFERENCE ------- ------ ------- ------ OPERATING PROFIT/(LOSS) BEFORE TAX AND MINORITY INTERESTS..... 4,400 7,893 (5,008) 3,871 ------ ------ ------ ------ Tax expense/(benefit)............ 1 1,509 1,686 (1,339) 904 ------ ------ ------ ------ NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS...................... 2,891 6,207 (3,669) 2,967 ------ ------ ------ ------ Minority interests............... 1 (54) (54) 4 5 ------ ------ ------ ------ NET PROFIT/(LOSS)................ 2,837 6,153 (3,665) 2,972 ====== ====== ====== ======
- --------------- NOTE: References above coincide with the discussions in Note 42.1 and Note 42.4. These references indicate which IAS to U.S. GAAP adjustments affect an individual financial statement caption. - -------------------------------------------------------------------------------- F- 71 287 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 42.6 CONDENSED CONSOLIDATED BALANCE SHEET The following is a Condensed Consolidated Balance Sheet of the Group, as of 31 December 1999 and 31 December 1998, restated to reflect the impact of valuation and income recognition principles and presentation differences between IAS and U.S. GAAP.
31.12.1999 31.12.1998 ------------------- ------------------- CHF MILLION U.S. GAAP IAS U.S. GAAP IAS - ----------- REFERENCE --------- ------- --------- ------- ASSETS Cash and balances with central banks........................... 5,073 5,073 3,267 3,267 Money market paper................ 69,717 69,717 18,390 18,390 Due from banks.................... 3, a 50,103 29,907 103,158 68,495 Cash collateral on securities borrowed........................ 113,162 113,162 91,695 91,695 Reverse repurchase agreements..... 132,474 132,474 141,285 141,285 Trading portfolio assets.......... b, 2, 3, 7 189,504 212,440 161,440 159,179 Positive replacement values....... 2 64,035 64,698 90,520 90,511 Loans, net of allowance for credit losses.......................... 3, a 235,714 234,858 254,750 247,926 Financial investments............. b, f, 4 2,378 7,039 2,962 6,914 Accrued income and prepaid expenses........................ 5,167 5,167 6,627 6,627 Investments in associates......... 1,102 1,102 2,805 2,805 Property and equipment............ a, b, j 9,655 8,701 10,523 9,886 Intangible assets and goodwill.... a 21,428 3,543 21,707 2,210 Private equity investments........ 4 3,001 0 1,759 0 Other assets...................... b, d, g, h, 4, 6 18,717 11,007 29,398 12,092 ------- ------- --------- ------- TOTAL ASSETS...................... 921,230 898,888 940,286 861,282 ======= ======= ========= ======= LIABILITIES Money market paper issued......... 64,655 64,655 51,528 51,527 Due to banks...................... 3 90,112 76,365 114,903 85,716 Cash collateral on securities lent............................ 3 12,832 12,832 19,127 19,171 Repurchase agreements............. 3 173,840 196,914 136,824 137,617 Trading portfolio liabilities..... 2,3,7 52,606 54,586 51,600 47,033 Negative replacement values....... 2 95,004 95,786 125,857 125,847 Due to customers.................. 3,a 291,595 279,960 282,543 274,850 Accrued expenses and deferred income.......................... 12,040 12,040 11,232 11,232 Long-term debt.................... a, 7 56,049 56,332 50,445 50,783 Other liabilities................. a, b, c, d, f, i, 2, 3 20,230 18,376 40,476 27,722 ------- ------- --------- -------
- -------------------------------------------------------------------------------- F- 72 288 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
31.12.1999 31.12.1998 ------------------- ------------------- CHF MILLION U.S. GAAP IAS U.S. GAAP IAS - ----------- REFERENCE --------- ------- --------- ------- TOTAL LIABILITIES................. 868,963 867,846 884,535 831,498 ------- ------- --------- ------- MINORITY INTERESTS................ 434 434 990 990 ------- ------- --------- ------- TOTAL SHAREHOLDERS' EQUITY........ 51,833 30,608 54,761 28,794 ------- ------- --------- ------- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY.......................... 921,230 898,888 940,286 861,282 ======= ======= ========= =======
- --------------- NOTE: References above coincide with the discussions in Note 42.1 and Note 42.4. These references indicate which IAS to U.S. GAAP adjustments affect an individual financial statement caption. 42.7 COMPREHENSIVE INCOME Comprehensive income is defined as the change in Shareholders' equity excluding transactions with shareholders. Comprehensive income has two major components: Net profit, as reported in the income statement, and Other comprehensive income. Other comprehensive income includes such items as foreign currency translation and unrealized gains in available-for-sale securities. The components and accumulated other comprehensive income amounts for the years ended 31 December 1999 and 31 December 1998 are as follows:
UNREALIZED ACCUMULATED FOREIGN GAINS IN OTHER CURRENCY AVAILABLE-FOR-SALE COMPREHENSIVE COMPREHENSIVE CHF MILLION TRANSLATION SECURITIES INCOME INCOME - ----------- ----------- ------------------ ------------- ------------- Balance, 1 January 1998............... (111) 47 (64) Net loss.............................. (3,665) Other comprehensive income Foreign currency translation........ (345) (345) Unrealized gains, arising during the year, net of CHF 89 million tax.............................. 267 267 Less: Reclassification adjustment for gains realized in net profit, net of CHF 76 million tax........................... (229) (229) (307) ------ Comprehensive loss.................... (3,972) ---- ---- ---- ------ Balance, 31 December 1998............. (456) 85 (371) ---- ---- ---- NET PROFIT............................ 2,837 OTHER COMPREHENSIVE INCOME FOREIGN CURRENCY TRANSLATION........ 14 14 UNREALIZED GAINS, ARISING DURING THE YEAR, NET OF CHF 18 MILLION TAX.............................. 74 74 LESS: RECLASSIFICATION ADJUSTMENT FOR GAINS REALIZED IN NET PROFIT, NET OF CHF 40 MILLION TAX........................... (143) (143) (55) ------ COMPREHENSIVE INCOME.................. 2,782 ---- ---- ---- ------ BALANCE, 31 DECEMBER 1999............. (442) 16 (426) ---- ---- ----
- -------------------------------------------------------------------------------- F- 73 289 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) NOTE 43 ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GAAP In addition to the differences in valuation and income recognition and presentation, disclosure differences exist between IAS and U.S. GAAP. The following are additional U.S. GAAP disclosures that relate to the basic financial statements. 43.1 BUSINESS COMBINATIONS On 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation consummated a merger of the banks, resulting in the formation of UBS. New shares totaling 428,746,982 were issued exclusively for the exchange of the existing shares of Union Bank of Switzerland and Swiss Bank Corporation. Under the terms of the merger agreement, Union Bank of Switzerland shareholders received 5 registered shares for each bearer share held and 1 registered share for each registered share held, totaling 257,500,000 shares of UBS AG. Swiss Bank Corporation shareholders received 1 1/13 registered shares of the Group for each Swiss Bank Corporation registered share held, totaling 171,246,982 shares. The combined share capital amounted to CHF 5,754 million. As a result of the exchange of shares, CHF 1,467 million were transferred from share capital to the share premium account. The merger was accounted under the pooling of interests method and, accordingly, the information included in the financial statements presents the combined results of Union Bank of Switzerland and Swiss Bank Corporation as if the merger had been in effect for all periods presented. Summarized results of operations of the separate companies for the period from 1 January 1998 through 29 June 1998, the date of combination, are as follows:
CHF MILLION UNION BANK OF SWITZERLAND SWISS BANK CORPORATION ----------- ------------------------- ---------------------- Total operating income................... 5,702 8,646 Net profit............................... 739 2,614
As a result of the merger, the Group harmonized its accounting policies that have then been retrospectively applied for the restatement of comparative information and opening retained earnings at 1 January 1997. As a result, adjustments were required for the accounting for treasury shares, netting of balance sheet items, repurchase agreements, depreciation, and employee share plans. Summarized results of operations of the separate companies for the year ended 31 December 1997 are as follows:
CHF MILLION TOTAL OPERATING INCOME NET LOSS ----------- ---------------------- -------- Union Bank of Switzerland............................... 13,114 (129) Swiss Bank Corporation.................................. 13,026 (248) ------ ---- Total as previously reported............................ 26,140 (377) Impact of accounting policy harmonization............... (1,260) (290) ------ ---- Consolidated............................................ 24,880 (667)
Prior to 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation entered into certain transactions with each other in the normal course of business. These intercompany transactions have been eliminated in the accompanying financial statements. 43.2 RESTRUCTURING PROVISION See Note 24 for information on the restructuring provision. - -------------------------------------------------------------------------------- F- 74 290 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) At the time of the merger announcement in December 1997, it was announced that the merged bank's operations in various locations would be combined, resulting in vacant properties, reductions in personnel, elimination of redundancies in the IT platforms, exit costs and other costs. As a result, restructuring provisions of CHF 7,300 million (of which CHF 7,000 million was recognized as a restructuring expense in 1997 and CHF 300 million was recognized as a component of general and administrative expense in the fourth quarter of 1999) were established, to be used over a period of four years. At 31 December 1999, the Group had utilized CHF 5,871 million of the provisions. The restructuring provisions, included CHF 3,000 million for employee termination benefits, CHF 1,500 million for sale and lease breakage costs associated with the closure of premises, CHF 1,650 for IT integration projects and write-offs of equipment which management had committed to dispose of; and CHF 1,150 million for other costs, including professional fees, miscellaneous transfer taxes and statutory fees. For income statement purposes, these costs would normally be classified as personnel expense, general and administrative expense or other income.
UTILIZATION THROUGH 31 DECEMBER 1999 ------------------------------------------------ CHF MILLION PERSONNEL IT PREMISES OTHER TOTAL ----------- --------- ----- -------- ----- ----- UBS Switzerland............................... 300 1,054 180 203 1,737 Private and Corporate Clients............... 205 929 176 201 1,511 Private Banking............................. 95 125 4 2 226 UBS Asset Management.......................... 25 9 0 3 37 UBS Warburg................................... 1,983 373 1 414 2,771 Corporate Center.............................. 94 3 759 470 1,326 ----- ----- --- ----- ----- GROUP TOTAL................................... 2,402 1,439 940 1,090 5,871 ===== ===== === ===== =====
31.12.99 -------- Restructuring provision as of 31.12.1997... 7,000 Additional provision in 1999............... 300 Used in 1998............................... 4,027 Used in 1999............................... 1,844 -------- Total used through 31.12.1999.............. 5,871 -------- RESTRUCTURING PROVISION REMAINING.......... 1,429 ========
The employee terminations affected all functional levels and all operating divisions within the Group. The CHF 2,000 million portion of the provision related to employee severance and early retirement costs reflects the costs of eliminating approximately 7,800 positions, after considering attrition and redeployment within the Company. CHF 1,000 million of the provision relates to payments to maintain stability in the workforce during the integration period. As of 31 December 1999, approximately 5,700 employees had been severed or early retired and the remaining personnel restructuring reserve balance was CHF 598 million. 43.3 Segment Reporting See Note 2 and Note 3 for segment reporting information. UBS is organized into three business groups: UBS Switzerland, UBS Warburg and UBS Asset Management, and our Corporate Center. UBS Switzerland encompasses Private Banking and Private and Corporate Clients. - -------------------------------------------------------------------------------- F- 75 291 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Private Banking offers a broad portfolio of financial products and services to offshore and Swiss high net worth clients who bank in Switzerland or other offshore centers, and to the financial intermediaries advising them. The business unit's products and services are aimed at encompassing the complete life cycle of the client, including succession planning and the generational change. Private Banking provides a number of asset-based, transaction-based and other services. Asset-based services include custodial services, deposit accounts, loans and fiduciary services while transaction-based services include trading and brokerage and investment fund services. The business unit also provides financial planning and consulting and offers financial planning instruments to clients. These services include establishing proprietary trusts and foundations, the execution of wills, corporate and tax structuring and tax efficient investments. Private and Corporate Clients is the leading retail bank in Switzerland and targets individual clients with assets of up to approximately CHF 1 million and business and corporate clients in Switzerland. Private and Corporate Clients provides a broad range of products and services to these clients, including retail banking, investment services and lending. UBS Warburg is made up of four business units, Corporate and Institutional Clients, UBS Capital, Private Clients and e-services. Corporate and Institutional Clients is one of the leading global investment banks and is headquartered in London. It provides wholesale financial and investment products and services globally to a diversified client base, which includes institutional investors (including institutional asset managers and broker-dealers), corporations, sovereign governments and supranational organizations. Corporate and Institutional Clients also manages cash and collateral trading on behalf of the Group and executes the vast majority of the Group's retail securities, derivatives and foreign currency exchange transactions. UBS Capital is the Group's global private equity business. UBS Capital invests in unlisted companies, managing these investments over a medium term time horizon to increase their value and "exiting" the investment in a manner that will maximize the capital gain. The business unit seeks to make both majority and minority equity investments in established and emerging unlisted companies, either with the Group's own capital or through sponsored investment funds. UBS Capital endeavors to create investment value by working together with management to develop the businesses it invests in over the medium term in order to optimize their performance. Private Clients provides onshore private banking services for high net worth individuals in key markets world-wide, providing a similar range of services to Private Banking, but specializing in combining traditional private banking services with investment banking innovation. For example, Private Clients offers innovative products allowing clients to release value from own-company shareholdings or options. e-services is a new business, currently working towards a client launch in Germany in the Autumn of 2000. e-services will provide personalized investments and advisory services at competitive fees for affluent clients in Europe, delivered via a multi-channel structure which integrates internet, call centers and investment centers. e-services will deliver a distinctive set of services, including advanced financial planning and asset allocation, and investment products such as UBS and third-party funds, securities and pension products. UBS Asset Management is made up of two business units: Institutional Asset Management and Investment Funds/GAM. Institutional Asset Management is responsible for the Group's institutional asset management business, and for the investment management of the Groups mutual funds. Its diverse institutional client base located throughout the world consists of corporate and public pension plans, endowments and private - -------------------------------------------------------------------------------- F- 76 292 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) foundations, insurance companies, central banks and supranationals, quasi-institutions, and financial advisers. Investment Funds/GAM is the mutual funds business of UBS. Investment Funds is one of the leading mutual funds providers in Europe and the seventh largest in the world. GAM is a diversified asset management group with assets composed primarily of private client accounts, institutional and mutual funds. Global Asset Management operates under its established brand name within UBS Asset Management and employs its own distinctive investment style. UBS Asset Management will increasingly leverage Global Asset Management's range of mutual funds and its multi-manager selection process, in which it selects the top 90 out of about 6,000 third-party fund providers, to enhance the range of its investment styles and products. The Corporate Center encompasses Group level functions which cannot be devolved to the operating divisions. Additionally, the Corporate Center plays an active role with regard to funding, capital and balance sheet management and management of foreign currency earnings. 43.4 NET TRADING INCOME See Note 6 for information on net trading income. Foreign exchange net trading income include gains and losses from spot and forward contracts, options, futures, and translation of foreign currency assets and liabilities, bank notes, precious metals, and commodities. Fixed income net trading income includes the results of making markets in both developed and emerging countries in government securities, corporate debt securities, money market instruments, interest rate and currency swaps, options, and other derivatives. Equities net trading income includes the results of making markets in global equity securities and equity derivatives such as swaps, options, futures, and forward contracts. 43.5 LOANS See Note 12 for information on loans. The following table summarizes the Group's impaired loans at and for the years ended 31 December 1999 and 31 December 1998:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Impaired loans(1),(2)....................................... 22,456 26,447 Amount of allowance for credit losses related to impaired loans..................................................... 12,471 13,582 Average impaired loans(3)................................... 24,467 25,939
Included in the impaired loans information above are non-performing loans, which are as set forth below. Unrecognized interest on non-performing loans was CHF 409 million and CHF 423 million for the years ended 31 December 1999 and year ended 31 December 1998, respectively.
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Non-performing loans........................................ 13,073 16,113 Amount of allowance for credit losses related to non-performing loans...................................... 8,661 10,006 Average non-performing loans(2)............................. 14,615 16,587
- --------------- (1) All impaired loans have a specific allowance for credit losses. (2) Interest income on impaired loans recognized in the years ended 31 December 1999 and 31 December 1998 is immaterial. (3) Average balances for the year ended 31 December 1999 are calculated from quarterly data. Average balances for the year ended 31 December 1998 are calculated from year-end balances. - -------------------------------------------------------------------------------- F- 77 293 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 43.6 FINANCIAL INVESTMENTS See Note 16 for information on financial investments. The following table summarizes the Group's financial investments as of 31 December 1999 and 31 December 1998:
GROSS GROSS BOOK AMORTIZED UNREALIZED UNREALIZED FAIR CHF MILLION VALUE COST GAINS LOSSES VALUE - ----------- ----- --------- ---------- ---------- ----- 31 DECEMBER 1999 EQUITY SECURITIES....................... 356 388 3 14 377 DEBT SECURITIES ISSUED BY THE SWISS NATIONAL GOVERNMENT AND AGENCIES..... 78 78 3 0 81 DEBT SECURITIES ISSUED BY SWISS LOCAL GOVERNMENTS.......................... 81 81 3 1 83 DEBT SECURITIES ISSUED BY THE U.S. TREASURY AND AGENCIES................ 410 410 0 0 410 DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS AND OFFICIAL INSTITUTIONS......................... 321 321 6 1 326 CORPORATE DEBT SECURITIES............... 847 851 24 6 869 MORTGAGE-BACKED SECURITIES.............. 109 109 1 1 109 OTHER DEBT SECURITIES................... 120 120 3 0 123 ----- ----- --- -- ----- TOTAL................................ 2,322 2,358 43 23 2,378 ===== ===== === == ===== 31 December 1998 Equity Securities....................... 400 423 82 0 505 Debt Securities Issued by the Swiss National Government and Agencies..... 85 85 8 0 93 Debt Securities Issued by Swiss Local Governments.......................... 89 89 7 0 96 Debt Securities Issued by the U.S. Treasury and Agencies................ 373 373 4 0 377 Debt Securities Issued by Foreign Governments and Official Institutions......................... 426 426 9 0 435 Corporate Debt Securities............... 1,044 1,044 4 9 1,039 Mortgage-Backed Securities.............. 26 26 3 0 29 Other Debt Securities................... 384 384 5 1 388 ----- ----- --- -- ----- Total................................ 2,827 2,850 122 10 2,962 ===== ===== === == =====
- -------------------------------------------------------------------------------- F- 78 294 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The following presents an analysis of the contractual maturities of the investments in debt securities as of 31 December 1999:
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS ----------------- ----------------- ----------------- ----------------- CHF MILLION, EXCEPT PERCENTAGES AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) - ------------------------------- ------ -------- ------ -------- ------ -------- ------ -------- SWISS NATIONAL GOVERNMENT AND AGENCIES................... 22 5.49% 42 4.91% 9 5.32% 5 3.59% SWISS LOCAL GOVERNMENTS...... 6 5.79% 46 5.31% 29 4.18% 0 U.S. TREASURY AND AGENCIES... 0 4 4.93% 0 406 5.11% FOREIGN GOVERNMENTS AND OFFICIAL INSTITUTIONS...... 87 5.60% 199 3.09% 22 3.61% 13 5.56% CORPORATE DEBT SECURITIES.... 107 5.14% 469 5.60% 275 2.11% 0 MORTGAGE-BACKED SECURITIES... 0 107 5.96% 2 2.46% 0 OTHER DEBT SECURITIES........ 37 6.59% 71 5.81% 12 8.16% 0 --- --- --- --- TOTAL AMORTIZED COST......... 259 938 349 424 === === === === TOTAL MARKET VALUE........... 260 966 351 424 === === === ===
Proceeds from sales and maturities of investment securities available for sale during the year ended 31 December 1999 and the year ended 31 December 1998 were CHF 1,482 million and CHF 1,002 million, respectively. Gross gains of CHF 180 million and gross losses of CHF 3 million were realized in 1999 on those sales, and gross gains of CHF 398 million and gross losses of CHF 92 million were realized in 1998. 43.7 DERIVATIVE INSTRUMENTS The Group uses derivative instruments for trading and non-trading purposes. All derivatives instruments held or issued for trading or used to hedge another financial instrument carried at fair value are accounted at fair value with changes in fair value recorded in Net trading income. The Group uses interest rate swaps in its asset/liability management. These interest rate swaps are accounted for on the accrual basis of accounting as an adjustment of Net interest income. No specific criteria is required for interest rate swaps to be classified on the accrual basis. Gains and losses on terminations of non-trading interest rate swaps are deferred and amortized to Net interest income over the remaining original maturity of the contract. All other derivatives used in asset/liability management are accounted for on a fair value basis of accounting due to the short term nature of these derivatives. - -------------------------------------------------------------------------------- F- 79 295 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the fair value, average fair value and notional amounts for each class of derivative financial instrument for the years ended 31 December 1999 and 31 December 1998 distinguished between held or issued for trading purposes and held or issued for non-trading purposes. See Note 27 for information on derivative instruments including a discussion of the distinction between trading and non-trading. Positive replacement values ("PRV") and negative replacement values ("NRV") represent the fair values of derivative instruments. Average balances for the years ended 31 December 1999 and 31 December 1998 are calculated from quarterly data.
31.12.1999 31.12.1998 ------------------------------------------------ ------------------------------------------------ TOTAL TOTAL TOTAL AVERAGE TOTAL AVERAGE NOTIONAL TOTAL AVERAGE TOTAL AVERAGE NOTIONAL PRV PRV NRV NRV CHF BN PRV PRV NRV NRV CHF BN ------- ------- ------- ------- -------- ------- ------- ------- ------- -------- CHF MILLIONS, EXCEPT WHERE STATED TRADING Interest rate contracts.......... 67,857 80,880 62,311 79,260 5,909 92,627 75,741 92,036 73,835 12,081 Foreign exchange contracts.......... 35,649 36,407 38,239 37,634 2,136 41,857 49,358 45,169 45,101 2,048 Precious metals contracts.......... 3,407 4,630 3,063 4,501 119 7,766 5,659 7,909 5,511 110 Equity/Index contracts.......... 23,558 18,217 58,011 42,788 517 26,134 30,242 58,467 59,936 1,061 Commodity contracts.......... 47 383 40 213 248 936 420 832 389 15 ------- ------- ------- ------- ------- ------- ------- ------- Total trading........ 130,518 140,517 161,664 164,396 169,320 161,420 204,413 184,772 ======= ======= ======= ======= ======= ======= ======= =======
31.12.1999 31.12.1998 ------------------------------------------------ ------------------------------------------------ TOTAL TOTAL TOTAL AVERAGE TOTAL AVERAGE NOTIONAL TOTAL AVERAGE TOTAL AVERAGE NOTIONAL PRV PRV NRV NRV CHF BN PRV PRV NRV NRV CHF BN ------- ------- ------- ------- -------- ------- ------- ------- ------- -------- CHF MILLIONS, EXCEPT WHERE STATED NON-TRADING Interest rate contracts.......... 12 57 4 81 1 84 80 156 229 10 Foreign exchange contracts.......... 100 105 131 63 14 32 200 5 157 6 Equity/Index contracts.......... 204 149 123 196 2 308 1141 506 1310 15 ------- ------- ------- ------- ------- ------- ------- ------- Total non-trading.... 316 311 258 340 424 1421 667 1696 ======= ======= ======= ======= ======= ======= ======= ======= TOTAL................ 130,834 140,828 161,922 164,736 169,744 162,841 205,080 186,468 ======= ======= ======= ======= ======= ======= ======= =======
- --------------- (1) The figures above are presented on a gross by counterparty basis for disclosure purposes, but shown net in the balance sheet (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 80 296 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 43.8 RETIREMENT BENEFIT PLANS AND OTHER EMPLOYEE BENEFITS See Note 35 for information on retirement benefit plans and other employee benefits. Under U.S. GAAP, a reconciliation of beginning and ending balances of the plan benefit obligation is required. The following is the reconciliation of the plan benefit obligation for the Swiss and foreign pension plans:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- SWISS PENSION PLANS Defined benefit obligation at beginning of year............. 14,944 14,431 Service cost.............................................. 464 535 Interest cost............................................. 636 726 Plan amendments........................................... 3,517 119 Special termination benefits.............................. (1,000) 0 Actuarial gain (loss)..................................... (571) 6 Benefits paid............................................. (979) (873) ------ ------ Defined benefit obligation at end of year................... 17,011 14,944
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- FOREIGN PENSION PLANS Defined benefit obligation at beginning of year............. 2,009 1,950 Service cost.............................................. 118 116 Interest cost............................................. 123 140 Plan amendments........................................... 2 7 Special termination benefits.............................. 0 (40) Actuarial gain (loss)..................................... (2) (32) Benefits paid............................................. (133) (60) Other..................................................... 327 (72) ----- -------- Defined benefit obligation at end of year................... 2,444 2,009
Under U.S. GAAP, a reconciliation of beginning and ending balances of the fair value of plan assets is required. The following is the reconciliation of the fair value of plan assets for the Swiss and foreign pension plans:
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- SWISS PENSION PLANS Fair value of plan assets at beginning of year.............. 17,885 17,224 Actual return of plan assets.............................. 2,136 856 Employer contributions.................................... 515 493 Plan participant contributions............................ 180 185 Benefits paid............................................. (979) (873) Special termination benefits.............................. (1,172) 0 ------ ----- Fair value of plan assets at end of year.................... 18,565 17,885
- -------------------------------------------------------------------------------- F- 81 297 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
CHF MILLION 31.12.1999 31.12.1998 ----------- ---------- ---------- FOREIGN PENSION PLANS Fair value of plan assets at beginning of year.............. 2,173 2,188 Actual return of plan assets.............................. 352 267 Employer contributions.................................... 21 41 Plan participant contributions............................ 14 9 Benefits paid............................................. (133) (60) Other..................................................... 452 (272) ----- ----- Fair value of plan assets at end of year.................... 2,879 2,173
43.9 OTHER EMPLOYEE BENEFITS The United Kingdom and the United States of America offer postretirement health care benefits that contribute to the health care coverage of the employees after retirement. U.S. GAAP presentation requires that a reconciliation of beginning and ending balances of the postretirement health care benefits be disclosed. The following is the reconciliation of the postretirement health care benefits obligation:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Postretirement benefit obligation at beginning of year...... 96 103 Service cost.............................................. 2 7 Interest cost............................................. 6 8 Plan amendments........................................... 0 5 Actuarial gain (loss)..................................... 0 9 Benefits paid............................................. (4) (4) Other..................................................... 17 (32) --- --- Postretirement benefit obligation at end of year............ 117 96
Under U.S. GAAP, a reconciliation of beginning and ending balances of the postretirement plan assets is required. The following is the reconciliation of the postretirement care plan assets:
CHF MILLION 31.12.1999 31.12.1998 - ----------- ---------- ---------- Fair value of plan assets at beginning of year.............. 3 3 Actual return of plan assets.............................. 1 1 Company contributions..................................... 4 3 Benefits paid............................................. (4) (4) --- --- Fair value of plan assets at end of year.................... 4 3
The assumed health care cost trend rate used in determining benefit expense for December 1999 is 4.6%. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would change the U.S. postretirement benefit obligation and the service and interest cost components of net periodic postretirement benefit costs by CHF 7.8 million. 43.10 EQUITY PARTICIPATION PLANS See Note 36 for information on equity participation plans. Additional disclosure for the equity participation plans required by U.S. GAAP follows. The accrued expense for the years ended 31 December 1999 and 31 December 1998 was CHF 2,045 million and CHF 996 million, respectively. The accruals include awards earned currently but issued in the following year. - -------------------------------------------------------------------------------- F- 82 298 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Stock award and stock purchase plans The following table shows the shares awarded and the weighted-average fair-market value per share for these plans. The fair values for the stock purchase awards reflect the purchase price paid. For 1999, in addition to the 1998 plan-year awards, the stock bonus awards include 1,405,000 shares issued in an exchange for previously issued non-share awards and for special bonuses and the stock purchase awards include 666,000 shares issued for the current year.
31.12.1999 31.12.1998 ---------- ---------- Shares awarded.............................................. 3,469,000 2,524,000 Weighted-average fair market value per share (in CHF)....... 220 210
STOCK PURCHASE PLANS --------------------------------------- Shares awarded.............................................. 1,802,000 1,338,000 Weighted-average fair market value per share (in CHF)....... 148 155
Shares awarded in 1998 under both types of plans included Swiss Bank Corporation shares issued to employees prior to the merger. For the above table, the number of these shares and their fair market value have been adjusted for the 1 1/13 Swiss Bank Corporation to UBS AG share conversion rate of the merger. Stock Option Plans During 1998, options that had been issued to Swiss Bank Corporation employees were revised to reflect the 1 1/13 SBC to UBS AG share conversion rate of the merger. Also, during 1998, because of a significant drop in UBS AG share price in the third quarter, employees were given the opportunity to convert options received earlier in the year with a strike price of CHF 270 to a reduced number ( 2/3) of options with a strike price of CHF 170. The stock option award information in Note 36 reflects both these changes. Companies that apply APB 25 in determining compensation costs for stock-based compensation awards are required to disclose the effects of the application of the "fair value method" determined under the guidance provided in SFAS No. 123. Under SFAS No. 123, the fair value of compensation cost is recognized, using option pricing models intended to estimate the fair value of the awards at the grant date. The table below illustrates the pro forma effects of applying the fair value method.
CHF MILLION, EXCEPT PER SHARE DATA 31.12.99 31.12.98 - ---------------------------------- -------- -------- Net income As reported 6,153 2,972 Pro forma 6,027 2,893 Basic EPS As reported 15.20 7.33 Pro forma 14.89 7.14 Diluted EPS As reported 15.07 7.20 Pro forma 14.76 7.01
- -------------------------------------------------------------------------------- F- 83 299 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) The pro forma amounts in the table above reflect the vesting periods of all options granted. The effects of applying the guidance contained in SFAS 123 for recognizing compensation expense and providing pro forma disclosures are not likely to be representative of the effects on reported Net profit for future years. The weighted-average fair-value of options granted in 1999 and 1998 was CHF 59 and CHF 54 per share, respectively. The fair value of options granted was determined as of the date of issuance using a proprietary option pricing model, substantially similar to the Black-Scholes, with the following assumptions:
31.12.1999 31.12.1998 ---------- ---------- Expected volatility................................... 33% 40% Risk free interest rate............................... 2.07% 2.56% Expected dividends.................................... 6.2 6.9 Expected life......................................... 6 YEARS 6 years
43.11 REGULATORY CAPITAL See Note 33 for information on regulatory capital. Internationally, it has been agreed that the Bank for International Settlements (BIS) ratio must be at least 8%. At 31 December 1999, the Group's BIS ratio and Tier 1 ratios were 14.5% and 10.6%, respectively, as compared to 13.2% and 9.3%, respectively, as of 31 December 1998. At 31 December 1999 and 1998, the Group was adequately capitalized under the regulatory provisions outlined under BIS. - -------------------------------------------------------------------------------- F- 84 300 CONSOLIDATED INTERIM FINANCIAL STATEMENTS UBS GROUP SIX-MONTH PERIODS ENDED 30 JUNE 2000 AND 1999 (UNAUDITED) - -------------------------------------------------------------------------------- F- 85 301 UBS GROUP INCOME STATEMENT (UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED CHF MILLION, EXCEPT PER SHARE DATA NOTE 30.6.00 30.6.99(1) - ---------------------------------- ---- ------- ---------- OPERATING INCOME Interest income............................................. 3 24,079 16,293 Interest expense............................................ 3 (19,753) (13,540) ------- ------- Net interest income......................................... 4,326 2,753 Credit loss recovery/expense................................ 83 (635) ------- ------- Net interest income after credit loss recovery/expense...... 4,409 2,118 ------- ------- Net fee and commission income............................... 4 7,835 6,184 Net trading income.......................................... 5 5,669 4,460 Net gains from disposal of associates and subsidiaries...... 6 23 1,778 Other income................................................ 7 621 562 ------- ------- Total operating income...................................... 18,557 15,102 ------- ------- OPERATING EXPENSES Personnel................................................... 8 8,876 6,819 General and administrative.................................. 8 3,174 2,388 Depreciation and amortization............................... 8 947 864 ------- ------- Total operating expenses.................................... 12,997 10,071 OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS.......... 5,560 5,031 ------- ------- Tax expense................................................. 1,257 1,151 ------- ------- NET PROFIT BEFORE MINORITY INTERESTS........................ 4,303 3,880 ------- ------- Minority interests.......................................... (35) (21) ------- ------- NET PROFIT.................................................. 4,268 3,859 ======= ======= Basic earnings per share (CHF)(3)........................... 9 10.91 9.38 Basic earnings per share before goodwill (CHF)(2)(3)........ 9 11.61 9.79 Diluted earnings per share (CHF)(3)......................... 9 10.79 9.30 Diluted earnings per share before goodwill (CHF)(2)(3)...... 9 11.49 9.71 ------- -------
- --------------- (1) The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). (2) The amortization of goodwill and other purchased intangible assets is excluded from this calculation. (3) 1999 share figures are restated for the two-for-one stock split, approved at the shareholder meeting of 18 April 2000. - -------------------------------------------------------------------------------- F- 86 302 UBS GROUP BALANCE SHEET
CHF MILLION 30.6.00 31.12.99(1) - ----------- ----------- ----------- (UNAUDITED) ASSETS Cash and balances with central banks........................ 3,457 5,073 Money market paper.......................................... 61,504 69,717 Due from banks.............................................. 25,761 29,907 Cash collateral on securities borrowed...................... 146,199 113,162 Reverse repurchase agreements............................... 164,866 132,474 Trading portfolio assets.................................... 215,649 212,440 Positive replacement values................................. 57,758 64,698 Loans, net of allowance for credit losses................... 233,015 234,858 Financial investments....................................... 9,504 7,039 Accrued income and prepaid expenses......................... 5,817 5,167 Investments in associates................................... 818 1,102 Property and equipment...................................... 8,216 8,701 Intangible assets and goodwill.............................. 3,545 3,543 Other assets................................................ 10,198 11,007 ------- ------- TOTAL ASSETS................................................ 946,307 898,888 ======= ======= Total subordinated assets................................... 330 600 ------- ------- LIABILITIES Money market paper issued................................... 85,409 64,655 Due to banks................................................ 75,172 76,365 Cash collateral on securities lent.......................... 15,334 12,832 Repurchase agreements....................................... 230,565 196,914 Trading portfolio liabilities............................... 60,279 54,586 Negative replacement values................................. 77,926 95,786 Due to customers............................................ 279,915 279,960 Accrued expenses and deferred income........................ 14,492 12,040 Long term debt.............................................. 52,990 56,332 Other liabilities........................................... 21,950 18,376 ------- ------- TOTAL LIABILITIES........................................... 914,032 867,846 ------- ------- MINORITY INTERESTS.......................................... 399 434 ------- ------- SHAREHOLDERS' EQUITY Share capital............................................... 4,317 4,309 Share premium account....................................... 14,554 14,437 Foreign currency translation................................ (557) (442) Retained earnings........................................... 22,431 20,327 Treasury shares............................................. (8,869) (8,023) ------- ------- TOTAL SHAREHOLDERS' EQUITY.................................. 31,876 30,608 ------- ------- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY.................................................... 946,307 898,888 ======= ======= Total subordinated liabilities.............................. 14,089 14,801 ======= =======
- --------------- (1) The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 87 303 UBS GROUP STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1) - ------------------------------ ------- ---------- CHF MILLION ISSUED AND PAID UP SHARE CAPITAL Balance at the beginning of the period...................... 4,309 4,300 Issue of share capital...................................... 8 6 ------ ------ BALANCE AT THE END OF THE PERIOD(2)......................... 4,317 4,306 ====== ====== SHARE PREMIUM Balance at the beginning of the period as previously reported.................................................. 13,929 13,740 Change in accounting policy................................. 508 (123) Balance at the beginning of the period (restated)........... 14,437 13,617 Premium on shares issued, and warrants exercised............ 74 9 Own equity derivatives...................................... (181) 467 Net premium on treasury share and own equity derivative activity.................................................. 224 179 ------ ------ BALANCE AT THE END OF THE PERIOD............................ 14,554 14,272 ====== ====== FOREIGN CURRENCY TRANSLATION Balance at the beginning of the period...................... (442) (456) Movements during the period................................. (115) (81) ------ ------ BALANCE AT THE END OF THE PERIOD............................ (557) (537) ====== ====== RETAINED EARNINGS Balance at the beginning of the period as previously reported.................................................. 20,501 16,293 Changes in accounting policy................................ (174) (69) Balance at the beginning of the period (restated)........... 20,327 16,224 Net profit for the period................................... 4,268 3,859 Dividends paid.............................................. (2,164) (2,051) ------ ------ BALANCE AT THE END OF THE PERIOD............................ 22,431 18,032 ====== ====== TREASURY SHARES, AT COST Balance at the beginning of the period as previously reported.................................................. (3,462) (1,482) Change in accounting policy................................. (4,561) (3,409) Balance at the beginning of the period (restated)........... (8,023) (4,891) Acquisitions................................................ (6,591) (2,983) Disposals................................................... 5,745 3,002 ------ ------ BALANCE AT THE END OF THE PERIOD(3)......................... (8,869) (4,872) ====== ====== TOTAL SHAREHOLDERS' EQUITY.................................. 31,876 31,201 ====== ======
- --------------- (1) The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). (2) Comprising 431,696,624 ordinary shares as of 30 June 2000 and 430,577,614 ordinary shares as of 30 June 1999, at CHF 10 each, fully paid. (3) Comprising 40,269,350 ordinary shares as of 30 June 2000 and 22,395,766 ordinary shares as of 30 June 1999. In addition to treasury shares, a maximum of 254,446 unissued shares (conditional capital) (1,373,456 as of 30 June 1999) can be issued without the approval of the shareholders. This amount consists of unissued and reserved shares for the former Swiss Bank Corporation employee share ownership plan and optional dividend warrants. The optional dividend warrants were granted in lieu of a cash dividend by the former Swiss Bank Corporation in February 1996 (at the option of the shareholder). - -------------------------------------------------------------------------------- F- 88 304 UBS GROUP STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1) - ------------------------------ ------- ---------- CHF MILLION - ----------- CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES Net profit.................................................. 4,268 3,859 ADJUSTMENTS TO RECONCILE TO CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES Non cash items included in net profit and other adjustments: Depreciation and amortization............................. 947 864 Provision for credit losses............................... (83) 635 Income from associates.................................... (59) (102) Deferred tax expense...................................... 213 193 Net gain from investing activities........................ (299) (1,997) Net increase/(decrease) in operating assets:................ Net due from/to banks..................................... (1,005) (2,091) Reverse repurchase agreements, cash collateral on securities borrowed.................................... (65,429) 13,509 Trading portfolio including net replacement values........ (8,436) 1,257 Loans due to/from customers............................... 1,881 14,486 Accrued income, prepaid expenses and other assets......... 159 306 Net increase/(decrease) in operating liabilities:........... Repurchase agreements, cash collateral on securities lent................................................... 36,153 (2,637) Accrued expenses and other liabilities.................... 6,354 (6,647) Income taxes paid......................................... (535) (591) ------- ------- NET CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES........... (25,871) 21,044 ======= ======= CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES Investments in subsidiaries and associates.................. (282) (339) Disposal of subsidiaries and associates..................... 370 3,350 Purchase of property and equipment.......................... (928) (1,096) Disposal of property and equipment.......................... 763 279 Net (investment)/divestment in financial investments........ (2,216) 293 ------- ------- NET CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES........... (2,293) 2,487 ======= ======= CASH FLOW FROM FINANCING ACTIVITIES Money market paper issued................................... 20,754 4,463 Net movements in treasury shares and treasury share contract activity.................................................. (729) 674 Capital issuance............................................ 8 6 Dividends paid.............................................. (2,164) (2,051) Issuance of long term debt.................................. 7,452 5,225 Repayment of long term debt................................. (10,794) (1,081) Repayment of minority interests............................. (20) (689) ------- ------- NET CASH FLOW FROM FINANCING ACTIVITIES..................... 14,507 6,547 Effects of exchange rate differences........................ (131) (46) ======= ======= NET INCREASE/(DECREASE) IN CASH EQUIVALENTS................. (13,788) 30,032 Cash and cash equivalents, beginning of period.............. 102,277 83,678 ------- ------- Cash and cash equivalents, end of period.................... 88,489 113,710 ======= ======= CASH AND CASH EQUIVALENTS COMPRISE: Cash and balances with central banks........................ 3,457 3,135 Money market paper.......................................... 61,504 65,688 Bank deposits maturing in less than 3 months................ 23,528 44,887 ------- ------- TOTAL....................................................... 88,489 113,710 ======= =======
- --------------- (1) The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 89 305 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 BASIS OF ACCOUNTING The consolidated interim financial statements have been prepared in accordance with and comply with International Accounting Standard ("IAS") 34, "Interim Financial Reporting." In the first half of 2000, the Group reorganized its business divisions. The segment reporting for the six-month period ended 30 June 2000, as well as the comparative segment reporting for the first six-month period ended 30 June 1999, have been restated to reflect the new Group structure. At the Annual General Meeting of shareholders held on 18 April 2000, a two-for-one stock split was approved to be effective 8 May 2000. Share and per share information have been adjusted to retroactively reflect the stock split. In preparing the consolidated interim financial statements, the same accounting policies and methods of computation are followed as in the consolidated financial statements as of 31 December 1999 and for the year then ended, with the exception of the following changes in accounting policies: IAS 37 Provisions, Contingent Liabilities and Contingent Assets In July 1998, the IASC issued IAS 37, Provisions, Contingent Liabilities and Contingent Assets, which has been adopted for the Group's financial statements as of 1 January 2000. The Standard provides recognition and measurement requirements for provisions. IAS 37 also provides accounting and disclosure requirements for contingent liabilities and contingent assets. IAS 38 Intangible Assets In July 1998, the IASC issued IAS 38 Intangible Assets, which the Group adopted prospectively as of 1 January 2000. The standard requires the capitalization and amortization of certain intangible assets, if it is probable that the future economic benefits that are attributable to the assets will flow to the enterprise and the cost can be measured reliably. IAS 10 (revised), Events after the Balance Sheet Date In May 1999, the IASC issued IAS 10 (revised), Events after the Balance Sheet Date, which has been adopted for the Group's financial statements as of 1 January 2000. IAS 10 (revised) establishes requirements for the recognition and disclosure of events after the balance sheet date. The adoption of IAS 10 (revised) had no impact on any comparative financial information. Interpretation SIC 16, Share Capital -- Reacquired Own Equity Instruments (Treasury Shares) In May 1999, the IASC issued Interpretation SIC 16, Share Capital -- Reacquired Own Equity Instruments (Treasury Shares), which the Group adopted as of 1 January 2000. The interpretation provides guidance for the recognition, presentation and disclosure of treasury shares. SIC 16 applies to own shares and derivatives on own shares held for trading and non-trading purposes. SIC 16 requires own shares and derivatives on own shares to be presented as treasury shares and deducted from shareholders' equity. Gains and losses relating to the sale of own shares and derivatives on own shares are recognized as a change in shareholders' equity. As a result of the adoption of Interpretation SIC 16, prior periods presented have been retroactively restated. Net trading income and income tax expense were reduced by CHF 138 million and CHF 35 million, respectively, for the six-month period ended 30 June 1999. Shareholders' equity and total assets were reduced by CHF 4,277 million for 31 December 1999. Of the CHF 4,227 million - -------------------------------------------------------------------------------- F- 90 306 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) reduction to total assets, CHF 4,561 million was a reduction in trading portfolio assets and the remaining CHF 334 million was a reduction to negative replacement values. In addition, the opening balance in shareholders' equity was adjusted as of 1 January 1998. Offsetting of Amounts Related to Certain Contracts In order to improve comparability with its main competitors, the Group has offset positive and negative replacement values and reverse repurchase agreements and repurchase agreements with the same counter-party for transactions covered by legally enforceable master netting agreements. This change became effective as of 1 January 2000 and all prior periods presented have been restated. Positive and negative replacement values have been reduced by CHF 66,136 million as of 31 December 1999. Reverse repurchase and repurchase agreements have been reduced by CHF 12,322 million as of 31 December 1999. Interest and Dividend Income and Expenses on Trading Assets and Liabilities In prior periods, interest and dividend income and expense on trading assets and liabilities were included in net trading income. In order to improve comparability with its main competitors, the Group has included interest and dividend income on trading assets and interest expense on trading liabilities in interest income and interest expense, respectively, and has discontinued the allocation of funding costs to net trading income. This change in presentation became effective as of 1 January 2000. The comparative financial information for 1999 has been restated to comply with this change. Interest income and interest expense was increased by CHF 8,144 million and CHF 8,756 million, respectively, for the six-month period ended 30 June 1999. In addition, net trading income was increased by CHF 612 million for the six-month period ended 30 June 1999. Tax Expense In prior periods, capital taxes were included in tax expense. The Group has reclassified capital taxes from tax expense to general and administrative expenses for the six-month period ended 30 June 1999. NOTE 2 REPORTING BY BUSINESS GROUP The business group results have been presented on a management reporting basis. Consequently, internal charges and transfer pricing adjustments have been reflected in the performance of each business. The basis of the reporting reflects the management of the business within the Group. Total revenue includes income, which is directly attributable to a business group whether from sales to external customers or from transactions with other segments. Revenue sharing agreements are used to allocate external customer revenues to a business group on a reasonable basis. Transactions between business groups are conducted at arms length. - -------------------------------------------------------------------------------- F- 91 307 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2000
UBS UBS ASSET UBS CORPORATE UBS SWITZERLAND MANAGEMENT WARBURG CENTER GROUP CHF MILLION ----------- ---------- ------- --------- ------ Revenues............................. 7,274 972 10,195 33 18,474 Credit loss recovery(1).............. (423) 0 (115) 621 83 ----- --- ------ ---- ------ Total operating income............... 6,851 972 10,080 654 18,557 ----- --- ------ ---- ------ Personnel expenses................... 2,416 421 5,749 290 8,876 General and administrative expenses........................... 1,163 196 1,437 378 3,174 Depreciation......................... 230 22 285 135 672 Amortization of goodwill and other intangible assets.................. 44 131 77 23 275 ----- --- ------ ---- ------ Total operating expenses............. 3,853 770 7,548 826 12,997 ----- --- ------ ---- ------ SEGMENT PERFORMANCE BEFORE TAX....... 2,998 202 2,532 (172) 5,560 Tax expense.......................... 1,257 ----- --- ------ ---- ------ NET PROFIT BEFORE MINORITY INTERESTS.......................... 4,303 Minority interests................... (35) ----- --- ------ ---- ------ NET PROFIT........................... 4,268 ===== === ====== ==== ======
- --------------- (1) In order to show the relevant business group performance over time, adjusted expected loss figures rather than the net credit recovery are reported for all business groups. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures to the net credit loss expenses for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit recovery/(expense) for financial reporting purposes of CHF 83 million for the six month period ended 30 June 2000 is as follows: UBS Switzerland CHF 237 million, UBS Warburg CHF (154) million. - -------------------------------------------------------------------------------- F- 92 308 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 1999(2)
UBS UBS ASSET UBS CORPORATE UBS SWITZERLAND MANAGEMENT WARBURG CENTER GROUP CHF MILLION ----------- ---------- ------- --------- ------ Revenues............................. 6,327 644 7,179 1,587 15,737 Credit loss expense(1)............... (560) 0 (171) 96 (635) ----- --- ----- ----- ------ Total operating income............... 5,767 644 7,008 1,683 15,102 ----- --- ----- ----- ------ Personnel expenses................... 2,383 281 4,073 82 6,819 General and administrative expenses........................... 988 125 1,175 100 2,388 Depreciation......................... 229 9 332 123 693 Amortization of goodwill and other intangible assets.................. 9 57 82 23 171 ----- --- ----- ----- ------ Total operating expenses............. 3,609 472 5,662 328 10,071 ----- --- ----- ----- ------ SEGMENT PERFORMANCE BEFORE TAX....... 2,158 172 1,346 1,355 5,031 Tax expense.......................... 1,151 ----- --- ----- ----- ------ NET PROFIT BEFORE MINORITY INTERESTS.......................... 3,880 Minority interests................... (21) ----- --- ----- ----- ------ NET PROFIT........................... 3,859 ===== === ===== ===== ======
- --------------- (1) In order to show the relevant business group performance over time, adjusted expected loss figures rather than the net credit loss expense are reported for all business groups. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures to the net credit loss expenses for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss expense for financial reporting purposes of CHF 635 million for the six-month period ended 30 June 1999 is as follows: UBS Switzerland CHF 617 million, UBS Warburg CHF 14 million, Corporate Center CHF 4 million. (2) The 1999 figures have been restated to reflect the new Group structure and retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 93 309 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) INCOME STATEMENT NOTE 3 NET INTEREST INCOME
FOR THE SIX-MONTH PERIOD ENDED 30.06.00 30.06.99(1) - ------------------------------ -------- ----------- CHF MILLION INTEREST INCOME Interest earned on loans and advances to banks.............. 2,079 2,467 Interest earned on loans and advances to customers.......... 7,153 5,639 Interest from finance leasing............................... 19 23 Interest earned on securities borrowed and reverse repurchase agreements..................................... 9,019 5,392 Interest and dividend income from financial investments..... 100 66 Interest and dividend income from trading portfolio......... 5,576 2,622 Other....................................................... 133 84 ------ ------ TOTAL....................................................... 24,079 16,293 ====== ====== INTEREST EXPENSE Interest on amounts due to banks............................ 2,230 1,695 Interest on amounts due to customers........................ 4,453 4,060 Interest on securities lent and repurchase agreements....... 6,707 4,218 Interest and dividend expense from trading portfolio........ 2,724 1,078 Interest on medium and long term debt....................... 3,639 2,489 ------ ------ TOTAL....................................................... 19,753 13,540 ====== ====== NET INTEREST INCOME......................................... 4,326 2,753 ====== ======
- --------------- (1) The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). - -------------------------------------------------------------------------------- F- 94 310 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 4 NET FEE AND COMMISSION INCOME
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99 - ------------------------------ ------- ------- CHF MILLION CREDIT-RELATED FEES AND COMMISSIONS......................... 145 215 ----- ----- SECURITY TRADING AND INVESTMENT ACTIVITY FEES Underwriting and corporate finance fees..................... 1,069 826 Brokerage fees.............................................. 2,979 1,882 Investment fund fees........................................ 1,360 925 Fiduciary fees.............................................. 175 162 Custodian fees.............................................. 726 788 Portfolio and other management and advisory fees............ 1,913 1,476 Other....................................................... 29 53 ----- ----- TOTAL....................................................... 8,251 6,112 ----- ----- COMMISSION INCOME FROM OTHER SERVICES....................... 391 367 ----- ----- TOTAL FEE AND COMMISSION INCOME............................. 8,787 6,694 ----- ----- FEE AND COMMISSION EXPENSE Brokerage fees paid......................................... 582 359 Other....................................................... 370 151 ----- ----- TOTAL....................................................... 952 510 ----- ----- NET FEE AND COMMISSION INCOME............................... 7,835 6,184 ===== =====
NOTE 5 NET TRADING INCOME
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1) - ------------------------------ ------- ---------- CHF MILLION FOREIGN EXCHANGE(2)......................................... 680 718 Fixed income................................................ 643 1,303 Equities.................................................... 4,346 2,439 ------ ----- NET TRADING INCOME.......................................... 5,669 4,460 ====== =====
- --------------- (1) The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). (2) Includes other trading income such as bank notes, precious metals and commodities. NOTE 6 NET GAINS FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99 - ------------------------------ ------- ------- CHF MILLION Net income from disposal of consolidated subsidiaries....... 0 1 Net gains from the disposal of investments in associates.... 23 1,777 -- ----- NET GAINS FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES...... 23 1,778 == =====
- -------------------------------------------------------------------------------- F- 95 311 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 7 OTHER INCOME
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99 - ------------------------------ ------- ------- CHF MILLION INVESTMENTS IN FINANCIAL ASSETS (DEBT AND EQUITY) Net income from disposal of private equity investments...... 411 150 Net income from disposal of other financial assets.......... 84 30 Net losses from revaluation of financial assets............. (218) (20) ---- --- TOTAL....................................................... 277 160 ---- --- INVESTMENTS IN PROPERTY Net income from disposal of properties held for resale...... 37 36 Net losses from revaluation of properties held for resale... (66) (9) Net income from other properties............................ 28 33 ---- --- TOTAL....................................................... (1) 60 ---- --- EQUITY INCOME FROM INVESTMENTS IN ASSOCIATES................ 59 102 ---- --- OTHER....................................................... 286 240 ---- --- TOTAL OTHER INCOME.......................................... 621 562 ==== ===
- -------------------------------------------------------------------------------- F- 96 312 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 8 OPERATING EXPENSES
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99 - ------------------------------ ------- ------- CHF MILLION PERSONNEL EXPENSES Salaries and bonuses........................................ 7,270 5,372(1) Contractors................................................. 335 386 Insurance and social contributions.......................... 490 372(1) Contributions to retirement benefit plans................... 238 242 Employee share plans........................................ 41 109 Other personnel expenses.................................... 502 338 ------ ------ TOTAL....................................................... 8,876 6,819 ====== ====== GENERAL AND ADMINISTRATIVE EXPENSES Occupancy................................................... 474 400 Rent and maintenance of machines and equipment.............. 256 123 Telecommunications and postage.............................. 412 371 Administration.............................................. 358 337 Marketing and public relations.............................. 209 107 Travel and entertainment.................................... 292 247 Professional fees........................................... 278 297 IT and other outsourcing.................................... 564 399 Other....................................................... 331 107 ------ ------ TOTAL....................................................... 3,174 2,388 ====== ====== DEPRECIATION AND AMORTIZATION Property, equipment and software............................ 672 693 Goodwill and other intangible assets........................ 275 171 ------ ------ TOTAL....................................................... 947 864 ====== ====== TOTAL OPERATING EXPENSES.................................... 12,997 10,071 ====== ======
- --------------- (1) Bonus related social contribution costs of CHF 125 million for the six months ended 30 June 1999 have been reclassified from Salaries and bonuses to Insurance and social contributions. - -------------------------------------------------------------------------------- F- 97 313 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 9 EARNINGS PER SHARE
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1) ------------------------------ ----------- ----------- BASIC EARNINGS PER SHARE CALCULATION Net profit for the period (CHF million)..................... 4,268 3,859 Net profit for the period before goodwill amortization (CHF million)(2)............................................... 4,543 4,030 Weighted average shares outstanding: Registered ordinary shares.................................. 431,147,206 430,232,988 Treasury shares............................................. (39,936,372) (18,746,327)(3) ----------- ----------- WEIGHTED AVERAGE SHARES FOR BASIC EARNINGS PER SHARE........ 391,210,834 411,486,661 =========== =========== BASIC EARNINGS PER SHARE (CHF).............................. 10.91 9.38 BASIC EARNINGS PER SHARE BEFORE GOODWILL AMORTIZATION (CHF)(2).................................................. 11.61 9.79 =========== =========== DILUTED EARNINGS PER SHARE CALCULATION Net profit for the period (CHF million)..................... 4,268 3,859 Net profit for the period before goodwill amortization (CHF million)(2)............................................... 4,543 4,030 Weighted average shares for basic earnings per share........ 391,210,834 411,486,661 Potential dilutive ordinary shares resulting from outstanding options, warrants and convertible debt securities................................................ 4,201,494 3,673,968(4) =========== =========== WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE...... 395,412,328 415,160,629 =========== =========== DILUTED EARNINGS PER SHARE (CHF)............................ 10.79 9.30 DILUTED EARNINGS PER SHARE BEFORE GOODWILL AMORTIZATION (CHF)(2).................................................. 11.49 9.71 =========== ===========
- --------------- (1) The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable IAS and changes in presentation (see Note 1: Basis of Accounting). (2) The amortization of goodwill and other purchased intangible assets is excluded from this calculation. (3) Treasury shares have increased by 6,679,451 for the six-month period ended 30 June 1999, due to a change in accounting policy (see Note 1: Basis of Accounting). (4) Share amount has been adjusted by 1,247,968, representing other potential dilutive instruments for the six-month period ended 30 June 1999, due to a change in accounting policy (see Note 1: Basis of Accounting). The 1999 share figures are restated for the two-for-one stock split, approved at the shareholder meeting of 18 April 2000. - -------------------------------------------------------------------------------- F- 98 314 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 10 DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements of the Group have been prepared in accordance with IAS. The principles of IAS differ in certain respects from U.S. GAAP. A summary of the significant accounting valuation and presentation differences between IAS and U.S. GAAP can be found at Notes 42.1 and 42.4 of the 31 December 1999 financial statements. The following is provided to supplement those discussions for the six month period ended 30 June 2000. 10.1 Valuation, income recognition and presentation differences between International Accounting Standards and United States Generally Accepted Accounting Principles 10.1.1 Goodwill For the six month period ended 30 June 2000, goodwill was reduced by CHF 178 million due to the recognition of deferred tax assets of Swiss Bank Corporation which had previously been subject to valuation reserves. 10.1.2 Restructuring provision For the six-month period ended 30 June 2000, a CHF 130 million additional restructuring expense was recognized for U.S. GAAP. The usage of the U.S. GAAP restructuring provision was as follows:
JAN-JUNE JAN-JUNE BALANCE 2000 2000 BALANCE 1.1.00 USAGE REVISION 30.6.00 CHF MILLION -------- -------- -------- --------- PERSONNEL................................................. 681 57 70 694 PREMISES.................................................. 240 98 45 187 IT........................................................ 27 3 0 24 OTHER..................................................... 129 6 15 138 ---- ----- ----- ----- TOTAL............................................ 1,077 164 130 1,043 ---- ----- ----- -----
10.1.3 Software capitalization Under IAS, effective 1 January 2000, certain costs associated with the acquisition or development of internal use software are required to be capitalized. Once the software is ready for its intended use, the costs capitalized are amortized to the Income statement over estimated lives. Under U.S. GAAP, the same principle applies, however this standard was effective 1 January 1999. For purposes of the U.S. GAAP reconciliation, the costs associated with the acquisition or development of internal use software that met the U.S. GAAP software capitalization criteria in 1999 have been reversed from Operating expenses and amortized over a life of 2 years. From 1 January 2000, the only remaining reconciliation item is the amortization of software capitalized in 1999 for U.S. GAAP purposes. - -------------------------------------------------------------------------------- F- 99 315 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 10.2 Reconciliation of IAS Shareholders' equity and Net profit to U.S. GAAP
30.06.00 ----------------------------- NET PROFIT SIX-MONTH SHAREHOLDERS' PERIOD EQUITY ENDED ------------- ------------ CHF MILLION AMOUNTS DETERMINED IN ACCORDANCE WITH IAS................... 31,876 4,268 ------ ------ ADJUSTMENTS IN RESPECT OF: A. SBC PURCHASE ACCOUNTING: GOODWILL.................................................. 18,728 (860) OTHER PURCHASE ACCOUNTING ADJUSTMENTS..................... (833) 25 C. RESTRUCTURING PROVISION.................................. 193 (157) D. DERIVATIVE INSTRUMENTS HELD OR ISSUED FOR NON-TRADING PURPOSES.................................................. (763) (1,270) F. FINANCIAL INVESTMENTS.................................... 190 25 G. PENSION LIABILITIES AND PENSION COSTS.................... 1,886 47 H. POSTRETIREMENT BENEFITS.................................. (20) 4 I. EQUITY PARTICIPATION PLANS............................... (187) (44) J. SOFTWARE CAPITALIZATION.................................. 309 (80) TAX ADJUSTMENTS........................................... (433) 71 ------ ------ TOTAL ADJUSTMENTS................................. 19,070 (2,239) ------ ------ AMOUNTS DETERMINED IN ACCORDANCE WITH U.S. GAAP:............ 50,946 2,029 ====== ====== OTHER COMPREHENSIVE INCOME.................................. 34 COMPREHENSIVE INCOME........................................ 2,063 ======
Note: References above refer to the discussions in Note 42.1 of the restated 31 December 1999 financial statements. - -------------------------------------------------------------------------------- F- 100 316 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 10.3 Earnings per share Under IAS and U.S. GAAP, basic earnings per share ("EPS") is computed by dividing income available to common shareholders' by the weighted-average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares that were outstanding during the period. The computation of basic and diluted EPS for the six-month period ended 30 June 2000 is presented in the following table:
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 - ------------------------------ ------------ Net profit available for ordinary shares (CHF million): IAS....................................................... 4,268 U.S. GAAP................................................. 2,029 Weighted average shares outstanding:........................ 391,210,834 Diluted weighted average shares outstanding:................ 395,412,328 Basic earnings per share (CHF): IAS....................................................... 10.91 U.S. GAAP................................................. 5.19 Diluted earnings per share (CHF): IAS....................................................... 10.79 U.S. GAAP................................................. 5.13
10.4 Consolidated Income Statement The following is a Consolidated Income Statement of the Group, for the six month period ended 30 June 2000, restated to reflect the impact of valuation and income recognition differences and presentation differences between IAS and U.S. GAAP.
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 ------------------------------ ------------------- CHF MILLION U.S. GAAP IAS ----------- --------- ------ OPERATING INCOME Interest income............................................. a 23,988 24,079 Less: interest expense...................................... a 19,738 19,753 ------ ------ Net interest income......................................... 4 250 4,326 Credit loss recovery........................................ 83 83 ------ ------ Total....................................................... 4,333 4,409 Net fee and commission income............................... 7,835 7,835 Net trading income.......................................... d 4,399 5,669 Other income, including income from associates.............. f 669 644 ------ ------ Total....................................................... 17,236 18,557 ------ ------
- -------------------------------------------------------------------------------- F- 101 317 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 ------------------------------ ------------------- CHF MILLION U.S. GAAP IAS ----------- --------- ------ OPERATING EXPENSES Personnel................................................... g,h,i 8,869 8,876 General and administrative.................................. c 3,201 3,174 Depreciation and amortization............................... a,j 1,786 947 Restructuring costs......................................... c 130 0 ------ ------ Total....................................................... 13,986 12,997 ------ ------ OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS.......... 3,250 5,560 ------ ------ Tax expense................................................. 1,186 1,257 NET PROFIT BEFORE MINORITY INTERESTS........................ 2,064 4,303 ------ ------ Less: Minority interests.................................... 35 35 ------ ------ NET PROFIT.................................................. 2,029 4,268 ====== ====== Other comprehensive income.................................. 34 COMPREHENSIVE INCOME........................................ 2,063 ======
- --------------- Note: References above refer to the discussions in Note 42.1 and Note 42.4 of the restated 31 December 1999 financial statements. These references indicate which IAS to U.S. GAAP adjustments affect an individual financial statement caption. - -------------------------------------------------------------------------------- F- 102 318 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 10.5 Condensed Consolidated Balance Sheet The following is a Condensed Consolidated Balance Sheet of the Group, as of 30 June 2000, restated to reflect the impact of valuation and income recognition principles and presentation differences between IAS and U.S. GAAP.
30.06.00 ------------------ U.S. GAAP IAS CHF MILLION ------- ------- ASSETS Cash and balances with central banks..................... 3,457 3,457 Money market paper....................................... 61,504 61,504 Due from banks........................................... 3,a 44,627 25,761 Cash collateral on securities borrowed................... 146,199 146,199 Reverse repurchase agreements............................ 164,866 164,866 Trading portfolio........................................ 2,3 205,342 215,649 Positive replacement values.............................. 2 57,378 57,758 Loans, net of allowance for credit losses................ 3,a 241,802 233,015 Financial investments.................................... f,4 3,624 9,504 Accrued income and prepaid expenses...................... 5,817 5,817 Investments in associates................................ 818 818 Property and equipment................................... a,j 9,094 8,216 Intangible assets and goodwill........................... a 20,510 3,545 Private equity investments............................... 4 3,881 0 Other assets............................................. d,g,h,i,2,3,4 21,342 10,198 ------- ------- TOTAL ASSETS............................................. 990,261 946,307 ------- ------- LIABILITIES Money market paper issued................................ 85,409 85,409 Due to banks............................................. 3 93,276 75,172 Cash collateral on securities lent....................... 15,334 15,334 Repurchase agreements.................................... 3 214,862 230,565 Trading portfolio liabilities............................ 60,279 60,279 Negative replacement values.............................. 2 77,548 77,926 Due to customers......................................... 3,a 298,434 279,915 Accrued expenses and deferred income..................... 14,492 14,492 Long-term debt........................................... a 53,120 52,990 Other liabilities........................................ a,c,d,f,i,2,6 26,162 21,950 ------- ------- TOTAL LIABILITIES........................................ 938,916 914,032 ------- ------- MINORITY INTERESTS....................................... 399 399 ------- ------- TOTAL SHAREHOLDERS' EQUITY............................... 50,946 31,876 ------- ------- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY................................................. 990,261 946,307 ======= =======
- --------------- Note: References above refer to the discussions in Note 42.1 and Note 42.4 of the restated 31 December 1999 financial statements. These references indicate which IAS to U.S. GAAP adjustments affect an individual financial statement caption. - -------------------------------------------------------------------------------- F- 103 319 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 11 ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GAAP In addition to the differences in valuation and income recognition and presentation, disclosure differences exist between IAS and U.S. GAAP. The following are additional U.S. GAAP disclosures that relate to the basic financial statements. 11.1 IAS Restructuring Provision Usage
SIX-MONTH PERIOD ENDED CHF MILLION PERSONNEL IT PREMISES OTHER 30.6.00 - ----------- --------- --- -------- ----- --------- UBS Switzerland................................. 53 19 1 20 93 Private and Corporate Clients................. 53 14 1 20 88 Private Banking............................... 0 5 0 0 5 UBS Asset Management............................ 1 0 0 0 1 UBS Warburg..................................... 0 0 0 0 0 Corporate Center................................ 3 0 91 3 97 -- --- -- -- ------- GROUP TOTAL..................................... 57 19 92 23 191 -- --- -- -- -------
30.6.00 --------- Restructuring provision as of 31.12.1997........ 7,000 Additional provision in 1999.................... 300 Used in 1998.................................... (4,027) Used in 1999.................................... (1,844) Used in 2000.................................... (191) ------- Total used through 30.06.2000................... 6,062 ------- RESTRUCTURING PROVISION REMAINING............... 1,238 -------
11.2 Segment Reporting UBS is organized into three business groups: UBS Switzerland, UBS Warburg and UBS Asset Management, and our Corporate Center. UBS Switzerland encompasses Private Banking and Private and Corporate Clients. Private Banking offers a broad portfolio of financial products and services to offshore and Swiss high net worth clients who bank in Switzerland or other offshore centers, and to the financial intermediaries advising them. The business unit's products and services are aimed at encompassing the complete life cycle of the client, including succession planning and the generational change. Private Banking provides a number of asset-based, transaction-based and other services. Asset-based services include custodial services, deposit accounts, loans and fiduciary services while transaction-based services include trading and brokerage and investment fund services. The division also provides financial planning and consulting and offers financial planning instruments to clients. These services include establishing proprietary trusts and foundations, the execution of wills, corporate and tax structuring and tax efficient investments. Private and Corporate Clients is the leading retail bank in Switzerland and targets individual clients with assets of up to approximately CHF 1 million and business and corporate clients in Switzerland. - -------------------------------------------------------------------------------- F- 104 320 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) Private and Corporate Clients provides a broad range of products and services to these clients, including retail banking, investment services and lending. UBS Warburg is made up of four business units; Corporate and Institutional Clients, UBS Capital, Private Clients and e-services. Corporate and Institutional Clients is one of the leading global investment banks and is headquartered in London. It provides wholesale financial and investment products and services globally to a diversified client base, which includes institutional investors (including institutional asset managers and broker-dealers), corporations, sovereign governments and supranational organizations. Corporate and Institutional Clients also manages cash and collateral trading on behalf of the Group and executes the vast majority of the Group's retail securities, derivatives and foreign currency exchange transactions. UBS Capital is the Group's global private equity business. UBS Capital invests in unlisted companies, managing these investments over a medium-term time horizon to increase their value and "exiting" the investment in a manner that will maximize the capital gain. The business unit seeks to make both majority and minority equity investments in established and emerging unlisted companies, either with the Group's own capital or through sponsored investment funds. UBS Capital endeavors to create investment value by working together with management to develop the businesses it invests in over the medium term in order to optimize their performance. Private Clients provides onshore private banking services for high net worth individuals in key markets world-wide, providing a similar range of services to Private Banking, but specializing in combining traditional private banking services with investment banking innovation. For example, Private Clients offers innovative products allowing clients to release value from own-company shareholdings or options. e-services is a new business, currently working towards a client launch in Germany in the Autumn of 2000. e-services will provide personalized investment and advisory services at competitive fees for affluent clients in Europe, delivered via a multi-channel structure which integrates internet, call centers and investment centers. e-services will deliver a distinctive set of services, including advanced financial planning and asset allocation, and investment products such as UBS and third-party funds, securities and pension products. UBS Asset Management is made up of two business units: Institutional Asset Management and Investment Funds/GAM. Institutional Asset Management is responsible for the Group's institutional asset management business, and for the investment management of the Groups mutual funds. Its diverse institutional client base located throughout the world consists of corporate and public pension plans, endowments and private foundations, insurance companies, central banks and supranationals, quasi-institutions, and financial advisers. Investment Funds/GAM is the mutual funds business of UBS. Investment Funds is one of the leading mutual funds providers in Europe and the seventh largest in the world. GAM is a diversified asset management group with assets composed primarily of private client accounts, institutional and mutual funds. Global Asset Management operates under its established brand name within UBS Asset Management and employs its own distinctive investment style. UBS Asset Management will increasingly leverage Global Asset Management's range of mutual funds and its multi-manager selection process, in which it selects the top 90 out of about 6,000 third-party fund providers, to enhance the range of its investment styles and products. - -------------------------------------------------------------------------------- F- 105 321 UBS GROUP NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) The Corporate Center encompasses Group level functions which cannot be devolved to the operating divisions. Additionally, the Corporate Center plays an active role with regard to funding, capital and balance sheet management and management of foreign currency earnings. - -------------------------------------------------------------------------------- F- 106 322 [UBS AG LOGO] 323 - -------------------------------------------------------------------------------- Part II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following are the estimated expenses, other than any underwriting discounts and commission and expenses reimbursed by the Registrants, to be incurred in connection with the issuance and distribution of the securities registered under this Registration Statement: Securities and Exchange Commission registration fees........ $ 396,000 Luxembourg Stock Exchange listing fees...................... 30,000(1) Printing and engraving expenses............................. 250,000(1) Blue Sky fees and expenses.................................. 1,000(1)(2) Legal fees and expenses..................................... 650,000(1) Accountants' fees and expenses.............................. 50,000(1) Trustee and Transfer Agent fees and expenses................ 15,000(1) ---------- TOTAL..................................................... $1,392,000 ==========
- ------------ (1) Estimates. (2) Legal Fees and expenses of Registrants are presented on a non-consolidated basis. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS UBS AG Under Swiss law, directors and senior officers acting in violation of their statutory duties - whether dealing with bona fide third parties or performing any other acts on behalf of the corporation - may become liable to the corporation, its shareholders and (in bankruptcy) its creditors for damages. The directors' liability is joint and several but only to the extent the damage is attributable to each director based on willful or negligent violation of duty. If the board of directors lawfully delegated the power to carry out day-to-day management to a different corporate body, e.g., the executive board, the board of directors is not vicariously liable for the acts of the members of the executive board. Instead, the directors can be held liable for their failure to properly select, instruct or supervise the executive board members. If directors and officers enter into a transaction on behalf of the corporation with bona fide third parties in violation of their statutory duties, the transaction is nevertheless valid as long as it is not excluded by the corporation's business purpose. Under Swiss law, a corporation may indemnify a director or officer of the corporation against losses and expenses (unless arising from his gross negligence or willful misconduct), including attorney's fees, judgments, fines and settlement amounts actually and reasonably incurred in a civil or criminal action, suit or preceding by reason of being of having been the representative of or serving at the request of the corporation. Because UBS AG is a Swiss company headquartered in Switzerland, many of the directors and officers of UBS AG are residents of Switzerland and not the U.S. As a result, U.S. investors may find it difficult in a lawsuit based on the civil liability provisions of the U.S. federal securities laws to: - effect service within the U.S. upon UBS AG and the directors and officers of UBS AG located outside the U.S., - enforce in U.S. courts or outside the U.S. judgments obtained against those persons in U.S. courts, - -------------------------------------------------------------------------------- II- 1 324 PART II - -------------------------------------------------------------------------------- - enforce in U.S. courts judgments obtained against those persons in courts in jurisdictions outside the U.S., and - enforce against those persons in Switzerland, whether in original actions or in actions for the enforcement of judgments of U.S. courts, civil liabilities based solely upon the U.S. federal securities laws. Neither the UBS articles of association nor Swiss statutory law contain provisions regarding the indemnification of directors and officers. According to general principles of Swiss employment law, an employer may, under certain circumstances, be required to indemnify an employee against losses and expenses incurred by him in the execution of his duties under the employment agreement, unless the losses and expenses arise from the employee's gross negligence or willful misconduct. UBS maintains directors' and officers' insurance for its directors and officers. UBS PREFERRED FUNDING TRUST The Amended and Restated Trust Agreement of UBS Preferred Funding Trust provides that, to the fullest extent permitted by applicable law, UBS Preferred Funding Company and UBS AG, jointly and severally, indemnify and defend the trustee, the registrar and any paying agent and their directors, officers, employees and agents against, and hold each of them harmless from, any liability, costs and expenses (including reasonable attorneys' fees) that may arise out of or in connection with its acting as the trustee or the registrar, transfer agent or paying agent, respectively, under the Amended and Restated Trust Agreement and the trust preferred securities, except for any liability arising out of gross negligence, bad faith or willful misconduct on the part of any such person or persons. UBS PREFERRED FUNDING COMPANY The Amended and Restated LLC Agreement of UBS Preferred Funding Company provides that, to the fullest extent permitted by applicable law, each director and officer shall be entitled to indemnification from UBS Preferred Funding Company for any loss, damage, claim or expense (including reasonable attorney's fees) incurred by such director or officer by reason of any act or omission performed or omitted by such director or officer in good faith on behalf of UBS Preferred Funding Company and in a manner reasonably believed to be within the scope of authority conferred on such Director or Officer by this Agreement, except with respect to any act or omission determined by a court of competent jurisdiction to have constituted gross negligence or wilful misconduct of such director or officer; provided, however, that any such indemnity shall be provided out of and to the extent of the assets of UBS Preferred Funding Company only, and no holder of company preferred securities, company common securities, company parity preferred securities or company junior securities shall have any personal liability on account thereof. UBS Preferred Funding Company may purchase and maintain insurance to protect any director or officer against liability asserted against him or her, or incurred by him or her, arising out of his or her status as such. Without limiting the foregoing, UBS Preferred Funding Company's directors shall have no personal liability to UBS Preferred Funding Company or any holder of company preferred securities, company common securities, company parity preferred securities or company junior securities for monetary damages: - for not voting to take enforcement action with respect to the subordinated notes or other eligible investments owned by UBS Preferred Funding Company, if any, prior to the occurrence of a bankruptcy event, or - at any time for breach of any such director's fiduciary duty (if any) except for such director's gross negligence or willful misconduct. - -------------------------------------------------------------------------------- II- 2 325 PART II - -------------------------------------------------------------------------------- ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three years preceding the filing of this Registration Statement, UBS AG has sold the following securities that were not registered under the Securities Act. UBS Warburg LLC or another affiliate thereof was the principal underwriter for each of the following issuances and, except as otherwise described below, the securities were offered to, and purchased by, institutional investors. The following issuances were not subject to the registration requirements of the Securities Act of 1933 because the securities were offered and sold either outside the United States in a manner not requiring registration under the Securities Act or within the United States in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D thereunder. 1998 February, 1998: XEU 110,000,000 1.00% convertible debt on FTSI Index. March, 1998: USD 250,000,000 5.75% debt. March-December, 1998: convertible debt and reverse convertible debt that combines a bond and a put option on a stock or stock index issued under the "cash or share delivery" ("Geld-Oder-Aktien-Lieferung" or "GOAL") plan through 14 separate GOALs, offered on various dates, at various interest rates, with maturities at the time of initial issuance ranging from 2 to 10 years, and denominated in CHF, DEM, USD, ITL and NLG. The aggregate amount issued over this period was CHF 3,357,000,000, USD 275,000,000, DEM 300,000,000, ITL 350,000,000,000 and NLG 275,000,000. One of the issuances was offered to, and purchased by, retail clients and institutional investors, the other 13 issuances were offered to, and purchased by, only institutional investors. July-December, 1998: 20,614 ordinary shares of UBS AG in accordance with the management stock plan (management aktien programm). July-December, 1998: 1,729 ordinary shares of UBS AG pursuant to exercise of 17,290 outstanding options (with 5,434,600 options remaining unexercised) in accordance with the management stock option plan (optionen wahldividende). 1999 January-December, 1999: convertible debt and reverse convertible debt that combines a bond and a put option on a stock or stock index issued under the GOAL plan through 26 separate GOALs, offered on various dates, at various interest rates, with maturities at the time of initial issuance ranging from 1 to 7 years, and denominated in CHF, EUR, USD and GBP. The aggregate amount issued over this period was CHF 1,210,000,000, EUR 492,000,000, USD 451,000,000 and GBP 95,000,000. January-December, 1999: convertible and ordinary debt issued by the Jersey branch of UBS AG under a medium term note program (the "European MTN Program") through 9 separate issuances, offered on various dates, at various interest rates, with maturities at the time of initial issuance ranging from 1 to 7 years, and denominated in EUR, USD, JPY, SEK and CHF. The aggregate amount issued over this period was EUR 900,000,000, USD 150,000,000, JPY 25,388,000,000, SEK 233,000,000 and CHF 250,000,000. Three of the issuances were offered to, and purchase by, retail clients and institutional investors, the other 6 issuances were offered to, and purchased by, only institutional investors. July, 1999: USD 100,000,000 1.50% convertible into AT&T shares issued by the Stamford branch of UBS AG under a medium term note program. - -------------------------------------------------------------------------------- II- 3 326 PART II - -------------------------------------------------------------------------------- January-December, 1999: 329,139 ordinary shares of UBS AG in accordance with the management stock plan (management aktien programm). January-December, 1999: 141,136 ordinary shares of UBS AG pursuant to exercise of 1,411,360 outstanding options (with 4,023,240 options remaining unexercised) in accordance with the management stock option plan (optionen wahldividende). 2000 January-June, 2000: convertible debt and reverse convertible debt that combines a bond and a put option on a stock or stock index issued under the GOAL plan issued through 19 separate GOALs, offered on various dates, at various interest rates with maturities at the time of initial issuance ranging from 1 to 5 years, and denominated in CHF, EUR and USD. The aggregate amount issued over this period was CHF 340,000,000, EUR 430,000,000 and USD 75,000,000. January-June, 1999: convertible and ordinary debt issued by the Jersey branch of UBS AG under the European MTN Program through 12 separate issuances, offered on various dates, at various interest rates with maturities at the time of initial issuance ranging from 2 years to 5 years and 41 days, and denominated in CHF, EUR, USD and JPY. The aggregate amount issued over this period was CHF 13,000,000, EUR 57,000,000, USD 177,000,000 and JPY 15,000,000,000. January-May, 2000: 101,826 ordinary shares of UBS AG (on a pre-split basis, in respect of the 2 for 1 stock split in May, 2000) pursuant to exercise of 1,018,216 outstanding options (with 3,004,980 options remaining unexercised) in accordance with the management stock option plan (optionen wahldividende). May-July, 2000: 600,026 ordinary shares of UBS AG (on a post-split basis, in respect of the 2 for 1 stock split in May, 2000) pursuant to exercise of 3,000,130 outstanding options (with 4,850 options remaining unexercised) in accordance with the management stock option plan (optionen wahldividende). ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER DESCRIPTION - ---------------------------------------------------------------------- 1 Form of Underwriting Agreement 3.1 Articles of Association for UBS AG 3.2 By-Laws of UBS AG 3.3 Form of Amended and Restated Trust Agreement of UBS Preferred Funding Trust I 3.4 Form of Amended and Restated Limited Liability Company Agreement of UBS Preferred Funding Company I 3.5 By-Laws of UBS Preferred Funding Company I (included in exhibit 3.4) 4.1 Form of UBS AG Subordinated Guarantee Agreement (included in exhibit 3.4) 4.2 Form of Subordinated Notes of UBS AG (included in exhibit 3.4) 5.1 Opinion of Richards, Layton & Finger, P.A. as to the validity of the trust preferred securities and the company preferred securities 5.2 Opinion of Sullivan & Cromwell as to the validity of the UBS AG subordinated guarantee 5.3 Opinion of Bar & Karrer as to certain matters of Swiss law 8.1 Opinion of Sullivan & Cromwell as to U.S. federal tax matters (included in exhibit 5.2) 8.2 Opinion of ATAG Ernst and Young AG, Switzerland, as to Swiss tax matters
- -------------------------------------------------------------------------------- II- 4 327 PART II - --------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION - ---------------------------------------------------------------------- 10 Agreement and Plan of Merger, dated as of July 12, 2000, by and among Paine Webber Group Inc., UBS AG and Neptune Merger Subsidiary Inc. 12 Statement regarding ratio of earnings to fixed charges 21 Subsidiaries of UBS AG 23.1 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.1) 23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.2) 23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1) 23.4 Consent of ATAG Ernst & Young AG, Switzerland 23.5 Consent of ATAG Ernst and Young Ltd. 24.1 Power of Attorney 25 Statement of Eligibility of Trustee
ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company hereby undertake that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof. UBS Preferred Funding Trust hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Act. - -------------------------------------------------------------------------------- II- 5 328 PART II - -------------------------------------------------------------------------------- Signatures Pursuant to the requirements of the Securities Act of 1933, UBS AG certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, in the State of New York, on 29 September 2000. UBS AG By: /s/ ROBERT MILLS ------------------------------------ Name: Robert Mills Title: Chief Financial Officer -- Americas and Regional Chief Operating Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement or amendment has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------------------------------------------------------------------------ * President and Group Chief 29 September 2000 - --------------------------------------------------- Executive Officer Marcel Ospel * Chief Financial Officer 29 September 2000 - --------------------------------------------------- Luqman Arnold * Group Controller and Member of 29 September 2000 - --------------------------------------------------- Group Managing Board Hugo Schaub * Chairman and Member of Board 29 September 2000 - --------------------------------------------------- of Directors Alex Krauer * First Vice Chairman and Member 29 September 2000 - --------------------------------------------------- of Board of Directors Alberto Togni * Second Vice Chairman and 29 September 2000 - --------------------------------------------------- Member of Board of Directors Markus Kundig * Member of Board of Directors 29 September 2000 - --------------------------------------------------- Peter Bockli * Member of Board of Directors 29 September 2000 - --------------------------------------------------- Rolf A. Meyer * Member of Board of Directors 29 September 2000 - --------------------------------------------------- Hans Peter Ming * Member of Board of Directors 29 September 2000 - --------------------------------------------------- Andreas Reinhart * Member of Board of Directors 29 September 2000 - --------------------------------------------------- Eric Honegger /s/ ROBERT MILLS 29 September 2000 - --------------------------------------------------- *By Robert Mills as attorney-in-fact
- -------------------------------------------------------------------------------- II- 6 329 PART II - -------------------------------------------------------------------------------- Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the Authorized Representative has duly caused this Registration Statement to be signed on its behalf by the undersigned, solely in its capacity as the duly authorized representative of UBS AG, in the United States, in The City of New York, State of New York, on 29 September, 2000. By: /s/ ROBERT MILLS ------------------------------------ Name: Robert Mills Title: Chief Financial Officer -- Americas and Regional Chief Operating Officer - -------------------------------------------------------------------------------- II- 7 330 PART II - -------------------------------------------------------------------------------- Signatures Pursuant to the requirements of the Securities Act of 1933, UBS Preferred Funding Trust I certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on 29 September 2000. UBS Preferred Funding Trust I By: UBS Preferred Funding Company LLC I By: /s/ ROBERT MILLS ---------------------------------- Name: Robert Mills Title: President and Managing Director Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------------------------------------------------------------------------ UBS Preferred Funding Grantor 29 September 2000 Company LLC I By: /s/ ROBERT MILLS 29 September 2000 ---------------------------------------------- Name: Robert Mills Title: President and Managing Director
- -------------------------------------------------------------------------------- II- 8 331 PART II - -------------------------------------------------------------------------------- Signatures Pursuant to the requirements of the Securities Act of 1933, UBS Preferred Funding Company LLC I certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on 29 September 2000. UBS Preferred Funding Company LLC I By: /s/ ROBERT MILLS ------------------------------------ Name: Robert Mills Title: President and Managing Director Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement or amendment has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------------------------------------------------------------------------ /s/ ROBERT MILLS President and Managing 29 September 2000 - --------------------------------------------------- Director Robert Mills * Treasurer and Director 29 September 2000 - --------------------------------------------------- Per Dyrvik * Secretary and Director 29 September 2000 - --------------------------------------------------- Robert Dinerstein /s/ ROBERT MILLS 29 September 2000 - --------------------------------------------------- * By Robert Mills as attorney-in-fact
- -------------------------------------------------------------------------------- II- 9 332 Index to Exhibits
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------------------------------------------------------------------------------------ 1 Form of Underwriting Agreement 3.1 Articles of Association for UBS AG 3.2 By-Laws of UBS AG 3.3 Form of Amended and Restated Trust Agreement of UBS Preferred Funding Trust 3.4 Form of Amended and Restated Limited Liability Company Agreement of UBS Preferred Funding Company I 3.5 By-Laws of UBS Preferred Funding Company I (included in exhibit 3.4) 4.1 Form of UBS AG Subordinated Guarantee Agreement (included in exhibit 3.4) 4.2 Form of Subordinated Notes of UBS AG (included in exhibit 3.4) 5.1 Opinion of Richards, Layton & Finger, P.A. as to the validity of the trust preferred securities and the company preferred securities 5.2 Opinion of Sullivan & Cromwell as to the validity of the UBS AG subordinated guarantee 5.3 Opinion of Bar & Karrer as to certain matters of Swiss law 8.1 Opinion of Sullivan & Cromwell as to U.S. federal tax matters (included in exhibit 5.2) 8.2 Opinion of ATAG Ernst and Young AG, Switzerland, as to Swiss tax matters 10 Agreement and Plan of Merger, dated as of July 12, 2000, by and among Paine Webber Group Inc., UBS AG and Neptune Merger Subsidiary Inc. 12 Statement regarding ratio of earnings to fixed charge 21 Subsidiaries of UBS AG 23.1 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.1) 23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.2) 23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1) 23.4 Consent of ATAG Ernst & Young AG, Switzerland 23.5 Consent of ATAG Ernst and Young Ltd. 24.1 Power of Attorney 25 Statement of Eligibility of Trustee
- -------------------------------------------------------------------------------- II- 10 EX-1.1 2 y39818a1ex1-1.txt FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1 $- UBS PREFERRED FUNDING TRUST I (a Delaware statutory business trust) - % Noncumulative Trust Preferred Securities representing a corresponding amount of - % Noncumulative Company Preferred Securities of UBS PREFERRED FUNDING COMPANY LLC I (a Delaware limited liability company) guaranteed on a subordinated basis by UBS AG (a bank organized under the laws of Switzerland) UNDERWRITING AGREEMENT - -, 2000 2 UNDERWRITING AGREEMENT September 29, 2000 UBS WARBURG LLC PAINEWEBBER INCORPORATED As Representatives of the Underwriters 299 Park Avenue New York, NY 10171-0026 Ladies and Gentlemen: UBS Preferred Funding Trust I (the "TRUST"), a statutory business trust organized under the Business Trust Act (the "DELAWARE TRUST ACT") of the State of Delaware (Chapter 38, Title 12, of the Delaware Code, 12 Del. C. Sections 3801 et seq.), UBS Preferred Funding Company LLC I (the "COMPANY"), a limited liability company organized under the Limited Liability Company Act (the "DELAWARE LLC ACT") of the State of Delaware (Chapter 18, Title 6, of the Delaware Code, 6 Del. C. Sections 18-101 et seq.), and UBS AG, a bank organized under the laws of Switzerland (the "GUARANTOR," and together with the Trust and the Company, the "UBS ENTITIES"), confirm their agreement (this "AGREEMENT") with UBS Warburg LLC ("WARBURG"), PaineWebber Incorporated ("PAINEWEBBER") and each of the other underwriters named in Schedule A hereto (collectively, the "UNDERWRITERS," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Warburg and PaineWebber are acting as representatives (in such capacity, hereinafter referred to as the "REPRESENTATIVES") with respect to the sale by the Trust and the purchase by the Underwriters, acting severally and not jointly, of the respective amounts of -% Noncumulative Trust Preferred Securities (liquidation preference $1,000 per trust preferred security) (the "TRUST PREFERRED SECURITIES") representing a corresponding amount of -% Noncumulative Company Preferred Securities (the "COMPANY PREFERRED SECURITIES") set forth opposite their names in Schedule A. The Trust Preferred Securities will be issued pursuant to an Amended and Restated Trust Agreement (the "TRUST AGREEMENT") to be dated as of the date on which the Closing Time referred to in Section 2(b) hereof occurs (such date, the "CLOSING DATE"), among the trustee named therein (the "TRUSTEE") and the Company, as Grantor. 2 3 The proceeds from the sale of the Trust Preferred Securities will be used by the Trust to purchase the Company Preferred Securities, representing limited liability company interests in the Company. The Company Preferred Securities will be issued pursuant to the Amended and Restated Limited Liability Company Agreement of the Company to be dated as of the Closing Date (the "LLC AGREEMENT") among the Guarantor, as initial holder of the common securities of the Company (the "COMPANY COMMON SECURITIES") and the Trustee on behalf of the Trust, as initial holder of the Company Preferred Securities. The Company Preferred Securities will be guaranteed by the Guarantor to the extent set forth in the UBS AG Subordinated Guarantee Agreement (the "GUARANTEE") to be dated as of the Closing Date among the Guarantor and Wilmington Trust Company, as Guarantee Trustee (the "GUARANTEE TRUSTEE", and together with the Trustee, the "TRUSTEES"). The Trust Preferred Securities, the Company Preferred Securities and the Guarantee are referred to herein collectively as the "SECURITIES." The Company will use the proceeds from the sale of the Company Preferred Securities to acquire, among other things, the -% Subordinated Notes of the Guarantor (the "SUBORDINATED NOTES"). The UBS Entities understand that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered and the Trust Agreement and the Guarantee have been qualified under the Trust Indenture Act of 1939, as amended (the "1939 ACT"). The UBS Entities have filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement on Form F-1, Registration Statement No. 333-46216, covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 ACT"), including the related preliminary prospectus. Promptly after execution and delivery of this Agreement, the UBS Entities will prepare and file a prospectus in accordance with the provisions of Rule 430A ("RULE 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 ACT REGULATIONS") and paragraph (b) of Rule 424 ("RULE 424(b)") of the 1933 Act Regulations. The information included in such prospectus that was omitted from such registration statement at the time it became effective, but that is deemed to be part of such registration statement at the time it became effective pursuant to paragraph (b) of Rule 430A is referred to as "RULE 430A INFORMATION". Each prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "PRELIMINARY PROSPECTUS". Such registration statement, including the exhibits thereto, at the time it became effective and including the Rule 430A Information is herein called the "REGISTRATION STATEMENT". Any registration statement filed 3 4 pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "RULE 462(b) REGISTRATION STATEMENT," and after such filing the term "REGISTRATION STATEMENT" shall include the Rule 462(b) Registration Statement. The final prospectus, in the form first furnished to the Underwriters for use in connection with the offering of the Securities, is herein called the "PROSPECTUS". SECTION 1. Representations and Warranties by the UBS Entities. The UBS Entities, jointly and severally, represent and warrant to each Underwriter as of the date hereof and as of the Closing Time referred to in Section 2(b) hereof, and agree with each Underwriter, as follows; provided that (i) each of the Company and the Trust makes no representations or warranties with respect to the Guarantor or any of its subsidiaries other than itself and (ii) the representations and warranties set forth in Sections 1 (c), (i) and (r) are made only by the Guarantor and not the Company or the Trust: (a) Compliance with Registration Requirements. The Registration Statement has been filed on an appropriate form under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of any of the UBS Entities, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time, the Registration Statement, the Rule 462(b) Registration Statement and any amendments thereto complied and will comply in all material respects with the applicable requirements of the 1933 Act and the 1933 Act Regulations and the 1939 Act and the rules and regulations of the Commission under the 1939 Act (the "1939 ACT REGULATIONS"), as applicable, and did not and will not at the Closing Date contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither the Prospectus nor any amendments thereto, at the time the Prospectus or any such amendment was issued and at the Closing Time, included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the UBS Entities in writing by any Underwriter through the Representatives expressly for use in the Registration Statement or Prospectus. 4 5 Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations. (b) Independent Accountants. The independent auditors who certified the financial statements included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations with respect to the Guarantor and its subsidiaries. (c) Good Standing of the UBS Entities. Each of the Guarantor and each of its subsidiaries that is a "significant subsidiary" as defined under Rule 405 of the 1933 Act Regulations (each a "SIGNIFICANT SUBSIDIARY") has been duly organized or incorporated under the laws of Switzerland or its respective jurisdiction of organization or incorporation, as the case may be, except to the extent that the failure to be duly organized or incorporated would not have a material adverse effect in the context of the issue of the Securities on the consolidated financial position and consolidated results of operations of the Guarantor and its Significant Subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"). The Trust has been duly created as a statutory business trust under the Delaware Trust Act and the Company has been duly formed as a limited liability company under the Delaware LLC Act. Each of the Guarantor and each of the Guarantor's Significant Subsidiaries is validly existing and in good standing under the laws of its respective jurisdiction of organization or incorporation, is duly qualified to do business and in good standing in each other jurisdiction in which qualification is necessary for the ownership of its respective properties or for the conduct of its respective businesses, except to the extent that the failure to be validly existing, qualified or in good standing would not have a Material Adverse Effect. The Trust is and will, under current law, be classified as a grantor trust and not an association taxable as a corporation for United States federal income tax purposes. Each UBS Entity has the power and authority necessary to own or hold its respective properties, to enter into and perform its respective obligations under the Transaction Documents (as defined below) to which it is a party and to conduct the businesses in which it is engaged, as described in the Prospectus, except to the extent that the failure to do so would not have a Material Adverse Effect. Each of the Trust and the Company is not a party to or otherwise bound by any agreement other than the Transaction Documents (as defined below) and agreements ancillary to consummating the transactions contemplated by the Transaction Documents (as defined below). (d) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered (if applicable under applicable law) by each of the UBS Entities. 5 6 (e) Absence of Defaults and Conflicts; Absence of Further Requirements. None of the UBS Entities or any of the Significant Subsidiaries is in violation of the constituent documents, charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which any of the UBS Entities or such Significant Subsidiary is a party or by which any of them may be bound, or to which any of the property or assets of any of the UBS Entities or any such Significant Subsidiary is subject, except a default in performance or observance of an obligation, agreement, covenant or condition that does not have and is not likely to have a Material Adverse Effect. The execution, delivery (if applicable under applicable law) and performance of this Agreement, the Trust Agreement, the LLC Agreement, the Guarantee, the Subordinated Notes and the Administration Agreement to be dated as of the Closing Date among the Guarantor and the Company (the "ADMINISTRATION AGREEMENT" and, together with this Agreement, the LLC Agreement, the Guarantee and the Subordinated Notes, the "UBS DOCUMENTS", and, together with the Trust Agreement, the "TRANSACTION DOCUMENTS") by the Guarantor, the Company and the Trust, as the case may be, and the consummation of the transactions contemplated hereby and thereby do not and will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the UBS Entities or any Significant Subsidiary under any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which any of the UBS Entities or any such Significant Subsidiary is a party or by which any of them is bound or to which any of their property or assets is subject, except for any such conflict, breach, violation or default which is waived or will not have (A) a material adverse effect on the transactions contemplated by any of the Transaction Documents or (B) a Material Adverse Effect; nor will such actions result in any violation of the provisions of the Articles of Association of the Guarantor, the Trust Agreement or the LLC Agreement or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the UBS Entities or any Significant Subsidiary or any of their properties or assets, except for a violation that will not have a Material Adverse Effect; and, except such as have been obtained or required under the 1933 Act or the 1933 Act Regulations, the Securities Exchange Act of 1934, as amended (the "1934 ACT") or the rules and regulations of the Commission under the 1934 Act (the "1934 ACT REGULATIONS") or state securities laws and the qualification of the Trust Agreement and the Guarantee under the 1939 Act, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body or any stock exchange authorities in Switzerland or the United States is required to be made or obtained by any of the UBS Entities in connection with the offering, issuance, and sale of the Securities or the execution, 6 7 delivery and performance by the UBS Entities of the each of the Transaction Documents, as applicable. (f) No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (a) there has not been any change in the share capital or long-term debt of the Guarantor or any of its subsidiaries that is material to the consolidated financial position of the Trust, the Company or the Guarantor, and (b) there has been no change, or, to the best of the knowledge of each of the UBS Entities, any development involving a prospective change, in or affecting the business, general affairs, management, consolidated financial position, consolidated shareholders' equity or consolidated results of operations of the Trust, the Company or the Guarantor, otherwise than as set forth or contemplated in the Prospectus that has had, or is likely to have, a Material Adverse Effect. (g) Investment Company Act. None of the UBS Entities is, or after giving effect to the offering and sale of the Securities and the application of the net proceeds therefrom as described in the forepart of this Agreement and in the Prospectus will be, required to register as an "investment company" under the Investment Company Act of 1940, as amended (the "1940 ACT"). (h) Absence of Proceedings. Except as disclosed in the Prospectus, there is no action, suit or proceeding before or by any government, governmental instrumentality or court, domestic or foreign, now pending to which any of the UBS Entities or any Significant Subsidiary of the Guarantor is a party or of which any property or assets of any of them is the subject which, if determined adversely to any of them, are likely, individually or in the aggregate, to have a Material Adverse Effect or could adversely affect the consummation of the transactions contemplated by this Agreement or the performance by any of the UBS Entities of its obligations hereunder, and, to the best of the knowledge of each of the UBS Entities, no such proceedings are threatened or contemplated. (i) Authorization of Trust Agreement. The Trust Agreement has been duly authorized by the Company and, at the Closing Time, will have been executed and delivered by the Company, as Grantor, and, assuming due authorization, execution and delivery of the Trust Agreement by the Trustee, the Trust Agreement will, at the Closing Time, be a valid and binding obligation of the Company enforceable against it in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except to the extent that enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) (the "BANKRUPTCY EXCEPTIONS"); and, at the 7 8 Closing Time, the Trust Agreement will have been duly qualified under the 1939 Act. (j) Authorization of Trust Preferred Securities. At the Closing Time, the Trust Preferred Securities will have been duly authorized by the Trust Agreement and, when issued and delivered against payment of the consideration set forth in this Agreement, will be validly issued and (subject to the terms of the Trust Agreement) fully paid and non-assessable and will be entitled to the benefits of the Trust Agreement; and the issuance of the Trust Preferred Securities is not subject to preemptive or other similar rights; and (subject to the terms of the Trust Agreement) holders of Trust Preferred Securities will be entitled to the same limitation of personal liability under Delaware law as extended to stockholders of private corporations for profit. (k) Authorization of Guarantee. The Guarantee has been duly authorized by the Guarantor and, when validly executed and delivered (if applicable under applicable law) by the Guarantor and, assuming due authorization, execution and delivery of the Company Preferred Securities Guarantee by the Guarantee Trustee, will constitute a valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except to the extent that enforcement thereof may be limited by the Bankruptcy Exceptions. At the Closing Time, the Guarantee will have been duly qualified under the 1939 Act. (l) Authorization of the LLC Agreement. The LLC Agreement has been duly authorized by the Guarantor and the Trust and, at the Closing Time, will have been duly executed and delivered by the Guarantor and the Trust, and will be a valid and legally binding obligation of the Guarantor and the Trust, enforceable against each of them in accordance with its terms, except to the extent that enforcement thereof may be limited by the Bankruptcy Exceptions. (m) Authorization of the Company Common Securities. At the Closing Time, the Company Common Securities will have been duly authorized by the LLC Agreement and, when issued and delivered by the Company to the Guarantor against payment therefor as described in the Registration Statement and Prospectus, and will be validly issued and (subject to the terms of the LLC Agreement) fully paid limited liability company interests; the issuance of the Company Common Securities is not subject to preemptive or other similar rights; and at the Closing Time all of the issued and outstanding Company Common Securities of the Company will be directly owned by the Guarantor free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (n) Authorization of the Company Preferred Securities. At the Closing Time, the Company Preferred Securities will have been duly authorized by the LLC Agreement and, when issued and delivered by the Company to the Trust against payment therefor as described in the Registration Statement and 8 9 Prospectus, and will be validly issued and (subject to the terms of the LLC Agreement) fully paid limited liability company interests; the issuance of the Company Preferred Securities is not subject to preemptive or other similar rights; and at the Closing Time all of the issued and outstanding Company Preferred Securities of the Company will be directly owned by the Trust (subject to the rights of holders of the Trust Preferred Securities) free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity other than claims of holders of the Trust Preferred Securities. (o) Authorization of the Administration Agreement. The Administration Agreement has been duly authorized by the Guarantor and the Company and, at the Closing Time, will have been duly executed and delivered by the Guarantor and the Company and will constitute a valid and binding obligation of the Guarantor and the Company, enforceable against the Guarantor and the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by the Bankruptcy Exceptions. (p) Payments under the Guarantee. All payments, if any, made by the Guarantor under the Guarantee may, under the current laws and regulations of Switzerland, be paid by the Guarantor in United States dollars and may be freely transferred out of Switzerland, and may be paid under the current laws and regulations of Switzerland without the necessity of obtaining any consent, approval, authorization, registration or other action by, or filing with, any governmental authority of Switzerland, except as described or contemplated in the Registration Statement and except for such prohibitions that would not materially aversely affect the financial condition or results of operation of the Guarantor in the context of the issue of the Securities. (q) Fair Summary. The statements set forth in the Prospectus under the captions "UBS Preferred Funding Trust I", "UBS Preferred Funding Company LLC I", "Description of Trust Preferred Securities", "Description of Company Preferred Securities", "Description of the UBS AG Subordinated Guarantee" and "Description of Subordinated Notes of UBS AG" insofar as they purport to constitute a summary of the terms of the Securities and each of the Transaction Documents referred to therein and under the captions "Certain U.S. Tax Considerations" and "Certain Tax Considerations Under the Laws of Switzerland" insofar as they purport to describe the provisions of the laws and documents referred to therein are, in all material respects, accurate, complete and fair. (r) Officer's Certificate. Any certificate signed by the Trustee, an officer of any of the UBS Entities or any of its subsidiaries and delivered to the Underwriters or to counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by the relevant UBS Entities to each Underwriter as to the matters covered thereby on the date of such certificate. 9 10 SECTION 2. Sale and Delivery to Underwriters; Closing. (a) Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Trust agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Trust, at the initial public offering price set forth in Schedule B, the number of Trust Preferred Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Trust Preferred Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Payment. Payment of the purchase price for, and delivery of certificates for, the Trust Preferred Securities shall be made at the offices of Sullivan & Cromwell or at such other place as shall be agreed upon by the Representatives and the UBS Entities, at 10:00 a.m. (Eastern time) on the [ ] business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the UBS Entities (such time and date of payment and delivery being herein called the "CLOSING TIME"). Payment shall be made to the Trust by wire transfer of immediately available funds to a bank account designated by the UBS Entities, against delivery to such persons designated by the Representatives for the respective accounts of the Underwriters of one or more certificates in global form for the Trust Preferred Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Trust Preferred Securities which it has agreed to purchase. UBS Warburg, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Trust Preferred Securities to be purchased by any Underwriter whose funds have not been received by the Closing Time, but such payment shall not relieve such Underwriter from its obligations hereunder. The purchase price per Trust Preferred Security to be paid by the several Underwriters for the Trust Preferred Securities shall be an amount equal to the initial public offering price as set forth in Schedule B. As compensation to the Underwriters for their commitments hereunder, the Trust hereby agrees to pay at the Closing Time to the Representatives, for the accounts of the several Underwriters, a commission per Trust Preferred Security set forth on Schedule B. At the Closing Time, the Trust will pay, or cause to be paid, such commission by wire transfer of immediately available funds to a bank account designated by the Representatives for the account of Underwriters. 10 11 (c) Denominations; Registration. Certificates for the Trust Preferred Securities shall be in such denominations and registered in such names as the Representatives may request in writing at least one business day before the Closing Time. The Trust Preferred Securities will be made available for examination and packaging by the Representatives in the City of New York not later than 10:00 a.m. (Eastern time) on the business day prior to the Closing Time. (d) Foreign Selling Restrictions. Each Underwriter represents and agrees that (i) it has not offered or sold and prior to the expiry of the period of six months from the Closing Date will not offer or sell any Trust Preferred Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their business or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 of Great Britain with respect to anything done by it in relation to the Trust Preferred Securities in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Trust Preferred Securities to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on. (e) Suitability Restrictions. Each Underwriter represents and agrees that it will not recommend to a customer the purchase, sale or exchange of any of the Trust Preferred Securities without reasonable grounds to believe, on the basis of information obtained from the customer concerning his investment objectives, other investments, financial situation and needs, and any other information known by the Underwriter including whether (a) the customer is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the Prospectus; (b) the customer has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and (c) the program is otherwise suitable for the customer. Each Underwriter also represents and agrees that it will maintain in its files documents disclosing the basis upon which the determination of suitability was reached as to each customer. 11 12 SECTION 3. Covenants of the UBS Entities. The UBS Entities covenant with each Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The UBS Entities, subject to Section 3(b), will comply with the requirements of Rule 430A and will notify the Representatives immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment to the Prospectus or for additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any of such purposes. The UBS Entities will make reasonable efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. During the period when the Underwriters are required to deliver a prospectus with respect to the Securities, the UBS Entities will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), or any amendment or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Representatives with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Underwriters shall reasonably object. (c) Delivery of Registration Statements. The UBS Entities have furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, conformed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith) and conformed copies of all consents and certificates of experts, and will also deliver to the Representatives upon request, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. (d) Delivery of Prospectuses. The UBS Entities have delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the UBS Entities hereby consent to the use of such copies for purposes permitted by the 1933 Act. The UBS Entities 12 13 will furnish to each Underwriter, without charge, during the period when the prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended) as such Underwriter may reasonably request. (e) Continued Compliance with Securities Laws. The UBS Entities will comply with the 1933 Act and the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations and the 1939 Act and the 1939 Act Regulations with respect to the offer of the Securities so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Trust Preferred Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the UBS Entities, to amend the Registration Statement or amend the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the UBS Entities will promptly prepare and file with the Commission, subject to Section 3(b), such amendment as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the UBS Entities will furnish to the Underwriters such number of copies of such amendment as the Underwriters may reasonably request. (f) Blue Sky Qualifications. The UBS Entities will use all reasonable efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other domestic or foreign jurisdictions as the Representatives may designate and to maintain such qualifications in effect for a period of one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement or, if less, such other period as may be necessary to complete the distribution of the Securities; provided, however, that the UBS Entities shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each domestic or foreign jurisdiction in which the Securities have been so qualified, the UBS Entities will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. 13 14 (g) Rule 158. The UBS Entities will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to their security holders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The UBS Entities will use or cause to be used the net proceeds received from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds." (i) Listing. The UBS Entities will use all reasonable efforts to effect the listing of the Trust Preferred Securities on the Luxembourg Stock Exchange. (j) Ratings. The UBS Entities shall take all reasonable action necessary to enable Moody's Investors Service, Inc. ("MOODY'S") and Standard & Poor's Ratings Service, a division of McGraw Hill, Inc. ("S&P"), to provide their respective ratings of the Trust Preferred Securities and the Company Preferred Securities. (k) Clearance and Settlement. The UBS Entities will cooperate with the Underwriters and take all reasonable action necessary if requested by the Representatives to permit the Trust Preferred Securities to be eligible for clearance and settlement through the facilities of The Depository Trust Company ("DTC"), Morgan Guaranty Trust Company of New York, Brussels Office, as the operator of the Euroclear System ("EUROCLEAR"), and Clearstream Banking SA ("CLEARSTREAM"). (l) Restriction on Sale of Securities. Except as contemplated by this Agreement, during a period of 30 days from the date of the Prospectus, neither the Trust nor the Company nor any other subsidiary of the Guarantor that is similar to the Trust or the Company will, without the prior written consent of the Representatives, directly or indirectly, sell, offer to sell, grant any option for sale of, or otherwise dispose of, any Trust Preferred Securities or any Company Preferred Securities or any security convertible into or exchangeable into or exercisable for Trust Preferred Securities or Company Preferred Securities. (m) Reporting Requirements. The UBS Entities, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. 14 15 SECTION 4. Payment of Expenses. (a) Expenses. The UBS Entities will pay all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, copying and delivery to the Underwriters of each of the Transaction Documents and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities (other than fees of counsel for the Underwriters related thereto), (iii) the preparation, issuance and delivery of the certificates for the Trust Preferred Securities to the Underwriters, (iv) the fees and disbursements of the UBS Entities' counsel, accountants, experts and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus and of the Prospectus and any amendments thereto, (vii) the fees and expenses of the Trustees, including the reasonable fees and disbursements of counsel for the Trustees, (viii) any fees payable in connection with the rating of the Trust Preferred Securities and the Company Preferred Securities, (ix) the fees and expenses incurred in connection with the listing of the Trust Preferred Securities on the Luxembourg Stock Exchange, (x) the fees and expenses incurred in connection with the approval by DTC, Euroclear and Clearstream of the Trust Preferred Securities for clearance through their respective systems, and (xi) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Securities by the National Association of Securities Dealers, Inc. (b) Termination of Agreement. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the UBS Entities shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of Davis Polk & Wardwell, counsel for the Underwriters. SECTION 5. Conditions of Underwriters' Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy in all material respects of the representations and warranties of the UBS Entities contained in Section 1 hereof and in certificates of any officer of the UBS Entities or any affiliate or subsidiary of the UBS Entities delivered pursuant to the provisions hereof, to the performance by each of the UBS Entities in all material respects of its covenants and other obligations hereunder, and to the following further conditions: 15 16 (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at the Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A). (b) Opinion of Swiss Counsel. At the Closing Time, the Representatives shall have received a written opinion, dated as of the Closing Time, of Bar & Karrer, Swiss counsel, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect set forth in Exhibit A. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the UBS Entities and certificates of public officials and may contain other customary or appropriate assumptions and qualifications reasonably satisfactory to counsel for the Underwriters. (c) Opinion of U.S. Counsel for the UBS Entities. At the Closing Time, the Representatives shall have received a written opinion, dated as of the Closing Time, of Sullivan & Cromwell, U.S. counsel for the UBS Entities, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect set forth in Exhibit B hereto. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the UBS Entities and certificates of public officials. Such opinion also may contain other customary or appropriate assumptions and qualifications reasonably satisfactory to counsel for the Underwriters. (d) Opinion of Delaware Counsel for the UBS Entities. At the Closing Time, the Representatives shall have received a written opinion, dated as of the Closing Time, of Richards, Layton & Finger, P.A., Delaware counsel for the UBS Entities, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect set forth in Exhibit C hereto. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the UBS Entities and certificates of public officials. Such opinion may also contain other 16 17 customary or appropriate assumptions and qualifications reasonably satisfactory to counsel for the Underwriters. (e) Opinion of Counsel for Underwriters. At the Closing Time, the Representatives shall have received the favorable opinion, dated as of the Closing Time, of Davis Polk & Wardwell, counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters, in form and substance satisfactory to the Underwriters. (f) Opinion of Counsel for the Trustees. At the Closing Time, the Representatives shall have received a written opinion, dated as of the Closing Time, of Richards, Layton & Finger, P.A., counsel for the Trustees, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect set forth in Exhibit D hereto and to such further effect as counsel for the Underwriters may reasonably request. (g) Opinion of U.S. Tax Counsel. At the Closing Time, the Representatives shall have received a written opinion, dated as of the Closing Time, of Sullivan & Cromwell, U.S. tax counsel for the UBS Entities, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters. Such opinion shall confirm Sullivan & Cromwell's opinion set forth in the Prospectus under the caption "Certain U.S. Tax Considerations" and state that, subject to the qualifications set forth therein, the discussion set forth in the Prospectus under such caption is their opinion and is an accurate summary of the U.S. tax matters described therein. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the UBS Entities and certificates of public officials. Such opinion may also contain other customary appropriate assumptions and qualifications reasonably satisfactory to counsel for the Underwriters. (h) Opinion of Swiss Tax Advisor. At the Closing Time, the Representatives shall have received a written opinion, dated as of the Closing Time, of ATAG Ernst & Young AG, Swiss tax advisor for the UBS Entities, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters. Such opinion shall confirm ATAG Ernst & Young AG's opinion set forth in the Prospectus under the caption "Certain Tax Considerations Under the Laws of Switzerland" and state that, subject to the qualifications set forth therein, the discussion set forth in the Prospectus under such caption is their opinion and is an accurate summary of the Swiss tax matters described therein. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the UBS Entities and certificates of public officials. Such opinion may also contain other 17 18 customary appropriate assumptions and qualifications reasonably satisfactory to counsel for the Underwriters. (i) Officers' Certificate. At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the UBS Entities and their subsidiaries, considered as one enterprise, and the Representatives shall have received certificates of an executive of each of the UBS Entities, dated as of the Closing Time, to the effect that (i) there has been no such adverse change that is material in the context of the issue of the Securities, (ii) the representations and warranties in Section 1 hereof were true and correct in all material respects when made and are true and correct in all material respects with the same force and effect as though expressly made at and as of the Closing Time (without giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth in the applicable representation or warranty), (iii) the UBS Entities shall have complied in all material respects with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and, to such officer's knowledge, no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (j) Accountant's Comfort Letters. At the time of the execution of this Agreement, the Representatives shall have received from ATAG Ernst & Young Accountants a letter, dated as of the date hereof, in form and substance reasonably satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus, including reports incorporated by reference therein, in each case as specified by counsel for the Underwriters. (k) Bring-down Comfort Letters. At the Closing Time, the Representatives shall have received from ATAG Ernst & Young Accountants a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (i) of this Section, except that the specified date referred to shall be a date not more than five business days prior to the Closing Time. (l) Maintenance of Rating. At the Closing Time, the Trust Preferred Securities and the Company Preferred Securities shall be rated at least aa3 by Moody's and A by S&P, and the UBS Entities shall have delivered to the Representatives a letter dated on, or prior to, the Closing Time, from each such rating agency, or other evidence satisfactory to the Representatives, confirming that the Trust Preferred Securities and the Company Preferred Securities have 18 19 such ratings. Since the date of this Agreement, there shall not have occurred a downgrading in the rating assigned to the securities of any of the UBS Entities by any "nationally recognized statistical rating organization," as that term is defined by the Commission for purposes of Rule 436(g)(2) under the 1933 Act, and no such organization shall have publicly announced that it has under surveillance or review, that does not indicate an improvement, its rating of any securities of any of the UBS Entities. (m) Approval of Listing. At the Closing Time, the Trust Preferred Securities shall have been approved for listing on the Luxembourg Stock Exchange, subject only to official notice of issuance, and approved for settlement through DTC, Euroclear and Clearstream. (n) Additional Documents. At the Closing Time, counsel for the Underwriters shall have been furnished with such documents as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the UBS Entities in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters. (o) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled in all material respects when and as required to be fulfilled, this Agreement may be terminated by the Representatives by notice to the UBS Entities at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. (a) Indemnification of Underwriters. The UBS Entities agree, jointly and severally, to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act (each an "INDEMNIFIED PERSON"), as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged 19 20 untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Guarantor; and (iii) against any and all expense whatsoever, as incurred (including, subject to Section 6(c) hereof, the fees and disbursements of counsel chosen by the Representatives), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that the indemnity set forth in this Section 6(a) shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the UBS Entities by any Underwriter directly or through the Representatives expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment thereto). (b) Indemnification of the UBS Entities, Directors and Officers. Each Underwriter, severally in proportion to its respective purchase obligation and not jointly, agrees to indemnify and hold harmless the UBS Entities, their respective directors or Supervisory or Managing Board members, the Trustee or the equivalent thereof, each of the officers of the UBS Entities who signed the Registration Statement, and each person, if any, who controls any of the UBS Entities within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), 20 21 including the Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment thereto) in reliance upon and in conformity with written information furnished to the UBS Entities by such Underwriter through the Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment thereto) and, provided, further, that the UBS Entities shall not be liable to any Indemnified Person under this Section 6(a) with respect to the Registration Statement (or any amendment thereto), including the Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment thereto) to the extent that any such loss, claim, damage or liability of such Indemnified Person results from the fact that such Indemnified Person or the Underwriter it controls sold Trust Preferred Securities to a person as to whom it shall be established that there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus or the Prospectus as then amended in any case where such delivery is required by the 1933 Act if the UBS Entities have previously furnished copies thereof in sufficient quantity to such Indemnified Person or the Underwriter it controls and the loss, claim, damage or liability of such Indemnified Person results from an untrue statement or omission of a material fact contained in a preliminary prospectus which was identified in writing prior to the date hereof to such Indemnified Person or the Underwriter it controls and corrected in the Prospectus (as then amended). (c) Actions Against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by the Representatives, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the UBS Entities, provided that if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying party receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action (which approval shall not be unreasonably withheld), unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the 21 22 indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party be liable for fees and expenses of more than one counsel (in addition to any one firm of local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement Without Consent If Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 7. Contribution. In order to provide for just and equitable contribution in circumstances under which the indemnification provided for in Section 6 hereof is for any reason held to be unenforceable by an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the UBS Entities on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the UBS Entities on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. 22 23 The relative benefits received by the UBS Entities on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses but after deducting the total underwriting commission received by the Underwriters) received by the UBS Entities and the total underwriting commission received by the Underwriters, in each case as set forth on the cover of the Prospectus, bear to the aggregate initial public offering price of the Securities as set forth on such cover. The relative fault of the UBS Entities on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the UBS Entities or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The UBS Entities and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Trust Preferred Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and 23 24 each director or Supervisory or Managing Board member or the equivalent of the UBS Entities, the Trustee, each officer of the UBS Entities who signed the Registration Statement, and each person, if any, who controls any of the UBS Entities within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the UBS Entities. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Trust Preferred Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the UBS Entities or any of their subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the UBS Entities, and shall survive delivery of the Trust Preferred Securities to the Underwriters. SECTION 9. Termination of Agreement. (a) Termination; General. The Representatives may terminate this Agreement, by notice to the Guarantor, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings or business affairs or business prospects of the UBS Entities and their subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the international financial markets or the financial markets in the United States or Switzerland, or any outbreak of hostilities or escalation thereof affecting the United States or Switzerland or other calamity or crisis, or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives (after discussion with the Guarantor to the extent practicable), impracticable to market the Trust Preferred Securities or to enforce contracts for the sale of the Trust Preferred Securities, or (iii) if trading in any securities of the UBS Entities has been suspended or materially limited by the Commission, the New York Stock Exchange or the Luxembourg Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or the Luxembourg Stock Exchange or in the Nasdaq National Market has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any such exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if trading in any securities of the Guarantor has been suspended or limited on any stock exchange in Switzerland, or minimum or 24 25 maximum prices for trading have been fixed, or maximum ranges for prices have been required by any such stock exchange or any competent governmental authority in or of Switzerland, or (v) if a banking moratorium has been declared by either Federal or New York, or Swiss authorities; or (vi) if there has occurred a change or an official announcement by a competent authority of a forthcoming change in Swiss taxation materially adversely affecting the Guarantor or the Guarantee or the transfer thereof or the imposition of exchange controls by the United States or Switzerland. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the Underwriters. If one or more of the Underwriters shall fail at the Closing Time to purchase the Trust Preferred Securities which it or they are obligated to purchase under this Agreement (the "DEFAULTED SECURITIES"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (i) if the number of Defaulted Securities does not exceed 10% of the aggregate number of the Trust Preferred Securities to be purchased hereunder, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (ii) if the number of Defaulted Securities exceeds 10% of the aggregate number of the Trust Preferred Securities to be purchased hereunder, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement, either the Representatives or the Guarantor shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any 25 26 other documents or arrangements. As used herein, the term "UNDERWRITER" includes any person substituted for an Underwriter under this Section 10. SECTION 11. Notices. All notices, requests, statements and other communications hereunder shall be in writing and shall be delivered or sent by mail, messenger or any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representatives c/o UBS Warburg LLC, Attention: Debt Syndicate Manager, Facsimile No. -; and notices to the Guarantor shall be directed to UBS AG, Attention: General Counsel, Facsimile No. -. Any such notice, request, statement or communication shall be effective upon receipt thereof. SECTION 12. Parties. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the UBS Entities and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters and the UBS Entities and their respective successors and the controlling persons and officers and directors and Supervisory and Managing Board members or the equivalent referred to in Sections 6 and 7, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters and the UBS Entities and their respective successors, and said controlling persons and officers and directors and Supervisory and Managing Board members or the equivalent, and for the benefit of no other person, firm or corporation. No purchaser of Trust Preferred Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. Governing Law, Submission for Jurisdiction. (a) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. (b) Submission to Jurisdiction. Each of the parties hereto irrevocably (i) agrees that any legal suit, action or proceeding against the UBS Entities brought by any Underwriter or by any person who controls any Underwriter arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in any Federal court located in the State of New York, (ii) waives, to the fullest extent it may effectively do so, any objection which it may now or hereafter have to the laying of venue of any such proceeding and (iii) submits to the non-exclusive jurisdiction of such courts in any such suit, action or proceeding. The Guarantor irrevocably waives any immunity to jurisdiction to which it may 26 27 otherwise be entitled or become entitled (including sovereign immunity, immunity to pre-judgment attachment, post-judgment attachment and execution) in any legal suit, action or proceeding against it arising out of or based on this Agreement or the transactions contemplated hereby which is instituted in any New York court or in any competent court in Switzerland. The UBS Entities have appointed Robert C. Dinerstein, Esq., c/o UBS AG, 299 Park Avenue, New York, New York, 10171, as their authorized agent (the "AUTHORIZED AGENT") upon whom process may be served in any such action arising out of or based on this Agreement or the transactions contemplated hereby which may be instituted in any New York court by any Underwriter or by any person who controls any Underwriter, expressly consent to the jurisdiction of any such court in respect of any such action, and waives any other requirements of or objections to personal jurisdiction with respect thereto. Such appointment shall be irrevocable. The UBS Entities represent and warrant that the Authorized Agent has agreed to act as such agent for service of process and agrees to take any and all action, including the filing of any and all documents and instruments, that may be necessary to continue such appointment in full force and effect as aforesaid. Service of process upon such Authorized Agent and written notice of such service to the UBS Entities shall be deemed, in every respect, effective service of process upon the UBS Entities. SECTION 14. Judgment Currency. In respect of any judgment or order given or made for any amount due hereunder that is expressed and paid in a currency (the "JUDGMENT CURRENCY") other than United States dollars, the Guarantor will indemnify each Underwriter against any loss incurred by such Underwriter as a result of any variation as between (i) the rate of exchange at which the United States dollar amount is converted into the judgment currency for the purpose of such judgment or order and (ii) the rate of exchange at which an Underwriter is able to purchase United States dollars with the amount of the judgment currency actually received by such Underwriter. The foregoing indemnity shall constitute a separate and independent obligation of the Guarantor and shall continue in full force and effect notwithstanding any such judgment or order as aforesaid. The term "rate of exchange" shall include any premiums and costs of exchange payable in connection with the purchase of or conversion into United States dollars. In the event that any such Underwriter, as a result of any variation as noted in (i) or (ii) above, recovers an amount of United States dollars on conversion of a sum paid in a judgment currency which amount is in excess of the judgment or order given or made in United States dollars, such Underwriter shall remit such excess to the Guarantor. SECTION 15. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 27 28 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the UBS Entities a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters and the UBS Entities in accordance with its terms. Very truly yours, UBS AG By: ______________________________________________ Name: Title: UBS PREFERRED FUNDING COMPANY LLC I By: ______________________________________________ Name: Title: UBS PREFERRED FUNDING TRUST I By: UBS PREFERRED FUNDING COMPANY LLC I, as Depositor By: ______________________________________________ Name: Title: 29 Confirmed and Accepted, as of the date first above written: UBS WARBURG LLC PAINEWEBBER INCORPORATED Acting severally on behalf of themselves and as Representatives of the other Underwriters named in Schedule A hereto. By: UBS WARBURG LLC By: ______________________________________ Name: Title: 30 SCHEDULE A
Name of Underwriter Number of Trust Preferred Securities - ------------------- ------------------------------------ UBS Warburg LLC PaineWebber Incorporated Credit Suisse First Boston Corporation Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Morgan Stanley & Co. Incorporated Salomon Smith Barney Inc. TOTAL ------------------------------------ ====================================
SA-1 31 SCHEDULE B 1. The initial public offering price per security for the Trust Preferred Securities, determined as provided in said Section 2, shall be $1,000.00. 2. The purchase price per security for the Trust Preferred Securities to be paid by the several Underwriters shall be $1,000.00, being an amount equal to the initial public offering price set forth above. 3. The compensation per Trust Preferred Security to be paid by the Trust to the several Underwriters in respect of their commitments hereunder shall be $- per Trust Preferred Security (or $- in the aggregate). SB-1 32 EXHIBIT A FORM OF OPINION OF SWISS COUNSEL 1. The Guarantor has been duly incorporated and is validly existing as a corporation under the laws of Switzerland. 2. The Guarantor has the corporate power and authority to execute and deliver each of the UBS Documents and to perform its obligations under each of these agreements. 3. The Guarantor has taken all necessary corporate action to authorize the execution and delivery by the Guarantor of each of the UBS Documents and the performance by the Guarantor of its obligations under each of these agreements. 4. The Underwriting Agreement, Guarantee, Subordinated Notes and Administration Agreement have been duly executed and delivered by the Guarantor and the choice of New York law as the law expressed to be governing each of these agreements or documents will be recognized under the laws of Switzerland. Accordingly, (i) New York law will determine the validity, binding nature and enforceability of each of these agreements or documents, and (ii) these agreements or documents will, according to the courts of Switzerland duly applying New York law, constitute valid and legally binding obligations of the parties thereto, enforceable against the parties thereto in accordance with their terms. 5. The LLC Agreement has been duly executed and delivered by the Guarantor and the choice of Delaware law as the law expressed to be governing the LLC Agreement will be recognized under the laws of Switzerland. Accordingly, (i) Delaware law will determine the validity, binding nature and enforceability of the LLC Agreement and (ii) the LLC Agreement will, according to the courts of Switzerland duly applying Delaware law, constitute valid and legally binding obligations of the parties thereto, enforceable against the parties thereto in accordance with their respective terms. 6. The execution and delivery by the Guarantor and the other parties thereto of each of the UBS Documents and the performance by the Guarantor and the other parties thereto of their respective obligations under each of the UBS Documents do not and will not conflict with or result in a breach of any provision of the laws of Switzerland or of the Articles of Association. 7. No license, authorization, permission or consent from any public authority or governmental agency of Switzerland is required by the laws of Switzerland for the valid execution and delivery by the Guarantor and the other parties thereto of each of the UBS Documents or for the performance by the A-1 33 Guarantor and the other parties thereto of their respective obligations under each of the UBS Documents. 8. In order to insure the legality, validity, enforceability or admissibility in evidence of each of the UBS Documents, it is not necessary that they be filed or recorded with any public office in Switzerland. 9. No exchange control regulations are currently in force in Switzerland and no authorization, approval, consent or license of any governmental authority or agency of or in Switzerland is required for the payment by the Trust of any amounts pursuant to the terms of the Trust Preferred Securities or for the payment by the Guarantor of any amount pursuant to the terms of the Guarantee or the Subordinated Notes. 10. The Guarantor can sue and be sued in its own name. 11. It is not necessary that Wilmington Trust Company, acting in its capacity as the Guarantee Trustee under the Guarantee, should be licensed, qualified or otherwise entitled to carry on business in Switzerland (i) in order to enable it to enforce its rights, or exercise any power, duty or obligation conferred or imposed on it, under the Guarantee (including, without limitation, its right to bring a claim or a proceeding on behalf of the Holders (as defined in the Guarantee) in a court of competent jurisdiction in Switzerland to enforce the obligations of the Guarantor thereunder) or (ii) by reason of the execution of the Guarantee by the Guarantee Trustee or of the performance by the Guarantee Trustee of its obligations thereunder. 12. To our knowledge, there is no pending or threatened action, suit or proceeding before any Swiss canton or federal, or any other (whether or not in Switzerland) court or governmental agency, authority or body involving the UBS Entities or any of their subsidiaries of a character required to be disclosed in the Prospectus that is not adequately disclosed as required. A-2 34 EXHIBIT B FORM OF OPINION OF SULLIVAN & CROMWELL 1. The Guarantee and the Trust Agreement have each been qualified under the 1939 Act. 2. None of the UBS Entities is, or after giving effect to the offering and sale of the Securities and the application of the net proceeds therefrom as described in the Prospectus will be, required to be registered as an "investment company" under the 1940 Act. 3. No consent, approval, authorization or order of any court or governmental agency or body of the federal government of the United States or the State of New York is required for the issuance and sale of the Securities by the UBS Entities and the compliance by the UBS Entities with the provisions of each of the Transaction Documents to which they are party have been obtained or made except as have been obtained. 4. The statements in the Prospectus under the captions "Prospectus Summary", "UBS Preferred Funding Trust I", "UBS Preferred Funding Company LLC I", "Description of Trust Preferred Securities", "Description of Company Preferred Securities", "Description of UBS AG Subordinated Guarantee" and "Description of Subordinated Notes of UBS AG", insofar as such statements purport to constitute a summary of the terms of any of the Transaction Documents, constitute accurate summaries thereof in all material respects. 5. We hereby confirm, subject to the qualifications set forth herein, the statements in the Prospectus under the caption "Certain U.S. Tax Considerations" are an accurate summary of the U.S. federal income tax matter described therein. 6. The Registration Statement and the Prospectus (other than the reports of experts pertaining to the financial statements and the financial statements and other financial and statistical information contained therein, as to which we express no opinion) comply as to form in all material respects with the applicable requirements of the 1933 Act, the 1939 Act, the 1933 Act Regulations and the 1939 Act Regulations. 7. The consummation of the transactions contemplated in the Transaction Documents and the compliance with the terms thereof do not and will not violate any existing applicable New York or federal law, rule or regulation; provided, however, that, for purposes of this paragraph, we express no opinion with respect to Federal or state securities laws, other antifraud laws and fraudulent transfer laws; provided, further, that insofar as performance by the UBS Entities of their obligations under each of the Transaction Documents is concerned, we express no opinion as to B-1 35 bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditor's rights and relating to general equitable principles. 8. To our knowledge, there is no pending or threatened action, suit or proceeding before any New York or U.S. federal court or governmental agency, authority or body involving the UBS Entities or any of their subsidiaries of a character required to be disclosed in the Prospectus that is not adequately disclosed as required. 9ab . Assuming due authorization, execution and delivery by each of the parties thereto, the Underwriting Agreement, the Trust Agreement, the Subordinated Notes Purchase Agreement and the Administration Agreement constitute valid and binding agreements of the Company, enforceable against the Company in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 10. Assuming due authorization, execution and delivery by each of the parties thereto, the Underwriting Agreement, the LLC Agreement and the Trust Agreement constitute valid and binding agreements of the Trust, enforceable against the Trust in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 11. Assuming due authorization, execution and delivery by each of the parties thereto, the Guarantee constitutes a valid and legally binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 12. No facts have come to our attention that would lead us to believe that the Registration Statement (except for financial statements and schedules and other financial data included therein, as to which we have not been asked to comment), at the time it became effective or at the date hereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for financial statements and schedules and other financial data included therein, as to which we have not been asked to comment), as of the date of such Prospectus and at the date hereof, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-2 36 EXHIBIT C FORM OF OPINION OF DELAWARE COUNSEL TO THE UBS ENTITIES 1. The Company has been duly formed and is validly existing in good standing as a limited liability company under the Delaware LLC Act. 2. Under the LLC Agreement and the Delaware LLC Act, the Company has all necessary limited liability company power and authority to conduct its business as described in the Prospectus, to execute and deliver the Underwriting Agreement, the Trust Agreement and the Administration Agreement, and to perform its obligations under each such agreement. 3. The Company Preferred Securities issued to the Trust have been duly authorized and validly issued and, subject to the qualifications set forth in the following paragraph, are fully paid and nonassessable limited liability company interests in the Company. 4. The Trust, as a member of the Company, shall not be obligated personally for any of the debts, obligations or liabilities of the Company, whether arising in contract, tort or otherwise solely by reason of being a member of the Company, except as the Trust may be obligated to make payments provided for in the LLC Agreement and to repay any funds wrongfully distributed to it. 5. The provisions of the LLC Agreement, including the terms of the Company Preferred Securities, are permitted under the Delaware LLC Act. 6. The LLC Agreement constitutes a legal, valid and binding agreement of the Guarantor and the Trust, and is enforceable against the Guarantor and the Trust in accordance with its terms. 7. Under the LLC Agreement and the Delaware LLC Act, the Company has taken all necessary limited liability company action to authorize the execution and delivery by the Company of each of the Transaction Documents to which it is a party and the Company Preferred Securities, and to perform its obligations thereunder. 8. The issue and sale by the Company of the Company Preferred Securities to the Trust pursuant to the LLC Agreement and the Underwriting Agreement, and the performance by the Company of its obligations under each of the Transaction Documents to which it is a party, will not violate (i) any Delaware statute, rule or regulation, or (ii) the Certificate of Formation of the Company or the LLC Agreement. 9. No consent, approval, authorization, order, registration, filing or qualification of or with any Delaware court or Delaware governmental agency or body C-1 37 is required solely in connection with (i) the issuance and sale by the Company of the Company Preferred Securities to the Trust as contemplated by the Prospectus, or (ii) the execution, delivery and performance by the Company of any of the Transaction Documents to which it is a party. 10. Under the LLC Agreement and the Delaware LLC Act, the issuance by the Company of the Company Preferred Securities is not subject to any preemptive purchase rights of any person. 11. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Trust Act. 12. Under the Trust Agreement and the Delaware Trust Act, the Trust has all necessary trust power and authority to conduct its business as described in the Prospectus, to execute and deliver each of the Transaction Documents to which it is a party, and to perform its obligations under each such agreement. 13. The provisions of the Trust Agreement, including the terms of the Trust Preferred Securities, are permitted under the Delaware Trust Act. 14. The Trust Agreement constitutes a legal, valid and binding agreement of the Company and the Trustee and is enforceable against the Company and the Trustee in accordance with its terms. 15. The Trust Preferred Securities are duly authorized by the Trust Agreement and when authenticated, issued and delivered in accordance with the Trust Agreement, the Trust Preferred Securities will be duly and validly issued and, subject to the qualifications set forth in the following paragraph, fully paid and nonassessable undivided beneficial interests in the assets of the Trust. 16. The holders of Trust Preferred Securities, in their capacity as such, will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We note that the holders may be obligated to make payments as set forth in the Trust Agreement. 17. Under the Trust Agreement and the Delaware Trust Act, the execution and delivery by the Trust of each of the Transaction Documents to which it is a party, and the performance by the Trust of its obligations thereunder, have been duly authorized by all necessary trust action on the part of the Trust. 18. No consent, approval, authorization, order, registration or qualification of or with any Delaware court or Delaware governmental agency or Delaware body is required solely in connection with (i) the issuance and sale by the Trust of the Trust Preferred Securities to the holders as contemplated by the Prospectus, and (ii) the C-2 38 execution, delivery and performance by the Trust of each of the Transaction Documents to which it is a party. 19. Under the Delaware Trust Act and the Trust Agreement, the issuance of the Trust Preferred Securities is not subject to any preemptive purchase rights of any person. 20. The issue and sale by the Trust of the Trust Preferred Securities pursuant to the Trust Agreement and the Underwriting Agreement, and the performance by the Trust of its obligations under each of the Transaction Documents to which it is a party, will not violate (i) any Delaware statute, rule or registration, or (ii) the Certificate of Trust or the Trust Agreement. C-3 39 EXHIBIT D FORM OF OPINION OF COUNSEL TO THE TRUSTEES 1. - is a banking corporation validly existing under the laws of the State of 2. The Guarantee Trustee has the requisite power and authority to execute, deliver and perform its obligations under the Guarantee and has taken all necessary action to authorize the execution, delivery and performance of the Guarantee. 3. The Trustee has the requisite power and authority to execute and deliver the Trust Agreement and the Guarantee Trustee has the requisite power and authority to execute and deliver the LLC Agreement, and each has taken all necessary action to authorize the execution and delivery of the Trust Agreement and the LLC Agreement, as the case may be. 4. Each Transaction Document to which either of the Trustees is a party has been duly executed and delivered by the appropriate one of the Trustees. D-1 EX-3.1 3 y39818a1ex3-1.txt ARTICLES OF ASSOCIATION FOR UBS AG 1 EXHIBIT 3.1 [UBS LOGO] ARTICLES OF ASSOCIATION UBS AG 18 April 2000 2 CONTENTS SECTION 1 Page 4 Name, registered office, business object and duration of the Corporation SECTION 2 Page 5 Share capital SECTION 3 Corporate bodies Page 8 A. General Meeting of Shareholders Page 12 B. Board of Directors Page 17 C. Group Executive Board Page 18 D. Statutory and Group Auditors SECTION 4 Page 19 Financial statements and distribution of profit, reserves SECTION 5 Page 20 Notices and jurisdiction SECTION 6 Page 21 Non-cash considerations
3 3 SECTION 1 Name, registered office, business object and duration of the Corporation ARTICLE 1 NAME AND REGISTERED OFFICE A corporation limited by shares under the name of UBS AG/UBS SA/UBS Ltd. is established with a registered office in Zurich and Basel. ARTICLE 2 BUSINESS OBJECT 1 The purpose of the Corporation is the operation of a bank. Its scope of operations extends to all types of banking, financial, advisory, trading and service activities in Switzerland and abroad. 2 The Corporation may establish branches and representative offices as well as banks, finance companies and other enterprises of any kind in Switzerland and abroad, hold equity interests in these companies, and conduct their management. 3 The Corporation is authorized to acquire, mortgage and sell real estate and building rights in Switzerland and abroad. ARTICLE 3 DURATION The duration of the Corporation shall not be limited by time. 4 4 SECTION 2 Share capital ARTICLE 4 SHARE CAPITAL 1 The share capital of the Corporation is CHF 4,308,931,620 (four billion, three hundred and eight million, nine hundred and thirty-one thousand, six hundred and twenty Swiss francs), divided into 430,893,162 registered shares with a par value of CHF 10 each. The share capital is fully paid up. 2 Registered shares may be converted into bearer shares and bearer shares into registered shares by resolution of the General Meeting of Shareholders; the Corporation may issue certificates representing multiples of shares. ARTICLE 4a CONDITIONAL CAPITAL 1 Warrants related to the 1996 optional dividend of the former Swiss Bank Corporation The share capital will be increased, under exclusion of shareholders' preemptive rights, by a maximum of CHF 8,885,240, corresponding to 888,524 registered shares of CHF 10 par value each (which must be fully paid up) through the exercise of warrants issued in connection with the 1996 optional dividend of the former Swiss Bank Corporation. The subscription ratio, time limits and further details were determined by the Board of Directors of the former Swiss Bank Corporation. The purchase of shares through the exercise of option rights, as well as any subsequent transfer of the shares, are subject to the registration restrictions set out in Art. 5 of these Articles of Association. 5 5 2 Employee stock ownership plan of the former Swiss Bank Corporation The share capital will be increased, under exclusion of shareholders' preemptive rights, by a maximum of CHF 2,532,620, corresponding to a maximum of 253,262 registered shares of CHF 10 par value each (which must be fully paid up) through the exercise of subscription rights granted to employees of the former Swiss Bank Corporation as a means of participation in the Corporation. The purchase of the shares through the exercise of subscription rights within the framework of the employee stock ownership plan, and any subsequent transfer of the shares, are subject to the registration restrictions set out in Art. 5 of these Articles of Association. ARTICLE 5 SHARE REGISTER AND NOMINEES 1 A share register is maintained for the registered shares, in which owners' and usufructuaries' family and given names are entered, with their complete address and nationality (or registered office for legal entities). 2 If the mailing address of a shareholder changes, the new address must be communicated to the Corporation. As long as this has not been done, all written communications will be sent to the address entered in the share register, this being valid according to the requirements of the law. 3 Those who acquire registered shares shall be entered in the share register as shareholders with voting rights if they expressly declare that they acquired these registered shares in their own names and for their own account. If the party acquiring the shares is not prepared to provide such a declaration, the Board of Directors may refuse to allow the shares to be entered with voting rights. 4 The restriction on registration under paragraph 3 above also applies to shares acquired by the exercise of preemptive, option or conversion rights. 6 6 5 The Board of Directors is authorized, after hearing the position of the registered shareholder or nominee affected, to strike the entry of a shareholder with voting rights from the share register retroactively with effect to the date of the entry, if it was obtained under false pretences. The party affected must be informed of the action immediately. 6 The Board of Directors formulates general principles relating to the registration of fiduciaries/nominees and issues the necessary regulations to ensure compliance with the above provisions. ARTICLE 6 DEFERRED PRINTING OF SHARES 1 In the case of registered shares, the Corporation may elect not to print and deliver certificates. However, shareholders may at any time request the Corporation to print and deliver certificates free of charge. Particulars are set forth in regulations issued by the Board of Directors. 2 Uncertificated registered shares may only be transferred by the assignment of all appurtenant rights. The assignment must be reported to the Corporation to be valid. If uncertificated registered shares are held in a custody or portfolio account at a bank, they may only be transferred with the cooperation of that bank. Furthermore, they may only be pledged in favour of that bank, in which case notifying the Corporation is not necessary. ARTICLE 7 EXERCISE OF RIGHTS 1 Shares are indivisible. The Corporation recognizes only one representative per share. 2 Voting rights and associated rights may only be exercised in relation to the Corporation by a party entered in the share register as having the right to vote. 7 7 SECTION 3 Corporate bodies A. General Meeting of Shareholders ARTICLE 8 AUTHORITY The General Meeting of Shareholders is the Corporation's supreme corporate body. ARTICLE 9 TYPES OF GENERAL MEETINGS The Annual General Meeting takes place every year within six months after the close of the a. ANNUAL GENERAL MEETING financial year; the annual report and the report of the Auditors must be available for inspection by shareholders at the Corporation's registered offices at least twenty days before the meeting. ARTICLE 10 b. EXTRAORDINARY GENERAL 1 MEETINGS Extraordinary General Meetings are convened whenever the Board of Directors or the Auditors consider it necessary. 2 Such a meeting must also be convened if demanded by a resolution of the shareholders in General Meeting or by a written request from one or more shareholders, representing together at least one tenth of the share capital, specifying the items to be included on the agenda and the proposals to be put forward. ARTICLE 11 CONVENING 1 The General Meeting shall be called by the Board of Directors, or if need be by the Statutory Auditors, at least twenty days before the meeting is to take place. The meeting is called by publishing a single notice in the publication of record designated by the Corporation. An invitation will be sent to all shareholders registered. 8 8 2 The notice to convene the General Meeting shall specify the agenda with the proposals of the Board of Directors and proposals from shareholders, and in the event of elections the names of the proposed candidates. ARTICLE 12 PLACING OF ITEMS ON THE AGENDA 1 Shareholders representing shares with an aggregate par value of one million Swiss francs may submit proposals for matters to be placed on the agenda for consideration by the General Meeting, provided that their proposals are submitted in writing within the deadline published by the Corporation and include the actual motion(s) to be put forward. 2 No resolutions may be passed concerning matters which have not been duly placed on the agenda, except on a motion put forward at the General Meeting to call an Extraordinary General Meeting or a motion for a special audit to be carried out. ARTICLE 13 CHAIRMANSHIP, TELLERS, MINUTES 1 The Chairman of the Board of Directors or, if the Chairman cannot attend, a Vice Chairman or another member designated by the Board of Directors, shall preside over the General Meeting and appoint a secretary and the necessary tellers. 2 Minutes are kept of the proceedings and must be signed by the presiding Officer and the Secretary. ARTICLE 14 SHAREHOLDER PROXIES 1 The Board of Directors issues procedural rules for participation and representation of shareholders at the General Meeting. 9 9 2 A shareholder may only be represented at the General Meeting by his or her legal representative or under a written power of attorney by another shareholder eligible to vote, by a corporate proxy, by the independent proxy or by a custodial proxy. 3 The presiding Officer decides whether to recognize the power of attorney. ARTICLE 15 VOTING RIGHT Each share conveys the right to cast one vote. ARTICLE 16 RESOLUTIONS, ELECTIONS 1 Resolutions and elections are decided at the General Meeting by an absolute majority of the votes cast, excluding blank and invalid ballots, subject to the compulsory provisions of the law. 2 A resolution to change Art. 18 of these Articles of Association, to remove one fourth or more of the members of the Board of Directors, or to delete or modify Art. 16 paragraph 2 of these Articles of Association, must receive at least two thirds of the votes represented. 3 Voting on resolutions and elections shall take place with a show of hands, but a written ballot shall be adopted if requested by at least 3% of the votes represented or if the presiding Officer so orders. A written ballot or election may also be conducted electronically. 4 In the case of written ballots, the presiding Officer may rule that only the ballots of those shareholders shall be collected who choose to abstain or to cast a negative vote, and that all other shares represented at the General Meeting at the time of the vote shall be counted in favour, in order to expedite the counting of the votes. 10 10 5 The presiding Officer may order a vote by show of hands to be repeated in a written ballot if he feels there is any doubt regarding the results. In this case the show of hands vote is deemed not to have taken place. ARTICLE 17 POWERS The General Meeting has the following powers: a) To establish and amend the Articles of Association b) To elect the members of the Board of Directors, the Statutory Auditors and the Group Auditors c) To approve the annual report and the consolidated financial statements d) To approve the annual accounts and to decide upon the appropriation of the net profit shown in the balance sheet e) To give the members of the Board of Directors and of the Group Executive Board a discharge concerning their administration f) To take decisions on all matters reserved to the General Meeting by law or by the Articles of Association, or which are placed before it by the Board of Directors. 11 11 Corporate bodies B. Board of Directors ARTICLE 18 NUMBER OF BOARD MEMBERS The Board of Directors shall consist of at least six and no more than twelve members. ARTICLE 19 TERM OF OFFICE 1 The term of office for members of the Board of Directors is four years, with the interval between two Annual General Meetings being deemed a year for this purpose. The initial term of office for each Director shall be fixed in such a way as to assure that about one fourth of all the members have to be newly elected or re-elected every year. 2 New Directors elected to replace members who vacate their office before completion of their term shall serve for the remainder of the term of the Directors they are replacing. Members whose term of office has expired are immediately eligible for re-election. Article 20 ARTICLE 20 ORGANIZATION, CHAIRMAN'S OFFICE 1 The Board of Directors shall elect a Chairman's Office from among its members. It shall be composed of the Chairman and at least one Vice Chairman. 2 The Board of Directors shall appoint its secretary, who need not be a member of the Board. ARTICLE 21 CONVENING, PARTICIPATION 1 The Chairman shall convene the Board of Directors as often as business requires, but at least six times a year. 12 12 2 The Board of Directors shall also be convened if one of its members or the Group Executive Board submits a written request to the Chairman's Office to hold such a meeting. ARTICLE 22 DECISIONS 1 Decisions of the Board of Directors are taken by an absolute majority of the votes cast. In case of a tie, the presiding Officer shall cast the deciding vote. 2 The number of members who must be present to constitute a quorum, and the modalities for the passing of resolutions shall be laid down by the Board of Directors in the Organization Regulations. No such quorum is required for decisions confirming and amending resolutions relating to capital increases. ARTICLE 23 DUTIES AND POWERS 1 The Board of Directors has responsibility for the ultimate direction of the Corporation and the supervision and control of its executive management. 2 The Board of Directors may also take decisions on all matters which are not expressly reserved to the shareholders in General Meeting or to another corporate body by law or by the Articles of Association. 13 13 ARTICLE 24 ULTIMATE DIRECTION OF THE The ultimate direction of the Corporation CORPORATION comprises in particular: a) Preparing of and deciding on proposals to be placed before the General Meeting b) Issuing the regulations necessary for the conduct of business and for the delineation of authority, in particular the Organization Regulations and the regulations governing the Group Internal Audit c) Laying down the principles for the accounting, financial and risk controls and financial planning, in particular the allocation of equity resources and risk capital for business operations d) Decisions on Group strategy and other matters reserved to the Board of Directors under the Organization Regulations e) Appointment and removal of the President (Group Chief Executive Officer) and the members of the Group Executive Board, the members of the Group Managing Board and the head of Group Internal Audit f) Decisions on increasing the share capital, to the extent this falls within the authority of the Board of Directors (Art. 651 paragraph 4 of the Swiss Code of Obligations), on the report concerning an increase in capital (Art. 652e of the Swiss Code of Obligations) and on the ascertainment of capital increases and the corresponding amendments to the Articles of Association. 14 14 ARTICLE 25 SUPERVISION, CONTROL Supervision and control of the business management comprises in particular the following: a) Review of the annual report, consolidated and parent company financial statements as well as quarterly and half-year financial statements b) Acceptance of regular reports covering the course of business and the position of the Group, the status and development of country, counter-party and market risks and the extent to which equity and risk capital are tied up due to business operations c) Consideration of reports prepared by the Statutory and Group Auditors concerning the annual financial statements. ARTICLE 26 DELEGATION, ORGANIZATION The Board of Directors may delegate part of its REGULATIONS authority to one or more of its members subject to Arts. 24 and 25. The allocation of authority and functions shall be defined in the Organization Regulations. ARTICLE 27 SIGNATURES, SEAL, EXCEPTIONAL 1 MEASURES In accordance with the Articles of Association the company's external representation and the manner and form of signature shall be defined in the Organization Regulations. 2 Signing in the name of the company requires two authorized signatures to be binding. Forms and other written documents produced in large quantities in the course of daily business may be distributed with only one or without signature. Such exceptions to the joint signature principle shall be made known in a suitable fashion. 3 The Board of Directors and those authorized by it to sign on behalf of the Corporation may empower individual persons to execute specific business and legal transactions. 15 15 4 For countries in which law or custom prescribes the use of seals on important or formal documents, a seal may be added to the signature. The Board of Directors shall designate such seals and issue regulations for their use. 5 To safeguard important interests of the Bank, the Board of Directors, or persons acting on the Board's instructions, may take exceptional measures in emergency situations arising as a result of extraordinary political developments. ARTICLE 28 REMUNERATION The Board of Directors shall determine the remuneration of its members. 16 16 Corporate bodies C. Group Executive Board ARTICLE 29 ORGANIZATION The Group Executive Board is composed of the Group Chief Executive Officer, the Chief Financial Officer and at least three other members with important group functions. ARTICLE 30 FUNCTIONS, AUTHORITIES 1 The Group Executive Board is responsible for the management of the Group. It is the supreme executive body as defined by the Swiss Federal Law on Banks and Savings Banks. It implements the Group strategy decided by the Board of Directors and ensures the execution of the decisions of the Board of Directors and the Chairman's Office. It is responsible for the Group's results. 2 The Group Executive Board has the following principal responsibilities: a) Preparing and proposing Group strategy and the fundamental policy decisions necessary for their implementation, the Organization Regulations and the basic organizational structure of the Group b) Exercising such functions and authorities as shall be assigned to it by the Organization Regulations c) Regularly informing the Board of Directors, as prescribed by Art. 25, item b of these Articles of Association, and submitting the documents in accordance with Art. 25, items a and c of these Articles of Association 3 The functions and authorities of the Group Executive Board and other management units designated by the Board of Directors are to be defined by the Organization Regulations. 17 17 Corporate bodies D. Statutory and Group Auditors ARTICLE 31 TERM OF OFFICE, AUTHORITY AND 1 DUTIES An auditing company is to be appointed as Statutory and Group Auditors. 2 The shareholders in General Meeting shall elect the Statutory and Group Auditors for a term of one year. The rights and duties of the Statutory and Group Auditors are determined by the provisions of the law. 3 The General Meeting may appoint Special Auditors for a term of three years, who provide the attestations required for capital increases. 18 18 SECTION 4 Financial statements and appropriation of profit, reserves ARTICLE 32 FINANCIAL YEAR The consolidated and parent company financial accounts are closed on December 31 of each year. ARTICLE 33 APPROPRIATION OF DISPOSABLE 1 PROFIT At least 5% of the profit for the year is allocated to the general statutory reserve until such time as said reserve amounts to 20% of the share capital. 2 The remaining profit is, subject to the provisions of the Swiss Code of Obligations and of the Federal Banking law, at the disposal of the shareholders in General Meeting who may also use it for the formation of free or special reserves. ARTICLE 34 RESERVES The shareholders in General Meeting determine the utilization of the general reserve in accordance with the legal provisions acting upon the recommendations of the Board of Directors. 19 19 SECTION 5 Notices and jurisdiction ARTICLE 35 OFFICIAL PUBLICATION MEDIA Public notices appear in the Swiss official commercial gazette (in French "Feuille Officielle Suisse du Commerce", or German "Schweizerisches Handelsamtsblatt"). The Board of Directors may designate other publications as well. ARTICLE 36 JURISDICTION Jurisdiction for any disputes arising out of the corporate relationship shall be at both the registered offices of the Corporation, with the exception of legal actions in connection with the contestation or nullity of decisions of the shareholders' meeting or the nullity of Board of Directors' decisions, where jurisdiction shall exclusively be with the courts of Zurich. 20 20 SECTION 6 Non-cash considerations ARTICLE 37 NON-CASH CONSIDERATIONS 1 The Corporation acquires Schweizerische Bankgesellschaft (SBG) in Zurich by merger through the capital increase of April 30/May 19, 1998. Assets of CHF 426,820,619,609.52 and liabilities of CHF 408,302,595,203.66 pursuant to the merger balance sheet of September 30, 1997 shall be transferred by universal succession to the Corporation; the amount of the capital increase has been paid in accordance with the merger agreement. The shareholders of the company acquired receive 128,750,000 fully paid-up registered shares of the acquiring company each with a par value of CHF 20. 2 The Corporation acquires Schweizerischer Bankverein (SBV) in Basel by merger through the capital increase of April 29/May 18, 1998. Assets of CHF 352,252,889,332.69 and liabilities of CHF 338,770,039,294.46 pursuant to the merger balance sheet of September 30, 1997 shall be transferred by universal succession to the Corporation; the amount of the capital increase has been paid in accordance with the merger agreement. The shareholders of the company acquired receive 85,623,491 fully paid-up registered shares of the acquiring company each with a par value of CHF 20. UBS AG For the Board of Directors: Alex Krauer Alberto Togni Chairman Vice Chairman 21 EX-3.2 4 y39818a1ex3-2.txt BY-LAWS OF UBS AG 1 EXHIBIT 3.2 starting version of 8 JAN 97 ORGANIZATION REGULATIONS OF UBS AG Based on art. 716b of the Swiss Code of Obligations and art. 24 of the Articles of Association of UBS AG, the Board of Directors has issued the following Organization Regulations on July 7, 1999. 2 The "Appendix" (Authorities) is an integrated part of these Organization Regulations 3 I. THE BOARD OF DIRECTORS Art. 1 Constitution (1)The Board of Directors constitutes itself in the last meeting preceding the Annual General Meeting of Shareholders (subject to approval of elections at the AGM). (2)The Board elects its Chairman, one full time and one or two part-time Vice Chairmen and appoints its Secretary. Art. 2 Meetings and invitations to convene (1)The Board meets as prescribed by art. 21 of the Articles of Association. (2)Except in urgent cases the invitations to the meeting, together with the agenda, are sent to the directors at least one week before the date of the meeting. (3)As a rule, the members of the Group Executive Board participate in board meetings in an advisory capacity. The presiding director decides where exceptions will be made. Together with the President & CEO, the presiding director determines whether other persons may attend. Art. 3 Decisions and minutes (1)The Board takes its decisions as prescribed by art. 22 of the Articles of Association. As an exception, directors may participate in meetings via telephone or video. They are counted as present in such cases. (2)In urgent cases decisions may be taken via circular mail. Such decisions are only valid when all directors are sent the text of the resolution, when more than two thirds of the directors cast a vote, and when the absolute majority of directors voting approve the resolution submitted to them. Any dissenting director is entitled to request a meeting to be convened. In such a case the decision via circular mail is not valid. (3)Minutes are kept of decisions taken by the Board and are signed by the presiding director and the Secretary. They shall be made available for inspection before the next board meeting and shall be approved at this meeting. (4)Any member of the Board may demand that his/her dissenting vote be noted in the minutes. Directors are any time entitled to examine the minutes. Art. 4 Functions and authorities (1)The functions and authorities of the Board are based on the provisions contained in arts. 23 - 28 of the Articles of Association. All details are governed in the "Appendix". 4 Art. 5 Right to information and examination (1)At a meeting, any member of the Board is entitled to demand information on any matter relating to the Group regardless of what is on the agenda. The other directors and any members of the Group Executive Board that are present shall provide such information to the best of their knowledge. (2)If a director has the matter on which he or she is seeking information placed on the agenda, the Chairman's Office shall arrange through the President & CEO for a knowledgeable member of staff to provide comprehensive information on this matter. (3)Where it is imperative for compliance with his/her duties any director may request information outside of meetings from members of the Group Executive Board concerning the Group's business development. Requests to examine books and files must be made in writing to the Chairman's Office. The director who makes such a request must examine the documents in person. Where the Chairman's Office rejects a request to examine books and files, the director making the request may submit it to the Board. Art. 6 Term of office, end of active service (1)A director who has reached the age of seventy automatically retires from the Board with effect from the next Annual General Meeting of Shareholders. (2)A director who has ended his or her active involvement in the company or organization of which he or she used to be a representative shall offer to vacate his or her directorship. The Board decides whether a resignation is to be submitted or whether the director may exercise the mandate until completion of his/her term of office. II. THE CHAIRMAN'S OFFICE Art. 7 Composition The Board of Directors establishes a Chairman's Office, composed of the Chairman and at least one Vice Chairman. Art. 8 Meetings (1)As a rule the Chairman's Office meets four to six times a year to deal with the issues of its authority. The President & CEO participates at these meetings in an advisory capacity. Other members of the Group Executive Board may be invited to participate for special purposes. 5 (2)The Chairman and/or the full-time Vice Chairman participate in the meetings of the Group Executive Board. Such participation serves to ensure that the Board is apprised of current developments and permits the exercise of its supervisory and control functions. The Chairman and the full-time Vice Chairman participate in these meetings in an advisory capacity. Art. 9 Decisions and minutes (1)The presence of the Chairman and one Vice Chairman is required for resolutions to be passed at meetings of the Chairman's Office. (2)Minutes are kept on the resolutions passed and are signed by the Chairman and the Secretary. The minutes are sent to the members of the Chairman's Office and the CEO. They are then made available for perusal at the following Board of Directors' meeting. Art. 10 Functions and authorities (1)The authorities of the Chairman's Office are governed in detail in the "Appendix". In addition it has responsibility for preparing proposals to be submitted to the Board of Directors and for monitoring the implementation of the Board of Directors' decisions. (2)As an exception, urgent decisions falling within the authority of the Board of Directors may be taken by the Chairman's Office. Such decisions are to be brought to the attention of the Board of Directors at its next meeting. This regulation shall not apply to such functions and duties of the Board of Directors which, pursuant to art. 716a of the Swiss Code of Obligations, are non-transferable and inalienable. (3)The credit approval authorities of the Chairman's Office can be delegated to the full-time Vice Chairman who brings his decisions to the next meeting of the Chairman's Office for information. Extraordinary cases will be submitted to circular approval by all members of the Chairman's Office. Art. 11 The Chairman's Office as Audit Supervisory Board (1)The Chairman's Office performs the duties as Audit Supervisory Board as defined in the Federal Banking Commission's circular letter on internal auditing dated 14 December 1995. In this function, the Chairman's Office shall convene four times a year for special meetings with the Head of Group Internal Audit. (2)At these meetings, the objectives for the year and the activity report of the Head of Group Internal Audit will be discussed. The meetings also serve to discuss matters of general policy and to inform the Chairman's Office of important findings made by Group Internal Audit. Art. 12 The Chairman's Office as Compensation Committee 6 The Chairman's Office performs the duties as Compensation Committee for the Group Executive Board and the Group Managing Board. Its authorities are governed in detail in the "Appendix". III. THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS Art. 13 Functions and authorities The Board of Directors appoints an Audit Committee of three of its part-time members to control the functional quality and the performance adequacy of the Group and Statutory Auditors as well as their interaction with Group Internal Audit. Duties and procedures are governed in a special regulation issued by the Board of Directors. IV. THE CHAIRMAN OF THE BOARD OF DIRECTORS Art. 14 Functions (1)The Chairman - or in his/her absence one of the Vice Chairmen - presides over the meetings of the Board of Directors and the General Meeting of Shareholders. (2)The Chairman of the Board of Directors, together with the full-time Vice Chairman, exercises ongoing supervision over the Group Executive Board on behalf of the Board of Directors. The Chairman and the full-time Vice Chairman are responsible for providing information to the Chairman's Office and the Board of Directors that is relevant to their function. (3)Group Internal Audit directly reports to the Chairman of the Board of Directors. Art. 15 Authorities (1)The Chairman of the Board of Directors and the full-time Vice Chairman may demand information about any matters relating to the Group, and examine reports, proposals and minutes of meetings of the Group Executive Board, the Functional Areas of the Corporate Center and the Divisions. (2)Decisions of the Group Executive Board concerning the Group's risk profile and the risk policies of the Divisions are to be submitted to the Chairman of the Board of Directors for approval. V. THE GROUP EXECUTIVE BOARD Art. 16 Composition 7 The Group Executive Board consists of the President & CEO, the Chief Financial Officer and the Heads of the Divisions. Additional members may be appointed for specific Group functions. Art. 17 Meetings, decisions, minutes (1)As a rule, the Group Executive Board meets every two weeks. Extraordinary meetings will be held as required or at the request of a member. (2)A quorum is constituted when at least three members of the Group Executive Board are present, or can be reached for discussion and voting. For voting on matters of fundamental importance, however, two thirds of the members, including the member responsible for the area concerned, must attend. (3)Decisions are taken by the absolute majority of the members present. In case of a tie the presiding officer has the casting vote. (4)Minutes are kept of decisions taken by the Group Executive Board and are signed by the presiding officer and the recording secretary. They are taken as approved if no comment is made on them in the next meeting. They shall be sent to the members of the Chairman's Office and the Group Executive Board. Art. 18 Functions and authorities (1)The Group Executive Board is the Group's supreme executive body within the meaning of the Swiss Banking Law. It ensures cooperation and unity within the Group across divisional lines and is responsible for the Group's performance. (2)The authorities of the Group Executive Board are governed in detail in the "Appendix", based on article 30 of the Articles of Association. The Group Executive Board prepares the proposals which have to be submitted to the Chairman's Office and the Board of Directors for approval and supports them in their decision making process. It regularly informs the Board of Directors on the Group's business development. (3)The Group Executive Board may wholly or partially delegate approval authorities to one of its members. Art. 19 The Group Executive Board as Risk Council The Group Executive Board assumes the responsibilities of a Risk Council. Based on proposals submitted by the Chief Risk Officer it defines the principles for the measurement of market, credit, country and operational risks. It monitors the size and development of exposures at group level and manages the risk profile and the risk mix by allocating limits to the Divisions within the parameters set by the Board of Directors. Art. 20 The President & CEO 8 (1)The President & CEO is responsible for the overall executive management of the Group; he/she heads the Group Executive Board and presides over its meetings. (2)He/She ensures that matters relating to the Group are dealt with, supervises the management of the Divisions and ensures that the Divisions work together. He/She is responsible for ensuring that decisions are taken in a timely fashion and for supervising their implementation. (3)He/She is responsible for Human Resources, Management Development and Corporate Communications and - in consultation with the Chairman of the Board of Directors - for the image of the Group as a whole. (4)He/She ensures that the Chairman's Office and the Board of Directors are informed in a timely and appropriate manner. (5)The President & CEO has an all-encompassing right to information and examination regarding all matters handled by the Corporate Center and by the Divisions. He/She has veto power over any decisions taken by any management body. A veto has the effect of suspending the decision until the matter is decided by the Group Executive Board. Art. 21 The Corporate Center (1)The Corporate Center supports the Group Executive Board in its duties and functions. In particular it has responsibility for the provision and management of resources critical to the Group's success (capital, management capabilities, all kinds of risks and their related limits), Group Controlling and other staff functions. (2)The heads of the Functional Areas of the Corporate Center have functional directive and functional controlling authority throughout the Group. Art. 22 The Heads of Divisions (1)The Division Heads are responsible for the group-wide functional management of their Division, for the implementation of the business strategy within their Division and for the implementation of the decisions taken by the Board of Directors, the Chairman's Office and the Group Executive Board. (2)They have overall responsibility for the Division and its management and are accountable for the divisional results. Art. 23 The Chief Financial Officer (1)The Group Chief Financial Officer is responsible for the Group's financial management, for the implementation of group-wide independent risk control and for group-wide controlling processes. The Chief Risk Officer and the Chief Credit Officer have group-wide responsibility for the Risk functions. Art. 24 Special committees 9 Matters of common interest to the Group are dealt with in special committees presided over by the President & CEO, the CFO or another member of Senior Management appointed to this function by the Group Executive Board. VI. THE DIVISIONS Art. 25 Organization of business activities (1)The Group's business activities are organized into Divisions which in turn are broken down into Business Areas. (2)The structure and assignment of activities are reflected in the basic organizational structure of the Group. Details about responsibilities, functions and authorities are governed in the Division's Business Regulations and the "Appendix" to these Organizational Regulations. Art. 26 Resources, logistics and operations The Divisions are responsible for resources, logistics and operations. At shared locations the Group Executive Board assigns all or part of this responsibility to the most suitable Division. Art. 27 Divisional Boards (1)The Divisional Board is made up of the Division Head (who is a member of the Group Executive Board), members of the Group Managing Board reporting to the Division Head, plus possibly individual other members of senior management. (2)The Division Head presides over the Divisional Board. (3)Authorities and procedures are defined by the Business Regulations of the Divisions, which are based on these Organization Regulations. VII. EXECUTIVE MANAGEMENTS OF GROUP COMPANIES Art. 28 Appointment The Boards of Directors of group companies appoint their executive managements and chief executives upon recommendation of the Divisional Boards. Details are governed in the "Regulation governing the management of group companies of UBS". 10 VIII. BUSINESS UNITS, REPRESENTATIVES AND ADVISORS OUTSIDE SWITZERLAND Art. 29 Appointment Upon recommendation of the Divisional Boards, the Group Executive Board appoints the executive managements and chief executives of the business units as well as the representatives and the permanent advisors of the Group. IX. GROUP INTERNAL AUDIT Art. 30 Organization (1)Group Internal Audit performs the Group's internal audits. (2)The guidelines for the activities of Group Internal Audit are contained in a special set of regulations. (3)The Chairman's Office may order special audits to be conducted. Individual members of the Board of Directors may submit requests for such audits to the Chairman's Office. If there is any doubt about whether such a request is justified, the question is submitted to the Board of Directors by the presiding director. (4)The members of the Group Executive Board, with the agreement of the Chairman of the Board of Directors, may instruct Group Internal Audit to conduct special audits. Art. 31 Functions and authorities (1)Group Internal Audit monitors compliance with the legal and regulatory requirements and with the provisions of the Articles of Association, as well as with internal directives and guidelines within the organizational units of the parent company and the group companies. In doing so, it specifically verifies or assesses whether the internal controls are commensurate with the risks and are working effectively, whether activities within the Group are being conducted and recorded properly, correctly and fully, and whether the organization of operations, including information technology, is efficient and the information is reliable. (2)Group Internal Audit possesses unrestricted auditing rights within the parent company and the group companies; it has access at all times to all accounts, books and records. It must be provided with all information and data needed to fulfill its auditing duties. Art. 32 Reports 11 (1)Group Internal Audit is independent in its reporting and is not subject to any instructions. (2)Group Internal Audit addresses its reports ultimately to the Chairman of the Board of Directors. The procedure employed for this and the list of other recipients of its audit reports are described in the regulations governing Group Internal Audit. (3)In the case of minor errors or shortcomings, it may be sufficient to inform the head of the organizational unit or supervisor of the staff member concerned. (4)The Chairman of the Board of Directors and the President & CEO shall inform the Chairman's Office and the Board of Directors in an appropriate manner of any findings of Group Internal Audit which raise questions of fundamental importance or reveal serious errors. (5)The Chairman of the Board of Directors shall also inform the Board of Directors of the results of special audits performed at the request of individual board members (art. 30, paragraph 3). (6)The members of the Board of Directors and the President & CEO shall receive the annual activity report of the Head of Group Internal Audit for inspection. This report is to be discussed at a meeting of the Board of Directors. X. SIGNATURES Art. 33 Authority to sign for the parent company (1)The following persons are authorized to sign: a) The members of the Chairman's Office as well as the members of the Group Executive Board sign jointly with another authorized signatory for all business units of the parent company; b) In addition to the signatories specified under a) above, groups of persons designated by the Chairman's Office may also sign for the parent company's business units in and outside Switzerland. (2)For the handling of certain matters, the Chairman and the Vice Chairmen of the Board of Directors as well as the members of the Group Executive Board may authorize, jointly with another signatory of the same category, a member of the Board of Directors, of the Group Executive Board, of senior management, or another person to bind the Corporation with legal effect by his or her sole signature. This authority may also be accorded to one of the two authorizing persons. (3)Members of Senior Management may, in individual cases and in connection with matters on which decisions have been made by the relevant body of the parent company, authorize, jointly with another signatory of the same category, 12 another internal or external person to bind the parent company with legal effect by his or her sole signature for acts which can only be performed outside the business premises, such as the signing of contracts. (4)The Group Executive Board may rule that forms and other written documents produced in large quantities in the course of daily business may be distributed with only one or without signature. Such exceptions to the joint signature principle shall be made known in a suitable fashion giving details of the relevant maximum authorized amounts. Art. 34 Form of signature The Chairman and Vice Chairmen of the Board of Directors, the members of the Group Executive Board and the members of the senior management sign by adding their signature to the Corporation's name. Art. 35 Signing on behalf of group companies Analogous to the rules for the parent company, the signature requirements at group companies are to be established in line with local regulations by the Boards of Directors or the corresponding bodies of the group companies, subject to approval by the head of the Division concerned. All members of the respective Boards of Directors or other corresponding corporate bodies may be granted signing powers. XI. GENERAL PROVISIONS Art. 36 Calculation of approval authorities (1)For the calculation of the approval authorities mentioned in the appendix to these regulations the following has to be taken into account: (2)All direct and indirect exposures and equity interests of the parent company and the group companies in respect of any single debtor or group of debtors as well as exposures in respect of individuals who own a substantial interest in a debtor company. Exposures whose size and risk are insignificant constitute an exception. (3)A debtor company is deemed to belong to a group of debtors if another person or company holds a direct or indirect interest of more than 50% of the votes in such debtor firm or if this group of debtors otherwise exercises a controlling influence. In cases of doubt, the exposure is to be viewed as belonging to a group. (4)With respect to issues of securities or other uncertificated rights, the calculation will be based on the entire underwriting amount per transaction. 13 (5)The construction of new buildings and alterations to existing ones, as well as investments for which a budget has been approved by the appropriate bodies, do not need to be re-submitted if the costs do not exceed the budget. Art. 37 Abstention - Members of the Board of Directors, the Group Executive Board, the Divisional Boards and executive managements are obliged to abstain from discussions and decisions on transactions or other matters involving a potential conflict of interest. XII. AMENDMENTS Art. 38 Amendments The members of the Board of Directors must be notified in writing of any proposals for the amendment of the Organization Regulations at least one week before the proposals are to be discussed. XIII. ENTRY INTO FORCE, IMPLEMENTING PROVISIONS Art. 39 Entry into force, implementing provisions (1)These Organization Regulations entered into force on 6 February 1998. They were revised on 7 July 1999. (2)The Group Executive Board shall enact the necessary rules for the implementation of these regulations. UBS AG Alex Krauer Alberto Togni Chairman of the Vice Chairman of the Board of Directors Board of Directors EX-3.3 5 y39818a1ex3-3.txt FORM OF AMENDED AND RESTATED TRUST AGREEMENT 1 Exhibit 3.3 AMENDED AND RESTATED TRUST AGREEMENT OF UBS PREFERRED FUNDING TRUST I UBS PREFERRED FUNDING COMPANY LLC I AS GRANTOR AND WILMINGTON TRUST COMPANY AS TRUSTEE DATED AS OF --, 2000 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS SECTION 1.01. Definitions .................................................... 1
ARTICLE II TRUST INDENTURE ACT Section 2.01. Trust Indenture Act; Application ............................... 5 Section 2.02. Lists of Holders of the Trust Preferred Securities ............. 5 Section 2.03. Reports by the Trustee ......................................... 6 Section 2.04. Periodic Reports to the Trustee ................................ 6 Section 2.05. Evidence of Compliance with Conditions Precedent ............... 6 Section 2.06. Defaults; Waiver ............................................... 6 Section 2.07. Trust Enforcement Event; Notice ................................ 7
ARTICLE III CONTINUATION OF TRUST Section 3.01. Continuation of Trust .......................................... 7 Section 3.02. Trust Account .................................................. 8 Section 3.03. Title to Trust Property ........................................ 8 Section 3.04. Situs of Trust ................................................. 8 Section 3.05. Business of the Trust .......................................... 9 Section 3.06. Liability of Holders of the Trust Preferred Securities ......... 9
ARTICLE IV FORM OF TRUST PREFERRED SECURITIES, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF TRUST PREFERRED SECURITIES Section 4.01. Form and Transferability of Trust Preferred Securities ......... 9 Section 4.02. Issuance of Trust Preferred Securities ........................ 10 Section 4.03. Registration, Transfer and Exchange of Trust Preferred Securities ..................................................... 11 Section 4.04. Lost or Stolen Trust Preferred Securities, Etc. ................ 13 Section 4.05 Cancellation and Destruction of Surrendered Certificates ....... 13 Section 4.06. Surrender of Trust Preferred Securities and Withdrawal of Company Preferred Securities ................................... 13 Section 4.07. Redeposit of Company Preferred Securities ...................... 15 Section 4.08. Filing Proofs, Certificates and Other Information .............. 15
ARTICLE V DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF TRUST PREFERRED SECURITIES Section 5.01. Periodic Distributions ......................................... 15 Section 5.02. Redemptions of Company Preferred Securities .................... 16
-i- 3 Section 5.03. Distributions in Liquidation of Grantor ........................ 17 Section 5.04. Fixing of Record Date for Holders of the Trust Preferred Securities ..................................................... 17 Section 5.05. Payment of Distributions ....................................... 17 Section 5.06. Voting Rights .................................................. 18 Section 5.07. Currency. ...................................................... 19
ARTICLE VI THE TRUSTEE Section 6.01. Eligibility .................................................... 19 Section 6.02. Obligations of the Trustee ..................................... 19 Section 6.03. Resignation and Removal of the Trustee; Appointment of Successor Trustee .............................................. 22 Section 6.04. Notices ........................................................ 23 Section 6.05. Status of Trust ................................................ 24 Section 6.06. Appointment of Grantor to File on Behalf of Trust .............. 24 Section 6.07. Indemnification by the Grantor ................................. 24 Section 6.08. Fees, Charges and Expenses ..................................... 24 Section 6.09. Appointment of Co-Trustee or Separate Trustee .................. 25
ARTICLE VII AMENDMENT AND TERMINATION Section 7.01. Supplemental Trust Agreement 26 Section 7.02. Termination 27
ARTICLE VIII MISCELLANEOUS Section 8.01. Counterparts ................................................... 27 Section 8.02. Exclusive Benefits of Parties .................................. 27 Section 8.03. Invalidity of Provisions ....................................... 27 Section 8.04. Notices ........................................................ 27 Section 8.05. Trustee's Agents ............................................... 28 Section 8.06. Holders of the Trust Preferred Securities Are Parties .......... 28 Section 8.07. Governing Law .................................................. 28 Section 8.08. Headings ....................................................... 28 Section 8.09. Trust Preferred Securities Non-Assessable and Fully Paid ....... 29 Section 8.10. No Preemptive Rights ........................................... 29 Section 8.11. Survival ....................................................... 29
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Page ---- EXHIBIT A Form of Trust Preferred Securities
-iii- 5 CROSS-REFERENCE TABLE(1)
SECTION OF SECTION OF TRUST INDENTURE ACT OF 1939, AS AMENDED AMENDED AND RESTATED TRUST AGREEMENT 310(a) ............................................................... 6.01, 6.09(b)(i) 310(b) ............................................................... 6.01 310(c) ............................................................... Inapplicable 311(a) ............................................................... 2.02(a) 311(b) ............................................................... 2.02(b) 311(c) ............................................................... Inapplicable 312(a) ............................................................... 2.02(a) 312(b) ............................................................... 2.02(b) 313 .................................................................. 2.03 314(a) ............................................................... 2.04 314(b) ............................................................... Inapplicable 314(c) ............................................................... 2.05 314(d) ............................................................... Inapplicable 314(f) ............................................................... Inapplicable 315(a) ............................................................... 6.02 315(b) ............................................................... 2.07 315(c) ............................................................... 6.02 315(d) ............................................................... 6.02 316(a) ............................................................... 2.06, 5.06 316(c) ............................................................... 5.04
(1) This Cross-Reference Table does not constitute part of the Declaration and shall not affect the interpretation of any of its terms or provisions. 6 AMENDED AND RESTATED TRUST AGREEMENT OF UBS PREFERRED FUNDING TRUST I AMENDED AND RESTATED TRUST AGREEMENT, dated as of -, 2000, is between UBS PREFERRED FUNDING COMPANY LLC I, a Delaware limited liability company, as grantor (the "Grantor"), and Wilmington Trust Company, as trustee (the "Trustee"). W I T N E S S E T H WHEREAS, the Trustee and the Grantor established UBS Preferred Funding Trust I (the "Trust") under the Delaware Business Trust Act (12 Del. C. Section 3801, et seq.) (as amended from time to time, the "Business Trust Act"), pursuant to a Trust Agreement, dated as of -, 2000 (the "Original Trust Agreement"), and a Certificate of Trust for the Trust was filed with the Secretary of State of the State of Delaware on -, 2000; and WHEREAS, the Trustee and the Grantor hereby desire to continue the Trust and to amend and restate in its entirety the Original Trust Agreement; and WHEREAS, the Trust proposes to issue $1,500,000,000 aggregate liquidation amount of -% Noncumulative Trust Preferred Securities (the "Trust Preferred Securities") representing a corresponding amount of -% Noncumulative Company Preferred Securities (the "Company Preferred Securities") guaranteed on a subordinated basis (the "Subordinated Guarantee") by UBS AG (the "Bank"); and NOW, THEREFORE, in consideration of the premises contained herein and intending to be legally bound hereby, it is agreed among the parties hereto to amend and restate in its entirety the Original Trust Agreement as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following definitions shall apply to the respective terms (in the singular and plural forms of such terms) used in this Trust Agreement and the Trust Preferred Securities: "Affiliate" of any specified Person means any other Person controlling or controlled by or under common control with such specified Person. For the purposes of -1- 7 this definition, "control" when used with respect to any specified Person means the power to direct the management and polities of such Person, directly or indirectly whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Bank" means UBS AG, a bank organized under the laws of Switzerland. "Business Day" means a day on which (i) the Trans-European Automated Real-Time Gross settlement Express Transfer system ("Target") is operating, (ii) banks are open for business and carrying out transactions in U.S. dollars in London and Luxembourg and (iii) banks are open for business in Wilmington, Delaware, U.S.A. "Business Trust Act" has the meaning specified in the recitals to this Trust Agreement. "Clearing Agency" has the meaning set forth in Section 4.06. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Clearing Agency effects book-entry transfers and pledges of interest in securities deposited with the Clearing Agency. "Clearstream" means Clearstream Banking societe anonyme. "Company Preferred Securities" means the -% Noncumulative Company Preferred Securities, aggregate liquidation preference $1,500,000,000, offered by the Company pursuant to a prospectus dated -, 2000. "Company Preferred Securities Certificate" means the Company Preferred Security certificates evidencing Company Preferred Securities held by the Trustee (unless withdrawn under Section 4.06) from time to time under this Trust Agreement for the benefit of Holders of the Trust Preferred Securities. "Corporate Office" means the principal corporate office of the Trustee at which at any particular time its business in respect of matters governed by this Trust Agreement shall be administered, which at the date of this Trust Agreement is located at c/o Wilmington Trust Company, 1100 North Market Street, Wilmington, Delaware 19890. "corresponding amount" means (i) for each $1,000 liquidation amount of Trust Preferred Securities, $1,000 liquidation preference of Company Preferred Securities and (ii) for each $1,000 liquidation preference of Company Preferred Securities, $1,000 liquidation amount of Trust Preferred Securities. -2- 8 "Definitive Trust Preferred Securities Certificate" means any definitive permanent registered Trust Preferred Securities issued in exchange for all or a part of the Global Certificate and no longer held by DTC. "Dividend" has the meaning specified in the LLC Agreement for "dividend". "DTC" means The Depository Trust Company. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System. "Global Certificate" mean the single global Trust Preferred Securities Certificate held by DTC representing the shares of the Trust Preferred Securities. "Grantor" means UBS Preferred Funding Company LLC, a Delaware limited liability company, and its successors. "Holder" means the Person in whose name a Trust Preferred Security is registered on the Register maintained by the Registrar for such purposes. "Issue Date" means the date on which the Trust Preferred Securities and the Company Preferred Securities are initially issued. "Liquidation Preference" has the meaning specified in the LLC Agreement. "List of Holders" has the meaning specified in Section 2.02(a). "LLC Agreement" means the Amended and Restated Limited Liability Company Agreement of the Grantor, dated as of --, 2000, and as from time to time amended, modified or supplemented. "Opinion of Counsel" means the written opinion of counsel, who may be counsel to the Grantor, and who shall be reasonably acceptable to the Trustee. "Original Trust Agreement" has the meaning specified in the recitals to this Trust Agreement. "Owner" has the meaning specified in Section 4.06. -3- 9 "Paying Agent" means the Person or Persons from time to time appointed and acting as Paying Agent as provided in Section 5.05 and shall initially be Wilmington Trust Company and in Luxembourg shall initially be BNP Paribas. "Person" means any individual, general partnership, limited partnership, corporation, limited partnership, joint venture, trust, business trust, cooperative or association and the heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so admits. "Redemption Date" has the meaning specified in Section 5.02. "Register" has the meaning specified in Section 4.03 of this Trust Agreement. "Registrar" means any bank or trust company appointed to register Trust Preferred Securities and transfers thereof as herein provided, and shall initially be the Trustee. "Regular Distribution" has the meaning specified in Section 5.04. "Securities Act" means the Securities Act of 1933, as amended. "Subordinated Guarantee" means the Bank's guarantee, on a subordinated basis, of the Company Preferred Securities, pursuant to the UBS AG Subordinated Guarantee Agreement, dated as of -, 2000, and as from time to time amended, modified or supplemented. "Transfer Agent" means the Person or Persons from time to time appointed and acting as Transfer Agent as provided in Section 4.03(c) and shall initially be Wilmington Trust Company and in Luxembourg shall initially be BNP Paribas. "Trust" means UBS Preferred Funding Trust I, the Delaware business trust governed by this Trust Agreement. "Trust Agreement" means this Trust Agreement, as the same may be amended, modified or supplemented from time to time. "Trust Estate" means all right, title and interest of the Trust in and to the Company Preferred Securities and the related rights of the Trust under the Subordinated Guarantee from time to time held by the Trustee hereunder, and all distributions and payments with respect thereto. "Trust Estate" shall not include any amounts paid or payable to the Bank pursuant to this Trust Agreement, including, without limitation, fees, expenses and indemnities. -4- 10 "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time. "Trust Preferred Securities" means the -% Noncumulative Trust Preferred Securities, aggregate liquidation amount $-, offered by the Trust, representing a corresponding amount of the Company Preferred Securities. "Trust Preferred Securities Certificate" means a Trust Preferred Security certificate, issued hereunder evidencing Trust Preferred Securities representing a corresponding amount of the Company Preferred Securities. "Trustee" means Wilmington Trust Company, in its capacity as Trustee and not in its individual capacity. "U.S. dollars," "dollars", "U.S.$" and "$" means the currency of the United States of America. ARTICLE II TRUST INDENTURE ACT 2.01. Section Trust Indenture Act; Application. (a) This Trust Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Trust Agreement and shall, to the extent applicable, be governed by such provisions. A term defined in the Trust Indenture Act has the same meaning when used in this Trust Agreement, unless otherwise defined in this Trust Agreement or unless the context otherwise requires. (b) If and to the extent that any provision of this Trust Agreement limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (c) The application of the Trust Indenture Act to this Trust Agreement shall not affect the nature of the Trust Preferred Securities as equity securities representing undivided beneficial interests in the assets of the Trust. 2.02. Section Lists of Holders of the Trust Preferred Securities . (a) If the Trust Preferred Securities are not held in the form of a Global Certificate registered in the name of DTC or its nominee, the Grantor shall provide the Trustee (i) within 14 days after each record date for payment of Dividends, a list, in such form as the -5- 11 Trustee may reasonably require, of the names and addresses of the Holders of the Trust Preferred Securities ("List of Holders") as of such record date and (ii) at any other time, within 30 days of receipt by the Trust of a written request from the Trustee for such List, a List of Holders as of a date no more than 14 days before such List of Holders is given to the Trustee. The Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it or which it receives in the capacity as Paying Agent (if acting in such capacity); provided that the Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. 2.03. Section Reports by the Trustee. Within 60 days after May 1 of each year, the Trustee shall provide to the Holders of the Trust Preferred Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. 2.04. Section Periodic Reports to the Trustee. The Grantor shall provide to the Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form and manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Trust's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). 2.05. Section Evidence of Compliance with Conditions Precedent. The Grantor shall provide to the Trustee evidence of compliance with the conditions precedent, if any, provided for in this Trust Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act may be given in the form of an Officers' Certificate. 2.06. Section Defaults; Waiver. (a) The Holders of a majority in liquidation amount of the Trust Preferred Securities may, by vote, on behalf of the Holders of all of the Trust Preferred Securities, waive any past default in respect of the Trust Preferred Securities and its consequences; provided that, if the underlying event of default is also a default in respect of the Company Preferred Securities and: -6- 12 (i) is not waivable under the LLC Agreement, the default under this Trust Agreement shall also not be waivable; or (ii) requires the consent or vote of the holders of more than 50% of the aggregate liquidation preference of the Company Preferred Securities to be waived under the LLC Agreement (a "Super Majority"), the default under this Trust Agreement may only be waived by the vote of the Holders of at least the relevant Super Majority in liquidation amount of the Trust Preferred Securities. The foregoing provisions of this Section 2.06(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Trust Agreement and the Trust Preferred Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such default shall cease to exist, and any default with respect to the Trust Preferred Securities arising therefrom shall be deemed to have been cured, for every purpose of this Trust Agreement, but no such waiver shall extend to any subsequent or other default with respect to the Trust Preferred Securities or impair any right consequent thereon. (b) A waiver of a default under the LLC Agreement by the Trustee at the direction of the Holders of the Trust Preferred Securities constitutes a waiver of the corresponding default under this Trust Agreement. The foregoing provisions of this Section 2.06(b) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Trust Agreement and the Trust Preferred Securities, as permitted by the Trust Indenture Act. 2.07. Section Trust Enforcement Event; Notice . The Trustee shall, within 90 days after the occurrence of a default with respect to the Trust Preferred Securities, transmit by mail, first class postage prepaid, to the Holders of the Trust Preferred Securities, notices of all defaults with respect to the Trust Preferred Securities actually known to the Trustee, unless such defaults shall have been cured before the giving of such notice; provided that, the Trustee shall be protected in withholding such notice if and so long as the Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Trust Preferred Securities. ARTICLE III CONTINUATION OF TRUST 3.01. Section Continuation of Trust. (a) The Trust continued hereby shall be known as "UBS Preferred Funding Trust I," in which name the Trust may engage in the transactions contemplated hereby, make and execute contracts and other instruments and sue and be sued. The Trustee, shall have the powers and authority to cause the Trust to do such things. It is the intention of the parties that the Trust -7- 13 continued hereby constitute a business trust under the Business Trust Act and that this Agreement constitute the governing instrument of the Trust. The Trust exists for the sole purpose of issuing Trust Preferred Securities representing a corresponding amount of the Company Preferred Securities held by the Trust and performing functions directly related thereto. The Grantor hereby delivers to the Trustee for deposit in the Trust one or more Company Preferred Securities Certificates representing Company Preferred Securities with an aggregate liquidation preference of $1,500,000,000 for the benefit of the Holders of the Trust Preferred Securities. Each Holder is intended by the Grantor to be the beneficial owner of an amount of Company Preferred Securities represented by the amount of Trust Preferred Securities held by such Holder. To the fullest extent permitted by law, without the need for any other action of any Person, including the Trustee or any other Holder, each Holder shall be entitled to enforce, in the name of the Trust, the rights of the Trust under the Company Preferred Securities and the Subordinated Guarantee represented by the Trust Preferred Securities held by such Holder. Any recovery on such an enforcement action shall belong solely to such Holder who brought the action, not to the Trust, the Trustee or any other Holder individually or to the Holders as a group. The Trustee shall have the power and authority (subject to the Trustee's rights, privileges and protections in Section 6.02 and elsewhere herein) to enforce any of the Trust's rights in respect of the Company Preferred Securities which are not enforced by any Holder. Subject to Section 7.02, the Trust shall be irrevocable. (b) The Trustee hereby acknowledges receipt of one or more Company Preferred Security Certificates representing Company Preferred Securities having an aggregate liquidation preference of $- registered in the name of the Trust, and its acceptance on behalf of the Trust of the Company Preferred Securities, and declares that the Trust shall hold the Company Preferred Securities for the benefit of the Holders of the Trust Preferred Securities. 3.02. Section Trust Account . The Trustee shall open an account with a banking institution authorized to exercise corporate trust powers and having a combined capital and surplus of at least $50,000,000 and subject to supervision of examination by federal or state authority, entitled "UBS Preferred Funding Trust I -- Trust Account." All distributions received by the Trustee on behalf of the Trust in respect of the Company Preferred Securities shall be deposited in such account by the Trustee until distributed as provided in Article IV. 3.03. Section Title to Trust Property. Legal title to the Trust Estate shall be vested at all times in the Trust. 3.04. Section Situs of Trust. The situs of the Trust shall be in Wilmington, Delaware. The account described in Section 3.02 shall be maintained with a bank in the State of Delaware. The Trustee shall cause the books and records of the Trust to be maintained at the Corporate Office. The Trust Estate shall be held in the State of Delaware. Notwithstanding the foregoing, the Trustee may transfer such of the books and records of the Trust to a co-trustee appointed pursuant to Section 6.09 or to such agents as it may appoint in accordance with the Section 8.05, as shall be reasonably necessary (and for so long as may be reasonably necessary) -8- 14 to enable such co-trustee or agents to perform the duties and obligations for which such co-trustee or agents may be so employed. 3.05. Section Business of the Trust. The Trust has been formed for the purpose of: (i) issuing the Trust Preferred Securities, (ii) investing the proceeds of the Trust Preferred Securities in the Company Preferred Securities, which benefit from the related Subordinated Guarantee and (iii) engaging in any related or incidental activities. The Trust shall have the power and authority to execute, deliver and perform its obligations under the LLC Agreement and other agreements to which the Trust is a party and to become a member of the Grantor. The only assets of the Trust shall be the Company Preferred Securities and the related rights of the Trust under the Subordinated Guarantee. The Trust may not acquire any other assets, issue any other equity securities or any debt securities, or engage in any other activities. 3.06. Section Liability of Holders of the Trust Preferred Securities. With respect to the Trust, Holders of the Trust Preferred Securities shall be entitled to the same limitation of personal liability to which stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware are extended. ARTICLE IV FORM OF TRUST PREFERRED SECURITIES, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF TRUST PREFERRED SECURITIES 4.01. Section Form and Transferability of Trust Preferred Securities. (a) Except as otherwise required by DTC, the Trust Preferred Securities shall be in substantially the form set forth in Exhibit A, with the appropriate insertions, modifications and omissions, as hereinafter provided. (b) The Trust Preferred Securities shall be issued in denominations of $1,000 liquidation amount and whole-number multiples of $1,000. All Trust Preferred Securities shall be dated the date of their execution or countersignature. (c) Trust Preferred Securities may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Trust Agreement as may be required by the Trustee or required to comply with any applicable law or regulation or with the rules and regulations of any securities exchange upon which the Trust Preferred Securities may be listed or to conform with any usage with respect thereto. (d) Title to any Trust Preferred Security that is properly endorsed or accompanied by a properly executed instrument of transfer or endorsement shall be transferable -9- 15 by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until the transfer shall be registered on the Register as provided in Section 4.03, the Trust, the Trustee, the Registrar and the Grantor may, notwithstanding any notice to the contrary, treat the Holder thereof at such time as the absolute owner thereof for the purpose of determining the Person entitled to distributions or to any notice provided for in this Trust Agreement and for all other purposes. (e) Trust Preferred Securities shall be executed by the Trustee by the manual signature of a duly authorized signatory of the Trustee, provided, however, that such signature may be a facsimile if a Registrar (other than the Trustee) shall have countersigned the Trust Preferred Security by manual signature of a duly authorized signatory of the Registrar. No Trust Preferred Security shall be entitled to any benefit under this Trust Agreement or be valid or obligatory for any purpose unless it shall have been executed as provided in the preceding sentence. The Registrar shall record on the Register each Trust Preferred Securities executed as provided above and delivered as hereinafter provided. Trust Preferred Securities bearing the signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trustee shall be validly issued notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Trust Preferred Securities or did not hold such offices at the date of delivery of such Trust Preferred Securities. 4.02. Section Issuance of Trust Preferred Securities. (a) The Trustee having received on behalf of the Trust one or more Company Preferred Security Certificates representing Company Preferred Securities with an aggregate liquidation preference of $1,500,000,000 and having acknowledged such receipt in Section 3.01(b), subject to the terms and conditions of this Trust Agreement, the Trustee, on behalf of the Trust, shall execute and deposit a single Global Certificate with DTC, who shall thereupon be the initial Holder of the Trust Preferred Securities. (b) Beneficial interests in the Trust Preferred Securities will be evidenced by, and transfers thereof will be effected only through, records maintained by the Clearing Agency Participants. Unless and until Definitive Trust Preferred Securities Certificates have been issued to the Owners pursuant to Section 4.03(c): (i) the provisions of this Section 4.02(b) shall be in full force and effect; (ii) the Trust and the Trustee shall be entitled to deal with the Clearing Agencies for all purposes of this Trust Agreement (including the payment of Dividends on the Global Certificate and receiving approvals, votes or consents hereunder) as the Holder of the Trust Preferred Securities and the sole Holder of the Global Certificate, and shall have no obligation to the Owners; -10- 16 (iii) to the extent that the provisions of this Section 4.02(b) conflict with any other provisions of this Trust Agreement, the provisions of this Section 4.02(b) shall control; and (iv) the rights of the Owners shall be exercised only through the Clearing Agencies and shall be limited to those established by law and agreements between such Owners and the relevant Clearing Agency and/or the Clearing Agency Participants, and the Clearing Agency shall receive and transmit payments of Dividends on the Global Certificate to such Clearing Agency Participants. The Clearing Agency will make book-entry transfers among the Clearing Agency Participants; provided, that solely for the purposes of determining whether the Holders of the requisite amount of Trust Preferred Securities have voted on any matter provided for in this Trust Agreement, so long as Definitive Trust Preferred Securities Certificates have not been issued to the Owners pursuant to Section 4.03(c), the Trustee may conclusively rely on, and shall be fully protected in relying on, any written instrument (including a proxy) delivered to the Trustee by any Clearing Agency setting forth the Owners' votes or assigning the right to vote on any matter to any other Persons either in whole or in part. (c) Notices to Clearing Agency. Whenever a notice or other communication to the Holders is required under this Trust Agreement, unless and until Definitive Trust Preferred Securities Certificates shall have been issued to the Owners pursuant to Section 4.03(c), the Trustee shall give all such notices and communications specified herein to be given to the Holders to the Clearing Agency, and shall have no notice obligations to the Owners except that for as long as the Trust Preferred Securities are listed on the Luxembourg Stock Exchange, all notices regarding the Trust Preferred Securities shall be published in English in one leading daily newspaper with circulation in Luxembourg (which is expected to be the Luxemburger Wort) as long as such publication is required under the rules of the Luxembourg Stock Exchange. (d) Appointment of Successor Clearing Agency. If any Clearing Agency elects to discontinue its services as securities depositary with respect to the Trust Preferred Securities, the Grantor and the Trust shall use their best efforts to appoint a successor Clearing Agency with respect to the Trust Preferred Securities. 4.03. Section Registration, Transfer and Exchange of Trust Preferred Securities. (a) The Trustee shall cause a Register (the "Register") to be kept at the office of the Registrar in which, subject to such reasonable regulations as the Trustee and the Registrar may prescribe, the Trustee shall provide for the registration of Trust Preferred Securities and of transfers and exchanges of Trust Preferred Securities as herein provided. In the absence of appointing a third party, the Trustee shall serve as the Registrar. The Grantor may remove the Registrar and, upon removal or resignation of the Registrar, appoint a successor Registrar. Subject to the terms and conditions of this Trust Agreement, the Registrar shall register the transfers on the Register from time to time of Trust Preferred Securities upon any surrender thereof by the Holder in person or by a duly authorized attorney, properly endorsed or -11- 17 accompanied by a properly executed instrument of transfer or endorsement, together with evidence of the payment of any transfer taxes as may be required by law. Upon such surrender, the Trustee shall execute a new Trust Preferred Security representing the same corresponding amount of Company Preferred Securities in accordance with Section 4.01(e) and deliver the same to or upon the order of the Person entitled thereto. (b) At the option of a Holder, Trust Preferred Securities may be exchanged for other Trust Preferred Securities representing the same corresponding amount of Company Preferred Securities. Upon surrender of a Trust Preferred Security at the office of the Registrar or such other office as the Trustee may designate for the purpose of effecting an exchange of Trust Preferred Securities, subject to the conditions to transfer set forth in this Trust Agreement, the Trustee shall execute and deliver a new Trust Preferred Security representing the same corresponding amount of Company Preferred Securities as the Trust Preferred Security surrendered. As a condition precedent to the registration of the transfer or exchange of any Trust Preferred Security, the Registrar may require (i) production of proof satisfactory to it as to the identity and genuineness of any signature; (ii) compliance with such regulations, if any, as the Trustee or the Registrar may establish not inconsistent with the provisions of this Trust Agreement; and (iii) such other information as the Registrar may reasonably request. No Holder may require the transfer of any Trust Preferred Security to be registered during the period of fifteen days ending on the due date for any payment of principal on the Trust Preferred Securities. The Trust shall not be required to register, or cause others to register, the transfer of Trust Preferred Securities after such Trust Preferred Securities have been called for redemption. Registration of transfers of Trust Preferred Securities, including Trust Preferred Securities Certificates, shall be made without change by the Trust, but the transferor must pay any tax or governmental charge that may be imposed in relation to the transfer, together with any indemnity that the Trust or the Bank or the Transfer Agent may require. (c) The Global Certificate is exchangeable for Definitive Preferred Security Trust Certificates in registered form if DTC: (i) notifies the Trust that it is unwilling or unable to continue as depositary for the Global Certificate and the Trust does not appoint a successor depositary or (ii) has ceased to be a clearing agency registered under the Securities Exchange Act of 1934. Upon surrender of the Global Certificates by the clearing Agencies, accompanied by registration instructions, the Grantor will cause to be prepared for delivery to the Owners the Definitive Trust Preferred Certificates in accordance with instructions of the Clearing Agencies. Definitive Trust Preferred Securities Certificates may be transferred in any whole-number multiples of $1,000 by surrendering the Definitive Trust Preferred Certificates, together with the form of transfer endorsed on it, duly completed and executed, at the specified office of -12- 18 the Transfer Agent. The initial Transfer Agent shall be Wilmington Trust Company. As long as the Trust Preferred Securities are listed on the Luxembourg Stock Exchange, the Trust shall also maintain a Transfer Agent in Luxembourg. The initial Luxembourg Transfer Agent shall be BNP Paribas. If only part of a Definitive Trust Preferred Securities Certificate is transferred, a new Definitive Trust Preferred Securities Certificate representing the securities not transferred shall be issued to the transferor within three business days after the Transfer Agent receives the certificate. The new Definitive Trust Preferred Securities Certificate representing the Trust Preferred Securities that were not transferred shall be delivered to the transferor by uninsured mail at the risk of the transferor, to the address of the transferor that appears in the Register. The new Definitive Trust Preferred Securities Certificate representing the Trust Preferred Securities that were transferred shall be sent to the transferee within three business days after the Trustee receives the surrendered Definitive Trust Preferred Securities Certificate by uninsured mail at the risk of the Holder entitled to the Definitive Trust Preferred Securities Certificate, to the address specified on the form of transfer. All transfers of definitive Trust Preferred Securities and entries shall be made as provided in the Registrar and Transfer Agency Agreement relating to the Trust Preferred Securities. 4.04. Section Lost or Stolen Trust Preferred Securities, Etc. If (i) any mutilated Trust Preferred Security shall be surrendered to the Registrar, or if the Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Preferred Security, and (ii) there shall be delivered to the Registrar and the Grantor such security or indemnity as may be required by them to hold each of them harmless, then in the absence of notice that such Trust Preferred Security shall have been acquired by a bona fide purchaser or, as applicable, any protected purchaser, the Grantor shall sign and make available for delivery, in exchange for or in lieu of any mutilated, destroyed, lost or stolen Trust Preferred Security, a new Trust Preferred Security representing the same amount of corresponding Company Preferred Securities. In connection with the issuance of any new Trust Preferred Security, the Grantor may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Preferred Security issued pursuant to this Section shall constitute conclusive evidence of a Trust Preferred Security corresponding to that evidenced by the lost, stolen or destroyed Trust Preferred Security, as if originally issued, whether or not the lost, stolen or destroyed Trust Preferred Security shall be found at any time. 4.05. Section Cancellation and Destruction of Surrendered Certificates. All Trust Preferred Securities surrendered to the Trustee shall be canceled by the Trustee. Except as prohibited by applicable law or regulation, the Trustee may destroy such canceled Trust Preferred Securities or otherwise dispose of them in accordance with its usual practices. 4.06. Section Surrender of Trust Preferred Securities and Withdrawal of Company Preferred Securities. Any Person who is the beneficial owner (an "Owner") of the Trust Preferred Securities represented by the Global Certificates held by DTC or a successor -13- 19 clearing agency (the "Clearing Agency") or, if a participant in the Clearing Agency is not the Owner, then as reflected in the records of a Person maintaining an account with such Clearing Agency (directly or indirectly), in accordance with the rules of such Clearing Agency, may withdraw all, but not less than all, of the Company Preferred Securities represented by such Trust Preferred Securities by providing a written notice to the Trustee, with evidence of beneficial ownership in form satisfactory to the Trustee, and providing to the Grantor such documents or information as the Grantor may request for tax reporting purposes, at the Corporate Office or at such other office as the Trustee may designate for such withdrawals, all in form satisfactory to the Trustee, in its sole discretion. The Owner's notice shall also be deemed to be such Owner's agreement to be subject to the terms of the LLC Agreement applicable to the rights of holders of the Company Preferred Securities. Within a reasonable period after such a request has been properly made, the Trustee shall instruct DTC to reduce the Trust Preferred Securities represented by the Global Certificate by the corresponding amount of the Company Preferred Securities to be so withdrawn by the withdrawing Owner. The Grantor shall issue to the withdrawing Owner a Company Preferred Security Certificate representing the amount of the Company Preferred Securities so withdrawn, and the Trustee, on behalf of the Trust, shall instruct DTC to reduce the amount of Trust Preferred Securities represented by the Global Certificate held by DTC by such amount. Any Owner who wishes to withdraw the Company Preferred Securities in accordance with this Section 4.06 shall be required to provide the Grantor with a completed Form W-8 or such other documents or information as are requested by the Grantor for tax reporting purposes and thereafter shall be admitted to the Grantor as a member of the Grantor upon such Owner's receipt of a Company Preferred Security Certificate registered in such Owner's name. The Trustee shall deliver the Company Preferred Security Certificates represented by the Trust Preferred Securities surrendered in accordance with this Section 4.06 to the Owner at the Corporate Office, except that, at the request, risk and expense of the Owner and for the account of the Owner, such delivery may be made at such other place as may be designated by such Owner. The Trustee shall only deliver such Company Preferred Security Certificates upon payment by such Owner to the Trustee of all taxes and other governmental charges and any fees (including the fees and expenses of the Trustee and its counsel) payable in connection with such delivery and the transfer of such Company Preferred Security Certificates. Notwithstanding anything in this Section 4.06 to the contrary, if the Company Preferred Securities represented by Company Trust Preferred Securities have been called for redemption in accordance with the LLC Agreement, no Owner of such Trust Preferred Securities may withdraw any or all of the Company Preferred Securities represented by such Trust Preferred Securities. -14- 20 4.07. Section Redeposit of Company Preferred Securities. Any Holder of Company Preferred Securities may redeposit withdrawn Company Preferred Securities by delivering to the Trustee the Company Preferred Security Certificate for the Company Preferred Securities to be deposited, which are (i) if required by the Trustee properly endorsed or accompanied by a properly executed instrument of transfer or endorsement in form satisfactory to the Trustee and in compliance with the terms of the LLC Agreement and (ii) accompanied by all such certifications as may be required by the Trustee in its sole discretion and in accordance with the provisions of this Trust Agreement. Within a reasonable period after such deposit is properly made, the Trustee shall instruct DTC to increase the amount of Trust Preferred Securities represented by the Global Certificate held by DTC by an amount equal to the Company Preferred Securities so deposited. The Trustee shall only accept the redeposit of such Company Preferred Securities upon payment by such Holder of the Company Preferred Securities to the Trustee of all taxes and other governmental charges and any fees and expenses (including the fees and expenses of the Trustee and its counsel) payable in connection with such deposit and the transfer of the deposited Company Preferred Securities. If required by the Trustee, Company Preferred Security Certificates presented for redeposit at any time shall also be accompanied by an agreement or assignment, or other instrument satisfactory to the Trustee, that shall provide for the prompt transfer to the Trustee or its nominee of any distribution or other right that any Person in whose name the Company Preferred Security Certificates are registered may thereafter receive upon or in respect of such deposited Company Preferred Securities, or in lieu thereof such agreement of indemnity or other agreement as shall be satisfactory to the Trustee. 4.08. Section Filing Proofs, Certificates and Other Information. Any Person presenting Company Preferred Security Certificates for redeposit in accordance with Section 4.06 may be required from time to time to file such proof of residence or other information, to execute such certificates and to make such representations and warranties as the Trustee may reasonably deem necessary or proper. ARTICLE V DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF TRUST PREFERRED SECURITIES 5.01. Section Periodic Distributions. Whenever (and to the extent) the Trust receives any cash payments representing a Dividend or redemption payment on the Company Preferred Securities, or payments from the Bank pursuant to the Subordinated Guarantee in respect of such Dividend or redemption payment, the Trustee acting directly or through any Paying Agent shall distribute such amounts to Holders of the Trust Preferred Securities on the record date fixed pursuant to Section 5.04, in proportion to the respective liquidation amount of Trust Preferred Securities held by such Holders. -15- 21 Section 5.02. Redemptions of Company Preferred Securities. The Trust Preferred Securities shall be redeemed only upon redemption of the Company Preferred Securities. If the Grantor redeems the Company Preferred Securities in accordance with the LLC Agreement, then the Grantor shall give the Trustee at least 30 days' prior notice before doing so. The Trustee shall mail the notice of the redemption not less than 25 days prior to the date fixed for redemption (the "Redemption Date") of the Company Preferred Securities to the Holders of the Trust Preferred Securities as provided under Section 8.04. No defect in the notice of redemption or in the mailing or delivery thereof shall affect the validity of the redemption proceedings. The Grantor shall provide the Trustee with such notice, and each such notice shall state: (i) the Redemption Date, (ii) the redemption price at which the Trust Preferred Securities and the Company Preferred Securities are to be redeemed, (iii) that all outstanding Trust Preferred Securities are to be redeemed or, in the case of a redemption of fewer than all outstanding Trust Preferred Securities in connection with a partial redemption of the Company Preferred Securities, the amount of such Trust Preferred Securities to be so redeemed and (iv) the place or places where Trust Preferred Securities to be redeemed are to be surrendered for redemption. If only some of the outstanding Trust Preferred Securities are to be redeemed, the Trust Preferred Securities to be redeemed shall be selected in accordance with DTC's procedures. If the Trust Preferred Securities do not remain registered in the name of DTC or its nominee and only some of the outstanding Trust Preferred Securities are to be redeemed, the Trust Preferred Securities shall be redeemed proportionally or selected for redemption pursuant to the rules of any securities exchange on which the Trust Preferred Securities are listed at that time. The Grantor shall promptly notify the Registrar and Transfer agent for the Trust Preferred Securities, in writing, of the Trust Preferred Securities selected for redemption. The Grantor agrees that if a partial redemption of the Company Preferred Securities would result in a delisting of the Trust Preferred Securities from any securities exchange on which the Trust Preferred Securities are then listed, the Grantor shall only redeem the Company Preferred Securities in whole. On the date of redemption of the Company Preferred Securities, so long as the Company or the Bank has deposited with Wilmington Trust Company, the Paying Agent, on behalf of the Trust the aggregate amount payable upon redemption of all the Company Preferred Securities held by the Trust to be redeemed, the Paying Agent on behalf of the Trust shall irrevocably deposit with DTC funds sufficient to pay the redemption price and give DTC irrevocable instructions to pay the redemption price to the Holders of the Trust Preferred Securities to be redeemed. Once the Paying Agent has received this deposit, all rights of the Holders of the Trust Preferred Securities called for redemption shall end, except their right to receive the redemption price, without interest. If any date fixed for redemption of the Trust Preferred Securities is not a Business Day, then the redemption price shall instead be paid on the next -16- 22 Business Day, except that if that Business Day falls in the next calendar year, the redemption price shall be paid on the preceding Business Day. No interest or other payment shall be due as a result of any such adjustment. Section 5.03. Distributions in Liquidation of Grantor. Upon receipt by the Trust of any Liquidation Preference from the Grantor upon the liquidation of the Grantor, after satisfaction of creditors of the Trust as required by applicable law, the Trust shall distribute the same to the Holders of the Trust Preferred Securities on the record date fixed pursuant to Section 4.04, in proportion to the respective liquidation preference of the Company Preferred Securities which were represented by the Trust Preferred Securities held by such Holders. Section 5.04. Fixing of Record Date for Holders of the Trust Preferred Securities. Each distribution on the Trust Preferred Securities in respect of Dividends on the Company Preferred Securities ("Regular Distributions") shall be payable to the Holders of record as they appear on the Register on the corresponding record date. The record date for Regular Distributions is the fifteenth calendar day prior to the relevant distribution date. Whenever any other distribution shall become payable, or whenever the Trustee shall receive notice of any meeting at which holders of the Company Preferred Securities are entitled to vote or of which holders of the Company Preferred Securities are entitled to notice, the Trustee shall in each such instance fix a record date (which shall be the same date as the record date fixed by the Grantor with respect to the Company Preferred Securities, of which the Grantor shall promptly inform the Trustee) for the determination of the Holders of the Trust Preferred Securities who shall be entitled (i) to receive such distribution, or (ii) to receive notice of, and to give instructions for the exercise of voting rights at, any such meeting. Section 5.05. Payment of Distributions. The Trust shall maintain a Paying Agent with respect to the Trust Preferred Securities which shall initially be Wilmington Trust Company. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Trustee. If Wilmington Trust Company resigns as Paying Agent, the Trustee shall appoint another bank or trust company to act as Paying Agent. As long as the Trust Preferred Securities are listed on the Luxembourg Stock Exchange, the Trust shall also maintain a Paying Agent in Luxembourg. The initial Luxembourg Paying Agent shall be [--]. As long as the Trust Preferred Securities are in book-entry form, payments on the Trust Preferred Securities shall be made to DTC, which shall credit the relevant accounts at DTC on the scheduled payment dates. The payments shall be distributed to participants, indirect participants and beneficial owners of the Trust Preferred Securities in accordance with DTC's procedures. If definitive Trust Preferred Securities are issued as described in Section 4.03(c), payments on the Trust Preferred Securities shall be made by check mailed to the address of the Holder entitled to receive the payment, as address appears in the Register. -17- 23 Payments of the redemption price of, and distributions in liquidation on, Trust Preferred Securities shall be made upon surrender of such Trust Preferred Securities at the office of the Paying Agent. The Grantor shall pay Dividends on, the redemption price of, and Liquidation Preferences on, the Company Preferred Securities directly to the Paying Agent for distribution to the Holders of the Trust Preferred Securities in accordance with the terms of this Trust Agreement and the paying agency agreement as then in effect with the Paying Agent. If any distributions on the Trust Preferred Securities would be payable on a day that is not a Business Day, that distribution shall instead be made on the next Business Day. No interest or other payment shall be due as a result of any such delay. Section 5.06. Voting Rights. If at any time, the holders of Company Preferred Securities are entitled to vote under the LLC Agreement, the Trustee shall: (i) notify the Holders of the Trust Preferred Securities of such right, (ii) request specific direction from each Holder as to the vote with respect to the Company Preferred Securities represented by such Holder's Trust Preferred Securities, and (iii) vote the relevant Company Preferred Securities only in accordance with such specific direction. Upon receiving notice of any meeting at which the holders of Company Preferred Securities are entitled to vote, the Trustee shall, as soon as practicable, mail to the Holders of the Trust Preferred Securities a notice as provided under Section 8.04. The Company shall provide the form of notice to the Trustee to be forwarded to the Holders of the Trust Preferred Securities. The notice shall contain: (i) all the information that is contained in the notice announcing the meeting of the Company Preferred Securities, (ii) a statement that the Holders of the Trust Preferred Securities shall be entitled, subject to any applicable provision of law, to direct the Trustee specifically as to the exercise of the voting rights pertaining to the number of the Company Preferred Securities represented by their respective Trust Preferred Securities, and (iii) a brief description of the manner in which the Holders of the Trust Preferred Securities may give such specific directions. If the Trust receives a written direction from a Holder, the Trustee shall vote, or cause to be voted, the amount of the Company Preferred Securities represented by such Holder's Trust Preferred Securities in accordance with the instructions set forth in the direction. If the Trustee does not receive specific instructions from any Holder, the Trustee shall abstain from voting the Company Preferred Securities represented by such Holder's Trust Preferred Securities. The Grantor hereby agrees to take all reasonable action that may be deemed necessary by the Trustee in order to enable the Trustee to vote such Company Preferred Securities or cause such Company Preferred Securities to be voted. Section 5.07. Currency. All distributions and other payments and all other monetary rights and obligations in respect of the Trust Preferred Securities shall be performed in U.S. dollars. -18- 24 ARTICLE VI THE TRUSTEE Section 6.01. Eligibility. The Trust shall at all times have a Trustee that is not an Affiliate of the Grantor and is a bank that is organized and doing business under the laws of the State of Delaware, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by Federal or State authority. If such bank publishes reports of conditions at least annually, pursuant to law or to the requirements of Federal or State supervising or examining authority, then for the purposes of this Section 6.01, the combined capital and surplus of such bank shall be deemed to be its combined capital and surplus as set forth in its most recent report of conditions so published. If the Trustee ceases to be eligible in accordance with the provisions of this Section 6.01, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.03. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the Grantor (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. The Trustee shall make available for inspection by Holders of the Trust Preferred Securities at the Corporate Office and at such other places as it may from time to time deem advisable during normal business hours any reports and communications received from the Grantor by the Trustee as the holder of the Company Preferred Securities. Promptly upon request from time to time by the Grantor, the Trustee shall cause the Registrar to furnish to it a list as of a recent date, of the names, addresses and holdings of all Persons in whose names Trust Preferred Securities are registered on the Register. Section 6.02. Obligations of the Trustee. (a) The Trustee, before the occurrence of any default with respect to the Trust Preferred Securities and after the curing or waiver of all such defaults that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Trust Agreement and no implied covenants shall be read into this Trust Agreement against the Trustee. In case a default with respect to the Trust Preferred Securities has occurred (that has not been cured or waived pursuant to Section 2.06) of which an officer of the Trustee has actual knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Trust Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. Subject to these requirements, the Trustee shall be under no obligation to exercise any of the powers vested in it by this Trust Agreement at the request of any Holder, -19- 25 unless such Holder offers the Trustee reasonable indemnity against all costs, expenses and liabilities that might be incurred by exercising those powers. (b) No provision of this Trust Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of a default with respect to the Trust Preferred Securities and after the curing or waiving of all such defaults that may have occurred: (A) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Trust Agreement and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Trust Agreement, and no implied covenants or obligations shall be read into this Trust Agreement against the Trustee; and (B) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Trust Agreement; provided that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Trust Agreement, but need not confirm or investigate the accuracy of any mathematical calculations or other facts stated therein; (ii) the Trustee shall not be liable for any error of judgment made in good faith by an officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than 50% in liquidation amount of the Trust Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Trust Agreement; and (iv) the Trustee's sole duty with respect to the custody safe keeping and physical preservation of the Company Preferred Securities, the Subordinated Guarantee and the Trust Preferred Securities shall be to deal with such property in a similar manner as the Trustee deals with similar property for its own account, subject to the protections -20- 26 and limitations on liability afforded to the Trustee under this Trust Agreement and the Trust Indenture Act. (c) The Trustee shall: (i) cause its authorized signatories to execute and deliver on behalf of the Trust: (1) the Paying Agency Agreement, dated -, 2000, among the Company, the Trust, and Paying Agent, (2) the Calculation Agency Agreement, dated [--], 2000, among the Company, and the Bank, acting through its London branch, as the calculation agent, (3) the Registrar and Transfer Agency Agreement, dated [--], 2000, among the Trust, the Company and [--], as Registrar and Transfer Agent for the Trust Preferred Securities, (4) the Global Certificate in respect of the Trust Preferred Securities, and (5) any and all additional documents as may be desirable in connection with the offering of the Trust Preferred Securities representing the Company Preferred Securities; and (ii) cause its authorized signatories to execute and deliver: (1) a Certificate of the Trustee, dated [--], 2000, pursuant to Section - of the Underwriting Agreement, and (ii) a Certificate of the Trustee, dated -, 2000, attaching the Trust Agreement as may be amended from time to time and stating that the signatures on documents signed by the Trustee on behalf of the Trust are authorized and genuine. The Grantor may instruct the Trustee to dissolve the Trust and distribute the Trust Estate on a pro rata basis to the Holders of the Trust Preferred Securities in the case of either a Tax Event as to the Trust or an Investment Company Act Event as to the Trust, as such is defined in the LLC Agreement. In the event that the Trustee is uncertain as to application or interpretation of any provision of this Trust Agreement or must choose between alternative courses of action, the Trustee may seek the instructions of the Grantor by written notice requesting instructions. The Trustee shall take and be protected in taking such action as has been directed by the Grantor; provided that, if the Trustee does not receive instructions within ten days or such shorter time as is set forth in such notice, the Trustee shall be under no duty to take or refrain from taking such action and shall be fully protected in any course of action taken by it in good faith not inconsistent with this Trust Agreement as it shall deem advisable and in the interest of the Holders of the Trust Preferred Securities. The Trustee and its Affiliates may own, buy, sell or deal in any class of securities of the Grantor and its Affiliates and in Trust Preferred Securities or become pecuniarily interested in any transaction in which the Grantor or its Affiliates may be interested or contract with or lend money to or otherwise act as fully or as freely as if it were not the Trustee hereunder. The Trustee may also act as transfer agent or registrar of any of the securities of the Grantor and its Affiliates or act in any other capacity for the Grantor or its Affiliates. -21- 27 The Trustee (and its officers, directors, employees and agents) makes no representation nor shall it have any liability for or responsibility with respect to the issuance of the Trust Preferred Securities (except for its counter-signatures thereon) or any instruments referred to therein or herein, or as to the correctness of any statement made therein or herein; provided, however, that the Trustee is responsible for its representations and warranties in the last paragraph of this Section 6.02. The Trustee assumes no responsibility for the correctness of the description that appears in the Trust Preferred Securities, which can be taken as a statement of the Grantor summarizing certain provisions of this Trust Agreement. Notwithstanding any other provision herein or in the Trust Preferred Securities, the Trustee makes no warranties or representations as to the validity, genuineness or sufficiency of the Trust Preferred Securities, as to the validity or sufficiency of this Trust Agreement, as to the value of the Trust Preferred Securities or as to any right, title or interest of the Holders of the Trust Preferred Securities, except that the Trustee hereby represents and warrants as follows: (i) the Trustee has been duly organized and is validly existing and in good standing under Delaware law, with full power, authority and legal right under such laws to execute, deliver and carry out the terms of this Trust Agreement; (ii) this Trust Agreement has been duly authorized, executed and delivered by the Trustee; and (iii) this Section 5.02 constitutes a valid and binding obligation of the Trustee enforceable against the Trustee in accordance with its terms subject to equitable principles and bankruptcy, insolvency, moratorium, receivership and other similar laws affecting the enforcement of creditors' rights generally. Notwithstanding anything herein or in any other document to the contrary, to the maximum extent provided in Section 3803(b) of the Business Trust Act, a trustee of the Trust, when acting in such capacity, shall not be personally liable to any Person other than the Trust and the beneficial owners thereof for any act, omission or obligation of the Trust or any other trustee or other agent or representative of the Trust. In the exercise or administration of the trusts hereunder, the Trustee (i) may act directly or, at the expense of the Trust, through agents or attorneys, and the Trustee shall not be liable for the default or misconduct of such agents or attorneys if such agents or attorneys shall have been selected by the Trustee in good faith, and (ii) may, at the expense of the Trust, consult with counsel, accountants and other experts, and it shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any such counsel, accountants or other experts. Section 6.03. Resignation and Removal of the Trustee; Appointment of Successor Trustee. The Trustee may resign as Trustee at any time by giving notice of its resignation to the Grantor. The Trustee may be removed by the Grantor at any time by notice of such removal delivered to the Trustee. Any resignation or removal of the Trustee shall take effect upon the appointment of a qualified successor trustee and the successor's acceptance of such appointment as hereinafter provided. -22- 28 If the Trustee shall resign or be removed, the Grantor shall, within 45 days after the delivery of the notice of resignation or removal, as the case may be, appoint a successor trustee, which shall be a bank or trust company, or an affiliate of a bank or trust company, having its principal office in the State of Delaware and having a combined capital and surplus of at least $50,000,000. If a successor Trustee shall not have been appointed in 45 days, the resigning Trustee may petition a court of competent jurisdiction to appoint a successor trustee, and the expenses of such proceeding shall be borne by the Grantor. Every successor trustee shall execute and deliver to its predecessor and to the Grantor an instrument in writing accepting its appointment hereunder, and thereupon the resigning or removed Trustee shall be fully released and discharged of the trusts and duties of the Trustee hereunder and such successor trustee, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor and for all purposes shall be the Trustee under this Trust Agreement, and such predecessor, upon payment of all sums due it and on the written request of the Grantor, shall promptly execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver all rights, title and interest in the Company Preferred Securities and any moneys or property held hereunder to such successor and shall deliver to such successor a list of the Holders of all outstanding Trust Preferred Securities. Any successor Trustee shall promptly mail notice of its appointment to the Holders of the Trust Preferred Securities. Any Person into or with which the Trustee may be merged, consolidated or converted, or any Person succeeding to the corporate trust business of the Trustee, shall be the successor of such Trustee without the execution or filing of any document or any further act, provided such Person shall be eligible under the provisions of the immediately preceding paragraph. Section 6.04. Notices. The Grantor agrees that it shall give timely notice to the Trustee and any Paying Agent of any record date for the Company Preferred Security Certificates, which record date shall become the record date with respect to the Trust Preferred Securities pursuant to Section 5.04. Notices to the Holders of the Trust Preferred Securities shall be given as described in Section 8.04. Section 6.05. Status of Trust. It is intended that the Trust shall constitute a grantor trust under the Internal Revenue Code of 1986, as amended, and shall not be an "invest ment company" under the Investment Company Act of 1940, as amended. Section 6.06. Appointment of Grantor to File on Behalf of Trust. The Grantor and the Trustee hereby appoint, authorize and direct the Grantor, if the Grantor deems it necessary, appropriate or convenient to do, as the sponsor and agent of the Trust pursuant to -23- 29 Section 3806(b)(7) of the Business Trust Act (and any of the following are hereby confirmed if such action has been taken) (i) to prepare or cause the preparation of, and file, a Registration Statement relating to the offer and sale of the Trust Preferred Securities; (ii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process, and other papers and documents as the Grantor, on behalf of the Trust, may deem necessary or desirable to register the Trust Preferred Securities under, or obtain for the capital securities an exemption from, the securities "Blue Sky" laws; (iii) to execute on behalf of the Trust such underwriting or purchase or placement agent agreements with one or more underwriters or managers or placement agents relating to the offering of the Trust Preferred Securities of the Trust; (iv) to execute on behalf of the Trust any and all documents, papers and instruments as may be desirable in connection with any of the foregoing; and (v) to file and execute on behalf of the Trust, such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents that shall be necessary or desirable to register establish the exemption from registration of the Trust Preferred Securities under the securities or "Blue Sky" laws of such jurisdictions as the Grantor, on behalf of the Trust, may deem necessary or desirable. In the event that any filing referred to in this paragraph is required by the rules and regulations of any state securities or Blue Sky laws to be executed on behalf of the Trust by the Trustee or the Grantor, the Trustee, in its capacity as trustee of the Trust, and the Grantor are hereby authorized and directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that the Trustee, in its capacity as trustee of the Trust, shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of such state securities or "Blue Sky" laws. Section 6.07. Indemnification by the Grantor. To the fullest extent permitted by law, the Grantor and the Bank, jointly and severally, agree to indemnify and defend the Trustee, the Registrar and any Paying Agent and their directors, officers, employees and agents against, and hold each of them harmless from, any liability, costs and expenses (including reasonable attorneys' fees) that may arise out of or in connection with its acting as the Trustee or the Registrar, transfer agent or Paying Agent, respectively, under this Trust Agreement and the Trust Preferred Securities, except for any liability arising out of gross negligence, bad faith or willful misconduct on the part of any such Person or Persons. This Section 6.07 and Section 6.08 and the obligations of the Grantor and the Bank thereunder shall survive the termination of the Trust and this Agreement. Section 6.08. Fees, Charges and Expenses. All changes or expenses of the Trust, including the charges or expenses of the Trustee or any Trustee's agent hereunder or of any Registrar, shall be paid by the Stamford branch of UBS AG, except that, if the Trustee incurs fees, charges or expenses for which it is not otherwise liable under this Trust Agreement at the request of a Holder or other Person, such Holder or other Person shall be liable for such fees, charges and expenses. Section 6.09. Appointment of Co-Trustee or Separate Trustee. -24- 30 (a) Notwithstanding any other provisions of this Trust Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any property of the Trust must at the time be located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Holders of the Trust Preferred Securities, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section 6.09, such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as successor trustee under Section 6.03 and no notice to the Holders of the Trust Preferred Securities of the appointment of any co-trustee or separate trustee shall be required. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon and exercised or performed by the Trustee shall be exercised or performed by the Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Trustee joining in such act), except to the extent that under any laws of any jurisdiction in which any particular act or acts are to be performed, the Trustee shall be incompetent or unqualified to perform such act or acts, in which event, such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Trustee; (ii) the Trustee shall be personally liable by reason of any act or omission of any separate trustee or co-trustee; and (iii) the Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Trust Agreement. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Trust Agreement, specifically including every provision of this Trust Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee and a copy thereof given to the Grantor. -25- 31 (d) Any separate trustee or co-trustee may at any time constitute the Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect to this Trust Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. ARTICLE VII AMENDMENT AND TERMINATION Section 7.01. Supplemental Trust Agreement. The Grantor and the Trustee may, at any time and from time to time, without the consent of the Holders of the Trust Preferred Securities, enter into one or more agreements supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another partnership, corporation or other entity to the Grantor and the assumption by any such successor of the covenants of the Grantor herein contained; or (b) to add to the covenants of the Grantor for the benefit of the Holders of the Trust Preferred Securities, or to surrender any right or power herein conferred upon the Grantor; or (c) (i) to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make any other provisions with respect to matters or questions arising under this Trust Agreement, provided that any such action taken under subsection (c)(ii) hereof shall not materially adversely affect the interests of the Holders of the Trust Preferred Securities; or (d) to cure any ambiguity or correct any mistake. Any other amendment or agreement supplemental hereto must be in writing and approved by Holders of 66 2/3% of the then outstanding Trust Preferred Securities. Section 7.02. Termination. The Trust shall dissolve upon the earliest to occur of: (i) the redemption of all of the Trust Preferred Securities, (ii) the delivery of a final distribution of the Company Preferred Securities to the Holders of the Trust Preferred Securities, (iii) withdrawal of all of the Company Preferred Securities from the Trust or (iv) dissolution of the Trust in accordance with the following paragraph or (v) in the event a liquidation of the Grantor is commenced, as contemplated in Section [--] hereof. The dissolution, winding up and termination of the Trust shall be performed in accordance with Section 3808 of the Business Trust Act, and the Trustee shall have the power and authority to wind up the affairs of the Trust -26- 32 in accordance therewith. This Agreement shall terminate upon the filing of a certificate of cancellation as provided in Section 3810 of the Business Trust Statute. The Grantor may instruct the Trustee to dissolve the Trust and distribute the Company Preferred Securities on a pro rata basis to the Holders of the Trust Preferred Securities in the case of either a Tax Event as to the Trust or an Investment Company Act Event as to the Trust, as each is defined in the LLC Agreement. Except as provided in Section 6.07 and Section 6.08, upon termination of the Trust in accordance with the foregoing, the respective obligations and responsibilities of the Trustee and the Grantor created hereby shall terminate. The Trustee shall notify the Paying Agent and the Holders of the Trust Preferred Securities of any such amendment or termination of the Trust Agreement within a reasonable period of time. Upon the completion of winding up of the Trust, including the payment or the making reasonable provisions for payment of all obligations of the Trust in accordance with Section 3808(e) of the Business Trust Act, the Trustee shall file a certificate of cancellation with the Delaware Secretary of State in accordance with Section 3810 of the Business Trust Act, at which time the Trust shall terminate. The Grantor shall act as the liquidator of the Trust and shall be responsible for directing the Trustee to take all required actions in connection with winding up the Trust. ARTICLE VIII MISCELLANEOUS Section 8.01. Counterparts. This Trust Agreement may be executed by the Grantor, the Trustee and the Bank in separate counterparts, each of which counterparts, when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute one and the same instrument. Copies of this Trust Agreement shall be filed with the Trustee and shall be open to inspection during business hours at the Corporate Office by any Holder of a Trust Preferred Security. Section 8.02. Exclusive Benefits of Parties. This Trust Agreement is for the exclusive benefit of the parties hereto and the Holders of the Trust Preferred Securities, and their respective successors and assigns, and shall not be deemed to give any legal or equitable right, remedy or claim to any other Person whatsoever. Section 8.03. Invalidity of Provisions. In case any one or more of the provisions contained in this Trust Agreement or of the Trust Preferred Securities should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions hereof or thereof shall in no way be affected, prejudiced or disturbed thereby. -27- 33 Section 8.04. Notices. Any notices to be given to the Grantor hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail or by telecopier, addressed to the Grantor c/o [--], Attention: [--] (Fax: [--]), or at any other place to which the Grantor may have transferred its principal executive office. Any notices to be given to the Trustee hereunder or under the Trust Preferred Securities shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail or by telecopier, addressed to the Trustee at the Corporate Office. Notices to the Holders of the Trust Preferred Securities shall be given by delivery of the relevant notice to DTC, Euroclear, Clearstream and any other relevant securities clearing system for communication by each of them to entitled participants, and, as long as the Trust Preferred Securities are listed on one or more stock exchanges and the rules of such stock exchange(s) so require, notices shall also be published in the manner that the rules of such stock exchange(s) may require. In addition, for as long as the rules of the Luxembourg Stock Exchange so require, notices shall be published in one English language daily newspaper of general circulation in London (which is expected to be the Financial Times) and in a daily newspaper of general circulation in Luxembourg (which is expected to be the Luxembourger Wort). If the Trust Preferred Securities are no longer held in the name of DTC or its nominee, notice to the Holders of the Trust Preferred Securities shall be mailed by first-class mail, postage prepaid, to the Holders' addresses appearing in the records of the Trust. Delivery of a notice sent by mail shall be deemed to be effected at the time when the same is deposited, postage prepaid, in a post office letter box. Delivery of a notice personally delivered or sent by telecopier shall be deemed to be effected at the time it is received. Section 8.05. Holders of the Trust Preferred Securities Are Parties. Notwithstanding that Holders of the Trust Preferred Securities have not executed and delivered this Trust Agreement or any counterpart thereof, the Holders of the Trust Preferred Securities from time to time shall be bound by all of the terms and conditions hereof and of the Trust Preferred Securities by acceptance of delivery of Trust Preferred Securities. Section 8.06. Governing Law. This Trust Agreement and the Trust Preferred Securities and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, and construed in accordance with, the law of the State of Delaware. Section 8.07. Headings. The headings of articles and sections of this Trust Agreement and the Trust Preferred Securities have been inserted for convenience only and are not to be regarded as part of this Trust Agreement or to have any bearing upon the meaning or interpretation of any provision contained herein or in the Trust Preferred Securities. -28- 34 Section 8.08. Trust Preferred Securities Non-Assessable and Fully Paid. The Holders of the Trust Preferred Securities shall not be personally liable for obligations of the Trust, the interests in the Trust represented by the Trust Preferred Securities shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever, and the Trust Preferred Securities upon delivery thereof by the Trustee pursuant to this Trust Agreement are and shall be deemed fully paid. Section 8.09. No Preemptive Rights. No Holder shall be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional interest in the Trust, whether now or hereafter authorized and whether issued for cash or other consideration or by way of distribution. Section 8.10. Survival. The rights and protections of the Trustee hereunder, including, without limitation, its right to defense, indemnity, expense reimbursement and compensation for its services hereunder, shall survive the termination of the Trust and this Trust Agreement. -29- 35 IN WITNESS WHEREOF, the Grantor and the Trustee have duly executed this Trust Agreement as of the day and year first above set forth. UBS PREFERRED FUNDING COMPANY LLC, as Grantor By: ________________________________ Name: Title: WILMINGTON TRUST COMPANY, as Trustee By: ________________________________ Name: Title: UBS AG joins in this Trust Agreement solely for purposes of obligating itself under Sections 6.07 and 6.08 of this Trust Agreement and not as grantor, trustee or beneficiary. UBS AG By: ________________________________ Name: Title: By: ________________________________ Name: Title: 36 EXHIBIT A TRUST PREFERRED SECURITY OF UBS PREFERRED FUNDING TRUST I, a Delaware Business Trust, representing - aggregate liquidation preference of -% Noncumulative Company Preferred Securities, liquidation preference $1,000 per security, of UBS PREFERRED FUNDING COMPANY LLC I (a Delaware Limited Liability Company) CERTIFICATE NO. __ COMMON CODE ________________ ISIN NUMBER: ________________ Wilmington Trust Company, not in its individual capacity, but solely as Trustee (the "Trustee") on behalf of the above-named Trust, hereby certifies that [--] is the registered owner of [--] liquidation amount of [--]% Noncumulative Trust Preferred Securities, stated liquidation amount $1,000 per security ("Trust Preferred Securities"), representing a corresponding amount of [--]% Noncumulative Company Preferred Securities (the "Company Preferred Securities") of UBS Preferred Funding Company LLC I, a Delaware limited liability company (the "Grantor"), deposited in trust by the Grantor with the Trustee pursuant to an Amended and Restated Trust Agreement of UBS Preferred Funding Trust I, dated as of [--], 2000 (as amended or supplemented from time to time, the "Trust Agreement") between the Grantor and the Trustee. Subject to the terms of the Trust Agreement, the registered Holder hereof is entitled to a full interest in the amount of Company Preferred Securities held by the Trustee under the Trust Agreement as are represented by the Trust Preferred Securities evidenced by this global certificate, including the distribution, voting, liquidation and other rights of such Company Preferred Securities specified in the Amended and Restated Limited Liability Company Agreement of the Grantor, as amended, a copy of which is on file at the Corporate Office of the Trustee. (i) The Trust Agreement. The Trust Preferred Securities are issued upon the terms and conditions set forth in the Trust Agreement. The Trust Agreement (a copy of which is on file at the Corporate Office of the Trustee) sets forth the rights of Holders of the Trust Preferred Securities and the rights and duties of the Trustee and the Grantor. The statements made herein are summaries of certain provisions of the Trust Agreement and are subject to the detailed provisions thereof, to which reference is hereby made. In the event of any conflict or discrepancy between the provisions hereof and the provisions of the Trust Agreement, the provisions of the Trust Agreement shall govern. Unless otherwise expressly herein provided, all defined terms used herein shall have the meanings ascribed thereto in the Trust Agreement. (ii) Enforcement of Rights; Withdrawal of Company Preferred Securities. To the fullest extent permitted by law, without the need for any other action of any Person, including the Trustee or any other Holder, each Holder shall be entitled to enforce, in the name of the Trust, the rights of the Trust in respect of the Company Preferred Securities and the Subordinated Guarantee represented by the Trust Preferred Certificates held by such Holder. Any recovery on A-1 37 such enforcement action shall belong solely to such Holder who brought the action, not to the Trust, the Trustee or any other Holder individually or to Holders as a group. Any beneficial owner of Trust Preferred Securities may withdraw all, but not less than all, of the Company Preferred Securities represented by such Trust Preferred Securities by providing a written notice to the Trustee, with evidence of beneficial ownership in form satisfactory to the Trustee, and providing to the Grantor such documents or information as the Grantor may request for tax reporting purposes at the Corporate Office. Such notice shall also be deemed to be such beneficial owner's agreement to be subject to the terms of the LLC Agreement. (iii) Distributions of Dividends on Company Preferred Securities. Whenever (and to the extent) the Trust receives any cash payment representing a Dividend or redemption payment on the Company Preferred Securities, the Trustee acting directly or through any Paying Agent shall distribute such amounts to Holders of Trust Company Preferred Securities on the record date therefor, in proportion to the respective liquidation amounts of the Trust Preferred Securities held by such Holders. (iv) Redemptions of Company Preferred Securities. The Trust Preferred Securities shall be redeemed only upon redemption of the Company Preferred Securities. If the Grantor redeems the Company Preferred Securities in accordance with the LLC Agreement, then the Grantor shall give the Trustee at least 30 days' prior notice before doing so. The Trustee shall mail the notice of the redemption not less than 25 days prior to the date fixed for redemption of the Company Preferred Securities to the Holders of the Trust Preferred Securities. No defect in the notice of redemption or in the mailing or delivery thereof or publication of its contents shall affect the validity of the redemption proceedings. If only some of the outstanding Trust Preferred Securities are to be redeemed, the Trust Preferred Securities to be redeemed shall be selected in accordance with DTC's procedures. If the Trust Preferred Securities do not remain registered in the name of DTC or its nominee and only some of the outstanding Trust Preferred Securities are to be redeemed, the Trust Preferred Securities shall be redeemed proportionally or selected for redemption pursuant to the rules of any securities exchange on which the Trust Preferred Securities are listed at that time. The Grantor shall promptly notify in writing the Registrar and Transfer Agent for the Trust Preferred Securities of the Trust Preferred Securities selected for redemption. On the date of redemption of the Company Preferred Securities, so long as the Company or the Bank has deposited with the Paying Agent on behalf of the Trust the aggregate amount payable upon redemption of all the Company Preferred Securities held by the Trust to be redeemed, the Paying Agent on behalf of the Trust shall irrevocably deposit with DTC funds sufficient to pay the redemption price and give DTC irrevocable instructions to pay the redemption price to the Holders of the Trust Preferred Securities to be redeemed. A-2 38 (v) Distributions in Liquidation of Grantor. Upon receipt by the Trust of any Liquidation Preference from the Grantor upon the liquidation of the Grantor, after satisfaction of creditors of the Trust required by applicable law, the Trust shall distribute the same to Holders of the Trust Preferred Securities on the record date therefor, in proportion to the respective Liquidation Preference of the Company Preferred Securities which were represented by the Trust Preferred Securities held by such Holders. (vi) Fixing of Record Date for Holders of the Trust Preferred Securities. Each Regular Distribution on the Trust Preferred Securities shall be payable to the Holders of record as they appear on the Register on the corresponding record date. The record date for Regular Distributions is the fifteenth calendar day prior to the relevant distribution date. Whenever any other distribution shall become payable, or whenever the Trustee shall receive notice of any meeting at which holders of the Company Preferred Securities are entitled to vote or of which holders of the Company Preferred Securities are entitled to notice, the Trustee shall in each such instance fix a record date (which shall be the same date as the record date fixed by the Grantor with respect to the Company Preferred Securities, of which the Grantor shall promptly inform the Trustee) for the determination of the Holders of the Trust Preferred Securities who shall be entitled (i) to receive such distribution or (ii) to receive notice of, and to give instructions for the exercise of voting rights at, any such meeting. (vii) Payment of Distributions. As long as the Trust Preferred Securities are in book-entry form, payments on the Trust Preferred Securities shall be made to DTC, which shall credit the relevant accounts at DTC on the scheduled payment dates. The payments shall be distributed to participants, indirect participants and beneficial owners of the Trust Preferred Securities in accordance with DTC's procedures. If definitive Trust Preferred Securities are issued, payments on the Trust Preferred Securities shall be made by check mailed to the address of the Holder entitled to receive the payment, as address appears in the Register. Payments of the redemption price of, and distributions in liquidation on, Trust Preferred Securities shall be made upon surrender of such Trust Preferred Securities at the office of the Paying Agent. (viii) Voting Rights. If at any time, the holders of Company Preferred Securities are entitled to vote under the LLC Agreement, the Trustee shall: (i) notify the Holders of the Trust Preferred Securities of such right, (ii) request specific direction from each Holder as to the vote with respect to the Company Preferred Securities represented by such Holder's Trust Preferred Securities, and (iii) vote the relevant Company Preferred Securities only in accordance with such specific direction. Upon receiving notice of any meeting at which the holders of Company Preferred Securities are entitled to vote, the Trustee shall, as soon as practicable, mail to the Holders of the Trust Preferred Securities a notice. The Company shall provide the form of notice to the Trustee to be forwarded to the Holders of the Trust Preferred Securities. The notice shall contain: (i) all the information that is contained in the notice announcing the meeting of the Company Preferred A-3 39 Securities, (ii) a statement that the Holders of the Trust Preferred Securities shall be entitled, subject to any applicable provision of law, to direct the Trustee specifically as to the exercise of the voting rights pertaining to the number of the Company Preferred Securities represented by their respective Trust Preferred Securities, and (iii) a brief description of the manner in which the Holders of the Trust Preferred Securities may give such specific directions. If the Trust receives a written direction from a Holder, the Trustee shall vote, or cause to be voted, the amount of the Company Preferred Securities represented by such Holder's Trust Preferred Securities in accordance with the instructions set forth in the directions. If the Trustee does not receive specific instructions from any Holder, the Trustee shall abstain from voting the Company Preferred Securities represented by such Holder's Trust Preferred Securities. (ix) Currency. All distribution and other payments and all other monetary rights and obligations in respect of the Trust Preferred Certificates shall be performed in U.S. dollars. (x) Transfer and Exchange of Trust Preferred Securities. Subject to the terms and conditions of the Trust Agreement, the Registrar shall register the transfers on the Register from time to time of Trust Preferred Securities upon any surrender thereof by the Holder in person or by a duly authorized attorney, properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, together with evidence of the payment of any transfer taxes as may be required by law. Upon such surrender, the Trustee shall execute a new Trust Preferred Security representing the same corresponding amount of the Company Preferred Securities and deliver the same to or upon the order of the Person entitled thereto. Upon surrender of a Trust Preferred Security at the office of the Registrar or such other office as the Trustee may designate for the purpose of effecting an exchange of Trust Preferred Securities, subject to the conditions to transfer set forth in the Trust Agreement, the Trustee shall execute and deliver a new Trust Preferred Security representing the same corresponding amount of Company Preferred Securities as the Trust Preferred Security surrendered. As a condition precedent to the registration of the transfer or exchange of any Trust Preferred Security, the Registrar, may require (i) the production of proof satisfactory to it as to the identity and genuineness of any signature; (ii) compliance with such regulations, if any, as the Trustee or the Registrar may establish not inconsistent with the provisions of the Trust Agreement; and (iii) such other information as the Registrar may reasonably request. No Holder may require the transfer of any Trust Preferred Security to be registered during the period of fifteen days ending on the due date for any payment of principal on the Trust Preferred Securities. The trust shall not be required to register, or cause others to register, the transfer of Trust Preferred Securities after such Trust Preferred Securities have been called for redemption. A-4 40 (xi) Title to Trust Preferred Securities. It is a condition of the Trust Preferred Securities, and every successive Holder hereof by accepting or holding the same consents and agrees, that title to this Trust Preferred Security, when properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, is transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until the transfer of this Trust Preferred Security shall be registered on the books of the Trust, the Trustee, the Registrar and the Grantor may, notwithstanding any notice to the contrary, treat the Holder hereof at such time as the absolute owner hereof for the purpose of determining the Person entitled to distributions or to any notice provided for in the Trust Agreement and for all other purposes. (xii) Reports, Inspection of Transfer Books. The Trustee shall make available for inspection by Holders of the Trust Preferred Securities at the Corporate Office and at such other places as it may from time to time deem advisable during normal business hours any reports and communications received by the Trustee as the record holder of the Company Preferred Securities. The Registrar shall keep books at the Corporate Office for the registration of transfer of Trust Preferred Securities, which books at all reasonable times shall be open for inspection by the Holders of the Trust Preferred Securities as and to the extent provided by applicable law. (xiii) Supplemental Trust Agreement. The Grantor and the Trustee may, at any time and from time to time, without the consent of the Holders of the Trust Preferred Securities, enter into one or more agreements supplemental to the Trust Agreement, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another partnership, corporation or other entity to the Grantor and the assumption by any such successor of the covenants of the Grantor contained therein; (b) to add to the covenants of the Grantor for the benefit of the Holders of the Trust Preferred Securities, or to surrender any right or power herein conferred upon the Grantor; (c)(i) to correct or supplement any provision therein which may be defective or inconsistent with any other provision therein or (ii) to make any other provisions with respect to matters or questions arising under the Trust Agreement, provided that any such action taken under subsection (ii) hereof shall not materially adversely affect the interests of the Holders of the Trust Preferred Securities; or (d) to cure any ambiguity or correct any mistake. Any other amendment or agreement supplemental hereto must be in writing and approved by Holders of 66 2/3% of the then outstanding Trust Preferred Securities. (xiv) Governing Law. The Trust Agreement and this Trust Preferred Security and all rights thereunder and hereunder and provisions thereof and hereof shall be governed by, and construed in accordance with, the law of the State of Delaware. (xv) Trust Preferred Security Non-Assessable and Fully Paid. Holders of the Trust Preferred Securities shall not be personally liable for obligations of the Trust, the interest in the Trust represented by the Trust Preferred Securities shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever and the Trust Preferred Securities upon A-5 41 delivery thereof by the Trustee pursuant to the Trust Agreement are and shall be deemed fully paid. (xvi) Liability of Holders of the Trust Preferred Securities. Holders of the Trust Preferred Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. (xvii) No Preemptive Rights. No Holder shall be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional interest in the Trust, whether now or hereafter authorized and whether issued for cash or other consideration or by way of distribution. This Trust Preferred Security shall not be entitled to any benefits under the Trust Agreement or be valid or obligatory for any purpose unless this Trust Preferred Security shall have been executed by the Trustee by the manual signature of a duly authorized signatory of the Trustee, provided, however, that such signature may be a facsimile if a Registrar (other than the Trustee) shall have countersigned this Security by manual signature of a duly authorized signatory of the Registrar. THE TRUSTEE IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY COMPANY PREFERRED SECURITIES. THE TRUSTEE ASSUMES NO RESPONSIBILITY FOR THE CORRECTNESS OF THE FOREGOING DESCRIPTION WHICH CAN BE TAKEN AS A STATEMENT OF THE GRANTOR SUMMARIZING CERTAIN PROVISIONS OF THE TRUST AGREEMENT. THE TRUSTEE MAKES NO WARRANTIES OR REPRESENTATIONS AS TO THE VALIDITY, GENUINENESS OR SUFFICIENCY OF THE COMPANY PREFERRED SECURITIES OR OF THE TRUST PREFERRED SECURITIES; OR AS TO THE VALIDITY OR SUFFICIENCY OF THE TRUST AGREEMENT; AS TO THE VALUE OF THE TRUST PREFERRED SECURITIES OR AS TO ANY RIGHT, TITLE OR INTEREST OF THE HOLDERS OF THE TRUST PREFERRED SECURITIES IN AND TO THE TRUST PREFERRED SECURITIES. Dated: UBS PREFERRED FUNDING TRUST I By: __________________________________, not in its individual capacity, but solely as Trustee on behalf of the Trust, By: __________________________________ Name: Title: A-6 42 [By: __________________________________ Name: Title:]1 - ------------------------------- 1 Manual countersignature of Registrar if required pursuant to Section 4.01(e) of the Trust Agreement. A-7 EX-3.4 6 y39818a1ex3-4.txt FORM OF AMENDED AND RESTATED LIMITED LIABILITY AGT 1 Exhibit 3.4 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF UBS PREFERRED FUNDING COMPANY LLC I DATED AS OF -, 2000 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINED TERMS Section 1.1 Definitions........................................................................................... 2 Section 1.2 Headings.............................................................................................. 13 ARTICLE II CONTINUATION AND TERM; ADMISSION OF SECURITYHOLDERS Section 2.1 Continuation.......................................................................................... 13 Section 2.2 Admission of Securityholders.......................................................................... 14 Section 2.3 Name.................................................................................................. 14 Section 2.4 Term.................................................................................................. 14 Section 2.5 Registered Agent and Office........................................................................... 14 Section 2.6 Principal Executive Offices........................................................................... 14 Section 2.7 Qualification in Other Jurisdictions.................................................................. 15 ARTICLE III PURPOSE AND POWERS OF THE COMPANY; BY-LAWS; SUPPORT AGREEMENT Section 3.1 Purposes and Powers................................................................................... 15 Section 3.2 By-Laws............................................................................................... 15 Section 3.3 Bank Subordinated Guarantee........................................................................... 15 ARTICLE IV CAPITAL CONTRIBUTIONS, ALLOCATIONS AND SECURITIES Section 4.1 Form of Contribution.................................................................................. 15 Section 4.2 Contributions with Respect to the Common Securityholders.............................................. 16 Section 4.3 Contributions with Respect to the Preferred Securityholders........................................... 16 Section 4.4 Allocation of Profits and Losses...................................................................... 16 Section 4.5 Withholding........................................................................................... 16 Section 4.6 Securities as Personal Property....................................................................... 17 ARTICLE V SECURITYHOLDERS Section 5.1 Powers of Securityholders............................................................................. 17 Section 5.2 Partition............................................................................................. 17 Section 5.3 Resignation........................................................................................... 17 Section 5.4 Liability of Securityholders.......................................................................... 17 ARTICLE VI MANAGEMENT Section 6.1 Management of the Company............................................................................. 18 Section 6.2 Limits on Board of Directors' Powers.................................................................. 22 Section 6.3 Reliance by Third Parties............................................................................. 23 Section 6.4 No Management by Any Preferred Securityholders........................................................ 23
-i- 3 Section 6.5 Business Transactions of the Common Securityholder with the Company................................... 23 Section 6.6 Outside Businesses.................................................................................... 23 Section 6.7 Duties of Directors................................................................................... 24 Section 6.8 Additional Directors.................................................................................. 24 ARTICLE VII COMPANY SECURITIES; SUBORDINATED NOTES Section 7.1 Company Common Securities............................................................................. 24 Section 7.2 General Provisions Regarding Company Preferred Securities and Company Parity Preferred Securities...................................................................................... 25 Section 7.3 Company Preferred Securities.......................................................................... 27 ................................................................................................. 28 Section 7.4 General Provisions Regarding Subordinated Notes....................................................... 38 ARTICLE VIII VOTING AND MEETINGS Section 8.1 Voting Rights of Preferred Securityholders............................................................ 38 Section 8.2 Voting Rights of Common Securityholders............................................................... 39 Section 8.3 Meetings of the Securityholders....................................................................... 39 ARTICLE IX DIVIDENDS Section 9.1 Dividends............................................................................................. 40 Section 9.2 Limitations on Distributions.......................................................................... 41 Section 9.3 No Dividend Instruction............................................................................... 41 ARTICLE X BOOKS AND RECORDS Section 10.1 Financial Statements................................................................................. 41 Section 10.2 Limitation on Access to Records...................................................................... 42 Section 10.3 Accounting Method.................................................................................... 42 Section 10.4 Annual Audit......................................................................................... 42 ARTICLE XI TAX MATTERS Section 11.1 Company Tax Returns.................................................................................. 42 Section 11.2 Tax Reports.......................................................................................... 43 Section 11.3 Taxation as a Partnership............................................................................ 43 Section 11.4 Taxation of Securityholders.......................................................................... 43 ARTICLE XII EXPENSES Section 12.1 Expenses............................................................................................. 43 Section 12.2 Contribution to Funds of the Company................................................................. 44 ARTICLE XIII TRANSFERS OF SECURITIES BY SECURITYHOLDERS AND RELATED MATTERS Section 13.1 Right of Assignee to Become a Preferred Securityholder........................................... 44
-ii- 4 Section 13.2 Events of Cessation of Security Ownership........................................................ 44 Section 13.3 Persons Deemed Preferred Securityholders......................................................... 44 Section 13.4 The Company Preferred Certificates............................................................... 45 Section 13.5 Transfer of Company Preferred Certificates....................................................... 45 Section 13.6 Mutilated, Destroyed, Lost or Stolen Company Preferred Certificates.............................. 46 Section 13.7 Restrictions on Transfers of Securities.......................................................... 47 ARTICLE XIV MERGERS, CONSOLIDATIONS AND SALES Section 14.1 The Company...................................................................................... 47 ARTICLE XV DISSOLUTION, LIQUIDATION AND TERMINATION Section 15.1 No Dissolution................................................................................... 48 Section 15.2 Events Causing Dissolution....................................................................... 48 Section 15.3 Notice of Dissolution............................................................................ 49 Section 15.4 Liquidation...................................................................................... 49 Section 15.5 Certain Restrictions on Liquidation Payments..................................................... 49 Section 15.6 Termination...................................................................................... 49 ARTICLE XVI MISCELLANEOUS Section 16.1 Amendments....................................................................................... 50 Section 16.2 Amendment of Certificate of Formation............................................................ 50 Section 16.3 Successors....................................................................................... 50 Section 16.4 Law; Severability................................................................................ 50 Section 16.5 Filings.......................................................................................... 50 Section 16.6 Power of Attorney................................................................................ 51 Section 16.7 Exculpation...................................................................................... 51 Section 16.8 Indemnification.................................................................................. 51 Section 16.9 Additional Documents............................................................................. 52 Section 16.10 Notices.......................................................................................... 52 Section 16.11 Nominee Letter................................................................................... 53 Section 16.12 Counterparts..................................................................................... 53 ANNEX A - Form of UBS AG Subordinated Guarantee Agreement ANNEX B - Form of Administration Agreement ANNEX C - By-Laws of the Company ANNEX D - Form of Subordinated Note of UBS AG ANNEX E - List of Initial Directors and Officers ANNEX F - Investment Policies ANNEX G - Form of Certificate Evidencing Company Preferred Securities ANNEX H - Form of No Dividend Instruction ANNEX I - Form of Nominee Letter
-iii- 5 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF UBS PREFERRED FUNDING COMPANY LLC I This AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT of UBS Preferred Funding Company LLC I, a Delaware limited liability company (the "Company"), is made as of -, 2000, among UBS AG, a bank organized under the laws of Switzerland (the "Bank"), as initial Securityholder (as defined below) and holder of the Company Common Securities (as defined below), and the Persons (as defined below), who may from time to time become additional Securityholders of the Company in accordance with the provisions hereof. WITNESSETH WHEREAS, the Bank, as initial Securityholder, has formed a limited liability company pursuant to the Delaware Limited Liability Company Act, 6 Del.C. Section 18-101, et seq., as amended from time to time (the "Delaware Act"), by filing a Certificate of Formation of the Company (the "Certificate of Formation") with the office of the Secretary of State of the State of Delaware on or about -, 2000, and has entered into the Limited Liability Company Agreement of the Company dated as of -, 2000 (the "Original Agreement"); WHEREAS, the Securityholders desire to amend and restate the Original Agreement as provided in this Amended and Restated Limited Liability Company Agreement of the Company (as amended, modified or supplemented from time to time in accordance with its terms, this "Agreement") and to continue the Company as a limited liability company under the Delaware Act in accordance with the provisions of this Agreement; and WHEREAS, simultaneously with the Bank's execution and delivery of this Agreement, the Company and the Bank are executing and delivering the UBS AG Subordinated Guarantee Agreement, dated as of the date hereof, substantially in the form of Annex A hereto (as amended, modified or supplemented from time to time in accordance with its terms, the "Bank Subordinated Guarantee"). NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Securityholders hereby agree as follows: ARTICLE I DEFINED TERMS Section 1.1 Definitions. Unless the context otherwise requires, the terms defined in this Article I shall, for the purposes of this Agreement, have the meanings herein specified. -1- 6 "Administration Agreement" means the Administration Agreement between the Company and the Administrator, dated as of -, 2000, as amended, modified or supplemented from time to time in accordance with its terms (attached hereto as Annex B). "Administrative Action" means any judicial decision, official administrative pronouncement, published or private ruling, regulatory procedure, notice or announcement (including any notice or announcement of intent to adopt such procedures or regulations) by any legislative body, court, governmental authority or regulatory body having appropriate jurisdiction. "Administrator" means the branch of the Bank located in Stamford, Connecticut, in its capacity as the service provider under the Administration Agreement. "Affiliate" means, with respect to a specified Person, any Person directly or indirectly controlling, controlled by, or under common control with the specified Person. "Affiliate Securities" means any securities issued by the Bank or a subsidiary of the Bank and includes the Subordinated Notes. "Agreement" has the meaning specified in the second Recital of this Agreement. "Applicable Procedures" means, with respect to any transfer or transaction involving a Company Preferred Security, the rules and procedures of the Clearing Agency for such Company Preferred Security, in each case to the extent applicable to such transaction and as in effect from time to time. "authorized person" has the meaning specified in Section 2.1(b). "Available Distributable Profits" means, for any financial year of the Bank, (i) if there are no Bank Parity Securities outstanding, Distributable Profits for the immediately preceding financial year of the Bank, and (ii) if there are Bank Parity Securities outstanding, then an amount determined as the product of (x) Distributable Profits for such immediately preceding financial year of the Bank and (y) a ratio (I) the numerator of which is the aggregate amount of full dividends on the Company Preferred Securities to be paid on the Dividend Payment Dates which occur during the then current financial year (but excluding dividends paid on January of the current year and including dividends to be paid on January of the following year in the case of calculations occurring after October 2010) and (II) the denominator of which is the sum of the amount determined pursuant to clause (I) plus the aggregate amount of full dividends on the Bank Parity Securities to be paid on dividend payment dates which occur during the then current financial year. "Bank" has the meaning specified in the Preamble of this Agreement. "Bank Junior Obligations" means (i) ordinary shares of the Bank, (ii) each class of preferred or preference shares or similar securities of the Bank that ranks junior to -2- 7 the most senior ranking preferred or preference shares or similar securities of the Bank, (iii) any indebtedness, guarantee or support agreement or similar undertaking of the Bank in respect of any subsidiary securities that rank junior to the Bank Subordinated Guarantee. "Bank Parity Securities" means (i) each class of preferred or preference shares or similar securities of the Bank that ranks equally with the most senior ranking preferred or preference shares or similar securities of the Bank and (ii) any securities issued by any subsidiaries of the Bank and entitled to the benefit of any guarantee or support agreement or similar undertaking of the Bank that ranks equally with the Bank Subordinated Guarantee. "Bank Subordinated Guarantee" has the meaning specified in the third Recital to this Agreement. A "Bankruptcy Event" shall be deemed to occur if (i) at any time the Bank's unconsolidated unsubordinated liabilities exceed its unconsolidated total assets (valued at the higher of their going-concern and their liquidation value), as calculated based on the most recent unconsolidated interim balance sheet of the Bank, and the unsubordinated creditors of the Bank do not agree to subordinate their claims to the extent that such liabilities exceed such assets; or (ii) the Swiss Federal Banking Commission exercises the broad discretion granted to it under Swiss Banking Law before the occurrence of such an excess as described in (i), above, by withdrawing the banking license of the affected bank, which has then been required to go into liquidation pursuant to Article 23 quinquies of the Swiss Banking Law. In the case of the occurrence of the events described in (i) above, the Board of Directors of the Bank, pursuant to Article 725 paragraph 2 of the Swiss Code of Obligations, must then notify the competent court of such excess and upon such notification, such court must declare the bankruptcy of the Bank in accordance with Article 725a paragraph 1 of the Swiss Code of Obligations and Article 35 paragraph 2 of the Swiss Banking Law. "Board of Directors" means the Directors of the Company as constituted in accordance with the provisions of this Agreement and of the By-Laws. "Business Day" means a day on which (i) the Trans-European Automated Real-Time Gross settlement Express Transfer system ("TARGET") is operating, (ii) banks are open for business and carrying out transactions in U.S. dollars in London and Luxembourg, and (iii) banks are open for business in Wilmington, Delaware, U.S.A. "By-Laws" means the By-Laws of the Company in the form of Annex C hereto, as they may be amended from time to time by the Board of Directors of the Company in accordance with the provisions of this Agreement (which By-Laws are, for all purposes of this Agreement, deemed to be incorporated herein and to be a part hereof). "Calculation Agent" means -. -3- 8 "Capital Event" means the determination by the Bank after consultation with the Swiss Federal Banking Commission that the Company Preferred Securities cannot be included in calculating the Tier 1 capital of the Bank on a consolidated basis. "Capital Limitation" has the meaning specified in Section 7.3(b)(iii). "Cayman Islands Branch" means the branch of the Bank located in the Cayman Islands. "Certificate of Designations" means a Certificate of Designations establishing the terms and conditions of the Company Preferred Securities or the Company Parity Preferred Securities adopted by the Board of Directors pursuant to Section 7.2(a) and any and all amendments thereof. "Change in Tax Law" means the receipt by the Bank of an opinion of a nationally recognized law firm or other tax advisor (which may be an accounting firm) in Switzerland, the United States or the Cayman Islands, as appropriate, experienced in such matters to the effect that an event of the type described in clause (A), (B) or (C) of the definition of "Tax Event" has occurred or will occur as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or treaties (or any regulations under any laws or treaties) of the United States, Switzerland or the Cayman Islands or any political subdivision or taxing authority of or in the United States, Switzerland or the Cayman Islands affecting taxation or (ii) any Administrative Action or any amendment to, clarification of, or change in the official position or Bank interpretation of any Administrative Action or any interpretation or pronouncement that provides for a position with respect to any Administrative Action that differs from the previously generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, regardless of the manner in which such amendment, clarification, change, interpretation or pronouncement is made known, which amendment, clarification, change or Administrative Action is effective or which interpretation or pronouncement is announced on or after the date of issuance of the Company Preferred Securities. "Clearing Agency" means an organization registered as a "clearing pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. DTC will be the initial Clearing Agency. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Clearstream" means Clearstream societe anonyme. -4- 9 "Closing Date" means a "closing date" or "time of delivery" under the Underwriting Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any corresponding United States federal tax statute enacted after the date of this Agreement. A reference to a specific section (Section) of the Code (or any Treasury regulation promulgated thereunder) refers not only to such section but also to any corresponding provision of any United States federal tax statute (or any Treasury regulation promulgated thereunder) enacted after the date of this Agreement, as such specific section or corresponding provision is in effect on the date of application of the provisions of this Agreement containing such reference. "Common Securityholder" means a Securityholder that owns one or more Company Common Securities. Initially, the Bank will be the only Common Securityholder. "Company" has the meaning specified in the Preamble of this Agreement. "Company Common Securities" means the securities of the Company representing the common limited liability company interests in the Company described in this Agreement. "Company Junior Securities" means the Company Common Securities and any classes or series of equity securities of the Company (representing limited liability company interests in the Company) now or hereafter issued, other than any class or series of equity securities of the Company (representing limited liability company interests in the Company) expressly designated as being on parity with the Company Preferred Securities as to dividend rights and rights upon dissolution, liquidation or winding up of the Company. "Company Parity Preferred Securities" means any class or series of equity securities of the Company (representing limited liability company interests in the Company) expressly designated as being on parity with the Company Preferred Securities as to dividend rights and rights upon dissolution, liquidation or winding up of the Company. "Company Preferred Certificate" means a certificate substantially in the form attached hereto as Annex G, evidencing the Company Preferred Securities held by a Preferred Securityholder, which has been duly executed as provided in Section 13.4. "Company Preferred Securities" means the -% Noncumulative Company Preferred Securities, aggregate liquidation preference $-, offered by the Company pursuant to a Prospectus dated -, 2000 together with any subsequent offering by the Company of -% Noncumulative Company Preferred Securities (each representing a preferred limited liability company interest in the Company). -5- 10 "Company Security" means a limited liability company interest in the Company, including the right of the holder thereof to any and all benefits to which a Securityholder may be entitled as provided in this Agreement, together with the obligations of a Securityholder to comply with all of the terms and provisions of this Agreement, and includes the Company Junior Securities, the Company Preferred Securities and the Company Parity Preferred Securities from time to time outstanding. "Delaware Act" has the meaning specified in the first Recital of this Agreement. "Definitive Dividend" means, as to a Dividend Payment Date and related Dividend Period, dividends that are due and payable because (i) they are not limited by the Capital Limitation and (ii) either (x) they are with respect to a Mandatory Dividend Payment Amount due on a Mandatory Dividend Payment Date or (y) a No Dividend Instruction was not delivered and they are not limited by the Distributable Profits Limitation. "Determination Date" for a Dividend Period or Interest Period (as applicable) means two London Banking Days preceding the first day of that Dividend Period or Interest Period (as applicable). "Directors" means each of the Persons listed as directors on Annex E hereto until such Persons shall resign or otherwise be duly removed as a Director, and each Person who may from time to time be designated to serve as a successor to any Director of the Company or as an additional Director of the Company, in each case in accordance with the provisions of this Agreement and of the By-Laws. "Distributable Profits" means, for any financial year of the Bank, profit that may be distributed in accordance with Swiss law then applicable. Currently, for any financial year of the Bank, distributable profits are equal to profit brought forward, plus profit for the period, minus appropriation to general statutory reserve plus other reserves, each as shown in the audited unconsolidated balance sheet and statement of appropriation of retained earnings of the Bank and as determined in accordance with accounting standards applicable under Swiss law. "Distributable Profits Limitation" means the limitation on dividends specified in Section 7.3(b)(iv). "Distributable Profit Limitation Certificate" has the meaning specified in Section 7.3(b)(iv). "Dividend Payment Date" has the meaning specified in Section 7.3(b)(i). -6- 11 "Dividend Period" has the meaning specified in Section 7.3(b)(i). "dividends" means, when used with respect to Company Preferred Securities, distributions on the Company Preferred Securities in the amounts and in the manner set forth in this Agreement. "DTC" means The Depository Trust Company. "Eligible Investments" means, pursuant to the Investment Policies, the assets or investments which the Company may hold and consist of (i) the Subordinated Notes issued by the Cayman Islands branch of UBS AG with an aggregate principal amount of $-, and (ii) other securities issued by the Bank acting through a branch, agency or other office located outside of the United States or by a non-U.S. branch of a non-U.S. subsidiary of the Bank. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System. "Financial Year" means, with respect to the Company, (i) the period commencing upon the formation of the Company and ending on December 31, 2000 and (ii) any subsequent twelve month period commencing on January 1 and ending on December 31 and, with respect to the Bank, means any twelve-month period commencing on January 1 and ending on December 31. "Investment Company Act Event" means the receipt by the Bank of an opinion of a nationally recognized law firm in the United States experienced in such matters to the effect that there is more than an insubstantial risk that the Company or the Trust is an "investment company" within the meaning of the 1940 Act. "Investment Policies" means the investment policies of the Company in the form of Annex F hereto, as amended from time to time by the Board of Directors of the Company in accordance with the provisions of this Agreement (which investment policies are, for purposes of this Agreement, deemed to be incorporated herein and to be a part hereof). "Junior Creditors" means all holders of any Bank. "liquidation preference" means, with respect to each Company Preferred Security, as of any time of determination, the liquidation preference thereof as specified in Section 7.3(a). "London Banking Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. -7- 12 "majority (or other stated percentage) in liquidation preference" means Preferred Securityholder(s) who are the record owners of Company Preferred Securities the aggregate liquidation preference of which represent more than 50% (or not less than the stated percentage) of the aggregate liquidation preference of all Company Preferred Securities then outstanding. "Make Whole Amount" as applied to a redemption of the Company Preferred Securities means the greater of (i) 100% of the liquidation preference of the Company Preferred Securities and (ii) as determined by a Quotation Agent (as defined below), the sum of the present value of the liquidation preference of the Company Preferred Securities together with the present values of scheduled payments of dividends accrued from the date of redemption to the Dividend Payment Date in October 2010 (the "Remaining Life"), in each case discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate. For purposes of determining the Make Whole Amount: "Adjusted Treasury Rate" means, with respect to any redemption date, the Treasury Rate plus .75. "Comparable Treasury Issue" means, with respect to any redemption date, the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity that is within a period from three months before to three months after the Interest Payment Date and Dividend Payment Date in October 2010, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (A) the average of five Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (B) if the Calculation Agent obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Quotation Agent" means UBS Warburg LLC and its successors, except that if UBS Warburg LLC shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury dealer"), the Corporation will designate another Primary Treasury Dealer. -8- 13 "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Quotation Agent after consultation with the Company. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Calculation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Calculation Agent by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such redemption date. "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the redemption date, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Remaining Life (or if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life will be determined and the Treasury Rate will be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. The Treasury Rate will be calculated on the third Business Day preceding the redemption date. "Mandatory Dividend Payment Amount" has the meaning specified in Section 7.3(b)(ii). "Mandatory Dividend Payment Date" has the meaning specified in Section 7.3(b)(ii). "1940 Act" means the Investment Company Act of 1940, as amended. "No Dividend Instruction" has the meaning specified in Section 9.3. "Nondefinitive Dividends" means, as to a Dividend Payment Date and related Dividend Period, dividends that are not Definitive Dividends. "Officers" means each of the Persons listed as an Officer on Annex E hereto until such Persons shall resign or otherwise be duly removed as an Officer and each Person -9- 14 who may from time to time be duly appointed an Officer by the Board of Directors or pursuant to Section 6.1(b) and acting in accordance with the provisions of this Agreement and of the By-Laws. "Opinion of Counsel" means a written opinion of counsel, who may be counsel to the Company, and who shall be reasonably acceptable to the Registrar. "Original Agreement" has the meaning specified in the first Recital of this Agreement. "Owner" means each Person who is the record owner reflected on the securities register maintained by the Registrar. "Paying Agency Agreement" means the Paying Agency Agreement, dated -, 2000, between the Company and - pursuant to which the Company appointed - as paying agent for the Company Preferred Securities. "Person" means any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization. "Power of Attorney" means the power of attorney granted pursuant to Section 16.6. "Preferred Securityholder" means a Securityholder that holds Company Preferred Securities or Company Parity Preferred Securities. "Prospectus" means the prospectus, dated -, 2000, pursuant to which the Company Preferred Securities and the Trust Preferred Securities are being offered. "Purchase Price" for any Company Preferred Security means the amount paid per $1000 of liquidation preference of such Company Preferred Security pursuant to an Underwriting Agreement under which such Company Preferred Securities are being purchased, payment of which shall constitute the contribution to capital contemplated by Section 4.3. "Rating Agency" means, at any time, Moody's Investors Service, Inc. or Standard & Poor's Ratings Group, if either one is rating the Company Preferred Securities at the time or, if neither is providing a rating for the Company Preferred Securities at such time, then a "nationally recognized statistical rating organization" as that term is defined for purposes of Rule 436(g)(2) under the Securities Act. "Registrar" has the meaning specified in Section 13.5(a). -10- 15 "Registrar and Transfer Agency Agreement" means the Registrar and Transfer Agency Agreement, dated as of -, 2000, between the Company and -, pursuant to which the Company has appointed - as registrar and transfer agent for the Company Preferred Securities, as such agreement may be amended, modified or supplemented from time to time. "Relevant Period" means (i) in the case of Bank Parity Securities that pay dividends less frequently than semi-annually, one year and (ii) in the case of Bank Parity Securities that pay dividends semi-annually or more frequently than semi-annually, six months (in each case ending on or including the date on which the related dividend on a Bank Parity Security is paid but not including the corresponding day in the month that is twelve or six months prior thereto). "Securities Act" means the Securities Act of 1933, as amended. "Securities Register" has the meaning specified in Section 13.5(a). "Securityholder" means any Person that holds a Company Security and is admitted as a member and securityholder pursuant to the provisions of this Agreement and of the Delaware Act, in its capacity as a securityholder and as a member of the Company. For purposes of the Delaware Act, the Common Securityholders and the Preferred Securityholders shall constitute separate classes or groups of Securityholders and of members. "Subordinated Notes" means the Subordinated Notes issued by the Cayman Islands Branch, having an aggregate principal amount of $- in substantially the form of Annex D hereto. "Swiss Banking Law" means the Swiss Federal Law Relating to Banks and Savings Banks of November 8, 1934, as amended. "Swiss Federal Banking Commission" means the Swiss Federal Banking Commission of Switzerland and, if any successor governmental authority succeeds to the bank regulatory functions of the Swiss Federal Banking Commission in Switzerland, such successor governmental authority; provided, however, that if the Bank becomes domiciled in a jurisdiction other than Switzerland, then each reference herein to the Swiss Federal Banking Commission shall be deemed to instead refer to the governmental authority having primary regulatory authority with respect to the Bank's capital adequacy in such other jurisdiction. "Tax Event" means the receipt by the Bank of an opinion of a nationally recognized law firm or other tax advisor (which may be an accounting firm) in Switzerland or the United States, as appropriate, experienced in such matters to the effect that, as a result of (i) any amendment to, clarification of, or change (including any announced prospective -11- 16 change) in, the laws or treaties (or any regulations under any laws or treaties) of the United States, Switzerland or the Cayman Islands or any political subdivision or taxing authority of or in the United States, Switzerland or the Cayman Islands affecting taxation or (ii) any Administrative Action or any amendment to, clarification of, or change in the official position or the interpretation of any Administrative Action or any interpretation or pronouncement that provides for a position with respect to any Administrative Action that differs from the theretofore generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, irrespective of the manner in which such amendment, clarification, change, interpretation or pronouncement is made known, which amendment, clarification, change or Administrative Action is effective or which interpretation, pronouncement or decision is announced on or after the date of issuance of the Company Preferred Securities, there is more than an insubstantial risk that (A) the Company or the Trust is or will be subject to more than a de minimis amount of additional taxes, duties or other governmental charges, (B) the Bank is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to payments of interest or principal on the Subordinated Notes and with respect to any payments on the Trust Preferred Securities, (C) the Company is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to payments of dividends on the Company Preferred Securities or the Trust is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to distributions on the Trust Preferred Securities, or (D) the treatment of any of the Company's items of income, gain, loss, deduction or expense, or the treatment of any item of income, gain, loss, deduction or expense of the Bank related to the Subordinated Notes or its ownership of the Company, in each case as reflected on the tax returns (including estimated returns) filed (or to be filed) by the Company or the Bank, will not be respected by a taxing authority, as a result of which the Company or the Bank is or will be subject to more than a de minimis amount of additional taxes, duties or other governmental charges or civil liabilities, the effect of which cannot be avoided by the Company or the Bank taking reasonable measures available to it without any adverse effect on or material cost to the Bank or the Company (as determined by the Bank in its sole discretion). "Tax Matters Partner" means the party designated as such in Section 11.1(a). "Telerate Page 3750" means the display designated as "Page 3750" on the Bridge/Telerate Service (or such other page as may replace Page 3750) on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits. "Transaction Documents" has the meaning specified in Section 6.1(e)(i). "Transfer Agent" has the meaning specified in Section 13.5(a). -12- 17 "Trust" means, with respect to the Company Preferred Securities, UBS Preferred Funding Trust I, a Delaware statutory business trust, and, with respect to any Company Parity Preferred Securities, such Trust or another trust performing a substantially similar function with respect to such Company Parity Preferred Securities. "Trust Certificates" means, with respect to Company Preferred Securities issued through the Trust, the certificates issued by the Trust representing ownership of such Company Preferred Securities. "Trust Preferred Securities" means the -% Noncumulative Trust Preferred Securities, aggregate liquidation amount $1,500,000,000, offered by the Trust pursuant to the Prospectus together with any subsequent offering by the Trust of -% Noncumulative Trust Preferred Securities, in each case representing an equal number of Company Preferred Securities. "Underwriting Agreement" means an underwriting agreement among the Company, the Bank and one or more underwriters or initial purchasers relating to the Company Preferred Securities or a series of the Company Parity Preferred Securities (and, if the Company Preferred Securities or the series of Company Parity Preferred Securities are being held through a Trust (such as UBS Preferred Funding Trust I in the case of the -% Noncumulative Company Preferred Securities), the related trust certificates). "United States" means the United States of America, its territories and possessions, any state of the United States, and the District of Columbia. "U.S. dollars," "dollars," "U.S.$" and "$" mean the currency of the United States of America. Section 1.2 Headings. The headings and subheadings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. ARTICLE II CONTINUATION AND TERM; ADMISSION OF SECURITYHOLDERS Section 2.1 Continuation. (a) The Securityholders hereby agree to the continuation of the Company as a limited liability company under and pursuant to the provisions of the Delaware Act and of this Agreement and agree that the rights, duties and liabilities of the Securityholders shall be as provided in the Delaware Act, except as otherwise provided herein or in the By-Laws. -13- 18 (b) Any Person designated as an "authorized person" by the Board of Directors is authorized to execute, deliver and file on behalf of the Company any and all amendments to and restatements of the Certificate of Formation, as an authorized person within the meaning of the Delaware Act. Section 2.2 Admission of Securityholders. Upon the execution of this Agreement, the Bank shall become and be designated as, automatically and without any further act on the part of any Person being necessary, the Common Securityholder. Without execution of this Agreement, upon the payment to the Company for the Company Preferred Securities being acquired by a Person in connection with the issuance of the Company Preferred Securities on the Closing Date pursuant to the terms of the related Underwriting Agreement, which action shall be deemed to constitute a request by such Person that the books and records of the Company reflect its admission as a Preferred Securityholder, such Person shall thereupon be admitted to the Company as a Preferred Securityholder and shall be bound by all the terms and conditions hereof and of the Company Preferred Securities. Section 2.3 Name. The name of the Company being formed hereby is "UBS Preferred Funding Company LLC I". The Company will maintain "UBS" as part of its name for as long as any Trust Preferred Securities of the Trust remain outstanding unless, because of a merger or other business combination involving the Bank or a change by the Bank of its own name, inclusion of "UBS" as part of the Company's name is no longer appropriate. Subject to such limitation, the business of the Company may be conducted upon compliance with all applicable laws under any other name designated by the Board of Directors. Section 2.4 Term. The term of the Company shall commence upon the date the Certificate of Formation shall have been filed in the office of the Secretary of State of the State of Delaware and shall continue perpetually, unless the Company is dissolved in accordance with the provisions of the Delaware Act and this Agreement. The existence of the Company as a separate legal entity shall continue until the cancellation of the Certificate of Formation in the manner required by the Delaware Act. Section 2.5 Registered Agent and Office. The Company's registered agent in the State of Delaware shall be The Corporation Trust Company, 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801 and its registered office in the State of Delaware shall be c/o the registered agent. At any time, the Board of Directors may designate another registered agent and/or registered office. Section 2.6 Principal Executive Offices. The principal executive offices of the Company shall be at -. The Board of Directors may change the location of the Company's principal place of business; provided, however, that such change has no material adverse effect upon any Preferred Securityholder. -14- 19 Section 2.7 Qualification in Other Jurisdictions. The Board of Directors shall cause the Company to be qualified or registered under assumed or fictitious name statutes or similar laws in any jurisdiction in which the Company conducts business and in which such qualification or registration is required by law or deemed advisable by the Board of Directors. Each Person designated by the Board of Directors as an "authorized person" is authorized to execute, deliver and file on behalf of the Company any certificates (and any amendments or restatements thereof) necessary for the Company to qualify to do business in each jurisdiction in which the Board of Directors has determined that the Company shall conduct business. ARTICLE III PURPOSE AND POWERS OF THE COMPANY; BY-LAWS; SUPPORT AGREEMENT Section 3.1 Purposes and Powers. The sole purposes of the Company are to issue Company Preferred Securities, Company Parity Preferred Securities and Company Common Securities and to use substantially all of the proceeds thereof to acquire and hold the Subordinated Notes and other Eligible Investments and, except as otherwise expressly limited herein, to enter into, make and perform all contracts and other undertakings, and engage in all activities and transactions, as the Board of Directors may reasonably deem necessary or advisable for the carrying out of the foregoing purposes of the Company in all events without causing the Company to be treated as other than a partnership that is not a publicly traded partnership for U.S. federal income tax purposes. The Company may not conduct any other business or operations except as contemplated by the preceding sentence. The Company shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purposes of the Company as set forth herein. Section 3.2 By-Laws. The Board of Directors, Officers and Securityholders shall be subject to the express provisions of this Agreement and of the By-Laws. In case of any conflict between any provisions of this Agreement and any provisions of the By-Laws, the provisions of this Agreement shall control. Section 3.3 Bank Subordinated Guarantee. Upon execution and delivery of the Bank Subordinated Guarantee by the Company and the Bank, the provisions of the Bank Subordinated Guarantee shall be deemed to be incorporated herein and to be a part hereof except to the extent any such provisions shall conflict with any express provisions of this Agreement or of the Delaware Act. ARTICLE IV CAPITAL CONTRIBUTIONS, ALLOCATIONS AND SECURITIES Section 4.1 Form of Contribution. The contribution to the Company with respect to a Securityholder may, as determined by the Board of Directors in its discretion, be in cash or other legal consideration. -15- 20 Section 4.2 Contributions with Respect to the Common Securityholders. The Common Securityholder shall contribute to the Company on or prior to the issuance of the Company Preferred Securities, cash in this amount of $-. Section 4.3 Contributions with Respect to the Preferred Securityholders. On each Closing Date, there shall be contributed to the capital of the Company, with respect to each Person who purchases a Company Preferred Security on such Closing Date, an amount in cash equal to the Purchase Price for such Company Preferred Security (such amount being such Person's capital contribution to the Company). Preferred Securityholders, in their capacity as Securityholders of the Company, shall not be required to make any additional contributions to the Company (except as may be required by law). Section 4.4 Allocation of Profits and Losses. Except as otherwise provided in Section 7.3, the profits and losses of the Company for any Financial Year (or portion thereof) shall be allocated as follows: (a) all gains and losses resulting from any disposition (including, without limitation, any redemption or prepayment) of assets by the Company shall be allocated 100% to the Common Securityholders; (b) except as otherwise provided in a Certificate of Designations, net profit of the Company (determined without regard to the amount of any gains and losses described in subparagraph (a) of this Section 4.4) shall be allocated (i) pro rata among the Preferred Securityholders until the amount so allocated equals the amount of dividends paid during such Financial Year (or portion thereof), as determined on a daily accrual basis with respect to the Company Preferred Securities or Company Parity Preferred Securities held by such Preferred Securityholder, as adjusted pursuant to Sections 7.3 and 4.3 or in any Certificate of Designations after the delivery of a No Dividend Instruction, and (ii) thereafter to the Common Securityholders; and (c) expenses, deductions and net loss of the Company (determined without regard to the amount of any gains and losses described in subparagraph (a) of this Section 4.4) shall be allocated 100% to the Common Securityholders. Notwithstanding the foregoing, the Tax Matters Partner shall have the power to alter any such allocations for federal, state, and local income tax purposes if such alteration is necessary to cause such allocations to have "substantial economic effect" (within the meaning of Treasury regulation 1.704-1(b)(2)) or to ensure that such allocations are otherwise in accordance with the interests of the Securityholders (within the meaning of Treasury regulation 1.704-1(b)(3)) determined on the basis of the economic arrangements of the parties as described in this Agreement. Section 4.5 Withholding. The Company shall comply with any withholding requirements under federal, state and local law and shall remit amounts withheld to and file required forms with applicable jurisdictions. Subject to the provisions of Section 7.3 to the extent that the -16- 21 Company is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Securityholder, the amount withheld shall be deemed to be a distribution in the amount of the withholding to such Securityholder. The Company will, however, be required to pay additional amounts so that the net amount received by a Preferred Securityholder after withholding will not be less than the Mandatory Dividend Payment Amount then due and payable as described in Section 7.3(c). To the fullest extent permitted by law, in the event of any claimed over-withholding, Securityholders shall be limited to an action against the applicable jurisdiction. If the amount withheld was not withheld from actual distributions, the Company may reduce subsequent distributions by the amount of such withholding, except with respect to distributions on the Company Preferred Securities. Each Securityholder, by its acceptance of Securities, shall be deemed to agree to furnish the Company with any representations and forms as shall reasonably be requested by the Company to assist it in determining the extent of, and in fulfilling, its withholding obligations. Section 4.6 Securities as Personal Property. Each Securityholder hereby agrees that its Company Securities shall for all purposes be personal property. A Securityholder has no interest in specific property of the Company. ARTICLE V SECURITYHOLDERS Section 5.1 Powers of Securityholders. The Securityholders shall have the power to exercise any and all rights or powers granted to the Securityholders pursuant to the express terms of this Agreement and of the By-Laws and shall be subject in all respects to the provisions hereof and thereof. Section 5.2 Partition. Each Securityholder waives any and all rights that it may have to maintain an action for partition of the property of the Company. Section 5.3 Resignation. A Securityholder may resign from the Company prior to the dissolution and winding up of the Company only upon the assignment of its entire ownership interest in any Company Securities (including by any redemption, repurchase or other acquisition by the Company of such Company Securities) in accordance with the provisions of this Agreement. A resigning Securityholder shall not be entitled to receive any distribution and shall not otherwise be entitled to receive the fair value of its Company Securities except as otherwise expressly provided for in this Agreement. Section 5.4 Liability of Securityholders. (a) Except as otherwise required by the Delaware Act, (i) the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company and (ii) no Securityholder shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Securityholder of the Company. -17- 22 (b) A Securityholder, in its capacity as such, shall have no liability in excess of (i) the amount of its capital contributions, (ii) its share of any assets and undistributed profits of the Company, (iii) any amounts required to be paid by such Securityholder pursuant to this Agreement or any payment and/or indemnity in connection with the registration of transfers of Company Securities and (iv) the amount of any distributions wrongfully distributed to it to the extent set forth in the Delaware Act. ARTICLE VI MANAGEMENT Section 6.1 Management of the Company. (a) Except as otherwise expressly provided in this Agreement or in the By-Laws or as required in the Delaware Act, the business and affairs of the Company shall be managed, and all actions required under this Agreement shall be determined, solely and exclusively by the Board of Directors, which shall have all rights and powers on behalf and in the name of the Company to perform all acts necessary and desirable to the objects and purposes of the Company, including the right to appoint Officers and to authorize any Officer to act on behalf of the Company. Any action taken by the Board of Directors or any duly appointed and acting Officer in accordance with this Agreement or the By-Laws shall constitute the act of, and shall serve to bind, the Company. (b) The number of directors of the Company initially shall be three, which number may be increased as provided in this Agreement, in any Certificate of Designations or in the ByLaws, but shall never be less than three nor more than five. The names of the Directors who shall serve until the first annual meeting of Securityholders and until their successors are duly elected and qualify, are set forth in Annex E hereto. These Directors may increase the number of Directors and may fill any vacancy, whether resulting from an increase in the number of directors or otherwise, on the Board of Directors occurring before the first annual meeting of Securityholders in the manner provided in the By-Laws. The names of the initial Officers, and their offices, are set forth in Annex E hereto. Each such Officer shall have the duties and responsibilities that would apply to his or her office if the Company were a corporation established under the Delaware General Corporation Law, except to the extent that the Directors from time-to-time determine otherwise. (c) Each member of the Board of Directors shall be a "manager" of the Company for all purposes of, and within the meaning of, the Delaware Act. (d) Without limiting the generality of the foregoing, and subject to the provisions of Section 6.2, the Board of Directors shall have all authority, rights and powers in the management of the business of the Company to do any and all other acts and things necessary, proper, convenient or advisable to effectuate the purposes of this Agreement, provided that in exercising its authority, rights and powers in the management of the business of the Company, the Board of Directors shall use commercially reasonable efforts in order that any such action does not cause the Company to be -18- 23 treated as an association or as a "publicly traded partnership" (within the meaning of Section 7704 of the Code), including by way of illustration, but not by way of limitation, the following: (i) to authorize the Company or any Officer of the Company on behalf of the Company, to engage in transactions and dealings, including transactions and dealings with any Securityholder or any Affiliate of any Securityholder and including the entering into and performance by the Company of one or more agreements with any Person whereby, subject to the supervision and control of the Board of Directors, any such other Person shall render or make available to the Company managerial, investment, advisory or related services, office space and other services and facilities upon such terms and conditions as may be provided in such agreement or agreements (including, if deemed fair and equitable by the Board of Directors, the compensation payable thereunder by the Company); (ii) to call meetings of Securityholders or any class or series thereof; (iii) to issue Company Securities, including Company Common Securities and Company Preferred Securities, in accordance with the provisions of this Agreement; (iv) to pay all expenses incurred in forming the Company to the extent not paid by the Bank; (v) to purchase, hold and dispose of Eligible Investments in accordance with the Investment Policies established from time to time by the Board of Directors and otherwise in accordance with the provisions of this Agreement; (vi) to authorize (A) the entering into by the Company of the Administration Agreement, the Registrar and Transfer Agency Agreement and the Paying Agency Agreement and (B) the performance by the Company of its obligations thereunder; (vii) to authorize (A) the entering into by the Company of the Underwriting Agreement and (B) the performance by the Company of its obligations thereunder, including the offer and sale of the Company Preferred Securities pursuant thereto; (viii) to authorize (A) the entering into by the Company of the Bank Subordinated Guarantee and (B) the performance by the Company of its obligations thereunder; (ix) to authorize (A) the entering into by the Company of similar agreements (or other agreements not inconsistent herewith) in the future and (B) the performance by the Company of its obligations thereunder; (x) to authorize, suspend, pay, declare or otherwise determine and make dividends, in cash or otherwise, on Company Securities, in accordance with the provisions of this Agreement and of the Delaware Act; -19- 24 (xi) to establish, when a record date is not otherwise established by this Agreement, record date with respect to all actions to be taken hereunder that require a record date to be established, including with respect to allocations, dividends and voting rights; (xii) to establish or set aside in their discretion any reserve or reserves for contingencies and for any other proper Company purpose; (xiii) to redeem or repurchase on behalf of the Company, Company Securities which may be so redeemed or repurchased in accordance with the provisions of this Agreement; (xiv) to appoint (and dismiss from appointment) attorneys and agents on behalf of the Company, and employ (and dismiss from employment) any and all Persons providing legal, accounting or financial services to the Company, or such other employees or agents as the Directors deem necessary or desirable for the management and operation of the Company; (xv) to incur and pay all expenses and obligations incident to the operation and management of the Company, including, without limitation, the services referred to in the preceding paragraph, taxes, interest, rent and insurance; (xvi) to acquire and enter into any contract of insurance necessary or desirable for the protection or conservation of the Company and its assets or otherwise in the interest of the Company as the Board of Directors shall determine; (xvii) to open accounts and deposit, maintain and withdraw funds in the name of the Company in banks, savings and loan associations, brokerage firms or other financial institutions, which bank accounts if opened prior to one month after the Closing Date for the Company Preferred Securities may be opened by any Officer that is authorized to do so by a written consent of any Director; (xviii) to effect a dissolution or liquidation of the Company, if the Bank is liquidated, whether voluntarily or involuntarily, subject to applicable regulatory requirements, including the prior approval of the Swiss Federal Banking Commission if then required under applicable guidelines or policies of the Swiss Federal Banking Commission, and to act as liquidating trustee or the Person winding up the Company's affairs, all in accordance with and subject to the provisions of this Agreement and of the Delaware Act; (xix) to bring and defend on behalf of the Company actions and proceedings at law or equity before any court or governmental, administrative or other regulatory agency, body or commission or otherwise; -20- 25 (xx) to prepare and cause to be prepared reports, statements and other relevant information for distribution to Securityholders as may be required or determined to be appropriate by the Board of Directors from time to time; (xxi) to prepare and file all necessary returns and statements and pay all taxes, assessments and other impositions applicable to the assets of the Company; (xxii) to execute all other documents or instruments, perform all duties and powers and do all things for and on behalf of the Company in all matters necessary or desirable or incidental to the foregoing; (xxiii) to purchase and maintain on behalf of the Company insurance to protect any Director or Officer against any liability asserted against him or her, or incurred by him or her, arising out of his or her status as such, and (xxiv) to amend this Agreement in accordance with Section 16.1. (e) (i) Notwithstanding anything in this Agreement to the contrary, without the need for consent of any other Person, including the Board of Directors, the Company is authorized to purchase the Subordinated Notes and to enter into and perform the Underwriting Agreement relating to the Company Preferred Securities (including the offer and sale of the Company Preferred Securities pursuant thereto), the Subordinated Notes Purchase Agreement, the Bank Subordinated Guarantee, the Administration Agreement, the Paying Agency Agreement, the Calculation Agency Agreement, the member interest certificates in respect of the Company Preferred Securities, the Registrar and Transfer Agency Agreement relating to the Company Preferred Securities, the Registrar and Transfer Agency Agreement relating to the Trust Preferred Securities, the Amended and Restated Trust Agreement of the Trust and amendments and restatements thereof, and other similar agreements (and other agreements not inconsistent therewith) (the "Transaction Documents") and any Officer or Director of the Company may (A) on behalf of the Company, execute and deliver, and cause the Company (1) to perform its obligations under, (2) to satisfy any conditions required to be satisfied by the Company as a condition precedent to the effectiveness of, and (3) to take such other actions as such Officer or Director may deem appropriate with respect to, each of the Transaction Documents; and (B) cause the Company to issue Company Common Securities and the Company Preferred Securities on the Closing Date under the Purchase Agreement relating to Company Preferred Securities in accordance with this Agreement. (ii) Subject to the provisions of Section 6.2 below, the expression of any power or authority of the Board of Directors shall not in any way limit or exclude any other power or authority which is not specifically or expressly set forth in this Agreement. (f) The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with this Agreement and in the absence of actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a court, shall be final and conclusive and shall be binding upon -21- 26 the Company and every Securityholder: the amount of the net income of the Company for any period and the amount of assets at any time legally available for the payment of dividends, redemption of the Company Securities or the payment of other distributions on the Company Securities; the amount of paid-in surplus, net assets, other surplus, annual or other net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose or time of creation of any gain or loss on disposition of the Company's assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Company; and any matters relating to the acquisition, holding and disposition of any assets by the Company. (g) The Board of Directors shall cause the Company to use its available funds, after satisfaction of the Company's liabilities and other obligations, for distributions to Securityholders in accordance with this Agreement, and establishment by the Company of such reserves as the Board of Directors shall deem to be necessary or appropriate to purchase Eligible Investments in accordance with the Investment Policies, as such policies and guidelines may be changed from time to time by the Board of Directors as provided herein; provided that such new policies and guidelines cannot be inconsistent with the express provisions of this Agreement. Section 6.2 Limits on Board of Directors' Powers. Anything in this Agreement to the contrary notwithstanding, the Board of Directors shall not cause or permit the Company to, and the Company shall not: (a) acquire any assets other than as expressly provided in the Investment Policies; (b) acquire any securities or other assets that give the Company U.S. source income; (c) for so long as any Trust Certificates settle and clear through DTC, Euroclear or Clearstream, acquire or own any securities other than Eligible Investments; (d) possess Company property for other than a Company purpose; (e) admit a Person as a Securityholder, except as expressly provided in this Agreement; -22- 27 (f) perform any act that would subject any Preferred Securityholder to liability for (A) the debts, obligations and liabilities of the Company in any jurisdiction, except as expressly provided in this Agreement, or (B) a tax on "unrelated business taxable income" under the Code as a consequence of such act; (g) engage in any activity that would cause the Company to be treated as an association or as a "publicly traded partnership" (within the meaning of Section 7704 of the Code); (h) engage in any activity that is not consistent with the purposes of the Company, as set forth in Section 3.1 of this Agreement; or (i) borrow money or enter into repurchase agreements, reverse repurchase agreements, or other securities lending transactions or take any action that could reasonably be expected to cause a Tax Event, Capital Event or Investment Company Act Event to occur. Section 6.3 Reliance by Third Parties. Persons dealing with the Company are entitled to rely conclusively upon the power and authority of the Board of Directors and of any duly appointed and acting Officers. In dealing with the Board of Directors or any Officer duly appointed and acting as set forth in this Agreement or in the By-Laws, no Person shall be required to inquire into the authority of the Board of Directors or any such Officer to bind the Company. Persons dealing with the Company are entitled to rely conclusively on the power and authority of the Board of Directors or any Officer duly appointed and acting as set forth in this Agreement or in the ByLaws. Section 6.4 No Management by Any Preferred Securityholders. Except as otherwise expressly provided herein, no Preferred Securityholder, in its capacity as a Preferred Securityholder of the Company, shall take part in the day-to-day management, operation or control of the business and affairs of the Company. The Preferred Securityholders, in their capacity as Preferred Securityholders of the Company, shall not be agents of the Company and shall not have any right, power or authority to transact any business in the name of the Company or to act for or on behalf of or to bind the Company. Section 6.5 Business Transactions of the Common Securityholder with the Company. Subject to Sections 6.1 and 6.2 of this Agreement and applicable law, a Common Securityholder and any of its Affiliates may hold deposits of, and enter into business transactions with, the Company and, subject to applicable law, shall have the same rights and obligations with respect to any such matter as Persons who are not a Common Securityholder or Affiliates thereof. Section 6.6 Outside Businesses. Any Director, Officer, Securityholder or Affiliate thereof may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Company, and the Company and the Securityholders shall have no rights by virtue of this Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if -23- 28 competitive with the business of the Company, shall not be deemed wrongful or improper. No Director, Officer, Securityholder or Affiliate thereof shall be obligated to present any particular investment opportunity to the Company even if such opportunity is of a character that, if presented to the Company, could be taken by the Company, and any Director, Officer, Securityholder or Affiliate thereof shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment opportunity. Any Securityholder or Affiliate thereof may engage or be interested in any financial or other transaction with any other Securityholder or Affiliate thereof. Section 6.7 Duties of Directors. The Board of Directors shall, in considering any proposed action or inaction with respect to the Subordinated Notes pursuant to Section 6.1(d), take into account the interest of both the Preferred Securityholders and the Bank, as owner of the Company Common Securities. To the fullest extent permitted by law, no member of the Board of Directors shall have any liability to any Preferred Securityholder or the Company for not voting to take any enforcement action under the Subordinated Notes in the event of a default by the Cayman Islands Branch in performing any of its obligations (including payment obligations) thereunder. Section 6.8 Additional Directors. If at any time the aggregate of unpaid dividends on the Company Preferred Securities or any Company Parity Preferred Securities equals or exceeds an amount equal to three semi-annual dividend payments, the holders of Company Preferred Securities and any Company Parity Preferred Securities, voting together as a single class, will have the exclusive right to elect two additional directors. Holders of a majority (based on the aggregate liquidation preference) of Company Preferred Securities and Company Parity Preferred Securities may exercise this right by written consent or at a meeting of such holders called for such purpose. This meeting may be called at the request of any holder of Company Preferred Securities or Company Parity Preferred Securities. This right will continue either until all unpaid dividends have been paid in full or until full dividends have been paid on the Company Preferred Securities for two consecutive dividend periods. While this right continues, any vacancy in the office of the additional directors may be filled only by the holders of Company Preferred Securities and Company Parity Preferred Securities voting as described above. ARTICLE VII COMPANY SECURITIES; SUBORDINATED NOTES Section 7.1 Company Common Securities. (a) The Bank, as the initial Common Securityholder, shall be deemed to have been issued - Company Common Securities upon its designation as the Common Securityholder pursuant to Section 2.2 of this Agreement. Upon issuance as provided in this Agreement, the Company Common securities so issued shall be deemed duly authorized, validly issued, fully paid and nonassessable. -24- 29 (b) Company Common Securities shall not be evidenced by any certificate or other written instrument, but shall only be evidenced by this Agreement. (c) The Common Securityholders will receive dividends out of interest payments received by the Company on the Subordinated Notes and other Eligible Investments, if any, not required to be applied to fund dividends with respect to the Company Preferred Securities or expenses of the Company. However, as long as the Company Preferred Securities or the Company Parity Preferred Securities are outstanding, no dividends or other distributions (including redemptions and purchases) may be made with respect to Company Common Securities unless full dividends on all Company Preferred Securities and Company Parity Preferred Securities have been paid as provided in Section 7.3. (d) Subject to the rights, if any, of the Preferred Securityholders (to the limited extent provided in Section 8.1), all voting rights are vested in the Company Common Securities. The Common Securityholders are entitled to vote in proportion to the stated amounts represented by their Company Common Securities. (e) If the Company dissolves, liquidates or winds up (whether voluntary or involuntary) after all debts and liabilities of the Company have been satisfied and there have been paid or set aside for the Preferred Securityholders the full preferential amounts to which such holders are entitled, the Common Securityholders will be entitled to share equally and ratably in any assets remaining. Section 7.2 General Provisions Regarding Company Preferred Securities and Company Parity Preferred Securities. (a) There is hereby authorized for issuance and sale Company Preferred Securities having an aggregate initial liquidation preference of $1,500,000,000. The specific designation, dividend rate, liquidation preference, redemption terms, voting rights, exchange limitations and other powers, preferences and special rights and limitations of the Company Preferred Securities are set forth in Section 7.3 hereof. Upon issuance as provided in this Agreement, the Company Preferred Securities and the Company Parity Preferred Securities (if any) so issued, shall be deemed duly authorized, validly issued, fully paid and nonassessable. The Company has the power to create and issue additional preferred limited liability company interests in the Company that are junior to the Company Preferred Securities as to payment of dividends and payments of amounts upon dissolution, liquidation or winding up of the Company ("Company Junior Securities") or that are on a parity with the Company Preferred Securities as to payment of dividends and payments of amounts upon dissolution, liquidation or winding up of the Company ("Company Parity Preferred Securities") and admit the purchasers of such limited liability company interests to the Company as members of the Company. So long as any Company Preferred Securities remain outstanding, additional Company Parity Preferred Securities may be issued only with the consent of the holders of two-thirds (based on the aggregate liquidation preference) of the Company Preferred Securities and Company Parity Preferred Securities, voting together as a single -25- 30 class, and only if the Bank Subordinated Guarantee is amended so that such Company Parity Preferred Securities benefit from the Bank Subordinated Guarantee in the same manner as the Company Preferred Securities without any adverse effect on holders of the Company Preferred Securities. See Section 7.3(h). The Company may not, without the consent of each Preferred Securityholder, authorize, create or increase the authorized amount of, or issue any class or series of equity securities of or limited liability company interests in the Company, or any warrants, options or other rights convertible or exchangeable into any class or series of any equity securities of or limited liability company interests in the Company, ranking prior to the Company Preferred Securities, either as to dividend rights or rights on dissolution, liquidation or winding up of the Company. Subject to the express provisions of this Agreement and of the By-Laws, the Board of Directors shall have authority to fix the terms of Company Parity Preferred Securities that may be issued by the Company by adopting in accordance with the provisions of this Agreement a Certificate of Designations relating to such Company Parity Preferred Securities that shall set forth the preferences and other terms of such series, including without limitation the following: (1) the title and stated value of such series; (2) the number or amount by aggregate liquidation preference of securities of such series offered and the initial liquidation preference per security or minimum denomination of such series; (3) the dividend rate(s), period(s), and/or payment date(s) or method(s) of calculation thereof applicable to such series; (4) whether such Company Parity Preferred Securities are cumulative or not and, if cumulative, the date from which dividends on such Company Parity Preferred Securities shall accumulate; (5) the provisions for a sinking fund, if any, for such series; (6) the provisions for redemption, if applicable, of such series; (7) any voting rights of such series; (8) the relative ranking and preferences of such series as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; (9) any limitations on issuance of any Company Parity Preferred Securities ranking senior to or on a parity with such series of Company Preferred Securities as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; (10) whether such Company Parity Preferred Securities will be eligible for issuance as book-entry Company Parity Preferred Securities; and (11) any other specific terms, preferences, rights, limitations or restrictions of such series. Upon such adoption by the Board of Directors, each such Certificate of Designations shall thereupon be incorporated into and deemed to be part of this Agreement. (b) All Company Preferred Securities and Company Parity Preferred Securities shall rank senior to all Company Junior Securities in respect of the right to receive dividends or other distributions and the right to receive payments out of the assets of the Company upon voluntary or involuntary dissolution, winding-up or termination of the Company in accordance with the provisions hereof (subject to the provisions of Section 7.3 or any Certificate of Designations). All Company Preferred Securities and Company Parity Preferred Securities redeemed, purchased or otherwise acquired by the Company shall be canceled. The Company Preferred Securities and Company Parity Preferred Securities shall be issued in registered form only. -26- 31 (c) Neither the Bank, the Company nor any of their respective Affiliates shall have the right to vote or give or withhold consent with respect to any Company Preferred Security or Company Parity Preferred Security owned by it, directly or indirectly, and, for purposes of any matter upon which the Preferred Securityholders may vote or give or withhold consent as provided in this Agreement, Company Preferred Securities and Company Parity Preferred Securities owned by any of the Bank, the Company or any of their respective Affiliates shall be treated as if they were not outstanding. (d) Anything in this Agreement to the contrary notwithstanding: (i) as long as any Company Preferred Securities are outstanding, other Company Parity Preferred Securities may not be redeemed or repurchased unless the Company concurrently redeems an approximately equal proportion of the aggregate liquidation preference of the outstanding Company Preferred Securities or each Rating Agency then rating the Company Preferred Securities informs the Company in writing that the redemption or repurchase of such Company Parity Preferred Securities would not result in a reduction or withdrawal of the rating then assigned by that Rating Agency to the Company Preferred Securities, and (ii) as long as any Company Preferred Securities or Company Parity Preferred Securities remain outstanding, the Company may issue or authorize the issuance of any Company Parity Securities or Company Parity Preferred Securities only with the approval of the holders of two-thirds (based on the aggregate liquidation preference) of the Company Preferred Securities and Company Parity Preferred Securities, voting together as a single class, and only if the Bank Subordinated Guarantee is amended prior thereto so that such additional Company Parity Preferred Securities benefit from the Bank Subordinated Guarantee in substantially the same manner as the Company Preferred Securities without any adverse effect on the holders of the Company Preferred Securities. (e) In purchasing Company Preferred Securities or Company Parity Preferred Securities, each Preferred Securityholder agrees with the Bank and the Company that the Bank, the Company and the Preferred Securityholders (i) will treat Preferred Securityholders as holders of the Company Preferred Securities or Company Parity Preferred Securities for all purposes, and not as the holders of an interest in the Bank, the Cayman Islands Branch or in any other Person and (ii) will follow allocations made by the Company pursuant to Section 4.4 of this Agreement. Section 7.3 Company Preferred Securities. (a) Designation. There shall hereby be designated as a series of preferred limited liability company interests in the Company a series identified as the Company's "-% Noncumulative Company Preferred Securities", liquidation preference $1000 per security and aggregate liquidation preference $1,500,000,000 (the "Company Preferred Securities"). -27- 32 Exhibit 3.4 The holders of the Company Preferred Securities (or of any other Company Security) will have no preemptive rights with respect to any limited liability company interests in the Company or any other securities of the Company convertible into or carrying rights or options to purchase any such securities. Company Preferred Securities will not be convertible into Company Common Securities or any other class or series of limited liability company interests in the Company and will not be subject to any sinking fund or other obligation of the Company for its repurchase or retirement. A Company Preferred Security shall be represented by the corresponding Company Preferred Certificate. (b) Dividends. (i) Dividends on the Company Preferred Securities will be payable from the date of initial issuance on a noncumulative basis, through October 2010 semi-annually in arrears on April [--] and October [--] of each year and thereafter on January [--], April [--], July [--] and October [--] of each year (each a "Dividend Payment Date" and each period from and including a Dividend Payment Date, or the date of initial issuance as applicable, to but not including the next Dividend Payment Date, a "Dividend Period") for the Dividend Period then ending, but only if the Company has legally available funds for such purpose and satisfies the other qualifications described below. Dividends will be payable on the liquidation preference (i) for each Dividend Period through the Dividend Period ending on the Dividend Payment Date in October 2010, at a fixed rate per annum on the liquidation preference equal to [--]% (calculated on the basis of a year of twelve 30-day months) and (ii) for each dividend period commencing on such Dividend Payment Date and thereafter, at a floating rate per annum on the liquidation preference equal to [--]% above three-month LIBOR (calculated on the basis of the actual number of days elapsed in a 360-day year). Dividends will be mandatorily due and payable in the circumstances described in Section 7.3(b)(ii) below, except that dividends will never be mandatorily due and payable if the Capital Limitation described below in Section 7.3(b)(iii) applies. If dividends on a Dividend Payment Date are neither mandatorily due and payable nor prohibited by application of the Capital Limitation, then (i) payment of dividends on the Company Preferred Securities will be limited by the Bank's Available Distributable Profits (see Section 7.3(b)(iv), below) and (ii) if the Bank delivers, on or before the tenth Business Day immediately preceding such Dividend Payment Date, an instruction (a "No Dividend Instruction") to the Company not to pay dividends on such Dividend Payment Date or to pay less than full dividends on such Dividend Payment Date, dividends payable on the related Dividend Payment Date will be limited as provided in such No Dividend Instruction (see Section 7.3(b)(v) below). -28- 33 If any dividends will be payable on the Company Preferred Securities on a day that is not a Business Day, those dividends will instead be paid on the next Business Day. No interest or other payment will be due as a result of any such adjustment. LIBOR, with respect to a Determination Date, means the rate (expressed as a percentage per annum) for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that Determination Date that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on that Determination Date. If such rate does not appear on Telerate Page 3750, LIBOR will be determined on the basis of the rates which deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that Determination Date and in a principal amount equal to an amount of not less than $1,000,000 that is representative for a single transaction in such market at such time, are offered to prime banks in the London interbank market by four major banks in the London interbank market selected by the Calculation Agent, after consultation with the Company, at approximately 11:00 a.m., London time, on that Determination Date. The Calculation Agent will request the principal London office of each of such banks to provide a quotation at its rate. If at least two such quotations are provided, LIBOR with respect to that Determination will be the arithmetic mean of such quotations. If fewer than two quotations are provided, LIBOR in respect of that Determination Date will be the arithmetic mean of the rates quoted by three major money center banks in New York City selected by the Calculation Agent, after consultation with the Company, at approximately 11:00 a.m., New York City time, on that Determination Date for loans in U.S. dollars to leading European banks for a three-month period commencing on the second London Banking Day immediately following that Determination Date and in a principal amount equal to an amount of not less than $1,000,000. However, if the banks selected by the Calculation Agent to provide quotations are not quoting as mentioned in this paragraph, LIBOR for the applicable period will be the same as LIBOR as determined on the previous Determination Date. All percentages resulting from any calculations on the Company Preferred Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (ii) The Company is required to pay dividends on the Company Preferred Securities in three circumstances, as follows: (A) If the Bank declares or pays dividends or makes any other payment or distribution on any Bank Junior Obligations and the Capital Limitation does not apply, then the Company will be required to pay full dividends on the -29- 34 Company Preferred Securities during the one-year period beginning on and including the earlier of the date on which such dividend was declared or the date on which such dividend or other payment was made. (B) If the Bank or any of its subsidiaries redeems, repurchases or otherwise acquires any Bank Parity Securities or Bank Junior Obligations for any consideration, except by conversion into or exchange for shares or Junior Obligations of the Bank and except as described below (and provided that the Capital Limitation does not apply), then the Company will be required to pay dividends on the Company Preferred Securities during the one-year period beginning on and including the date on which such redemption, repurchase or other acquisition occurred. (C) If (x) the Bank or any of its subsidiaries declares or pays any dividends or makes any other payment or distribution on any Bank Parity Securities on any date and (y) during the Relevant Period ending on and including such date there occurred a Dividend Payment Date as to which the Company paid no dividends or less than full dividends on the Company Preferred Securities, and provided that the Capital Limitation does not apply, then on that date the Company will be required to pay a special dividend on the Company Preferred Securities. The special dividend will be payable on that date whether or not that date is otherwise a Dividend Payment Date and, if it is a Dividend Payment Date, will be in addition to any other dividends required to be paid on such Dividend Payment Date. The special dividend will be in an amount that, when taken together with dividends previously paid on the Company Preferred Securities during the Relevant Period, represents the same proportion of full dividends on the Company Preferred Securities for all Dividend Payment Dates during the Relevant Period that the dividend on Bank Parity Securities paid on such date bears to full dividends on such Bank Parity Securities for the Relevant Period. Notwithstanding paragraph (B) above, the Company will not be required to pay dividends solely as a result of (a) repurchases, redemptions or other acquisitions of Bank Parity Securities or ordinary shares in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or shareholder share purchase plan or in connection with the issuance of Bank Parity Securities or Bank Junior Obligations (or securities convertible into or exercisable for such Bank Parity Securities or Bank Junior Obligations) as consideration in an acquisition transaction, (b) market-making in the Bank Parity Securities or ordinary shares as part of the securities business of the Bank or any of its subsidiaries, (c) the purchase of fractional interests in shares of Bank Parity Securities or Bank Junior Obligations pursuant to the conversion or exchange provisions of such Bank Parity Securities or Bank Junior Obligations or the security being converted or exchanged, (d) any declaration of a dividend in connection with any shareholder's rights plan, or the issuance of rights, shares or other property under any shareholder's rights plan, or the redemption or repurchase of rights pursuant to any such plan, or (e) any dividend in the form of shares, warrants, options or other rights where the dividend shares or the shares -30- 35 issuable upon exercise of such warrants, options or other rights are the same shares as that on which the dividend is being paid or ranks pari passu with or junior to such shares. Any Dividend Payment Date or other date on which dividends on the Company Preferred Securities are required to be paid as described in paragraphs (A), (B) or (C) above is a "Mandatory Dividend Payment Date." The amount of dividends required to be paid on any Mandatory Dividend Payment Date (after giving effect to the Capital Limitation, if applicable) is called the "Mandatory Dividend Payment Amount". If a Dividend Payment Date is a Mandatory Dividend Payment Date, the Company will be required to pay the Mandatory Dividend Payment Amount as dividends on that date whether or not there are Available Distributable Profits and whether or not interest is paid on the Subordinated Notes. (iii) The prohibition on the payment of dividends on the Company Preferred Securities as described below is called the "Capital Limitation". Unless the Swiss Federal Banking Commission expressly permits otherwise, the Company will not pay dividends on the Company Preferred Securities on any Dividend Payment Date (whether or not it is a Mandatory Dividend Payment Date) if on such date the Bank is not in compliance, or because of a distribution by the Bank or any of its subsidiaries of profits of the Bank (including a payment of dividends on the Company Preferred Securities) would not be in compliance, with the Swiss Federal Banking Commission's minimum capital adequacy requirements applicable to the Bank as then in effect. (iv) The limitation or prohibition on the payment of dividends on the Company Preferred Securities as described below is called the "Distributable Profits Limitation". The Distributable Profits Limitation will not limit or prohibit payment of dividends up to the Mandatory Dividend Payment Amount as to a Mandatory Dividend Payment Date. On or before the Dividend Payment Date in April of each year, the Bank will deliver a certificate to the Company (a "Distributable Profits Limitation Certificate") specifying: (i) the Distributable Profits of the Bank for the financial year ending on the preceding December 31 and (ii) the Available Distributable Profits for payment of dividends on the Company Preferred Securities on the Dividend Payment Dates in the then current year. Unless the Company is required to pay as dividends the Mandatory Dividend Payment Amount for a Mandatory Dividend Payment Date, (A) the aggregate amount of dividends on the Company Preferred Securities that the Company may pay on the Dividend Payment Date in April of the current year may not exceed the lesser of full dividends and the Available Distributable Profits set forth in such Distributable Profits Limitation Certificate, and (B) the aggregate amount of dividends on the Company Preferred Securities that the Company may pay on any subsequent Dividend Payment Date in the current year (or in January of the following year in the case of dividend payment dates occurring after October 2010) may not -31- 36 exceed the lesser of full dividends and the remaining amount of such Available Distributable Profits (after giving effect to the payment of dividends pursuant to this subclause or subclause (A), above). (v) Except for the Mandatory Dividend Payment Amounts required to be paid on Mandatory Dividend Payment Dates: (A) dividends on Company Preferred Securities will not be payable on a Dividend Payment Date if, on or before the tenth Business Day immediately preceding such Dividend Payment Date, the Bank delivers a No Dividend Instruction to the Company instructing it not to pay dividends on such Dividend Payment Date; and (B) if, on or before the tenth Business Day immediately preceding such Dividend Payment Date, the Bank delivers a No Dividend Instruction to the Company limiting but not prohibiting the payment of dividends on such Dividend Payment Date, dividends on the Company Preferred Security will be payable on such Dividend Payment Date only to the extent permitted by such No Dividend Instruction. If a No Dividend Instruction is given, then the Company must promptly give notice to holders of the Company Preferred Securities in the manner described in Section 7.3(i) of the fact that it has received a No Dividend Instruction and the amount of dividends, if any, that will be paid on the related Dividend Payment Date. (c) Additional Amounts. If the Company or the Trust is required to withhold any taxes, duties or other governmental charges with respect to any payment of dividends on the Company Preferred Securities or the Trust Preferred Securities, the Company will be required to pay as additional amounts included in the mandatory dividend payment (and the Bank will be required to include in any related payment made by it under the Bank Subordinated Guarantee) an amount sufficient that the net amount received by the holder of the Company Preferred Securities or Trust Preferred Securities, as applicable, after the withholding, will not be less than the Mandatory Dividend Payment Amount. However, the Company will not be required to pay any such additional amounts to the extent that the taxes, duties or other governmental charges are imposed or levied by Switzerland or the Cayman Islands because the holder or beneficial owner of Trust Preferred Securities or Company Preferred Securities: (i) has some connection with Switzerland or the Cayman Islands, as applicable, other than being a holder or beneficial owner of those Trust Preferred Securities or Company Preferred Securities; or (ii) has not made a declaration of non-residence in, or other lack of connection with, Switzerland or the Cayman Islands, as applicable, or any similar claim for exemption, if the Company has given the beneficial owner of those Trust Preferred Securities -32- 37 or Company Preferred Securities or its nominee at least 60 days' prior notice of an opportunity to make the declaration or claim. (d) Ranking and Liquidation Preference. The Company Preferred Securities ordinarily will rank senior to the Company Common Securities as to payment of dividends. However, the Bank has the right to shift the dividend preference of the Company Preferred Securities to the Company Common Securities on any Dividend Payment Dates to the extent that the Mandatory Dividend Payment Amount then required to be paid as dividends on the Company Preferred Securities (if any) is less than full dividends on the Company Preferred Securities. If the Bank shifts the dividend preference to the Company Common Securities, the interest payment received by the Company on the Subordinated Notes will be returned as dividends to the Bank as holder of the Company Common Securities before any dividends are paid on the Company Preferred Securities. As long as any Company Preferred Securities are outstanding, the Bank, to the fullest extent permitted by law, will take no voluntary action to cause the Company to dissolve or liquidate unless the Bank also liquidates. If the Bank is liquidated, whether voluntarily or involuntarily (and whether in connection with the occurrence of a Bankruptcy Event or otherwise), the Company will be liquidated. If the Company dissolves, liquidates, or winds up, then, after the claims of any creditors of the Company are satisfied, the holders of the Company Preferred Securities will be entitled to receive, before any distribution of assets is made to the holders of Company Junior Securities upon liquidation, liquidating distributions in respect of the Company Preferred Securities in the amount of the liquidation preference of their Company Preferred Securities plus an amount equal to unpaid dividends, if any, on the Company Preferred Securities with respect to the current Dividend Period accrued on a daily basis to the date of liquidation, plus an amount equal to unpaid Definitive Dividends for any prior Dividend Period, but without interest and without accumulation of unpaid Nondefinitive Dividends for any prior Dividend Period. Notwithstanding and as a limitation on the foregoing, the holders of the Company Preferred Securities may not receive liquidating distributions in a liquidation of the Company in an amount exceeding the liquidating distributions to which they would have been entitled had they instead owned preferred shares of the Bank having an aggregate liquidation preference equal to the aggregate liquidation preference of the Company Preferred Securities and bearing dividends at the rate of dividends applicable to the Company Preferred Securities. The holders of the Company Common Securities will be entitled to share pro rata in any remaining assets of the Company only after holders of the Company Preferred Securities have received the amounts described above. (e) Voting Rights. Except as expressly required by applicable law, or except as indicated below, the holders of Company Preferred Securities will not be entitled to vote. In the event the holders of Company Preferred Securities are entitled to vote as indicated below, each $1,000 liquidation preference of Company Preferred Securities will be entitled to one vote on matters on which holders of Company Preferred Securities are entitled to vote. -33- 38 If at any time the aggregate of unpaid dividends equals or exceeds an amount equal to three semi-annual or six quarterly dividend payments, the holders of the Company Preferred Securities and any Company Parity Preferred Securities, voting together as a single class, will have the exclusive right to elect two additional Directors of their choosing. Holders of a majority (based on the aggregate liquidation preference) of the Company Preferred Securities and any Company Parity Preferred Securities may exercise this right by written consent or at a meeting of holders of Company Preferred Securities and Company Parity Preferred Securities called for such purpose. This right will continue until all unpaid dividends have been paid in full or until full dividends have been paid on the Company Preferred Securities and Company Parity Preferred Securities for two consecutive Dividend Periods. While this right continues, any vacancy in the office of the additional Directors may be filled only by the holders of the Company Preferred Securities and any Company Parity Preferred Securities voting as described above. A meeting of holders of Company Preferred Securities or Company Parity Preferred Securities will be called at the request of holders of 25% (based on the aggregate liquidation preference) of the Company Preferred Securities and any Company Parity Preferred Securities. As long as any Company Preferred Securities and Company Parity Preferred Securities are outstanding, the Company may not, without the consent or vote of the holders of at least 662/3% of the outstanding Company Preferred Securities and any Company Parity Preferred Securities (based on the aggregate liquidation preference), voting together as a single class: (i) change or remove any provision of this Agreement (including the terms of the Company Preferred Securities), issue any Company Parity Preferred Securities, redeem or repurchase any Company Common Securities, or consent to a change in the booking location of the issuance of the Subordinated Notes to a branch or other office of the Bank other than the Cayman Islands branch of the Bank, in each case, if such action would materially and adversely affect the rights, preferences, powers or privileges of the Company Preferred Securities and such Company Parity Preferred Securities; (ii) to the fullest extent permitted by law, liquidate, dissolve or terminate the Company without the concurrent liquidation of the Bank; (iii) amend or modify the Company's Investment Policies; or (iv) merge, convert, consolidate, reorganize or effect any other business combination involving the Company, unless the resulting entity will have no class or series of equity securities either authorized or outstanding that ranks ahead of the Company Preferred Securities as to dividends or as to the distribution of assets upon liquidation, dissolution or winding up, except the same number of shares of such equity securities with the same preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions or redemption as the shares of equity securities of the Company that are authorized and outstanding immediately prior to such transaction, and each holder of Company Preferred Securities immediately prior -34- 39 to such transaction shall receive securities with the same preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions or redemption of the resulting entity as the Company Preferred Securities held by such holder immediately prior to the transaction. Notwithstanding the foregoing, without the consent of any holder of Company Preferred Securities or Company Parity Preferred Securities, the Bank may amend or supplement this Agreement: (i) to correct or supplement any provision in this Agreement which may be defective or inconsistent with any other provision therein, or to make any other provisions with respect to matters or questions arising under this Agreement, so long as any such action shall not materially adversely affect the interests of the holders of Company Preferred Securities; or (ii) to cure any ambiguity or correct any mistake. As long as any Company Preferred Securities are outstanding, the Company may not, without the consent of the holder of each outstanding Company Preferred Security, authorize, create or increase the authorized amount of, or issue any class or series of, any equity securities of or limited liability company interests in the Company, or any warrants, options or other rights convertible or exchangeable into any class or series of any equity securities of or limited liability company interests in the Company, ranking prior to the Company Preferred Securities, either as to dividend rights or rights on dissolution, liquidation or winding-up of the Company. (f) Redemption. The Company Preferred Securities may not be redeemed before the Dividend Payment Date regularly scheduled to occur in October 2010, unless a Tax Event, an Investment Company Act Event or a Capital Event occurs, in which case the Company may redeem the Company Preferred Securities in whole (but not in part) at any time on not less than 30 nor more than 60 days' notice. On or after the Dividend Payment Date regularly scheduled to occur in October 2010, the Company may redeem the Company Preferred Securities on any Dividend Payment Date for cash, in whole or in part, on not less than 30 nor more than 60 days' notice. The redemption price for such redemptions on or after the regularly scheduled Dividend Payment Date in October 2010 will be: (i) 100% of the liquidation preference of the Company Preferred Securities being redeemed; plus (ii) an amount equal to unpaid dividends, if any, on the Company Preferred Securities with respect to the current Dividend Period (whether or not declared) accrued on a daily basis to the date fixed for redemption; plus -35- 40 (iii) an amount equal to unpaid Definitive Dividends for any prior Dividend Period, without interest and without accumulation of unpaid Nondefinitive Dividends for any prior Dividend Period. The Company will also have the right to redeem the Company Preferred Securities in whole (but not in part) at any time prior to the Dividend Payment Date regularly scheduled to occur in October 2010, upon the occurrence of a Tax Event, an Investment Company Act Event or a Capital Event. The redemption price for a redemption arising out of a Tax Event resulting from a Change in Tax Law and relating to the: (i) imposition of tax on the Trust or the Company; or (ii) the imposition of withholding tax on the Company's payment of dividends on the Company Preferred Securities, on the Trust's payment of dividends on the Trust Preferred Securities, on the Bank's payment of interest on the Subordinated Notes or on the Bank's payment under the Bank Subordinated Guarantee. (which are the events described in clauses (A), (B) and (C) of the definition of "Tax Event") will be the redemption price described above for optional redemptions. Otherwise, the redemption price for such redemptions will be: (i) the Make Whole Amount; plus (ii) an amount equal to unpaid dividends, if any, on the Company Preferred Securities with respect to the current Dividend Period (whether or not declared) accrued on a daily basis to the date fixed for redemption; plus (iii) an amount equal to unpaid Definitive Dividends for any prior Dividend Period, without interest and without accumulation of unpaid Nondefinitive Dividends for any prior Dividend Period. The Company will have until the Dividend Payment Date regularly scheduled to occur in October 2010 after the occurrence of a Tax Event, an Investment Company Act Event or a Capital Event to exercise its right to redeem the Company Preferred Securities. Any redemption of Company Preferred Securities must comply with applicable regulatory requirements, including the prior approval of the Swiss Federal Banking Commission if then required under applicable guidelines or policies of the Swiss Federal Banking Commission. If dividends on any Company Preferred Securities are unpaid, no Company Preferred Securities may be redeemed unless all outstanding Company Preferred Securities are redeemed and the Company may not purchase or otherwise acquire any Company Preferred Securities, except pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Company Preferred Securities. -36- 41 The Company Preferred Securities will not be subject to any sinking fund or mandatory redemption and will not be convertible into any other securities of or limited liability company interests in the Company or any securities of the Bank. As long as any Company Preferred Securities are outstanding, other Company Parity Preferred Securities may not be redeemed or repurchased unless the Company concurrently redeems an approximately equal proportion of the aggregate liquidation preference of the outstanding Company Preferred Securities or each rating agency then rating the Company Preferred Securities informs the Company in writing that the redemption or repurchase of such Company Parity Preferred Securities would not result in a reduction or withdrawal of the rating then assigned by that rating agency to the Company Preferred Securities. If fewer than all of the outstanding Company Preferred Securities are to be redeemed, the amount of Company Preferred Securities to be redeemed shall be determined by the Board of Directors, and the securities to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors in its sole discretion to be equitable; provided, that such method satisfies any applicable requirements of any securities exchange on which the Company Preferred Securities or any Trust Preferred Securities may then be listed and, if the Company Preferred Securities or Trust Preferred Securities are then held by DTC or its nominee in the form of a global security, any applicable requirements of DTC. The Company will promptly notify the registrar and transfer agent for the Company Preferred Securities in writing of the securities selected for redemption and, in the case of any partial redemption, the liquidation preference to be redeemed. In the event that payment of the Redemption Price in respect of any Company Preferred Securities is improperly withheld or refused and not paid either by the Company or by the Bank pursuant to the Company Preferred Securities Guarantee, dividends on such Company Preferred Securities, shall continue to accumulate from the date fixed for redemption to the date of actual payment of such Redemption Price. Any Company Preferred Securities redeemed shall be canceled. There shall be no prescription period in respect of uncollected dividends on the Company Preferred Securities. The Preferred Securityholders, by acceptance of such Company Preferred Securities, acknowledge and agree to the subordination provisions in, and other terms of, the Company Preferred Securities Guarantee. (g) Registrar and Transfer Agent. [--], or another entity that the Bank may designate from time to time, will act as registrar and transfer agent for the Company Preferred Securities. Registration of transfers of Company Preferred Securities will be effected without charge by or on behalf of the Company, but upon payment of any tax or other governmental charges that may be imposed in connection with any transfer or exchange. The Company will not be required to register or cause to be registered the transfer of Company Preferred Securities after such Company Preferred Securities have been called for redemption. -37- 42 In the event of a partial redemption of the Company Preferred Securities that would result in a delisting of the Trust Preferred Securities from any securities exchange on which the Trust Preferred Securities are then listed, the Company will redeem the Company Preferred Securities in whole. (h) Notices. Notices to holders of the Company Preferred Securities will be mailed by first-class mail, postage prepaid, to the holders' addresses appearing in the Company's records. (i) Governing Law. The Company Preferred Securities are governed by, and shall be construed in accordance with, the laws of the State of Delaware (without regard to principles of conflict of laws). (j) Additional Information. For so long as any Company Preferred Securities are outstanding, the Company will furnish to holders and beneficial owners of Trust Preferred Securities and Company Preferred Securities and to prospective purchasers designated by such holders upon request the information required to be delivered pursuant to the Securities Act. Section 7.4 General Provisions Regarding Subordinated Notes. (a) The Company may sell the Subordinated Notes only upon the affirmative vote of both a majority of the Board of Directors and the holders of two-thirds (based on the aggregate liquidation preference) of the Company Preferred Securities and other Company Parity Preferred Securities (if any), voting together as a single class. (b) The Company may not agree to any modification or amendment to the Subordinated Notes as long as any Company Preferred Securities or other Company Parity Preferred Securities (if any) are outstanding unless holders of two-thirds (based on the aggregate liquidation preference) of the Company Preferred Securities and other Company Parity Preferred Securities (if any), voting as a class, consent to such modification or amendment. Such consent to modification or amendment to the Subordinated Notes shall not be required if (i) the proposed amendment or modification would not materially and adversely affect the rights, preferences, powers or privileges of the Company and (ii) the Company has received a letter from each of Moody's Investors Service Inc. and Standard & Poor's Ratings Services to the effect that such amendment will not result in a downgrading of its respective rating then assigned to the Company Preferred Securities. ARTICLE VIII VOTING AND MEETINGS Section 8.1 Voting Rights of Preferred Securityholders. (a) Except as shall be otherwise expressly provided in Section 7.3(e) or otherwise herein, in the By-Laws or in any Certificate of Designations adopted by the Board of Directors or as otherwise required by the Delaware Act, the Preferred Securityholders shall have no right or power to vote on any question or -38- 43 matter or in any proceeding or to be represented at, or to receive notice of, any meeting of Securityholders. (b) Notwithstanding that Preferred Securityholders holding Company Preferred Securities are entitled to vote or consent under the circumstances described in this Agreement, the By-Laws or any Certificate of Designations, any of the Company Preferred Securities that are owned by the Bank, the Common Securityholder, the Company or any of their respective Affiliates, either directly or indirectly, shall not be entitled to vote or consent and shall, for the purposes of such vote or consent, be treated as if they were not outstanding except for Company Preferred Securities purchased or acquired by the Bank or its Affiliates in connection with transactions effected by or for the account of customers of the Bank or any of its Affiliates or in connection with the distribution or trading of or market-making in connection with such Company Preferred Securities; provided, however, that Persons (other than Affiliates of the Bank) to whom the Bank or any of its Affiliates have pledged Company Preferred Securities may vote or consent with respect to such pledged Company Preferred Securities pursuant to the terms of such pledge. Section 8.2 Voting Rights of Common Securityholders. Except as otherwise provided herein, and except as otherwise required by the Delaware Act, all voting rights of the Securityholders shall be vested exclusively in the Common Securityholders. The Company Common Securities shall entitle the Common Securityholders to vote in proportion to their percentage ownership interest in the Company upon all matters upon which Common Securityholders have the right to vote. All Common Securityholders shall have the right to vote separately as a class on any matter on which the Common Securityholders have the right to vote regardless of the voting rights of any other Securityholder. Section 8.3 Meetings of the Securityholders. (a) Meetings of the Securityholders of any class or of all classes of Securities may be called at any time by the Chairman of the Board (if any), the President or the Board of Directors or as provided by this Agreement or the By-Laws. A meeting of holders of Company Preferred Securities or Company Parity Preferred Securities will be called at the request of holders of 25% (based on the aggregate liquidation preference) of the Company Preferred Securities and any Company Parity Preferred Securities. Except to the extent otherwise provided, the following provisions shall apply to meetings of Securityholders. (b) Securityholders may vote in person or by proxy at such meeting. Whenever a vote, consent or approval of Securityholders is permitted or required under this Agreement, such vote, consent or approval may be given at a meeting of Securityholders or by written consent. (c) Each Securityholder may authorize any Person to act for it by proxy on all matters in which a Securityholder is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Securityholder or its attorney-in-fact. Every proxy shall be revocable at the pleasure of the Securityholder executing it at any time before it is voted. -39- 44 (d) Each meeting of Securityholders shall be conducted by the Board of Directors or by such other Person that the Board of Directors may designate. (e) Any required approval of Preferred Securityholders may be given at a separate meeting of such Preferred Securityholders convened for such purpose or at a meeting of Securityholders of the Company or pursuant to written consent. The Board of Directors shall cause a notice of any meeting at which Preferred Securityholders holding Company Preferred Securities or Company Parity Preferred Securities are entitled to vote pursuant to Section 7.3, any Certificate of Designations adopted by the Board of Directors or Article XIV of this Agreement, or of any matter upon which action may be taken by written consent of such Preferred Securityholders, to be mailed to each holder of record of the Company Preferred Securities or Company Parity Preferred Securities. Each such notice shall include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any action proposed to be taken at such meeting on which such Preferred Securityholders are entitled to vote or of such matters upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. (f) Subject to Section 8.3(e) of this Agreement, the Board of Directors, in their sole discretion, shall establish all other provisions relating to meetings of Securityholders, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Securityholders, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. ARTICLE IX DIVIDENDS Section 9.1 Dividends. (a) Subject to the terms of this Article IX, Preferred Securityholders shall receive periodic dividends, if any, in accordance with Article VII of this Agreement or any Certificate of Designations duly adopted by the Board of Directors, and Common Securityholders shall receive periodic dividends and distributions, subject to Article VII of this Agreement or any Certificate of Designations duly adopted by the Board of Directors, and to the provisions of the Delaware Act, when, as and if declared by the Board of Directors, in its discretion. A dividend shall constitute a distribution within the meaning of the Delaware Act. (b) A Securityholder shall not be entitled to receive any dividend or other distribution with respect to any dividend payment date (and any such dividend or other distribution shall not be considered due and payable), irrespective of whether such dividend or other distribution is payable automatically or has been declared by the Directors, until such time as the Company shall have funds legally available for the payment of such dividend to such Securityholder pursuant to the terms of this Agreement and the Delaware Act, and notwithstanding any provision of Section 18-606 of the Delaware Act to the contrary, until such time, a Securityholder shall not have the status of a -40- 45 creditor of the Company, or the remedies available to a creditor of the Company; provided however that a Preferred Securityholder and a Holder of Trust Securities may exercise such rights or remedies as provided herein or in any other agreement or document. Section 9.2 Limitations on Distributions. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make a distribution (including a dividend) to any Securityholder on account of a Company Security if such distribution would violate Section 18-607 of the Delaware Act or other applicable law. Section 9.3 No Dividend Instruction. (a) At any time, and from time to time, the Common Securityholder may, at its option, deliver to the Company a written instruction in the form of Annex H hereof on or before the tenth Business Day immediately preceding any dividend payment date for the Company Preferred Securities instructing the Company not to pay dividends, or to limit but not prohibit dividends, on such Dividend Payment Date (a "No Dividend Instruction"). As described in Section 7.3(b)(v), upon receipt of a No Dividend Instruction with respect to the Company Preferred Securities and except to the extent permitted by such No Dividend Instruction, no dividend shall become due and payable on the Company Preferred Securities (or any Company Parity Preferred Securities or Company Junior Securities (other than the Company Common Securities)) on the dividend payment date immediately succeeding the date of receipt of such instruction. A No Dividend Instruction shall only be effective for the dividend payment date immediately succeeding the date of receipt of such instruction by the Company. If such dividend payment date is a Mandatory Dividend Payment Date, then such No Dividend Instruction shall be of no force or effect. If at any time there is more than one Common Securityholder, a No Dividend Instruction shall not be effective until signed by all of the Common Securityholders. (b) Notwithstanding Section 9.3(a), dividends on the Company Preferred Securities will be definitive, due and payable on each Mandatory Dividend Payment Date whether or not a No Dividend Instruction has been given or is deemed given with respect to such Mandatory Dividend Payment Date. ARTICLE X BOOKS AND RECORDS Section 10.1 Financial Statements. The Board of Directors shall, as soon as available after the end of each Financial Year of the Company, cause to be prepared and mailed to each Common Securityholder of record the audited financial statements of the Company for such Financial Year prepared in accordance with generally accepted accounting principles. So long as any Company Preferred Securities are outstanding, the Company will furnish to holders and beneficial owners of Company Preferred Securities and to prospective purchasers designated by such holders upon request, the most recent annual audited financial statements and, if prepared, semi- -41- 46 annual unaudited financial statements of the Company then available, together with a brief description of the Company's business. Section 10.2 Limitation on Access to Records. Each Securityholder has the right, subject to this Agreement and to reasonable standards established by the Board of Directors to obtain from the Company from time to time upon reasonable request for any purpose reasonably related to such Securityholder's interest as a member in the Company, information regarding the affairs of the Company. Notwithstanding any provision of this Agreement, the Board of Directors may, to the maximum extent permitted by law, keep, or cause to be kept, confidential from the Preferred Securityholders, for such period of time as the Board of Directors deems reasonable, any information the disclosure of which the Board of Directors reasonably believes to be in the nature of trade secrets or other information the disclosure of which the Board of Directors in good faith believe is not in the best interest of the Company or could damage the Company or its business or which the Company or the Board of Directors are required by law or by an agreement with any Person to keep confidential. Section 10.3 Accounting Method. For both financial and tax reporting purposes and for purposes of determining profits and losses, the books and records of the Company shall be kept on the accrual method of accounting applied in a consistent manner and shall reflect all Company transactions and be appropriate and adequate for the Company's business. Section 10.4 Annual Audit. As soon as practical after the end of each Financial Year, but not later than 90 days after such end, the financial statements of the Company shall be audited by a firm of independent certified public accountants selected by the Board of Directors, and such financial statements shall be accompanied by a report of such accountants containing their opinion. The cost of such audits shall be an expense of the Company and paid by the Company. ARTICLE XI TAX MATTERS Section 11.1 Company Tax Returns. (a) The Common Securityholder is hereby designated as the Company's "Tax Matters Partner" under Section 6231(a)(7) of the Code and shall have all the powers and responsibilities of such position as provided in the Code. The Tax Matters Partner is specifically directed and authorized to take whatever steps the Bank, in its discretion, deems necessary or desirable to perfect such designation, including filing any forms or documents with the Internal Revenue Service and taking such other action as may from time to time be required under the Treasury Regulations. Expenses incurred by the Tax Matters Partner in its capacity as such shall be borne by the Company. (b) The Tax Matters Partner shall cause to be prepared and timely filed all tax returns required to be filed for the Company. The Tax Matters Partner may, in its discretion, cause -42- 47 the Company to make or refrain from making any federal, state or local income or other tax elections for the Company that they deem necessary or advisable, including, without limitation, any election under Section 754 of the Code or any successor provision. Section 11.2 Tax Reports. The Tax Matters Partner shall, as promptly as practicable and in any event within 90 days of the end of each Financial Year, cause to be prepared and mailed by the Company to each Preferred Securityholder of record Internal Revenue Service Schedule K-1 and any other forms that are necessary or advisable in order to permit the Securityholders to comply with U.S. federal and any other income tax requirements. Section 11.3 Taxation as a Partnership. The Company shall take any necessary steps to be treated as a partnership for U.S. federal income tax purposes and shall not file any election to be treated as anything other than a partnership for such purposes. Section 11.4 Taxation of Securityholders. As provided in Section 4.4(b), profits shall be allocated to the Preferred Securityholders on a daily accrual basis. The Securityholders intend that allocations of income and loss for U.S. federal income tax purposes be consistent with the economic allocations of income under this Agreement. ARTICLE XII EXPENSES Section 12.1 Expenses. Except as otherwise provided in this Agreement, the Company shall be responsible for, and shall pay, all expenses out of funds of the Company determined by the Board of Directors to be available for such purpose, provided that such expenses or obligations are those of the Company or are otherwise incurred by or pursuant to the direction of the Board of Directors in connection with this Agreement, including, without limitation: (a) all costs and expenses related to the business of the Company and all routine administrative expenses of the Company, including the maintenance of books and records of the Company, the preparation and dispatch to the Securityholders of checks, financial reports, tax returns and notices required pursuant to this Agreement and the holding of any meetings of the Securityholders; (b) all expenses incurred in connection with any litigation involving the Company (including the cost of any investigation and preparation) and the amount of any judgment or settlement paid in connection therewith (other than expenses incurred by any Director in connection with any litigation brought by or on behalf of any Securityholder against such Director); (c) all expenses for indemnity or contribution payable by the Company to any Person; -43- 48 (d) all expenses incurred in connection with the collection of amounts due to the Company from any Person; (e) all expenses incurred in connection with the preparation of amendments or restatements to this Agreement; and (f) all expenses incurred in connection with the dissolution, winding up or termination of the Company. Section 12.2 Contribution to Funds of the Company. The Bank will from time to time either (a) contribute (or cause others, including the Stamford branch of the Bank, to contribute) to the Company such additional funds as are necessary in order to enable the Company to pay its expenses described in Section 12.1 on or before any date when any such expenses are due or (b) directly pay the Company's expenses then due and payable and not otherwise paid. ARTICLE XIII TRANSFERS OF SECURITIES BY SECURITYHOLDERS AND RELATED MATTERS Section 13.1 Right of Assignee to Become a Preferred Securityholder. An assignee of Company Preferred Securities or Company Parity Preferred Securities shall become a Preferred Securityholder upon compliance with the provisions of Section 13.5 of this Agreement. Section 13.2 Events of Cessation of Security Ownership. A Person shall cease to be a Securityholder upon the lawful assignment of all of its Securities (including by any redemption or other repurchase by the Company) or as otherwise provided herein. Section 13.3 Persons Deemed Preferred Securityholders. The Company may treat the Person in whose name any Company Preferred Certificate shall be registered on the books and records of the Company as the sole holder of such Company Preferred Certificate and of the Company Preferred Securities or Company Parity Preferred Securities represented by such Company Preferred Certificate for purposes of receiving dividends or other distributions and for all other purposes whatsoever and, accordingly, shall, to the fullest extent permitted by law, not be bound to recognize any equitable or other claim to or interest in such Company Preferred Certificate or in the Company Preferred Securities or Company Parity Preferred Securities represented by such Company Preferred Certificate on the part of any other Person, whether or not the Company shall have actual or other notice thereof. Notwithstanding the foregoing or anything to the contrary herein, the Company agrees that at any time that the Trust shall be a holder of any Company Preferred Securities, each holder of a preferred certificate issued by the Trust shall, upon presentation to the Company or the Registrar of reasonable evidence thereof, have the right to the fullest extent permitted by law and without the need for any other action of any other person, including the trustee under the Trust and any other holder of any other of such preferred certificates, (a) to enforce, in the name of the Trust, the Trust's rights under the Company Preferred Securities and the Bank -44- 49 Subordinated Guarantee represented by the preferred certificates of such holder and (b) to withdraw from the Trust upon written notice to such trustee and the Company and hold directly the underlying Company Preferred Securities represented by such preferred certificates (in which case such holder will be entitled directly to enforce its rights under the Bank Subordinated Guarantee). Section 13.4 The Company Preferred Certificates. (a) Company Preferred Certificates evidencing fractions of Company Preferred Securities or Company Parity Preferred Securities shall not be issued. Each Company Preferred Certificate shall be signed, manually or by facsimile, by the President, any Vice-President or the Secretary of the Company. Company Preferred Certificates, other than Company Preferred Certificates held by a Trust, shall also be signed, manually or by facsimile, by the Registrar. Company Preferred Certificates bearing the signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Company shall be validly issued notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Company Preferred Certificates or did not hold such offices at the date of delivery of such Company Preferred Certificates. A transferee of a Company Preferred Certificate shall become a Securityholder, upon due registration of such Company Preferred Certificate in such transferee's name pursuant to Section 13.5. (b) Upon their original issuance, Company Preferred Certificates evidencing the Company Preferred Securities or Company Parity Preferred Securities shall be issued in the form of one or more Company Preferred Certificates. Section 13.5 Transfer of Company Preferred Certificates. (a) The Board of Directors shall provide for the registration and transfer of each class of Company Preferred Certificates in a record thereof (each a "Securities Register") and shall appoint a securities registrar (the "Registrar") and transfer agent (the "Transfer Agent") to act on its behalf; provided, however, that without any action on the part of the Board of Directors being necessary, [--] is hereby appointed as the initial Registrar and Transfer Agent. Subject to the other provisions of this Article XIII, upon surrender for registration of transfer of any Company Preferred Certificate, the Board of Directors shall cause one or more new Company Preferred Certificates to be issued in the name of the designated transferee or transferees. Every Company Preferred Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Board of Directors duly executed by the Preferred Securityholder or his or her attorney duly authorized in writing. Any registration of transfer shall be effected upon the Transfer Agent being satisfied with the documents of title and identity of the Person making the request upon the receipt by the transfer agent of any applicable certificate relating to transfer restrictions as described below, and subject to such reasonable regulations as the Company may from time to time establish. Each Company Preferred Certificate surrendered for registration of transfer shall be canceled by the Board of Directors. A transferee of a Company Preferred Certificate shall be admitted to the Company as a Preferred Securityholder and shall be entitled to the rights and subject to the obligations of a Preferred Securityholder hereunder upon receipt by such transferee of -45- 50 a Company Preferred Certificate. By acceptance of a Company Preferred Certificate, each transferee shall be bound by this Agreement. The transferor of a Preferred Certificate, in whole, shall cease to be a Preferred Securityholder at the time that the transferee of such Company Preferred Certificate is admitted to the Company as a Preferred Securityholder in accordance with this Section 13.5. (b) Upon surrender for registration of transfer of any Company Preferred Certificate at the office or agency of the Company or the Registrar maintained for that purpose, subject to Section 13.6, the Company shall deliver or cause to be delivered to the Registrar in a form duly executed on behalf of the Company in the manner provided for in Section 13.4(a), and the Registrar shall countersign in the manner provided in and to the extent required by Section 13.4(a) and deliver, in the name of the designated transferee or transferees, one or more new Company Preferred Certificates in authorized denominations of a like aggregate liquidation preference dated the date of execution by such Registrar. The Registrar shall not be required, (i) to issue, register the transfer of or exchange any Company Preferred Security or Company Parity Preferred Securities during a period beginning at the opening of business 15 days before the day of selection for redemption of such Company Preferred Securities or Company Parity Preferred Securities and ending at the close of business on the day of mailing of the notice of redemption, or (ii) to register the transfer of or exchange any Company Preferred Security or Company Parity Preferred Securities so selected for redemption in whole or in part, except, in the case of any such Company Preferred Security or Company Parity Preferred Securities to be redeemed in part, any portion thereof not to be redeemed. No service charge shall be made for any registration of transfer or exchange of Company Preferred Certificates, but the Registrar may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Company Preferred Certificates. Section 13.6 Mutilated, Destroyed, Lost or Stolen Company Preferred Certificates. If (a) any mutilated Company Preferred Certificate shall be surrendered to the Registrar, or if the Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Company Preferred Certificate, and (b) there shall be delivered to the Registrar and the Company such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Company Preferred Certificate shall have been acquired by a bona fide purchaser, the Company shall sign, the Registrar shall countersign to the extent required under Section 13.4(a), and the Company and the Registrar shall make available for delivery (all in the manner provided for in Section 13.4), in exchange for or in lieu of any mutilated, destroyed, lost or stolen Company Preferred Certificate, a new Company Preferred Certificate of like class, tenor and denomination. In connection with the issuance of any new Company Preferred Certificate under this Section 13.6, the Company or the Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Company Preferred Certificate issued pursuant to this Section shall constitute conclusive evidence of a limited liability company interest in the Company corresponding to that evidenced by the lost, stolen or -46- 51 destroyed Company Preferred Certificate, as if originally issued, whether or not the lost, stolen or destroyed Company Preferred Certificate shall be found at any time. Section 13.7 Restrictions on Transfers of Securities. (a) Company Preferred Securities or Company Parity Preferred Securities may not be sold or otherwise transferred unless such securities are registered under the Securities Act or an exemption from the registration requirements thereof is available, and the Company Preferred Certificates shall bear a legend to this effect unless the Bank and the Company determine otherwise in compliance with applicable law. (b) No Company Preferred Security or Company Parity Preferred Security shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Agreement or any Certificate of Designations. Any transfer or purported transfer of any Company Preferred Security or Company Parity Preferred Security not made in accordance with this Agreement shall be null and void. (c) The Company Common Securities may be sold, assigned or otherwise transferred by the Bank to a direct or indirect wholly owned subsidiary of the Bank, which subsidiary shall be admitted as a member of the Company with respect to the Company Common Securities transferred upon such Person's execution and delivery of a counterpart of this Agreement. ARTICLE XIV MERGERS, CONSOLIDATIONS AND SALES Section 14.1 The Company. The Company may not, without the prior approval of holders of at least 66-2/3% of the outstanding Company Preferred Securities and any Company Parity Preferred Securities (based on the aggregate liquidation preference), voting as a single class, merge, convert, consolidate, reorganize or effect any other business combination involving the Company, unless the resulting entity will have no class or series of equity securities either authorized or outstanding that ranks ahead of the Company Preferred Securities or the Company Parity Preferred Securities as to dividends or as to the distribution of assets upon liquidation, dissolution or winding up, except the same number of shares of such equity securities with the same preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions or redemption as the shares of equity securities of the Company that are authorized and outstanding immediately prior to such transaction, and each holder of Company Preferred Securities or the Company Parity Preferred Securities immediately prior to such transaction shall receive securities with the same preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions or redemption of the resulting entity as the Company Preferred Securities or the Company Parity Preferred Securities held by such holder immediately prior to the transaction. -47- 52 ARTICLE XV DISSOLUTION, LIQUIDATION AND TERMINATION Section 15.1 No Dissolution. The Company shall not be dissolved by the admission of Securityholders. The death, insanity, retirement, resignation, expulsion, bankruptcy or dissolution of a Securityholder, or the occurrence of any other event which terminates the continued membership of a Securityholder in the Company, shall not in and of itself cause the Company to be dissolved and its affairs wound up. Upon the occurrence of any such event, the business of the Company shall be continued without dissolution. The bankruptcy of a Securityholder (as defined in Section 18-101(1) and 18-304 of the Delaware Act) shall not cause a Securityholder to cease to be a member of the Company. Notwithstanding any other provision of this Agreement, each Securityholder waives any right it might have under the Delaware Act to agree in writing to dissolve the Company upon the Bankruptcy of a Securityholder, or the occurrence of an event that causes a Securityholder to cease to be a member of the Company. Section 15.2 Events Causing Dissolution. The Company shall be dissolved and its affairs shall be wound up in accordance with the Delaware Act if any of the following events occur: (a) a decree or order by a court of competent jurisdiction shall have been entered adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of the Company under any applicable federal or state bankruptcy or similar law, and such decree or order shall have continued undischarged and unstayed for a period of 90 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, trustee, assignee, sequestrator or similar official in bankruptcy or insolvency of the Company or of all or substantially all of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of 90 days or the Company shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization, arrangement, adjustment or composition under any applicable federal or state bankruptcy or similar law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver, liquidator, trustee, assignee, sequestrator or similar official in bankruptcy or insolvency of the Company or of all or substantially all of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due and its willingness to be adjudged a bankrupt, or limited liability company action shall be taken by the Company in furtherance of any of the aforesaid purposes; (b) the Bank is liquidated; (c) the entry of a decree of judicial dissolution of the Company under Section 18-802 of the Delaware Act; -48- 53 (d) in connection with the redemption, repurchase or exchange of all outstanding Company Preferred Securities; (e) the written consent of all Securityholders; (f) at any time there are no members of the Company unless the Company is continued in accordance with the Delaware Act or this Agreement; or (g) the entry of a judgment initiating judicial liquidation in respect of the Bank under Swiss law or any other liquidation of the Bank under Swiss law. Section 15.3 Notice of Dissolution. Upon the dissolution of the Company, the Board of Directors shall promptly notify the Securityholders of such dissolution. Section 15.4 Liquidation. Upon dissolution of the Company, the Board of Directors or, in the event that the dissolution is caused by an event described in Sections 15.2(b) or (c) of this Agreement and there are no Directors, a Person or Persons who may be approved by the Preferred Securityholders holding not less than a majority in liquidation amount, as liquidating trustees, shall immediately commence to wind up the Company's affairs; provided, however, that a reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the satisfaction of liabilities to creditors so as to minimize the losses attendant upon a liquidation. The proceeds of liquidation shall be distributed, as realized, in the manner provided in Section 18-804 of the Delaware Act, subject to the provisions of Section 15.5. Section 15.5 Certain Restrictions on Liquidation Payments. In the event of any voluntary or involuntary dissolution of the Company (other than as set forth in any Certificate of Designations), Preferred Securityholders holding Company Preferred Securities or Company Parity Preferred Securities at the time outstanding shall be entitled to receive out of the assets of the Company legally available for distribution to Securityholders, before any distribution of assets is made to Common Securityholders or any other Company Junior Securities, liquidating distributions in respect of the Company Preferred Securities or Company Parity Preferred Securities in the amount of the liquidation preference, plus an amount equal to unpaid dividends, if any, thereon with respect to the current Dividend Payment accrued on a daily basis to the date of liquidation, plus an amount equal to unpaid Definitive Dividends for any prior Dividend Period, but without interest and without accumulation of unpaid Nondefinitive Dividends for any prior dividend period. If, upon any such liquidation, the liquidating distribution can be paid only in part because the Company has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Company on the Company Preferred Securities or Company Parity Preferred Securities shall be paid on a pro rata basis. Section 15.6 Termination. The Company shall terminate when all of the assets of the Company have been distributed in the manner provided for in this Article XV, and the Certificate of Formation shall have been canceled in the manner required by the Delaware Act. -49- 54 ARTICLE XVI MISCELLANEOUS Section 16.1 Amendments. This Agreement may be amended by a written instrument executed by an Officer designated by the Board of Directors without the consent of any Preferred Securityholder; provided, however, that no amendment shall be made, and any such purported amendment shall be void and ineffective, to the extent that such amendment (a) would have a material adverse effect on a Preferred Securityholder (including, without limitation, amendments to Sections 6.2 and 6.7), (b) would result in causing the Company to be treated as anything other than a partnership for purposes of United States federal income taxation would result in the Company being deemed to be required to register under the Investment Company Act, or (c) has not received the prior requisite approval of the holders of the Company Preferred Securities and the Company Parity Preferred Securities, as applicable, as may be expressly provided in this Agreement, the By-Laws or any Certificate of Designations duly adopted by the Board of Directors. Section 16.2 Amendment of Certificate of Formation. In the event this Agreement shall be amended pursuant to Section 16.1, the Board of Directors shall cause the Certificate of Formation to be amended to reflect such change if it deems such amendment of the Certificate of Formation to be necessary or appropriate. Section 16.3 Successors. This Agreement shall be binding as to the executors, administrators, estates, heirs and legal successors, or nominees or representatives, of the Securityholders. Section 16.4 Law; Severability. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. In particular, this Agreement shall be construed to the maximum extent possible to comply with all of the terms and conditions of the Delaware Act. If, nevertheless, it shall be determined by a court of competent jurisdiction that any provisions or wording of this Agreement shall be invalid or unenforceable under the Delaware Act or other applicable law, such invalidity or unenforceability shall not invalidate the entire Agreement. In that case, this Agreement shall be construed so as to limit any term or provision so as to make it enforceable or valid within the requirements of applicable law, and, in the event such term or provisions cannot be so limited, this Agreement shall be construed to omit such invalid or unenforceable provisions. If it shall be determined by a court of competent jurisdiction that any provision relating to the distributions and allocations of the Company or to any fee payable by the Company is invalid or unenforceable, this Agreement shall be construed or interpreted so as (a) to make it enforceable or valid and (b) to make the distributions and allocations as closely equivalent to those set forth in this Agreement as is permissible under applicable law. Section 16.5 Filings. Following the execution and delivery of this Agreement, the Board of Directors shall cause to be promptly prepared any documents required to be filed and recorded under the Delaware Act, and the Board of Directors shall cause to be promptly filed and recorded each such document in accordance with the Delaware Act and, to the extent required by local law, to be filed and recorded or notice thereof to be published in the appropriate place in each -50- 55 jurisdiction in which the Company may hereafter establish a place of business. The Board of Directors shall also promptly cause to be filed, recorded and published such statements of fictitious business name and any other notices, certificates, statements or other instruments required by any provision of any applicable law of the United States or any state or other jurisdiction which governs the conduct of its business from time to time. Section 16.6 Power of Attorney. Each Preferred Securityholder does hereby constitute and appoint each Person specifically authorized by the Board of Directors to act as its true and lawful representative and attorney-in-fact, in its name, place and stead to make, execute, sign, deliver and file (a) any amendment of the Certificate of Formation required because of an amendment to this Agreement or in order to effectuate any change in the ownership of the Company Securities, (b) any amendments to this Agreement made in accordance with the terms hereof and (c) all such other instruments, documents and certificates which may from time to time be required by the laws of the United States of America, the State of Delaware or any other jurisdiction, or any political subdivision or agency thereof, to effectuate, implement and continue the valid and subsisting existence of the Company or to dissolve the Company or for any other purpose consistent with this Agreement and the transactions contemplated hereby. The power of attorney granted hereby is coupled with an interest and shall (a) survive and not be affected by the subsequent death, incapacity, disability, dissolution, termination or bankruptcy of the Preferred Securityholder granting the same or the transfer of all or any portion of such Preferred Securityholder's Preferred Securities and (b) extend to such Preferred Securityholder's successors, assigns and legal representatives. Section 16.7 Exculpation. (a) No Director or Officer shall have personal liability to the Company or the Securityholders for monetary damages for breach of, in the case of a Director, such Director's fiduciary duty (if any) or, in the case of a Director or an Officer, for any act or omission performed or omitted by such Director or Officer in good faith on behalf of the Company, except for such Director's or Officer's gross negligence or willful misconduct. (b) Each Director and Officer shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters that such Director or Officer reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which distributions to Securityholders might properly be paid. Section 16.8 Indemnification. To the fullest extent permitted by applicable law, each Director and Officer shall be entitled to indemnification from the Company for any loss, damage, claim or expense (including reasonable attorney's fees) incurred by such Director or Officer -51- 56 by reason of any act or omission performed or omitted by such Director or Officer in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of authority conferred on such Director or Officer by this Agreement, except with respect to any act or omission determined by a court of competent jurisdiction to have constituted gross negligence or wilful misconduct of such Director or Officer; provided, however, that any indemnity under this Section 16.8 shall be provided out of and to the extent of Company assets only, and no Securityholder shall have any personal liability on account thereof. The right to indemnification under this Section 16.8 is a contract right. The Company may purchase and maintain insurance to protect any director or officer against liability asserted against him or her, or incurred by him or her, arising out of his or her status as such. Without limiting the foregoing, the Company's directors shall have no personal liability to the Company or its Securityholders for monetary damages (i) for not voting to take enforcement action with respect to the Subordinated Notes or other Affiliate Securities owned by the Company, if any, prior to the occurrence of a Bankruptcy Event or (ii) at any time for breach of any such director's fiduciary duty (if any) except for such director's gross negligence or willful misconduct. Section 16.9 Additional Documents. Each Preferred Securityholder, upon the request of the Board of Directors, agrees to perform all further acts and execute, acknowledge and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement. Section 16.10 Notices. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (i) If given to the Company, at the address set forth below: [--] Telephone: Facsimile: Attention: With copies to: [--] Telephone: Facsimile: Attention: (ii) If given to any Securityholder, at the address set forth in the Securities Register. -52- 57 Subject to Section 7.3 of this Agreement or any Certificate of Designations, each such notice, request or other communication shall be effective (a) if given by telecopier, when transmitted to the number specified in such registration books and the appropriate confirmation is received, (b) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (c) if given by any other means, when delivered at the address specified in the Securities Register. Section 16.11 Nominee Letter. At the request of any Person who is or has agreed to become a holder of Company Preferred Securities as a nominee or on behalf of another Person, the Company shall provide such nominee with a letter substantially in the form of Annex I. Section 16.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement and all of which together shall constitute one and the same agreement. -53- 58 IN WITNESS WHEREOF, the Bank and the Common Securityholder have executed this Agreement as of the date first above stated. UBS AG By:____________________________________ Name: Title: Authorized Signatory By:____________________________________ Name: Title: Authorized Signatory Accepted and agreed by: UBS Preferred Funding Trust I By: Wilmington Trust Company ________________________________ not in its individual capacity, but solely as Trustee on behalf of the Trust -54- 59 Annex A to the Amended and Restated Limited Liability Company Agreement SUBORDINATED GUARANTEE AGREEMENT UBS AG UBS PREFERRED FUNDING COMPANY LLC I DATED AS OF [--], 2000 60 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INTERPRETATIONS Section 1.01. Definitions and Interpretation........................... A-1 ARTICLE II TRUST INDENTURE ACT Section 2.01. Trust Indenture Act; Application......................... A-8 Section 2.02. Lists of Holders of Securities........................... A-8 Section 2.03. Reports by the Guarantee Trustee......................... A-8 Section 2.04. Periodic Reports to Guarantee Trustee.................... A-8 Section 2.05. Evidence of Compliance with Conditions Precedent......... A-9 Section 2.06. Events of Default; Waiver................................ A-9 Section 2.07. Event of Default; Notice................................. A-9 Section 2.08. Rights of Holders........................................ A-10 Section 2.09. Conflicting Interests.................................... A-10 Section 2.10. Powers, Duties and Rights of Guarantee Trustee........... A-10 Section 2.11. Certain Rights of Guarantee Trustee...................... A-12 Section 2.12. Not Responsible for Recitals or Issuance of Guarantee.... A-14 ARTICLE III GUARANTEE TRUSTEE Section 3.01. Guarantee Trustee; Eligibility........................... A-14 Section 3.02. Appointment, Removal and Resignation of Guarantee Trustee A-15 ARTICLE IV GUARANTEE Section 4.01. Guarantee................................................ A-16 Section 4.02. Delivery of Guarantor Certificate........................ A-17 Section 4.03. Waiver of Notice and Demand.............................. A-17 Section 4.04. Obligations Not Affected................................. A-17 Section 4.05. Action Against Guarantor................................. A-18 Section 4.06. Independent Obligations.................................. A-18
-i- 61 Section 4.07. Taxes.................................................... A-18 Section 4.08. Rights Not Separately Transferable....................... A-19 ARTICLE V LIMITATIONS OF TRANSACTIONS; RANKING Section 5.01. Limitation of Transactions............................... A-19 Section 5.02. Ranking.................................................. A-21 ARTICLE VI TERMINATION Section 6.01. Termination............................................. A-21 ARTICLE VII INDEMNIFICATION Section 7.01. Exculpation.............................................. A-22 Section 7.02. Indemnification.......................................... A-22 ARTICLE VIII MISCELLANEOUS Section 8.01. Successors and Assigns................................... A-22 Section 8.02. Amendments............................................... A-23 Section 8.03. Judgment Currency Indemnity.............................. A-23 Section 8.04. Assignment of the Guarantor.............................. A-24 Section 8.05. Notices.................................................. A-24 Section 8.06. Governing Law............................................ A-25 Section 8.07. Jurisdiction............................................. A-25 EXHIBIT A Guarantor's Certificate............................................ A-A-1
-ii- 62 CROSS-REFERENCE TABLE(1)
SECTION OF TRUST INDENTURE ACT OF 1939, AS AMENDED SECTION OF GUARANTEE 310(a)................................................ 3.01(a) 310(b)................................................ 2.09, 3.01(c) 310(c)................................................ Inapplicable 311(a)................................................ 2.02(b) 311(b)................................................ 2.02(b) 311(c)................................................ Inapplicable 312(a)................................................ 2.02(a) 312(b)................................................ 2.02(b) 313................................................... 2.03 314(a)................................................ 2.04 314(b)................................................ Inapplicable 314(c)................................................ 2.05 314(d)................................................ Inapplicable 314(f)................................................ Inapplicable 315(a)................................................ 2.10(c), 2.10(d) 315(b)................................................ 2.07 315(c)................................................ 2.10(c) 315(d)................................................ 2.10(d) 316(a)................................................ 2.08
- --------------- (1) This Cross-Reference Table does not constitute part of the Guarantee and shall not affect the interpretation of any of its terms or provisions. -iii- 63 This SUBORDINATED GUARANTEE AGREEMENT (this "Guarantee"), dated as of [--], 2000, is executed and delivered by UBS AG, a bank incorporated under the laws of Switzerland, with its principal executive offices in Zurich and Basel, Switzerland (together with its successors, the "Guarantor"), WILMINGTON TRUST COMPANY, a bank and trust company incorporated under the laws of the State of Delaware, in its capacity as trustee under the Trust Agreement (as defined below) (the "Initial Holder"), and WILMINGTON TRUST COMPANY, a bank and trust company incorporated under the laws of the State of Delaware, in its capacity as trustee, for the benefit of the Initial Holder and any subsequent holders from time to time of the Company Preferred Securities (as defined herein) of UBS Preferred Funding Company LLC I, a Delaware limited liability company (together with its successors, the "Company"). WITNESSETH WHEREAS, pursuant to the Amended and Restated Limited Liability Company Agreement of the Company (as amended from time to time, the "LLC Agreement") dated as of the date hereof among the Guarantor, UBS Preferred Funding Trust I (together with its successors, the "Trust") and the holders from time to time of the Company Preferred Securities (as defined below), the Company is issuing on the date hereof its [--]% Noncumulative Company Preferred Securities, having an aggregate liquidation preference of $1,500,000,000, representing preferred limited liability company interests in the Company (the "Company Preferred Securities"); and WHEREAS, in order to induce the Initial Holder to purchase the Company Preferred Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth herein, to pay to the Initial Holder and any subsequent Holders from time to time of the Company Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the purchase by the Initial Holder and any subsequent Holder from time to time of Company Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of the Initial Holder and any subsequent Holders from time to time of the Company Preferred Securities. ARTICLE I DEFINITIONS AND INTERPRETATIONS Section 1.01. Definitions and Interpretation. In this Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.01; 64 (b) a term defined anywhere in this Guarantee has the same meaning throughout; (c) all references to "the Guarantee" or "this Guarantee" are to this Guarantee as modified, supplemented or amended from time to time; (d) all references in this Guarantee to Articles and Sections are to Articles and Sections of this Guarantee, unless otherwise specified; and (e) a reference to the singular includes the plural and vice versa. "Additional Amounts" means an amount paid as further Dividends in order that the net amounts received by the Holders of the Company Preferred Securities or Trust Preferred Securities, as applicable, after withholding or deduction of any Relevant Tax required by law to be deducted or withheld by the Company or the Trust, as applicable, equals the amount which would have been received in respect of the Company Preferred Securities or Trust Preferred Securities, as applicable, in the absence of such withholding or deduction, except that no Additional Amounts are payable to a Holder of the Company Preferred Securities or Trust Preferred Securities, as applicable, with respect to any Company Preferred Securities or Trust Preferred Securities, as applicable, if the Relevant Jurisdiction is Switzerland or the Cayman Islands (i) to the extent that such Relevant Tax is imposed or levied by virtue of such Holder (or the beneficial owner) of such Company Preferred Securities or Trust Preferred Securities having some connection with the Relevant Jurisdiction, other than being a Holder (or beneficial owner) of such Company Preferred Securities or Trust Preferred Securities or (ii) to the extent that such Relevant Tax is imposed or levied by virtue of such Holder (or beneficial owner) not having made a declaration of non-residence in, or other lack of connection with, the Relevant Jurisdiction or any similar claim for exemption, if the Guarantor or its agent has provided the beneficial owner of such Company Preferred Securities or Trust Preferred Securities, or its nominee with at least 60 days' prior written notice of an opportunity to make such a declaration or claim. "Administrative Action" means any judicial decision, official administrative pronouncement, published or private ruling, regulatory procedure, notice or announcement (including any notice or announcement of intent to adopt such procedures or regulations) by any legislative body, court, governmental authority or regulatory body having appropriate jurisdiction. "Affiliate" means, with respect to any specified person, any other Person that directly or indirectly controls or is controlled by, or is under common control with, such specified Person. "Assets" means the consolidated gross assets of the Guarantor, all as shown by the published audited consolidated balance sheet of the Guarantor [, all valued in such a manner as the Guarantor or any liquidator (as the case may be) may determine and calculated in accordance with international accounting standards]. A-2 65 "Authorized Officer" of a Person means any Person that is authorized to bind such Person. "Bankruptcy Event" has the meaning assigned to it in the LLC Agreement. "Base Liquidation Amount" means, with respect to each $1,000 liquidation preference of Company Preferred Securities at any date, an amount equal to (i) $1,000 plus (ii) an amount equal to unpaid Dividends, if any, on the Company Preferred Securities with respect to the Dividend Period in which the liquidation of the Guarantor commenced (whether as a result of a Bankruptcy Event or otherwise), accrued on a daily basis to the date of such commencement, plus (iii) an amount equal to unpaid Definitive Dividends for any prior Dividend Period, without interest and without accumulation of unpaid Nondefinitive Dividends for any prior Dividend Period. "Business Day" has the meaning assigned to it in the LLC Agreement. A "Capital Loss" shall be deemed to occur if the Guarantor's assets are less than the sum of (i) its Liabilities and (ii) one-half of its share capital and statutory reserves, each as shown on and as calculated based on the latest published annual unaudited consolidated balance sheet of the Guarantor. "Company" has the meaning assigned to it in the preamble to this Guarantee. "Company Common Securities" has the meaning assigned to it in the LLC Agreement. "Company Preferred Securities" has the meaning assigned to it in the first recital to this Guarantee. "Corporate Trust Office" means the principal trust office of the Guarantee Trustee at which, at any particular time, its corporate trust business shall be administered, which office at the date hereof is located at [--], Attention: Corporate Trust Administration. "Corresponding Amount" means, (i) for each $1,000 liquidation amount of Trust Preferred Securities, $1,000 liquidation preference of Company Preferred Securities and (ii) for each A-3 66 $1,000 liquidation preference of Company Preferred Securities, $1,000 liquidation amount of Trust Preferred Securities. "Covered Person" means any Holder or beneficial owner of Company Preferred Securities. "Definitive Dividends" has the meaning assigned to it in the LLC Agreement. "Dividend Payment Date" means through October 2010, April [--] and October [--] of each year, and thereafter, January [--], April [--], July [--] and October - of each year.[--] "Dividend Period" has the meaning assigned to it in the LLC Agreement. "Dividend Rate" means, on any day, the dividend rate applicable to the Company Preferred Securities as determined pursuant to Section [--] of the LLC Agreement. "Dividends" means, when used with respect to Company Preferred Securities, distributions on the Company Preferred Securities in the amounts and in the manner set forth in the LLC Agreement. "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Guarantee. "Guarantee" has the meaning set forth in the preamble to this Guarantee. "Guarantee Additional Amounts" has the meaning set forth in Section 4.07. "Guarantee Payments" has the meaning assigned to it in Section 4.01. "Guarantee Trustee" means Wilmington Trust Company, a bank and trust company incorporated under the laws of the State of Delaware, and its successors, in its capacity as trustee under this Guarantee, until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee by executing a counterpart hereof and becoming a party hereto, and thereafter means each such Successor Guarantee Trustee. "Guarantor" has the meaning assigned to it in the preamble to this Guarantee. "Guarantor Certificate" has the meaning assigned to it in Section 4.02. "Holder" means any holder, as registered on the books and records of the Company or the Trust of Company Preferred Securities or Trust Preferred Securities, as the case may be; provided, however, that, in determining whether the holders of the requisite percentage of Company Preferred Securities or Trust Preferred Securities, as the case may be, have given any request, notice, A-4 67 consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor (other than the Trust). "Indemnified Person" means the Guarantee Trustee, the Initial Holder, any Affiliate of the Guarantee Trustee, or any officer, director, shareholder, member, partner, employee, representative, nominee, custodian or agent of the Guarantee Trustee. "Initial Holder" has the meaning set forth in the preamble to this Guarantee. "Initial Subordinated Notes" means the Subordinated Promissory Notes dated the date hereof issued by the Cayman Islands Branch of the Guarantor. "Investment Company Act" means the U.S. Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Liabilities" means the consolidated gross liabilities of the Guarantor, all as shown by the latest published audited consolidated balance sheet of the Guarantor, as adjusted for contingencies and for subsequent events, all valued in such a manner as the Guarantor or any liquidator (as the case may be) may determine and calculated in accordance with international accounting standards. "Liquidation Distribution" means, with respect to each $1,000 liquidation preference of Company Preferred Securities, an amount equal to the lesser of (i) the Base Liquidation Amount and (ii) an amount calculated as (A) the amount of remaining assets of the Guarantor determined to be available for distribution in respect of this Guarantee, the Parity Preferred Shares and the Parity Guarantees in any insolvency of the Guarantor, without giving effect to any distributions hereunder or under the terms of any Parity Guarantees, multiplied by (B) a fraction, (x) the numerator of which is the Base Liquidation Amount as of the date the liquidation of the Guarantor commenced (whether as a result of a Bankruptcy Event or otherwise), and (y) the denominator of which is the aggregate principal or face amount of all claims, without duplication, under the Company Preferred Securities (determined as if the Company Preferred Securities were Parity Preferred Shares), the Parity Preferred Shares and the Parity Guarantees determined to be payable out of such remaining assets of the Guarantor. "LLC Agreement" has the meaning assigned to it in the first recital to this Guarantee. "Majority (or Other Stated Percentage) in liquidation amount of the Company Preferred Securities" means, except as provided by the Trust Indenture Act, a vote by Holder(s) of Company Preferred Securities, voting as a class, of more than 66 2/3% (or other stated percentage) of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Dividends to the date upon which the voting percentages are determined) of all Company Preferred Securities. A-5 68 "Mandatory Dividend Payment Amount" has the meaning assigned to it in the LLC Agreement. "Mandatory Dividend Payment Date" has the meaning assigned to it in the LLC Agreement. "Nondefinitive Dividends" has the meaning assigned to it in the LLC Agreement. "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. "Ordinary Shares" means the ordinary shares of the Guarantor and any other shares of the Guarantor's capital stock ranking junior to the Parity Preferred Shares, if any, in each case issued by the Guarantor from time to time. "Parity Guarantee" means any guarantee issued by the Guarantor from time to time of any equity preferred or preference shares issued by any subsidiary of the Guarantor from time to time, if such guarantee ranks pari passu with the Guarantor's obligations under this Guarantee. "Parity Preferred Shares" means the most senior ranking equity preferred or preference shares outstanding and issued by the Guarantor from time to time. "Parity Securities" means, collectively, the Parity Guarantees, the Parity Preferred Shares and the Parity Subsidiary Securities. "Parity Subsidiary Securities" means any parity securities issued by a subsidiary of the Guarantor from time to time that are guaranteed by the Guarantor under a Parity Guarantee. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Potential Securityholder" has the meaning assigned to it in Section 5.01(d). "Qualified Subsidiary" means a subsidiary of the Guarantor which satisfies the conditions to be considered a "company controlled by the parent company" under Rule 3a-5 of the Investment Company Act, or any successor provision. "Redemption Price" means, for each $1,000 liquidation preference of Company Preferred Securities, (i) in the case of a redemption of Company Preferred Securities pursuant to Section [--] of the LLC Agreement, the amount determined pursuant to Section [--] of the LLC A-6 69 Agreement, and (ii) in the case of a redemption of Company Preferred Securities pursuant to Section [--] of the LLC Agreement, the amount determined pursuant to Section [--] of the LLC Agreement. "Relevant Jurisdiction" means Switzerland and the Cayman Islands. "Relevant Tax" means any present or future taxes, duties, assessments or governmental charges of whatever nature, imposed or levied by or on behalf of any Relevant Jurisdiction or any authority therein or thereof having the power to tax. "Responsible Officer" means, with respect to the Guarantee Trustee, any officer within the Corporate Trust Office of the Guarantee Trustee, including any vice president, any assistant vice president, any secretary, any assistant secretary, the treasurer, any assistant treasurer or other officer of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Solvent" means (i) the Guarantor is able to pay its debts as they fall due and (ii) the Guarantor's Assets exceed its Liabilities (other than its liabilities to persons who are not senior creditors). "Subordinated Notes" means the Initial Subordinated Notes and, upon maturity or redemption thereof, any successor subordinated notes that constitute the assets of the Company. "Successor Guarantee Trustee" means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 3.01. "Trust" has the meaning assigned to it in the first recital to this Guarantee. "Trust Agreement" means the Amended and Restated Trust Agreement, dated as of [--], 2000 and as from time to time amended, modified or supplemented, among the Company, as grantor, Wilmington Trust Company, as trustee, and the holders from time to time of the Trust Preferred Securities. "Trust Indenture Act" means the U.S. Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Trust Preferred Securities" means [--]% Noncumulative Trust Preferred Securities issued by the Trust. "UBS AG Senior Liabilities" has the meaning assigned to it in Section 5.02(a). A-7 70 ARTICLE II TRUST INDENTURE ACT Section 2.01. Trust Indenture Act; Application. (a) This Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Guarantee and shall, to the extent applicable, be governed by such provisions. A term defined in the Trust Indenture Act has the same meaning when used in this Guarantee, unless otherwise defined in this Guarantee or unless the context otherwise requires. (b) If and to the extent that any provision of this Guarantee limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. Section 2.02. Lists of Holders of Securities. (a) The Guarantee Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders of Company Preferred Securities. If the Guarantee Trustee is not the Registrar, the Guarantor shall furnish to the Guarantee Trustee semi-annually on or before April [--] and October [--] of each year, after October 2010 on or before January [--], April [--], July [--] and October [--] of each year, and at such other times as the Guarantee Trustee may request in writing, a list, in such form and as of such date as the Guarantee Trustee may reasonably require, containing all the information in the possession or control of the Registrar, the Guarantor or any of its paying agents other than the Guarantee Trustee as to the names and addresses of Holders of Company Preferred Securities. (b) The Guarantee Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. Section 2.03. Reports by the Guarantee Trustee. Within 60 days after [May 15] of each year, the Guarantee Trustee shall provide to the Holders of the Company Preferred Securities (and, for so long as the Initial Holder is the Holder of the Company Preferred Securities, also to the Holders of the Trust Preferred Securities), such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. Section 2.04. Periodic Reports to Guarantee Trustee. The Guarantor shall provide to the Guarantee Trustee such documents, reports and information as required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Guarantee Trustee is for informational purposes only and the Guarantee Trustee's receipt of such shall not constitute constructive notice of any information A-8 71 contained therein or determinable from information contained therein, including the Guarantor's compliance with any of its covenants hereunder (as to which the Guarantee Trustee is entitled to rely exclusively on Officers' Certificates). Section 2.05. Evidence of Compliance with Conditions Precedent. The Guarantor shall provide to the Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate and shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definition relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. Section 2.06. Events of Default; Waiver. The Holders of a Majority in liquidation amount of the Company Preferred Securities may, by vote, on behalf of the Holders of all of the Company Preferred Securities, waive any past Event of Default and its consequences except an Event of Default in respect of a covenant or provision hereof which cannot be modified or amended without the consent of each Holder of Company Preferred Securities (and, for so long as the Initial Holder is the Holder of the Company Preferred Securities, also of each Holder of Trust Preferred Securities). Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Section 2.07. Event of Default; Notice. (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Company Preferred Securities (and, for so long as the Initial Holder is the Holder of the Company Preferred Securities, also to the Holders of the Trust Preferred Securities), notices of all Events of Default actually known to a Responsible Officer of the Guarantee Trustee, unless such defaults have been cured before the giving of such notice; provided, that, the Guarantee Trustee shall be protected in withholding such A-9 72 notice if and so long as a Responsible Officer of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Company Preferred Securities. (b) The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless a Responsible Officer of the Guarantee Trustee shall have received written notice, or a Responsible Officer of the Guarantee Trustee charged with the administration of this Guarantee shall have obtained actual knowledge, of such Event of Default. Section 2.08. Rights of Holders. (a) The Holders of a Majority in liquidation amount of the Company Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee. (b) If the Guarantee Trustee fails to enforce its rights under this Guarantee after a Holder of Company Preferred Securities has made a written request, such Holder of Company Preferred Securities may institute a legal proceeding directly against the Guarantor to enforce the Guarantee Trustee's rights under Article 4, without first instituting a legal proceeding against the Company, the Guarantee Trustee or any other person or entity. Notwithstanding the foregoing, if the Guarantor has failed to make a Guarantee Payment, a Holder of Company Preferred Securities may directly institute a proceeding in such Holder's own name against the Guarantor for enforcement of Article 4 for such payment. (c) Notwithstanding any other provision of this Agreement, for so long as the Trust is the Holder of any Company Preferred Securities, any Holder of Trust Preferred Securities shall have the right, upon the occurrence of an Event of Default, to institute a suit directly against the Guarantor for enforcement of its payment and other obligations hereunder with respect to a Corresponding Amount of Company Preferred Securities. Section 2.09. Conflicting Interests. The LLC Agreement shall be deemed to be specifically described in this Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. Section 2.10. Powers, Duties and Rights of Guarantee Trustee. (a) This Guarantee shall be held by the Guarantee Trustee for the benefit of the Holders of the Company Preferred Securities, and the Guarantee Trustee shall not transfer this Guarantee to any Person except a Holder of Company Preferred Securities exercising his or her rights pursuant to Section 2.08(b) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, A-10 73 title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Guarantee Trustee has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee for the benefit of the Holders of the Company Preferred Securities. (c) The Guarantee Trustee, before the occurrence of any Event of Default and after the curing or waiver of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Guarantee, and no implied covenants shall be read into this Guarantee against the Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.06 and is actually known to a Responsible Officer of the Guarantee Trustee), the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Guarantee shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee, and no implied covenants or obligations shall be read into this Guarantee against the Guarantee Trustee; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee; provided that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Guarantee (but need not confirm or investigate the accuracy of any mathematical calculations or other facts stated therein); A-11 74 (ii) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in liquidation amount of the Company Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or the exercise of any trust or power conferred upon the Guarantee Trustee under this Guarantee; and (iv) no provision of this Guarantee shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability, or indemnity, satisfactory to the Guarantee Trustee, against such expense, risk or liability, is not assured to it under the terms of this Guarantee. Section 2.11. Certain Rights of Guarantee Trustee. (a) Subject to the provisions of Section 2.01: (i) The Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document (whether in its original or facsimile form) believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Guarantee shall be sufficiently evidenced by an Officers' Certificate. (iii) Whenever, in the administration of this Guarantee, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any rerecording, refiling or registration thereof). A-12 75 (v) The Guarantee Trustee may, at the expense of the Guarantor, consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee from any court of competent jurisdiction. (vi) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such security and indemnity, satisfactory to the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided, that nothing contained in this Section 2.11(a)(vi) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee. (vii) The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit but shall incur no liability or additional liability of any kind by reason of such inquiry or investigation. (viii) The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (ix) Any action taken by the Guarantee Trustee or its agents hereunder shall bind the Holders of the Company Preferred Securities, and the signature of the Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Guarantee, both of which shall be conclusively evidenced by the Guarantee Trustee or its agent taking such action. (x) Whenever in the administration of this Guarantee the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy A-13 76 or right or taking any other action hereunder, the Guarantee Trustee (i) may request written instructions from the Holders of a Majority in liquidation amount of the Company Preferred Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such written instructions are received and (iii) shall be protected in conclusively relying on or acting in accordance with such written instructions. (xi) The Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Guarantee. (b) No provision of this Guarantee shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty. Section 18.12. Not Responsible for Recitals or Issuance of Guarantee. The recitals contained in this Guarantee shall be taken as the statements of the Guarantor, and the Guarantee Trustee does not assume any responsibility for their correctness. The Guarantee Trustee makes no representation as to the validity or sufficiency of this Guarantee. ARTICLE III GUARANTEE TRUSTEE Section 3.01. Guarantee Trustee; Eligibility. (a) There shall at all times be a Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, and be permitted by the Securities and Exchange Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 3.01(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. A-14 77 (b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 3.01(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 3.02(c). (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. Section 3.02. Appointment, Removal and Resignation of Guarantee Trustee. (a) Subject to Section 3.02(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. (b) The Guarantee Trustee shall not be removed in accordance with Section 3.02(a) until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. (c) The Guarantee Trustee appointed to office shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 3.02 within 60 days after delivery of an instrument of removal or resignation, the Guarantee Trustee resigning or being removed may petition, at the expense of the Guarantor, any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. (e) No Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Guarantee Trustee. (f) Upon termination of this Guarantee or removal or resignation of the Guarantee Trustee pursuant to this Section 3.02, and before the appointment of any Successor Guarantee Trustee, the Guarantor shall pay to the Guarantee Trustee all amounts to which it is entitled to the date of such termination, removal or resignation. A-15 78 ARTICLE IV GUARANTEE Section 4.01. Guarantee. (a) The Guarantor irrevocably and unconditionally agrees with the Guarantee Trustee, the Initial Holder and the Holders from time to time of the Company Preferred Securities, subject to the limitations set forth in this Guarantee, to pay in full to the Initial Holder and each subsequent Holder of Company Preferred Securities, whether such rights under this Guarantee are asserted by the Guarantee Trustee or directly by any such Holder (without duplication of amounts theretofore paid to the Holders of the Company Preferred Securities by the Company), regardless of any defense, right of set-off or counterclaim that the Company may have or assert: (i) on each Mandatory Dividend Payment Date, Dividends on the Company Preferred Securities in an amount equal to the Mandatory Dividend Payment Amount; (ii) on each other Dividend Payment Date, Dividends (if any) on the Company Preferred Securities that have become Definitive Dividends as to such Dividend Payment Date because the Guarantor did not deliver a No Dividend Instruction, (iii) on each Redemption Date, the Redemption Price payable with respect to the Company Preferred Securities called for redemption by the Company; (iv) upon any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Liquidation Distribution; and (v) any Additional Amounts payable by the Company with respect to the payment set forth in clauses (i) through (iv), above, under the LLC Agreement; (collectively, the "Guarantee Payments"); provided that, if a Bankruptcy Event has occurred as to the Guarantor, the Guarantee Payments payable under clause (i), (ii), (iii) and (iv) above of this Section 4.01 shall be an amount equal to the lesser of (A) the aggregate amount of Guarantee Payments pursuant to such clause of this Section 4.01 without giving effect to this proviso and (B) an amount calculated as (1) the remaining assets of the Guarantor in the related bankruptcy or insolvency proceeding after satisfaction of all claims which, as a matter of law, are prior to those of holders of this Guarantee or any Parity Guarantee multiplied by (2) a fraction, (x) the numerator of which is the aggregate amount of Guarantee Payments pursuant to such clause of this Section 4.01 without giving effect to this proviso and (y) the denominator of which is the aggregate principal or face amount of all claims under this Guarantee and the Parity Guarantees. All Guarantee Payments shall include interest accrued on such Guarantee Payments, at a rate per annum equal to the stated Dividend Rate of the Company Preferred Securities, since the date of the claim asserted under this Guarantee relating to such Guarantee Payments. A-16 79 (b) The Guarantor's obligation to make any of the payments listed in (i) through (iii) of subsection (a) above may be satisfied by direct payment of the required amounts (which shall be in United States dollars) by the Guarantor to the Holders or by causing the Company to pay such amounts to the Holders. Section 4.02. Delivery of Guarantor Certificate. As of each (x) Dividend Payment Date with respect to which the Company has not paid the full amount of Dividends at the Dividend Rate payable as contemplated by clause (i) or (ii), as applicable, of Section 4.01(a) or (y) Redemption Date with respect to which the Company has not paid the Redemption Price in full, the Guarantor shall deliver an Officers' Certificate to the Guarantee Trustee within five Business Days after such Dividend Payment Date or Redemption Date, as applicable, substantially in the form attached as Exhibit A (the "Guarantor Certificate"). Section 4.03. Waiver of Notice and Demand. The Guarantor hereby waives notice of acceptance of this Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Company or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. Section 4.04. Obligations Not Affected. The obligations, covenants, agreements and duties of the Guarantor under this Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Company of any express or implied agreement, covenant, term or condition relating to the Company Preferred Securities to be performed or observed by the Company; (b) the extension of time for the payment by the Company of all or any portion of the Dividends, Redemption Price, liquidation preference or any other sums payable under the terms of the Company Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Company Preferred Securities; provided that nothing in this Guarantee shall affect or impair any valid extension; (c) any failure, omission, delay or lack of diligence on the part of the Holders of the Company Preferred Securities to enforce, assert or exercise any right, privilege, power or remedy conferred on such Holders pursuant to the terms of the Company Preferred Securities, or any action on the part of the Company granting indulgence or extension of any kind; A-17 80 (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Company or any of the assets of the Company; (e) any invalidity of, or defect or deficiency in, the Company Preferred Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 4.04 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. Section 4.05. Action Against Guarantor. The Guarantor waives any right or remedy to require that any action be brought first against the Company or any other person or entity before proceeding directly against the Guarantor. Section 4.06. Independent Obligations. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Company with respect to the Company Preferred Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 4.04. It is further understood that all rights of a Holder of a Company Preferred Security against the Guarantor under this Guarantee, and all corresponding obligations of the Guarantor to such Holder, are separate and independent of the rights and corresponding obligations between the Guarantor and the respective Holders of the other Company Preferred Securities. Section 4.07. Taxes. All payments in respect of the Guarantee Payments (including interest accrued thereon, if any) by the Guarantor shall be made without withholding or deduction for or on account of any Relevant Tax, unless the withholding or deduction of such Relevant Tax is required by law. In that event, the Guarantor shall pay, as further Guarantee Payments, such additional amounts as may be necessary in order that the net amounts received by a Holder (or a third party on its behalf) after such withholding or deduction will equal the amount which would have been received in respect of the Guarantee Payments (including interest accrued thereon, if any) in the absence of such withholding or deduction ("Guarantee Additional Amounts"), except that no such Guarantee Additional Amounts shall be payable to a Holder (or a third party on its behalf) with respect to any Guarantee Payments (including interest accrued thereon, if any) [if the Relevant A-18 81 Jurisdiction is Switzerland or the Cayman Islands], (i) to the extent that such Relevant Tax is imposed or levied by virtue of such Holder (or the beneficial owner of Company Preferred Securities to which such Guarantee Payments relate) having some connection with the Relevant Jurisdiction, other than being a Holder of Company Preferred Securities (or beneficial owner of Company Preferred Securities) or (ii) to the extent that such the Relevant Tax is imposed or levied by virtue of such Holder (or beneficial owner) not having made a declaration of non-residence in, or other lack of connection with, the Relevant Jurisdiction or any similar claim for exemption, if the Guarantor or its agent has provided the beneficial owner of such Company Preferred Securities or its nominee with at least 60 days' prior written notice of any opportunity to make such a declaration or claim. Section 4.08. Rights Not Separately Transferable. This Guarantee is a guarantee for the benefit of each Holder from time to time of Company Preferred Securities with respect to each Company Preferred Security held by such Holder. Upon transfer of any Company Preferred Securities to a third party, a Holder thereof shall no longer have any rights hereunder with respect to such Company Preferred Securities. The rights under this Guarantee with respect to a Company Preferred Security are not separately transferable from such Company Preferred Security. The Initial Holder, by its execution of this Guarantee, hereby accepts the rights under this Guarantee as initial purchaser and acquirer of the Company Preferred Securities with the understanding that such rights shall be transferred by operation of law to any subsequent Holder acquiring a Company Preferred Security from the Initial Holder or from a subsequent Holder of Company Preferred Securities. ARTICLE V LIMITATIONS OF TRANSACTIONS; RANKING Section 5.01. Limitation of Transactions. (a) The Guarantor, for so long as any Company Preferred Securities remain outstanding, shall not issue any preferred or preference shares ranking senior on liquidation to its obligations under this Guarantee or give any guarantee in respect of any preferred securities or preferred or preference shares issued by any of its subsidiaries if such guarantee would rank senior to this Guarantee, unless this Guarantee is amended to give the Holders of the Company Preferred Securities such rights and entitlements as are contained in or attached to such other guarantee so that this Guarantee ranks pari passu with such guarantee and pari passu on liquidation with any declared dividend or declared liquidation payments of such preferred or preference shares. (b) The Guarantor shall pay all amounts required to be paid pursuant to this Guarantee in respect of any Dividends on the Company Preferred Securities payable in respect of the most recent Dividend Period prior to any dividend or other payment (except dividends in the form of the Ordinary Shares) upon the Ordinary Shares. (c) The Guarantor, for so long as any Trust Preferred Securities or Company Preferred Securities remain outstanding, shall not (i) issue any liquidation preference participation A-19 82 rights (not being capital stock) ranking senior to or pari passu with the right to liquidation payments under its Parity Preferred Shares, (ii) create, incur or permit to exist any debt junior to its obligations under this Guarantee and (iii) create, incur or permit to exist any debt that ranks pari passu with this Guarantee unless such debt contains a provision substantially similar to proviso contained in Section 4.01. (d) The Guarantor, for so long as any Trust Securities or Company Preferred Securities remain outstanding, shall (i) maintain, or shall cause any one or more Qualified Subsidiaries (each, a "Potential Securityholder") to maintain, 100% ownership of the Company Common Securities. The Guarantor may transfer and permit the transfer of the Company Common Securities from one Potential Securityholder to another Potential Securityholder; provided that prior to such transfer it has received an opinion of a nationally recognized U.S. law firm experienced in such matters to the effect that (A) the Company will continue to be treated as a partnership for United States federal income tax purposes and such transfer will not cause the Company to be classified as an association or publicly traded partnership taxable as a corporation for United States federal income tax purposes, (B) such transfer will not cause the Company or the Trust to be required to register under the Investment Company Act and (C) such transfer will not adversely affect the limited liability of the Holders of the Company Preferred Securities. (e) The Guarantor, for so long as any Trust Securities or Company Preferred Securities remain outstanding, (i) shall cause the Company to remain a limited liability company, (ii) shall use its commercially reasonable efforts to ensure that the Company will not be an association or a publicly traded partnership taxable as a corporation for United States federal income tax purposes, (iii) shall cause the Company to remain a limited liability company and not to voluntarily dissolve, wind up, liquidate or be terminated, except as permitted by the LLC Agreement and (iv) shall use its commercially reasonable efforts to ensure that the Trust will not be classified as other than a grantor trust for United States federal income tax purposes. (f) The Guarantor, for so long as any of the Company Preferred Securities are outstanding, shall, to the fullest extent permitted by law, not permit, or take any action to cause, the dissolution, liquidation, termination or winding up of the Company, unless the Guarantor is itself in liquidation. (g) If the Company Preferred Securities are distributed to Holders of Trust Preferred Securities in connection with the involuntary or voluntary dissolution, winding-up or liquidation of the Trust, the Guarantor shall use its commercially reasonable efforts to cause the Company Preferred Securities to be listed on the Luxembourg Stock Exchange or on such other national securities exchange or similar organization as the Trust Preferred Securities are then listed or quoted on. A-20 83 Section 5.02. Ranking. (a) The Guarantee will constitute a general and unsecured obligation of UBS AG and, in liquidation of UBS AG, will rank, both as to payment and in liquidation: (i) subordinate and junior to all deposits and other liabilities of the Guarantor (including those in respect of bonds, notes and debentures that do not expressly rank pari passu with the obligations of the Guarantor under this Agreement; and (ii) senior to the Ordinary Shares and any other securities of the Guarantor expressed to rank junior to the most senior preference shares of the Guarantor (if any) from time to time outstanding. The foregoing liabilities that rank senior to the UBS AG subordinated guarantee are collectively called "UBS AG Senior Liabilities". (b) Payments under this Guarantee (other than payments upon a winding-up or dissolution, by bankruptcy or otherwise, in Switzerland of the Guarantor) are conditional upon the Guarantor not being in default in the payment of UBS AG Senior Liabilities and being Solvent at the time of payment. A report as to the insolvency of the Guarantor by two persons, each being a managing director, director or other authorized officer or agent of the Guarantor or employees of the independent accountants of the Guarantor will, in the absence of manifest error be treated and accepted by the Guarantor, the holders of Company Preferred Securities and all other interested parties as correct and sufficient evidence thereof. ARTICLE VI TERMINATION Section 6.01. Termination. This Guarantee shall terminate upon, and be of no further force and effect from the earlier of (i) full payment of the Redemption Price of all Company Preferred Securities or purchase and cancellation of all Company Preferred Securities or (ii) upon full payment of the Liquidation Distribution, plus Additional Amounts thereon, if any, as payable upon liquidation of the Company. Notwithstanding the foregoing, this Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Company Preferred Securities must restore payment of any sums paid under the Company Preferred Securities or under this Guarantee for any reason whatsoever. A-21 84 ARTICLE VII INDEMNIFICATION Section 7.01. Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, liability, expense, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, liability, expense, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Dividends to Holders of Company Preferred Securities might properly be paid. Section 7.02. Indemnification. The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense (including taxes other than taxes based on the income of any such Indemnified Person) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.02 shall survive the termination of this Guarantee or the earlier resignation or removal of the Guarantee Trustee. ARTICLE VIII MISCELLANEOUS Section 8.01. Successors and Assigns. All guarantees and agreements contained in this Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Company Preferred Securities then outstanding. A-22 85 Section 8.02. Amendments. Except for those changes (i) required under Section 5.01(a) above, which may be made unilaterally by the Guarantor without the consent of the Holders of the Company Preferred Securities, or (ii) provided for in the two penultimate sentences of this paragraph, this Guarantee may be modified by the Guarantor and the Guarantee Trustee only with the prior approval of the Holders of not less than 662/3% in liquidation amount of the Company Preferred Securities (excluding any Company Preferred Securities held by the Guarantor or any of its Affiliates, other than Company Preferred Securities purchased or acquired by the Guarantor or its Affiliates in connection with transactions effected by or for the account of customers of the Guarantor or any of its Affiliates in connection with the distribution or trading of or market-making in connection with such securities and except that persons (other than Affiliates of the Guarantor) to whom the Guarantor or any of its subsidiaries have pledged Company Preferred Securities may vote or convert with respect to such pledged securities pursuant to the terms of such pledge). This Guarantee may be amended without the consent of the Holders of the Company Preferred Securities to (i) cure any ambiguity, (ii) correct or supplement any provision in this Guarantee that may be defective or inconsistent with any other provision of this Guarantee, (iii) add to the covenants, restrictions or obligations of the Guarantor, (iv) conform to any change in the Investment Company Act, the Trust Indenture Act or the rules or regulations of either such Act and (v) modify, eliminate and add to any provision of this Guarantee to such extent as may be necessary or desirable; provided that no such amendment made in reliance upon clause (v) above shall have a material adverse effect on the rights, preferences or privileges of the Holders of the Company Preferred Securities. Except as provided in the preceding sentence, Sections 4.01, 4.02, 4.07 and the form of Exhibit A may not be amended without the prior approval of each Holder of the Company Preferred Securities. Any amendment hereof in accordance with this Section 8.02 shall be binding on all Holders of Company Preferred Securities. Section 8.03. Judgment Currency Indemnity. (a) If, for the purposes of obtaining judgment in any court, it is necessary to convert an amount due from the Guarantor under any provision of this Guarantee to a currency other than U.S. dollars, the parties agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures Wilmington Trust Company could purchase such other currency with U.S. dollars at its New York office on the second Business Day preceding the day on which final judgment is given. (b) The obligations of the Guarantor in respect of any amount due to the Guarantee Trustee or any Holders under this Agreement shall, notwithstanding any judgment in a currency other than U.S. dollars, be discharged only to the extent that on the Business Day following receipt by the Guarantee Trustee or such Holders, as the case may be, of any amount adjudged to be so due in such other currency the Guarantee Trustee or such Holders, as the case may be, may in accordance with normal banking procedures purchase U.S. dollars with such other currency. (c) If the amount of U.S. dollars so purchased is less than the amount originally due to the Guarantee Trustee or such Holders, as the case may be, in U.S. dollars, the Guarantor A-23 86 agrees, to the fullest extent that it may effectively do so, as a separate obligation and notwithstanding any such judgment, to indemnify the Guarantee Trustee or such Holders, as the case may be, against such loss. (d) If the amount of dollars so purchased exceeds the amount originally due to the Guarantee Trustee or such Holders, as the case may be, in U.S. dollars, agree to remit any remaining amount to the Guarantor. Section 8.04. Assignment of the Guarantor. The Guarantor may not assign its obligations under the Guarantee, except in the case of a merger, consolidation or a sale of substantially all of its assets, where the Guarantor is not the surviving entity, and then only to the entity which is the survivor of such merger, consolidation or sale. Section 8.05. Notices. All notices provided for in this Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) If given to the Guarantee Trustee, at the Guarantee Trustee's mailing address set forth below: [--] (b) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Company Preferred Securities): UBS AG Bahnhofstrasse 45 Zurich, Switzerland 011 41-1-234 11 11 Attention: General Counsel and Aeschenvorstadt 1 Basel, Switzerland 011 41-61-288 20 20 Attention: General Counsel (c) If given to any Holder of Company Preferred Securities, at the address set forth on the books and records of the Company. A-24 87 All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 8.06. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. Section 8.07. Jurisdiction. Any claim or proceeding brought by the Guarantee Trustee on behalf of Holders or a Holder to enforce the obligations of the Guarantor hereunder shall be brought exclusively in a court of competent jurisdiction in Switzerland. Any claim or proceeding relating to the application of Articles 2 and 3, and the definitions of terms as used therein, including, without limitation, any claims, counter-claims and cross-claims asserted against the Guarantee Trustee in connection therewith, shall be brought in a court of competent jurisdiction in the State of New York. A-25 88 This GUARANTEE is executed as of the day and year first above written. UBS AG, as Guarantor By: _______________________________ Name: Title: By: ________________________________ Name: Title: WILMINGTON TRUST COMPANY, as Guarantee Trustee By: ______________________________ Name: Title: WILMINGTON TRUST COMPANY, as Initial Holder (in its capacity as trustee pursuant to the TRUST AGREEMENT) By: _____________________________ Name: Title: A-26 89 EXHIBIT A UBS AG OFFICERS' CERTIFICATE [Date] The undersigned, [name of Authorized Officer], [title of Authorized Officer], and [name of Authorized Officer], [title of Authorized Officer], of UBS AG, a bank incorporated under the laws of Switzerland, pursuant to Section 4.02 of the Subordinated Guarantee Agreement dated as of [--], 2000 (the "Guarantee"), executed and delivered by UBS AG, as guarantor, Wilmington Trust Company, in its capacity as trustee pursuant to the Trust Agreement, and Wilmington Trust Company, as trustee, for the benefit of the Holders from time to time of the [--]% Noncumulative Company Preferred Securities (the "Company Preferred Securities") of UBS Preferred Funding Company LLC I, do hereby certify as of the date hereof on behalf of UBS AG as follows (capitalized terms used herein without definitions have the meanings assigned to them in the Guarantee): 1. We have read and are familiar with the provisions of the Guarantee (including, without limitation, Section 4.02 thereof) and all definitions therein. 2. We have reviewed all corporate documents necessary to state the facts contained herein and are duly authorized to certify to those facts. 3. In our opinion, we have made such examination or investigation as is necessary to enable us to express an informed opinion as to the facts certified herein. 4. [Neither] [Either] UBS AG [nor] [or] any of its subsidiaries has redeemed, repurchased or otherwise acquired (other than (I) in connection with transactions effected by or for the account of customers of the Guarantor or any of its subsidiaries or in connection with the distribution, trading or market-making in respect of such securities, (II) in connection with the satisfaction by the Guarantor or any of its subsidiaries of its obligations under any employee benefit plans or similar arrangements with or for the benefit of employees, officers, directors or consultants, (III) as a result of a reclassification of the capital stock of the Guarantor or any of its subsidiaries or the exchange or conversion of one class or series of such capital stock for another class or series of such capital stock or (IV) the purchase of fractional interests in shares of the capital stock of the Guarantor or any of its subsidiaries pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged) for any consideration (and moneys [have] [have not] been paid to or made available for a sinking fund or for redemption of any such shares) any Ordinary Shares or any Parity Securities during the twelve month period immediately preceding and including the date hereof. A-A-1 90 5. [Neither] [Either] UBS AG [nor] [or] any of its subsidiaries has declared or made a dividend or other payment in respect of the Ordinary Shares that pay dividends annually, if any, during the twelve month period immediately preceding and including the date hereof. 6. [Neither] [Either] UBS AG [nor] [or] any of its subsidiaries has declared or made a dividend or other payment in respect of the Ordinary Shares that pay dividends semi-annually, if any, during the six month period immediately preceding and including the date hereof. 7. [Neither] [Either] UBS AG [nor] [or] any of its subsidiaries has declared or made a dividend or other payment in respect of the Ordinary Shares that pay dividends quarterly, if any, during the three month period immediately preceding and including the date hereof. 8. (a) [Neither] [Either] UBS AG [nor] [or] any of its subsidiaries has declared or made a dividend or other payment in respect of the Parity Securities that pay dividends annually, if any, during the twelve month period immediately preceding and including the date hereof. (b) A dividend or other payment in respect of the Parity Securities that pay dividends annually, if any, was declared or made [in full] [at __% of the stated dividend rate for such Parity Securities]. 9. (a) [Neither] [Either] UBS AG [nor] [or] any of its subsidiaries has declared or made a dividend or other payment in respect of its Parity Securities that pay dividends semi-annually, if any, during the six month period immediately preceding and including the date hereof. (b) A dividend or other payment in respect of the Parity Securities that pay dividends semi-annually, if any, was declared or made [in full] [at __% of the stated dividend rate for such Parity Securities]. 10. (a) [Neither] [Either] UBS AG [nor] [or] any of its subsidiaries has declared or made a dividend or other payment in respect of the Parity Securities that pay dividends quarterly, if any, during the three month period immediately preceding and including the date hereof. (b) A dividend or other payment in respect of the Parity Securities that pay dividends quarterly, if any, was declared or made [in full] [at __% of the stated dividend rate for such Parity Securities.] A-A-2 91 IN WITNESS WHEREOF, the undersigned have duly executed as of the date first set forth above. UBS AG By: _______________________________ Name: Title: By: _______________________________ Name: Title: A-A-3 92 Annex B to the Amended and Restated Limited Liability Company Agreement ADMINISTRATION AGREEMENT BETWEEN UBS PREFERRED FUNDING COMPANY LLC I AND UBS AG, ACTING THROUGH ITS STAMFORD BRANCH DATED AS OF [--], 2000 93 TABLE OF CONTENTS
Page Section 1. Administrative Services......................................................................... B-2 Section 2. Compensation; Indemnities....................................................................... B-3 Section 3. Term............................................................................................ B-4 Section 4. Obligation to Supply Information................................................................ B-4 Section 5. The Administrator's Liability and Standard of Care.............................................. B-4 Section 6. Reliance on Information Obtained from Third Parties............................................. B-4 Section 7. Notices......................................................................................... B-4 Section 8. Amendment....................................................................................... B-5 Section 9. No Joint Venture................................................................................ B-5 Section 10. Assignment...................................................................................... B-5 SECTION 11. GOVERNING LAW................................................................................... B-6 Section 12. Submission to Jurisdiction...................................................................... B-6 Section 13. Execution in Counterparts....................................................................... B-6 Section 14. Section Headings................................................................................ B-6 Section 15. Entire Agreement................................................................................ B-6
94 This ADMINISTRATION AGREEMENT (this "Agreement") dated as of - -, 2000 between UBS Preferred Funding Company LLC I, a Delaware limited liability company (the "Company") and UBS AG, a bank organized under the laws of Switzerland (the "Bank"), acting through its Stamford branch, as administrator (the "Administrator"). WITNESSETH WHEREAS, the Company proposes to engage in the following activities (among others): i. to purchase newly issued undated subordinated notes (the "Subordinated Notes"), issued by the Bank through its Cayman Islands branch office, in an aggregate principal amount of $[--]; ii. to issue (i) [--] common limited liability company interests in the Company (the "Company Common Securities"), representing all of the common limited liability company interests in the Company, to the Bank, acting through its [--] branch, at an aggregate purchase price of $[--]; and (ii) [--]% Noncumulative Company Preferred Securities with an aggregate liquidation preference of $[--] (the "Company Preferred Securities"), representing preferred limited liability company interests in the Company to UBS Preferred Funding Trust I, a Delaware statutory business trust (the "Trust"), the proceeds of which will be used to purchase the Subordinated Notes and pay certain expenses relating to the foregoing offering; iii. to enter into any agreements in connection with the foregoing (together with the Amended and Restated Limited Liability Company Agreement of the Company (the "Company Agreement"), the "Transaction Documents"); iv. to enter into any agreement providing for the management and administration of the activities of the Company; and v. to engage in such activities and to exercise such powers permitted to limited liability companies under the laws of the State of Delaware that are incidental to or connected with the foregoing business or purposes or necessary to accomplish the foregoing or any other lawful purpose which is, in each case, not inconsistent with the Company Agreement as amended from time to time; and WHEREAS, the Company has requested that the Administrator provide assistance to the Company and perform various services for the Company, and the Administrator is willing to furnish such services on the terms and conditions herein set forth. In connection herewith, the Administrator has also requested certain indemnities from the Company. NOW, THEREFORE, in mutual consideration of these promises, the parties hereto agree as follows: 95 1. Administrative Services. The Administrator hereby agrees to provide corporate management and administrative services to the Company and the Company hereby authorizes the Administrator to provide such services, including: i. taking such actions, as Administrator on behalf of the Company (including through directors or officers of the Company or through employees of the Administrator who are authorized by the Company), as are necessary or desirable for the Company to remain organized and qualified in all appropriate jurisdictions and to carry out its business in such manner as the directors of the Company determine and as the Company shall from time to time reasonably request in order to effect transactions of the type described in the Preliminary Statement to this Agreement; ii. providing, or causing to be provided, clerical, bookkeeping and other services necessary and appropriate for the Company, including, without limitation, the following services: (i) providing such banking and investment services as may be agreed upon from time to time; (ii) providing from its employees signatories to the Company's bank and investment accounts; (iii) maintaining any books and records in the State of New York that are required in the ordinary course of the business of the Company (the "Business"), are agreed between the parties and are required in order to comply with any laws or regulations of the State of Delaware and in such form and manner as may be agreed upon from time to time; (iv) preparing such periodic reports and accounting information as may be requested from time to time by the board of directors; (v) dealing with correspondence relating to the Business; (vi) providing a Company Secretary; (vii) providing non-exclusive telephone, telecopy, telex, post office box and duplicating facilities and within its premises and such other non-exclusive space and ancillary services as may be necessary for the other purposes of the Business including facilities for meetings of the directors of the Company from time to time; (viii) complying with the terms of the Company Agreement all agreements to which the Company is a party and, without prejudice to the foregoing, B-2 96 not entering into, on behalf of the Company, any commitments, loans or obligations nor charging, mortgaging, pledging, encumbering or otherwise restricting or disposing of the Company's property or assets and generally not taking any action inconsistent with the Business; and (ix) keeping confidential all documents, materials and other information relating to the Business and not disclosing any of the aforesaid without the prior consent of the Company unless it shall in good faith determine that such disclosure is necessary to protect the interests of the Administrator; and iii. undertaking such other administrative services as may be reasonably requested by the Company, including providing notices to third parties on behalf of the Company and providing such other services as are necessary or desirable for the Company to carry out its duties and obligations under the Transaction Documents. Any of the above services may, if the Administrator or the Company deems it necessary or desirable, be subcontracted by the Administrator; provided, that prior written consent is obtained from the Company of such subcontract and, provided further, that notwithstanding such subcontract, the Administrator shall remain responsible for performance of the services set forth above. 2. Compensation; Indemnities. i. The Company agrees to pay to the Administrator, in consideration for the Administrator's services described in paragraphs (a)-(c) of Section 1, an annual fee as determined periodically by the Company and the Administrator, which fee in no event shall exceed the value of the services provided by the Administrator to the Company on an arm-length basis. ii. The Company shall pay and shall indemnify and hold harmless the Administrator and the Administrator's directors, officers, employees and agents (each of the foregoing an "Administrator Indemnified Person") from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs and expenses (including, without limitation, under any securities laws, rules or regulations) arising from or relating to the transactions contemplated hereby (all of the foregoing being collectively referred to as "Indemnified Amounts"), provided, however, that the Company shall have no obligation to indemnify any Administrator Indemnified Person hereunder in respect of Indemnified Amounts to the extent any such losses, liabilities, actions, suits, judgments, demands, damages, costs and expenses resulted from the negligence or willful misconduct of such Administrator Indemnified Person. iii. The Administrator shall pay and shall protect, indemnify and hold harmless the Company and its directors, officers, employees and agents and all Persons affiliated with the Company (each of the foregoing a "Company Indemnified Person") from and against any and all B-3 97 losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs and expenses (including, without limitation, reasonable fees and expenses of counsel) of any nature (including, without limitation, under any securities laws, rules or regulations) arising from or relating to the Administrator's negligence or willful misconduct or that of its directors, officers, employees and agents in connection with the exercise of the Administrator's rights and/or the performance of the Administrator's duties hereunder. iv. This Section 2 shall survive the termination of this Agreement. 3. Term. The Company may terminate this Agreement upon at least 90 days' written notice to the Administrator. 4. Obligation to Supply Information. The Company shall forward to the Administrator such information in connection with the Transaction Documents as the Administrator may from time to time reasonably request in connection with the performance of its obligations hereunder. 5. The Administrator's Liability and Standard of Care. The Administrator assumes no liability for anything other than the services rendered by it pursuant to Section 1. Without limiting the generality of the foregoing, it is agreed that the Administrator assumes no liability with respect to any of the Company's obligations under the Transaction Documents. The Administrator shall perform its duties hereunder diligently and with the same standard of care exercised by a prudent person in connection with the performance of the same or similar duties and, in no event with less care than the Administrator exercises or would exercise in connection with the same or similar obligations if those obligations were the direct obligations of the Administrator. 6. Reliance on Information Obtained from Third Parties. The Company recognizes that the accuracy and completeness of the records maintained and the information supplied by the Administrator hereunder is dependent upon the accuracy and completeness of the information obtained by the Administrator from the parties to the Transaction Documents and other sources and the Administrator shall not be responsible for any inaccuracy in the information so obtained or for any inaccuracy in the records maintained by the Administrator hereunder that may result therefrom. 7. Notices. All notices and other communications to be given shall be in writing (including by facsimile transmission) and delivered to the relevant address or number specified below (or such other address or number as may be notified in accordance with this Section 7) and shall take effect at the time of receipt. B-4 98 The Company: UBS Preferred Funding Company LLC I [--] Telephone: [--] Facsimile: [--] Attention: [--] The Administrator: UBS AG (Stamford) [--] Telephone: [--] Facsimile: [--] Attention: [--] With a copy to: [--] Telephone: Facsimile: Attention: 8. Amendment. No waiver, alteration, modification, amendment or supplement of the terms of this Agreement shall be effective unless accomplished by written instrument signed by all parties hereto. 9. No Joint Venture. Nothing contained in this Agreement shall constitute the Administrator and the Company as members of any partnership, joint venture, association, syndicate or unincorporated business. 10. Assignment. This Agreement may not be assigned by any party without the prior written consent of the other parties, provided, that the parties hereby agree that if the Bank sells, assigns or otherwise transfers the Company Common Securities to a wholly owned subsidiary of the Bank, the Bank's rights (and obligations) under this Agreement (including those of the Administrator) may be assigned to such subsidiary. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. B-5 99 11. GOVERNING LAW. THIS ADMINISTRATION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. 12. Submission to Jurisdiction. The Bank irrevocably consents and agrees, that any legal action, suit or proceeding against it with respect to its obligations, liabilities or any other matter arising out of or in connection with this Agreement may be brought in the courts of the State of New York or the courts of the United States of America located in The City of New York and until amounts due and to become due under this Agreement have been paid, hereby irrevocably consents and submits to the non-exclusive jurisdiction of each such court in personam, generally and unconditionally with respect to any such action, suit or proceeding for itself and in respect of its properties, assets and revenues. Service of process upon the branch in any such action, suit or proceeding shall be deemed in every respect service of process upon the Bank. The Bank hereby irrevocably and unconditionally waives, to the fullest extent permitted by law, except as otherwise provided for in this Agreement, any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions, suit or proceedings brought in the United States Federal courts located in The City of New York or the courts of the State of New York and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. The provisions of this Section 12 shall survive any termination of this Agreement, in whole or in part. 13. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same Agreement. 14. Section Headings. Section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement. 15. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters covered hereby and supersedes all prior agreements and understandings with respect to such matters between the parties. B-6 100 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. UBS AG, acting through its Stamford branch By: ______________________________________ Name: Title: UBS PREFERRED FUNDING COMPANY LLC I By: ______________________________________ Name: Title: B-7 101 Annex C to the Amended and Restated Limited Liability Company Agreement BY-LAWS OF UBS PREFERRED FUNDING COMPANY LLC I These By-laws have been established as the By-laws of UBS Preferred Funding Company LLC I, a Delaware limited liability company (the "Company") pursuant to the Amended and Restated Limited Liability Company Agreement, dated as of [--], 2000 (as from time to time amended, modified or supplemented, the "Agreement"), pursuant to which the Company's existence has been continued, and, together with the Agreement and Annexes, C, E, F, G, H and I thereto, are deemed to be the limited liability company agreement of the Company for purposes of the Delaware Act. In the event of any inconsistency between the Agreement and these By-laws, the provisions of the Agreement shall control. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. ARTICLE I SECURITYHOLDERS Section 1.1. Annual Meetings. An annual meeting of Securityholders may be held at such date, time and place either within or without the State of Delaware if and as may be decided and designated by the Board of Directors from time to time; provided, however the Company shall not be required to have an annual meeting of Securityholders. Any other proper business may be transacted at the annual meeting. Section 1.2. Special Meetings. Special meetings of Securityholders may be called at any time by the Chairman of the Board, if any, the President or the Board of Directors, to be held at such date, time and place either within or without the State of Delaware as may be stated in the notice of the meeting. A special meeting of Securityholders shall be called by the Secretary upon the written request, stating the purpose of the meeting, of Securityholders who together own of record a majority of the Securities entitled to vote at such meeting. Section 1.3. Notice of Meetings. Whenever Securityholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each Securityholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the Securityholder at such Securityholder's address as it appears on the records of the Company. C-1 102 Section 1.4. Adjournments. Any meeting of Securityholders, annual or special, may be adjourned from time to time, to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Company may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Securityholder of record entitled to vote at the meeting. Section 1.5. Quorum. At each meeting of Securityholders, except where otherwise provided by law or the Agreement or these By-laws, the holders of at least 50% of the Securities entitled to vote on a matter at the meeting, present in person or represented by proxy, shall constitute a quorum. In the absence of a quorum of the holders of Securities entitled to vote on a matter, the holders of a majority of the Securities present or represented may adjourn such meeting from time to time in the manner provided by Section 1.4 of these By-laws until a quorum shall be so present or represented. Securities other than Common Securities belonging on the record date for the meeting to the Company or an Affiliate of the Company shall neither be entitled to vote nor be counted for quorum purposes. Section 1.6. Organization. Meetings of Securityholders shall be presided over by the Chairman of the Board, if any, or in the absence of the Chairman of the Board by the President, or in the absence of the President by a Vice President, or in the absence of the foregoing persons, by a chairman designated by the Board of Directors, or in the absence of such designation, by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary, an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7. Voting; Proxies. Unless otherwise provided in the Agreement, each Securityholder entitled to vote at any meeting of Securityholders shall have voting power proportionate to the outstanding amount, based on initial issue price, of the Securities held by such Securityholder that have voting power upon the matter in question. Each Securityholder entitled to vote at a meeting of Securityholders or to express consent or dissent to action in writing without a meeting may authorize another person or persons to act for such Securityholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power, regardless of whether the interest with which it is coupled is an interest in the Securities themselves or an interest in the Company generally. A Securityholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Company. Voting at meetings of Securityholders need not be by written ballot unless the holders of a majority of the outstanding Securities entitled to vote thereon present in person or represented by proxy at such meeting shall so determine. Directors shall be designated, removed and replaced C-2 103 as provided in the Agreement and Article II hereof. Other than in the case of any matter expressly set forth in the Agreement for which a higher vote may be required, the affirmative vote of the holders of a majority of the Securities present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the Securityholders. Section 1.8. Fixing Date for Determination of Securityholders of Record. In order that the Company may determine the Securityholders entitled to notice of or to vote at any meeting of Securityholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining Securityholders entitled to notice of or to vote at a meeting of Securityholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of Securityholders of record entitled to notice of or to vote at a meeting of Securityholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Company may determine the Securityholders entitled to consent to action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining Securityholders entitled to consent to action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company by delivery to (a) its registered office in the State of Delaware, (b) its principal place of business, or (c) an Officer or agent of the Company having custody of the book in which proceedings of meetings of Securityholders are recorded. Delivery made to the Company's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining Securityholders entitled to consent to action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the Company may determine the Securityholders entitled to receive payment of any distribution or allotment of any rights or the Securityholders entitled to exercise any rights in respect of any exchange of Securities, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining Securityholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. C-3 104 Section 1.9. List of Securityholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of Securityholders, a complete list of the Securityholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Securityholder and the amount of Securities registered in the name of each Securityholder. Such list shall be open to the examination of any Securityholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any Securityholder who is present. Section 1.10. Consent of Securityholders in Lieu of Meeting. Unless otherwise provided in the Agreement or by law, any action required by law to be taken at any annual or special meeting of Securityholders of the Company, or any action which may be taken at any annual or special meeting of such Securityholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding Securities having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all Securities entitled to vote thereon were present and voted and shall be delivered to the Company by delivery to (a) its registered office in the State of Delaware by hand or by certified mail or registered mail, return receipt requested, (b) its principal place of business, or (c) an Officer or agent of the Company having custody of the book in which proceedings of meetings of Securityholders are recorded. Every written consent shall bear the date of signature of each Securityholder who signs the consent and no written consent shall be effective to take the action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this By-Law to the Company, written consents signed by holders representing a sufficient amount of Securities to take action are delivered to the Company by delivery to (a) its registered office in the State of Delaware by hand or by certified or registered mail, return receipt requested, (b) its principal place of business, or (c) an Officer or agent of the Company having custody of the book in which proceedings of meetings of Securityholders are recorded. Prompt notice of the taking of the action without a meeting by less than unanimous written consent shall be given to those Securityholders who have not consented in writing. ARTICLE II BOARD OF DIRECTORS 2.1. Number; Powers; By-laws. The business and affairs of the Company shall be managed by or under the direction of a Board composed of not less than three nor more than five Directors. The Board shall manage the business and affairs of the Company and may exercise all powers in connection therewith, except for such powers as are required to be exercised by Securityholders, all in accordance with the Agreement, these By-laws and applicable law. Except C-4 105 to the extent that the Board or the Securityholders confer such authority on a Director, no Director shall have the authority to bind the Company. 2.2. Voting Power. Each Director shall, in the consideration of any matter by the Board, have a single vote at the time such vote is taken or made (whether at a meeting or by written consent). Except where a greater percentage approval may be provided for herein or in the Agreement or by law, an action shall be deemed approved by the Board only if it has been approved by a majority of the Directors. 2.3. Quorum. At all meetings of the Board, the presence of at least a majority of Directors shall constitute a quorum for the transaction of business. In case at any meeting of the Board a quorum shall not be present, any Director present may adjourn the meeting from time to time until a quorum shall be present. 2.4. Designation; Removal; Replacement. The term of office of a Director shall be until the earliest of the following events: (i) his or her successor is designated or (ii) he or she resigns or is removed. Any Director may be removed, with or without cause by majority vote of the remaining Directors. In the event of the resignation, removal or death of a Director, such Director shall be replaced by another person designated by majority vote of the remaining Directors. Any Director may resign at any time upon written notice to the Board of Directors or to the President or the Secretary of the Company. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Section 2.5. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board may from time to time determine, and if so determined notice thereof need not be given. Section 2.6. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, by the President or by any two Directors. Reasonable notice thereof shall be given by the person or persons calling the meeting. Section 2.7. Participation in Meetings by Conference Telephone Permitted. Unless otherwise restricted by the Agreement or these By-laws, the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this By-Law shall constitute presence in person at such meeting. Section 2.8. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in the absence of the Chairman of the Board by the President, or in their absence, by a chairman chosen at the meeting. The Secretary, or in the absence of the C-5 106 Secretary, an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.9. Action by Directors Without a Meeting. Unless otherwise restricted by the Agreement or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE III COMMITTEES Section 3.1. Committees. The Board of Directors may, by resolution of the Board adopted by majority vote, designate one or more committees, each committee to consist of one or more of the Directors of the Company. Any such committee, to the extent provided in the resolution of the Board of Directors or in these By-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Company, and may authorize the seal of the Company to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Formation, adopting an agreement of merger, consolidation or conversion, recommending to the Securityholders the sale, lease or exchange of all or substantially all of the Company's property and assets, recommending to the Securityholders a dissolution of the Company or a revocation of a dissolution, amending these By-laws and, unless the resolution, these By-laws or the Agreement expressly so provides, no such committee shall have the power or authority to authorize the issuance of Securities, to adopt a certificate of ownership and merger, consolidation or conversion or to remove or indemnify Officers or Directors. Section 3.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these By-laws. C-6 107 ARTICLE IV OFFICERS Section 4.1. Officers; Election. As soon as practicable after the annual meeting of Securityholders in each year, the Board of Directors shall elect a President and a Secretary, and may also elect one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers and such other Officers as the Board may deem desirable or appropriate and may give any of them such further designations or alternate titles as it considers desirable. Any number of offices may be held by the same person unless the Agreement or these By-laws otherwise provide. Section 4.2. Term of Office; Resignation; Removal; Vacancies. Unless otherwise provided in the resolution of the Board of Directors electing any Officer, each Officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any Officer may resign at any time upon written notice to the Board or to the President or the Secretary of the Company. Such resignation shall take effect at the time specified therein, and, unless otherwise specified therein, no acceptance of such resignation shall be necessary to make it effective. The Board may remove any Officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such Officer, if any, with the Company, but the election of an Officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Company by death, resignation, removal or otherwise may be filled by the Board at any regular or special meeting. Section 4.3. Powers and Duties. The Officers of the Company shall have such powers and duties in the management of the Company as shall be stated in these By-laws or in a resolution of the Board of Directors which is not inconsistent with these By-laws and, to the extent not so stated, as generally pertain to comparable offices in a corporation organized under the General Corporation Law of the State of Delaware, subject to the control of the Board. The Secretary shall have the duty to record the proceedings of the meetings of the Securityholders, the Board of Directors and any committees in a book to be kept for that purpose. The Board may require any Officer, agent or employee to give security for the faithful performance of his or her duties. ARTICLE V SECURITIES Section 5.1. Certificates for Securities. The Preferred Securities in the Company shall be registered in certificated form. If such certificate is manually countersigned by a transfer agent or by a registrar, any other signature on the certificate may be a facsimile. In case any Officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such Officer before such certificate is issued, it may be issued by the Company with the same effect as if such person were such Officer at the date of issue. C-7 108 Section 5.2. Lost, Stolen or Destroyed Certificates; Issuance of New Certificates. The Company may issue a new certificate representing Securities in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Company may require the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to give the Company a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated Securities. ARTICLE VI MISCELLANEOUS Section 6.1. Seal. The Company may have a company seal which shall have the name of the Company inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The Company seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 6.2. Waiver of Notice of Meetings of Securityholders, Directors and Committees. Whenever notice is required to be given by law or under any provision of the Agreement or these By-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Securityholders, Directors or a committee of Directors need be specified in any written waiver of notice unless so required by the Agreement or these By-laws. Section 6.3. Indemnification of Directors, Officers and Employees. The Company shall indemnify to the full extent permitted under the Delaware Act and other applicable law any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a Director, Officer or employee of the Company or serves or served at the request of the Company any other enterprise as a Director, director, officer or employee except for such Director's or Officer's gross negligence or willful misconduct. Expenses, including reasonable attorneys' fees, incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the Company promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by the Company. The rights provided to any person by this By-Law shall be enforceable against the Company by such person who shall be presumed to have relied upon it in serving or continuing to serve as a Director, Officer or employee as provided above. No amendment of this By-Law shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment. For purposes of this By-Law, the term "Company" C-8 109 shall include any predecessor of the Company and any constituent company (including any constituent of a constituent) absorbed by the Company in a consolidation or merger; the term "other enterprise" shall include any limited liability company, corporation, partnership, joint venture, trust or employee benefit plan; service "at the request of the Company" shall include service as a Director, Officer or employee of the Company which imposes duties on, or involves services by, such Director, Officer or employee with respect to an employee benefit plan, its participants or beneficiaries; any excise taxes assessed on a person with respect to an employee benefit plan shall be deemed to be indemnifiable expenses; and action by a person with respect to an employee benefit plan which such person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interests of the Company. The rights conferred on any Person by this Section 6.3 shall not be exclusive of any other rights which such Person may have or hereafter acquire under any statute, provision of these By-Laws, the Agreement, any other agreement, vote of Securityholders or disinterested Directors or otherwise. The Company's obligation, if any, to indemnify any Person who was or is serving at its request as a director, officer, employee or agent of any other enterprise shall be reduced by any amount such Person may collect as indemnification from such other enterprise. Any repeal or modification of the foregoing provisions of this Section 6.4 shall not adversely affect any right of protection hereunder of any Person in respect of any act or omission occurring prior to the time of such repeal or modification. Section 6.4. Interested Directors; Quorum. No contract or transaction between the Company and one or more of its Directors or Officers, or between the Company and any other limited liability company, 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 her or their votes are counted for such purpose, if: (1) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of disinterested Directors, even though the disinterested Directors be less than a quorum; or (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Securityholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the Securityholders; or (3) the contract or transaction is fair as to the Company as of the time it is authorized, approved or ratified, by the Board, a committee thereof or the Securityholders. 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. Section 6.5. Form of Records. Any records maintained by the Company in the regular course of its business, including its Securities ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape or disk, photographs, microphotographs or any other information storage device, provided that the records so kept can be C-9 110 converted into clearly legible form within a reasonable time. The Company shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 6.6. Amendment of By-laws. These By-laws may be amended or repealed, and new by-laws adopted, by the Board of Directors in accordance with the Agreement. Section 6.7. Governing Law. These By-laws shall be governed by and construed in accordance with the laws of the State of Delaware (without regard to principles of conflict of laws). C-10 111 Annex D to the Amended and Restated Limited Liability Company Agreement $[--] FORM OF SUBORDINATED NOTE UBS AG, acting through its Cayman Islands branch [--]% PERPETUAL SUBORDINATED NOTES UBS AG, a bank organized under the laws of Switzerland (the "Bank"), acting through its Cayman Islands branch (the "Cayman Islands branch"), for value received, hereby promises to pay to UBS PREFERRED FUNDING COMPANY LLC I, a Delaware limited liability company (the "Company"), principal and interest on the principal amount of this Subordinated Note (this "Subordinated Note"), under the terms and conditions described hereunder. Section 1. Definitions. The following terms are used herein with the meanings assigned to them below: "Administrative Action" means any judicial decision, official administrative pronouncement, published or private ruling, regulatory procedure, notice or announcement (including any notice or announcement of intent to adopt such procedures or regulations) by any legislative body, court, governmental authority or regulatory body having appropriate jurisdiction. "Bank" means UBS AG, a bank organized under the laws of Switzerland, acting through its Cayman Islands branch. A "Bankruptcy Event" shall be deemed to occur if (i) at any time the Bank's unconsolidated unsubordinated liabilities exceed its unconsolidated total assets (valued at the higher of their going-concern and their liquidation value), as calculated based on the most recent unconsolidated interim balance sheet of the Bank and the unsubordinated creditors of the Bank do not agree to subordinate their claims to the extent that such liabilities exceed such assets; or (ii) the Swiss Federal Banking Commission exercises the broad discretion granted to it under the Swiss Banking Law before the occurrence of such an excess as described in (i), above, by withdrawing the banking license of the affected bank, which has then been required to go into liquidation pursuant to Article 23 quinquies of the Swiss Banking Law. D-1 112 "Business Day" means a day on which (i) which the Trans-European Automated Real-Time Gross settlement Express Transfer system ("TARGET") is operating, (ii) banks are open for business and carrying out transactions in U.S. Dollars in London and Luxembourg and (iii) banks are open for business in Wilmington, Delaware, U.S.A. "Calculation Agent" means the London branch of UBS AG. "Capital Event" means the determination by the Bank after consultation with the Federal Banking Commission that the Company Preferred Securities cannot be included in calculating the Tier 1 capital of the Bank on a consolidated basis. "Cayman Islands branch" means the branch of the Bank located in the Cayman Islands. "Change in Tax Law" means the receipt by the Bank of an opinion of a nationally recognized law firm or other tax advisor (which may be an accounting firm) in Switzerland, the United States or the Cayman Islands, as appropriate, experienced in such matters to the effect that an event of the type described in clause (A), (B) or (C) of the definition of "Tax Event" has occurred or will occur as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or treaties (or any regulations under any laws or treaties) of the United States, Switzerland or the Cayman Islands or any political subdivision or taxing authority of or in the United States, Switzerland or the Cayman Islands affecting taxation or (ii) any Administrative Action or any amendment to, clarification of, or change in the official position or Bank interpretation of any Administrative Action or any interpretation or pronouncement that provides for a position with respect to any Administrative Action that differs from the previously generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, regardless of the manner in which such amendment, clarification, change, interpretation or pronouncement is made known, which amendment, clarification, change or Administrative Action is effective or which interpretation or pronouncement is announced on or after the date of issuance of the Company Preferred Securities.] "Company" means UBS Preferred Funding Company LLC I, a Delaware limited liability company. "Company Agreement" means the Amended and Restated Limited Liability Company Agreement of the Company, as amended and restated as of Issue Date of the Company Preferred Securities. "Company Common Securities" means the securities of the Company representing the common limited liability company interests in the Company. D-2 113 "Company Preferred Securities" means the [--]% Noncumulative Company Preferred Securities, aggregate liquidation preference $[--], offered by the Company pursuant to a Prospectus dated [--], 2000 together with any subsequent offering by the Company of [--]% Noncumulative Company Preferred Securities, each representing preferred limited liability company interests in the Company. "Dividend Payment Date" means, with respect to dividends on the Company Preferred Securities, the date on which such dividends are payable under the Company Agreement. "Determination Date" for an Interest Period means two London Banking Days preceding the first day of that Interest Period. "Eligible Investments"means, pursuant to the Investment Policies, the assets or investments which the Company may hold and consist of (i) the Subordinated Notes and (ii) other securities issued by the Bank acting through a branch, agency or other office located outside of the United States or by a non-U.S. branch of a non-U.S. subsidiary of the Bank. "Interest Payment Date" means, with respect to the Subordinated Notes, each date on which interest is payable, as specified in Section 3(a). "Interest Period" has the meaning ascribed thereto in Section 3. "Investment Company Act Event" means the receipt by the Bank of an opinion of a nationally recognized law firm in the United States experienced in such matters to the effect that there is more than an insubstantial risk that the Company or the Trust is an "investment company" within the meaning of the 1940 Act. "Investment Policies" means the investment policies of the Company as set forth in Annex F of the Company Agreement. "Issue Date" means the date of initial issuance of the Company Preferred Securities and the Trust Preferred Securities. "London Banking Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "1940 Act" means the Investment Company Act of 1940, as amended. "Subordinated Note Make Whole Amount" as applied to a redemption of this Subordinated Note means the greater of (i) 100% of the principal amount of the Subordinated Notes and (ii) as determined by a Quotation Agent (as defined below), the sum of the present value of the principal amount of this Subordinated Note together with the present values of D-3 114 scheduled payments of interest accrued from the date of redemption to the Dividend Payment Date in October 2010 (the "Remaining Life"), in each case discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate. For purposes of determining the Subordinated Note Make Whole Amount: "Adjusted Treasury Rate" means, with respect to any Redemption Date, the Treasury Rate plus .75. "Comparable Treasury Issue" means, with respect to any Redemption Date, the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity that is within a period from three months before to three months after the Interest Payment Date and Dividend Payment Date in October 2010, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (A) the average of five Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (B) if the Calculation Agent obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Quotation Agent" means UBS Warburg LLC and its successors, except that if UBS Warburg LLC shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury dealer"), the Corporation will designate another Primary Treasury Dealer. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Quotation Agent after consultation with the Corporation. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Calculation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Calculation Agent by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date. D-4 115 "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the redemption date, appearing in the most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Remaining Life (or if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life will be determined and the Treasury Rate will be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. The Treasury Rate will be calculated on the third Business Day preceding the Redemption Date. "Subordinated Notes" means the [--]% Perpetual Subordinated Notes issued by the Cayman Islands branch under the Subordinated Notes Purchase Agreement, including this Subordinated Note. "Subordinated Notes Purchase Agreement" means the Subordinated Notes Purchase Agreement, dated [--], 2000, between the Bank, acting through the Cayman Islands branch, and the Company. "Swiss Federal Banking Commission" means the Swiss Federal Banking Commission of Switzerland and, if any successor governmental authority succeeds to the bank regulatory functions of the Swiss Federal Banking Commission in Switzerland, such successor governmental authority; provided, however, that if the Bank becomes domiciled in a jurisdiction other than Switzerland, then each reference herein to the Swiss Federal Banking Commission shall be deemed to instead refer to the governmental authority having primary regulatory authority with respect to the Bank's capital adequacy in such other jurisdiction. "Tax Event" means the receipt by the Bank of an opinion of a nationally recognized law firm or other tax advisor (which may be an accounting firm) in Switzerland or the United States, as appropriate, experienced in such matters to the effect that, as a result of (i) any amendment to, clarification of, or change (including any announced prospective change) in, the laws or treaties (or any regulations under any laws or treaties) of the United States, Switzerland or the Cayman Islands or any political subdivision or taxing authority of or in the United States, Switzerland or the Cayman Islands affecting taxation or (ii) any Administrative Action or any amendment to, clarification of, or change in the official D-5 116 position or the interpretation of any Administrative Action or any interpretation or pronouncement that provides for a position with respect to any Administrative Action that differs from the theretofore generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, irrespective of the manner in which such amendment, clarification, change, interpretation or pronouncement is made known, which amendment, clarification, change or Administrative Action is effective or which interpretation, pronouncement or decision is announced on or after the date of issuance of the Company Preferred Securities, there is more than an insubstantial risk that (A) the Company or the Trust is or will be subject to more than a de minimis amount of additional taxes, duties or other governmental charges, (B) the Bank is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to payments of interest or principal on the Subordinated Notes and with respect to any payments on the Trust Preferred Securities, (C) the Company is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to payments of dividends on the Company Preferred Securities or the Trust is or will be required to pay any additional amounts in respect of any taxes, duties or other governmental charges with respect to distributions on the Trust Preferred Securities, or (D) the treatment of any of the Company's items of income, gain, loss, deduction or expense, or the treatment of any item of income, gain, loss, deduction or expense of the Bank related to the Subordinated Notes or its ownership of the Company, in each case as reflected on the tax returns (including estimated returns) filed (or to be filed) by the Company or the Bank, will not be respected by a taxing authority, as a result of which the Company or the Bank is or will be subject to more than a de minimis amount of additional taxes, duties or other governmental charges or civil liabilities, the effect of which cannot be avoided by the Company or the Bank taking reasonable measures available to it without any adverse effect on or material cost to the Bank or the Company (as determined by the Bank in its sole discretion). "Telerate Page 3750" means the display designated as "Page 3750" on the Bridge/Telerate Service (or such other page as may replace Page 3750) on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits. "Trust" means UBS Preferred Funding Trust I, a Delaware statutory business trust. "Trust Preferred Securities" means the [--]% Noncumulative Trust Preferred Securities, aggregate liquidation amount $[--], offered by the Trust together with any subsequent offering by the Trust of [--]% Noncumulative Trust Preferred Securities, in each case representing an equal number of Company Preferred Securities. "UBS AG Senior Liabilities" has the meaning set forth in Section 6(a). D-6 117 "U.S. dollars," "dollars," "U.S.$" and "$" mean the currency of the United States of America. Section 2. Form of Subordinated Notes. This Subordinated Note is one of a duly authorized issue of the Subordinated Notes of the Bank in the aggregate principal amount of $[--] designated as its [--]% Perpetual Subordinated Notes and purchased pursuant to the Subordinated Notes Purchase Agreement. The Subordinated Notes are represented by a single definitive note in bearer form. Section 3. Payments of Interest. (a) Interest on the Subordinated Notes is payable from the date of initial issuance as follows (or, if any such day is not a Business Day, the next Business Day, but without any additional interest or other payment in respect of such delay) (each an "Interest Payment Date" and the period from and including an Interest Payment Date, or the date of initial issuance, as applicable, to but not including the next Interest Payment Date, an "Interest Period"): (i) for each Interest Period through the Interest Period ending on the Interest Payment Date in October 2010, semi-annually in arrears on April [--] and October [--] of each year at a fixed rate per annum on the principal amount of this Subordinated Note equal to [--]% (calculated on the basis of a 360-day year consisting of twelve 30-day months); and (ii) for each Interest Period ending after October 2010, quarterly in arrears on the first business day on or after January [--], April [--], July [--] and October [--] of each year at a floating rate per annum on the principal amount of this Subordinated Note equal to [--]% above three-month LIBOR (calculated on the basis of the actual number of days elapsed in a 360-day year). LIBOR, with respect to a Determination Date, means the rate (expressed as a percentage per annum) for deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that Determination Date that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on that Determination Date. If such rate does not appear on Telerate Page 3750, LIBOR will be determined on the basis of the rates which deposits in U.S. dollars for a three-month period commencing on the second London Banking Day immediately following that Determination Date and in a principal amount equal to an amount of not less than $1,000,000 that is representative for a single transaction in such market at such time, are offered to prime banks in the London interbank market by four major banks in the London interbank market selected by the Calculation Agent, after consultation with the Company, at approximately 11:00 a.m., London time, on that Determination Date. The Calculation Agent will request the principal London office of each of such banks to provide a quotation at its rate. If at least two such quotations are provided, LIBOR with respect D-7 118 to that Determination will be the arithmetic mean of such quotations. If fewer than two quotations are provided, LIBOR in respect of that Determination Date will be the arithmetic mean of the rates quoted by three major money center banks in New York City selected by the Calculation Agent, after consultation with the Company, at approximately 11:00 a.m., New York City time, on that Determination Date for loans in U.S. dollars to leading European banks for a three-month period commencing on the second London Banking Day immediately following that Determination Date and in a principal amount equal to an amount of not less than $1,000,000. However, if the banks selected by the Calculation Agent to provide quotations are not quoting as mentioned in this paragraph, LIBOR for the applicable period will be the same as LIBOR as determined on the previous Determination Date. All percentages resulting from any calculations on this Subordinated Note will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (b) Interest due on an Interest Payment Date is deferrable at the option of the Cayman Islands branch to the extent that, pursuant to the Company Agreement, dividends on the Company Preferred Securities due on the corresponding Dividend Payment Date would constitute Nondefinitive Dividends (as defined in the Company Agreement). Interest deferred in this manner will not itself bear interest. Section 4. Redemption. The Subordinated Notes are redeemable with the consent of the Swiss Federal Banking Commission and at the option of the Cayman Islands branch: (a) on the Interest Payment Date in October 2010 or any Interest Payment Date occurring after that date, in whole or in part, at a redemption price equal to 100% of their principal amount plus interest accrued but unpaid to the date fixed for redemption; and (b) prior to the Interest Payment Date in October 2010, in whole but not in part, if a Tax Event resulting from a Change in Tax Law (and relating to an event described in clauses (A), (B) or (C) of the definition of "Tax Event") occurs at a redemption price equal to 100% of their principal amount plus interest accrued but unpaid to the date fixed for redemption, or (c) prior to the Interest Payment Date in October 2010, in whole but not in part, if a Tax Event not resulting from a Change in Tax Law relating to an event described in clauses (A), (B) or (C) of the definition of "Tax Event", an Investment Company Act Event or a Capital Event occurs at a redemption equal to interest accrued but unpaid to the date fixed for redemption plus the Subordinated Note Make Whole Amount. Section 5. Additional Amounts. If the Cayman Islands branch is required to withhold any taxes, duties or other governmental changes with respect to any payment in respect of the D-8 119 Subordinated Notes, the Cayman Islands branch will pay such additional amounts as shall be required so that the amount received by the Company under the Subordinated Notes shall not be reduced as a result of any such additional taxes, duties or other governmental charges. Section 6. Subordination. (a) The Subordinated Notes constitute a general and unsecured obligation of the Bank and, in liquidation of the Bank, will rank, both as to payment and in liquidation: (i) subordinate and junior to all deposits and other liabilities of the Bank (including those in respect of bonds, notes and debentures that do not expressly rank pari passu with the obligations of the Bank under the Subordinated Notes; and (ii) senior to the ordinary shares and any other securities of the Bank expressed to rank junior to the most senior preference shares of the Bank (if any) from time to time outstanding. The foregoing liabilities that rank senior to the Subordinated Notes are collectively called "UBS AG Senior Liabilities". (b) Payments under the Subordinated Notes (other than payments upon a winding-up or dissolution, by bankruptcy or otherwise, in Switzerland of the Bank) are conditional upon the Bank (i) not being in default in the payment of UBS AG Senior Liabilities, (ii) being able to pay its debts as they fall due and (iii) having consolidated gross assets in excess of consolidated gross liabilities (other than liabilities to persons who are not senior creditors) at the time of payment. A report as to the insolvency of the Bank by two persons, each being a managing director, director or other authorized officer or agent of the Bank or employees of the independent accountants of the Bank will, in the absence of manifest error be treated and accepted by the Bank, the holders of Company Preferred Securities and all other interested parties as correct and sufficient evidence thereof. Section 7. Failure of Payment. If the Bank fails to make a payment when due of an installment of interest on this Subordinated Note, the Company shall be entitled to seek to enforce payment only of the defaulted installment of interest but not in respect of any failure to pay interest due under this Subordinated Note that was deferred because the dividends on the Company Preferred Securities on the corresponding Dividend Payment Date would have constituted Nondefinitive Dividends (as defined in the Company Agreement). The Company may, in its discretion, proceed to protect and enforce its rights by such appropriate judicial proceedings as the Company shall deem most effectual to protect and enforce any such rights, whether for the specific performance of any covenant or agreement in the Subordinated Note Purchase Agreement or in aid of the exercise of any power granted therein, or to enforce any other proper remedy. Except with respect to a failure of payment of principal, that the principal amount of the Subordinated Notes shall not be subject to D-9 120 acceleration or become due and payable, whether upon notice or otherwise, upon the failure of the Bank to make a payment when due of an installment of interest or a winding up of the Bank. Section 8. Forgiveness of Debt. If a Bankruptcy Event or a Capital Event occurs, then this Subordinated Note or successor Eligible Investments then held by the Company shall be canceled and the Bank's obligations thereunder (including, without limitation, its obligations to pay principal and interest, including any interest deferred in accordance with Section 3(b)) shall be forgiven. Section 9. Transfer of the Subordinated Note. This Subordinated Note may be sold only in whole and not in part and may not be divided into denominations of less than $[--]. Section 10. GOVERNING LAW. THIS SUBORDINATED NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. Section 11. Submission to Jurisdiction. The Bank irrevocably consents and agrees, that any legal action, suit or proceeding against it with respect to its obligations, liabilities or any other matter arising out of or in connection with this Agreement may be brought in the courts of the State of New York or the courts of the United States of America located in New York City and until amounts due and to become due under this Subordinated Note have been paid, hereby irrevocably consents and submits to the non-exclusive jurisdiction of each such court in personam, generally and unconditionally with respect to any such action, suit or proceeding for itself and in respect of its properties, assets and revenues. Service of process upon the branch in any such action, suit or proceeding shall be deemed in every respect service of process upon the Bank. The Bank hereby irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any of the aforesaid action, suits or proceedings brought in the United States Federal courts located in New York City or the courts of the State of New York and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. The provisions of this Section 11 shall survive any termination of this Subordinated Note, in whole or in part. Section 12. Modification and Amendment. This Subordinated Note may be modified or amended only by the written agreement of the Cayman Islands branch and the Company. D-10 121 IN WITNESS WHEREOF, the Bank has caused this instrument to be duly executed. Dated: [--], 2000 UBS AG, acting through its Cayman Islands branch By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: D-11 122 Annex E to the Amended and Restated Limited Liability Company Agreement LIST OF INITIAL DIRECTORS AND OFFICERS NAME POSITION AND OFFICES HELD ---- ------------------------- Robert Mills Managing Director and President Per Dyrvik Director and Treasurer Robert Dinerstein Director and Secretary E-1 123 Annex F to the Amended and Restated Limited Liability Company Agreement INVESTMENT POLICIES The Company will maintain its assets in a manner that will not require the Company to be registered as an investment company under the 1940 Act. The Company will not (i) invest in the securities of other issuers for the purpose of exercising control over such issuers, (ii) underwrite securities of other issuers, (iii) actively trade in investments, (iv) offer securities in exchange for property or (v) make loans to third parties, including, without limitation, officers, directors or other affiliates of the Company. The Company may not hold or invest in any securities other than the Subordinated Notes issued by the Cayman Islands branch of the Bank with an aggregate principal amount of $- or other securities issued by the Bank acting through a branch, agency or other office located outside of the United States or by a non-U.S. branch of a non-U.S. subsidiary of the Bank (together, "Eligible Investments"). With respect to any Eligible Investments other than the Subordinated Notes purchased by the Company, the terms thereof must be established in good faith to reflect, to the extent deemed advisable by the Bank, arm's-length market terms at the time of purchase and the purchase by the Company of Eligible Investments must be approved by the affirmative vote of a majority of the entire Board of Directors. Upon receipt at maturity of the Subordinated Notes of the principal amount thereof, the Company will either invest the principal amount received in other Eligible Investments or, if the Company elects to redeem the Company Preferred Securities at such time (subject to having received prior approval of the Swiss Federal Banking Commission of Switzerland to do so, if then required), apply such amount to the redemption price of the Company Preferred Securities. Capitalized terms not defined herein have the meanings ascribed to such terms in the Company's Amended and Restated Limited Liability Company Agreement, dated -, 2000, of UBS Preferred Funding Company LLC I, as the same may be amended from time to time. F-1 124 Annex G to the Amended and Restated Limited Liability Company Agreement AMOUNT OF COMPANY CERTIFICATE NUMBER R - PREFERRED SECURITIES: $ _____________ __________ [________________] -% NONCUMULATIVE COMPANY PREFERRED SECURITIES (liquidation preference $1,000 per security) of UBS PREFERRED FUNDING COMPANY LLC I UBS PREFERRED FUNDING COMPANY LLC I, a limited liability company formed under the laws of the State of Delaware (the "Company"), hereby certifies that __________ (the "Securityholder") is the registered owner of __________ Company Preferred Securities representing preferred limited liability company interests in the Company, which are designated the -% Noncumulative Company Preferred Securities, liquidation preference $1,000 per security and aggregate liquidation preference $- (the "Company Preferred Securities"). Subject to certain obligations which may arise under the Delaware Limited Liability Company Act (the "Delaware Act"), no additional payments will be required pursuant to the Delaware Act for the Company Preferred Securities to represent preferred limited liability company interests in the Company, as to which the Securityholders of the Company who hold the Company Preferred Securities (the "Securityholders"), in their capacities as such, have no liability in excess of their obligations to make payments provided for in the LLC Agreement (as defined below) and their share as provided in the LLC Agreement of the Company's assets and undistributed profits (subject to their obligation to repay any funds wrongfully distributed to them), and are transferable on the books and records of the Company, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer and otherwise in accordance with the provisions of the LLC Agreement. The powers, preferences and special rights and limitations of the Company Preferred Securities are set forth in, and this certificate and the Company Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Limited Liability Company Agreement of the Company dated as of -, as the same may be amended from time to time in accordance with its terms (the "LLC Agreement"), authorizing the issuance of the Company Preferred Securities and determining the powers, preferences and other special rights and limitations, regarding dividends, voting, return of capital and otherwise, and other matters relating to the Company Preferred Securities. Capitalized terms used herein but not defined herein shall have the meaning given them in the LLC Agreement. The Company is entitled to the benefits of the Bank Subordinated Guarantee of UBS AG, a bank organized under the laws of Switzerland, dated as of -, 2000 (the "Bank Subordinated Guarantee") to the extent provided therein. The Company will furnish a copy of the LLC Agreement and the Bank Subordinated G-1 125 Guarantee to the Securityholder without charge upon written request to the Company at its principal place of business. All dividends and redemption price and other payments and all other monetary rights and obligations in respect of the Company Preferred Securities shall be performed in U.S. dollars. The Securityholder, by accepting this certificate, is deemed to have agreed to be bound by the provisions of the LLC Agreement. Upon receipt of this certificate, the Securityholder is admitted to the Company as a Preferred Securityholder, is bound by the LLC Agreement and is entitled to the benefits thereunder. This certificate shall be governed by and construed in accordance with the laws of the State of Delaware (without regard to principles of conflict of laws). IN WITNESS WHEREOF, this certificate has been executed on behalf of the Company by a duly authorized officer as of this ___ day of _______, ____. UBS PREFERRED FUNDING COMPANY LLC I By: __________________________________ Name: Title: G-2 126 Annex H to the Amended Restated Limited Liability Company Agreement FORM OF NO DIVIDEND INSTRUCTION (pursuant to Section 9.3 of the Amended and Restated Limited Liability Company Agreement of UBS Preferred Funding Company LLC I) [Date] UBS Preferred Funding Company LLC I [ ] ---------------- [ ] ---------------- [ ] ---------------- Attention: [ ] ---------------- [ ] ---------------- [ ] ---------------- [ ] ---------------- Attention: [ ] ---------------- Re: No Dividends on Company Preferred Securities Reference is made to the Amended and Restated Limited Liability Company Agreement, dated as of -, 2000 (as amended from time to time the "Agreement"), of UBS Preferred Funding Company LLC I (the "Company"). Terms used herein and defined in the Agreement are used herein as so defined. Pursuant to Section 9.3 of the Agreement, the undersigned, as the Common Securityholder[s], hereby instruct[s] the Company not to pay dividends on the Company Preferred Securities on the dividend payment date for such series immediately following the date of receipt of this letter. All such dividends otherwise payable on such series of Company Preferred Securities shall be paid on the Company Common Securities in accordance with the Agreement. [Common Securityholder(s)] ------------------------------------- Name: Title: H-1 127 Annex I to Amended and Restated Limited Liability Agreement FORM OF NOMINEE LETTER [Date] Re: -% Noncumulative Company Preferred Securities To the nominee holder of the above-referenced securities, c/o [Common Depository] Ladies and Gentlemen: With respect to any -% Noncumulative Company Preferred Securities of UBS Preferred Funding Company LLC I (the "Company") that you may hold as a nominee on behalf of another person or for your own account, you are hereby authorized to omit from any statement that you may be required to furnish to the Company under paragraph (a)(1)(i) or paragraph (a)(3)(i) of United States Treasury Regulations Section 1.6031(c)-1T (the "Regulation") that part of the information described in paragraphs (a)(1)(ii)(E) and (a)(3)(ii)(D) of the Regulation regarding the method of acquisition and acquisition cost and that part of the information described in paragraphs (a)(1)(ii)(F) and (a)(3)(ii)(E) of the Regulation regarding the net proceeds from the transfer. This authorization shall continue in effect for each taxable year of the Company unless modified or revoked in writing by the Company more than 60 days before the beginning of such taxable year. Sincerely yours, I-1 EX-5.1 7 y39818a1ex5-1.txt OPINION RE VALIDITY 1 Exhibit 5.1 [RICHARDS, LAYTON & FINGER, P.A.] September 29, 2000 UBS Preferred Funding Company LLC I c/o UBS AG 299 Park Avenue New York, New York 10171 UBS Preferred Funding Trust I c/o UBS AG 299 Park Avenue New York, New York 10171 Re: UBS Preferred Funding Company LLC I and UBS Preferred Funding Trust I Ladies and Gentlemen: We have acted as special Delaware counsel for UBS Preferred Funding Company LLC I, a Delaware limited liability company (the "Company"), and UBS Preferred Funding Trust I, a Delaware business trust (the "Trust"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of originals or copies of the following: (a) The Certificate of Formation of the Company, dated as of September 18, 2000 (the "LLC Certificate"), as filed in the office of the Secretary of State of the State of Delaware (the "Secretary of State") on September 18, 2000; (b) The Limited Liability Company Agreement of the Company, dated as of September 18, 2000, entered into by UBS AG, a bank organized under the laws of Switzerland ("UBS"); 2 UBS Preferred Funding Company LLC I UBS Preferred Funding Trust I September 29, 2000 Page 2 (c) A form of Amended and Restated Limited Liability Company Agreement of the Company (the "LLC Agreement"), to be entered into by UBS and the Trust, as members, to be attached as an exhibit to the Registration Statement (as defined below); (d) The Certificate of Trust of the Trust (the "Trust Certificate"), as filed in the office of the Secretary of State on September 18, 2000; (e) The Trust Agreement of the Trust, dated as of September 18, 2000, between the Company, as grantor, and Wilmington Trust Company, as trustee of the Trust (the "Trustee"); (f) A form of the Amended and Restated Trust Agreement of the Trust (the "Trust Agreement"), to be entered into among the Company, as guarantor, the Trustee and UBS, solely for the purposes stated therein, to be attached as an exhibit to the Registration Statement; (g) The Registration Statement (the "Registration Statement") on Form F-1 Registration No. 333-46216, including a related prospectus (the "Prospectus"), relating to the ___% Noncumulative Company Preferred Securities of the Company (each, a "Preferred Security" and collectively, the "Preferred Securities") and to the ___% Noncumulative Trust Preferred Securities of the Trust (each, a "Trust Preferred Security" and collectively, the "Trust Preferred Securities"), as filed by the Company and the Trust with the Securities and Exchange Commission on or about September 20, 2000; (h) A Certificate of Good Standing for the Company, dated September 28, 2000, obtained from the Secretary of State; and (i) A Certificate of Good Standing for the Trust, dated September 28, 2000, obtained from the Secretary of State. Initially capitalized terms used herein and not otherwise defined are used as defined in the LLC Agreement. For purposes of this opinion, we have not reviewed any documents other than the documents listed in paragraphs (a) through (i) above. In particular, we have not reviewed any document (other than the documents listed in paragraphs (a) through (i) above) that is referred to in or incorporated by reference into the documents reviewed by us. We have assumed that there exists no provision in any document that we have not reviewed that is inconsistent with the opinions stated herein. We have conducted no independent factual investigation of our own, but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. 3 UBS Preferred Funding Company LLC I UBS Preferred Funding Trust I September 29, 2000 Page 3 With respect to all documents examined by us, we have assumed (i) the authenticity of all documents submitted to us as authentic originals, (ii) the conformity with the originals of all documents submitted to us as copies or forms, and (iii) the genuineness of all signatures. For purposes of this opinion, we have assumed (i) that the LLC Agreement constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including with respect to the admission of members to, and the creation, operation, management and termination of, the Company, and that the LLC Agreement and the LLC Certificate are in full force and effect and have not been amended, (ii) that the Trust Agreement constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including with respect to the creation, operation, management and termination of the Trust, and that the Trust Agreement and the Trust Certificate are in full force and effect and have not been amended, (iii) except to the extent provided in paragraphs 1 and 4 below, the due creation or the due organization or due formation, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its creation or organization or formation, (iv) the legal capacity of natural persons who are signatories to the documents examined by us, (v) that each of the parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, (vi) the due authorization, execution and delivery by all parties thereto of all documents examined by us, (vii) the receipt by each Person to whom a Preferred Security is to be issued by the Company (each, a "Preferred Securityholder" and collectively, the "Preferred Securityholders") of a certificate substantially in the form of the certificate attached to the LLC Agreement evidencing the Preferred Securities and the payment for the Preferred Securities acquired by it, in accordance with the LLC Agreement and the Registration Statement, (viii) the receipt by each Person to whom a Trust Preferred Security is to be issued by the Trust (each, a "Holder" and collectively, the "Holders") of a certificate substantially in the form of the trust certificate attached to the Trust Agreement and the payment for the Trust Preferred Security acquired by it, in accordance with the Trust Agreement and the Registration Statement, (ix) that the books and records of the Company set forth the names and addresses of all Persons to be admitted as members of the Company and the dollar value of each of the member's contribution to the Company, (x) that the Preferred Securities are issued and sold to the Preferred Securityholders in accordance with the Registration Statement and the LLC Agreement, and (xi) that the Trust Preferred Securities are issued and sold to the Holders in accordance with the Registration Statement and the Trust Agreement. We have not participated in the preparation of the Registration Statement and assume no responsibility for its contents. This opinion is limited to the laws of the State of Delaware (excluding the securities laws and blue sky laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder which are currently in effect. 4 UBS Preferred Funding Company LLC I UBS Preferred Funding Trust I September 29, 2000 Page 4 Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: 1. The Company has been duly formed and is validly existing in good standing as a limited liability company under the Delaware Limited Liability Company Act (6 Del. C. Section 18- 101, et seq.). 2. The Preferred Securities will represent valid and, subject to the qualifications set forth in paragraph 3 below, fully paid and nonassessable limited liability company interest in the Company. 3. The Preferred Securityholders shall not be obligated personally for any of the debts, obligations or liabilities of the Company, whether arising in contract, tort or otherwise solely by reason of being a member of the Company, except as a Preferred Securityholder may be obligated to repay any funds wrongfully distributed to it. We note that the Preferred Securityholders may be obligated to make payments as set forth in the LLC Agreement. 4. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Business Trust Act (12 Del. C. Section 3801, et seq.). 5. The Trust Preferred Securities will represent valid and, subject to the qualifications set forth in paragraph 6 below, fully paid and nonassessable interests in the Trust. 6. The Holders, in their capacity as such, will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We note that the Holders may be obligated to make payments as set forth in the Trust Agreement. We consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. We also consent to Sullivan & Cromwell's and Davis Polk & Wardwell's relying as to matters of Delaware law upon this opinion in connection with opinions to be rendered by them in connection with the Registration Statement. In addition, we hereby consent to the use of our name under the heading "Validity of the Securities" in the Prospectus. In giving the foregoing consents, we do not thereby admit that we come within the category of Persons whose consent is required under Section 7 of the 5 UBS Preferred Funding Company LLC I UBS Preferred Funding Trust I September 29, 2000 Page 5 Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Except as stated above, without our prior written consent, this opinion may not be furnished or quoted to, or relied upon by, any other Person for any purpose. Very truly yours, /s/ Richards, Layton & Finger, P.A. EAM/JGL/ENF EX-5.2 8 y39818a1ex5-2.txt OPINION RE VALIDITY 1 Exhibit 5.2 [SULLIVAN & CROMWELL LETTERHEAD] September 28, 2000 UBS AG, Bahnhofstrasse 45, Zurich, Switzerland. Dear Ladies and Gentlemen: In connection with the subordinated guarantee by UBS AG, a bank organized under the laws of Switzerland, of the ___% Noncumulative Company Preferred Securities to be issued by UBS Preferred Funding Company I, the terms of which are established by the UBS AG Subordinated Guarantee Agreement (the "Subordinated Guarantee Agreement"), we, as your counsel, have examined such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, we advise you that, in our opinion, assuming the due authorization, execution and delivery of the Subordinated Guarantee Agreement, the Subordinated Guarantee Agreement will 2 UBS AG -2- constitute a valid and legally binding obligation of UBS AG, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. The foregoing opinion is limited to the Federal laws of the United States and the laws of the State of New York and we are expressing no opinion as to the effect of the laws of any other jurisdiction. With respect to the due authorization, execution and delivery by UBS AG of the Subordinated Guarantee Agreement, we have relied upon the opinion, dated September 29, 2000, of Bar & Karrer, and our opinion is subject to the same assumptions, qualifications and limitations with respect to such matters as are contained in such opinion of Bar & Karrer. Also, we have relied as to certain matters on information obtained from public officials, officers of UBS AG and other sources believed by us to be responsible, and we have assume that the Subordinated Guarantee Agreement has been duly authorized, executed and delivered by Wilmington Trust Company, an assumption which we have not independently verified. 3 UBS AG -3- We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading "Validity of the Securities" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /S/ Sullivan & Cromwell EX-5.3 9 y39818a1ex5-3.txt OPINION RE MATTERS OF SWISS LAW 1 [BAR & KARRER LETTERHEAD] Exhibit 5.3 September 28, 2000 UBS AG, Bahnhofstrasse 45, Zurich, Switzerland. Dear Ladies and Gentlemen: In connection with the registration under the Securities Act of 1933 (the "Act") of the Subordinated Guarantee of UBS AG, a bank organized under the laws of Switzerland, with respect to the ___% Noncumulative Company Preferred Securities listed by UBS Preferred Funding Company I, we, as your counsel, have examined such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, we advise you that, in our opinion, the UBS AG Subordinated Guarantee Agreement has been duly authorized, and will have been duly executed and delivered by UBS AG when executed and delivered by Luqman Arnold and Robert Mills. 2 UBS AG The foregoing opinion is limited to Swiss law and we are expressing no opinion as to the effect of the laws of any other jurisdiction. Also, we have relied as to certain matters on information obtained from public officials, officers of UBS AG and other sources believed by us to be responsible. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading "Validity of the Securities" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ Bar & Karrer EX-8.2 10 y39818a1ex8-2.txt OPINION RE TAX MATTERS 1 EXHIBIT 8.2 [ATAG ERNST & YOUNG LETTERHEAD] CONFIRMATION We hereby confirm, subject to the qualifications set forth therein, the statements in the Prospectus under the caption "Certain Tax Considerations under the Laws of Switzerland" are an accurate summary of the Swiss Income tax matters described therein. ATAG Ernst & Young AG /s/ Alfred Preisig -------------------------- ALFRED PREISIG Partner Tax /s/ Rosmarie Knecht -------------------------- ROSMARIE KNECHT Senior Manager Tax Zurich, Switzerland September 29, 2000 EX-10 11 y39818a1ex10.txt AGREEMENT AND PLAN OF MERGER 1 Exhibit 10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER DATED AS OF JULY 12, 2000 BY AND AMONG PAINE WEBBER GROUP INC., UBS AG AND NEPTUNE MERGER SUBSIDIARY, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS RECITALS ARTICLE I CERTAIN DEFINITIONS; INTERPRETATION
SECTION PAGE - ------- ---- 1.01 Certain Definitions................................... 1 ARTICLE II THE MERGER 2.01 The Merger............................................ 8 2.02 Effective Time........................................ 8 2.03 Closing............................................... 8 2.04 Reservation of Right to Revise Structure.............. 8 ARTICLE III CONSIDERATION; EXCHANGE 3.01 Merger Consideration.................................. 9 3.02 Rights as Stockholders; Stock Transfers............... 11 3.03 Fractional Shares..................................... 11 3.04 Exchange Procedures................................... 11 3.05 Anti-Dilution Adjustments............................. 12 3.06 Options; Other Equity-Based Awards.................... 13 3.07 Dissenting Stockholders............................... 14 ARTICLE IV ACTIONS PENDING THE EFFECTIVE TIME 4.01 Forbearances of the Company........................... 14 4.02 Forbearances of Parent................................ 16 ARTICLE V REPRESENTATIONS AND WARRANTIES 5.01 Disclosure Schedules.................................. 16 5.02 Standard.............................................. 17 5.03 Representations and Warranties of the Company......... 17 5.04 Representations and Warranties of Parent and the Merger Subsidiary......................................... 25 ARTICLE VI COVENANTS 6.01 Reasonable Best Efforts............................... 28 6.02 Registration Statement................................ 28 6.03 Parent Documents...................................... 29 6.04 Stockholder Meetings.................................. 30 6.05 Publicity............................................. 30 6.06 Access; Information................................... 30 6.07 Acquisition Proposals................................. 31 6.08 Regulatory Applications; Consents..................... 32 6.09 Employee Matters...................................... 32 6.10 Notification of Certain Matters....................... 34 6.11 Indemnification; Directors' and Officers' Insurance... 34
i 3
SECTION PAGE - ------- ---- 6.12 Stock Exchange Approvals.............................. 35 6.13 Dividends............................................. 35 6.14 Section 15 of the Investment Company Act.............. 35 6.15 Affiliates............................................ 36 6.16 Letters of Accountants................................ 36 6.17 GE Stockholders Agreement............................. 36 6.18 ERISA Clients......................................... 36 6.19 GE Amendment and Yasuda Amendment..................... 37 6.20 Tax Matters........................................... 37 ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER 7.01 Conditions to Each Party's Obligation to Effect the Merger.................................................... 37 7.02 Conditions to Obligation of the Company............... 38 7.03 Conditions to Obligation of Parent.................... 38 ARTICLE VIII TERMINATION 8.01 Termination........................................... 39 8.02 Effect of Termination and Abandonment................. 39 8.03 Termination Fee....................................... 40 ARTICLE IX MISCELLANEOUS 9.01 Survival.............................................. 40 9.02 Waiver; Amendment..................................... 40 9.03 Counterparts.......................................... 41 9.04 Governing Law and Venue............................... 41 9.05 Expenses.............................................. 41 9.06 Notices............................................... 41 9.07 Entire Understanding; No Third-Party Beneficiaries.... 42 9.08 Severability.......................................... 42 9.09 Assignment............................................ 42 9.10 Enforcement........................................... 42 9.11 Interpretation........................................ 42
ii 4 AGREEMENT AND PLAN OF MERGER, dated as of July 12, 2000 (this "Agreement"), by and among Paine Webber Group Inc. (the "Company"), UBS AG ("Parent") and Neptune Merger Subsidiary, Inc. (the "Merger Subsidiary"). RECITALS A. The Company. The Company is a Delaware corporation, having its principal place of business in New York, New York. B. Parent. Parent is an Aktiengesellschaft organized under the laws of Switzerland, having its principal places of business in Zurich and Basel, Switzerland. C. The Merger Subsidiary. The Merger Subsidiary is a Delaware corporation and a wholly owned subsidiary of Parent that has been organized for the purpose of effecting the Merger (as defined herein) in accordance with this Agreement. D. The Merger. Subject to the terms and conditions contained in this Agreement, the parties intend to effect the merger of the Company with and into the Merger Subsidiary, with the Merger Subsidiary being the corporation surviving such merger. E. Voting Agreements. As further conditions and inducements to the willingness of Parent to enter into this Agreement, (1) General Electric Company ("GE"), Subsidiaries of which hold not less than 21.0% of the presently outstanding shares of the Company Common Stock, has entered into an agreement with Parent, in the form of Exhibit A hereto, (2) The Yasuda Mutual Life Insurance Company ("Yasuda"), which holds not less than 7.0% of the presently outstanding shares of the Company Common Stock, has entered into an agreement with Parent, in the form of Exhibit B hereto, and (3) each of Donald B. Marron and Joseph J. Grano, Jr. (each such person, a "Management Stockholder" and, together with GE and Yasuda, the "Voting Agreement Parties"), stockholders of the Company collectively holding the power to vote not less than 1.0% of the outstanding shares of Company Common Stock, have entered into an agreement with Parent, in the form of Exhibit C hereto (each of the foregoing agreements with GE, Yasuda and the Management Stockholders, a "Voting Agreement", and collectively, the "Voting Agreements"), pursuant to each of which Voting Agreements, among other things, each Voting Agreement Party has agreed to vote or cause to be voted certain shares of Company Common Stock in favor of adoption of this Agreement. F. Tax-Free Treatment. The parties intend that, for U.S. federal income tax purposes, the transactions contemplated by this Agreement will qualify for the Tax Treatment. G. Board Action. The respective Boards of Directors of each of the Company, Parent and the Merger Subsidiary have each adopted resolutions approving this Agreement and the Merger and, in the case of each of the Boards of Directors of the Company and the Merger Subsidiary, declaring the advisability of this Agreement in accordance with the Delaware General Corporation Law, as amended (the "DGCL"). NOW, THEREFORE, in consideration of the premises, and of the mutual covenants, representations, warranties and agreements contained herein, the parties agree as follows: ARTICLE I CERTAIN DEFINITIONS; INTERPRETATION 1.1 Certain Definitions. The following terms are used in this Agreement with the meanings set forth below: "Acquisition Proposal" means any offer or other proposal which, if consummated, would result in an Acquisition Transaction, provided that solely for purposes of the definition of Acquisition Proposal, all references to 35% in the definition of Acquisition Transaction shall be deemed references to 20%. 1 5 "Acquisition Transaction" means a transaction or series of transactions that, directly or indirectly, in substance constitutes a disposition of (A) assets or businesses that constitute or represent 35% or more of the total revenue, operating income, assets or earnings before interest, taxes, depreciation and amortization of the Company and its Subsidiaries, taken as a whole, or (B) 35% or more of the outstanding shares of any class of capital stock of the Company or capital stock of, or other equity or voting interests in, any Subsidiary or Subsidiaries of the Company which, taken together, directly or indirectly hold at least the share of assets or businesses referred to in clause (A) above, whether by means of (a) a merger, share exchange or consolidation, or any similar transaction, (b) a purchase, lease or other sale, transfer or disposition, or (c) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) by a person (including a group of persons that would qualify as a "group" within the meaning of Section 13(d) of the Exchange Act) of such assets, businesses or shares of capital stock, or otherwise. "Affiliate" means, with respect to any specified person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; provided, however, that in no event shall GE or any person in which it directly or indirectly holds securities be deemed to be an affiliate of the Company or its Subsidiaries; provided further, however, that (x) any investment account advised or managed by such person or one of its Subsidiaries or affiliates on behalf of third parties, or (y) any partnership, limited liability company, or other similar investment vehicle or entity engaged in the business of making investments for which such person acts as the general partner, managing member, manager, investment advisor, principal underwriter or the equivalent shall not be deemed an affiliate of such person; and the terms "controlling" and "controlled" have correlative meanings. "Affiliate's Letter" has the meaning assigned in Section 6.15. "Agreement" means this Agreement, as amended or modified from time to time in accordance with Section 9.02. "Average Closing Price" means the average of the closing sales prices for a Parent Share on the NYSE Composite Tape, as reported in The Wall Street Journal (Northeast edition) or, if not reported therein, in another authoritative source selected by Parent, on the last trading day immediately preceding the Closing Date. "Bankruptcy and Equity Exception" has the meaning assigned in Section 5.03(e)(i). "Business Day" means any day other than Saturday, Sunday and any day on which banks in the State of New York are required or authorized by law or regulation to be closed. "Bylaws" has the meaning assigned in Section 2.01(c). "Cash Election Shares" has the meaning assigned in Section 3.01(b). "Certificate of Incorporation" has the meaning assigned in Section 2.01(b). "CFTC" means the United States Commodities Futures Trading Commission. "Client" means any person to whom the Company or any of its Subsidiaries provides investment advisory services under any Contract. "Closing" and "Closing Date" have the meanings assigned in Section 2.03. "Code" means the Internal Revenue Code of 1986, as amended. "Company" has the meaning assigned in the preamble to this Agreement. "Company Affiliate" has the meaning assigned in Section 6.15. 2 6 "Company Common Stock" means the common stock, par value $1.00 per share, of the Company. "Company Financial Statements" has the meaning assigned in Section 5.03(h)(ii). "Company Options" means, collectively, outstanding options to purchase shares of Company Common Stock under the Company Stock Plans. "Company Proxy Statement" has the meaning assigned in Section 6.02(a). "Company Requisite Vote" has the meaning assigned in Section 5.03(e)(i). "Company SEC Documents" has the meaning assigned in Section 5.03(h)(i). "Company Stockholders Meeting" has the meaning assigned in Section 6.04. "Company Stock-Based Award" has the meaning assigned in Section 3.06(b). "Company Stock Plans" has the meaning assigned in Section 5.03(b). "Compensation and Benefit Plans" has, with respect to any person, the meaning assigned in Section 5.03(p)(i). "Confidentiality Agreement" has the meaning assigned in Section 6.06(c). "Consideration" has the meaning assigned in Section 3.01(a)(i)(B). "Constitutive Documents" means, with respect to any juridical person, such person's articles or certificate of incorporation and bylaws or similar organizational documents. "Contract" means, with respect to any person, any agreement, indenture, debt instrument, contract, lease or legally binding commitment to which such person or any of its Subsidiaries is a party or by which any of them may be bound or to which any of their properties may be subject. "Converted Cash Election Share" has the meaning assigned in Section 3.01(c)(i)(C). "Converted Stock Election Share" has the meaning assigned in Section 3.01(c)(ii)(B). "Costs" has the meaning assigned in Section 6.11(a). "DGCL" has the meaning assigned in the Recitals. "Disclosure Schedule" has the meaning assigned in Section 5.01. "Dissenters' Shares" means shares of Company Common Stock the holders of which shall have perfected and not withdrawn or lost their appraisal rights in accordance with Section 262 of the DGCL. "DOL" means the United States Department of Labor. "Effective Time" means the time at which the Merger becomes effective in accordance with Section 2.02. "Election" has the meaning assigned in Section 3.01(b). "Election Deadline" has the meaning assigned in Section 3.04(a). "Election Form" has the meaning assigned in Section 3.01(b). "Eligible Company Stockholders" are holders of shares of Company Common Stock who will not be "five percent transferee shareholders" as defined in United States Treasury Regulation Section 1.367(a)-3(c)(5)(ii) or who enter into five-year gain recognition agreements in the form provided in United States Treasury Regulation Section 1.367(a)-8(b). "Employees" has the meaning assigned in Section 5.03(p)(i). 3 7 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" has, with respect to any person, the meaning assigned in Section 5.03(p)(iii). "ERISA Client" has the meaning assigned in Section 6.18. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Exchange Agent" has the meaning assigned in Section 3.01(b). "Exchange Fund" has the meaning assigned in Section 3.04(b). "Exchange Offer" has the meaning assigned in Section 2.04. "Exchange Ratio" has the meaning assigned in Section 3.01(a)(i)(A). "Federal Reserve System" means the Board of Governors of the United States Federal Reserve System and the United States Federal Reserve Banks. "Fee Trigger Event" has the meaning assigned in Section 8.03(a)(ii). "Form F-4" has the meaning assigned in Section 6.02(a). "Fund Board" or "Fund Boards" has the meaning assigned in Section 5.03(t)(i). "GAAP" means generally accepted accounting principles in the United States. "GE" has the meaning assigned in the Recitals. "GE Amendment" has the meaning assigned in Section 5.03(e)(iii). "GE Stockholders Agreement" means the Amended and Restated Stockholders Agreement, dated August 6, 1997, between the Company, GE, General Electric Capital Corporation, General Electric Capital Holdings, Inc., and Kidder Peabody Group Inc., and joined in by GECS Holdings, Inc., in the form previously furnished to Parent, as further amended by the GE Amendment. "Governmental Authority" means any United States or foreign government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, the SEC or any other government authority, agency, department, board, commission or instrumentality of the United States or any foreign government or any state or other political subdivision thereof or any state insurance or banking authority, the Board of Governors of the Federal Reserve System or the Federal Deposit Insurance Corporation and any court, tribunal or arbitrator(s) of competent jurisdiction. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. "Indemnified Parties" has the meaning assigned in Section 6.11(a). "Insurance Amount" has the meaning assigned in Section 6.11(c). "IAS" means International Accounting Standards. "Investment Advisers Act" means the Investment Advisers Act of 1940, as amended, and the rules and regulations thereunder. "Investment Company" means any investment company within the meaning of the Investment Company Act, disregarding Section 3(c) thereof, that is sponsored, organized, advised, managed or distributed by the Company or one of its Subsidiaries (including the Registered Funds). "Investment Company Act" means the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. 4 8 "Involuntarily Terminated" means the termination of an employee's employment with Parent and its Subsidiaries by the employer of such employee following the Effective Time other than termination (i) owing to death or permanent disability or (ii) by Parent or any of its Subsidiaries for cause (as customarily defined by the Company prior to the Effective Time). "IRS" means the United States Internal Revenue Service. "Liens" means a charge, mortgage, pledge, security interest, restriction (other than a restriction on transfer arising under Securities Laws or a restriction arising under laws relating to the regulation of brokers, dealers, investment advisors, investment companies, banks, insurance companies and other regulated business or negative pledge or negative covenant provisions of agreements relating to indebtedness), claim, lien, or encumbrance of any nature whatsoever. "Litigation" has the meaning assigned in Section 5.03(l). "Management Stockholder" has the meaning assigned in the Recitals. "Material Adverse Effect" means, with respect to Parent, the Company or the Surviving Corporation, respectively, an effect or change that, individually or in the aggregate with other such effects or changes, is both material and adverse with respect to the respective financial condition, results of operations, assets or business of Parent and its Subsidiaries, the Company and its Subsidiaries or the Surviving Corporation and its Subsidiaries, in each case taken as a whole; provided, that "Material Adverse Effect" shall not be deemed to include effects or changes arising from: (1) changes in the economy of the United States or the global economy or securities markets in general, (2) changes in GAAP or IAS, (3) this Agreement or the transactions contemplated hereby or the announcement thereof (including the resignation of officers or employees of Parent or the Company or their respective Subsidiaries as a result thereof) and (4) changes in the financial services industry in general, provided that nothing in clauses (1), (2) and (4) shall include any change which materially disproportionately affects the applicable party and its Subsidiaries. The terms "Material" and "Materially", when capitalized herein, have correlative meanings. "Merger" has the meaning assigned in Section 2.01(a). "Merger Subsidiary" has the meaning assigned in the preamble to this Agreement. "MSRB" means the United States Municipal Securities Rulemaking Board. "Multiemployer Plans" has the meaning assigned in Section 5.03(p)(ii). "NASD" means the National Association of Securities Dealers, Inc. "New Certificates" has the meaning assigned in Section 3.04(b). "No-Election Shares" has the meaning assigned in Section 3.01(b). "NYSE" means the New York Stock Exchange, Inc. "Old Certificates" has the meaning assigned in Section 3.04(a). "Parent" has the meaning assigned in the preamble to this Agreement. "Parent Circular" has the meaning assigned in Section 6.03(a). "Parent Documents" has the meaning assigned in Section 6.03(a). "Parent Financial Statements" has the meaning assigned in Section 5.04(f)(ii). "Parent Requisite Vote" has the meaning assigned in Section 5.04(c). "Parent SEC Documents" has the meaning assigned in Section 5.04(f)(i). "Parent Severance Plan" has the meaning assigned in Section 6.09(d). "Parent Shareholders Meeting" has the meaning assigned in Section 6.04. 5 9 "Parent Shares" means the Ordinary Shares, par value CHF 10 per share, of Parent. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Plan" has, with respect to any person, the meaning assigned in Section 5.03(p)(ii). "Per Share Cash Consideration" has the meaning assigned in Section 3.01(a)(i)(B). "Per Share Stock Consideration" has the meaning assigned in Section 3.01(a)(i)(A). "person" means any individual, bank, corporation, limited liability company, partnership, association, joint-stock company, business trust, unincorporated organization or other entity. "Plans" has the meaning assigned in Section 5.03(p)(ii). "Previously Disclosed" has the meaning assigned in Section 5.01. "Registered Fund" has the meaning assigned in Section 5.03(t)(i). "Reports" has the meaning assigned in Section 5.03(g). "Representatives" means, with respect to any person, such person's directors, officers, employees, legal and financial advisors or any representatives of such legal and financial advisors. "Restraints" has the meaning assigned in Section 7.01(c). "Rights" means, with respect to any person, securities or obligations convertible into or exercisable or exchangeable for, or giving any person any preemptive or other right to subscribe for or acquire, or any options (including, in the case of the Company, the Company Options and the Company Stock-Based Awards), calls or commitments relating to, or any stock or equity appreciation right or other instrument the value of which is determined in whole or in part by reference to the market price or value of, shares of capital stock of such person. "SEC" means the United States Securities and Exchange Commission. "Second-Step Merger" has the meaning assigned in Section 2.04. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Securities Laws" means, collectively, the Securities Act, the Exchange Act, the Investment Advisers Act, the Investment Company Act and all state securities laws and the rules and regulations thereunder. "Self-Regulatory Organization" means, with respect to any person, any United States or foreign governmental or non-governmental self-regulatory organization, agency or authority, including any of the NYSE, the NASD, the National Futures Association, or any securities or other exchange or board of trade of which such person or any Subsidiary of such person is a member or to the supervision or regulation of which such person or any Subsidiary of such person is subject. "Stock Election Shares" has the meaning assigned in Section 3.01(b). "Stock Number" has the meaning assigned in Section 3.01(b). "Stock-Selected No-Election Share" has the meaning assigned in Section 3.01(c)(i)(B). "Stub Period" has the meaning assigned in Section 6.09(f). "Stub Period Bonuses" has the meaning assigned in Section 6.09(f). "Subsidiary" and "Significant Subsidiary" have the meanings assigned in Rule 1-02 of Regulation S-X of the SEC; provided, however, that (x) any investment account advised or managed by such person or one of its Subsidiaries or affiliates on behalf of a third party and (y) any partnership, limited liability company, or other similar investment vehicle or entity engaged in the 6 10 business of making investments of which such person acts as the general partner, managing member, manager, investment advisor, principal underwriter or the equivalent shall not be deemed a Subsidiary of such person. "Subsidiary Common Stock" has the meaning assigned in Section 3.01(a)(iii). "Superior Proposal" has the meaning assigned in Section 6.07(a). "Surviving Corporation" has the meaning assigned in Section 2.01(a). "Taxes" means all taxes, charges, fees, levies or other assessments, however denominated and whether imposed by a taxing authority within or without the United States, including all net income, gross income, gross receipts, sales, use, ad valorem, goods and services, capital, transfer, franchise, profits, license, withholding, payroll, employment, employer health, excise, estimated, severance, stamp, occupation, property or other taxes, custom duties, fees, assessments or charges of any kind whatsoever in the nature of taxes, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority whether arising before, on or after the Closing Date. "Tax Returns" means, collectively, all returns, declarations, reports, estimates, information returns and statements required to be filed under federal, state, local or any foreign tax laws. "Tax Treatment" is the intention of the parties to this Agreement that (i) the Merger shall qualify as a "reorganization" within the meaning of Section 368(a) of the Code and the rules and regulations thereunder, (ii) Parent, the Merger Subsidiary and the Company will each be a "party" to such reorganization within the meaning of Section 368(b) of the Code and the rules and regulations thereunder, (iii) Parent will be treated as a corporation under Section 367(a) of the Code as to each Eligible Company Stockholder with respect to the Merger and (iv) Eligible Company Stockholders will not recognize taxable gain in connection with the receipt of Parent Shares exchanged for Company Common Stock pursuant to the Merger under Section 367(a) of the Code, except with respect to cash received in lieu of fractional share interests. "Treasury Shares" means shares of Company Common Stock, if any, owned by the Company or any of its Subsidiaries other than shares (i) held by the Company or any of its Subsidiaries in connection with any market-making or proprietary trading activity or for the account of another person, (ii) as to which the Company is or may be required to act in a fiduciary or similar capacity, (iii) held in satisfaction of a debt previously contracted or (iv) the cancellation of which would violate any legal duties or obligations of the Company or any of its Subsidiaries. "Two-Step Restructuring" has the meaning assigned in Section 2.04. "Voting Agreement" has the meaning assigned in the Recitals. "Voting Agreement Parties" has the meaning assigned in the Recitals. "Yasuda" has the meaning assigned in the Recitals. "Yasuda Amendment" has the meaning assigned in Section 5.03(e)(iii). "Yasuda Stockholders Agreement" means the Amended and Restated Investment Agreement by and between the Company and Yasuda, dated as of November 5, 1992. "Year 2000 Bonuses" has the meaning assigned in Section 6.09(f). 7 11 ARTICLE II THE MERGER 2.01 The Merger. At the Effective Time: (a) Structure and Effects of the Merger. Subject to Section 2.04, the Company will merge with and into the Merger Subsidiary in accordance with the terms set forth in this Agreement (the "Merger"), and the separate corporate existence of the Company will thereupon cease. The Merger Subsidiary will be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and will continue to be governed by the laws of the State of Delaware, and the separate corporate existence of the Merger Subsidiary, with all its rights, privileges, immunities, powers and franchises, will continue unaffected by the Merger except as set forth in this Article II. The Merger will have the effects specified in the DGCL. (b) Certificate of Incorporation. The certificate of incorporation of the Surviving Corporation (the "Certificate of Incorporation") shall be the certificate of incorporation of the Merger Subsidiary as in effect immediately prior to the Effective Time, until duly amended in accordance with the terms thereof and the DGCL. (c) Bylaws. The bylaws of the Surviving Corporation (the "Bylaws") will be the bylaws of the Merger Subsidiary as in effect immediately prior to the Effective Time, until duly amended in accordance with the terms thereof and the Certificate of Incorporation. (d) Directors. The directors of the Surviving Corporation will be the directors of the Merger Subsidiary immediately prior to the Effective Time, and such directors, together with any additional directors as may thereafter be elected, will hold such office until such time as their successors shall be duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and the Bylaws. 2.02 Effective Time. The Merger will become effective upon the filing, in the office of the Secretary of State of the State of Delaware, of a certificate of merger in accordance with Section 251 of the DGCL, or at such later date and time as may be set forth in such certificate. Subject to the satisfaction or waiver of the conditions set forth in Article VII, the parties will cause the Merger to become effective (a) on a date that is not later than three Business Days after the last of the conditions set forth in Article VII (other than conditions that by their terms cannot be satisfied until the time of Closing) shall have been satisfied or waived in accordance with the terms of this Agreement or (b) on such other date as the parties may agree in writing. 2.03 Closing. The closing of the Merger (the "Closing") will take place at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York, or at such other place as the parties shall agree, on the date (the "Closing Date") when the Effective Time is to occur. 2.04 Reservation of Right to Revise Structure. At Parent's election, the Merger may alternatively be structured (a) so that the Company is merged into a wholly owned subsidiary of Parent other than the Merger Subsidiary or (b) following the making of any Acquisition Proposal, to provide for an exchange offer (the "Exchange Offer") for the Company Common Stock, in each case to be followed by an unconditional merger (the "Second-Step Merger") upon consummation of the Exchange Offer (the "Two-Step Restructuring"); provided, that (i) in the case of clause (b) of this Section 2.04, (x) 50% of the shares of Company Common Stock exchanged in the Exchange Offer shall be exchanged for 0.4954 of a Parent Share and 50% of the shares of Company Common Stock exchanged in the Exchange Offer shall be exchanged for $73.50 per share in cash; (y) 50% of the shares of Company Common Stock converted in the Second-Step Merger shall be converted into 0.4954 of a Parent Share and 50% of the shares of Company Common Stock converted in the Second-Step Merger shall be converted into $73.50 per share in cash; and (z) the Board of Directors of the Company determines in good faith that the Two-Step Restructuring would not adversely affect the Company or its stockholders in a way in which they would not have been adversely affected if the Two-Step Restructuring were not effected (it being understood that 8 12 accelerating the date of the Closing would not adversely affect the Company or its stockholders for this purpose); (ii) no such alternative described in clause (a) or (b) of this Section 2.04 shall (x) alter or change adversely the treatment of the holders of Company Options or (y) impede receipt of any approval or consent referred to in Section 7.01(b) or the consummation of the transactions contemplated by this Agreement; and (iii) no such alternative described in clause (a) or (b) of this Section 2.04 shall in the view of counsel to the Company or counsel to Parent adversely affect such counsel's ability to provide the tax opinion described in Sections 7.02(c) and 7.03(c), respectively, of this Agreement. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election. ARTICLE III CONSIDERATION; EXCHANGE 3.01 Merger Consideration. (a) Subject to the terms and conditions of this Agreement, at the Effective Time, by virtue of the Merger and without any action on the part of Parent, the Merger Subsidiary or any holder of shares of capital stock of the Company: (i) Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than Dissenters' Shares, Treasury Shares and shares held directly or indirectly by Parent, except shares held by Parent or any of its Subsidiaries in a fiduciary capacity or in satisfaction of a debt previously contracted) will be converted into the right to receive, at the election of each holder thereof, but subject to the election and allocation procedures of Sections 3.01(b) and (c), the other provisions of this Section 3.01 and possible adjustment as set forth in Section 3.05, either: (A) 0.4954 (the "Exchange Ratio") of a Parent Share (the "Per Share Stock Consideration"), or (B) $73.50 in cash (the "Per Share Cash Consideration" and, together with the "Per Share Stock Consideration," the "Consideration"). (ii) Each share of Company Common Stock that, immediately prior to the Effective Time, is a Treasury Share or is owned directly or indirectly by Parent, except shares held by Parent or any of its Subsidiaries in a fiduciary capacity or in satisfaction of a debt previously contracted, will be canceled and retired and will cease to exist, and no exchange or payment will be made therefor. (iii) At the Effective Time, each share of Common Stock, par value $0.01 per share ("Subsidiary Common Stock"), of the Merger Subsidiary issued and outstanding immediately prior to the Effective Time shall remain outstanding and each certificate therefor shall continue to evidence one share of Subsidiary Common Stock of the Surviving Corporation. (iv) Notwithstanding clause (i)(A) of this Section 3.01(a), Parent may at its option, but shall not be obliged to, increase the fraction of a Parent Share into which each share of Company Common Stock may be converted pursuant to Section 3.01(a)(i)(A) to the extent that, in the reasonable judgment of Parent, such increase is necessary to enable the Merger to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. (b) Subject to the allocation procedures set forth in Section 3.01(c), each record holder of Company Common Stock will be entitled (i) to elect to receive Parent Shares for all of the shares of Company Common Stock ("Stock Election Shares") held by such record holder, (ii) to elect to receive cash for all of the shares of Company Common Stock ("Cash Election Shares") held by such record holder or (iii) to indicate that such holder makes no such election for all of the shares of Company Common Stock ("No-Election Shares") held by such record holder, provided, that notwithstanding anything in this Agreement to the contrary, the number of shares of Company Common Stock to be converted into the right to receive the Per Share Stock Consideration in the Merger (the "Stock Number") will equal as nearly as practicable fifty percent (50%) of the total number of shares of Company Common Stock outstanding 9 13 immediately prior to the Effective Time. All such elections (each, an "Election") shall be made on a form designed for that purpose by Parent and reasonably acceptable to the Company (an "Election Form"). Any shares of Company Common Stock for which the record holder has not, as of the Election Deadline, properly submitted to the Exchange Agent a properly completed Election Form (excluding any Dissenters' Shares) will be deemed No-Election Shares. All Dissenters' Shares will be deemed Cash Election Shares. A record holder acting in different capacities or acting on behalf of other persons in any way will be entitled to submit an Election Form for each capacity in which such record holder so acts with respect to each person for which it so acts. The exchange agent (the "Exchange Agent") will be a bank or trust company in the United States selected by Parent and reasonably acceptable to the Company. (c) The allocation among the holders of Company Common Stock of rights to receive the Per Share Stock Consideration or the Per Share Cash Consideration in the Merger will be made as follows: (i) Number of Stock Elections Less Than Stock Number. If the number of Stock Election Shares (on the basis of Election Forms received as of the Election Deadline) is less than the Stock Number, then (A) each Stock Election Share will be, as of the Effective Time, converted into the right to receive the Per Share Stock Consideration, (B) the Exchange Agent will allocate from among the No-Election Shares, pro rata to the holders of No-Election Shares in accordance with their respective numbers of No-Election Shares, a sufficient number of No-Election Shares so that the sum of such number and the number of Stock Election Shares equals as closely as practicable the Stock Number, and each such allocated No-Election Share (each, a "Stock-Selected No-Election Share") will be, as of the Effective Time, converted into the right to receive the Per Share Stock Consideration, provided that if the sum of all No-Election Shares and Stock Election Shares is equal to or less than the Stock Number, all No-Election Shares will be Stock-Selected No-Election Shares, (C) if the sum of Stock Election Shares and No-Election Shares is less than the Stock Number, the Exchange Agent will allocate from among the Cash Election Shares, pro rata to the holders of Cash Election Shares in accordance with their respective numbers of Cash Election Shares, a sufficient number of Cash Election Shares so that the sum of such number, the number of all Stock Election Shares and the number of all No-Election Shares equals as closely as practicable the Stock Number, and each such allocated Cash Election Share (each, a "Converted Cash Election Share") will be, as of the Effective Time, converted into the right to receive the Per Share Stock Consideration, and (D) each No-Election Share and Cash Election Share that is not a Stock-Selected No-Election Share or a Converted Cash Election Share (as the case may be) will be, as of the Effective Time, converted into the right to receive the Per Share Cash Consideration; or (ii) Number of Stock Elections Greater Than Stock Number. If the number of Stock Election Shares (on the basis of Election Forms received by the Election Deadline) is greater than the Stock Number, then (A) each Cash Election Share and No-Election Share will be, as of the Effective Time, converted into the right to receive the Per Share Cash Consideration, (B) the Exchange Agent will allocate from among the Stock Election Shares, pro rata to the holders of Stock Election Shares in accordance with their respective numbers of Stock Election Shares, a sufficient number of Cash Election Shares ("Converted Stock Election Shares") so that the difference of (x) the number of Stock Election Shares less (y) the number of the Converted Stock Election Shares equals as closely as practicable the Stock Number, and each Converted Stock Election Share will be, as of the Effective Time, converted into the right to receive the Per Share Cash Consideration, and 10 14 (C) each Stock Election Share that is not a Converted Stock Election Share will be, as of the Effective Time, converted into the right to receive the Per Share Stock Consideration. 3.02 Rights as Stockholders; Stock Transfers. At the Effective Time, holders of Company Common Stock will cease to be, and will have no rights as, stockholders of the Company, other than the right to receive (a) any dividend or other distribution with respect to such Company Common Stock with a record date occurring prior to the Effective Time, (b) any cash in lieu of any fractional Parent Share and (c) the Consideration provided under this Article III. After the Effective Time, there will be no transfers on the stock transfer books of the Company or the Surviving Corporation of shares of Company Common Stock. 3.03 Fractional Shares. Notwithstanding any other provision in this Agreement, no fractional Parent Shares and no certificates or scrip therefor, or other evidence of ownership thereof, will be issued in the Merger; instead, Parent will pay to each holder of Company Common Stock who otherwise would be entitled to a fractional Parent Share (after taking into account all Old Certificates delivered to the Exchange Agent or held by such holder) an amount in cash (without interest) determined by multiplying such fraction by the Average Closing Price. 3.04 Exchange Procedures. (a) At the time of mailing of the Company Proxy Statement to holders of record of Company Common Stock entitled to vote at the Company Stockholders Meeting, Parent will mail, or cause the Exchange Agent to mail, therewith an Election Form and a letter of transmittal to each such holder. To be effective, an Election Form must be properly completed, signed and actually received by the Exchange Agent not later than 5:00 p.m., New York City time, on the Business Day that is two trading days prior to the Closing Date (which date shall be publicly announced by Parent as soon as practicable but in no event less than five trading days prior to the Closing Date) (the "Election Deadline") and accompanied by the certificates representing all the shares of Company Common Stock ("Old Certificates") as to which such Election Form is being made, duly endorsed in blank or otherwise in form acceptable for transfer on the books of the Company (or accompanied by an appropriate guarantee of delivery by an eligible organization) in the case of shares that are not held in book entry form. For shares that are held in book entry form, Parent shall establish procedures for the delivery of such shares, which procedures shall be reasonably acceptable to the Company. Parent shall have reasonable discretion, which it may delegate in whole or in part to the Exchange Agent, to determine whether Election Forms have been properly completed, signed and timely submitted or to disregard defects in Election Forms. Any such determination of the Exchange Agent shall be conclusive and binding. Neither Parent nor the Exchange Agent shall be under any obligation to notify any person of any defect in an Election Form submitted to the Exchange Agent. The Exchange Agent shall also make all computations contemplated by Section 3.01 hereof, and, after consultation with the Company, all such computations will be conclusive and binding on the former holders of Company Common Stock absent manifest error. Any shares of Company Common Stock for which the record holder has not, as of the Election Deadline, properly submitted to the Exchange Agent a properly completed Election Form will be deemed No-Election Shares. Any Election Form may be revoked, by the stockholder who submitted such Election Form to the Exchange Agent, only by written notice received by the Exchange Agent (i) prior to the Election Deadline or (ii) after such time if (and only to the extent that) the Exchange Agent is legally required to permit revocations and only if the Effective Time shall not have occurred prior to such date. In addition, all Election Forms shall automatically be revoked if the Exchange Agent is notified in writing by Parent and the Company that the Merger has been abandoned. The Exchange Agent may, with the mutual agreement of Parent and the Company, make such rules as are consistent with this Section 3.04 for the implementation of the Elections provided for herein as shall be necessary or desirable fully to effect such Elections. Prior to the Effective Time, Parent and the Merger Subsidiary will enter into an exchange agent and nominee agreement with the Exchange Agent, in a form reasonably acceptable to the Company, setting forth the procedures to be used in accomplishing the deliveries and other actions contemplated by this Section 3.04, the provisions of which agreement may vary the provisions of such Sections in any respect not material and adverse to the stockholders of the Company. (b) Immediately prior to the Effective Time, the Merger Subsidiary will issue and deliver to the Exchange Agent, acting as nominee for Parent, a number of shares of Subsidiary Common Stock equal to 11 15 the number of shares of Company Common Stock to be converted in the Merger, in consideration for the agreement of Parent contained herein to issue and deliver Parent Shares in the Merger. At or prior to the Effective Time, Parent will deposit, or will cause to be deposited, with the Exchange Agent certificates representing Parent Shares ("New Certificates") and an amount of cash (such New Certificates and cash, together with any dividends or distributions with a record date occurring after the Effective Date with respect thereto (without any interest on any such cash, dividends or distributions) and any cash in lieu of any fractional Parent Share, being hereinafter referred to as the "Exchange Fund") sufficient to deliver to the holders of Company Common Stock the aggregate Consideration to which such holders are entitled pursuant to Section 3.01, together with all cash and other property to which such holders may be entitled pursuant to Sections 3.02 and 3.03 in respect of dividends and distributions or cash in lieu of fractional share interests. At the time of such deposit, Parent will irrevocably instruct the Exchange Agent to deliver such Consideration to such holders after the Effective Time in accordance with the procedures of the Exchange Agent referred to in Section 3.04(a). The shares of Subsidiary Common Stock issued by the Merger Subsidiary and delivered to the Exchange Agent at the Effective Time shall be deliverable to, or registered in the name or names of, Parent or such other person or persons as Parent shall instruct. (c) The Surviving Corporation will cause the New Certificates into which shares of a holder's Company Common Stock are converted on the Effective Date and/or any cash in respect of any Per Share Cash Consideration, cash in lieu of fractional share interests or dividends or distributions which such person is entitled to receive to be delivered to such stockholder upon delivery (if not previously delivered) to the Exchange Agent of Old Certificates representing such shares of Company Common Stock (or indemnity satisfactory to the Surviving Corporation and the Exchange Agent, if any of such Old Certificates are lost, stolen or destroyed) owned by such stockholder. No interest will be paid on any Consideration, or any cash in respect of fractional share interests or dividends or distributions, that any such person is entitled to receive pursuant to this Article III upon such delivery to the Exchange Agent of Old Certificates. (d) Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto will be liable to any former holder of Company Common Stock for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar laws. (e) No dividends or other distributions on Parent Shares with a record date occurring after the Effective Time will be paid to the holder of any unsurrendered Old Certificate representing shares of Company Common Stock converted in the Merger into the right to receive such Parent Shares until the holder thereof is entitled to receive New Certificates in exchange therefor in accordance with this Article III, and no such shares of Company Common Stock will be eligible to be voted at any meeting of holders of Parent Shares until the holder of the related Old Certificates is entitled to receive New Certificates in accordance with this Article III. After becoming so entitled in accordance with this Article III, the record holder also will be entitled to receive any such dividends or other distributions, without any interest thereon, which theretofore had become payable with respect to Parent Shares such holder had the right to receive upon surrender of such Old Certificates. (f) Any portion of the Exchange Fund that remains unclaimed by the holders of Old Certificates for six months after the Effective Time will be returned to Parent. Any stockholders of the Company who have not theretofore complied with this Article III thereafter shall look only to Parent for, and, subject to Section 3.04(d), Parent shall remain liable for, payment of their claim for Per Share Stock Consideration, Per Share Cash Consideration, cash in lieu of any fractional shares and unpaid dividends and distributions on Parent Shares deliverable in respect of each share of Company Common Stock represented by such Old Certificates such stockholder holds as determined pursuant to this Agreement, in each case without any interest thereon. 3.05 Anti-Dilution Adjustments. Should Parent change (or establish a record date for changing) the number of Parent Shares issued and outstanding prior to the Effective Date by way of a split, dividend, combination, recapitalization, exchange of shares or similar transaction with respect to the outstanding Parent Shares having a record date preceding the Effective Time, the Exchange Ratio will be adjusted 12 16 appropriately to provide to the holders of Company Common Stock the same economic effect as contemplated by this Agreement prior to such split, dividend, combination, recapitalization, exchange of shares or similar transaction. 3.06 Options; Other Equity-Based Awards. (a) At the Effective Time, each then outstanding Company Option, whether vested or unvested, will be converted into the right to acquire a number of Parent Shares equal to the product, rounded to the nearest whole share, of (i) the number of shares of Company Common Stock subject to such Company Option and (ii) the Exchange Ratio, at a per share exercise price, rounded down to the nearest whole cent, equal to (x) the aggregate exercise price for the shares of Company Common Stock purchasable pursuant to such Company Option divided by (y) the number of Parent Shares deemed purchasable under such Company Option in accordance with the foregoing; provided, however, that in the case of any Company Option which is an "incentive stock option," as defined under Section 422 of the Code, the adjustments provided by this Section shall be effected in a manner consistent with Section 424(a) of the Code. Prior to the Effective Time, the Company and Parent will make all necessary arrangements with respect to the Company Stock Plans and the stock plans of Parent to permit the assumption of such Company Options by Parent pursuant to this Section 3.06. (b) At the Effective Time, each right of any kind, whether vested or unvested, contingent or accrued, to acquire or receive shares of Company Common Stock or to receive benefits measured by the value of a number of shares of Company Common Stock, that may be held, awarded, outstanding, credited, payable or reserved for issuance under the Company Stock Plans and any other Company Compensation and Benefit Plan, except for Company Options converted in accordance with Section 3.06(a) above (each, a "Company Stock-Based Award"), shall be deemed to be converted into a right to acquire or receive, or to receive benefits measured by, as the case may be, the number of Parent Shares equal to the number of shares of Company Common Stock subject to such Company Stock-Based Award immediately prior to the Effective Time, multiplied by the Exchange Ratio, and such rights with respect to the Parent Shares shall otherwise be subject to the same terms, conditions and restrictions, if any, as were applicable to the Company Stock-Based Awards. At or prior to the Effective Time, the Company shall take all actions (if any) as may be required to effect the provisions of this Section 3.06(b). (c) At the Effective Time, Parent will assume each then outstanding Company Option and Company Stock-Based Award, as converted pursuant to this Section 3.06, in accordance with the terms of the Company Stock Plan under which such Company Option and Company Stock-Based Award was granted and the agreement, if any, by which it is evidenced. At or prior to the Effective Time, Parent will take all corporate action necessary to reserve for issuance a sufficient number of Parent Shares for delivery upon exercise of Company Options and Company Stock-Based Award assumed by it in accordance with this Section 3.06. Not later than the Closing Date, Parent will file a registration statement on Form S-8, or another appropriate form with respect to the Parent Shares subject to such Company Options and Company Stock-Based Awards, and will use its reasonable best efforts to maintain the effectiveness of that registration statement (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Company Options and Company Stock-Based Awards remain outstanding. Except as otherwise specifically provided by this Section 3.06, the terms of the Company Options and Company Stock-Based Awards, and the relevant Company Stock Plans and Company Compensation and Benefit Plans, as in effect on the Effective Time, shall remain in full force and effect with respect to the Company Options and Company Stock-Based Awards after giving effect to the Merger and the assumptions by Parent as set forth above. (d) As soon as practicable following the Effective Time, Parent shall deliver to the holders of Company Options and Company Stock-Based Awards appropriate notices setting forth such holders' rights pursuant to the respective Company Stock Plans and Company Compensation and Benefit Plans and the agreements evidencing the grants of such Company Options and Company Stock-Based Awards, and that such Company Options and Company Stock-Based Awards and such agreements shall be assumed by Parent and shall continue in effect on the same terms and conditions (subject to the adjustments required by Section 3.06(a) and (b)). 13 17 3.07 Dissenting Stockholders. Dissenters' Shares will be paid for by Parent in accordance with Section 262 of the DGCL. The Company shall give Parent (a) prompt notice of any written demands for fair value received by the Company, withdrawals of such demands, and any other related instruments served pursuant to Section 262 of the DGCL and received by the Company and (b) the opportunity to direct all negotiations and proceedings with respect to demands for fair value under the DGCL. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for fair value for Dissenters' Shares or offer to settle, or settle, any such demands. ARTICLE IV ACTIONS PENDING THE EFFECTIVE TIME 4.01 Forbearances of the Company. Except as set forth in the Company's Disclosure Schedule or as expressly contemplated by this Agreement, without the prior written consent of Parent (such consent not to be unreasonably withheld or delayed), during the period from the date of this Agreement to the Effective Time, the Company will not, and will cause each of its Subsidiaries not to: (a) Ordinary Course. Conduct the business of the Company and its Subsidiaries other than in the ordinary and usual course, or, to the extent consistent therewith, fail to use reasonable efforts to preserve intact its business organizations and assets and maintain its rights, franchises and existing relations with clients, customers, suppliers, employees and business associates. (b) Capital Stock. Other than pursuant to Rights that are set forth in Section 5.03(b), (i) issue, sell or otherwise permit to become outstanding, or authorize the creation of, any additional shares of capital stock of the Company or any of its Subsidiaries (other than issuances or sales by a Subsidiary to the Company or a wholly owned Subsidiary of the Company) or any Rights in respect thereof (including any rights issued under any stockholders rights plan or similar plan), (ii) enter into any agreement with respect to the foregoing or (iii) permit any additional shares of capital stock of the Company or any of its Subsidiaries to become subject to new grants of employee or director stock options, other Rights or similar stock-based employee rights, other than pursuant to the Company's Equity Plus Program, or new grants of options, Rights or similar stock-based employee rights to employees (other than officers or directors) or newly hired employees, in the ordinary course of business consistent with past practice (provided that any vesting provisions of such new grants (other than pursuant to the Company's Equity Plus Program) shall not accelerate as a result of the transactions contemplated by this Agreement). (c) Dividends, Etc. (i) Declare, set aside for payment or pay any dividend or other distribution (whether in cash, stock or property) on or in respect of, or declare or make any distribution on, any shares of capital stock of the Company or any of its Subsidiaries, other than (x) dividends and distributions from direct or indirect wholly owned Subsidiaries of the Company to the Company or another direct or indirect wholly owned Subsidiary of the Company, (y) regular quarterly cash dividends on the Company Common Stock at a rate not exceeding $0.12 per share per calendar quarter and (z) fixed-rate dividends paid pursuant to the existing terms of the outstanding preferred trust securities of the Company's Subsidiaries, or (ii) directly or indirectly adjust, split, combine, redeem, reclassify, purchase or otherwise acquire, any shares of its capital stock. (d) Compensation; Employment Agreements; Etc. Enter into, amend, modify or renew any employment, consulting, severance or similar contract with any director, officer or employee of the Company or any of its Subsidiaries, or grant any salary or wage increase or increase any employee benefit (including incentive or bonus payments), except (i) for normal individual increases in compensation to employees in the ordinary course of business consistent with past practice, (ii) for other changes that are required by applicable law, (iii) to satisfy contractual obligations that are existing as of the date hereof, (iv) for employment arrangements for, or grants of awards to, newly hired employees or employees other than officers or directors in the ordinary course of business 14 18 consistent with past practice, (v) new employment contracts Previously Disclosed and (vi) for arrangements specifically contemplated by this Agreement. (e) Benefit Plans. Enter into, establish, adopt or amend in any material respect (except (i) as may be required by applicable law, (ii) to satisfy contractual obligations that are existing as of the date hereof and (iii) as specifically contemplated by this Agreement) any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement (or similar arrangement) related thereto, in respect of any director, officer or employee of the Company or any of its Subsidiaries. (f) Dispositions. Except for sales, transfers, mortgages, encumbrances or other dispositions of securities or other investments or assets in the ordinary course of business consistent with past practice, sell, transfer, mortgage, encumber or otherwise dispose of or discontinue any of its assets, businesses or properties having a value in excess of $15,000,000 individually or $50,000,000 in the aggregate. (g) Acquisitions. Except for the acquisition of securities or other investments or assets in the ordinary course of business consistent with past practice, acquire any assets, businesses, or properties having a value in excess of $15,000,000 individually or $50,000,000 in the aggregate, it being understood that the Company will not, nor will it cause any of its Subsidiaries to, make any acquisition of assets or businesses not precluded by this clause (g) if, to the knowledge of the Company, such acquisition would be prohibited by Section 4.01(m)(ii). (h) Constitutive Documents. Amend the Constitutive Documents of the Company or any of its Subsidiaries. (i) Accounting Methods. Implement or adopt any change in its accounting principles or material accounting practices, other than as may be required by GAAP. (j) Contracts. Except in the ordinary course of business consistent with past practice, enter into or terminate any Contract that is or would be required to be publicly filed with the SEC pursuant Item 601(b)(10) of Regulation S-K under the Securities Act (other than any Contract required to be filed under clause (iii) of such Item 601(b)(10)), or amend or modify in any material respect any such Contract. (k) Claims. Settle any material claim, action or proceeding, except for any such claim, action or proceeding involving solely money damages where, if the relevant litigation has been the subject of a reserve, the amount paid or to be paid in settlement or compromise does not exceed such reserve, and, in any case, the relevant litigation is not reasonably likely to establish an adverse precedent that would be material to the Company's business or require material changes in the Company's business practices. (l) Indebtedness. Incur any indebtedness for borrowed money other than in the ordinary course of business consistent with past practice. (m) Adverse Actions. (i) Knowingly take any action that is reasonably likely to result in any of the Company's representations or warranties set forth in this Agreement being or becoming untrue such that the conditions to the Merger set forth in Article VII would not be satisfied, except as may be expressly required by applicable law or regulation; or (ii) Knowingly engage in any new line of business or knowingly make any acquisition of assets of a type not currently held by the Company or any of its Subsidiaries that would not be permissible for a United States financial holding company (as defined in 12 U.S.C. sec. 1841(p)) or would subject Parent, the Company or any Subsidiary of either to regulation by a 15 19 Governmental Authority that does not presently regulate such company or to regulation by a Governmental Authority that is materially different from current regulation. (n) Tax Treatment. Take or fail to take any action that would reasonably be expected to prevent or impede the transactions contemplated by this Agreement from qualifying for the Tax Treatment or that would prevent the tax opinions described in Sections 7.02(c) and 7.03(c) from being provided. (o) Commitments. Agree, commit to or enter into any agreement to take any of the actions referred to in Section 4.01 (a) through (n). 4.02 Forbearances of Parent. Except as set forth in Parent's Disclosure Schedule or as expressly contemplated by this Agreement, without the prior written consent of the Company (such consent not to be unreasonably withheld or delayed), during the period from the date of this Agreement to the Effective Time, Parent will not, and will cause each of its Subsidiaries not to: (a) Ordinary Course. Conduct the business of Parent and its Subsidiaries other than in the ordinary and usual course, or, to the extent consistent therewith, fail to use reasonable efforts to preserve intact its material business organizations and assets and maintain its material rights, franchises and material existing relations with clients, customers, suppliers, employees and business associates. (b) Dividends. Declare, set aside for payment or pay any dividend or other distribution on, or in respect of, any Parent Shares other than regular periodic cash dividends and distributions; it being understood that Parent may in 2000 declare and pay a cash dividend with respect to a nine-month period, and, after the Closing Date, declare and pay a dividend with respect to the remaining three-month period. (c) Constitutive Documents. Amend the Constitutive Documents of Parent or the Merger Subsidiary in any manner that would impede or delay the Merger and the other transactions contemplated hereby or would adversely affect the rights of a holder of Parent Shares. (d) Acquisitions. Enter into any agreement to acquire all or substantially all of the capital stock or assets of any other person or business unless, to the knowledge of Parent, such transaction would not reasonably be expected to materially delay or impede the consummation of the Merger. (e) Adverse Actions. Knowingly take any action reasonably likely to result in any of its representations and warranties set forth in this Agreement being or becoming untrue such that the conditions to the Merger set forth in Article VII would not be satisfied, except as may be expressly required by applicable law or regulation. (f) Tax Treatment. Subject to Section 3.01(a)(iv), take or fail to take any action that would reasonably be expected to prevent or impede the transactions contemplated by this Agreement from qualifying for the Tax Treatment or that would prevent the tax opinions described in Sections 7.02(c) and 7.03(c) from being provided. (g) Commitments. Agree, commit to or enter into any agreement to take any of the actions referred to in Section 4.02(a) through (f). ARTICLE V REPRESENTATIONS AND WARRANTIES 5.01 Disclosure Schedules. On or prior to the date hereof, the Company delivered to Parent, and Parent delivered to the Company, a schedule (respectively, its "Disclosure Schedule") setting forth, among other things, items the disclosure of which is necessary or appropriate either (a) in response to an express informational requirement contained in or requested by a provision hereof or (b) as an exception to one or more representations or warranties contained in Section 5.03 or 5.04, respectively, or to one or more of its 16 20 covenants contained in Article VI; provided that (i) no such item is required to be set forth in the Disclosure Schedule as an exception to a representation or warranty if its absence is not reasonably likely to result in the related representation or warranty being deemed untrue or incorrect under the standard established in Section 5.02 and (ii) the mere inclusion of an item in a Disclosure Schedule shall not be deemed an admission by the disclosing party that such item (or any undisclosed item or information of comparable or greater significance) represents a material exception or fact, event or circumstance with respect to the Company or Parent, respectively. Information set forth in a Disclosure Schedule, whether in response to an express informational requirement or as an exception to one or more representations or warranties or one or more covenants, in each case that is contained (or expressly incorporated by reference) in a correspondingly enumerated portion of such Disclosure Schedule, is described herein as "Previously Disclosed". Any matter disclosed in any section of either Disclosure Schedule shall be deemed disclosed for all purposes and sections thereof. 5.02 Standard. No representation or warranty of the Company or Parent contained in Section 5.03 (other than Sections 5.03(b), 5.03(c)(the first sentence thereof), 5.03(i) and 5.03(j)(i)) or 5.04 (other than 5.04(g) and 5.04(h)) shall be deemed untrue or incorrect, and no party hereto shall be deemed to have breached a particular representation or warranty, as a consequence of the existence of any fact, event, or circumstance that should have been disclosed as an exception to a particular representation or warranty, unless such fact, event or circumstance, whether individually or taken together with all other facts, events or circumstances that should have been so disclosed (whether or not as exceptions) with respect to such particular representation or warranty contained in Section 5.03 or 5.04, results or would be reasonably likely to result in a Material Adverse Effect with respect to the Company, in the case of Section 5.03, or Parent, in the case of Section 5.04, or would materially impair or delay the ability of the parties to consummate the Merger or the other transactions contemplated hereby. 5.03 Representations and Warranties of the Company. Subject to Sections 5.01 and 5.02 and except as specifically disclosed in the Company SEC Documents or as Previously Disclosed, the Company hereby represents and warrants to Parent as follows: (a) Organization, Standing and Authority. The Company is duly incorporated and an existing corporation in good standing under the laws of the State of Delaware. The Company is duly qualified to do business and is in good standing in the States of the United States and each foreign jurisdiction (with respect to jurisdictions which recognize such concept) where its ownership or leasing of property or the conduct of its business requires it to be so qualified. (b) Capital Stock. As of the date of this Agreement, the Company has (i) 400,000,000 authorized shares of Company Common Stock, of which 146,748,399 shares were outstanding as of July 7, 2000, and (ii) 20,000,000 authorized shares of Company Preferred Stock, of which no shares are outstanding. All of the outstanding shares of Company Common Stock have been duly authorized and are validly issued, fully paid and nonassessable, and have not been issued in violation of any preemptive rights. Set forth on the Company's Disclosure Schedule is a list of each Compensation and Benefit Plan under which any shares of capital stock of the Company or any Rights with respect thereto have been or may be awarded or issued ("Company Stock Plans"). As of July 7, 2000, the Company has outstanding Company Options representing the right to acquire 33,614,900 shares of Company Common Stock. Except as described in the immediately preceding sentence, the Company has no Company Common Stock authorized for issuance pursuant to any Company Stock Plans, except that, as of July 7, 2000, there were 15,014,217 shares of Company Common Stock authorized for issuance pursuant to the Company Stock Plans. Except as set forth above, there are no existing Rights of any kind with respect to the Company, and no securities or obligations evidencing such Rights are authorized, issued or outstanding. Except for the Convertible Debentures of the Company previously issued to certain key employees of the Company and its Subsidiaries in 2000 prior to the date hereof, the Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. 17 21 (c) Subsidiaries. Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 includes all the Subsidiaries of the Company which as of the date hereof are Significant Subsidiaries. No equity securities of any of the Company's Subsidiaries are or may become required to be issued (other than to the Company or a wholly owned Subsidiary of the Company) by reason of any Rights with respect thereto. There are no Contracts by which any of the Company"s Subsidiaries is or may be bound to sell or otherwise issue any shares of its capital stock, and there are no Contracts relating to the rights of the Company to vote or to dispose of such shares. All of the shares of capital stock of each of the Company's Significant Subsidiaries are validly issued, fully paid and nonassessable and subject to no Rights and are owned by the Company or a Subsidiary of the Company free and clear of any Liens. Each of the Company's Significant Subsidiaries is in good standing under the laws of the jurisdiction in which it is organized, and is duly qualified to do business and in good standing (with respect to jurisdictions which recognize such concept) in each jurisdiction where its ownership or leasing of property or the conduct of its business requires it to be so qualified. (d) Corporate Power. Each of the Company and its Subsidiaries has the corporate power and authority to carry on its business as it is now being conducted and to own or lease all of its properties and assets. (e) Corporate Authority and Action. (i) The Company has the requisite corporate power and authority, and has taken all corporate action necessary, in order to authorize the execution and delivery of, and performance of its obligations under this Agreement and, subject only to obtaining the requisite adoption of this Agreement by the holders of a majority of the shares of Company Common Stock entitled to vote at the Company Stockholders Meeting (the "Company Requisite Vote"), to consummate the Merger. This Agreement constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors" rights and to general equity principles (the "Bankruptcy and Equity Exception"). (ii) The Company has taken all action necessary in order to exempt this Agreement, the Voting Agreements and the Merger and the other transactions contemplated hereby and thereby from, and this Agreement, the Voting Agreements and the Merger and the other transactions contemplated hereby and thereby are exempt from, (i) the requirements of any "moratorium," "control share," "fair price" or other antitakeover laws and regulations of the State of Delaware, including Section 203 of the DGCL, and of any other State and (ii) the provisions of Article XIII of the Company's certificate of incorporation with respect to "Business Combinations". (iii) The Company has taken all corporate action necessary in order to authorize the execution and delivery of, and performance of its obligations under, and has entered into, amendments to each of the GE Stockholders Agreement and the Yasuda Stockholders Agreement (the "GE Amendment" and the "Yasuda Amendment", respectively). Each of the GE Amendment and the Yasuda Amendment is a valid and legally binding agreement of the Company and, assuming the due authorization, execution and delivery of such agreement by each other party thereto, is enforceable against the Company in accordance with its terms, subject to the Bankruptcy and Equity Exception. (f) Governmental Filings; No Violations. Other than those (i) pursuant to Section 2.02, (ii) under the HSR Act, the Exchange Act and the Securities Act, (iii) pursuant to the European Community Merger Control Regulation, (iv) required to be made with Self-Regulatory Organizations and Governmental Authorities regulating brokers, dealers, investment advisors, investment companies, banks, trust companies and insurance companies, (v) required to be made pursuant to state insurance or banking and trust company regulations and (vi) such other filings and/or notices set forth in the 18 22 Company's Disclosure Schedule, no notices, reports, applications or other filings are required to be made by the Company or any of its Subsidiaries with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by any of them from, any Governmental Authority in connection with the execution and delivery of this Agreement by the Company and the consummation by the Company of the Merger and the other transactions contemplated hereby. Subject, in the case of clause (A) below, to obtaining the Company Requisite Vote, and the making or obtaining of all filings, notices, applications, consents, registrations, approvals, permits or authorizations with or of any relevant Governmental Authority with respect to the Merger and the other transactions contemplated hereby, (A) the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby and (B) the execution and delivery of the GE Amendment and the Yasuda Amendment, and the performance by the Company of its obligations thereunder, do not and will not (1) constitute a breach or violation of, or a default under, or cause or allow the acceleration or creation of a Lien (with or without the giving of notice, passage of time or both) pursuant to, any law, rule or regulation or any judgment, decree, order, governmental or non-governmental permit or license, or any Contract of it or of any of its Subsidiaries or to which the Company or any of the Company's Subsidiaries or its or their properties is subject or bound or (2) constitute a breach or violation of, or a default under, the Constitutive Documents of the Company or any of its Subsidiaries or (3) require any consent or approval under any such law, rule, regulation, judgment, decree, order, governmental or non-governmental permit or license or the consent or approval of any other party to any such Contract. (g) Reports. The Company and its Subsidiaries have filed all reports, registrations, statements and other filings, together with any amendments required to be made with respect thereto, that they were required to file since December 31, 1997 with (i) the SEC or the CFTC or (ii) any other applicable Governmental Authorities (all such reports and statements, including the financial statements, exhibits and schedules thereto, being collectively referred to herein as the "Reports"), including all Reports required under the Securities Laws. Each of the Reports, when filed, complied as to form with the statutes, rules, regulations and orders enforced or promulgated by the Governmental Authority with which they were filed. (h) Company SEC Documents and Financial Statements. (i) Since January 1, 1998, the Company has timely filed all required reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated therein) with the SEC ("Company SEC Documents"). As of their respective dates (and without giving effect to any amendments or modifications filed after the date of this Agreement), each of the Company SEC Documents, including the financial statements, exhibits and schedules thereto, filed and publicly available with the SEC prior to the date hereof complied (and each of the Company SEC Documents filed after the date of this Agreement, will comply) as to form with applicable Securities Laws and did not (or in the case of statements, circulars or reports filed after the date of this Agreement, will not) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (ii) Each of the Company's consolidated statements of financial condition or balance sheets included in or incorporated by reference into the Company SEC Documents, including the related notes and schedules, fairly presented in all material respects (or, in the case of Company SEC Documents filed after the date of this Agreement, will fairly present in all material respects) the consolidated financial position of the Company and its Subsidiaries as of the date of such balance sheet and each of the Company's consolidated statements of income, cash flows and changes in stockholders' equity included in or incorporated by reference into Company SEC Documents, including any related notes and schedules (collectively, the foregoing financial statements and related notes and schedules are referred to as the "Company Financial Statements"), fairly presented in all material respects (or, in the case of Company SEC 19 23 Documents filed after the date of this Agreement, will fairly present in all material respects) the consolidated results of operations, cash flows and changes in stockholders" equity, as the case may be, of the Company and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments), in each case in accordance with GAAP consistently applied during the periods involved (except as may be noted therein and except, in the case of unaudited statements, for the absence of notes). (i) Absence of Undisclosed Liabilities. Except as disclosed in the Company Financial Statements or the Company SEC Documents filed prior to the date hereof, none of the Company or its Subsidiaries has any obligation or liability (contingent or otherwise), that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company. (j) Absence of Certain Changes or Events. Except as expressly contemplated by this Agreement or the transactions contemplated hereby and except as disclosed in the Company SEC Documents filed prior to the date hereof, since December 31, 1999, the Company and its Subsidiaries have conducted their business only in the ordinary course, and there has not been (i) any Material Adverse Effect on the Company or, to the knowledge of the Company, any development or combination of developments reasonably likely to have a Material Adverse Effect on the Company, (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of the Company's capital stock, other than regular quarterly cash dividends of $0.12 per share on the Company's Common Stock, (iii) any split, dividend, combination, recapitalization or similar transaction with respect to any of the Company's capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of the Company's capital stock, except for issuances of Company Common Stock upon the exercise of Company Options awarded prior to the date hereof in accordance with their terms, (iv) prior to the date hereof (A) any granting by the Company or any of its Subsidiaries to any current or former director, executive officer or other key employee of the Company or its Subsidiaries of any increase in compensation, bonus or other benefits, except for normal increases in the ordinary course of business and in accordance with past practice or as was required under any employment agreements in effect as of December 31, 1999, (B) any granting by the Company or any of its Subsidiaries to any such current or former director, executive officer or key employee of any increase in severance or termination pay, except in the ordinary course of business and consistent with past practice, or (C) any entry by the Company or any of its Subsidiaries into, or any amendments of, any Compensation and Benefit Plan, other than in the ordinary course of business and consistent with past practice, (v) except as required by a change in GAAP, any change in accounting methods, principles or practices by the Company materially affecting its assets, liabilities or business or (vi) any tax election that would be Material to the Company or any of its tax attributes or any settlement or compromise of any Material income tax liability (other than any such liability that was the subject of a dispute disclosed on Section 5.03(r) of the Company's Disclosure Schedule). (k) Intentionally Omitted. (l) Litigation; Regulatory Action. Except as disclosed in the Company SEC Documents filed before the date of this Agreement, no litigation, proceeding, investigation or controversy ("Litigation") before any court, arbitrator, mediator, or Governmental Authority is pending against or involves the Company or any of its Subsidiaries, and, to the Company's knowledge, no such Litigation has been threatened; neither the Company nor any of its Subsidiaries is a party to or is subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, any Governmental Authority charged with the supervision or regulation of broker-dealers, securities underwriting or trading, stock exchanges, commodities exchanges, investment companies, investment advisors or insurance agents and brokers or the supervision or regulation of the Company or any of its Subsidiaries or any of the other businesses they conduct; and neither the Company nor any of its Subsidiaries has been notified in writing by or received any written communication from any such Governmental Authority to the effect that such Governmental Authority is contemplating issuing or requesting (or is considering the appropriateness 20 24 of issuing or requesting) any such order, decree, agreement, memorandum of understanding, commitment letter or similar submission. (m) Compliance with Laws. Each of the Company and its Subsidiaries: (i) in the conduct of business, including its sales and marketing practices, is in compliance with all applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, suitability requirements, orders or decrees applicable thereto or to the employees conducting such businesses, and with the applicable rules of all Self-Regulatory Organizations to which it is subject; (ii) has all permits, licenses, authorizations, orders and approvals of, and has made or obtained all filings, notices, applications, consents, registrations, approvals, permits or authorizations with, to or of all Governmental Authorities and Self-Regulatory Organizations that are required in order to permit it to own and operate its businesses as presently conducted; and all such permits, licenses, authorizations, orders and approvals are in full force and effect and, to the Company's knowledge, no suspension or cancellation of any of them is threatened or reasonably likely; and all such filings, applications and registrations are current; (iii) has received no written notification or written communication from any Governmental Authority (A) asserting that it is not in compliance with any of the statutes, rules, regulations, or ordinances which such Governmental Authority enforces, or has otherwise engaged in any unlawful business practice, (B) threatening to revoke any license, franchise, permit, seat on any stock or commodities exchange or governmental authorization, (C) requiring it (including any of its directors or controlling persons) to enter into any order, decree, agreement, memorandum of understanding or similar arrangement (or requiring the board of directors thereof to adopt any resolution or policy) or (D) restricting or disqualifying the activities of the Company or any of its Subsidiaries (except for restrictions generally imposed by rule, regulation or administrative policy on brokers, dealers, investment advisors or banking organizations generally); (iv) is not, nor is any Affiliate of it, subject to a "statutory disqualification" as defined in Section 3(a)(39) of the Exchange Act or is subject to a disqualification that would be a basis for censure, limitations on the activities, functions or operations of, or suspension or revocation of the registration of any broker-dealer Subsidiary of the Company as a broker-dealer, municipal securities dealer, government securities broker or government securities dealer under Section 15, Section 15B or Section 15C of the Exchange Act, and there is no reasonable basis for, or proceeding or investigation, whether formal or informal or whether preliminary or otherwise, that is reasonably likely to result in, any such censure, limitations, suspension or revocation; (v) is not required to be registered as an investment company; and (vi) in the conduct of its business with respect to employee benefit plans subject to Title I of ERISA ("ERISA Plans"), it has not (A) breached any applicable fiduciary duty under Part 4 of Title I of ERISA which would subject it to liability under Sections 405 or 409 of ERISA, (B) engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975(c) of the Code which would subject it to liability or Taxes under Sections 409 or 502(i) of ERISA or Section 4975(a) of the Code or (C) engaged in any conduct that could constitute a crime or violation listed in Section 411 of ERISA which could preclude such person from providing services to any ERISA Plan. (n) Registrations. The Company and each of its Subsidiaries which are required to be registered as a broker-dealer, an investment advisor, a commodity pool operator, futures commission merchant, introducing broker, commodity trading advisor or insurance agent with the SEC, the CFTC, the securities commission or similar authority or insurance authority of any state or foreign jurisdiction or any Self-Regulatory Organization are duly registered as such and such registrations are in full force and effect. All United States Federal, state and foreign registration requirements have been complied with and such registrations as currently filed, and all periodic reports required to be 21 25 filed with respect thereto, are accurate and complete. Since January 1, 1998, there have been no contributions or payments, and there is no other information, that would be required to be disclosed by the Company or any of the Company's Subsidiaries on any Form G-37/G-38 or recorded by the Company or any such Subsidiary pursuant to Rule G-8(a)(xvi) of the MSRB. (o) No Brokers. None of the Company or its Subsidiaries, or any of their directors, officers or employees, has employed any broker or finder, or incurred any broker's or finder's commissions or fees, in connection with the transactions contemplated hereby, except that the Company has engaged The Blackstone Group L.P. and Goldman, Sachs & Co. as its financial advisors, the arrangements with which have been provided to Parent. (p) Compensation and Benefit Plans. (i) The Company has Previously Disclosed a complete list of all material benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and its Subsidiaries (the "Employees") and current or former directors of the Company, including, but not limited to, "employee benefit plans" within the meaning of Section 3(3) of ERISA, bonus, deferred compensation, profit-sharing, savings, employee stock ownership, stock bonus, stock purchase, restricted stock and stock option plans, and all material employment or severance contracts, contract or arrangement (the "Compensation and Benefit Plans"). True and complete copies of all Compensation and Benefit Plans, including, but not limited to, any trust instruments and/or insurance contracts, if any, forming a part thereof, and all amendments thereto have been provided or made available to Parent. (ii) All Compensation and Benefit Plans, other than "multiemployer plans" within the meaning of Section 3(37) of ERISA ("Multiemployer Plans"), covering Employees (the "Plans"), to the extent subject to ERISA, are in substantial compliance with ERISA. Each Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA ("Pension Plan") and which is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS with respect to "TRA" (as defined in Section 1 of IRS Revenue Procedure 93-39), and the Company is not aware of any circumstances reasonably likely to result in the revocation or denial of any such favorable determination letter. There is no pending or, to the knowledge of the Company, threatened litigation relating to the Plans. Neither the Company nor any of its Subsidiaries has engaged in a transaction with respect to any Plan that would subject the Company or any of its Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. (iii) No liability under Subtitle C or D of Title IV of ERISA has been or is expected to be incurred by the Company or any of its Subsidiaries with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the single-employer plan of any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate"). Neither the Company nor any of its Subsidiaries presently contributes to a Multiemployer Plan, nor have they contributed to such a plan within the past five calendar years. No notice of a "reportable event", within the meaning of Section 4043 of ERISA for which the 30-day reporting requirement has not been waived, has been required to be filed for any Pension Plan or by any ERISA Affiliate within the past 12-month period ending on the date hereof. (iv) All contributions required to be made under the terms of any Plan have been timely made or have been reflected on the Financial Statements. Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate has an outstanding funding waiver. Neither the Company nor any of its 22 26 Subsidiaries has provided, or is required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. (v) Under each Pension Plan which is a single-employer plan, as of the most recently completed actuarial valuation prior to the date hereof, the actuarially determined present value of all "benefit liabilities", within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan"s most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and to the knowledge of the Company there has been no adverse change in the financial condition of such Pension Plan since such valuation date. (vi) Neither the Company nor any of its Subsidiaries has any obligations for retiree health and life benefits under any plan other than obligations required pursuant to Section 4980B of the Code or Part 6 of Title I of ERISA. (vii) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (A) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due to any director or any Employee under any Compensation and Benefit Plan or otherwise from the Company or any of its Subsidiaries, (B) increase any benefits otherwise payable under any Compensation and Benefit Plan, (C) result in any acceleration of the time of payment or vesting or trigger any payment or funding (through a grantor trust or otherwise) of any such benefit, or (D) result in any breach or violation of, or a default under, any of the Compensation and Benefit Plans. (q) Labor Relations. Each of the Company and its Subsidiaries is in compliance with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, the Immigration Reform and Control Act, the Worker Adjustment and Retraining Notification Act, any such laws respecting employment discrimination, disability rights or benefits, equal opportunity, plant closure issues, affirmative action, workers" compensation, employee benefits, severance payments, labor relations, employee leave issues, wage and hour standards, occupational safety and health requirements and unemployment insurance and related matters. None of the Company or its Subsidiaries is engaged in any unfair labor practice and there is no unfair labor practice complaint pending or, to the knowledge of the Company, threatened against any of the Company or its Subsidiaries before the National Labor Relations Board. Neither the Company nor any of its Subsidiaries is a party to, is negotiating or is bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is the Company or any of its Subsidiaries the subject of a proceeding asserting that the Company or any such Subsidiary has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel it or such Subsidiary to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving the Company or any of its Subsidiaries pending or, to its knowledge, threatened, nor is it aware of any activity involving the Company"s or any of its Subsidiaries" employees seeking to certify a collective bargaining unit or engaging in any other organization activity. (r) Taxes. (i) The Company and its Subsidiaries have filed completely and correctly in all material respects all Tax Returns which are required by all applicable laws to be filed by them, and have paid, or made adequate provision for the payment of, all material Taxes, including material withholding Taxes, owed by the Company or its Subsidiaries; (ii) all Taxes which the Company and its Subsidiaries are required by law to withhold and collect have been duly withheld and collected, and have been paid over, in a timely manner, to the proper taxing authorities to the extent due and payable; (iii) the Company and its Subsidiaries have not executed any waiver to extend, or otherwise taken or failed to take any action that would have the effect of extending, the applicable statute of limitations in respect of any Tax liabilities of the Company or any of its Subsidiaries for the fiscal years prior to and including the most recent fiscal year; (iv) the Company or its predecessor has been 23 27 a member of the Company"s existing U.S. federal consolidated group for at least the past 20 years; (v) the Company is not a party to any tax sharing agreement or arrangement, other than with its Subsidiaries; (vi) no liens for Taxes exist with respect to any of the assets or properties of the Company, except for statutory liens for Taxes not yet due or payable or that are being contested in good faith; (vii) all of the U.S. federal income Tax Returns filed by or on behalf of each of the Company and its Subsidiaries have been examined by and settled with the IRS, or the statute of limitations with respect to the relevant Tax liability expired, for all taxable periods through and including the period ending on the date on which the Effective Time occurs; (viii) all Taxes due with respect to any completed and settled audit, examination or deficiency Litigation with any taxing authority have been paid in full; (ix) there is no audit, examination, deficiency, or refund Litigation pending with respect to any Taxes and during the past three years no taxing authority has given written notice of the commencement of any audit, examination or deficiency Litigation, with respect to any Taxes; (x) neither the Company nor any of its Subsidiaries has taken or agreed to take any action, or intends or plans to take any action or knows of any agreement, arrangement, plan or intention to take any action that is reasonably likely to prevent the (A) transactions contemplated by this Agreement from qualifying for the Tax Treatment or (B) tax opinions described in Sections 7.02(c) and 7.03(c) from being provided. (s) Proprietary Rights. The Company and its Subsidiaries have the right to use the names, service-marks, trademarks and other intellectual property necessary to carry on their business substantially as currently conducted and, to the knowledge of the Company, there are no infringements of or conflicts with the rights of others with respect to the use of such names, service-marks, trademarks, or other intellectual property in any state of the United States. (t) Investment Advisory Activities. (i) Each of the Investment Companies (or the trust of which it is a series) is duly organized and existing in good standing under the laws of the jurisdiction under which it is organized. Each of the Investment Companies (or the trust or corporation of which it is a series) that is registered or required to be registered under the Investment Company Act (each, a "Registered Fund") is governed by a board of trustees or directors (each a "Fund Board" and, collectively, the "Fund Boards") consisting of at least 50% of trustees or directors who are not "interested persons" (as defined in the Investment Company Act) of the Registered Funds or the Company. The Fund Boards operate in all material respects in conformity with the requirements and restrictions of Sections 10 and 16 of the Investment Company Act, to the extent applicable. (ii) Each of the Investment Companies is in compliance with all applicable United States federal, state and foreign laws, rules and regulations of the SEC, the CFTC, the IRS, and any Self-Regulatory Organization having jurisdiction over such Investment Company. (iii) Each Investment Company has been operated or managed in compliance with its respective objectives, policies and restrictions, including those set forth in the applicable prospectus and registration statement, if any, for that Investment Company. The Company and its Subsidiaries have operated their investment accounts in accordance with the investment objectives and guidelines in effect for such investment accounts. (iv) Neither the Company, nor, to the knowledge of the Company, any "affiliated person" (as defined in the Investment Company Act) of the Company, is ineligible pursuant to Section 9(a) or (b) of the Investment Company Act to serve as an investment advisor (or in any other capacity contemplated by the Investment Company Act) to a Registered Fund; neither the Company, nor, to the knowledge of the Company, any "associated person" (as defined in the Investment Advisers Act) of the Company is ineligible pursuant to Section 203 of the Investment Advisers Act to serve as an investment advisor or as an associated person to a registered investment advisor. 24 28 (u) Financial Opinion. The Company has received the oral opinion (to be subsequently confirmed in writing) of Goldman, Sachs & Co., on or prior to the date of this Agreement, to the effect that, as of the date of such opinion, the Consideration is fair from a financial point of view to holders of shares of Company Common Stock (other than Parent and its affiliates). (v) Certain Contracts. Except as set forth in the Company SEC Documents filed prior to the date hereof, neither the Company nor any of its Subsidiaries is a party to or bound by any non-competition agreement or any other agreement or obligation which purports to limit in any material respect the manner in which, or the localities in which, the business of the Company or its Subsidiaries is or would be conducted. (w) Derivatives. All swap, forward, future, option, or any other similar agreement or arrangement executed or arranged by the Company, whether entered into for the Company's account, or for the account of one or more of the Company's Subsidiaries or their customers, to the Company's knowledge, were entered into (i) in accordance with all applicable laws, rules, regulations and regulatory policies and (ii) with counterparties believed at the time to be financially responsible; and each of them constitutes the valid and legally binding obligation of the Company or any of its Subsidiaries, enforceable in accordance with its terms (subject to the Bankruptcy and Equity Exception), and are in full force and effect. Neither the Company nor any of its Subsidiaries nor, to the Company's knowledge, any other party thereto, is in breach of any of its obligations under any such agreement or arrangement. 5.04 Representations and Warranties of Parent and the Merger Subsidiary. Except as Previously Disclosed, Parent and the Merger Subsidiary hereby represent and warrant to the Company as follows: (a) Organization, Standing and Authority. Parent has been duly organized and is an existing Aktiengesellschaft under the laws of Switzerland and is in good standing under the laws of Switzerland. The Merger Subsidiary has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware. Each of Parent and the Merger Subsidiary is duly qualified to do business and is in good standing in the States of the United States and foreign jurisdiction (with respect to jurisdictions which recognize such concept) where its ownership or leasing of property or the conduct of its business requires it to be so qualified. Each of Parent and its Subsidiaries has in effect all United States Federal, state, local and foreign governmental authorizations necessary for it to own or lease its properties and assets and to carry on its business as it is now conducted. (b) Capital Stock. At May 31, 2000, Parent had issued and paid up share capital of 431,192,263 shares of capital stock, of which 1,053,082 shares were at the disposal of the Parent Board of Directors. In addition to the issued and paid up share capital, 758,807 shares of capital stock are unissued and are reserved for the Parent employee share ownership plan and optional dividend warrants. In the aggregate, these 431,951,070 shares represent the maximum amount of shares of capital stock that may be issued in the future without further approval from the stockholders of Parent. (c) Corporate Authority and Action. Parent and the Merger Subsidiary each has the requisite corporate power and authority, and has taken all corporate action necessary, in order to authorize the execution and delivery of, and performance of its obligations under, this Agreement and, subject only to obtaining the requisite authorization of an increase in the ordinary share capital of Parent by the affirmative vote of not less than two-thirds of all the Parent Shares represented at the Parent Shareholders Meeting (the "Parent Requisite Vote"), to consummate the Merger. This Agreement is a valid and binding agreement of Parent and the Merger Subsidiary, enforceable in accordance with its terms, subject to the Bankruptcy and Equity Exception. (d) Parent Shares. Subject only to obtaining the Parent Requisite Vote, the Parent Shares to be issued in the Merger, when issued in accordance with Section 3.01, will be duly and validly issued and fully paid up and subject to no preemptive rights. 25 29 (e) Governmental Filings; No Violations. Other than the filings and/or notices (i) pursuant to Section 2.02, (ii) under the HSR Act, the Exchange Act and the Securities Act, (iii) pursuant to the European Community Merger Control Regulation, (iv) required to be made pursuant to state insurance or banking regulations or with the Board of Governors of the Federal Reserve System, (v) required to be made with the NYSE, the Swiss Exchange and other Self-Regulatory Organizations and (vi) such other filings and/or notices set forth in Parent's Disclosure Schedule, no notices, reports, applications or other filings are required to be made by Parent or any of its Subsidiaries with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by any of them from, any Governmental Authority in connection with the execution and delivery of this Agreement by Parent and by the Merger Subsidiary and the consummation by Parent and the Merger Subsidiary of the Merger and the other transactions contemplated hereby. Subject to obtaining the Parent Requisite Vote, and the making or obtaining of all filings, notices, applications, consents, registrations, approvals, permits or authorizations with or of any relevant Governmental Authority with respect to the Merger and the other transactions contemplated hereby, the execution, delivery and performance of this Agreement, and the consummation of the Merger and other transactions contemplated hereby, does not and will not (A) constitute a breach or violation of, or a default under, or cause or allow the acceleration or creation of a Lien (with or without the giving of notice, passage of time or both) pursuant to, any law, rule or regulation or any judgment, decree, order, governmental or non-governmental permit or license, or any Contract of it or of any of its Subsidiaries or to which Parent or any of Parent's Subsidiaries or its or their properties is subject or bound, (B) constitute a breach or violation of, or a default under, the Constitutive Documents of Parent or any of its Subsidiaries, or (C) require any consent or approval under any such law, rule, regulation, judgment, decree, order, governmental permit or license, or the consent or approval of any other party to any such Contract. (f) Parent SEC Documents and Financial Statements. (i) Parent has timely filed or furnished all required reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated therein) under the federal Securities Laws required to be filed or furnished by it or any of its Subsidiaries with respect to periods since December 31, 1998 through the date of this Agreement (collectively, the "Parent SEC Documents") and will promptly provide each such registration statement, offering circular, report, definitive proxy statement or information statement filed, furnished or circulated after the date hereof, each in the form (including exhibits and any amendments thereto) filed with the SEC (or if not so filed, in the form used or circulated). As of their respective dates (and without giving effect to any amendments or modifications filed or furnished after the date of this Agreement), each of the SEC Documents, including the financial statements, exhibits and schedules thereto, filed, furnished or circulated prior to the date hereof complied (and each of the Parent SEC Documents filed, furnished or circulated after the date of this Agreement, will comply) as to form with applicable Securities Laws and did not (or in the case of reports, statements, or circulars filed, furnished or circulated after the date of this Agreement, will not) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (ii) Each of Parent's consolidated balance sheets included in or incorporated by reference into the Parent SEC Documents, including the related notes and schedules, fairly presented (or, in the case of Parent SEC Documents filed or furnished after the date of this Agreement, will fairly present) the consolidated financial position of Parent and its Subsidiaries as of the date of such balance sheet and each of the consolidated statements of income, cash flows and changes in equity included in or incorporated by reference into Parent SEC Documents, including any related notes and schedules (collectively, the foregoing financial statements and related notes and schedules are referred to as the "Parent Financial Statements"), fairly presented (or, in the case of Parent SEC Documents filed or furnished after the date of this Agreement, will fairly present) 26 30 the consolidated results of operations, cash flows and changes in equity, as the case may be, of Parent and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments), in each case in accordance with IAS consistently applied during the periods involved and, in the case of notes 42 and 43 to the consolidated financial statements of Parent included in the Annual Report on Form 20-F of Parent filed with the SEC on June 30, 2000, the information included presents fairly a reconciliation of the consolidated financial position and consolidated results of operations between IAS and GAAP consistently applied during the periods involved (except, in each case, as may be noted therein and except, in the case of unaudited statements, for the absence of notes). (g) Absence of Undisclosed Liabilities. Except as disclosed in the Parent Financial Statements or the Parent SEC Documents filed prior to the date hereof, none of Parent or its Subsidiaries has any obligation or liability (contingent or otherwise), that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on Parent. (h) Absence of Certain Changes or Events. Except as expressly contemplated by this Agreement or the transactions contemplated hereby and except as disclosed in the Parent SEC Documents filed prior to the date hereof, since December 31, 1999, Parent and its Subsidiaries have conducted their business only in the ordinary course, and there has not been any Material Adverse Effect on Parent or, to the knowledge of Parent, any development or combination of developments reasonably likely to have a Material Adverse Effect. (i) Litigation; Regulatory Action. Except as disclosed in the Parent SEC Documents filed before the date of this Agreement, no Litigation before any court, arbitrator, mediator or Governmental Authority is pending against or involves Parent or any of its Subsidiaries, and, to Parent"s knowledge, no such Litigation has been threatened. (j) Compliance with Laws. Each of Parent and its Subsidiaries: (i) in the conduct of business, including its sales and marketing practices, is in compliance with all applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, suitability requirements, orders or decrees applicable thereto or to the employees conducting such businesses (in their capacity as employees), and with the applicable rules of all Self-Regulatory Organizations to which it is subject; (ii) has all permits, licenses, authorizations, orders and approvals of, and has made or obtained all filings, notices, applications, consents, registrations, approvals, permits or authorizations with, to or of all Governmental Authorities that are required in order to permit it to own and operate its businesses as presently conducted; and all such permits, licenses, authorizations, orders and approvals are in full force and effect and, to Parent's knowledge, no suspension or cancellation of any of them is threatened or reasonably likely; and all such filings, applications and registrations are current; (iii) has received no written notification or written communication from any Governmental Authority (A) asserting that it is not in compliance with any of the statutes, rules, regulations, or ordinances which such Governmental Authority enforces, or has otherwise engaged in any unlawful business practice, (B) threatening to revoke any license, franchise, permit, seat on any stock or commodities exchange or governmental authorization, (C) requiring it (including any of its directors or controlling persons) to enter into any order, decree, agreement, memorandum of understanding or similar arrangement (or requiring the board of directors thereof to adopt any resolution or policy) or (D) restricting or disqualifying the activities of Parent or any of its Subsidiaries (except for restrictions generally imposed by rule, regulation or administrative policy on brokers, dealers or investment advisors generally); (iv) is not, nor is any Affiliate of it, subject to a "statutory disqualification" as defined in Section 3(a)(39) of the Exchange Act or is subject to a disqualification that would be a basis for censure, limitations on the activities, functions or operations of, or suspension or revocation of the 27 31 registration of any broker-dealer Subsidiary of Parent as a broker-dealer, municipal securities dealer, government securities broker or government securities dealer under Section 15, Section 15B or Section 15C of the Exchange Act; and (v) is not required to be registered as an investment company. (k) Investment Companies. Neither Parent nor, to the knowledge of Parent, any "affiliated person" (as defined in the Investment Company Act) thereof, is ineligible pursuant to Section 9(a) or (b) of the Investment Company Act to serve as an investment advisor (or in any other capacity contemplated by the Investment Company Act) to a Registered Fund; and neither Parent nor, to the knowledge of Parent, any "associated person" (as defined in the Investment Advisors Act) thereof, is ineligible pursuant to Section 203 of the Investment Advisors Act to serve as an investment advisor or as an associated person to a registered investment advisor. (l) Funds. At the Effective Time, Parent will have the funds necessary to consummate the Merger and pay the Consideration in accordance with the terms of this Agreement. (m) Interim Operations of the Merger Subsidiary. The Merger Subsidiary was formed solely for the purpose of engaging in the transactions contemplated hereby and has engaged in no business other than in connection with the transactions contemplated by this Agreement. The Merger Subsidiary is a wholly owned subsidiary of Parent. (n) Taxes. Parent and its Subsidiaries have paid, or made adequate provision for the payment of, all material Taxes, including material withholding Taxes, owed by Parent or its Subsidiaries. Neither Parent nor any of its Subsidiaries has taken or agreed to take any action, or intends or plans to take any action or knows of any agreement, arrangement, plan or intention to take any action that is reasonably likely to prevent the (x) transactions contemplated by this Agreement from qualifying for the Tax Treatment or (y) tax opinions described in Sections 7.02(c) and 7.03(c) from being provided. ARTICLE VI COVENANTS 6.01 Reasonable Best Efforts. (a) Subject to the terms and conditions of this Agreement, each of the Company, Parent and the Merger Subsidiary will use its reasonable best efforts in good faith to take, or cause to be taken (including causing any of its Subsidiaries to take), all actions, and to do, or cause to be done, all things necessary, proper or desirable, or advisable under applicable laws, so as to permit consummation of the Merger as promptly as practicable and otherwise to enable consummation of the transactions contemplated hereby and will cooperate fully with the other parties hereto to that end; and, in furtherance of the foregoing, the parties agree to use their respective reasonable best efforts to prevent the entry of any Restraints and to appeal as promptly as practicable any such Restraints that may be entered. (b) Without limiting the generality of Section 6.01(a), the Company will use its reasonable best efforts to obtain (i) any consents of Clients (including in the case of Registered Funds, the boards of directors or trustees and the stockholders of such Registered Funds) necessary under any Advisory Agreement or the Investment Company Act in connection with the deemed assignment of any such Advisory Agreement upon consummation of the Merger, and (ii) the consent or approval of all persons party to a Contract with the Company or any of its Subsidiaries, to the extent such consent or approval is required in order to consummate the Merger or for the Surviving Corporation to receive the benefits of such Contract; provided, that in no event shall the Company be deemed to have failed to satisfy the conditions set forth in Section 7.03(b) solely on the basis that any such consents or approvals have not been obtained as of the Closing Date. Nothing in this Section 6.01(b) shall be deemed to require the Company to waive any material rights or agree to any material limitation on its operations. 6.02 Registration Statement. (a) Each of the Company and Parent will cooperate with respect to and as promptly as practicable prepare, and Parent will file with the SEC as soon as practicable, a 28 32 Registration Statement on Form F-4 (the "Form F-4") under the Securities Act with respect to the issuance pursuant to this Agreement of Parent Shares, which Registration Statement will include the proxy statement/prospectus to be sent to the Company's Stockholders (the "Company Proxy Statement"). Parent and the Company will cause the Form F-4 to comply as to form in all material respects with the applicable provisions of the Securities Act and the rules and regulations thereunder. Each of the Company and Parent will use its respective reasonable best efforts to have the Form F-4 declared effective by the SEC as promptly as practicable after such filing. Parent will use its reasonable best efforts to obtain, prior to the effective date of the Form F-4, any necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement. Each of the Company and Parent shall use its reasonable best efforts to respond as promptly as practicable to any comments of the SEC with respect thereto and to cause the Company Proxy Statement to be mailed to the Company"s stockholders as promptly as practicable after the Form F-4 is declared effective under the Securities Act. Each of the Company and Parent shall furnish all information concerning it to the other as may be reasonably requested in connection with any such action and the preparation, filing and distribution of the Company Proxy Statement. Each of the Company and Parent shall promptly notify the other upon the receipt of any comments from the SEC or its staff or any request from the SEC or its staff for amendments or supplements to the Form F-4 or the Company Proxy Statement and shall provide the other with copies of all correspondence between it and its representatives, on the one hand, and the SEC and its staff, on the other hand. Notwithstanding the foregoing, prior to submitting the Form F-4 (or any amendment or supplement thereto) or filing or mailing the Company Proxy Statement (or any amendment or supplement thereto) or responding to any comments of the SEC with respect thereto, each of the Company and Parent, as the case may be, (i) shall provide the other party an opportunity to review and comment on such document or response and (ii) shall include in such document or response all comments reasonably proposed by such other party. (b) Each of the Company and Parent agrees, as to itself and its Subsidiaries, that none of the information supplied or to be supplied by it or its Subsidiaries for inclusion or incorporation by reference in the Form F-4, including the Company Proxy Statement and any amendment or supplement thereto will, at the time the Form F-4 becomes effective under the Securities Act, at the date of mailing to stockholders and at the time or times of the Company Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If at any time prior to the date of the Company Stockholders Meeting any information relating to the Company or Parent, or any of their respective Affiliates, officers, or directors, should be discovered by the Company or Parent which should be set forth in an amendment to the Form F-4 or a supplement to the Company Proxy Statement, so that such document would not include any misstatement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party that discovers such information shall promptly notify the other party and, to the extent required by law, an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by law, disseminated to the stockholders of the Company. 6.03 Parent Documents. (a) Parent will, with the reasonable assistance of the Company, as promptly as practicable following the date of this Agreement prepare a circular to be sent to Parent"s shareholders in connection with the Parent Shareholders Meeting (the "Parent Circular") and any document required by applicable law to be included therein or furnished therewith (together, the "Parent Documents"). Parent agrees, as to itself and its Subsidiaries, that the Parent Documents and any supplements thereto and any circulars or documents issued to shareholders of Parent, will contain all particulars relating to Parent required to comply in all material respects with any applicable statutory and other legal provisions. Each of the Company and Parent shall furnish all information concerning it to the other as may be reasonably requested in connection with any such action and the preparation and distribution of the Parent Documents. Notwithstanding the foregoing, prior to mailing the Parent Documents (or any amendment or supplement thereto), each of the Company and Parent, as the case 29 33 may be, (i) shall provide the other party an opportunity to review and comment on such document and (ii) shall include in such document all comments reasonably proposed by such other party. (b) Parent will use its reasonable best efforts to cause the definitive Parent Documents to be mailed to its shareholders as promptly as practicable after the preparation thereof and any applicable review or approval by any applicable Governmental Authority. 6.04 Stockholder Meetings. The Company will take all action necessary to convene a special meeting of the holders of the Company's Common Stock at which the holders of the Company's Common Stock will consider the adoption of this Agreement (including any adjournments or postponements thereof, the "Company Stockholders Meeting") as promptly as practicable after the Form F-4 has been declared effective by the SEC; provided, however, that, within the 10-day period immediately preceding the Company Stockholders Meeting, the Company may, in the event that an Acquisition Proposal is made within such 10-day period, postpone the Company Stockholders Meeting for a period not to exceed 14 days following the date on which such Acquisition Proposal was made. Parent will take all action necessary to convene an extraordinary general meeting of Parent"s shareholders at which a resolution will be proposed to consider the approval of the authorization of Parent Shares to be issued in the Merger and pursuant to Company Options and the Company Stock-Based Awards to be assumed in the Merger (the "Parent Shareholders Meeting") as promptly as practicable after the date hereof. Subject to the terms of this Agreement and subject to its fiduciary obligations under applicable law, the Board of Directors of the Company shall recommend to its stockholders, the adoption of this Agreement and shall use best reasonable efforts to solicit such authorization or adoption, as the case may be. In the event that subsequent to the date hereof, the Board of Directors of the Company determines that this Agreement is no longer advisable and either makes no recommendation or recommends that its stockholders reject this Agreement, the Company shall nevertheless submit this Agreement to the holders of the Company Common Stock for adoption at the Company Stockholders Meeting unless this Agreement shall have been terminated in accordance with its terms prior to the Company Stockholders Meeting. The Board of Directors of Parent agrees to recommend to its stockholders the authorization of the Parent Shares to be issued in the Merger; it being expressly understood that nothing contained in this Agreement shall prevent Parent's Board of Directors from making any disclosure to its stockholders if, in the good faith judgment of its Board of Directors, failure so to disclose would be inconsistent with its disclosure or other obligations under applicable law. 6.05 Publicity. The initial press release concerning the Merger and the other transactions contemplated by this Agreement shall be a joint press release in such form agreed to by the parties and thereafter the Company and Parent each shall consult with the other and provide each other the opportunity to review, comment upon and use reasonable best efforts to agree on, any press release or other public announcements with respect to the Merger and the other transactions contemplated by this Agreement prior to issuing any press releases or otherwise making public announcements with respect to the Merger and the other transactions contemplated by this Agreement and neither party shall issue any press release or otherwise make any public announcements with respect thereto without the other's prior consent, except as may be required by law or court process or by obligations pursuant to any listing agreement with or rules of any applicable securities exchange. 6.06 Access; Information. (a) The Company will, upon reasonable notice and subject to applicable laws relating to the exchange of information, afford Parent and its authorized Representatives, reasonable access during normal business hours throughout the period prior to the Effective Time or the termination of this Agreement to the books, records (including tax returns and work papers of independent auditors), properties, personnel and such other information as Parent may reasonably request and, during such period, it shall furnish promptly to such other party (i) a copy of each material report, schedule and other document filed by it pursuant to the requirements of the Securities Laws, and (ii) all other information concerning the business, properties and personnel of it as the other party may reasonably request. 30 34 (b) Parent will, upon reasonable notice and subject to applicable laws relating to the exchange of information, afford the Company and its authorized Representatives, reasonable access during normal business hours throughout the period prior to the Effective Time or the termination of this Agreement to the books, records (including tax returns and work papers of independent auditors), properties, personnel and to such other information as the Company may reasonably request and, during such period, it shall furnish promptly to such other party (i) a copy of each material report, schedule and other document filed by it pursuant to the requirements of Securities Laws, and (ii) all other information concerning the business, properties and personnel of it as the other party may reasonably request. (c) Each of Parent and the Company confirm that any information obtained pursuant to this Section 6.06 will be subject to the terms of the letter agreement, dated June 30, 2000 (as it may be amended from time to time, the "Confidentiality Agreement"), between Parent and the Company. (d) No investigation by a party of the business and affairs of the other shall affect or be deemed to modify or waive any representation, warranty, covenant or agreement in this Agreement or the conditions to consummation of the Merger contained in Article VII. (e) As soon as practicable after the date of this Agreement, Parent will deliver to the Company an information request list requesting information regarding the Subsidiaries of the Company reasonably necessary in connection with seeking regulatory notice and approvals required in connection with the transactions contemplated by this Agreement and the Company shall use its reasonable best efforts to provide within 20 days of such delivery the requested information based on information within the Company"s possession. 6.07 Acquisition Proposals. (a) The Company will not, and will cause its officers, directors, agents, advisors and Affiliates not to, solicit or encourage inquiries or proposals with respect to, or engage in any negotiations concerning, or provide any confidential information to, or have any discussions with, any person relating to, any Acquisition Proposal, other than the transactions contemplated by this Agreement; provided, that nothing contained in this Agreement shall prevent the Company or its Board of Directors from (i) making any disclosure to its stockholders if, in the good faith judgment of its Board of Directors, failure so to disclose would be inconsistent with its obligations under applicable law; (ii) providing (or authorizing the provision of) information to, or engaging in (or authorizing) such discussions or negotiations with, any person who has made a bona fide written Acquisition Proposal received after the date hereof which did not result from a breach of this Section 6.07; (iii) recommending such an Acquisition Proposal to its stockholders (and in connection therewith withdrawing its favorable recommendation to stockholders of this Agreement), if and only to the extent that, (x) in the case of actions referred to in clause (ii), the Company's Board of Directors determines in good faith that such Acquisition Proposal has a reasonable probability of resulting in a Superior Proposal or, in the case of actions referred to in clause (iii), is a Superior Proposal, (y) in the case of actions referred to in each of clauses (ii) and (iii), the Company's Board of Directors, after having consulted with and considered the advice of outside counsel to such Board, determines in good faith that providing such information or engaging in such negotiations or discussions, or making such recommendation, is required in order to discharge the directors' fiduciary duties in accordance with Delaware law and (z) the Company receives from such person a confidentiality agreement substantially in the form of the Confidentiality Agreement (which shall not preclude the making of any Acquisition Proposal); or (iv) withdrawing its favorable recommendation to stockholders of this Agreement or the Merger if, in the good faith judgment of its Board of Directors, such action would be required in order to discharge its obligations under applicable law. For purposes of this Agreement, a "Superior Proposal" means any Acquisition Proposal by a third party on terms which the Company's Board of Directors determines in its good faith judgment, after consultation with its financial advisors, to be more favorable to stockholders than the Merger and the other transactions contemplated hereby, after taking into account the likelihood of consummation of such transaction on the terms set forth therein, taking into account all legal, financial (including the financing terms of any such proposal), regulatory and other aspects of such proposal and any other relevant factors permitted under applicable law, after giving Parent at least five Business Days to respond to such third-party Superior Proposal once the Board has notified Parent that in the absence of any further action by 31 35 Parent it would consider such Acquisition Proposal to be a Superior Proposal, and then taking into account any amendment or modification to this Agreement proposed by Parent. The Company also agrees immediately to cease and cause to be terminated any activities, discussions or negotiations conducted prior to the date of this Agreement with any parties other than Parent, with respect to any of the foregoing. The Company shall promptly (within 24 hours) advise Parent following the receipt by it of any Acquisition Proposal and the material terms thereof (including the identity of the person making such Acquisition Proposal), and advise Parent of any developments (including any change in such terms) with respect to such Acquisition Proposal promptly upon the occurrence thereof. (b) Nothing contained in this Section 6.07 or any other provision of this Agreement will prohibit the Company or the Company's Board of Directors from notifying any third party that contacts the Company on an unsolicited basis after the date hereof concerning an Acquisition Proposal of the Company's obligations under this Section 6.07. 6.08 Regulatory Applications; Consents. (a) The Company, Parent, and their respective Subsidiaries shall cooperate and use their respective reasonable best efforts to prepare all documentation, to effect all filings, notices, applications, consents, registrations, approvals, permits or authorizations with, to, or of all third parties and Governmental Authorities necessary to consummate the transactions contemplated by this Agreement as promptly as reasonably practicable. Each of the Company and Parent shall have the right to review in advance, and to the extent practicable each will consult with the other, in each case subject to applicable laws relating to the exchange of information, with respect to all material written information submitted to any third party or any Governmental Authority in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the Company and Parent agrees to act reasonably and as promptly as practicable. Each of the Company and Parent agrees that it will consult with the other party hereto with respect to the obtaining of all material consents, registrations, approvals, permits and authorizations of all third parties and Governmental Authorities necessary to consummate the transactions contemplated by this Agreement and each party will keep the other party apprised of the status of material matters relating to completion of the transactions contemplated hereby. (b) Subject to applicable laws governing the exchange of information, each of the Company and Parent will, upon request, furnish the other party with all information concerning itself, its Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with any filing, notice or application made by or on behalf of such other party or any of its Subsidiaries to any third party or Governmental Authority. (c) The Company will cooperate with Parent to ensure that, to the extent reasonably practicable, on the Closing Date the activities and assets of the Company and its Subsidiaries are permitted to be conducted or held by Parent (as a foreign bank qualified as a financial holding company) and its Subsidiaries under the Bank Holding Company Act of 1956, as amended. Nothing in this Section 6.08(c) shall be deemed to require the Company to waive any material rights or agree to any material limitations on its operations or to dispose of any material asset or collection of assets prior to the Closing Date. 6.09 Employee Matters. (a) Parent will honor and will cause the Surviving Corporation to honor, in accordance with their respective terms the Company Compensation and Benefit Plans and all of the Company's other employee benefit, compensation, employment, severance and termination plans, programs, policies, and arrangements, including any rights or benefits arising as a result of the transactions contemplated by this Agreement (either alone or in combination with any other event). (b) Parent agrees that during the period commencing at the Effective Time and ending on the later of December 31, 2001 and the first anniversary of the Effective Time, the Employees will continue to be provided with benefits under employee benefit plans, programs, policies or arrangements (other than stock options or other plans involving the issuance of securities of the Company or Parent) which in the aggregate are no less favorable than those provided by the Company to such Employees immediately prior to the Effective Time. 32 36 (c) For all purposes (including, without limitation, eligibility, vesting, and benefit accrual) under the employee benefit plans of Parent and its Subsidiaries (including the Surviving Corporation) providing benefits to any Employees after the Effective Time, each Employee shall be credited with his or her years of service with the Company and its Subsidiaries (and any predecessor entities thereof) before the Effective Time, to the same extent as such Employee was entitled, before the Effective Time, to credit for such service under any similar Company Compensation and Benefit Plan, except for purposes of benefit accrual under defined benefit pension plans. Following the Effective Time, Parent shall, or shall cause its Subsidiaries to, (i) waive any pre-existing condition limitation under any welfare benefit plan maintained by Parent or any of its Subsidiaries in which Employees and their eligible dependents participate (except to the extent that such pre-existing condition limitation would have been applicable under the comparable Company welfare benefit plans immediately prior to the Effective Time), and (ii) provide each Employee with credit for any co-payments and deductibles incurred prior to the Effective Time (or such earlier or later transition date to new welfare benefits plans) for the calendar year in which the Effective Time (or such earlier or later transition date) occurs, in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that the Employees participate in after the Effective Time. (d) Notwithstanding anything to the contrary contained herein, Parent and its Subsidiaries (including the Surviving Corporation) shall provide severance compensation benefits to Employees who are Involuntarily Terminated during the six-month period following the Effective Time in amounts determined in accordance with the terms set forth on Section 6.09(d) of the Company"s Disclosure Schedule, and otherwise payable in accordance with Parent's severance plan as in effect as of the date of this Agreement as Previously Disclosed to the Company (the "Parent Severance Plan"). For the avoidance of doubt, Employees who are Involuntarily Terminated during the six-month period following the Effective Time shall be deemed to meet all eligibility requirements to receive severance benefits pursuant to the Parent Severance Plan. (e) As soon as practicable following the date of this Agreement, the Company shall offer to enter into retention bonus and pay guarantee agreements with key employees of the Company, as determined and approved by Parent in consultation with the Company. In no event shall any amount be payable under any such agreement prior to the Effective Time. Parent hereby agrees that the aggregate amount of retention bonuses subject to such agreements (including retention award payments paid consistent with the terms of the employment agreements to be entered into promptly following the date of this Agreement as contemplated by Section 6.09(g)) will be $875 million. (f) Notwithstanding anything in this Agreement to the contrary, until the Effective Time, the Company shall be permitted to continue to accrue its annual bonuses for Employees in respect of the portion of the Company's 2000 fiscal year elapsed through the Effective Time (the "Year 2000 Bonuses") in accordance with past practice, and shall be permitted to allocate such Year 2000 Bonuses to Employees consistent with past practice. All determinations and allocations in respect of the Year 2000 Bonuses shall be made in accordance with the foregoing by Company management as constituted prior to the Effective Time. The Company may make such determinations at an earlier time in the calendar year (after the date of this Agreement) than is the usual practice of the Company, and may communicate information in respect of the Year 2000 Bonuses to Employees at any time through the Effective Time as it may determine advisable or appropriate in its sole discretion after consultation with Parent. The Year 2000 Bonuses as determined in accordance with the foregoing shall be paid in cash to Employees no later than February 9, 2001. An Employee must be employed with the Company and its Subsidiaries on the payment date to be eligible to receive his or her Year 2000 Bonus; provided, that any Employee who is Involuntarily Terminated prior to the date on which he or she would have received the Year 2000 Bonus shall receive his or her Year 2000 Bonus on the date that the Year 2000 Bonuses are paid generally by the Company and its Subsidiaries to Employees. Parent shall cause the Year 2000 Bonuses to be paid in accordance with the foregoing. In addition, during the period from the Effective Time through December 31, 2000 (the "Stub Period"), Parent shall cause the Surviving Corporation to accrue bonuses for Employees in respect of the Stub Period (the "Stub Period Bonuses") consistent with the Company's past practice and allocate and communicate such Stub Period Bonuses to Employees consistent with the 33 37 Company's past practice. Parent shall cause the Stub Period Bonuses to be paid in accordance with the foregoing no later than February 9, 2001. (g) Promptly following the date of this Agreement, Parent and the Company shall prepare and enter into employment agreements with certain key executives of the Company consistent with the term sheets attached as Section 6.09(g) of the Company's Disclosure Schedule. (h) The Company shall be permitted to establish a leveraged employee partnership in respect of calendar year 2000 in addition to any such partnership established on or prior to the date of this Agreement consistent with past employee partnership investment opportunities made available by the Company to key employees. (i) Prior to the Effective Time, Parent and the Company shall take all such reasonable steps as may be required to cause any dispositions of Company Common Stock (including derivative securities with respect to Company Common Stock) or acquisitions of Parent Shares (including derivative securities with respect to Parent Shares) resulting from the transactions contemplated by this Agreement by each individual who is subject to the reporting requirements of Section 16(a) of the Exchange Act to be exempt under Rule 16b-3 promulgated under the Exchange Act. 6.10 Notification of Certain Matters. (a) The Company shall give prompt notice to Parent, and Parent or the Merger Subsidiary shall give prompt notice to the Company, of any fact, event or circumstance known to it that is reasonably likely, individually or taken together with all other facts, events and circumstances known to it, to result in a breach of any of its representations, warranties, covenants or agreements contained herein such that any of the conditions set forth in Article VII would not be satisfied. (b) The Company will promptly notify Parent, and Parent will promptly notify the Company, of: (i) any notice or other communication from any person alleging that any material consent of such person is or may be required as a condition to consummation of the Merger; or (ii) any material notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement. 6.11 Indemnification; Directors' and Officers' Insurance. From and after the Effective Time, Parent will indemnify and hold harmless each present and former director and officer of the Company or any of its Subsidiaries, determined as of immediately prior to the Effective Time (the "Indemnified Parties"), against any and all costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") arising from, relating to or otherwise in respect of, any actual or threatened claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time (including with respect to the transactions contemplated by this Agreement), to the fullest extent permitted under applicable law; provided that Parent shall not be required to indemnify any Indemnified Party pursuant to this Section 6.11 if it is determined that the Indemnified Party acted in bad faith and not in a manner such Indemnified Party believed to be in or not opposed to the best interests of the Company. Parent shall, and shall cause the Surviving Corporation to, advance expenses as incurred to the fullest extent permitted under applicable law provided the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification). (b) Any Indemnified Party wishing to claim indemnification under Section 6.11(a), upon learning of any such claim, action, suit, proceeding or investigation, must promptly notify Parent thereof, but the failure to so notify shall not relieve Parent of any liability it may have to such Indemnified Party to the extent such failure does not materially prejudice Parent. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), after the Effective Time (i) Parent or the Surviving Corporation shall have the right to assume the defense thereof and Parent shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if 34 38 Parent or the Surviving Corporation elects not to assume such defense or counsel for the Indemnified Parties advises that there are issues which raise conflicts of interest between Parent or the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and Parent or the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that Parent shall be obligated pursuant to this Section 6.11 to pay for only one firm of counsel (unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest) for all Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) Parent shall not be liable for any settlement effected without its prior written consent; and provided, further, that Parent shall not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. (c) For a period of six years from the Effective Time, Parent will provide director's and officer's liability insurance that serves to reimburse the present and former officers and directors of the Company or any of the Company's Subsidiaries (determined as of the Effective Time) with respect to claims against such directors and officers arising from facts or events which occurred before the Effective Time, which insurance shall contain at least the same coverage and amounts, and contain terms and conditions no less advantageous in any material respect, as that coverage currently provided by the Company; provided, however, that in no event shall Parent be required to expend per annum more than 200 percent of the current aggregate annual amount expended by the Company (such amount, the "Insurance Amount") to maintain or procure such directors and officers insurance coverage; provided, further, that if Parent is unable to maintain or obtain the insurance called for by this Section 6.11(c), Parent shall use its reasonable best efforts to obtain as much comparable insurance as is available for the Insurance Amount; provided, further, that officers and directors of the Company or any Company Subsidiary may be required to make application and provide customary representations and warranties to Parent's insurance carrier for the purpose of obtaining such insurance. (d) If Parent or any of its successors or assigns shall consolidate with or merge into any other entity and shall not be the continuing or surviving entity, then and in each case, proper provision shall be made so that successors and assigns of Parent shall assume the obligations set forth in this Section 6.11. (e) The provisions of this Section 6.11 are intended to be for the benefit of, and enforceable in accordance with their terms by, the Indemnified Parties. 6.12 Stock Exchange Approvals. Parent shall promptly prepare and submit to the NYSE a listing application and to the Swiss Exchange a prospectus, in each case with respect to the Parent Shares issuable in the Merger and pursuant to Company Options and the Company Stock-Based Awards to be assumed in the Merger, and shall use its reasonable best efforts to obtain, prior to the Effective Time, approval for the listings of such Parent Shares, in the case of the NYSE, subject to official notice of issuance. 6.13 Dividends. The Company shall coordinate with Parent the declaration, setting of record dates and payment dates of dividends on shares of Company Common Stock so that holders of shares of Company Common Stock do not receive dividends on both shares of Company Common Stock and Parent Shares received in the Merger in respect of any calendar quarter or fail to receive a dividend on either shares of Company Common Stock or Parent Shares received in the Merger in respect of any calendar quarter. 6.14 Section 15 of the Investment Company Act. The Company will use its reasonable best efforts to obtain as promptly as practicable, (a) if required by the terms of the advisory agreement with any Registered Fund, the approval of the stockholders of each such Registered Fund, pursuant to the provisions of Section 15 of the Investment Company Act applicable thereto, of a new investment company advisory agreement for such Registered Fund with the applicable Subsidiary of the Company no less favorable to the Company or its Subsidiaries to that in effect immediately prior to the Closing, and (b) a 35 39 consent to assignment from each other Client to whom it or any of its Subsidiaries is providing investment advisory services; provided that in no event shall the Company be deemed to have failed to satisfy the condition set forth in Section 7.03(b) solely on the basis that any such approvals or consents have not been obtained as of the Closing Date. 6.15 Affiliates. Prior to the Effective Time, the Company shall deliver to Parent a list of names and addresses of those Persons who are, in the opinion of the Company, as of the time of the Company Stockholders Meeting, "affiliates" of the Company within the meaning of Rule 145 under the Securities Act. There shall be added to such list the names and addresses of any other Person subsequently identified by either the Company or Parent as a Person who may be deemed to be such an affiliate of the Company; provided, however, that no such Person identified by Parent shall be added to the list of affiliates of the Company if Parent shall receive from the Company, on or before the date of the Company Stockholders Meeting, an opinion of counsel reasonably satisfactory to Parent to the effect that such person is not such an affiliate. The Company shall exercise its reasonable best efforts to deliver or cause to be delivered to Parent, prior to the Closing Date, from each affiliate of the Company identified in the foregoing list (as the same may be supplemented as aforesaid) (a "Company Affiliate") who makes or proposes to make an Election to receive Parent Shares, a letter dated as of the Closing Date substantially in the form attached as Exhibit D (an "Affiliate's Letter"). Parent shall not be required to maintain the effectiveness of the Form F-4 or any other registration statement under the Securities Act for the purposes of resale of Parent Shares by such Company Affiliates received in the Merger and the certificates representing Parent Shares received by such Company Affiliates shall bear a customary legend regarding applicable Securities Act restrictions and the provisions of this Section 6.15. 6.16 Letters of Accountants. (a) The Company shall use its reasonable best efforts to cause to be delivered to Parent two "comfort" letters of Ernst & Young, LLP, the Company's independent public accountants, one dated a date within two Business Days before the effective date of the Form F-4 and one dated a date within two Business Days before the Closing Date, respectively, and addressed to Parent and its directors, in form and substance reasonably satisfactory to Parent and customary in scope and substance for "comfort" letters delivered by independent public accountants in connection with registration statements similar to the Form F-4. (b) Parent shall use its best reasonable efforts to cause to be delivered to the Company two "comfort" letters of ATAG Ernst & Young Ltd., Parent's independent public accountants, one dated a date within two Business Days before the effective date of the Form F-4 and one dated a date within two Business Days before the Closing Date, respectively, and addressed to the Company and its directors, in form and substance reasonably satisfactory to the Company and customary in scope and substance for "comfort" letters delivered by independent public accountants in connection with registration statements similar to the Form F-4. 6.17 GE Stockholders Agreement. The parties hereto agree that as of the Effective Time the GE Stockholders Agreement shall forthwith become void and have no effect. 6.18 ERISA Clients. As soon as reasonably practicable after the date hereof, but in no event later than 60 days thereafter, the Company shall deliver to Parent a schedule identifying each Client that is (i) an employee benefit plan, as defined in Section 3(3) of ERISA, that is subject to Title I of ERISA; (ii) a person acting on behalf of such a plan; or (iii) an entity whose assets include the assets of such a plan, within the meaning of ERISA and applicable regulations (hereinafter referred to as an "ERISA Client"); and listing each contract or agreement, if any, and all amendments thereto, in effect on the date hereof, entered into by the Company or any of its Subsidiaries with respect to or on behalf of any ERISA Client, pursuant to which any of the entities identified in Exhibit E (including any entity that, to the knowledge of the Company, is an affiliate of any of the entities identified in Exhibit E) has agreed to (x) execute securities transactions; (y) provide any other goods or services; or (z) purchase, sell, exchange or swap securities or any other economic interest therein or derivative thereof, including rights to receive 36 40 or obligations to pay interest or principal under any debt obligation, or rights to receive or obligations to pay interest or principal denominated in a particular currency. 6.19 GE Amendment and Yasuda Amendment. The Company agrees not to amend, modify or waive any provision of the GE Amendment or the Yasuda Amendment and to comply in all respects with the terms thereof. 6.20 Tax Matters. Parent shall timely satisfy, or cause to be timely satisfied, all applicable Tax reporting and filing requirements contained in the Code with respect to the transactions contemplated hereby including, without limitation, the reporting requirements of United States Treasury Regulation Section 1.367(a)-3(c)(6) with respect to the Company. ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER 7.01 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each of Parent, the Merger Subsidiary and the Company to consummate the Merger is subject to the fulfillment or written waiver by Parent and the Company prior to the Closing of each of the following conditions: (a) Stockholder Approvals. (i) This Agreement shall have been duly adopted by the stockholders of the Company by the Requisite Company Vote. (ii) The shareholders of Parent shall have approved the authorization of the Parent Shares to be issued in the Merger and pursuant to Company Options and the Company Stock-Based Awards to be assumed in the Merger by the Parent Requisite Vote. (b) Governmental and Regulatory Consents. All approvals, consents and authorizations of, filings and registrations with, and applications and notifications to all Governmental Authorities required for the consummation of the Merger shall have been obtained or made and shall be in full force and effect and all waiting periods required by law shall have expired other than those the failure of which to have been obtained or made or to have expired would not reasonably be expected to have a detrimental impact on relations with Governmental Authorities; provided, however, that none of the preceding shall be deemed obtained or made if it shall be subject to any condition or restriction the effect of which, together with any other such conditions or restrictions, would be reasonably likely to have a Material Adverse Effect on the Surviving Corporation or Parent after the Effective Time. (c) No Injunction. No Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) (collectively, "Restraints") which is in effect and restrains, enjoins or otherwise prohibits consummation of the Merger or the other transactions contemplated by this Agreement. (d) Effectiveness of Form F-4. The Form F-4 shall have become effective under the Securities Act prior to the mailing of the Company Proxy Statement to its stockholders; no stop order suspending the effectiveness of the Form F-4 shall then be in effect; and no proceedings for that purpose shall have been initiated by the SEC and not concluded or withdrawn. (e) Exchange Listings. The Swiss Exchange shall have granted permission for the listing of the Parent Shares to be issued in the Merger and pursuant to the Company Options and the Company Stock-Based Awards to be assumed in the Merger, and such permission shall not have been withdrawn prior to the Effective Time, and the NYSE shall have authorized the Parent Shares to be issued in the Merger and pursuant to the Company Options and the Company Stock-Based Awards to be assumed in the Merger for listing on the NYSE, subject to official notice of issuance. 37 41 7.02 Conditions to Obligation of the Company. The obligation of the Company to consummate the Merger is also subject to the fulfillment or written waiver by the Company prior to the Closing of each of the following conditions: (a) Representations and Warranties. The representations and warranties of Parent set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except that representations and warranties that by their terms speak as of the date of this Agreement or some other date shall be true and correct only as of such date); and the Company shall have received a certificate, dated the Closing Date, signed on behalf of Parent by a senior executive officer to such effect. (b) Performance of Obligations of Parent. Parent and the Merger Subsidiary shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate, dated the Closing Date, signed on behalf of Parent by a senior executive officer to such effect. (c) Tax Opinion. The Company shall have received the opinion of Cravath, Swaine & Moore, counsel to the Company, dated the Closing Date, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, the transactions contemplated by this Agreement will qualify for the Tax Treatment. In connection with such opinion, Cravath, Swaine & Moore may request and rely upon representations contained in certificates of officers of the Company and Parent substantially in the form set forth in Exhibits F and G. 7.03 Conditions to Obligation of Parent. The obligation of each of Parent and the Merger Subsidiary to consummate the Merger is also subject to the fulfillment or written waiver by Parent prior to the Closing of each of the following conditions: (a) Representations and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except that representations and warranties that by their terms speak as of the date of this Agreement or some other date shall be true and correct only as of such date); and Parent shall have received a certificate, dated the Closing Date, signed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company to such effect. (b) Performance of Obligations of the Company. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate, dated the Closing Date, signed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company to such effect. (c) Tax Opinion. Parent shall have received the opinion of Sullivan & Cromwell, counsel to Parent, dated the Closing Date, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, (i) the Merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code and the rules and regulations thereunder and (ii) Parent, the Merger Subsidiary and the Company will each be a "party" to such reorganization within the meaning of Section 368(b) of the Code and the rules and regulations thereunder. In connection with such opinion, Sullivan & Cromwell may request and rely upon representations contained in certificates of officers of the Company and Parent substantially in the form set forth in Exhibits F and G. 38 42 ARTICLE VIII TERMINATION 8.01 Termination. This Agreement may be terminated, and the Merger may be abandoned at any time prior to the Effective Time: (a) Mutual Consent. By the mutual consent of Parent, the Merger Subsidiary and the Company. (b) Breach. By Parent and the Merger Subsidiary, on the one hand, or the Company, on the other hand, in the event of either: (i) a breach by the other party of any representation or warranty contained herein, which breach cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of such breach; or (ii) a breach by the other party of any of the covenants or agreements contained herein, which breach cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of such breach and, in each case (i) and (ii), which breach, individually or in the aggregate with other such breaches, would cause the conditions set forth in Section 7.03(a) or (b), in the case of a breach by the Company, and Section 7.02(a) or (b), in the case of a breach by Parent or the Merger Subsidiary, not to be satisfied or is reasonably likely to prevent, materially delay or materially impair the ability of the Company, the Merger Subsidiary or Parent to consummate the Merger and the other transactions contemplated by this Agreement. (c) Delay. By Parent or the Company in the event that the Effective Time has failed to occur on or before December 31, 2000, except to the extent that such failure arises out of or results from the knowing action or inaction of the party seeking to terminate pursuant to this Section 8.01(c) and provided, further that either party may elect to extend the term of the Agreement until not later than March 31, 2001 if any applicable banking or insurance regulatory approvals required to be obtained to satisfy the condition set forth in Section 7.01(b) shall not have been obtained by December 31, 2000. (d) No Regulatory Approval. By Parent or the Company, if the approval of any Governmental Authority required for consummation of the Merger and the other transactions contemplated by this Agreement shall have been denied by final nonappealable action of such Governmental Authority, or such Governmental Authority shall have requested the permanent withdrawal of any application therefor, or any such approval shall be made subject to any condition or restriction described in the proviso to Section 7.01(b). (e) No Stockholder Approval. By Parent or the Company, if (i) the Requisite Company Vote is not obtained upon a vote at a duly held meeting to obtain the Requisite Company Vote, or (ii) the Parent Requisite Vote is not obtained upon a vote at a duly held meeting to obtain the Parent Requisite Vote. (f) Failure to Recommend, Etc. By Parent, if at any time prior to the Company Stockholders Meeting, the Company's Board of Directors shall have failed to make its recommendation referred to in Section 6.04, withdrawn such recommendation or modified or changed such recommendation in a manner adverse to the interests of Parent. (g) Acquisition Proposal. By Parent, if the Company or its Board of Directors shall take any of the actions described in clause (iii) of the proviso to Section 6.07(a). 8.02 Effect of Termination and Abandonment. In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article VIII, no party to this Agreement shall have any liability or further obligation to any other party hereunder except (a) as set forth in Sections 8.03 and 9.01 and (b) that termination will not relieve a breaching party from liability for any knowing breach of this Agreement. 39 43 8.03 Termination Fee. The Company agrees to pay to Parent a cash fee of $370,000,000: (i) if this Agreement is terminated by either Parent or the Company pursuant to Section 8.01(c) or 8.01(e)(i) and, prior to the time of such termination, in the case of Section 8.01(c), or prior to the time of the vote at a duly held meeting to obtain the Requisite Company Vote, in the case of Section 8.01(e)(i), an Acquisition Proposal shall have been made to the Company or its stockholders or shall have been made publicly known, and concurrently with such termination or within fifteen months after such termination, either (x) the Company shall have entered into an agreement to engage in an Acquisition Transaction or an Acquisition Transaction shall have occurred, or (y) the Board of Directors of the Company shall have authorized, recommended or approved an Acquisition Transaction or shall have publicly announced an intention to authorize, recommend or approve an Acquisition Transaction; or (ii) if this Agreement is terminated by Parent pursuant to Section 8.01(g) (any of the events set forth in clause (i) or (ii) above of this Section 8.03(a), a "Fee Trigger Event"). (b) If this Agreement is terminated by Parent pursuant to Section 8.01(f), then (i) the Company shall pay to Parent $125,000,000 and (ii) if concurrently with such termination or within fifteen months after such termination any of the events referred to in clause (x) or (y) of Section 8.03(a)(i) occurs, then the Company shall, in addition to the payment under clause (i) above, pay to Parent $245,000,000. (c) Any payment required to be made under paragraphs (a) or (b) above shall be payable, without setoff, by wire transfer in immediately available funds, to an account specified by Parent not later than (i) in the case of a payment as a result of any event referred to in Section 8.03(a)(i)(x) or (y) or 8.03(b)(ii), upon the first to occur of such events or (ii) in the case of a termination for any event referred to in Section 8.03(a)(ii) or 8.03(b)(i), within three Business Days following such termination. Notwithstanding anything in this Agreement to the contrary, in no event shall the amounts payable under this Section 8.03 exceed $370,000,000 in the aggregate. (d) The Company acknowledges that the agreements contained in this Section 8.03 are an integral part of the transactions contemplated by this Agreement and that, without these agreements, Parent would not enter into this Agreement; accordingly, if the Company fails promptly to pay any amount due pursuant to this Section 8.03, and, in order to obtain such payment, Parent commences a suit which results in a judgment against the Company for the payment set forth in this Section 8.03, the Company shall pay to Parent its costs and expenses (including attorneys' fees) in connection with such suit, together with interest on any amount due pursuant to this Section 8.03 from the date such amount became payable until the date of such payment at the prime rate of Citibank N.A. in effect on the date such payment was required to be made plus two (2) percent. ARTICLE IX MISCELLANEOUS 9.01 Survival. No representations, warranties, agreements and covenants contained in this Agreement shall survive the Effective Time or termination of this Agreement; provided, however, that (a) the agreements of the parties contained in Article III, Section 6.06(c) and in this Article IX shall survive the Effective Time and (b) the agreements of the parties contained in Sections 8.02 and 8.03 and in this Article IX shall survive the termination of this Agreement. 9.02 Waiver; Amendment. Prior to the Effective Time, any provision of this Agreement may be (a) waived by the party benefitted by the provision in a writing signed by such party, or (b) amended or modified at any time, by an agreement in writing between the parties hereto and executed in the same manner as this Agreement, except that, after adoption of this Agreement by the stockholders of the 40 44 Company, no amendment may be made which under applicable law would require further approval of such stockholders without obtaining such required further approval. 9.03 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to constitute an original. 9.04 Governing Law and Venue. This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Delaware. The parties hereby irrevocably submit to the jurisdiction of the Federal courts of the United States of America and the state courts of the State of Delaware, in each case located in the State of Delaware, solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or thereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a Delaware Federal or state court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of such dispute. 9.05 Expenses. Whether or not the Merger is consummated, each party hereto will bear all expenses incurred by it in connection with this Agreement, and the transactions contemplated hereby, except that each of the Company and Parent shall each bear one-half of the costs and expenses of filing, printing and distributing the Form F-4, the Company Proxy Statement, the Parent Documents and related documents. 9.06 Notices. All notices, requests and other communications hereunder to a party shall be in writing and shall be deemed given (a) on the date of delivery, if personally delivered or telecopied (with confirmation), (b) on the first business day following the date of dispatch, if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing, if mailed by registered or certified mail (return receipt requested), in each case to such party at its address or telecopy number set forth below or such other address or numbers as such party may specify by notice to the parties hereto. If to the Company, to: Paine Webber Group Inc. 1285 Avenue of the Americas New York, NY 10019 Attention: Regina A. Dolan Senior Vice President and Chief Administrative Officer Facsimile: (212) 713-6048 With a copy to: Peter S. Wilson, Esq. Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, New York 10019 Facsimile: (212) 474-3700 41 45 If to Parent or the Merger Subsidiary, to: UBS AG Bahnhofstrasse 45 Zurich, Switzerland Attention: Luqman Arnold Facsimile: 41-1-234-3700 With a copy to: H. Rodgin Cohen, Esq. James C. Morphy, Esq. Sullivan & Cromwell 125 Broad Street New York, New York 10004 Facsimile: (212) 558-3588 9.07 Entire Understanding; No Third-Party Beneficiaries. This Agreement and the Confidentiality Agreement and the documents referred to herein and therein represent the entire understanding of the parties hereto with reference to the transactions contemplated hereby and thereby and such agreements supersede any and all other oral or written agreements heretofore made. Except for Section 6.11, insofar as such Section expressly provides certain rights to the Indemnified Parties named therein, nothing in this Agreement, expressed or implied, is intended to confer upon any person, other than the parties hereto or their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.08 Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 9.09 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or delegated, in whole or in part (except by operation of law), by any of the parties hereto without the prior written consent of each other party hereto, except that Parent and the Merger Subsidiary may assign or delegate in their sole discretion any or all of their rights, interests or obligations under this Agreement to any, direct or indirect, wholly owned subsidiary of Parent, but no such assignment shall relieve Parent of any of its obligations hereunder, and proviso (ii) and (iii) of Section 2.04 shall apply to such assignment. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by, the parties hereto and their respective successors and assigns. 9.10 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their terms or were otherwise breached. It is accordingly agreed that the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, this being in addition to any other remedy to which they are entitled at law or in equity. 9.11 Interpretation. When a reference is made in this Agreement to a Recital, Section, Exhibit or Schedule, such reference shall be to a Recital or Section of, or Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and are not part of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed followed by the words "without limitation". 42 46 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in counterparts by their duly authorized officers, all as of the day and year first above written. PAINE WEBBER GROUP INC. By: /s/ DONALD B. MARRON ------------------------------------ Name: Donald B. Marron Title: Chairman and Chief Executive Officer UBS AG By: /s/ MARCEL OSPEL ------------------------------------ Name: Marcel Ospel Title: Chairman and Chief Executive Officer By: /s/ LUQMAN ARNOLD ------------------------------------ Name: Luqman Arnold Title: Chief Financial Officer NEPTUNE MERGER SUBSIDIARY, INC. By: /s/ JOHN COSTAS ------------------------------------ Name: John Costas Title: President 43 EX-12 12 y39818a1ex12.txt STATEMENT RE RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 Ratio of Earnings to Fixed Charges The following table sets forth UBS AG's ratio of earnings to fixed charges, for the periods indicated. Ratios of earnings to combined fixed charges and preferred stock dividends requirements are not presented as there were no preferred share dividends in any of the periods indicated.
SIX MONTHS YEAR ENDED 31 DECEMBER ENDED 30 JUNE 1997 1998 1999 1999 2000 - ----------------------------------------------------------------------------------------------------- IAS(1) Pre-tax earnings from continuing operations(2).............................. (851) 3,560 7,709 4,980 5,519 Add: Fixed Charges........................... 17,273 32,958 30,246 13,800 20,061 ------------------------------------------------------ PRE-TAX EARNINGS BEFORE FIXED CHARGES........ 16,422 36,518 37,955 18,780 25,580 Fixed charges: Interest................................... 16,733 32,424 29,695 13,540 19,753 Other(3)................................... 540 534 551 260 308 ------------------------------------------------------ TOTAL FIXED CHARGES........................ 17,273 32,958 30,246 13,800 20,061 RATIO OF EARNINGS TO FIXED CHARGES(4)........ 0.95 1.11 1.25 1.36 1.28 US GAAP(1) Pre-tax earnings from continuing operations(1).............................. (5,319) 4,216 3,209 Add: Fixed charges:.......................... 26,307 30,211 20,046 ------------------ ------ PRE-TAX EARNINGS BEFORE FIXED CHARGES........ 20,988 34,427 23,255 Fixed charges: Interest................................... 25,773 29,660 19,738 Other(3)................................... 534 551 308 ------------------ ------ TOTAL FIXED CHARGES........................ 26,307 30,211 20,046 RATIO OF EARNINGS TO FIXED CHARGES(5)........ 0.80 1.14 1.16
- ------------ 1. The ratio is provided using both IAS and US GAAP values, as the ratio is materially different between the two accounting standards. No US GAAP information is provided for 31 December 1997 and 30 June 1999 as a U.S. GAAP reconciliation was not required for those periods. 2. Pre-tax earnings from continuing operations includes the elimination of subsidiary, associate, and minority interest income and the addition of dividends received from associates. 3. Other fixed charges is the interest component of rental expense. 4. The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1997 of CHF 851 million is due to restructuring charges of CHF 7,000 million charged in that period. Without that charge the ratio would have been 1.36. 5. The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 of CHF 5,319 million is due to restructuring charges of CHF 3,982 million under US GAAP, as well as CHF 1,706 million of pre-tax losses from significant financial events (gain on sale of BSI, provision for WWII litigation, and trading losses on LTCM and GED) charged for that period. Without those charges the ratio would have been 1.01. EX-21 13 y39818a1ex21.txt SUBSIDIARIES OF UBS AG 1 Exhibit 21 UBS GROUP COMPANIES OVERVIEW ( [Active] = 1 AND [UBS %] >= 25) [Registered Name] ASC, [UBS %] ASC 934
Registered Name Country of Incorp. 1061 Riverside Avenue Corporation Delaware 10880 Property Corporation Delaware 10960 Property Corporation Delaware 1999 Property Corp United States of America 1FA Information (ITC) Limited United Kingdom 222 Corporation New York 2FA Information Ltd United Kingdom 3550 North Central Corporation Delaware Adepot Nominees Pty Limited Australia AG zum Storchen Switzerland AGL Instalment Warrant Trusts Australia Akroyd & Smithers PLC United Kingdom Aktiengesellschaft Bellevue Switzerland Aktiengesellschaft zur Verwaltung von Immobilien und Beteiligungen Switzerland Al Masaken 1 Limited Cayman Islands Alamos Canyon Co New York Alexandra-Invest Russia Algachem AG (in Liq.) Switzerland Alkahest GmbH Germany Allegis Capital LLC Delaware American Sports Products Group United States of America Anstalt ALKOR Lichtenstein Anstalt HILKO Lichtenstein Apollo Nominees Ltd United Kingdom Aquarius International BV Netherlands Arcade Investments Sarl France Ardial SA France Argosa Corp Inc Bahamas ARI Acquisition Corporation Massachusetts Armand von Ernst & Cie AG Switzerland Ausbildungszentrum Schloss Wolfsberg AG Switzerland Autobahn-Raststatte Basel-Nord AG Switzerland Aventic AG Switzerland Aviation Management United States of America Bahnhof-Parking Aarau AG Switzerland Baltos Service AG Switzerland Banco UBS Warburg SA Brazil Banco UBS Warburg SA Branch Sao Paulo Brazil Bank Ehinger & Cie AG Switzerland Banque Ferrier Lullin (Luxembourg) SA Luxembourg Barbican Managers (Jersey) Limited Jersey, Channel Islands Basel Holdings Limited Bahamas Bau und Finanz AG Lyss Switzerland Baugesellschaft Blatten Switzerland BDL Banco di Lugano Switzerland BDL Banco di Lugano Branch Jersey Jersey, Channel Islands Beau-Site AG Switzerland
2 Bedouble Nominees Pty Limited New Zealand Bellaplast Holding AG Switzerland Bellevue-Bau AG Switzerland Beskid AG Switzerland Betunad AG Beteiligungen und Administrationen Switzerland Bielloni Castello SpA Italy Big Sky Ranch Co New York BIW Finanz und Beteiligungs AG (in Liq.) Switzerland Bleckman Group BV Netherlands BLI Bahnhof Luzern Immobilien AG Switzerland bondweb taxi Pty Limited Australia Brazzoli SpA Italy Brigham Services Limited Cyprus Brinson Equity Market Neutral Fund Ltd Cayman Islands Brinson Partners Inc Delaware Brinson Trust Company Illinois Brinson Venture Management LLC Delaware Brispot Nominees Pty Limited Australia British Industrial Corporation Ltd United Kingdom Bronte International SA Virgin Islands Brunswick UBS Warburg (Cyprus) Limited Cyprus Brunswick UBS Warburg (Russia) Limited Cyprus Brunswick UBS Warburg Corporate Finance (Cyprus) Limited Cyprus Brunswick UBS Warburg Ltd Cayman Islands Budget Rent a Car Netherlands Burgenstock-Hotels Switzerland Burgschaftsgesellschaft der Ersparniskasse Langenthal Switzerland Buttle Wilson & Co Limited New Zealand BW Nominees Limited New Zealand Canalside Limited Cayman Islands Cantrade Corporate Directors Limited Virgin Islands Cantrade Fund Management Company SA Luxembourg Cantrade London Limited United Kingdom Cantrade Nominees Limited Jersey, Channel Islands Cantrade Participations Ltd Jersey, Channel Islands Cantrade Privatbank AG Switzerland Cantrade Private Bank Switzerland (CI) Limited Jersey, Channel Islands Cantrade Properties Limited Jersey, Channel Islands Cantrade Trust Company (Cayman) Limited Cayman Islands Cantrade Trustee AG Switzerland Canven (CI) Limited Jersey, Channel Islands Canven V Limited Jersey, Channel Islands CapVis (CI) Limited Jersey, Channel Islands CapVis Equity Partners AG Switzerland Carlton AG Davos Switzerland CarPark Carolina Sweden Catena SA (in Liq.) Switzerland Catton Securities Limited United Kingdom CBA Instalment Warrant Trust Australia CBP Resources United States of America Cellere AG Switzerland CFS Holdings BV Netherlands
3 CFS Holdings NV Netherlands Chakwal Cement Company Ltd Pakistan Chateau Caravans Beheer BV Netherlands Chemet Corporation United States of America Chesspot Nominees Pty Limited Australia Chubs Financial Services Ltd Virgin Islands Cielo Grande Corporation Delaware City Bau SA Switzerland Clinique Cecil SA Switzerland CLS Corporate Language Services AG Switzerland Commercial Services Corporation - Coseco Switzerland Communications Supply Corp United States of America Compagnie Transmaritime d'Investissements SA Luxembourg Convenience Food Systems Netherlands Corpboard Ltd Virgin Islands Corsair Investments Ltd United Kingdom Credit de la Bourse SA France Credit Industriel SA Switzerland Dalgland Nominees (Pty) Ltd South Africa Debenture Nominees Pty Limited New Zealand Debonaire Pty Limited Australia Dental-Finanzvermittlungs GmbH Germany Digital Network Services Germany Dillon Read Development Inc New York Dillon Read Inc Delaware Dillon Read Limited Maryland DMA SA Switzerland Dolbech Investments Pty Ltd Australia Doveriya Holdings Cyprus DR (Bermuda) Associates Ltd Bermuda DR Structured Finance Corp Delaware Drei Linden AG Solothurn Switzerland DRMC Inc Delaware EIBA "Eidgenossische Bank" Beteiligungs- und Finanzgesellschaft Switzerland Eisberg Finance Ltd Cayman Islands Electronic Broking Services Limited United Kingdom Elena-Invest Russia Eltub Nominees Limited New Zealand Equity Participation Investment Trust Australia Esselsee SA Switzerland Eurofides France Factors AG Switzerland Far East Investments Limited United Kingdom FC Basel Marketing AG Switzerland Fenborough Services Limited Virgin Islands Fenway Services Limited Cyprus Ferrier Lullin & Cie SA Switzerland Ferrier Lullin Bank & Trust (Bahamas) Limited Bahamas Ferrier Lullin Cayman Bank & Trust Cayman Islands Ferrier Lullin International Inc Panama Ferrier Lullin Trust Management SA Switzerland Ferrier Lullin Trustees (Jersey) Limited Jersey, Channel Islands
4 Fiduciaria e Administradora Fidam Ltda Brazil Financiera Swiss Corporation Panama First Africa Group Holdings (Pty) Ltd South Africa First Directorships Limited, Bahamas Bahamas First Directorships Limited, Cayman Islands Cayman Islands Firtown International Holdings Ltd Cayman Islands FL Pacific Ltd Hong Kong (China) FL Trust Switzerland Management Company Luxembourg Frankfurter Munzhandlung GmbH Germany Freddo Argentina FSG Swiss Financial Services Group AG Switzerland GAM (Bermuda) Limited Bermuda GAM Administration Limited Isle of Man GAM Anlagefonds AG Switzerland GAM Corporate Trustee AG Switzerland GAM Distribution Limited Bermuda GAM Emerging Markets Limited Bermuda GAM Fonds Marketing GmbH Germany GAM Fund Management Limited Ireland GAM Fund Managers (Isle of Man) Limited Isle of Man GAM Funding Inc Delaware GAM International Management Limited United Kingdom GAM Investments Inc Delaware GAM Services Inc Delaware GAM Sterling Management Limited United Kingdom GAMadmin BV Netherlands Gams Holding SA Switzerland Gateway Land Corporation Connecticut Gebefina AG Switzerland General Secretaries Ltd Cayman Islands Genossenschaft Alterswohnheim Weiherwies Grub AR Switzerland Genval SA Switzerland Gesepart Switzerland Giubergia UBS Warburg Ltd United Kingdom Giubergia UBS Warburg SIM SpA Italy Global Asset Management (Asia) Limted Bermuda Global Asset Management (Australia) Limited Australia Global Asset Management (HK) Limited Hong Kong (China) Global Asset Management (Institutional) Limited United Kingdom Global Asset Management (NZ) Limited New Zealand Global Asset Management (Singapore) Pte Limited Singapore Global Asset Management (UK) Limited United Kingdom Global Asset Management (USA) Inc Delaware Global Asset Management do Brasil Ltda Brazil Global Asset Management GAM (Schweiz) AG Switzerland Global Asset Management GAM Sarl Luxembourg Global Asset Management Kabushiki Kaisha Japan Global Asset Management Limited, Bermuda Bermuda Global Asset Management Limited, London United Kingdom Global Asset Management Ltd Branch Kuwait Kuwait Global Asset Management Ltd Branch Zurich Switzerland Global Asset Management Trust Company Limited Virgin Islands
5 Global Financial Management Limited United Kingdom Globulus Holding AG Switzerland Gontor SA Switzerland Gouldsworth Holdings Limited Virgin Islands Gracebury Securitisation Limited United Kingdom Greenpark Management NV Netherlands Antilles Grossenbacher Unternehmungen AG Switzerland Gubelhang AG (in Liq.) Switzerland H2 Caravans Group NV Belgium H2 Equity Partners BV Netherlands H2 Invest 7 Netherlands Harbour Fiduciary Services Limited Bermuda Harbour International Trust Company (Bermuda) Limited Bermuda Haussmann Investments Sarl France High Timber Nominees Ltd United Kingdom Himmoba AG Switzerland Hirslanden-Gruppe AG Switzerland Hirslanden-Gruppe Management AG Switzerland Hirslanden-Gruppe Services AG Switzerland Holdkap AG Switzerland Hotel Seepark AG Switzerland Hunchbuy Ltd United Kingdom Iberchem Holding SA Switzerland ICP Associates GP Florida ICP1 Inc Florida ICP2 Inc Florida IFINA AG Lichtenstein IGI Calzature e Tecnologie SpA Italy IL Immobilien-Leasing AG Switzerland Imka Immobilien AG Switzerland Immobilien Zofingen AG Switzerland Implicit Corporation Delaware IMPRIS AG Switzerland Indelec Holding (USA) Inc Delaware Indelec Holding AG Switzerland Independent Fund Managers (Isle of Man) Limited Isle of Man InduInvest AG Switzerland Innkraftwerke AG Switzerland Intersuis SA Administadora y Comercial Argentina Intrag Switzerland Investholding AG Switzerland Investmentplan AG (in Liq.) Switzerland ITK Trust Company Limited Bahamas Kapar Pty Limited Australia Kapvalor AG Switzerland Key Mandates Limited Jersey, Channel Islands Kilala SA Switzerland Kingline Pty Ltd Australia Kintyre Corp Panama Kip Caravans BV Netherlands Kipling group Belgium Klinik "Im Park" AG Switzerland
6 Klinik "Permanence" AG Switzerland Klinik Hirslanden AG Switzerland Landmark Holdings Inc Delaware Landmark Holdings LLC Delaware Leatitia AG Switzerland Leoram Limited Cyprus LIMCO Cayman Limited Cayman Islands Lockmay Pty Limited Australia Long-Term India Investment Fund Limited Mauritius Lorag AG Switzerland Luxor Aktiengesellschaft Zurich Switzerland Lynch Pin Holdings Limited Virgin Islands Mando Climate South Korea Manidi SA Switzerland Meadowglade Ltd Jersey, Channel Islands Melfast Nominees Pty Limited Australia Melnew Nominees Pty Limited Australia Metalor Contacts France SA France Metalor Dental Products Ltd United Kingdom Metalor Dental USA Corp United States of America Metalor Iberica SA Spain Metalor Limited United Kingdom Metalor USA Holding Corporation United States of America Metalor USA Refining Corporation United States of America Metaux Precieux Far East Ltd Hong Kong (China) Metaux Precieux METALOR Deutschland GmbH Germany Metaux Precieux SA METALOR Switzerland Milln & Robinson Nominees Ltd United Kingdom Mister Minit Holdings NV Netherlands Mixlink Limited United Kingdom MK Electron Co Ltd South Korea Monds Pty Limited Australia Motor-Columbus AG Switzerland Nigel Stewart & Associates Pty Limited Australia NMS SA Switzerland North Street Consumer Phone Services LLC Delaware NS Secretaries Limited Jersey, Channel Islands NURESTRA SA Switzerland NYRE Holding Corp Delaware Ocho Property Corporation Delaware Office Genevois de Cautionnement Mutuel pour Commercants et Artisans Switzerland Oleoduc du Rhone SA Switzerland Omega International Corporation Bahamas Opera Pecunia Pension Plan Inc Bahamas Opera Pecunia SA Panama Opportunity GAM Limited Bermuda Oracle Fund Ltd Bahamas Orica Instalment Warrant Trust Australia Pallas Leasing GmbH Germany Pan Nominees Ltd United Kingdom Panserve Ltd Virgin Islands Pantera AG Switzerland
7 Papierfabrik Zwingen AG Switzerland Parha Immobilien AG (in Liq.) Switzerland Paris (ACT) Limited Australia Paris No. 1 Limited Australia Paris No. 2 Limited Australia Pasternak Holdings Limited Cyprus PDFM Limited United Kingdom PDFM Ventures Limited United Kingdom Pensionskasse der UBS Switzerland Phildrew Nominees Limited United Kingdom Phildrew Ventures Partnership United Kingdom Phillips & Drew (Australia) Ltd Australia Phillips & Drew Client Services Limited United Kingdom Phillips & Drew Fund Management Limited United Kingdom Phillips & Drew Holding Limited United Kingdom Phillips & Drew International Investment Inc New York Phillips & Drew International Investment Limited United Kingdom Phillips & Drew Life Limited United Kingdom Phillips & Drew Limited United Kingdom Phillips & Drew Unit Managers Limited United Kingdom Pinus AG Switzerland PL Services SA France Potter Australia Pty Limited Australia Potter Warburg Cash Management Limited Australia Potter Warburg Clearing Pty Limited Australia Potter Warburg Discount Investments Pty Limited Australia Potter Warburg Discount Limited Australia Potter Warburg Fixed Interest NZ Limited New Zealand Potter Warburg Fixed Interest Pty Limited Australia Potter Warburg New Zealand Limited New Zealand Potter Warburg Nominees Pty Limited Australia Potter Warburg Pty Limited Australia Potter Warburg Securities Pty Limited Australia Potter Warburg Securities Pty Limited Office Sydney Australia Potter Warburg Services Pty Limited Australia Potter Warburg UK Ltd United Kingdom Premex AG Switzerland Presto AG Switzerland Prime Securities Trust No 1 Australia Prime Securities Trust No 2 Australia Prime Securities Trust No 3 Australia Prime Securities Trust No 3F Australia Prime Securities Trust No 4 Australia Prime Securities Trust No 4F Australia Prime Securities Trust No 7 Australia Prime Securities Trust No 7F Australia Prime Security Holdings Pty Limited Australia Private Equity Holding Inc New York Privexia Fribourg SA Switzerland Privexia Geneve SA Switzerland Project Finance Ltd United Kingdom Promotora UBS de Venezuela SA Venezuela
8 PROTAB Projekt Swiss Securities Operations AG Switzerland PT UBS Securities Indonesia Indonesia PT UBS Warburg Indonesia Indonesia Quercus Investment Co AG Switzerland Racefacit Ltd United Kingdom Raleg Trading SA Panama Ransila AG Switzerland RC Immobilien Verwaltungs GmbH Germany Realia Holding AG Switzerland Redmen's Land Corporation Connecticut Renta AG fur Finanzplanung Switzerland Revetex AG Switzerland Ridgemount Services Limited Virgin Islands Rohzlas PL Leasing BV Netherlands Romibag AG Switzerland Rowe & Pitman Ltd United Kingdom Rugby United Kingdom SAG SEGA Aktienregister AG Switzerland Samorag AG Beteiligungs- & Finanzgesellschaft Switzerland Samsung Korea Premium Trust South Korea Saymilln Nominees Limited United Kingdom SBC (Forex Netting) Limited United Kingdom SBC Arbitech AB Sweden SBC Consultoria Comercio e Participacoes Ltda Brazil SBC Equity Partners AG Switzerland SBC Glacier Finance Ltd Cayman Islands SBC Group (UK) Pension Trust Fund Limited United Kingdom SBC Resource Management Inc Delaware SBC Warburg Australia Securities Trust No 1 Australia SBC Warburg Corporate Finance AG Branch Taipei Taiwan SBC Warburg Dillon Read Corporate Finance AG Switzerland SBC Warburg Dillon Read Ltd United Kingdom SBC Warburg Management Co Inc Panama SBC Warburg New Zealand Futures Limited New Zealand SBCI Futures Inc New York SBCI Investment banking Ltd United Kingdom SBCW Company Reorganisation (Number 01) Ltd United Kingdom SBCW Company Reorganisation (Number 02) Ltd United Kingdom SBCW Company Reorganisation (Number 03) Ltd United Kingdom SBCW Company Reorganisation (Number 04) Ltd United Kingdom SBCW Company Reorganisation (Number 05) Ltd United Kingdom SBCW Company Reorganisation (Number 06) Ltd United Kingdom SBCW Company Reorganisation (Number 07) Ltd United Kingdom SBCW Company Reorganisation (Number 08) Ltd United Kingdom SBCW Company Reorganisation (Number 09) Ltd United Kingdom SBCW Company Reorganisation (Number 10) Ltd United Kingdom SBCW Company Reorganisation (Number 11) Ltd United Kingdom SBCW Company Reorganisation (Number 12) Ltd United Kingdom SBCW Company Reorganisation (Number 13) Ltd United Kingdom SBCW Company Reorganisation (Number 14) Ltd United Kingdom SBCW Company Reorganisation (Number 15) Ltd United Kingdom SBCW Company Reorganisation (Number 16) Ltd United Kingdom
9 SBCWA Imputation Trust Australia SBCWA Universal Mirror Trust Australia SBS AG Switzerland SBV AG Switzerland Schroder Munchmeyer Hengst AG Germany Schroder Munchmeyer Hengst AG Branch Berlin Germany Schroder Munchmeyer Hengst AG Branch Dusseldorf Germany Schroder Munchmeyer Hengst AG Branch Frankfurt am Main Germany Schroder Munchmeyer Hengst AG Branch Munich Germany Schroder Munchmeyer Hengst AG Branch Offenbach Germany Schroder Munchmeyer Hengst AG Branch Stuttgart Germany Schroder Munchmeyer Hengst Consult GmbH Germany Schroder Munchmeyer Hengst Investment Luxemburg SA Luxembourg Schweizerische Gesellschaft fur Anlagewerte (SOCVAL) Switzerland Schweizerische Hypotheken- und Handelsbank Switzerland Schweizerische Hypotheken- und Handelsbank Branch Jersey Jersey, Channel Islands Schweizerische National-Versicherungs-Gesellschaft Switzerland SCI Nadar Monaco Seahorse Superannuation Pty Limited Australia SECB Swiss Euro Clearing Bank GmbH Germany SECOM AG Switzerland Second Directorships Limited Bahamas Securiana AG Switzerland Seeyet Investments Limited Hong Kong (China) Seligman Brothers Ltd United Kingdom Selinus Corporation NV Delaware Serse France Services (Wolfsberg) AG Switzerland Sethold Nominees Pty Limited Australia SG Warburg & Co (AFS) Ltd United Kingdom SG Warburg & Co International BV Netherlands SG Warburg & Co Ltd United Kingdom SG Warburg & Company plc United Kingdom SG Warburg Finance (Luxembourg) SA Luxembourg SG Warburg Finance BV Netherlands SG Warburg Financial Products Ltd United Kingdom SG Warburg Group (Australia) BV Netherlands SG Warburg Group Management Ltd United Kingdom SG Warburg Group plc United Kingdom SG Warburg Holdings Ltd United Kingdom SG Warburg Intermediary Dealer Ltd United Kingdom SG Warburg Investments (No. 2) Ltd United Kingdom SG Warburg Investments (Number 3) Ltd United Kingdom SG Warburg Investments (USA) Inc Delaware SG Warburg Nominees (Korea) Ltd United Kingdom SG Warburg Overseas Ltd United Kingdom SG Warburg Securities SA Switzerland SG Warburg Structural Finance Ltd United Kingdom SGW Finance plc United Kingdom SGW Ltd United Kingdom SGW Nominees (HK) Ltd Hong Kong (China) SGW Structural Finance Ltd United Kingdom
10 SGWIB Ltd United Kingdom SI de la Rue de Lausanne SA Switzerland SI Flaminia SA Switzerland SI Fleur des Monts SA Switzerland SI Lapro SA Switzerland SI Les Fontaines de la Ville SA Switzerland Sig Limited Bahamas Simonin AG Switzerland Sipeter Pty Limited Australia SIS SEGAINTERSETTLE AG Switzerland SMH Management Beteiligungs GmbH Germany SNOC Swiss Nominee Company Switzerland Societe des Forces Motrices du Grand-St-Bernard Switzerland Societe Immobiliere Chemin de l'Oree SA Switzerland Societe Internationale de Placements Switzerland Societe Mandataire SA Switzerland Societe Nice Valor Sarl France Societe Nouvelle des Bergues Switzerland Soliva AG Switzerland Solothurner Bank SoBa Switzerland Solymep SA France SOPAG SA Switzerland SP Cellular Corporation Delaware St. Saviours Crescent Developments (1990) Limited Jersey, Channel Islands Staincliffe Limited Jersey, Channel Islands Star AG Switzerland Stepway Limited Virgin Islands Stiga Forvaltning AB Sweden Strasser J. AG Aarau Switzerland Suabag Switzerland Suissor SA France Sviro Finance SA Switzerland Swisbanco (Coleman Street Nominees) Limited United Kingdom Swiss Bank Center I Association Inc Connecticut Swiss Bank Site Master Association Inc Connecticut Swiss Bankers Travelers Cheque Centre Switzerland Swiss Federal Holding Ltd Bermuda Swiss Finance Corporation (Mauritius) Ltd Mauritius SWS Pty Ltd Australia Sydpot Nominees Pty Limited Australia Systor AG Switzerland Tadelmo AG Switzerland TBM Srl Italy Telekurs Holding AG Switzerland The British American Construction Company Ltd United Kingdom The Transatlantic Trading Company Ltd United Kingdom Thesauba SA Switzerland Thesaurus Continentale Effekten-Gesellschaft in Zurich Switzerland Three Keys Limited Bahamas TicketCorner AG Switzerland Tintorie di Bisuschio SrL Italy Tivalor Etablissement Lichtenstein
11 Tobrosa AG Switzerland Topcard Service AG Switzerland Torgafina AG (in Liq.) Switzerland Transplan AG (in Liq.) Switzerland Trussway United States of America Tur Limited Bahamas UBS (Argentina) SRL Argentina UBS (Australia) Administration Pty Ltd Australia UBS (Australia) Capital Partners Limited Australia UBS (Australia) Specialised Finance Management Limited Australia UBS (Australia) Staff Superannuation Pty Ltd Australia UBS (Bahamas) Ltd Bahamas UBS (Cayman Islands) Ltd Cayman Islands UBS (CI) Limited Jersey, Channel Islands UBS (Cyprus) Ltd Cyprus UBS (France) SA France UBS (FXNET) Ltd United Kingdom UBS (Immobilien) GmbH Germany UBS (India) Private Ltd India UBS (Italia) SpA Italy UBS (Italia) SpA Branch Bologna Italy UBS (Italia) SpA Branch Rome Italy UBS (Jersey) Limited Jersey, Channel Islands UBS (Luxembourg) SA Luxembourg UBS (Monaco) SA Monaco UBS (Panama) SA Panama UBS (Sydney) Limited Australia UBS (Trust and Banking) Limited Japan UBS (USA) Inc Delaware UBS AG Switzerland UBS AG Agency Houston Texas UBS AG Agency Miami Florida UBS AG Branch Cayman Island Cayman Islands UBS AG Branch Chicago Illinois UBS AG Branch Hong Kong Hong Kong (China) UBS AG Branch Jersey Jersey, Channel Islands UBS AG Branch Labuan Malaysia UBS AG Branch London (PB) United Kingdom UBS AG Branch London (WDR) United Kingdom UBS AG Branch Los Angeles California UBS AG Branch New York (10 East 50th Street) New York UBS AG Branch New York (299 Park Avenue) New York UBS AG Branch Paris France UBS AG Branch San Francisco California UBS AG Branch Seoul South Korea UBS AG Branch Singapore Singapore UBS AG Branch Stamford Connecticut UBS AG Branch Taipei Taiwan UBS AG Branch Tokyo Japan UBS AG Limitada Uruguay UBS AG Limitada Punta del Este Uruguay UBS AG Representative Office Abu Dhabi United Arab Emirates
12 UBS AG Representative Office Baden-Baden Germany UBS AG Representative Office Bangkok Thailand UBS AG Representative Office Beijing China UBS AG Representative Office Beirut Lebanon UBS AG Representative Office Bogota Colombia UBS AG Representative Office Boston Massachusetts UBS AG Representative Office Buenos Aires Argentina UBS AG Representative Office Cairo Egypt UBS AG Representative Office Caracas Venezuela UBS AG Representative Office Dallas Texas UBS AG Representative Office Dubai United Arab Emirates UBS AG Representative Office Edinburgh United Kingdom UBS AG Representative Office Freiburg i. Br. Germany UBS AG Representative Office Istanbul Turkey UBS AG Representative Office Jakarta Indonesia UBS AG Representative Office Johannesburg South Africa UBS AG Representative Office Kuala Lumpur Malaysia UBS AG Representative Office Lima Peru UBS AG Representative Office Lisbon Portugal UBS AG Representative Office Manama Bahrain UBS AG Representative Office Melbourne Australia UBS AG Representative Office Mexico City Mexico UBS AG Representative Office Montevideo Uruguay UBS AG Representative Office Moscow Russia UBS AG Representative Office Mumbai India UBS AG Representative Office Nicosia Cyprus UBS AG Representative Office Osaka Japan UBS AG Representative Office Punta del Este Uruguay UBS AG Representative Office Rio de Janeiro Brazil UBS AG Representative Office Santiago de Chile Chile UBS AG Representative Office Sao Paulo Brazil UBS AG Representative Office Shanghai China UBS AG Representative Office Stuttgart Germany UBS AG Representative Office Sydney Australia UBS AG Representative Office Tehran Iran (Islamic Republic of) UBS AG Representative Office Tokyo Japan UBS AG Representative Office Tokyo (CF) Japan UBS AG Representative Office Vancouver Canada UBS AG Representative Office Vienna Austria UBS AG Representative Office Washington DC District of Columbia UBS Anlage-Service GmbH Germany UBS Asset Management (Australia) Holdings Pty Ltd Australia UBS Asset Management (Australia) Ltd Australia UBS Asset Management (Australia) Ltd Branch Melbourne Australia UBS Asset Management (France) SA France UBS Asset Management (Italia) SIM SpA Italy UBS Asset Management (Japan) Ltd Japan UBS Asset Securitization Corp Delaware UBS Assets (UK) Limited United Kingdom UBS Australia Holdings Ltd Australia UBS Australia Limited Australia UBS Bank (Canada) Canada
13 UBS Bank (Canada) Branch Montreal Canada UBS Bank (Canada) Branch Vancouver Canada UBS Banque SA France UBS Beteiligungs-GmbH & Co KG Germany UBS Bond Fund Management Company SA Luxembourg UBS Bridge Nominees Ltd Cayman Islands UBS Bridge Secretaries Ltd Cayman Islands UBS Bridge Trustees (Jersey) Ltd Jersey, Channel Islands UBS Brinson AgriVest LLC Massachusetts UBS Brinson Capital GmbH Germany UBS Brinson Fideicomiso Financiero Forestal I Argentina UBS Brinson Fund Management Company SA Luxembourg UBS Brinson Holding Pte Ltd Singapore UBS Brinson Inc (now UBS Asset Management (New York), Inc.) New York UBS Brinson Inc Branch Bahrain Bahrain UBS Brinson Inc Branch West Lebanon United States of America UBS Brinson International AG Switzerland UBS Brinson Investment GmbH Germany UBS Brinson Limited, Great Britain United Kingdom UBS Brinson Ltda Brazil UBS Brinson Pte Ltd Singapore UBS Brinson Realty Investors LLC United States of America UBS Brinson Realty Investors LLC Branch Dallas United States of America UBS Brinson Realty Investors LLC Branch San Francisco United States of America UBS Bunting Warburg Inc Canada UBS Bunting Warburg Inc Branch Calgary Canada UBS Bunting Warburg Inc Branch Montreal Canada UBS Bunting Warburg Inc Branch Vancouver Canada UBS Bunting Warburg Inc Representative Office Paris France UBS Bunting Warburg Limited Canada UBS Capital (Jersey) Ltd Jersey, Channel Islands UBS Capital (Scotland) Limited United Kingdom UBS Capital AG Switzerland UBS Capital Americas (LA-Advisor) LLC United States of America UBS Capital Americas III LP Jersey, Channel Islands UBS Capital Americas Investments II LLC Delaware UBS Capital Americas Investments III Ltd Cayman Islands UBS Capital Asia Pacific (HK) Limited Hong Kong (China) UBS Capital Asia Pacific (S) Limited Singapore UBS Capital Asia Pacific Limited Cayman Islands UBS Capital BV Netherlands UBS Capital GmbH Germany UBS Capital Holdings LLC Delaware UBS Capital II LLC Delaware UBS Capital Investors Inc New York UBS Capital Jersey Corporation I Ltd Jersey, Channel Islands UBS Capital Jersey Corporation II Ltd Jersey, Channel Islands UBS Capital Latin America LDC Cayman Islands UBS Capital LLC Delaware UBS Capital Management Inc Delaware UBS Capital Partners Limited United Kingdom UBS Capital SpA Italy
14 UBS Card Center AG Switzerland UBS Community Development Corporation New York UBS Company Reorganisation (Number 1) Plc United Kingdom UBS Company Reorganisation (Number 2) Plc United Kingdom UBS Company Reorganisation (Number 3) Ltd United Kingdom UBS Company Reorganisation (Number 4) Ltd United Kingdom UBS Company Reorganisation (Number 5) Ltd United Kingdom UBS Company Reorganisation (Number 6) Ltd United Kingdom UBS Construction Services Ltd United Kingdom UBS Deutschland GmbH Germany UBS Dynamic Floor Fund Management Company SA Luxembourg UBS Emerging Economies Fund Management Company SA Luxembourg UBS Employee Benefits Trust Limited Jersey, Channel Islands UBS Equity Fund Management Company SA Luxembourg UBS Espana SA Spain UBS Espana SA Branch Barcelona Spain UBS Espana SA Branch Marbella Spain UBS Europe SA Luxembourg UBS Finance (Cayman Islands) Ltd Cayman Islands UBS Finance (Curacao) NV Netherlands Antilles UBS Finance (Delaware) LLC Delaware UBS Financial Consulting AG Switzerland UBS Financial Consulting AG Taiwan Branch Taiwan UBS Financial Services (BVI) Limited Virgin Islands UBS Financial Services Limited Russia UBS Finanzholding AG Switzerland UBS Finanzholding GmbH Germany UBS Focused Fund Management Company SA Luxembourg UBS Fund Holding (Luxembourg) SA Luxembourg UBS Fund Holding (Switzerland) AG Switzerland UBS Fund Management (Switzerland) AG Switzerland UBS Fund Managers (Jersey) Limited Jersey, Channel Islands UBS Fund Managment (Italia) SGR SpA Italy UBS Fund Services (Luxembourg) SA Luxembourg UBS Funding (Jersey) Limited Jersey, Channel Islands UBS Futures & Options Ltd United Kingdom UBS Gestion Sociedad Gestora de Instituciones de Inversion Colectiva SA Spain UBS Gilts Nominees Ltd United Kingdom UBS Global Trust Corporation Branch Singapore Singapore UBS Global Trust Corporation Canada UBS Government Securities Limited United Kingdom UBS Group Insurance (Bermuda) Ltd Bermuda UBS Heisei Fund Management Company SA Luxembourg UBS Holding (France) SA France UBS Holdings Limited Jersey, Channel Islands UBS Holdings Pty Ltd Australia UBS Hong Kong Nominees Ltd Hong Kong (China) UBS Immobilier (France) SA France UBS Immoleasing AG Switzerland UBS Inc New York UBS International Employment Ltd Switzerland UBS International Holdings BV Netherlands
15 UBS Invest Kapitalanlagegesellschaft mbH Germany UBS Investment Management Pte Ltd Singapore UBS Investments (Bahamas) Limited Bahamas UBS Investments (CI) Ltd Cayman Islands UBS Investments Limited Hong Kong (China) UBS Islamic Fund Management Company SA Luxembourg UBS Israel Financial Instruments Ltd Israel UBS Jersey Holdings Limited Jersey, Channel Islands UBS Jersey Investments Limited Jersey, Channel Islands UBS Jersey Nominees Limited Jersey, Channel Islands UBS Jersey Pension Scheme Trustee Limited Jersey, Channel Islands UBS Lease Finance LLC Delaware UBS Leasing (Luxembourg) SA Luxembourg UBS Leasing AG Switzerland UBS Limited United Kingdom UBS Limited Risk Fund Management Company SA Luxembourg UBS Management Beteiligungs GmbH Germany UBS Management Support Co Ltd Japan UBS Medium Term Bond Fund Management Company SA Luxembourg UBS Money Market Fund Management Company SA Luxembourg UBS Mortgage Capital LLC Delaware UBS Mortgage Securities Inc Delaware UBS Nominees (Hong Kong) Ltd Hong Kong (China) UBS Nominees (Pty) Ltd, South Africa South Africa UBS Nominees Limited, Jersey Jersey, Channel Islands UBS Nominees Ltd, Cayman Cayman Islands UBS Nominees Pty Limited, Australia Australia UBS O'Connor Investor LLC Delaware UBS O'Connor LLC Delaware UBS Overseas (UK) Limited United Kingdom UBS Overseas Holding BV Netherlands UBS Polybahn AG Switzerland UBS Portfolio LLC Delaware UBS Principal Finance LLC Delaware UBS Private Banking Nominees Ltd United Kingdom UBS Private Equity SA France UBS Project Finance (1986) Ltd United Kingdom UBS Properties (Jersey) Ltd Jersey, Channel Islands UBS Realty & Office Engineering Company Switzerland UBS Realty & Office Engineering Company (Pty) Ltd South Africa UBS Representacao Ltda Brazil UBS Representative Office Ltd Switzerland UBS Research (Malaysia) Sdn Bhd Malaysia UBS Resources and Management Support AG (in Liq.) Switzerland UBS Rolling Hills Holding LLC New York UBS Secretaries Limited, Jersey Jersey, Channel Islands UBS Secretaries Ltd, Cayman Cayman Islands UBS Securities (Brasil) Servicos Financeiros Ltda Brazil UBS Securities (Canada) Inc Canada UBS Securities (East Asia) Limited Hong Kong (China) UBS Securities (East Asia) Ltd Branch Taiwan Taiwan UBS Securities (East Asia) Ltd Representative Office Beijing China UBS Securities (East Asia) Ltd Representative Office Shanghai China
16 UBS Securities (Hong Kong) Ltd Hong Kong (China) UBS Securities Investment Advisory (Taiwan) Ltd Taiwan UBS Securities Limited United Kingdom UBS Securities Limited Branch Basel Switzerland UBS Securities Limited Branch Geneva Switzerland UBS Securities Limited Branch Lugano Switzerland UBS Securities Limited Branch Zurich Switzerland UBS Securities Nominees (Pty) Ltd South Africa UBS Securities Nominees Ltd United Kingdom UBS Services (Japan) Limited United Kingdom UBS Services Limited United Kingdom UBS Short Term Bond Fund Management Company SA Luxembourg UBS Short Term Invest Management Company SA Luxembourg UBS Strategy Fund Management Company SA Luxembourg UBS Switzerland Stockholm Bankfilial Sweden UBS TC (Jersey) Ltd Jersey, Channel Islands UBS Trading Limited Hong Kong (China) UBS Trust (Canada) Canada UBS Trust Company New York UBS Trustee Company Limited United Kingdom UBS Trustees (Bahamas) Ltd Bahamas UBS Trustees (BVI) Limited Virgin Islands UBS Trustees (Cayman) Ltd Cayman Islands UBS Trustees (Channel Islands) Ltd Jersey, Channel Islands UBS Trustees (Jersey) Ltd Jersey, Channel Islands UBS UK Finance Limited United Kingdom UBS UK Holding Limited United Kingdom UBS UK Limited United Kingdom UBS Warburg & Associates (Singapore) Nominees Pte Ltd Singapore UBS Warburg & Associates (Singapore) Pte Ltd Singapore UBS Warburg & Associates (Singapore) Research Pte Ltd Singapore UBS Warburg (EBS) Ltd United Kingdom UBS Warburg (Forex) Inc New York UBS Warburg (France) SA France UBS Warburg (Futures & Options) Pte Ltd Singapore UBS Warburg (Israel) Ltd Israel UBS Warburg (Italia) Finanziaria SpA Italy UBS Warburg (Italia) SIM SpA Italy UBS Warburg (Japan) Limited Cayman Islands UBS Warburg (Japan) Limited Branch Tokyo Japan UBS Warburg (Malaysia) Sdn Bhd Malaysia UBS Warburg (Nederland) BV Netherlands UBS Warburg AG Germany UBS Warburg Asia Limited Hong Kong (China) UBS Warburg Australia Corporate Finance Ltd Australia UBS Warburg Australia Corporation Pty Ltd Australia UBS Warburg Australia Equities Ltd Australia UBS Warburg Australia Holdings Ltd Australia UBS Warburg Australia Limited Australia UBS Warburg Australia Limited Office Melbourne Australia UBS Warburg Australia Limited Office Perth Australia UBS Warburg Corporate Finance South Africa (Pty) Limited South Africa
17 UBS Warburg Corretora de Cambio e Valores Mobiliarios SA Brazil UBS Warburg Custody Pte Ltd Singapore UBS Warburg Derivatives Limited Hong Kong (China) UBS Warburg Finance Asia Ltd Hong Kong (China) UBS Warburg Finance Company (Cayman Islands) Ltd Cayman Islands UBS Warburg Futures Inc Delaware UBS Warburg Holdings Asia Limited Hong Kong (China) UBS Warburg Hong Kong Limited Hong Kong (China) UBS Warburg International Ltd United Kingdom UBS Warburg Investments Asia Ltd Hong Kong (China) UBS Warburg Investments Ltd Australia UBS Warburg LLC Delaware UBS Warburg LLC Branch Bloomington United States of America UBS Warburg LLC Branch Boston United States of America UBS Warburg LLC Branch Chicago (10 South Wacker Drive) United States of America UBS Warburg LLC Branch Chicago (141 West Jackson Boulevard) United States of America UBS Warburg LLC Branch Dallas United States of America UBS Warburg LLC Branch Houston United States of America UBS Warburg LLC Branch Lake Forest United States of America UBS Warburg LLC Branch New York (299 Park Avenue) United States of America UBS Warburg LLC Branch San Francisco (101 California Street) United States of America UBS Warburg LLC Branch San Francisco (555 California Street) United States of America UBS Warburg LLC Branch Springdale United States of America UBS Warburg Ltd United Kingdom UBS Warburg Ltd Dutch Branch Netherlands UBS Warburg Ltd Swiss Branch Switzerland UBS Warburg Management Asia Ltd Hong Kong (China) UBS Warburg New Zealand Equities Ltd New Zealand UBS Warburg New Zealand Holdings Limited New Zealand UBS Warburg New Zealand Limited New Zealand UBS Warburg New Zealand Limited Office Wellington New Zealand UBS Warburg Nominees Hong Kong Limited Hong Kong (China) UBS Warburg Nominees Ltd United Kingdom UBS Warburg Participations Limited Bermuda UBS Warburg Participations Limited Branch London United Kingdom UBS Warburg Pension Trustee Company Ltd United Kingdom UBS Warburg Property Services Pty Ltd Australia UBS Warburg Pte Ltd Singapore UBS Warburg Pty Ltd Australia UBS Warburg Pushkin Limited Cyprus UBS Warburg Securities (South Africa) (Pty) Limited South Africa UBS Warburg Securities Co Ltd Thailand UBS Warburg Securities India Private Limited India UBS Warburg Securities India Private Ltd Branch New Delhi India UBS Warburg Securities Ltd United Kingdom UBS Warburg Securities Ltd Branch Seoul South Korea UBS Warburg Securities Ltd Taiwan Branch Taiwan UBS Warburg Securities Nominees Ltd United Kingdom UBS Warburg Securities Philippines Inc Philippines UBS Warburg Sociedad de Bolsa SA Argentina UBS Warburg Trading SA Argentina UBS Xanadu GP Limited United Kingdom
18 UBS Xanadu Holding Limited United Kingdom UBSAM (Jersey) Limited United Kingdom UBSIT Holdings Limited Jersey, Channel Islands UGDO SA Switzerland Uni Finanz und Promotions AG Switzerland Unihouse Nominees Limited Jersey, Channel Islands Union Bank of Switzerland (Pensions) Ltd United Kingdom Union Economique et Financiere Monaco Union Valoren AG Switzerland Univalor Etablissement Lichtenstein Universo Administracao de Bens Ltda Brazil Universo Administracao de Bens Ltda Branch Sao Paulo Brazil Valetta Management Inc Panama Valoriana AG Switzerland Veritas International Limited Virgin Islands Verwa AG Switzerland Victor Hasselblad AB Sweden Villa Sistemi Medicali SpA Italy VOLAR Immobilien AG (in Liq.) Switzerland VPAF II Management LP United States of America Warbont Nominees Pty Limited Australia Warburco Nominees Ltd United Kingdom Warburg (Japan) Limited Hong Kong (China) Warburg Dillon Read (Asia) Limited Representative Office Beijing China Warburg Dillon Read (Asia) Limited Representative Office Shanghai China Warburg Dillon Read (Espana) SA Spain Warburg Dillon Read (Espana) SA Branch Barcelona Spain Warburg Dillon Read Fund Management Company SA Luxembourg Warburg Dillon Read Securities (Espana) SVB SA Spain Warburg Dillon Read Swaps Inc New York WDR Company Reorganisation (Number 17) Plc United Kingdom WDR Company Reorganisation (Number 18) Ltd United Kingdom WDR Company Reorganisation (Number 19) Ltd United Kingdom WDR Company Reorganisation (Number 20) Ltd United Kingdom WDR Company Reorganisation (Number 21) Ltd United Kingdom WDR Company Reorganisation (Number 22) Ltd United Kingdom WDR Company Reorganisation (Number 23) Ltd United Kingdom WDR Company Reorganisation (Number 24) Ltd United Kingdom WDR Company Reorganisation (Number 25) Ltd United Kingdom WDR Company Reorganisation (Number 26) Ltd United Kingdom WDR Company Reorganisation (Number 27) Ltd United Kingdom Widder Hotel AG Switzerland Winooski Inc Bahamas Wipa Wiler Parkhaus AG Switzerland Wohnbaugenossenschaft Bachli Teufen AR Switzerland Wohnbaugenossenschaft Pro Herisau Switzerland Wuhu Inc Bahamas Xanadu UBS Partner No 1 Limited Jersey, Channel Islands Xanadu UBS Partner No 2 Limited Jersey, Channel Islands YCA SA Switzerland ZAO Brunswick UBS Warburg Russia ZAO Brunswick UBS Warburg Corporate Finance Russia
19 ZAO Brunswick UBS Warburg Nominees Russia Ziber Investments Limited Jersey, Channel Islands Zur Schanzenbrucke AG Switzerland
EX-23.4 14 y39818a1ex23-4.txt CONSENT OF ATAG ERNST AND YOUNG AG SWITZERLAND 1 EXHIBIT 23.4 Consent We consent to the reference to our firm and to the summary of our opinion under the caption "Certain Tax Considerations Under the Laws of Switzerland" and to the inclusion of our opinion dated August 7, 2000 as an exhibit to the Registration Statement (Form F-1 No. 333-xxxxx) and related Prospectus of UBS AG for the registration of Noncumulative Trust Preferred Securities. ATAG Ernst & Young AG /s/ Alfred Preisig ------------------------------- Partner tax /s/ Rosmarie Knecht ------------------------------- Senior manager tax Zurich, Switzerland 29 September 2000 EX-23.5 15 y39818a1ex23-5.txt CONSENT OF ATAG ERNST AND YOUNG LTD 1 EXHIBIT 23.5 Consent of Independent Auditors We consent to the reference to our firm under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Experts" and to the use of our report dated 8 March 2000 (except for Note 38, as to which the date is 18 April 2000 and Note 1(t) as to which the date is 17 August 2000) in the Registration Statement (Form F-1 No. 333-xxxxx) and related Prospectus of UBS AG for the registration of Noncumulative Trust Preferred Securities. ATAG Ernst & Young Ltd. /s/ ROGER K. PERKIN /s/ PETER HECKENDORN ------------------- -------------------- Chartered lic.oec. Accountant in charge of the in charge of the audit audit
Basel, Switzerland 20 September 2000 EX-24.1 16 y39818a1ex24-1.txt POWER OF ATTORNEY 1 EXHIBIT 24.1 Power of Attorney Each of the undersigned hereby constitutes and appoints Luqman Arnold and Robert Mills, and each of them, with full power to act without the other, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the registration statement on Form F-1 relating to the registration of Noncumulative Trust Preferred Securities issued by UBS Group Capital Trust I, Noncumulative Company Preferred Securities issued by UBS Group Capital Company L.L.C. I and Subordinated Guarantee of UBS AG with respect to Noncumulative Company Preferred Securities, to sign any and all amendments to such registration statement, to sign any abbreviated registration statement filed pursuant to Rule 462(b) of the Securities Act of 1933 and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.
NAME TITLE DATE - --------------------------------------------------- ------------------------------ ----------------- /s/ MARCEL OSPEL President and Group Chief August 16, 2000 - --------------------------------------------------- Executive Officer Marcel Ospel /s/ LUQMAN ARNOLD Chief Financial Officer August 18, 2000 - --------------------------------------------------- Luqman Arnold /s/ HUGO SCHAUB Group Controller and Member of September 5, 2000 - --------------------------------------------------- Group Managing Board Hugo Schaub /s/ ALEX KRAUER Chairman and Member of Board August 16, 2000 - --------------------------------------------------- of Directors Alex Krauer /s/ ALBERTO TOGNI Vice-Chairman of Board of August 16, 2000 - --------------------------------------------------- Directors Alberto Togni /s/ MARKUS KUNDIG Vice-Chairman of Board of August 16, 2000 - --------------------------------------------------- Directors Markus Kundig /s/ PETER BOCKLI Member of Board of Directors August 16, 2000 - --------------------------------------------------- Peter Bockli /s/ ROLF A. MEYER Member of Board of Directors August 16, 2000 - --------------------------------------------------- Rolf A. Meyer /s/ HANS PETER MING Member of Board of Directors August 16, 2000 - --------------------------------------------------- Hans Peter Ming /s/ ANDREAS REINHART Member of Board of Directors August 16, 2000 - --------------------------------------------------- Andreas Reinhart /s/ ERIC HONEGGER Member of Board of Directors August 16, 2000 - --------------------------------------------------- Eric Honegger
EX-25 17 y39818a1ex25.txt STATEMENT OF ELIGIBILITY OF TRUSTEE 1 EXHIBIT 25 Registration Nos.: 333-46216; 333-46216-01; 333-46216-02 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) WILMINGTON TRUST COMPANY (Exact name of trustee as specified in its charter) Delaware 51-0055023 (State of incorporation) (I.R.S. employer identification no.)
Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 (Address of principal executive offices) Cynthia L. Corliss Vice President and Trust Counsel Wilmington Trust Company Rodney Square North Wilmington, Delaware 19890 (302) 651-8516 (Name, address and telephone number of agent for service) UBS PREFERRED FUNDING TRUST I (Exact name of obligor as specified in its charter) DELAWARE 51-6518252 (State of incorporation) (I.R.S. employer identification no.) 1100 NORTH MARKET STREET WILMINGTON, DELAWARE 19890-0001 (Address of principal executive offices) (Zip Code)
___% NONCUMULATIVE TRUST PREFERRED SECURITIES (Title of the indenture securities) -1- 2 ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Deposit Insurance Co. State Bank Commissioner Five Penn Center Dover, Delaware Suite #2901 Philadelphia, PA (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each affiliation: Based upon an examination of the books and records of the trustee and upon information furnished by the obligor, the obligor is not an affiliate of the trustee. ITEM 3. LIST OF EXHIBITS. List below all exhibits filed as part of this Statement of Eligibility and Qualification. A. Copy of the Charter of Wilmington Trust Company, which includes the certificate of authority of Wilmington Trust Company to commence business and the authorization of Wilmington Trust Company to exercise corporate trust powers. B. Copy of By-Laws of Wilmington Trust Company. C. Consent of Wilmington Trust Company required by Section 321(b) of Trust Indenture Act. D. Copy of most recent Report of Condition of Wilmington Trust Company. Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Wilmington Trust Company, a corporation organized and existing under the laws of Delaware, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Wilmington and State of Delaware on the 28th day of September, 2000. WILMINGTON TRUST COMPANY [SEAL] Attest: /s/ Patricia A. Evans By: /s/ Donald G. MacKelcan ------------------------------- ------------------------------ Assistant Secretary Name: Donald G. MacKelcan Title: Vice President 3 EXHIBIT A AMENDED CHARTER Wilmington Trust Company Wilmington, Delaware As existing on May 9, 1987 AMENDED CHARTER OR ACT OF INCORPORATION OF WILMINGTON TRUST COMPANY Wilmington Trust Company, originally incorporated by an Act of the General Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which company was changed to "Wilmington Trust Company" by an amendment filed in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act of Incorporation of which company has been from time to time amended and changed by merger agreements pursuant to the corporation law for state banks and trust companies of the State of Delaware, does hereby alter and amend its Charter or Act of Incorporation so that the same as so altered and amended shall in its entirety read as follows: First: - The name of this corporation is Wilmington Trust Company. Second: - The location of its principal office in the State of Delaware is at Rodney Square North, in the City of Wilmington, County of New Castle; the name of its resident agent is Wilmington Trust Company whose address is Rodney Square North, in said City. In addition to such principal office, the said corporation maintains and operates branch offices in the City of Newark, New Castle County, Delaware, the Town of Newport, New Castle County, Delaware, at Claymont, New Castle County, Delaware, at Greenville, New Castle County Delaware, and at Milford Cross Roads, New Castle County, Delaware, and shall be empowered to open, maintain and operate branch offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market Street, and 3605 Market Street, all in the City of Wilmington, New Castle County, Delaware, and such other branch offices or places of business as may be authorized from time to time by the agency or agencies of the government of the State of Delaware empowered 4 to confer such authority. Third: - (a) The nature of the business and the objects and purposes proposed to be transacted, promoted or carried on by this Corporation are to do any or all of the things herein mentioned as fully and to the same extent as natural persons might or could do and in any part of the world, viz.: (1) To sue and be sued, complain and defend in any Court of law or equity and to make and use a common seal, and alter the seal at pleasure, to hold, purchase, convey, mortgage or otherwise deal in real and personal estate and property, and to appoint such officers and agents as the business of the Corporation shall require, to make by-laws not inconsistent with the Constitution or laws of the United States or of this State, to discount bills, notes or other evidences of debt, to receive deposits of money, or securities for money, to buy gold and silver bullion and foreign coins, to buy and sell bills of exchange, and generally to use, exercise and enjoy all the powers, rights, privileges and franchises incident to a corporation which are proper or necessary for the transaction of the business of the Corporation hereby created. (2) To insure titles to real and personal property, or any estate or interests therein, and to guarantee the holder of such property, real or personal, against any claim or claims, adverse to his interest therein, and to prepare and give certificates of title for any lands or premises in the State of Delaware, or elsewhere. (3) To act as factor, agent, broker or attorney in the receipt, collection, custody, investment and management of funds, and the purchase, sale, management and disposal of property of all descriptions, and to prepare and execute all papers which may be necessary or proper in such business. (4) To prepare and draw agreements, contracts, deeds, leases, conveyances, mortgages, bonds and legal papers of every description, and to carry on the business of conveyancing in all its branches. (5) To receive upon deposit for safekeeping money, jewelry, plate, deeds, bonds and any and all other personal property of every sort and kind, from executors, administrators, guardians, public officers, courts, receivers, assignees, trustees, and from all fiduciaries, and from all other persons and individuals, and from all corporations whether state, municipal, corporate or private, and to rent boxes, safes, vaults and other receptacles for such property. (6) To act as agent or otherwise for the purpose of registering, issuing, certificating, countersigning, transferring or underwriting the stock, bonds or other obligations of any corporation, association, state or municipality, and may 5 receive and manage any sinking fund therefor on such terms as may be agreed upon between the two parties, and in like manner may act as Treasurer of any corporation or municipality. (7) To act as Trustee under any deed of trust, mortgage, bond or other instrument issued by any state, municipality, body politic, corporation, association or person, either alone or in conjunction with any other person or persons, corporation or corporations. (8) To guarantee the validity, performance or effect of any contract or agreement, and the fidelity of persons holding places of responsibility or trust; to become surety for any person, or persons, for the faithful performance of any trust, office, duty, contract or agreement, either by itself or in conjunction with any other person, or persons, corporation, or corporations, or in like manner become surety upon any bond, recognizance, obligation, judgment, suit, order, or decree to be entered in any court of record within the State of Delaware or elsewhere, or which may now or hereafter be required by any law, judge, officer or court in the State of Delaware or elsewhere. (9) To act by any and every method of appointment as trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity in the receiving, holding, managing, and disposing of any and all estates and property, real, personal or mixed, and to be appointed as such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian or bailee by any persons, corporations, court, officer, or authority, in the State of Delaware or elsewhere; and whenever this Corporation is so appointed by any person, corporation, court, officer or authority such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity, it shall not be required to give bond with surety, but its capital stock shall be taken and held as security for the performance of the duties devolving upon it by such appointment. (10) And for its care, management and trouble, and the exercise of any of its powers hereby given, or for the performance of any of the duties which it may undertake or be called upon to perform, or for the assumption of any responsibility the said Corporation may be entitled to receive a proper compensation. (11) To purchase, receive, hold and own bonds, mortgages, debentures, shares of capital stock, and other securities, obligations, contracts and evidences of indebtedness, of any private, public or municipal corporation within and without the State of Delaware, or of the Government of the United States, or of any state, territory, colony, or possession thereof, or of any foreign government or country; 6 to receive, collect, receipt for, and dispose of interest, dividends and income upon and from any of the bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property held and owned by it, and to exercise in respect of all such bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property, any and all the rights, powers and privileges of individual owners thereof, including the right to vote thereon; to invest and deal in and with any of the moneys of the Corporation upon such securities and in such manner as it may think fit and proper, and from time to time to vary or realize such investments; to issue bonds and secure the same by pledges or deeds of trust or mortgages of or upon the whole or any part of the property held or owned by the Corporation, and to sell and pledge such bonds, as and when the Board of Directors shall determine, and in the promotion of its said corporate business of investment and to the extent authorized by law, to lease, purchase, hold, sell, assign, transfer, pledge, mortgage and convey real and personal property of any name and nature and any estate or interest therein. (b) In furtherance of, and not in limitation, of the powers conferred by the laws of the State of Delaware, it is hereby expressly provided that the said Corporation shall also have the following powers: (1) To do any or all of the things herein set forth, to the same extent as natural persons might or could do, and in any part of the world. (2) To acquire the good will, rights, property and franchises and to undertake the whole or any part of the assets and liabilities of any person, firm, association or corporation, and to pay for the same in cash, stock of this Corporation, bonds or otherwise; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired, and to exercise all the powers necessary or convenient in and about the conduct and management of such business. (3) To take, hold, own, deal in, mortgage or otherwise lien, and to lease, sell, exchange, transfer, or in any manner whatever dispose of property, real, personal or mixed, wherever situated. (4) To enter into, make, perform and carry out contracts of every kind with any person, firm, association or corporation, and, without limit as to amount, to draw, make, accept, endorse, discount, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments. (5) To have one or more offices, to carry on all or any of its operations and businesses, without restriction to the same extent as natural persons might or 7 could do, to purchase or otherwise acquire, to hold, own, to mortgage, sell, convey or otherwise dispose of, real and personal property, of every class and description, in any State, District, Territory or Colony of the United States, and in any foreign country or place. (6) It is the intention that the objects, purposes and powers specified and clauses contained in this paragraph shall (except where otherwise expressed in said paragraph) be nowise limited or restricted by reference to or inference from the terms of any other clause of this or any other paragraph in this charter, but that the objects, purposes and powers specified in each of the clauses of this paragraph shall be regarded as independent objects, purposes and powers. Fourth: - (a) The total number of shares of all classes of stock which the Corporation shall have authority to issue is forty-one million (41,000,000) shares, consisting of: (1) One million (1,000,000) shares of Preferred stock, par value $10.00 per share (hereinafter referred to as "Preferred Stock"); and (2) Forty million (40,000,000) shares of Common Stock, par value $1.00 per share (hereinafter referred to as "Common Stock"). (b) Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors each of said series to be distinctly designated. All shares of any one series of Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends, if any, thereon shall be cumulative, if made cumulative. The voting powers and the preferences and relative, participating, optional and other special rights of each such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding; and, subject to the provisions of subparagraph 1 of Paragraph (c) of this Article Fourth, the Board of Directors of the Corporation is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of a particular series of Preferred Stock, the voting powers and the designations, preferences and relative, optional and other special rights, and the qualifications, limitations and restrictions of such series, including, but without limiting the generality of the foregoing, the following: (1) The distinctive designation of, and the number of shares of Preferred Stock which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (2) The rate and times at which, and the terms and conditions on which, dividends, if any, on Preferred Stock of such series shall be paid, the extent of 8 the preference or relation, if any, of such dividends to the dividends payable on any other class or classes, or series of the same or other class of stock and whether such dividends shall be cumulative or non-cumulative; (3) The right, if any, of the holders of Preferred Stock of such series to convert the same into or exchange the same for, shares of any other class or classes or of any series of the same or any other class or classes of stock of the Corporation and the terms and conditions of such conversion or exchange; (4) Whether or not Preferred Stock of such series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, Preferred Stock of such series may be redeemed. (5) The rights, if any, of the holders of Preferred Stock of such series upon the voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding-up, of the Corporation. (6) The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such series; and (7) The voting powers, if any, of the holders of such series of Preferred Stock which may, without limiting the generality of the foregoing include the right, voting as a series or by itself or together with other series of Preferred Stock or all series of Preferred Stock as a class, to elect one or more directors of the Corporation if there shall have been a default in the payment of dividends on any one or more series of Preferred Stock or under such circumstances and on such conditions as the Board of Directors may determine. (c) (1) After the requirements with respect to preferential dividends on the Preferred Stock (fixed in accordance with the provisions of section (b) of this Article Fourth), if any, shall have been met and after the Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of section (b) of this Article Fourth), and subject further to any conditions which may be fixed in accordance with the provisions of section (b) of this Article Fourth, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. (2) After distribution in full of the preferential amount, if any, (fixed in accordance with the provisions of section (b) of this Article Fourth), to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up, of the Corporation, the holders of the Common Stock shall be entitled to receive all of the remaining assets of the Corporation, tangible and intangible, of 9 whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. (3) Except as may otherwise be required by law or by the provisions of such resolution or resolutions as may be adopted by the Board of Directors pursuant to section (b) of this Article Fourth, each holder of Common Stock shall have one vote in respect of each share of Common Stock held on all matters voted upon by the stockholders. (d) No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any right to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. (e) The relative powers, preferences and rights of each series of Preferred Stock in relation to the relative powers, preferences and rights of each other series of Preferred Stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in section (b) of this Article Fourth and the consent, by class or series vote or otherwise, of the holders of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Stock whether or not the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them; provided, however, that the Board of Directors may provide in the resolution or resolutions as to any series of Preferred Stock adopted pursuant to section (b) of this Article Fourth that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Stock. (f) Subject to the provisions of section (e), shares of any series of Preferred Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 10 (g) Shares of Common Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. (h) The authorized amount of shares of Common Stock and of Preferred Stock may, without a class or series vote, be increased or decreased from time to time by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote thereon. Fifth: - (a) The business and affairs of the Corporation shall be conducted and managed by a Board of Directors. The number of directors constituting the entire Board shall be not less than five nor more than twenty-five as fixed from time to time by vote of a majority of the whole Board, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the whole Board shall be twenty-four until otherwise fixed by a majority of the whole Board. (b) The Board of Directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the whole Board permits, with the term of office of one class expiring each year. At the annual meeting of stockholders in 1982, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the directors, may be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next annual election of directors. At such election, the stockholders shall elect a successor to such director to hold office until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. (c) Notwithstanding any other provisions of this Charter or Act of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Charter or Act of Incorporation or the By-Laws of the Corporation), any director or the entire Board of Directors of the Corporation may be removed at any time without cause, but only by the affirmative vote of the holders of two-thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose. (d) Nominations for the election of directors may be made by the Board of Directors or 11 by any stockholder entitled to vote for the election of directors. Such nominations shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders. Notice of nominations which are proposed by the Board of Directors shall be given by the Chairman on behalf of the Board. (e) Each notice under subsection (d) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of such nominee and (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee. (f) The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (g) No action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Sixth: - The Directors shall choose such officers, agents and servants as may be provided in the By-Laws as they may from time to time find necessary or proper. Seventh: - The Corporation hereby created is hereby given the same powers, rights and privileges as may be conferred upon corporations organized under the Act entitled "An Act Providing a General Corporation Law", approved March 10, 1899, as from time to time amended. Eighth: - This Act shall be deemed and taken to be a private Act. Ninth: - This Corporation is to have perpetual existence. Tenth: - The Board of Directors, by resolution passed by a majority of the whole Board, may designate any of their number to constitute an Executive Committee, which Committee, to the extent provided in said resolution, or in the By-Laws of the Company, shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. 12 Eleventh: - The private property of the stockholders shall not be liable for the payment of corporate debts to any extent whatever. Twelfth: - The Corporation may transact business in any part of the world. Thirteenth: - The Board of Directors of the Corporation is expressly authorized to make, alter or repeal the By-Laws of the Corporation by a vote of the majority of the entire Board. The stockholders may make, alter or repeal any By-Law whether or not adopted by them, provided however, that any such additional By-Laws, alterations or repeal may be adopted only by the affirmative vote of the holders of two-thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class). Fourteenth: - Meetings of the Directors may be held outside of the State of Delaware at such places as may be from time to time designated by the Board, and the Directors may keep the books of the Company outside of the State of Delaware at such places as may be from time to time designated by them. Fifteenth: - (a) (1) In addition to any affirmative vote required by law, and except as otherwise expressly provided in sections (b) and (c) of this Article Fifteenth: (A) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder), which, after such merger or consolidation, would be an Affiliate (as hereinafter defined) of an Interested Stockholder, or (B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value of $1,000,000 or more, or (C) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $1,000,000 or more, or (D) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation, or (E) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the 13 Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder, or any Affiliate of any Interested Stockholder, shall require the affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purpose of this Article Fifteenth as one class ("Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. (2) The term "business combination" as used in this Article Fifteenth shall mean any transaction which is referred to in any one or more of clauses (A) through (E) of paragraph 1 of the section (a). (b) The provisions of section (a) of this Article Fifteenth 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 provisions of the Charter or Act of Incorporation or By-Laws if such business combination has been approved by a majority of the whole Board. (c) For the purposes of this Article Fifteenth: (1) A "person" shall mean any individual, firm, corporation or other entity. (2) "Interested Stockholder" shall mean, in respect of any business combination, any person (other than the Corporation or any Subsidiary) who or which as of the record date for the determination of stockholders entitled to notice of and to vote on such business combination, or immediately prior to the consummation of any such transaction: (A) is the beneficial owner, directly or indirectly, of more than 10% of the Voting Shares, or (B) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of not less than 10% of the then outstanding voting Shares, or (C) is an assignee of or has otherwise succeeded in any share of capital stock of the Corporation which were at any time within two years prior thereto beneficially owned by any Interested Stockholder, and such assignment or 14 succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (3) A person shall be the "beneficial owner" of any Voting Shares: (A) which such person or any of its Affiliates and Associates (as hereafter defined) beneficially own, directly or indirectly, or (B) which such person or any of its Affiliates or Associates has (i) 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 (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (C) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned 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 capital stock of the Corporation. (4) The outstanding Voting Shares shall include shares deemed owned through application of paragraph (3) above but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options or otherwise. (5) "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on December 31, 1981. (6) "Subsidiary" shall mean any corporation of which a majority of any class of equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on December 31, 1981) is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Investment Stockholder set forth in paragraph (2) of this section (c), the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (d) majority of the directors shall have the power and duty to determine for the purposes of this Article Fifteenth on the basis of information known to them, (1) the number of Voting Shares beneficially owned by any person (2) whether a person is an Affiliate or Associate of another, (3) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in paragraph (3) of section (c), or (4) whether the assets subject to any 15 business combination or the consideration received for the issuance or transfer of securities by the Corporation, or any Subsidiary has an aggregate fair market value of $1,000,000 or more. (e) Nothing contained in this Article Fifteenth shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Sixteenth: Notwithstanding any other provision of this Charter or Act of Incorporation or the By-Laws of the Corporation (and in addition to any other vote that may be required by law, this Charter or Act of Incorporation by the By-Laws), the affirmative vote of the holders of at least two-thirds of the outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) shall be required to amend, alter or repeal any provision of Articles Fifth, Thirteenth, Fifteenth or Sixteenth of this Charter or Act of Incorporation. Seventeenth: (a) a Director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Laws as the same exists or may hereafter be amended. (b) Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a Director of the Corporation existing hereunder with respect to any act or omission occurring prior to the time of such repeal or modification." 16 EXHIBIT B BY-LAWS WILMINGTON TRUST COMPANY WILMINGTON, DELAWARE AS EXISTING ON FEBRUARY 20, 2000 17 BY-LAWS OF WILMINGTON TRUST COMPANY ARTICLE I STOCKHOLDERS' MEETINGS Section 1. The Annual Meeting of Stockholders shall be held on the third Thursday in April each year at the principal office at the Company or at such other date, time, or place as may be designated by resolution by the Board of Directors. Section 2. Special meetings of all stockholders may be called at any time by the Board of Directors, the Chairman of the Board or the President. Section 3. Notice of all meetings of the stockholders shall be given by mailing to each stockholder at least ten (10) days before said meeting, at his last known address, a written or printed notice fixing the time and place of such meeting. Section 4. A majority in the amount of the capital stock of the Company issued and outstanding on the record date, as herein determined, shall constitute a quorum at all meetings of stockholders for the transaction of any business, but the holders of a small number of shares may adjourn, from time to time, without further notice, until a quorum is secured. At each annual or special meeting of stockholders, each stockholder shall be entitled to one vote, either in person or by proxy, for each share of stock registered in the stockholder's name on the books of the Company on the record date for any such meeting as determined herein. ARTICLE II DIRECTORS Section 1. The authorized number of directors that shall constitute the Board of Directors shall be fixed from time to time by or pursuant to a resolution passed by a majority of the Board within the parameters set by the Charter of the Bank. No more than two directors may also be employees of the Company or any affiliate thereof. Section 2. Except as provided in these Bylaws or as otherwise required by law, there shall be no qualifications for election or service as directors of the Company. In addition to any other provisions of these Bylaws, to be qualified for nomination for Election or appointment to the Board of Directors each person must have not attained the age of sixty-nine years at the time of such election or appointment, provided however, the Nominating and Corporate Governance Committee may waive such qualification as to a particular candidate otherwise qualified to serve as a director upon a good faith determination by such committee that such a waiver is in the best interests of the Company and its stockholders. The Chairman of the Board of Directors shall not be qualified to continue to serve as a director upon the 18 termination of his or her services in that office for any reason. Section 3. The class of Directors so elected shall hold office for three years or until their successors are elected and qualified. Section 4. The affairs and business of the Company shall be managed and conducted by the Board of Directors. Section 5. The Board of Directors shall meet at the principal office of the Company or elsewhere in its discretion at such times to be determined by a majority of its members, or at the call of the Chairman of the Board of Directors or the President. Section 6. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board of Directors or by the President, and shall be called upon the written request of a majority of the directors. Section 7. A majority of the directors elected and qualified shall be necessary to constitute a quorum for the transaction of business at any meeting of the Board of Directors. Section 8. Written notice shall be sent by mail to each director of any special meeting of the Board of Directors, and of any change in the time or place of any regular meeting, stating the time and place of such meeting, which shall be mailed not less than two days before the time of holding such meeting. Section 9. In the event of the death, resignation, removal, inability to act, or disqualification of any director, the Board of Directors, although less than a quorum, shall have the right to elect the successor who shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred, and until such director's successor shall have been duly elected and qualified. Section 10. The Board of Directors at its first meeting after its election by the stockholders shall appoint an Executive Committee, a Trust Committee, an Audit Committee and a Compensation Committee, and shall elect from its own members a Chairman of the Board of Directors and a President who may be the same person. The Board of Directors shall also elect at such meeting a Secretary and a Treasurer, who may be the same person, may appoint at any time such other committees and elect or appoint such other officers as it may deem advisable. The Board of Directors may also elect at such meeting one or more Associate Directors. Section 11. The Board of Directors may at any time remove, with or without cause, any member of any Committee appointed by it or any associate director or officer elected by it 19 and may appoint or elect his successor. Section 12. The Board of Directors may designate an officer to be in charge of such of the departments or divisions of the Company as it may deem advisable. ARTICLE III COMMITTEES Section 1. Executive Committee (A) The Executive Committee shall be composed of not more than nine members who shall be selected by the Board of Directors from its own members and who shall hold office during the pleasure of the Board. (B) The Executive Committee shall have all the powers of the Board of Directors when it is not in session to transact all business for and in behalf of the Company that may be brought before it. (C) The Executive Committee shall meet at the principal office of the Company or elsewhere in its discretion at such times to be determined by a majority of its members, or at the call of the Chairman of the Executive Committee or at the call of the Chairman of the Board of Directors. The majority of its members shall be necessary to constitute a quorum for the transaction of business. Special meetings of the Executive Committee may be held at any time when a quorum is present. (D) Minutes of each meeting of the Executive Committee shall be kept and submitted to the Board of Directors at its next meeting. (E) The Executive Committee shall advise and superintend all investments that may be made of the funds of the Company, and shall direct the disposal of the same, in accordance with such rules and regulations as the Board of Directors from time to time make. (F) In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Company by its directors and officers as contemplated by these By-Laws any two available members of the Executive Committee as constituted immediately prior to such disaster shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Company in accordance with the provisions of Article III of these By-Laws; and if less than three members of the Trust Committee is constituted immediately prior to such disaster shall be available for 20 the transaction of its business, such Executive Committee shall also be empowered to exercise all of the powers reserved to the Trust Committee under Article III Section 2 hereof. In the event of the unavailability, at such time, of a minimum of two members of such Executive Committee, any three available directors shall constitute the Executive Committee for the full conduct and management of the affairs and business of the Company in accordance with the foregoing provisions of this Section. This By-Law shall be subject to implementation by Resolutions of the Board of Directors presently existing or hereafter passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary Resolutions shall be suspended during such a disaster period until it shall be determined by any interim Executive Committee acting under this section that it shall be to the advantage of the Company to resume the conduct and management of its affairs and business under all of the other provisions of these By-Laws. Section 2. Audit Committee (A) The Audit Committee shall be composed of five members who shall be selected by the Board of Directors from its own members, none of whom shall be an officer of the Company, and shall hold office at the pleasure of the Board. (B) The Audit Committee shall have general supervision over the Audit Division in all matters however subject to the approval of the Board of Directors; it shall consider all matters brought to its attention by the officer in charge of the Audit Division, review all reports of examination of the Company made by any governmental agency or such independent auditor employed for that purpose, and make such recommendations to the Board of Directors with respect thereto or with respect to any other matters pertaining to auditing the Company as it shall deem desirable. (C) The Audit Committee shall meet whenever and wherever the majority of its members shall deem it to be proper for the transaction of its business, and a majority of its Committee shall constitute a quorum. Section 3. Compensation Committee (A) The Compensation Committee shall be composed of not more than five (5) members who shall be selected by the Board of Directors from its own members who are not officers of the Company and who shall hold office during the pleasure of the Board. (B) The Compensation Committee shall in general advise upon all matters of policy concerning the Company brought to its attention by the management and from time to time review the management of the Company, major organizational matters, 21 including salaries and employee benefits and specifically shall administer the Executive Incentive Compensation Plan. (C) Meetings of the Compensation Committee may be called at any time by the Chairman of the Compensation Committee, the Chairman of the Board of Directors, or the President of the Company. Section 4. Associate Directors (A) Any person who has served as a director may be elected by the Board of Directors as an associate director, to serve during the pleasure of the Board. (B) An associate director shall be entitled to attend all directors meetings and participate in the discussion of all matters brought to the Board, with the exception that he would have no right to vote. An associate director will be eligible for appointment to Committees of the Company, with the exception of the Executive Committee, Audit Committee and Compensation Committee, which must be comprised solely of active directors. Section 5. Absence or Disqualification of Any Member of a Committee (A) In the absence or disqualification of any member of any Committee created under Article III of the By-Laws of this Company, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. ARTICLE IV OFFICERS Section 1. The Chairman of the Board of Directors shall preside at all meetings of the Board and shall have such further authority and powers and shall perform such duties as the Board of Directors may from time to time confer and direct. He shall also exercise such powers and perform such duties as may from time to time be agreed upon between himself and the President of the Company. Section 2. The Vice Chairman of the Board. The Vice Chairman of the Board of Directors shall preside at all meetings of the Board of Directors at which the Chairman of the Board shall not be present and shall have such further authority and powers and shall perform such duties as the Board of Directors or the Chairman of the Board may from time to time 22 confer and direct. Section 3. The President shall have the powers and duties pertaining to the office of the President conferred or imposed upon him by statute or assigned to him by the Board of Directors. In the absence of the Chairman of the Board the President shall have the powers and duties of the Chairman of the Board. Section 4. The Chairman of the Board of Directors or the President as designated by the Board of Directors, shall carry into effect all legal directions of the Executive Committee and of the Board of Directors, and shall at all times exercise general supervision over the interest, affairs and operations of the Company and perform all duties incident to his office. Section 5. There may be one or more Vice Presidents, however denominated by the Board of Directors, who may at any time perform all the duties of the Chairman of the Board of Directors and/or the President and such other powers and duties as may from time to time be assigned to them by the Board of Directors, the Executive Committee, the Chairman of the Board or the President and by the officer in charge of the department or division to which they are assigned. Section 6. The Secretary shall attend to the giving of notice of meetings of the stockholders and the Board of Directors, as well as the Committees thereof, to the keeping of accurate minutes of all such meetings and to recording the same in the minute books of the Company. In addition to the other notice requirements of these By-Laws and as may be practicable under the circumstances, all such notices shall be in writing and mailed well in advance of the scheduled date of any other meeting. He shall have custody of the corporate seal and shall affix the same to any documents requiring such corporate seal and to attest the same. Section 7. The Treasurer shall have general supervision over all assets and liabilities of the Company. He shall be custodian of and responsible for all monies, funds and valuables of the Company and for the keeping of proper records of the evidence of property or indebtedness and of all the transactions of the Company. He shall have general supervision of the expenditures of the Company and shall report to the Board of Directors at each regular meeting of the condition of the Company, and perform such other duties as may be assigned to him from time to time by the Board of Directors of the Executive Committee. Section 8. There may be a Controller who shall exercise general supervision over the internal operations of the Company, including accounting, and shall render to the Board of Directors at appropriate times a report relating to the general condition and internal operations of the Company. 23 There may be one or more subordinate accounting or controller officers however denominated, who may perform the duties of the Controller and such duties as may be prescribed by the Controller. Section 9. The officer designated by the Board of Directors to be in charge of the Audit Division of the Company with such title as the Board of Directors shall prescribe, shall report to and be directly responsible only to the Board of Directors. There shall be an Auditor and there may be one or more Audit Officers, however denominated, who may perform all the duties of the Auditor and such duties as may be prescribed by the officer in charge of the Audit Division. Section 10. There may be one or more officers, subordinate in rank to all Vice Presidents with such functional titles as shall be determined from time to time by the Board of Directors, who shall ex officio hold the office Assistant Secretary of this Company and who may perform such duties as may be prescribed by the officer in charge of the department or division to whom they are assigned. Section 11. The powers and duties of all other officers of the Company shall be those usually pertaining to their respective offices, subject to the direction of the Board of Directors, the Executive Committee, Chairman of the Board of Directors or the President and the officer in charge of the department or division to which they are assigned. ARTICLE V STOCK AND STOCK CERTIFICATES Section 1. Shares of stock shall be transferable on the books of the Company and a transfer book shall be kept in which all transfers of stock shall be recorded. Section 2. Certificates of stock shall bear the signature of the President or any Vice President, however denominated by the Board of Directors and countersigned by the Secretary or Treasurer or an Assistant Secretary, and the seal of the corporation shall be engraved thereon. Each certificate shall recite that the stock represented thereby is transferable only upon the books of the Company by the holder thereof or his attorney, upon surrender of the certificate properly endorsed. Any certificate of stock surrendered to the Company shall be cancelled at the time of transfer, and before a new certificate or certificates shall be issued in lieu thereof. Duplicate certificates of stock shall be issued only upon giving such security as may be satisfactory to the Board of Directors or the Executive Committee. Section 3. The Board of Directors of the Company is authorized to fix in advance a 24 record date for the determination of the stockholders entitled to notice of, and to vote at, any meeting of stockholders and any adjournment thereof, or entitled to receive payment of any dividend, or to any allotment or rights, or to exercise any rights in respect of any change, conversion or exchange of capital stock, or in connection with obtaining the consent of stockholders for any purpose, which record date shall not be more than 60 nor less than 10 days proceeding the date of any meeting of stockholders or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent. ARTICLE VI SEAL Section 1. The corporate seal of the Company shall be in the following form: Between two concentric circles the words "Wilmington Trust Company" within the inner circle the words "Wilmington, Delaware." ARTICLE VII FISCAL YEAR Section 1. The fiscal year of the Company shall be the calendar year. ARTICLE VIII EXECUTION OF INSTRUMENTS OF THE COMPANY Section 1. The Chairman of the Board, the President or any Vice President, however denominated by the Board of Directors, shall have full power and authority to enter into, make, sign, execute, acknowledge and/or deliver and the Secretary or any Assistant Secretary shall have full power and authority to attest and affix the corporate seal of the Company to any and all deeds, conveyances, assignments, releases, contracts, agreements, bonds, notes, mortgages and all other instruments incident to the business of this Company or in acting as executor, administrator, guardian, trustee, agent or in any other fiduciary or representative capacity by any and every method of appointment or by whatever person, corporation, court officer or authority in the State of Delaware, or elsewhere, without any specific authority, ratification, approval or confirmation by the Board of Directors or the Executive Committee, and any and all such instruments shall have the same force and validity as though expressly 25 authorized by the Board of Directors and/or the Executive Committee. ARTICLE IX COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES Section 1. Directors and associate directors of the Company, other than salaried officers of the Company, shall be paid such reasonable honoraria or fees for attending meetings of the Board of Directors as the Board of Directors may from time to time determine. Directors and associate directors who serve as members of committees, other than salaried employees of the Company, shall be paid such reasonable honoraria or fees for services as members of committees as the Board of Directors shall from time to time determine and directors and associate directors may be employed by the Company for such special services as the Board of Directors may from time to time determine and shall be paid for such special services so performed reasonable compensation as may be determined by the Board of Directors. ARTICLE X INDEMNIFICATION Section 1. (A) The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person. The Corporation shall indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Corporation. (B) The Corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a Director or officer in his capacity as a Director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Director or officer to repay all amounts advanced if it should be ultimately determined that the Director or officer is not entitled to be indemnified under this Article or otherwise. 26 (C) If a claim for indemnification or payment of expenses, under this Article X is not paid in full within ninety days after a written claim therefor has been received by the Corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification of payment of expenses under applicable law. (D) The rights conferred on any person by this Article X shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Charter or Act of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise. (E) Any repeal or modification of the foregoing provisions of this Article X shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE XI AMENDMENTS TO THE BY-LAWS Section 1. These By-Laws may be altered, amended or repealed, in whole or in part, and any new By-Law or By-Laws adopted at any regular or special meeting of the Board of Directors by a vote of the majority of all the members of the Board of Directors then in office. 27 EXHIBIT C SECTION 321(b) CONSENT Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as amended, Wilmington Trust Company hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon requests therefor. WILMINGTON TRUST COMPANY Dated: September 28, 2000 By: /s/ Donald G. MacKelcan ----------------------- ----------------------------- Name: Donald G. MacKelcan Title: Vice President 28 EXHIBIT D NOTICE This form is intended to assist state nonmember banks and savings banks with state publication requirements. It has not been approved by any state banking authorities. Refer to your appropriate state banking authorities for your state publication requirements. R E P O R T O F C O N D I T I O N Consolidating domestic subsidiaries of the WILMINGTON TRUST COMPANY of WILMINGTON - ---------------------------------------------------------- ------------------ Name of Bank City in the State of DELAWARE , at the close of business on June 30, 2000.
ASSETS Thousands of dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coins 219,052 Interest-bearing balances 0 Held-to-maturity securities 24,122 Available-for-sale securities 1,481,169 Federal funds sold and securities purchased under agreements to resell 386,497 Loans and lease financing receivables: Loans and leases, net of unearned income 4,636,653 LESS: Allowance for loan and lease losses 69,352 LESS: Allocated transfer risk reserve 0 Loans and leases, net of unearned income, allowance, and reserve 4,567,301 Assets held in trading accounts 0 Premises and fixed assets (including capitalized leases) 121,339 Other real estate owned 758 Investments in unconsolidated subsidiaries and associated companies 1,645 Customers' liability to this bank on acceptances outstanding 0 Intangible assets 4,912 Other assets 113,928 Total assets 6,920,723
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LIABILITIES Deposits: In domestic offices 5,287,587 Noninterest-bearing 926,575 Interest-bearing 4,361,012 Federal funds purchased and Securities sold under agreements to repurchase 389,701 Demand notes issued to the U.S. Treasury 47,188 Trading liabilities (from Schedule RC-D) 0 Other borrowed money: /////// With original maturity of one year or less 663,000 With original maturity of more than one year 43,000 Bank's liability on acceptances executed and outstanding 0 Subordinated notes and debentures 0 Other liabilities (from Schedule RC-G) 60,895 Total liabilities 6,491,371 EQUITY CAPITAL Perpetual preferred stock and related surplus 0 Common Stock 500 Surplus (exclude all surplus related to preferred stock) 62,118 Undivided profits and capital reserves 404,149 Net unrealized holding gains (losses) on available-for-sale securities (37,415) Total equity capital 429,352 Total liabilities, limited-life preferred stock, and equity capital 6,920,723
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